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2004 Asia Pacific Technical Meeting

on Information and Communication Technology (ICT) Statistics


Wellington, 30 November - 2 December 2004

Statistics to measure the knowledge-based economy:


The case of Hong Kong, China

Stephen K.C. Leung


Census and Statistic Department
Hong Kong, China

Introduction

Most advanced economies have undergone significant structural


changes in recent years. One of the key characteristics of the changes is the
growing importance of knowledge in all sectors of economic activities. These
economies have developed from an agricultural economy in which land is the
key resource, then to an industrial economy in which natural resources and
labour are the main resources, and now to a knowledge-based economy (KBE)
in which knowledge is the key resource.

2. The term KBE (or sometimes called the New Economy or Modern
Economy) results from a fuller recognition of the role of knowledge and
technology in economic growth. Knowledge, as embodied in human being (as
human capital) and in technology, has always been central to economic
development.

3. To help understand the degree to which an economy is a KBE, relevant


statistical indicators have to be constructed. However, before such statistical
indicators can be developed, an analytical framework on the subject is needed.
Unfortunately, there is so far no internationally agreed framework for measuring
a KBE. This paper thus aims at reviewing the existing frameworks on KBE
promulgated by different international organizations with a view to drawing up
an appropriate framework for Hong Kong, China. The issues and challenges
in developing KBE indicators would also be discussed.
The need for a framework on KBE

4. There has been growing demand for KBE indicators partly as a result of
the increasing concern on “knowledge divide” between the advanced countries,
who are generating most of this knowledge, and developing countries, which
have comparatively less developed markets, institutions, telecommunications
infrastructures or educated people to create, adapt, and make effective use of the
rapidly growing stock of knowledge.

5. However, before such statistical indicators can be developed, a


framework on the subject is needed. This would enable relevant statistical
indicators to be grouped, organized and thus analysed in a logical manner within
the framework. Moreover, any gaps in available indicators can also be easily
identified by assessing whether comprehensive and relevant statistical indicators
exist for all the elements of the framework.

6. There is so far no internationally agreed framework for measuring a


KBE. Different frameworks have been developed by individual countries and
international organizations. In the course of doing so, there have been
deliberations on what a KBE is.

What is a KBE?

7. In a KBE, the primary competition is to innovate first, or at least most


effectively, rather than competition to cut prices in the perfect market that
classical economics posits. Countries that show more evidence of innovation
are richer and grow faster and companies that show more evidence of
innovation post better financial performance. Innovation is an expression of
the productive use of knowledge. More formally, it has been defined as “the
application in any organization of ideas new to it, whether they are embodied in
products, processes, services, or in the systems of management and marketing
through which the organization operates” (Maguire, Kazlauskas and Weir, 1994).
Alternatively, innovation has also be defined as “innovation if the creative
process through which additional economies value is extracted from knowledge;
the additional economic value is obtained through the transformation of
knowledge into new products, processes and services” (OECD, 1997).

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8. A KBE is thus a broader concept than an “Information Society”.
While an information society is basically a society where a majority of workers
will be producing, handling and distributing information or codified knowledge,
a KBE is characterized by the need for continuous learning of both codified
information and the competencies to use this information. As access to
information becomes easier and less expensive along with the advancement in
ICT, the skills and competencies relating to the selection and efficient use of
information become more crucial. Capabilities for selecting relevant
information and disregarding irrelevant information, recognizing patterns in
information, interpreting and decoding information as well as learning new and
forgetting old skills are becoming very important in a KBE.

9. Given the importance of knowledge and innovation to economic


growth, the new growth theory (Romer, 1990) puts innovation and technological
change into a more central and endogenous role than do the conventional
general equilibrium models of neo-classical economics. Traditional
production functions focus only on labour, capital, materials and energy with
knowledge and technology being considered as external influences on
production. The new growth theory can thus be seen as an extension of the
importance attached to technological change as the key driver of economic
growth.

10. More and more analytical approaches are being developed so that
knowledge can be included more directly in production functions. However,
incorporating knowledge into standard economic production functions is not an
easy task, as this factor defies some fundamental economic principles, such as
that of scarcity. Knowledge and information tend to be abundant; what is
scarce is the capacity to use them in meaningful ways. Nor is knowledge
easily transformed into the object of standard economic transactions.

