«International Journal of Accounting and Financial Management (IJAFM) Universal Research Group, (ISSN: 2322-2107 Vol.16, November ...»
International Journal of Accounting and Financial Management (IJAFM)
Universal Research Group, (www.universalrg.org)
Vol.16, November 2013
The Assessment of Intellectual Capital Efficiency on Performance
Efficiency of Listed Companies in Tehran Stock Exchange
Associate Professor of Yazd University of Yazd
Mohammad Alikhasi*(Corresponding author)
M.S in Business Management of Yazd University of Yazd
M.S in Information Technology Management of Sistan and Baluchestan University of Zahedan
The this research was to study effect of Intellectual Capital efficiency on accepted manufacturing company's performance efficiency in Tehran Stock Exchange. Statistical community of this research is 240 accepted manufacturing companies in Tehran Stock Exchange between 2005 and 2010. This statistical sample is selected randomly and by using the sampling formula of 100 companies.
The amount of Intellectual Capital efficiency and its components (Human, Relational and Structural Capital) by Palic method and the company's performance using Data Envelopment Analysis model of researches were calculated. The results obtained by research questions show that there is no significant relation between the Intellectual Capital efficiency and its components with the company's performance efficiency.
Keywords: Manufacturing companies, Intellectual capital efficiency, Performance efficiency, Tehran Stock Exchange.
1-INTRODUCTION Traditionally land, labor and capital were considered to be the most valuable assets in economics. Since time conventional physical assets were considered to be the main determinants of the performance of any economic activity. But the fast expansion of science, technology and finally the globalization altered the pattern and structure of the production system. The new production system is mainly driven by technology, knowledge, expertise and relations with stakeholders etc which may collectively be described as Intellectual Capital. In the new economic system, which is popularly known as the knowledge economy, intangible or intellectual assets have eventually recognized as the prominent resources.Companies like software, finance, pharmaceutical; banking, hotel etc. depend to a considerable extent on the intellectual capital for earning revenues.
Production or Manufacturing companies use Intellectual Capital with its physical assets to International Journal of Accounting and Financial Management (IJAFM) Universal Research Group, (www.universalrg.org) ISSN: 2322-2107 Vol.16, November 2013 sharpen their competitive edge.As a result, it is important to recognise intellectual capital components as the source which leads to the creation of value for firms. Firms should consider competitive advantage for strategic survival and, since markets, products, competitors and regulations are rapidly changing in the society, continual improvement of knowledge and innovation will enable them to maintain sustainable competitive advantage.
For this reason, managers regard knowledge and ability of creating and applying knowledge as the most important source of sustainable competitive advantage because knowledge is considered an asset and efforts for managing knowledge and applying intellectual assets have been considerably successful in terms of directing the organizations. Bornemann et al. (1999) found that enterprises, which have managed their intellectual capital better, had achieved stronger competitive advantage than the general enterprises.
Also they reported that companies which had strengthened their own intellectual capital management compared to the others had performed better. Brennan and Connell (2000)claimed that intellectual capital management played an important role on the longterm business performance of an enterprise. In this present study researcher try to find whether the Intellectual Capital Efficiency can significantly influence on performance Efficiency of company or not. The objective of the paper is to define Intellectual Capital and to highlight different methods of measuring Intellectual Capital. After that, an investigation is made to find out the relationship between Intellectual Capital Efficiency and performance Efficiency. The remainder of this paper contains a brief summary of the relevant literatures. It then describes the development of Questions and research method before analyzing and discussing results.
2- LITERATURE REVIEW 2-1- Definition of intellectual capital The term intellectual capital includes inventions, ideas, general knowledge, design approaches, computer programs and publications. An ex-editor of the business magazine “Fortune”, Thomas Stewart describes intellectual capital as “something that cannot be touched, although it slowly makes you rich”. Jacob Ben- Simchon, (2005)the term ‘intellectual capital’ uses to enclose all of the non- tangible or non-physical assets and resources of an organization, as well as its practices, patents and the implicit knowledge of its members and their network of partners and contracts. Stewart (1997) defines it as ‘packaged useful knowledge’, Sullivan (2000) as ‘knowledge that can be converted into profit’, Roos et al (1997) as the ‘sum of knowledge’ of its members and practical translation of this knowledge into brands, trademarks and processes. Edvinsson and Malone (1997) define it as the possession of knowledge, applied experience, organizational technology, customer relations and professional skills that provide a company with a competitive edge in the market. One of the most popular models for classifying intellectual capital(IC) is the Saint- Onge, H. (1996) model developed in the early 1990s. It divides intellectual capital into three parts: Human capital, Structural capital; and Customer capital.
A slight variant of this model developed by Dr. Nick Bontis re-states customer capital as relational capital to include relationships with suppliers. Human capital is recognized as the International Journal of Accounting and Financial Management (IJAFM) Universal Research Group, (www.universalrg.org) ISSN: 2322-2107 Vol.16, November 2013 largest and the most important intangible asset in an organization. Ultimately it provides the goods or services that customers require or the solutions to their problems. It includes the collective knowledge, competency, experience, skills and talents of people within an organization. It also includes an organization’s creative capacity and its ability to be innovative. Although investment in human capital is growing, there is still no standard measure of its effectiveness in companies’ balance sheets. Structural capital is the supportive infrastructure for human capital—it is the capital which remains in the factory or office when the employees leave at the end of the day. It includes organizational ability, processes, data and patents. Unlike human capital, it is company’s’ property and can be traded, reproduced and shared by, and within, the organization. Relational capital is a company’s relationship with its customers and with its network of suppliers, strategic partners and shareholders. The value of these assets is determined by the company’s reputation or image (MERITUM guidelines). These elements of IC are summed up in the definition of CIMA (2001) “IC is the possession of knowledge and experience, professional knowledge and skill, good relationships, and technological capacities, which when applied will give organizations competitive advantage.
