Comparative justification on intellectual capital
| Published date | 01 December 2004 |
| DOI | https://doi.org/10.1108/14691930410566997 |
| Date | 01 December 2004 |
| Pages | 522-539 |
| Author | A. Seetharaman,Kevin Lock Teng Low,A.S. Saravanan |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Comparative justification on
intellectual capital
A. Seetharaman
Multimedia University, Faculty of Management, Persiaran Multimedia,
Selangor Darul Ehsan, Malaysia
Kevin Lock Teng Low
Monash University Malaysia, Bandar Sunway, Selangor Darul Ehsan,
Malaysia, and
A.S. Saravanan
Multimedia University, Faculty of Management, Persiaran Multimedia,
Selangor Darul Ehsan, Malaysia
Keywords Intellectual capital, Human capital, Financial reporting
Abstract With the development of computerization and networking capabilities, there is a
significantly enhanced opportunity for sharing information and knowledge world-wide. For an
organization to survive in these turbulent times, there is a great need for its continuous renewal
through the introduction of new, innovative products and processes that are based on new
knowledge. As a result, the management and measurement of intellectual capital have attracted a
lot of attention in recent years both in the media and from academia. This paper assesses different
methodologies of intellectual capital measurements, both from a macro valuation standpoint and
from the operating perspective. Valuation metrics are suggested and it demonstrates how it is
applied to a cross-section of firms. The paper also shows that there is no conceptual framework
commonly accepted and there is a considerable lack of consistency both inter-country and
intra-country. This paper has taken three firms from distinct industries and has applied human,
relational or structural capital metrics depending on which is the most relevant.
Introduction
Knowledge underlies the creation of value. Successfully utilizing that knowledge
contributes to the progress of society. Knowledge in business is manifested as
intellectual capital, which includes human capital, structural capital, intellectual assets
and intellectual property. It is easy to get puzzled in the maze of terminology
surrounding intellectual capital. Knowledge management, organizational learning,
intangible assets, invisible assets and revenues, are also a few of the buzzwords. For
the purpose of this paper, we will refer to “intellectual capital” as the umbrella term
under which these other terms fall.
While everyone accepts the existence of intellectual capital (IC), extensive debate
continues over how to measure and manage this capital. Some insist that the
accounting profession must emerge from the Middle Ages and recognize these assets
on financial statements. Others argue that intangible assets are not mea surable in
dollar terms. The continued debate has yet to be resolved with a generally accepted
method of measurement. This difficulty in valuation and lack of awareness of
intangible assets is leading managers today to make uninformed capital investment
decisions. Current attempts to quantify intellectual capital recognize that this
discrepancy between the market capitalization of a firm and the replacement value of
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
www.emeraldinsight.com/researchregister www.emeraldinsight.com/1469-1930.htm
JIC
5,4
522
Journal of Intellectual Capital
Vol. 5 No. 4, 2004
pp. 522-539
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930410566997
the firm’s tangible assets is largely composed of the firm’s intellectual capital. As
replacement value of assets can be difficult to measure, book value is used as a proxy
for replacement value.
Intangible assets include all assets that are not on the balance sheet, yet contribute
to revenue generation. Intangible assets, like physical assets, create shareholder value
when they are expected to generate above average returns. A defining characteristic of
firms with a high proportion of intangible assets, also called “knowledge firms”, is their
reliance on knowledge workers and the management of knowledge assets to add value
in their products and relationships. Knowledge assets are a type of intangible asset,
which causes three unit qualities that physical assets lack. First, a physical asset is a
scare because it can only be deployed in one place at a time (rival assets), knowledge
assets can be deployed simultaneously in multiple locations and for multiple projects.
For examples, American Airlines Sabre reservation systems, which contains valuable
information on flight schedules and is used by hundreds of travel agents and travel
web sites, accounts for 60 per cent of AMR Corporation’s total market value.
A second significant difference between tangible and intangible assets, while
physical assets experience diminishing returns at some point, knowledge assets can
experience increasing returns. This increase is due to the cumulative nature of
knowledge. Finally, there are also network effects associated with knowledge assets.
Knowledge assets have an inherent feedback mechanism that leads to the
self-propagating virtuous circle. This “winner takes all” environment increases the
importance of being a first mover in knowledge intensive industry.
Intellectual capital
We prefer a three-part definition of intellectual capital that includes human, relational,
and structural components (see Figure 1).
Human capital – employee competence
Organizational wealth of nations, “employee competence involves the capacity to act in
a wide variety of situations to create both tangible and intangible assets”. These
employees of the firm contribute to generating knowledgeand ideas. All employees are
human capital, but all employees are not knowledgeworkers. An individual who works
on an assembly line is considered human capital due to his potential of improving the
Figure 1.
Types of intellectual
capital
Comparative
justification
523
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