Chapter 1: What is value creation?
A research-based introduction to the concept of value creation
Introduction
Value creation is one of the most central concepts in economics, social sciences and business. The term is used daily in political debates, public documents, research literature and corporate strategies. Yet there is no universally accepted definition of what value creation actually is.
For some, value creation is primarily associated with private business, economic growth and corporate profits. Others place greater emphasis on innovation, knowledge development, productivity, institutions or the public sector. The term is therefore often used with different meanings, depending on the professional perspective or context in which it is used.
This article aims to provide a research-based introduction to the concept of value creation. It draws on economic theory, social science research, and established academic perspectives to explain what value creation is, how value is created, and why value creation encompasses far more than financial results alone.
Contents
What does the word value creation mean?
Why is value creation important?
How do values arise?
Who creates values?
Value creation in the private sector
Value creation in the public sector
Value creation in the voluntary sector and civil society
Knowledge, innovation and human capital
Productivity and long-term value creation
Why is there no universal definition?
Summary
Further reading
1. What does the word value creation mean?
The word value creation consists of two parts: value and creation .
Value refers to something that has significance, utility or economic value for individuals, businesses or society. Creation involves developing, improving or further developing something new.
Taken together, value creation describes the process by which people, businesses and society develop something that has value.
Values can be economic, but they can also be social, cultural, technological or societal. A new drug, a more efficient production process, a safer transportation system, better education or a new digital service can all represent value creation if they create lasting benefit and contribute to increased productivity, a better quality of life or higher societal value.
Value creation is therefore not only about the result, but also about the process that makes the result possible.
2. Why is value creation important?
Value creation forms the basis for economic development and societal welfare.
Without value creation, it would not be possible to finance healthcare, education, research, infrastructure or other public services. Similarly, businesses would not be able to develop new products, invest in technology or create jobs.
Value creation is therefore not a goal in itself.
It is the foundation for prosperity, innovation and sustainable social development.
A society that over time creates more value than it consumes has greater opportunities to invest in the future. This applies to both private business, the public sector and voluntary organizations.
3. How do values arise?
Values rarely arise through a single activity.
They are developed through interaction between people, knowledge, technology, organization and investments.
When a company develops a new product, it is often based on many years of research, education, experience and technological development.
When a municipality establishes a preventive health service, it builds on medical knowledge, public organization, and the competence of employees.
When a researcher develops new knowledge, this can later become the basis for new products, new jobs or better public services.
Value creation is therefore a continuous process where different actors build on each other's work.
4. Who creates value?
One of the most debated questions in economics is who creates value.
The traditional debate has often pitted the public and private sectors against each other.
However, a broad research literature shows that modern societies are characterized by interdependence.
Private businesses develop products, services, technology and jobs.
The public sector invests in education, research, health, rule of law and infrastructure.
Universities develop new knowledge.
Voluntary organizations build social capital and trust.
The residents themselves create value through work, care, entrepreneurship and volunteer efforts.
Value creation is therefore the result of interaction between many actors, not a single sector.
5. Value creation in the private sector
The private sector plays a crucial role through entrepreneurship, investment, competition and innovation.
Businesses develop goods and services that meet needs, create jobs and contribute to economic activity.
Competition stimulates productivity improvements and the development of new solutions.
Profits make it possible to invest further in research, technology and expertise.
Private value creation is therefore a central driving force in modern market economies.
6. Value creation in the public sector
The public sector also creates value, although this is often measured in ways other than corporate profitability.
Investments in education increase the skills of the workforce.
Investments in health contribute to a higher quality of life and increased participation in working life.
The legal system, police, and courts create predictability that makes investment and business development possible.
Public research and infrastructure lay the foundation for innovation and productivity growth.
Value creation in the public sector is therefore about developing society's capacity, expertise and institutions in a way that benefits both citizens and businesses.
7. Value creation in the voluntary sector and civil society
Value is also created outside the market and public administration.
Voluntary organizations, sports clubs, cultural institutions, foundations and humanitarian organizations contribute to trust, community and social capital.
These values cannot always be measured in dollars and cents, but they are of great importance for quality of life, public health, integration and democratic participation.
A society with a high degree of trust and cooperation often has better conditions for both economic and social development.
8. Knowledge, innovation and human capital
Modern economies are increasingly based on knowledge.
Competence, research, technology and innovation are among the most important driving forces behind productivity growth and long-term value creation.
Investments in education and lifelong learning make people better able to develop new solutions and adapt to change.
