Measures that matter: an empirical investigation of intellectual capital and financial performance of banking firms in Indonesia
| DOI | https://doi.org/10.1108/JIC-09-2019-0225 |
| Pages | 1085-1106 |
| Date | 21 June 2020 |
| Published date | 21 June 2020 |
| Author | Noorlailie Soewarno,Bambang Tjahjadi |
| Subject Matter | HR & organizational behaviour,Organizational structure/dynamics,Accounting/accountancy,Accounting & Finance,Information & knowledge management,Knowledge management |
Measures that matter: an empirical
investigation of intellectual capital
and financial performance of
banking firms in Indonesia
Noorlailie Soewarno and Bambang Tjahjadi
Department of Accounting, Faculty of Economic and Business, Airlangga University,
Surabaya, Indonesia
Abstract
Purpose –This study aims to investigate the intellectual capital–financial performance relationship using two
models, namely the conventional Value-Added Intellectual Coefficient (VAIC) model and the adjusted Value-
Added Intellectual Coefficient (A-VAIC) model.
Design/methodology/approach –This study is designed as a quantitative research focusing on the
relationship between intellectual capital and financial performance of the banking industry in Indonesia. As
many as 114 data are derived from the publicly listed banks on the Indonesia Stock Exchange for the period of
2012–2017. The multiple regression analysis is employed to test the hypotheses studied.
Findings –In general, the result confirms that intellectual capital affects financial performance. Although not
all hypotheses of the study are supported by either the VAIC model or the A-VAIC model, the results provide a
deeper and new insight on how each component of intellectual capital efficiency (human capital, structural
capital, capital employed, innovation capital) relates to financial performance (return on asset, return on equity,
asset turnover, price to book ratio). The results also justify that further improvements in measuring intellectual
capital are still needed in the future.
Research limitations/implications –This study limits its generalization since the sample is only in the
Indonesian banking industry. Notwithstanding the limitation, the results imply that the Indonesian banking
managers need to be aware of intellectual capital management because of its strategic role in enhancing
financial performance.
Practical implications –This study contributes to the intellectual capital literature by providing empirical
evidence on the use of both models, namely the conventional VAIC and the A-VAIC in the Indonesian banking
industry research setting which is never been studied before.
Social implications –This study has the social implication to the enhancement of the quality life of the
society. The higher the quality of intellectual capital inthe banking firms, the better the banks serve the needs
of the community.
Originality/value –This study contributes to the IC literature by providing empirical research on the use of
the VAIC model and the A-VAIC model in the Indonesian banking industry.
Keywords Financial performance, Intellectual capital, Human capital efficiency, Innovation capital efficiency,
Capital employed efficiency
Paper type Research paper
Introduction
Global business has been developing rapidly as indicated by the development of information
and communication technology, science and intense global competition. Pulic (2004)
explained that the success of a business depends on the capability of using knowledge.
Knowledge as one form of intangible assets becomes the new source of financial performance
and competitive advantage. The shift from the physical-based economy to the knowledge-
based economy has challenged many scholars to find a new way to measure intangible assets,
including intellectual capital. Schiavone et al. (2014) and Chowdhury et al. (2019) stated that
intellectual capital is not only a driving force and an important resource in the creation of
value and sustainable company development but also as a source of innovation and as a key
Measures that
matter
1085
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1469-1930.htm
Received 19 September 2019
Revised 23 February 2020
Accepted 7 May 2020
Journal of Intellectual Capital
Vol. 21 No. 6, 2020
pp. 1085-1106
© Emerald Publishing Limited
1469-1930
DOI 10.1108/JIC-09-2019-0225
in profit growth. Pulic (1998) developed the Value-Added Intellectual Coefficient (VAIC)
model, a monetary-based measurement model of intellectual capital that is capable of
assessing the efficiency of intellectual capital across the industry. Furthermore, Pulic (2004)
also stated that value added is an indicator of business success. It shows the ability of a firm
to create value. It also needs investments in resources, including salaries and interests on
financial assets, dividends to investors, taxes to the state and investments in future
development. The VAIC model of Pulic has been extensively used in research as well as in
corporate practices to measure the intellectual capital efficiency (Nadeem et al., 2018b).
Petty and Guthrie (2000) mentioned that intellectual capital is one of the approaches used
in the assessment and measurement of intangible assets. When using a monetary-based
model, most scholars agree that measuring intellectual capital relates to measuring human
capital, structural capital and capital employed efficiencies (Pulic, 1998,2004;Vishnu and
Gupta, 2014;Ousama and Fatima, 2015;Dumay, 2016;Cleary and Quinn, 2016;Dzenopoljac
et al., 2017;Bayraktaroglu et al., 2019;Smriti and Das, 2018;Kweh et al., 2019;Chowdhury
et al., 2019). Scholars have proven that intellectual capital plays a critical role in enhancing
firms’performance. By properly managing intellectual capital, management of a firm will be
able to improve financial performance (Khalique et al., 2015;Nimtrakoon, 2015;Inkinen, 2015;
Dzenopoljac et al., 2016,2017;Nadeem et al., 2018a,b;Andreeva and Garanina, 2016;
Ozkan et al., 2017;Nadeem et al., 2018a,b;Kweh et al., 2019;Chowdhury et al., 2019).
Chouaibi and Kouaib (2015) conducted a study in the manufacturing Tunisian companies
using the VAIC model and revealed that both managerial ownership and ownership
concentration have a positive impact on intellectual capital performance while institutional
ownership has no significant effect on the VAIC.
Although the importance of intellectual capital is theoretically supported, the empirical
studies show inconsistent results. Most previous studies employ the conventional VAIC
model to measure the association between intellectual capital (human capital, structural
capital and capital employed efficiencies) and financial performance (return on asset,
return on equity, asset turnover, price to book value). Table 1 shows the results of studies
trying to investigate the association between intellectual capital and financial
performance.
Those inconsistent results in intellectual capital studies could be due to unclear
measurements. Some critics on the conventional VAIC model have been stated by some
scholars (Maji and Goswami, 2017;Nadeem et al., 2018b;Vishnu and Gupta, 2014). One of the
attempts to reconstruct the VAIC model was proposed by Nadeem et al. (2018b), called the
adjusted Value-Added Intellectual Coefficient (A-VAIC) model. The essence of the VAIC
reconstruction model into the A-VAIC model lies in one of the intellectual capital components
namely structural capital which is replaced with innovation capital calculated from the R&D.
This study employed both the VAIC and the A-VAIC models. The A-VAIC model is a
model adjustment developed by Nadeem et al. (2018b).Pulic (2004) mentioned that the
calculation of value added is based on two types of capital, namely physical capital and
intellectual capital. In some studies, the VAIC model has been criticized, especially in
measuring structural capital using value added minus human capital (Stahle et al., 2011;
Vishnu and Gupta, 2014;Nimtrakoon, 2015;Maji and Goswami, 2017). In their study, Nadeem
et al. (2018b) claimed that the A-VAIC model provides more consistent results than those of
the VAIC model.
Structural capital as a component of intellectual capital relates to the unique production
process. Mehralian et al. (2013) mentioned that copyrights and R&D are important factors for
a firm in utilizing employees’knowledge. R&D investment is the main source of innovation.
Baklouti et al. (2010) explained that R&D investment plays a critical role in improving
productivity and profitability of a firm. Choong (2008) and Nadeem et al. (2018a) also
mentioned that structural capital is a capital of innovation.
JIC
21,6
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