11. The term KBE was first coined by OECD and defined as “economies
which are directly based on the production, distribution and use of knowledge
and information” (OECD, 1996). The APEC then extended this idea to state
that in a KBE “the production, distribution ands use of knowledge is the main
drivers of growth, wealth creation and employment across all industries.”
(APEC, 2000) While the KBE ideal encompasses concepts like innovation,
higher education and R&D, it is broader than this and highlights the importance
of knowledge in all aspects of the economy. KBE is also referred to as the

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New Economy or Modern Economy somehow separate from a stagnant “old
economy”. However, in a truly KBE, all sectors have become
knowledge-intensive, not just those usually called “high technology”.

12. On the other hand, there is growing belief that knowledge can do more
than increase economic growth. It can lead to structural change in an economy
and therefore society. Such change differs from the incremental changes to
which all economies are constantly subjected. OECD started in 1999 a
two-year study called “Growth Project” to analyse the causes underlying
differences in growth performance in OECD countries and identify factors,
institutions and policies that could enhance long-term growth prospects (OECD,
2000a, 2000b and 2001a).

13. The Project suggested that, in some aspects, there is a “New Economy”
and that some of the features associated with the “New Economy” can actually
be observed. It then look beyond the business cycle and asked what structural
shifts, if any, have taken place in growth patterns in OECD economies in recent
years. The questions led to an investigation of the underlying sources of
growth. The Project concluded that there were divergences in the growth
patterns of the OECD countries and attributed this to new capital investment
particularly that on ICT, increased use and rising quality of labour, and greater
efficiency in how capital and labour were combined or multifactor productivity.
Thus, all these elements are regarded as the fundamental characteristics of a
KBE.

Existing frameworks on KBE

14. While there have been a lot of discussions on the characteristics of a


KBE at the international arena, there is so far no internationally agreed
framework for measuring a KBE. Different frameworks have been developed
by individual countries and international organizations. The framework
promulgated by some international organizations, including OECD, APEC and
World Bank, would be reviewed in the following paragraphs.

15. As rightly pointed out by the Australian Bureau of Statistics (ABS,


2002a), the above frameworks differ from a traditional statistical framework
which can be viewed as a conceptual map which allows statistics to be
organized and logically grouped. First, their scope is very wide so that the

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component parts in the frameworks would themselves be the subject of
statistical frameworks, with some of them already in place. Moreover, the
frameworks do not deal with concepts, such as classifications, standards or
definitions, which are left to be dealt with by the frameworks for the component
parts.

16. The above frameworks can thus be viewed as a “descriptive” or


“presentation” framework using different statistical indicators rather than trying
to view those indicators within context of a statistical framework. Each of
them just defines a collection of statistical indicators for describing the subject
under study, i.e. KBE, with the indicators grouped accordingly to particular
aspects of the subject.

OECD framework

17. OECD started to conduct research on the KBE and attempt to compile
statistical indicators on the KBE as early as in 1996, based on their work of
developing and publishing science and technology (S&T) indicators (OECD,
1996). OECD pointed out that “the traditional economic indicators have never
been completely satisfactory, mostly because they failed to recognize economic
performance beyond the aggregate value of goods and services.”

18. To fully understand the workings of the KBE, new economic concepts
and measures are required which track phenomena beyond conventional market
transactions. In general, it was suggested by OECD that improved indicators
for the KBE are needed for the following tasks:

(i) measuring knowledge inputs;


(ii) measuring knowledge stocks and flows;
(iii) measuring knowledge outputs;
(iv) measuring knowledge networks; and
(v) measuring knowledge and learning

19. The principal knowledge input indicators are expenditure on research


and development (R&D); employment of engineers and technical personnel;
patents; and international balance of payments. These are in fact part of S&T
indicators promulgated by OECD. Measuring the stock of physical capital
available to an economy is an awesome task, so that measuring the stock of

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knowledge capital would seem almost impossible. As such, only a few proxy
indicators have been suggested by OECD. This also applies to the flow of
knowledge. As regards knowledge outputs, again only rough indicators have
been developed, including the delineation of a list of high technology industries.

20. In general, OECD attempted to measure knowledge direct. It was


however noted that measuring the KBE using such an approach might pose a
great challenge because there were systematic obstacles to the creation of
intellectual capital accounts to parallel all accounts of conventional fixed capital.
At the heart of the KBE, knowledge itself is particularly hard to quantify and
also to price.

21. As for measuring knowledge networks, indicators of knowledge


creation and distribution at the firm level were suggested to be collected through
innovation surveys. Finally, indicators for measuring knowledge and learning
are needed to reflect the efficiency and equity of education and training in what
must also be a “learning economy”. In this regards, OECD has been
developing human capital indicators aimed particularly at measuring private and
social rates of return to investment in education and training.