Innovation is about translating knowledge into practical improvements that create benefits for people, businesses and society.
Knowledge is therefore not just a result of value creation.
It is also one of the most important prerequisites for value creation to take place.
9. Productivity and long-term value creation
Productivity describes how efficiently society uses its resources.
When the same resources can create greater value through better organization, higher competence or new technology, productivity increases.
Productivity growth is one of the most important explanations for why living standards have increased over time.
Long-term value creation is therefore not just about producing more, but about producing smarter, more sustainably and with higher quality.
10. Why is there no universal definition?
Value creation is a complex concept because economic and societal development can be studied from different academic perspectives.
Some place the greatest emphasis on markets, competition, and entrepreneurship.
Others emphasize innovation, knowledge development, institutions or human capital.
No single definition captures the full breadth of the concept.
Nevertheless, there is broad agreement that value creation is about developing resources, knowledge, products, services or institutions in a way that creates lasting benefit and increases society's overall values.
11. Summary
Value creation is far more than financial profit.
It encompasses the processes that enable societies to develop new knowledge, higher productivity, better services, stronger institutions and an increased quality of life.
Value is created through the interaction between people, businesses, research, technology, the public sector, the private sector and civil society.
A broad understanding of value creation therefore involves seeing the entire ecosystem that makes economic and societal development possible.
This understanding forms the basis for the rest of the course series on value creation.
12. Further reading
The next articles in this series present how key economists and social scientists have understood value creation. In-depth articles on, among others, Joseph E. Stiglitz , Mariana Mazzucato , Philippe Aghion , Douglass North , Michael Porter and Kalle Moene shed light on different perspectives on knowledge, innovation, productivity, institutions and social development. Taken together, these works provide a broad research basis for understanding value creation in modern societies.
➜ Chapter 2 - Value creation throughout economic history
Recommended literature
Value creation is about much more than economic growth and money. It is about people, knowledge, innovation, productivity, institutions, trust and the interaction between the public and private sectors.
Here we have collected books from some of the world's leading economists and thinkers who explain in various ways how value is created, who contributes to creating it, and what prerequisites make long-term value creation possible.
The books complement each other and provide different perspectives on the same fundamental question:
What really makes people, businesses and societies create greater value over time?
Recommended books from our library
Creating a Learning Society: A New Approach to Growth, Development, and Social Progress
Author: Joseph E. Stiglitz and Bruce C. Greenwald
Short review:
Creating a Learning Society examines how knowledge, learning, and technological development contribute to economic growth and long-term value creation. Joseph E. Stiglitz and Bruce C. Greenwald challenge the notion that economic development is primarily about accumulating more physical capital. They argue that society’s ability to create, disseminate, and apply knowledge is crucial to productivity growth and improved living standards. A key point is that learning does not only occur in schools and universities. It also occurs in businesses, through work, production, innovation, and the interaction between people and organizations. Knowledge can also spread from one business and one part of the economy to others.
The book thus provides an important perspective on why human capital, competence, innovation and learning must be understood as central parts of a society's ability to create value over time.
Why we recommend the book
We recommend Creating a Learning Society because it expands the understanding of what lies behind economic value creation.
Machines, technology and financial capital are important, but they do not create productivity growth alone. Behind the development are people who learn, develop knowledge, improve work processes, share experiences and find new solutions.
This makes the book particularly relevant to Invisible Capital and our perspective on value creation: A significant part of society's value-creating capacity is found in the knowledge, competence, and learning ability of the people who participate in the economy.
Stiglitz and Greenwald thus provide an academic foundation for one of the most important relationships in modern value creation:
The Value of Everything: Making and Taking in the Global Economy
Author: Mariana Mazzucato
Short review
In The Value of Everything, Mariana Mazzucato asks a fundamental question: What exactly is value – and who creates it? Mazzucato returns to the historical discussions of value in economics and shows how the understanding of value creation has changed. She challenges the notion that high income, high prices or large profits necessarily mean that correspondingly large values have been created. One of the book's most important contributions is the distinction between value creation and value extraction . Mazzucato examines the financial sector, the pharmaceutical industry, innovation and the public sector, among others, and argues that we must become better at distinguishing between activities that actually create new values, and activities that primarily extract values that have already been created.
The book also challenges the traditional notion that the private sector creates value while the public sector mainly consumes or redistributes it. Innovation and economic development often arise through a complex interaction between public investment, research, businesses, capital and people.
