The global economy is becoming more and more competitive, spurred on by the growth of dynamic economies in Asia. Many well-established companies in the developed world face increasing pressure from young companies in emerging economies that enjoy considerable cost advantages. And as these countries catch up with advanced technologies, the price war intensifies.

If companies want to maintain their economic competitiveness in the face of these challenges, it is crucial that they develop so-called intellectual assets that generate uniqueness and originality. These assets are difficult to be imitated, because they are intangibles and generated through humans' intellectual activities. So, companies can use them as a core source of growth, competitiveness and corporate values.

These intellectual assets include not only IP rights such as patents, trade marks and copyright, but also a wide range of intangible assets such as human resources, know-how, organizational structure, corporate culture, brands and reputation. On its own, no intellectual asset has its own value, nor can it generate any cash flow by itself. Intellectual assets can only generate value when they are managed, either by an individual or a company, within the framework of a concrete corporate strategy or philosophy.

Japan's response

Recently, a number of research projects have been devoted to intellectual assets: what they are, how they should be disclosed and how their values should be estimated. As a first step of their findings, Japan's Ministry of Economy, Trade and Industry (METI) published Guidelines for Intellectual Property Information Disclosure in January 2004. METI's aim was to enhance communication between companies and the market (and their shareholders). The guidelines encourage businesses to disclose information in 10 areas:

• Core technologies and business models.

• R&D segment and business strategy orientation.

• R&D segment and IP overview.

• Analysis of marketability and market advantages of technologies.

• Organization of R&D and IP, and information about R&D alliances.

• IP acquisition and management, trade secret management, and policies to prevent the loss of technological know-how.

• Significance of licensing activities to the company's business.

• Significance of the patent portfolio to the company's business.

• Policies on the company's IP portfolio.

• Information on risk management.

Figure 1: Virtuous cycle of intellectual assets

The business key: intellectual assets management

The guidelines were the result of a strong belief within the Japanese government of the importance of managing and disclosing intellectual assets as a way of strengthening competitiveness and raising corporate value.

Because intellectual assets are intangible and have no value if they are not being managed, CEOs that want to maximize these assets to create value must consider how to use their company's tangible and intellectual (intangible) assets within what is called the value chain. Even though this is a basic element of corporate management it is one that is vital for CEOs to understand and carry out.

Once CEOs properly identify their company's intellectual assets, they can begin to manage them effectively. Needless to say, they then ought to concentrate their companies' resources on developing their intellectual assets. CEOs should adopt an appropriate management system, such as the balanced scorecard, to help them set up internal systems to manage their intellectual assets.

The reason that we encourage companies to disclose information about their intellectual assets, their value chain and the way that they utilize intellectual assets within the company to their stakeholders (including managers, shareholders, business partners and customers), is to allow the market to evaluate their corporate value properly. This puts more emphasis on intellectual assets and encourages company officials to manage them more effectively. In short, we believe it is important to create a virtuous cycle of intellectual asset management (see figure 1).

Unlocking the information

So far, 12 companies have published an intellectual property report about their IP assets using the Guidelines for Information Disclosure. They are Olympus, Kabu.com, Hitachi, Asahi Kasei, Hitachi Chemical, Bridgestone, Konica Minolta, Ajinomoto, Iseki, Tokyo Electron, Mitsui Engineering & Shipbuilding and AnGes MG. These companies are now awaiting a response from the market. At the moment the market seems hesitant about assessing and comparing the information. However, once stakeholders do start to assess it, we expect many more businesses to start disclosing similar information and the market to become more effective in evaluating it.

Figure 2: Elements and indicators of corporate value

Figure 3: Time line

Developing a reporting mechanism

On February 25 2005, METI set up the Subcommittee on Management & Intellectual Assets, within its Industrial Structure Council (see box). The group, made up of representatives from business, academia and consumer associations, has been considering various mechanisms for reporting information about intellectual assets within companies.

Before companies can create a virtuous cycle of intellectual assets, they have to understand the meaning of intellectual assets and the value chain and how they can be utilized. Of course, we cannot measure intellectual assets in absolute figures. Information about intellectual assets differs from company to company, and financial statements, which represent a company's financial history, cannot represent intellectual assets or future cash flow from the value chain.

Instead, every company should identify its intellectual assets and explain how it plans to utilize them in a way that describes its value chain (qualitative information). By doing this, it is presenting what is effectively a story about itself. A certain number of indicators (quantitative information) should appear in the story to support it. The story should describe the future cash flow and value chain, and companies can do this by explaining their corporate philosophy, past investment and management, accumulated unique intellectual assets, the unique value chain, how they plan to use the value chain and intellectual assets, and how that value can be maintained and improved.

However, the story that each company tells about its future revenue (and the indicators that it provides to support its story) differs from company to company. The resulting lack of consistency potentially affects credibility and comparability.

In principle, therefore, we believe each company should disclose a certain number of fixed intellectual asset indicators (around 40 to 50) as an appendix to ensure and enhance the credibility of their stories and indicators. If most companies use the same 40 to 50 fixed indicators then people will be able to make comparisons between them far more accurately. Companies would still be able to decline to provide information in respect of a small number of the indicators on strategic grounds. We believe it would be most useful to develop a list of fixed indicators based on seven key parts of the value chain (see figure 2). The Industrial Structure Council's Subcommittee on Management and Intellectual Assets is considering these issues at the moment and plans to complete a set of guidelines laying down recommended practices for reporting intellectual assets by the middle of the year. These are expected to recommend companies tell their IP story by setting out their corporate philosophy, and then explaining their past investment and management, accumulated unique intellectual assets, unique value chain and their corporate profits. Companies will then explain how they plan to use their value chain and intellectual assets and set out their expected mid-term corporate profits. Finally, companies will provide fixed indicator data in an appendix. The time line for METI's project is outlined in figure 3 above.

Some companies will refer to these intellectual assets reports with sustainability reports or IP reports. They enable companies to communicate their future plans to their stakeholders more effectively and encourage them to make intellectual assets the core part of their business strategy.

Yutaka Tozaki is chief of the IP Policy Office within METI's Economic and Industrial Policy Bureau