22. Instead of approaching the KBE from measurement of knowledge


direct, the above framework was later slightly modified and expanded to cover
basically four main areas as follows (OECD, 1999 and 2001b):

(i) the creation and diffusion of knowledge;


(ii) information economy;
(iii) the global integration of economic activity; and
(iv) economic structure and productivity

While Indicators on creation and diffusion of knowledge build on the work of


the S&T indicators, a set of indicators on information economy were also
developed building on the work on indicators for the information society.

23. Later on, the OECD Growth Project further explored the idea of a KBE
and concluded that a number of factors are important for a KBE (OECD, 2001a).
These conclusions suggest the following broad elements of a KBE framework:

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(i) the importance of a stable and open macro-economic
environment with effectively functioning markets;
(ii) the diffusion of ICT;
(iii) fostering innovation;
(iv) investing in human capital; and
(v) stimulating firm creation.

APEC framework

24. APEC approached the KBE from a perspective similar to that of the
OECD Growth Project. In 2000, the APEC Economic Committee, in
partnership with organizations in member economies, analysed the
underpinnings of the KBE by examining the empirical evidence from the
individual economies concerned. The work concluded that four dimensions
characterize KBEs and are largely responsible for the strong economic
performance of some economies over the last few decades (APEC, 2000). The
four dimensions so deduced are that:

(i) innovation and technological change are pervasive and supported


by an effective national innovation system;
(ii) human resources development is pervasive;
(iii) an efficient infrastructure operates, particularly in ICT; and
(iv) the business environment is supportive of enterprise and
innovation.

However, APEC only chose those indicators that were available for the case
study economies. This somehow tended to limit the choice of indicators.

25. In 2001, APEC conducted another study to examine what are the
fundamental underpinnings of the New Economy. The definition of the New
Economy is compatible with the KBE concept. They concluded that the four
dimension of KBE success are necessary conditions for the New Economy as
well (APEC, 2001). The study in fact pushed the analyses deeper than the four
characteristics of the KBE, to focus on achieving the New Economy outcome of
high productivity growth and on minimizing the exacerbation of a digital divide
which could result from too shy a discussion of policy.

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World Bank framework

26. Besides OECD and APEC, the World Bank Institute (WBI) in the
World Bank Group has been running a programme on Knowledge for
Development (K4D). It aims at creating capability in client countries to take
advantage of the new opportunities raised by the knowledge revolution and in
effect building the knowledge dimension into their development strategy.

27. The K4D programme has also developed a framework to help countries
articulate strategies for their transition to a KBE. The framework consists of a
set of 69 structural and qualitative variables that benchmark how an economy
compares with their neighbours. The set of 69 variables serve as proxies for
the five areas that are critical in the development of a KBE, namely:

(i) overall performance of the economy;


(ii) economic incentive and institutional regime;
(iii) education and human resources;
(iv) innovation system; and
(v) information infrastructure.

28. Given the large set of variables, WBI has developed a simplified
“knowledge assessment scorecards” consisting only of 14 key variables among
the 69 variables. Besides, WBI has also undertaken a comparison of the 69
variables for a group of 100 countries/territories, including Hong Kong.

A proposed framework on KBE for Hong Kong

29. While different sets of statistical indicators have been selected and
grouped according to different aspects in the above frameworks, they can be
broadly grouped into the following four dimensions:

(i) Innovation System – indicators to reflect the quantity, quality and


rate of knowledge and information production/creation in the
economy.
(ii) Information and Communication Technology (ICT) – indicators
to reflect the efficiency and effectiveness of knowledge and
information distribution in the economy.

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(iii) Human Resource Development – indicators to reflect the
quantity and quality of individuals equipped to access and use of
knowledge and information for further production/creation and
distribution of knowledge and information in the economy.
(iv) Business Environment – indicators to reflect a business
environment conducive to the production/creation and
distribution of knowledge and information in the economy.

30. It can be seen that different frameworks place different emphasis on


different dimensions. The number of indicators included under the different
frameworks of individual countries and international organizations also varies
greatly, from more than 130 to just about 20. Moreover, the extent of
overlapping among the frameworks is also not great, indicating the wide
divergence in the selection of indicators. Nevertheless, some of the indicators,
though different from each other, are not completely mutually exclusive from
each other. Some indicators are just slight variants of other indicators.

