Charting intellectual capital performance of the gateway to China
| Date | 19 April 2011 |
| DOI | https://doi.org/10.1108/14691931111123412 |
| Pages | 249-276 |
| Published date | 19 April 2011 |
| Author | Samuel Kai Wah Chu,Kin Hang Chan,Wendy W.Y. Wu |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Charting intellectual capital
performance of the gateway to
China
Samuel Kai Wah Chu
Faculty of Education, The University of Hong Kong, Hong Kong
Kin Hang Chan
Institute for China Business, School of Professional and Continuing Education,
the University of Hong Kong, Hong Kong, and
Wendy W.Y. Wu
Faculty of Education, The University of Hong Kong, Hong Kong
Abstract
Purpose – This paper aims to investigate whether intellectual capital (IC) has an impact on the
financial aspects of organizational performance as well as attempting to identify the IC components
that are associated with corporate financial performance indicators that signal organizational growth.
Design/methodology/approach – This study drew on financial data from publicly available
annual reports of all the constituent companies of the Hang Seng Index of the Hong Kong Stock
Exchange for the years 2001-2009. Following the value added intellectual coefficiente(VAIC)
methodology, regression models were constructed to examine the relationships between IC and the
corporate financial performance indicators.
Findings – Evidence was found to suggest that IC, as measured by VAIC, was positively associated
with profitability of businesses. In particular, structural capital, as a key component of IC, played a
notable part in enhancing corporate profitability, and showed a growing trend in its significance.
Empirical findings, based on correlation and linear multiple regression analysis, indicated that the
components of VAIC were strong predictors of corporate financial performance such as return on
equity and profitability. In particular, capital employed efficiency (CEE) was a significant predictor of
all four corporate financial performance indicators.
Practical implications – The results may extend the understanding of the role of IC in business
operations in Hong Kong, and may help to identify the specific IC drivers that may have a direct
impact on the financial performance of these companies. In particular, although CEE was a significant
predictor of all four corporate finance performance indicators, the increasing contribution of structural
capital efficiency (SCE) in predicting ROA and ROE was observed. The role that structural capital
plays in strengthening business performance warrants further investigation.
Originality/value – There has only been one previous empirical study on the intellectual capital of
constituent companies on the Hong Kong Hang Seng Index. This study adds to the literature as the
second study in the field. It is the first comparative study across two time periods of the
above-mentioned data.
Keywords Intellectualcapital, China, Hong Kong, Value added,Organizational performance
Paper type Research paper
1. Introduction
A growing number of leading academics and business practitioners acknowledge that
the economy worldwide is being transformed into a “knowledge-based economy”,
where economic value is seen mainly to be derived from intellectual capital (IC), rather
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Charting IC
performance
249
Journal of Intellectual Capital
Vol. 12 No. 2, 2011
pp. 249-276
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691931111123412
than just from physical capital (Sveiby, 1997; Pulic, 1998; Bontis, 2001; Chen et al.,
2005). Given this shift in the means of value creation in the new economy, traditional
accounting measures may no longer be adequate in reflecting the true performance of
these companies.
The gap between a company’s market value and its book value, also known as the
market to book controversy, has been observed and discussed (Lev and Zarowin, 1999).
Different IC models and valuation methods have been proposed to measure IC or
intangible assets in order to reflect better the invisible value not captured in financial
statements (Lev and Zarowin, 1999; Edvinsson and Malone, 1997).
Forty-two valuation methodologies for measuring intangible assets have been
identified so far (Sveiby, 2010), and it is likely that more methodologies will arise.
Among them, the value added intellectual coefficiente(VAIC) (Pulic, 2000a, b) is
increasingly being adopted by both academics and practitioners (Pulic and
Bornemann, 1997; Firer and Williams, 2003; Chen et al., 2005; Shiu, 2006; Chan,
2009b). Evidence from these studies suggests a relationship between IC and business
performance (Firer and Williams, 2003; Chen et al., 2005; Shiu, 2006; Chan, 2009b;
Ze
´ghal and Maaloul, 2010). Previous IC studies mostly focused on companies in Europe
and North America (Pulic, 2000b; Ze
´ghal and Maaloul, 2010; Nazari and Herremans,
2007; Riahi-Belkaoui, 2003), but emerging economies have been gaining global
importance in recent years. Pascal Lamy, the Director-General of the World Trade
Organization, recently commented in a special address that a reshuffling of global
economic power has been witnessed in the past few years (Lamy, 2010). In fact, China
has risen to become the second-largest economy in the world (Central Intelligence
Agency, 2010a). However, IC studies on Mainland China seem to be lacking.
China’s economic development has been fascinating. She is the world’s number one
exporter, and holds the largest foreign exchange reserves (Central Intelligence Agency,
2010a). Hong Kong (formerly a British colony, now a Special Administrative Region of
China since July 1997) has thrived as a trade gateway to mainland China for over a
century and a half (InvestHK – The Government of the Hon g Kong Special
Administrative Region, 2010). Located on the southeast coastline of mainland China,
Hong Kong has served as a go-between for the mainland and the Western world since
colonial times. To access the world’s biggest single market – mainland China’s 1.3
billion consumers – thousands of companies overseas have established their
beachhead in Hong Kong due to its world-class infrastructure, pro-trade policies,
international business environment, stable political environment, sound legal syst em,
and abundant pool of talents (InvestHK – The Government of the Hong Kong Special
Administrative Region, 2010; HSBC, 2010). Despite the small geographical area that
Hong Kong occupies (its size is only 0.0115 percent of the size of mainland China)
(Central Intelligence Agency, 2010b), Hong Kong alone contributed 41 percent of
China’s foreign capital inflows during the period 1979-2005 (Lee et al., 2009). Thus,
there is a strong motivation to study IC and its association with corporate financial
performance in Hong Kong.
This research investigated the relationship between companies’ IC and their
financial performance as well as exploring the general IC development of Hong Kong
during the period 2001 to 2009 in relation to Hong Kong’s aspiration of becoming a
knowledge economy. Empirical evidence, if any, was sought to explore the existence of
a relationship between IC and four key traditional indicators of corporate financial
JIC
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