Knowledge Economy

Updated on January 29, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Knowledge Economy Definition

A knowledge economy refers to the economy in which the knowledge workers are the integral input element. The father of modern management, Peter F. Drucker, popularized the concept through his book, The Age of Discontinuity (1969).

This modern production practice is more visible in developed countries where a skilled workforce is a prime requisite for research activities, innovations, technological evolution, and scientific advancements. All these advancements and innovations contribute to production efficiency and create new opportunities.

Key Takeaways

  • Knowledge economy exhibits the nation’s intellectual capital, innovation clusters, and technology resources.
  • The knowledge model prioritizes output creation most efficiently by utilizing scientific discoveries and innovations.
  • The knowledge-based model’s essential components are knowledge workers, information, innovation capability, intangibles like patents, copyrights, proprietary software, and knowledge processing.
  • Both implicit and explicit knowledge is important. Skilled workers should possess relevant qualifications or certifications. In addition, they should have skills like technical, relational, and problem-solving.

Knowledge Economy Explained

Knowledge economy relies on knowledge or intellectual capitalIntellectual CapitalIntellectual capital is the knowledge of an organization’s human resources used for money-making or other helpful purposes. Such information or knowledge provides the organization with a competitive advantage.read more. A knowledge capital indicates the knowledge base of workers, information, technology infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more, etc. In addition, the new economic model produces intangibles like patents, copyrights, proprietary software, and knowledge processing. All these points to the importance of its source, education.

The main features of this new economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more are education and skills, information and technology infrastructure, research, and the innovation system. The system values a skilled labor force, and skilled workers fill major job positions. Furthermore, investing in education and training develops skilled and competent workers capable of producing research and scientific knowledge.

Knowledge Economy

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Education and technological advancement played an important role in the transition of the agrarian economy to a knowledge economy in most countries. It changed the way people think, triggered innovation, changed the production practice, etc. In addition, the productivity of knowledge and skills helped many countries develop competitive advantageCompetitive AdvantageCompetitive advantage refers to an advantage availed by a company that has remained successful in outdoing its competitors belonging to the same industry by designing and implementing effective strategies that allow the same in offering quality goods or services, quoting reasonable prices to its customers, maximizing the wealth of its stakeholders and so on and as a result of which the company can make more profits, build a positive brand reputation, make more sales, maximize return on assets, etc.read more and compete internationally. When the agrarian model showcased the utilization of tangible assetsTangible AssetsTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation.read more and unskilled labor force, the knowledge-based one utilized intangible assets and a highly skilled labor force to create massive output more efficiently.

Knowledge creation, dissemination, and application boost economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more. It also increases people’s living standards by increasing the quantity and quality of output and supplying innovative products and services. For example, the United States saw substantial economic prosperity due to technical advancement. Although the United States exhibits the good implications of the knowledge approach, it is not yet a top knowledge economy country. The United States ranks top for aspects relevant to research, development, and innovation and lowest for education and technical readiness.

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Knowledge economy examples are discernable from various Middle East regions. Many of the Middle East regions have been facing economic growth issues. Multiple factors contribute to it, like their over-dependence on oil resources and shortage of soft infrastructure. The leaders’ solution to overcome this economic stagnation is to foster a knowledge-based economic model by creating, acquiring, distributing, and using knowledge.

The transition to a knowledge-based model was not easy for Middle East regions. They have to invest in the renovation of education systems, R&D and technological improvement, and efficient telecommunications as an initial step.

The UAE government has made building a knowledge system a key priority by streamlining more resources into infrastructure, creating a favorable environment for e-business and fintech industries, and introducing innovation clusters to attract worldwide entrepreneurs to incubate their ideas. One example of their initiative is Dubai’s TechnoPark.


Knowledge-intensive activities are the main element in the knowledge-based economic model. Hence most of the characteristics are evolved in association with knowledge. The Journal of the Knowledge Economy is the first journal to examine the aspects of a knowledge-based model and highlight the knowledge evolution and associated impact. Some of the characteristics are the following:

  • The prime input is intellectual capital.
  • The system makes use of explicit and implicit knowledge.
  • The main constituents are knowledge-based organizations, knowledge workers, and knowledge processes.
  • Great emphasis on knowledge management through creation, storage, retrieving, and distribution activities.
  • The new economy is not solely composed of service entities, and they also have high-tech manufacturing entities.
  • High value for intellectual properties. 
  • The Knowledge Economy Indicator (KEI) was the index that points to a region’s overall progress toward the Knowledge Economic model.
  • The model thrives on generating evolutions and innovations.
  • Skilled workers should possess relevant qualifications or certifications. Also, they have skills like technical, relational, and problem-solving.

Frequently Asked Questions (FAQs)

What is the knowledge economy meaning?

The father of modern management, Peter F. Drucker, popularized the concept through his book, The Age of Discontinuity (1969). Knowledge workers dominate the knowledge-based model. The sustainability of such an economy primarily depends on the factors like advancements in research activities, innovations, technological evolution, and scientific advances.

Which is the top knowledge economy country?

Based on the knowledge economy index 2020, a technique for measuring a country’s status in the global knowledge-based model against other countries, Sweden tops the list of sustaining a knowledge-based model. The other countries on the top places of the list are Scandinavian countries like Denmark, Norway, Finland, etc.

What are the elements of the knowledge economy?

Essential elements of the knowledge-based economic model are intellectual capital, information technology resources, financial resources, and innovation clusters fostering innovation culture. Furthermore, the government should create an atmosphere favoring intellectual capital by developing quality education infrastructure and policies.

This has been a guide to Knowledge Economy and its definition. Here we discuss how the knowledge economy works along with the characteristics and examples. You can learn more from the following articles –

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