31. Based on the complete list of indicators from the various frameworks, a
list of indicators based on the following considerations is drawn up in Annex I:

(i) International comparability - the indicators should be


commonly covered in the other frameworks;
(ii) Availability -the indicators should be available in Hong Kong;
(iii) Relevance - the indicators should be relevant for our specific
policy requirements;

32. The above list would form the preliminary basis for developing a set of
KBE indicators for Hong Kong. It can be seen that above list of indicators has
a rather good balance in the number of indicators for the four dimensions
concerned. In terms of number of indicators, it is on the high side, amounting
to about 80.

Issues and Challenges in Developing KBE Indicators

33. All the KBE frameworks discussed above, including the one proposed
for Hong Kong, are not without limitations. First of all, without an
international standard on KBE indicators, it is difficult for benchmarking an
economy’s position as a KBE against other economies. Given that different

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economies would have different emphasis on the various aspects of a KBE, it is
understandable that they might choose quite different sets of KBE indicators in
their frameworks. In this connection, international cooperation in devising a
core set of indicators for international comparison would be useful.

34. Users might find it difficult to interpret some of the indicators.


Without standard reference optimal levels, it is difficult to assess the
performance of an economy in terms of some KBE indicators, e.g. it is not sure
whether it is simply the higher the percentage of researchers to labour force the
better. Moreover, some indicators under the business environment appear so
general that they may not help to distinguish a KBE from a non-KBE, e.g. it is
not pretty clear whether a KBE would grow at a higher rate, be more productive,
have lower unemployment, etc.

35. The indicators might not be able to fully reflect the very substantial
achievements in the KBE attributes of an economy resulting from the adoption
of a small number of break-through technologies.

36. With the vast number of indicators, it is not easy to assess the overall
performance of an economy, i.e. with some indicators improving while some
other deteriorating, it is difficult to assess whether the economy is becoming
more knowledge-based or less. Of course, one option is to develop a single
KBE index based on the individual indicators. However, such approach is not
without limitations as this would require assigning an appropriate weight to
each and every indicator. This would only be possible if there is an
appropriate model that links up the various dimensions and the indicators
therein, not to mention that such a model would have to be agreed upon in the
international arena before any international comparison could be done.

Way forward

37. Despite the above limitations in the KBE framework, it is still planned
to finalise the list of relevant KBE indicators for Hong Kong by end 2004/early
2005. Relevant parties and potential users of the KBE indicators both within
and outside the Government would be consulted. If everything goes smoothly,
the first full set of KBE indicators for Hong Kong would be available in mid
2005.

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38. The above framework would of course be regularly reviewed taking
into consideration latest developments in this area in the international arena.

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Annex I
Proposed Indicators on Knowledge-based Economy for Hong Kong

(I) Innovation System

Overall performance and environment for innovation


1.1 No. of business start-ups as % to adults (aged 25-64)
1.2 Venture capital investment as % to GDP

Research and development (R&D)


1.3 Gross domestic expenditure on R&D (GERD) as a % to GDP
1.4 GERD % share by performing sector
1.5 Business R&D (BERD) as a % to GDP
1.6 BERD % share by size of firm
1.7 Government R&D (GOVERD) as % to GDP
1.8 Higher education R&D (HERD) as % to GDP
1.9 GERD as % to GDP by type of research
1.10 Researchers as % to labour force

Patents
1.11 Patent applications filed in/patents granted by US Patent Office per million
population
1.12 National patent applications by field

Innovation
1.13 Innovation expenditure as % to total business receipts
1.14 % of firms with technological product or process innovation
1.15 University licensing, spin-outs and start-ups

Research outputs
1.16 Scientific and technical articles per million population

Technological cooperation
1.17 % of firms with cooperation arrangement in R&D with government or higher
education institutions
1.18 % of firms with cooperation arrangement in innovation activities with other business
firms

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(II) Information and Communication Technology (ICT)

ICT investment
2.1 Investment in ICT equipment and software as % of non-residential gross fixed capital
formation in business sector
2.2 Expenditure on ICT goods and services in business sector as % to business receipts
2.3 Expenditure on ICT goods and services in the economy as % to GDP

ICT manpower
2.4 % share of ICT workers in the labour force
2.5 % share of high skill ICT workers in the labour force

ICT infrastructure and pricing


2.6 No. of telephone mainlines per 1 000 population
2.7 No. of mobile phone subscribers per 1 000 population
2.8 No. of telecommunications access paths (fixed lines + mobile subscribers) per 1 000
population
2.9 No. of Internet Service Providers, POPs and access lines

