SMEs in Knowledge-Based Economies

Abstract

Today’s Information Age is having a dramatic effect on businesses as well as on the life styles of people. Globalization, rapid technological change and the importance of knowledge in gaining and sustaining competitive advantage characterize this information age. Traditionally, economists have seen capital, labor, and natural resources as the essential ingredients for economic enterprise. The new economy of the 21st century is increasingly based on knowledge with information, innovation, creativity and intellectual capitalism as its essential ingredients (Persaud, 2001). Today’s modern economy then, is based more on intangibles, information, innovation, and creativity, and their abilities to facilitate expanding economic potential (Persaud, 2001) and the exploitation of ideas rather than material things. Many new terms have been coined for this new economy such as “knowledge-based economy”, “borderless economy”, “weightless economy”. and “digital economy” to name a few (Woodall, 2000). This new economy seems to defy the basic economic law of scarcity which means, if a physical object is sold, the seller ceases to own it. In this new economy, however, when an idea is sold, the seller still possesses it and can sell it over and over again (Woodall, 2000). Traditional economic theory assumes that most industries run into “diminishing returns” at some point because unit costs start to rise, so no one firm can corner the market. In the new economy, knowledge-based products and services have “increasing returns” because knowledge-based products are expensive to produce for the first time, but cheap to reproduce. High fixed costs and negligible variable costs give these industries vast potential for economies of scale (Sharma, Wickramasinghe & Gupta, 2003; Woodall, 2000).