The impact of intellectual capital on firm performance: a study of Indian firms listed in COSPI
| Pages | 935-964 |
| DOI | https://doi.org/10.1108/JIC-11-2017-0156 |
| Published date | 15 August 2018 |
| Date | 15 August 2018 |
| Author | Neha Smriti,Niladri Das |
| Subject Matter | HR & organizational behaviour,Information & knowledge management,Knowledge management,Behavioural accounting |
The impact of intellectual capital
on firm performance: a study of
Indian firms listed in COSPI
Neha Smriti and Niladri Das
Department of Management Studies,
Indian Institute of Technology (Indian School of Mines),
Dhanbad, Dhanbad, India
Abstract
Purpose –The purpose of this paper is to examine the effect of intellectual capital (IC) on financial
performance (FP) for Indian companies listed on the Centre for Monitoring Indian Economy Overall Share
Price Index (COSPI).
Design/methodology/approach –Hypotheses were developed according to theories and literature review.
Secondary data were collected from Indian companies listed on the COSPI between 2001 and 2016, and the
value-added intellectual coefficient (VAIC) of Pulic (2000) was used to measure IC and its components. A
dynamic system generalized method of moments (SGMM) estimator was employed to identify the variables
that significantly contribute to firm performance.
Findings –Indian listed firms appear to be performing well and efficiently utilizing their IC. Overall, human
capital had a major impact on firm productivity during the study period. Furthermore, the empiricalanalysis
showed that structural capital efficiency and capital employed efficiency were equally important contributors
to firm’s sales growth and market value. The growing importance of the contribution of IC to value creation
was consistently reflected in the FP of these Indian companies.
Practical implications –This study has robust theoretical grounds and employs a validated methodology.
The present study extends knowledge of IC among academicians and managers and highlights its
contribution to value creation. The findings may help stakeholders and policymakers in developing countries
properly reallocate intellectual resources.
Originality/value –This study is the first study to evaluate IC and its relationship with traditional
measures of firm performance among Indian listed firms using dynamic SGMM and VAIC models.
Keywords India, Intellectual capital, System GMM, Firm performance measures
Paper type Research paper
1. Introduction
The growth of knowledge-based, fast-changing and technologically advanced companies in
the world economyhas increased the importanceof intellectual capital (IC)(Petty and Guthrie,
2000; Cañibano et al., 2000). In this cutting-edge economy, tangible and intangible resources
are considered potential sources of strategic advantage (Ruta, 2009). The resource-based
theory of thefirm and tangible and intangibleresources are drawing significantinterest in the
strategic management, economic and accounting literature based on the observed links
between intangible resources and performance measure. Thus, a direct impact of IC on firm
performance is expected (Pew Tan et al., 2008).
Researchers have linked the value of IC to firm performance (Bollen et al., 2005; Kamath,
2008; Dženopoljac et al., 2016). The measure of firm performance classified into three
categories,namely: operational performance, businessperformance and financialperformance
(FP) (B ollen et al., 2005). This paper selects FP as a traditional measure of performance.
Researchers haveused indicators like return on assets (ROA)(Chen et al., 2005, Nadeem et al.,
2017), asset turnover (Chen et al., 2005;Kamath, 2008) and sales growth (SG)(Chen et al., 2005;
Li and Zhao, 2018). Some researchers have also observed the effect of IC on market value
(Chen et al., 2005; Kamath, 2008; Sardo and Serrasqueiro, 2017). This study uses these four
indicators as indicators of firm performance. Simple measures of financial indicators are
not adequate for stakeholder’s analysis of the performance of the knowledge-driven firm.
Journal of Intellectual Capital
Vol. 19 No. 5, 2018
pp. 935-964
© Emerald PublishingLimited
1469-1930
DOI 10.1108/JIC-11-2017-0156
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1469-1930.htm
935
The impact of
IC on firm
performance
Such stakeholders comprise governments, shareholders, suppliers, customers and employees
(Kamath, 2008). Traditional financial accounting measures ignore the role of human capital
(HC, a component of IC), which can mislead decision makers and stakeholders (Grant, 1996;
Stewart, 1997; Bontis, 2001). In response, firms have begun reporting intangibles due to their
growing importance in strategic competitive advantage. IC generally comprises of those
intangible resources that play an important role in the wealth –creation process of a firm,
including the sumof all skills and competencies possessedby employees that create value for
the firm (Mitchell Williams, 2001; Choo Huang et al., 2007; Smriti and Das, 2017).
In developing or emerging economies such as India, thereporting of IC and its disclosure
are in their infancy. The knowledge economy of India remains in a renovation phase, and
investment in knowledge infrastructure is required. The quality of human resources is a
primary concern in emerging countries because a knowledgeable, flexible and well-trained
workforce enhances the competitivenessof an organization. Accordingly, the Government of
India has recognizedthe expansion of intellectual resources, human resourcesand innovation
as a core scheme u nder the Ministry of S kill Developmen t and Entrepreneur ship (2015).
This paper investigates the effect of IC on business performance in the service and
manufacturing sectors in India. In 2015–2016, the Indian service market contributed
approximately66.1 percent of gross value-added(VA) growth in India (IBEF Report,2017a, b).
The Government of India aims to expand the manufacturing sector share of gross domestic
product from 16 to 25 percent and to create 100m new jobs by 2022. The manufacturing
component of theIndex of Industrial Production (IIP)grew by 4.9 percent in FY17 (FY: Indian
financial year, April to March) and 1.8 percent in the first quarter of FY18.
In 2016–2017, the service sector was responsible for 60.7 percent of the foreign direct
investmentequity inflows, highlightingthe emergence of India as an attractive destinationfor
investments in manufacturing-oriented and service-oriented sectors. The manufacturing and
service sectors are among most capital and knowledge-intensive and fastest-growing sectors
in the Indian economy, and contribute a major portion of the country’s foreign exchange
earnings. Bothtypes of industries require extremely specializedknowledge and skills and are
subject to organiz ational implicit kno wledge and capabilit ies (Sharabati et al., 2010).
The endurance of these industries requires significant volumes of human resources and
physical capital (PC) for its endurance.
The study addresses the gap in the literature by exploring the relationships between IC and
traditional measures of corporate performance in the service and manufacturing industries in
India. The findings of this study will be useful for domestic manufacturing and service-oriented
industries seeking to measure IC performance and will also offer insights on critical issues that
demand quick consideration to enhance IC performance. Firms can identify whether IC truly
defines their performance and their resource reallocation decisions. Furthermore, stakeholders
can obtain insights on the factors driving the performance of the firms. This study tries to
extend the IC literature and justifies the link between IC and firm FP to ensure that the
inclusion of IC disclosures on balance sheets by accounting managers is fruitful.
The paper is designed into following parts. Section 2 deals with the literature review
related to IC, measurement of firm performance and formulation of the hypotheses. Section 3
discusses the variables and research methodology used. Sections 4 and 5 deal with the
findings of the empirical analysis and discussion of the results, respectively, followed by
limitations and future implications in the last section.
2. Background
2.1 Review of the IC measurement and its sub-components
The total of hidden values of the firm also referred as IC (Sardo and Serrasqueiro,
2017) is responsible for the increase in the market value of stock of many firms in
comparison to the replacement cost of their tangible resources (Vishnu and Gupta, 2014).
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