Knowledge Economy: Overview & Characteristics

As the U.S. economy resurges in the wake of COVID-19, its recovery can - in part - be attributed to the knowledge economy. A knowledge-based economy is more resilient and better equipped to respond to specific problems and economic challenges. In this article, we’ll explore the knowledge economy – let’s start with the definition.

What Is The Knowledge Economy?

You might be asking, “What is the knowledge economy?” The knowledge economy as a term was popularized by Peter Drucker in his 1966 book, “The Effective Executive.” The definition of the knowledge economy is: an economic system that relies more heavily on intellectual capabilities than physical inputs or natural resources. Instead of traditional inputs, big data analytics and automation are fundamental to the production process.

With the advent of the knowledge economy, there has been an increase in the production of intangible assets, especially proprietary technology and patents. The IT/ICT industries are at the fore-front of economic growth in areas like AI and robotics. In the knowledge economy, exchange between research centers, universities, and think tanks abets further innovation. It is also characterized by the development of regions focused on certain industries - technology in Silicon Valley and automotive engineering in Germany.

Research has shown that investments in information technology result in growth in productivity that exceeds that of other investments - but only when coupled with organizational changes. Common organizational changes may include the introduction of profit-sharing plans and increased employee participation in decision-making.

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The Knowledge Economy and Workers

The knowledge economy is considered the primary cause of the expansion of STEM jobs. Occupational paths such as computer science, engineering, chemistry, and biology offer the greatest opportunities for career growth and executive leadership positions. Skills like data analysis, working with financial models, and the ability to innovate are in high demand in this economy.

In a knowledge economy, there is also an increased demand for teamwork, problem-solving, communication, and certain computer skills. These skills are seen as complements to education, not substitutes.

Knowledge economy workers are typically highly-educated. However, a high level of education is not required. But do knowledge economy workers always need formal degrees in the subject area they are pursuing? While formal education is linked to increased rates of participation in the knowledge economy, highly literate people, or people with technical training in a specific area, participate at the highest rates.

10 Characteristics Of The Knowledge Economy

Below are a few characteristics of the knowledge economy:

1. Institutional structures that provide incentives for entrepreneurship and the use of knowledge
2. Availability of skilled labor and a good education system
3. Access to information and communication infrastructures (ICT)
4. A vibrant innovation landscape that includes the academic world, the private sector, and civil society
5. An increased demand for workers in STEM subjects
6. The development of “clusters” of industries in certain geographic regions
7. A steep rise in the number of patents
8. Knowledge exchange between industries
9. Innovation-driven producers and uses (example: open-source software and customer feedback)
10. The global diffusion of knowledge

Knowledge Economy In Developing Countries

The relative weakness of the knowledge economy in developing countries creates countless opportunities for business through the spread of information and technology from developed countries.

Management consulting firms have also stepped in to help speed up the adoption of knowledge-based business in these countries. In a 2010 study, the World Bank reported that domestic consulting firms in developing countries face challenges that external strategy consulting firms can help with.

The Knowledge Economy Index

The knowledge economy index accounts for whether the environment in a country is conducive to knowledge being used effectively. It is based on the country’s performance in 4 pillar categories:

1. Economic incentive and institutional regime
2. Education and human resources
3. The innovation system
4. Information and communication infrastructures

The knowledge economy in developing countries is characterized by lower rankings across these pillars. According to the 2008 index, the Nordic countries of Denmark, Sweden, and Finland rank 1 to 3 respectively, the U.S. ranks 9, a developing country like Kenya ranks 106, and Zambia ranks last at 140.

Conclusion

An overall understanding of the knowledge economy allows current and aspiring consultants to understand hiring trends, primary areas of growth, and larger economic trends such as the economic recovery post Covid-19.

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Additional Reading:

• Mental Models: What Are They?
• Building An Innovation Culture
• Leadership: Where Everything Rises and Falls