The Power of Creative Destruction: Economic Upheaval and the Wealth of Nations
Author: Philippe Aghion, Céline Antonin and Simon Bunel
Short review
The Power of Creative Destruction is about one of the most important drivers of long-term economic growth: innovation.
Philippe Aghion, Céline Antonin and Simon Bunel build on Joseph Schumpeter's classic idea of "creative destruction" – the process by which new technologies, businesses, products and ideas challenge and replace existing solutions.
But the book is not just about the disappearance of the old. The authors examine why some economies manage to create continuous innovation and productivity growth, while others stagnate. Competition, entrepreneurship, research, education, institutions and public policy thus become important parts of the explanation.
Creative destruction also comes at a cost. New technologies and businesses create opportunities and jobs, but can also make existing skills, tasks and business models less relevant. The challenge is therefore to create societies that both promote innovation and enable people to participate in the transition.
Why we recommend the book
We recommend The Power of Creative Destruction because it shows why innovation is a fundamental driver of value creation .
Value creation is not just about producing more of what we already produce. It also occurs when people develop new ideas, technology, and ways of working that enable us to solve tasks better than before.
This makes the book particularly relevant to The Invisible Capital. Behind innovation are people with knowledge, expertise, creativity and experience. But Aghion's perspective also shows that human capital must be part of a larger system where competition, institutions, research, investment and policy create the conditions for new ideas to actually turn into economic and social development.
The book thus provides an important context in our understanding of value creation:
Knowledge → new ideas → innovation → productivity growth → long-term value creation.
Competitive Advantage: Creating and Sustaining Superior Performance
Author: Michael E. Porter
Short review
Competitive Advantage is one of Michael E. Porter's most influential works on how businesses create value and develop lasting competitive advantages.
One of the book's most important contributions is the value chain . Porter shows that a business should not be viewed as a single, unified activity, but as a series of interconnected activities – from development and production to logistics, marketing, sales and service. It is through these activities, and the interaction between them, that the business creates value for customers.
Porter also shows how competitive advantage can arise through, among other things, lower costs or differentiation. But behind these results lies the organization of the company's activities, expertise, technology, work processes and the way in which resources are used.
The value chain thus makes it possible to examine where in the business the values are actually created – and how different activities together contribute to the end result.
Why we recommend the book
We recommend Competitive Advantage because Porter gives us a perspective that fits very well into our broader understanding of value creation.
When we talk about a business “creating value,” it may sound as if the business does this as a single entity. Porter opens up the business and shows that value creation occurs through many activities that are interrelated .
And this is where people become particularly interesting.
Behind research, product development, purchasing, production, logistics, marketing, sales, customer service, technology and management are people with knowledge, experience, expertise and the ability to collaborate . The value chain is therefore also a useful way to highlight the human effort behind the company's financial results.
For Invisible Capital, Porter thus gives us another important part of the value creation picture:
People and resources → activities → interaction → customer value → competitiveness → value creation
Institutions, Institutional Change and Economic Performance
Author: Philippe Aghion, Céline Antonin and Simon Bunel
Short review
Institutions, Institutional Change and Economic Performance is one of Douglass C. North's most important works on why some societies are more successful than others in creating economic development over time.
North shifts attention from traditional factors of production such as capital and labor to the institutions that shape how people, businesses, and governments act and cooperate. Institutions are society's formal and informal rules of the game – including laws, regulations, norms, traditions, and established ways of organizing interaction.
These rules of the game affect the incentives that people and organizations face. They also affect investments, knowledge development, cooperation, transaction costs, and which economic activities emerge.
North also shows that institutions develop over time. History therefore matters: Today's economic opportunities are influenced by institutional choices and development paths that can stretch far back in time.
Why we recommend the book
We recommend Institutions, Institutional Change and Economic Performance because it explains a crucial aspect of value creation that easily becomes invisible:
Value creation needs good rules of the game.
People may have knowledge. Businesses may have capital. Entrepreneurs may have great ideas. A society may have natural resources and advanced technology. But outcomes are also influenced by the institutions that determine how people can collaborate, invest, compete, make deals, and develop businesses.
This makes North particularly interesting for our understanding of trust as part of invisible capital. Trust is not the same as institutions, but stable rules of the game, credible agreements, and well-functioning institutions can reduce uncertainty and make economic interaction easier.
North thus gives us another important part of the value creation picture:
Institutions → predictability and incentives → cooperation and investment → productive activity → long-term value creation.
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