Table of Contents

Economy

What Is the Knowledge Economy? Definition, Criteria, and Example

By

Adam Hayes

Updated June 15, 2024

Reviewed by

Toby Walters

Fact checked by

Amanda Jackson

What Is the Knowledge Economy?

The knowledge economy is a system of consumption and production based on intellectual capital. It refers to the ability to capitalize on scientific discoveries and applied research.

The knowledge economy represents a large share of the activity in most highly developed economies. A significant component of value might consist of intangible assets in a knowledge economy, such as the value of its workers' knowledge or intellectual property.

Key Takeaways

The knowledge economy describes the contemporary commercialization of science and academic scholarship.
Innovation in the knowledge economy based on research is commodified via patents and other forms of intellectual property.
The knowledge economy lies at the intersection of private entrepreneurship, academia, and government-sponsored research.
Knowledge-related industries represent a large share of the activity in most highly developed countries.
A knowledge economy depends on skilled labor and education, strong communications networks, and institutional structures that incentivize innovation.

Knowledge Economy: A system of consumption and production that is based on intellectual capital. — Investopedia / Tara Anand

Understanding the Knowledge Economy

Developing economies tend to be heavily focused on agriculture and manufacturing. Highly developed countries have a larger share of service-related activities. This includes knowledge-based economic activities such as research, technical support, and consulting.

The knowledge economy is the marketplace for the production and sale of scientific and engineering discoveries. This knowledge can be commodified in the form of patents or other intellectual property protections. The producers of this information such as scientific experts and research labs are also considered to be part of the knowledge economy.

The Bayh-Dole Act of 1980 was a major turning point in the treatment of intellectual property in the U.S. It allowed universities to retain title to inventions or discoveries made with federal R&D funding and to negotiate exclusive licenses.

The world economy has become more knowledge-based thanks to globalization, bringing with it the best practices from each country's economy. Knowledge-based factors also create an interconnected and global economy where human expertise and trade secrets are considered important economic resources.

Generally accepted accounting principles (GAAP) don't allow companies to include these assets on their balance sheets, however.

The modern commercialization of academic research and basic science has its roots in governments seeking military advantage.

Knowledge Economy and Human Capital

The knowledge economy addresses how education, knowledge, and "human capital" can serve as a productive asset or business product to be sold and exported to yield profits for individuals, businesses, and the economy.

This component of the economy relies heavily on intellectual capabilities rather than natural resources or physical contributions. Products and services that are based on intellectual expertise advance technical and scientific fields in the knowledge economy. This encourages innovation in the economy as a whole.

The World Bank defines knowledge economies according to four pillars:

Institutional structures that provide incentives for entrepreneurship and the use of knowledge
Availability of skilled labor and a good education system
Access to information and communication technology (ICT) infrastructures
A vibrant innovation landscape that includes academia, the private sector, and civil society

Example of a Knowledge Economy

Academic institutions, companies engaging in research and development (R&D), programmers developing software and search engines for data, and health workers using digital data to improve treatments are all components of a knowledge economy.

These economy brokers pass on the results of their research to workers in more traditional fields such as farmers who use software applications and digital solutions to manage their crops more effectively. These fields also include advanced technological-based medical procedures such as robot-assistant surgeries and schools that provide digital study aids and online courses for their students.

How Big Is the Knowledge Economy?

It's difficult to put a price tag on the global knowledge economy because it's not a clearly defined category such as manufacturing. It's possible to gain a rough estimate by gauging some of the major components of the knowledge economy, however.

The total intellectual property market was worth $62.18 billion in the United States in 2023, according to the U.S. Chamber of Commerce. The market size of the country's higher education institutions accounted for $818.6 billion in 2023.

What Are the Most Valuable Skills in the Knowledge Economy?

Higher education and technical training are obvious assets but communication and teamwork are also essential skills for a knowledge-based economy, according to the Organization for Economic Cooperation and Development. It's unlikely that any single knowledge worker can generate groundbreaking innovations alone so these interpersonal and workplace competencies are essential to surviving in a knowledge-based workplace.

Which Country Has the Biggest Knowledge Economy?

Factors of a knowledge economy are measured by the United Nations Development Program's Global Knowledge Index. It replaced the World Bank Knowledge Economy Index after 2012.

This metric scores each country based on "enabling factors" for the knowledge economy. These include education levels, technical and vocational training, innovation, and communications technology. Switzerland was the top-ranked knowledge economy with a total score of 69.1% as of 2023. The next two are Sweden at 68.0% and the United States with a score of 66.9%.

The Bottom Line

The term knowledge economy describes the commercialization of intellectual pursuits. This type of economy capitalizes on research and scientific discoveries. It’s a significant component of highly developed economies such as Switzerland, Sweden, and the United States but it’s global and not confined to just a certain handful of countries. Intellectual property plays a significant role in a knowledge economy.

Unfortunately, generally accepted accounting principles (GAAP) don’t recognize these assets on companies’ balance sheets so you won’t be able to pinpoint titles to them by doing this type of research.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

GovTrack. "H.R. 6933 (96th): Government Patent Policy Act of 1980."
The World Bank. "The Knowledge Economy, The Kam Methodology, and World Bank Operations." Pages 5-8.
IBISWorld. "Colleges and Universities in the US - Market Size (2004-2029)."
Statista. "Market Size of Intellectual Property Licensing in the United States From 2013 to 2023."
OECD. "Competencies for the Knowledge Economy." Page 1.
Knoema. "Global Knowledge Index."

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