There is no doubt that we are living through a revolution brought about by what is called the knowledge economy. Because the future potential of companies which are able to ride on this latest Kondratiev wave is so good, stock valuations for such companies are extremely high. There's nothing extraordinary about that--new technologies, especially inventions which bring about great changes, are often priced very high by the market. Consider, for example, the valuations of electricity and radio companies in the US markets before the crash of 1929; or even the prices of computer companies in the 19802. The market sets a high premium on knowledge.
So it's not surprising that companies which operate at the cutting edge of technology command high valuations. They may be in infotech or biotech, but so long as the knowledge they possess has a commercial application, their valuations are high.
But it is worth remembering some fundamental facts about research-based companies. First, their research is original, and it can be patented. Simply put, the test of a knowledge-based company is whether it owns intellectual property. Take the most highly valued companies on the Nasdaq, and they are easily distinguished by their access to intellectual property. That is not really true, however, for the internet companies. Most of these do not own the technology, and they don't have exclusive rights to content. They merely use the technology. Sure, they may have built up great brands, such as AOL or Amazon, and formidable franchises, but that has more to do with marketing and management than "knowledge". Also, much of the "content" used to draw eyeballs to these sites is easily replicable by imitators.
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The other feature of knowledge-based companies is the very low cost incurred for producing and selling an additional item of the product. That's because the costs of research in knowledge-based companies are very high. This is especially true of infotech companies, where the cost of producing an additional copy is often zero. For example, the cost of producing an additional copy of Windows 2000 is zero for Microsoft, and the entire sales realisation passes straight to the bottomline.
In contrast, take the so-called knowledge companies in India. These infotech companies hold no patents, because their trade is not in infotech products but in services. To be sure, the dividing line between a product and a service is getting blurred, but the fact remains that, in order to generate additional revenue, the company has to incur considerable expenditure. Which means that the companies will not have the kind of operating leverage enjoyed by the software product manufacturers. And so far as Indian dotcom companies are concerned, the information contained in their portals can scarcely be called knowledge. But India does have companies which possess enforceable intellectual property rights. Media companies which own movie titles, for instance, would qualify.
The point, however, is that the companies riding the infotech wave in India are very different from those in the US. It is significant that revenues from US exports of intellectual property have overtaken export proceeds from other sources. The difference is that the US companies are creating the knowledge, while Indians seem to be good at using it.