2-2- Measurement of intellectual capital The Scandinavian insurance company, Skandia AFS, is the pioneer in measuring and reporting Intellectual Capital. The company has been providing intellectual capital information in a supplementary statement to its Annual Reports since 1994. The supplementary statement has been developed to bring out the company’s human focus, current customer focus and its structural process focus. In addition, the future development related information is provided in addition to the historical financial data. However the various approaches for measuring Intellectual Capital are categorised into four measurement approaches by E.E.Sveiby (2007). The categories are an extension of the classifications suggested by Luthy (1998) and Williams (2001). These are; (i) Direct Intellectual Capital methods (DIC): Estimate the Rupeevalue of intangible assets by identifying its various components. Once these components are identified, they can be directly evaluated, either individually or as an aggregated. This method includes The Value Explorer, Intellectual Asset Valuation, Total Value Creation (TVC), Accounting for the future (AFTF) etc. (ii) Market Capitalization Methods (MCM): Calculate the difference between a company's market capitalization and its book value as the value of its intellectual capital or intangible assets. Markets to Book Value, Tobin’s Q are examples of this method. (iii) Return on Assets methods (ROA). It is the capitalisation of industry aboveaverage earnings by the company’s average cost of capital. Industry aboveaverage earnings is the multiplication of company’s excess ROA over industry ROA with its average tangible assets. This method includes Knowledge Capital Earnings, Economic Value Added (EVATM), Calculated Intangible Value (CIV), Value Added Intellectual Coefficient (VAICTM) etc. (iv) Scorecard Methods (SC). The various components of intangible assets or intellectual capital are identified and indicators and indices are generated and reported in scorecards or as graphs. Examples of this method are National Intellectual Capital Index (NICI), IC RatingTM, ICdVALTM, Value Chain Scoreboard etc.
International Journal of Accounting and Financial Management (IJAFM) Universal Research Group, (www.universalrg.org) ISSN: 2322-2107 Vol.16, November 2013 2-3- Influence of intellectual capital on corporate performance Davenport and Prusak (1998) note that technological advances in data processing, Communication and transportation, as well as customer demand and strategists’ planning have made the world economy to change very fast. Teese (2000) states that intangible assets of the firm and its IC are the keys to achieving sustainable competitive advantage and drives economic growth.Reed (2000) finds that intellectual capital is a strong predictor of a company’s performance. Bontis et al (2000) investigated three elements of intellectual capital, namely the human, structural and customer elements, as well as their interrelationships. The The main conclusions that could be drawn from the study are that human and customer capital are significant factors in the way in which businesses are run and that structural capital has a positive influence on business performance. Riahi-Belkaoui (2003) has tested the relationship between intellectual capital and the performance of selected multi-national companies of USA. The result suggests that intellectual capital is positively associated with financial performance. Saudah Sofia (2005) examines the impact of the degree and form of IC on management accounting practices, specifically, performance measurement and corporate performance. Results suggest that IC has influence on the corporate performance. Ming-Chin Chen et al., (2005)have tried to examine the relationship between the value creation efficiency and firm’s market valuation and financial performance. They have found that the intellectual capital has a positive influence on the market value and the financial performance. Paula Kujansivu and Antti Lِnnqvist (2005)try to find the relation between monetary value of Intellectual Capital and value creation efficiency of Intellectual Capital of Finnish companies. The study results show value of IC and efficiency of IC are somehow related. Maria do Rosلrio Cabrita and Jorge Landeiro Vaz (2005) examine the inter relationships and the interaction effects among intellectual capital components and organizational performance, in the Portuguese banking context. The study results indicate the significant relationship between intellectual capital and organizational performance. Syed Najibullah (2005) investigates empirically the value creation efficiency of Intellectual Capital and market valuation and financial performance of 22 Bangladesian Banks listed on Dhaka Stock Exchange. The study results support the positive role of intellectual Capital in creating corporate value. Norma Juma (2006) tries to find the relationship between intellectual Capital and New Venture Performance in high tech ventures of U.S.A.
The findings of this study suggest that human capital is the most critical component of IC when predicting operating performance of high-tech ventures, while intellectual property is the crucial component when predicting market-based performance. Hong Pew Tan et al., (2007)have reported a positive association between intellectual capital of firm and their financial performance. G Barathi Kamath (2007), after analyzing the human capital and the physical capital of 98 scheduled commercial banks of India, has studied their impact on the value based performance during a period of five years from 2000 to 2004. His study confirms that the observed vast differences in performance of different segments of Indian banks are mainly due to the underlying differences in HC. Flavio L. Richieri (2007) makes a study with IC stock (CIA) and IC efficiency (ICE) and corporate financial performance as measured by ROA, ROE and ROS of 1000 biggest Brazilian companies. The study results suggest the existence of a positive relation between both CIV and ICE and the dependent International Journal of Accounting and Financial Management (IJAFM) Universal Research Group, (www.universalrg.org) ISSN: 2322-2107 Vol.16, November 2013 variables ROE, ROA and ROS. B.A Ranjith Appuhami (2007) investigates the impact of value creation efficiency of Intellectual Capital on investors’ capital gain on shares of listed companies in Thailand Stock Exchange.