ICT penetration in households


2.10 Household PC penetration rate
2.11 % of individual accessing a PC by age, sex, occupation, level of education
2.12 % of household with access to the Internet by type of household, income
2.13 No. of Internet users as % of population
2.14 No. of broadband subscribers per 1 000 population
2.15 % of individuals accessing the Internet by age, sex, occupation, level of education
2.16 No. of Internet hosts per 1 000 population

ICT penetration in business and government


2.17 Business PC penetration rate by size/industry
2.18 Business internet penetration rate by size/industry
2.19 Business web site penetration rate by size/industry
2.20 No. of secured web servers per million population

E-commerce
2.21 % of firms having sold through Internet
2.22 % share of e-commerce receipts in total business receipts
2.23 % of firms having purchased through Internet
2.24 % of population having ordered through internet

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ICT sector
2.25 Value added of ICT sector as % of value added of business sector
2.26 Capital expenditure by the ICT sector as % of total business capital expenditure
2.27 Employment in ICT sector as % of employment in business sector

(III) Human Resources Development

Investment in human capital


3.1 Expenditure on higher education as % to GDP
3.2 Public spending on education as % to GDP
3.3 School PC and Internet penetration rate

General education
3.4 Educational attainment of adult (aged 25-64) by level
3.5 Enrolments in secondary schools as % of relevant age group
3.6 Enrolment in tertiary education as % of relevant age group
3.7 % of workers with tertiary education level in workforce
3.8 % distribution of highest completed level of education of population
3.9 % distribution of highest completed level of education of labour force

Supply of knowledge workers


3.10 No. of university graduates by field of study
3.11 No. of post-graduate degree completions by course work and research
3.12 Human resources in science and technology (HRST) as % to population aged 15+
3.13 % share of knowledge workers in labour force
3.14 % share of professional and technical workers in labour force
3.15 Distribution of employed persons by skill level
3.16 Labour force status of people with science and technology qualifications

(IV) Business Environment

Globalization
4.1 Trade in goods as % to GDP
4.2 Exports of high-technology products as % to GDP
4.3 Exports of high-technology products as % to exports
4.4 Trade in services as % to GDP
4.5 Inward and outward foreign direct investment (FDI) flow as % to GDP
4.6 Technology balance of payments flow/balance as % to GDP

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Economic conditions
4.7 Average annual GDP growth
4.8 Volatility of GDP, exchange rate, inflation and short term interest rate
4.9 Sectoral distribution of GDP
4.10 Gross capital formation as % of GDP
4.11 GDP per capita
4.12 Labour productivity by industry
4.13 Unemployment rate
4.14 Labour force participation rate by age and sex
4.15 Prices movements
4.16 Value added of knowledge-based industries as % of GDP
4.17 % share of knowledge-based industries in total business sector value added
4.18 % share of high technology imports and exports in total trade

Social conditions
4.19 Life expectancy at birth
4.20 Annual average population growth rate
4.21 Age structure of population
4.22 Income distribution of the population
4.23 Median household income

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References

APEC Economic Cooperation Economic Committee (2000), Towards


Knowledge-based Economies in APEC, APEC Secretariat, Singapore.

APEC Economic Cooperation Economic Committee (2001), The New Economy


and APEC, APEC Secretariat, Singapore.

Australia Bureau of Statistics (2002a), Measuring a Knowledge-based Economy


and Society – An Australian Framework, discussion paper (cat. No. 1375.0)

Maguire, C., Kazlauskas, C. and Weir, A.D. (1994), Information Systems for
Innovative Organizations, London, Academic Press

OECD (1996), The Knowledge-based Economy, Paris

OECD (1997), National Innovation Systems, Paris

OECD (1999), The Knowledge-based Economy: A Set of Facts and Figures,


Paris

OECD (2000a), Is There a New Economy? First Report on the OECD Growth
Project, Paris

OECD (2000b), A New Economy? The Changing Role of Innovation and


Information Technology in Growth, Paris

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Capital, Human and Social Capital and Sustained Growth and Development,
Paris

OECD (2001a), The New Economy: Beyond the Hype, Final Report on the
OECD Growth Project, Paris

OECD (2001b), Science, Technology and Industry Scoreboard: Towards a


Knowledge-based Economy, Paris

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Romer, P.M. (1990), Endogenous Technical Change, Journal of Political
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Schuller, T. (2000), The Complementary Roles of Human and Social Capital,


paper for international workshop on “The contribution of Human and Social
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