Intellectual capital in Indonesia: dynamic panel approach

DOIhttps://doi.org/10.1108/JABS-02-2018-0059
Pages240-262
Date21 March 2019
Published date21 March 2019
AuthorTessa Soetanto,Pei Fun Liem
Subject MatterStrategy,International business
Intellectual capital in Indonesia:
dynamic panel approach
Tessa Soetanto and Pei Fun Liem
Abstract
Purpose Intellectual capital (IC)has been considered as a valuable asset in the wealth creation and
sustainabilityof the company; however, limited andmixed results are found on its impact on firmfinancial
performance and market value(MV). This paper aims to investigate the influence of IC towardMV and
financial performance of publicly listed firms in Indonesia. In addition, this research also presents the
comparisonof the high and low level of knowledgeindustries regarding IC performance.
Design/methodology/approach A balanced panel data of 127 firms from12 industries in Indonesia
during 2010 until 2017 was evaluated using dynamic panel regression and administering a well-
developed BlundellBond instrument (dynamic panel data estimator) to account for endogeneity
problem.
Findings The results of this study showed that IC had a significant and positive impact on firm
performance. Specifically,structural capital efficiency and capital employed (CE) efficiency have been
contributed to the value creation of the company, after controlling for firm size and type of industry.
Differentto the theoretical expectation, this researchfound no significant relationship betweenIC and MV
of the firm. However,when the sample was clustered into high-level and low-levelknowledge industry, CE
displayedpositive and significant relationshipin high-level industry.
Originality/value This research contributes to IC research by having a larger sample of Indonesian
firms from all industries except banks and financial institutions and using Modified Value Added
Intellectual Capital measurement model. To address the endogeneity problem, dynamic panel
regressionusing system generalized methodof moment was applied.
Keyword Firm performance
Paper type Research paper
Introduction
Previously, it was believed that the most important asset in a company would be the
physical/tangible assets such as machinery, equipment and building. However, it is no
longer relevant to the current economy or what is called as knowledge-based economy
(KBE), where the source of productivity and business value creation has shifted to
intangible assets or also known asknowledge-based capital (KBC), e.g. organization know-
how, software, patents, designs and firm-specific skills (Edvinsson and Malone, 1997;
Stewart, 1997;Sveiby, 1997;OECD,2013).
The World Bank and Organisationfor Economic Co-operation and Development (OECD), as
cited by the Asian Development Bank (2014), defined KBE as “an economy that uses
information resources-technologies, skills and processes to achieve and accelerate
economic growth potential” (p. X). Moreover, the KBC refers to various types of intangible
assets that create future benefits and can be classified into three types: computerized
information, innovativeproperty and economic competencies (OECD, 2013).
Firms in OECD countries are investing in KBCas much as or even more than in the physical
capital; in fact, in some countries, the investment made by business entities in KBC is
Tessa Soetanto and
Pei Fun Liem both are
based at the Management -
International Business
Management, Universitas
Kristen Petra, Surabaya
East Java, Indonesia.
Received 13 March 2018
Revised 10 October 2018
Accepted 25 October 2018
PAGE 240 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 13 NO. 2 2019,pp. 240-262, ©EmeraldPublishing Limited, ISSN 1558-7894 DOI 10.1108/JABS-02-2018-0059
exceeding the physical capital significantly. Based on a study conducted in the European
Union and in the USA, KBC is not only boosting growth and productivity about 20 to 34 per
cent of labor productivity growth but also transforming firms to be more competitive (OECD,
2013).
As the largest economy in Southeast Asia, Indonesia has entered the Association of
Southeast Asian Nations (Asean) Economic Community and regional economic integration
in 2015 with the implication that prioritizing the economy based on the previous model of
growth will be not enough to uphold its position in KBE. Indonesia needs to focus more on
high-end technologies, skills and services to sustain a high growth of economic level
beyond 2015 (Asian Development Bank, 2014). The development of Indonesia in building
KBE could be seen by the fact that during the year of 2003-2012, the economic growth
engine and employment of Indonesia hadshifted to services (an average of 3.3 percentage
points) then manufacturing sector (average 1.8 percentage points) toward GDP growth,
whereas 82 per cent employment out of 20 million of new job creations is in the services
sector (Asian Development Bank, 2014). Remarkably, the contribution from the services
sector made up 56.7 per cent of the GDP, compared to the manufacturing sector whose
contribution only made up 21.5 per cent of the GDP in 2016 (OECD, 2016). Besides, to
boost its innovative capacity, Indonesia has also participated in the innovation project by
OECD for inclusive development in the area of science, technology and innovation policies
(OECD, 2014). Based on those facts previously, Indonesian firms are expected to use more
intangible assets in achieving competitive advantage and that leads to the statement of
problem of the current study whether Indonesian firms are using intellectual capital (IC) to
achieve their objectives,specifically toward firm performance and market value (MV).
The term KBC/asset (by economists) or intangible assets (as in accounting literature) or
also referred to as IC (as in management) is often being used interchangeably (Bontis,
2001). It plays a significant role in the economy and experiencing tremendous growth of
importance until today (Bollen et al.,2005) and has received many attentions from various
scholars and practitioners in a worldwide over the past two decades as knowledge-based
equity of organizations (Pettyand Guthrie, 2000;Bontis, 2001).
From now and onwards, the term of intellectual capital will be mentioned as IC. The
position of IC has dominated the creation of wealth in firms for the past years (Vishnu and
Gupta, 2014); therefore, it is noteworthy to manage and measure IC to develop their
competitive competence and achieve companies’ goals (Wang, 2008). To keep the value
and growth, companies will likely depend more on the performance of their IC along with
the growth of the knowledge economy to dominate field of commerce (Sveiby, 2010).
According to several scholars, IC is believed to be the hidden value that is not revealed
in the financial reports (Edvinsson and Malone, 1997;Chen et al., 2005;Mondal and
Ghosh, 2012). IC itself is not very easy to be recognized, detected and reported in the
financial reports (Nazari et al., 2007;Nimtrakoon, 2015). Current financial reporting
standard cannot adequately explain the underlying firm value, which leads to the
problem of information asymmetry for investors and negatively influence to the value of
financial statements in the KBE (Bukh et al., 2005).
The main objective of this research is to extend the study of IC in Indonesia (Feimianti and
Anantadjaya, 2014;Razafindrambinina and Anggreni, 2011) as the main driver of
competitive advantage in KBE by unpackinghow IC is contributing to firm performance and
MV of all sector industries in Indonesia, using the Modified Value Added Intellectual Capital
(MVAIC) that will be referred to MVAIC for the rest of the paper, a model to measure IC
efficieny in more comprehensive manner (Nazari et al.,2007;Vishnu and Gupta, 2014;
Nimtrakoon, 2015). Consideringthat the endogeneity problem between IC efficieny and firm
performance or MV that is ignored in the previous study will be taken into account in the
current discussion. Overall, this study contributes to body of IC literatures at least in three
ways. First, MVAIC is used as IC measurement, unlike other previous studies that used
VOL. 13 NO. 2 2019 jJOURNALOF ASIA BUSINESS STUDIES jPAGE 241

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