INTRODUCTION:
The
term “Knowledge economy” (Fritz Mechuip) propagated by Philip Kotler has got
tremendous attention during the last two decades as the knowledge asset became
the supreme asset in the organization and industries. The knowledge assets or
Intellectual assets are forming part of Intangible assets which is presented In
the balance sheet with an optimum level of disclosures. Intangible Assets
include knowledge, experiences , Skills and traits etc.
which
are difficult to measure, whereas both Physical and financial assets of a firm
include tangible assets like building, machinery, plants etc.. and working
capital, owner’s equity, retained earnings etc.. Has been reported without
force. We are witnessing that the Market Value differs from Book Value of
assets; this difference is due to the performance of Intangible assets or
Intellectual Capital of the firm.
Knowledge
and Intellectual Capital (IC) contributes largely to the competitive edge
(Wiig: 1997). IT, ITeS, BPO, KPO companies are having appreciable amount of
intellectual assets in the form of Human Assets with good grade of intelligence
and academic credentials and Intellectual Properties like patents, trademarks,
licensing, copyrights etc. The Directors and BOD members including CEOs of
major IT companies are either expelled or retained in the business to withstand
the keen competition in the technology field. They are paid
highest remuneration and other compensation to carve the fruitful outputs of
intelligence from them. Even the technicians and designers like personnel have
been paid high in this sector all that costs are treated as Human cost with
respect to conventional accounting standards and written off against profit in
the Income statements. Ante Pulic (1998) identifies these costs as Human Assets
and he developed an intellectual capital measurement tool called VAICTM.
This
study makes an attempt to analyze the effect of Intellectual capital efficiency
on the firm performance of IT industry in India by taking The NSE-IT index
companies into account. The data of the 10 respective companies in the NSE-IT
index has been collected from secondary sources and measured the value of IC
Using Ante Pulic’s VAICTM model. The firm performance Indicators are
summarized towards the selection of Return on Equity (ROE), Return on Assets
(ROA) and Net Profit Margin. Many country specific and industry specific
analysis have been made by previous researchers to analyse the very
relationship of IC with these performance Indicators. Significant relationship
between IC on ROA has been concluded (Nik maheran and Nik Muhamed et.al :2009,
Firer and Williams :2003, Muhamed Ismail :2009, Wang:2001, Gosh and
Mondal:2005). Researchers also Concluded that there is significant relationship
between IC (VAICTM.) and ROE (Fethi Calisir : 2010, Gosh and Mondal
:2009, Kehelwatatenna et. al :2010). The strong significant relationship of IC
on performance Indicators ROA and ROE has been established (Muhamed Ziqul Haq
:2014, Muhamed Gorban Mehri et. al :2013, Chang and Hsieh: 2011, Chen et. al: 2005).
The effect of IC (VAICTM.) on Net Profit Margin and Gross Profit
Margin has been proved by Chang and Hsieh (2011) and Gosh and mondal (2012).
Literature
Review:
A multitude of research has been done previously to
test the importance of intellectual capital(IC) towards firm performance most
particularly in knowledge intensive industries like Pharmaceutical Industry,
IT, ITeS, KPO, Electronics etc..The empirical research showed IC as strategic
asset of organization essential to boost up the performance.
The
studies related to IC have been getting global attention for a couple of
decades due to its significance in earnings management. Firer and William
(2003) tested the effect of Intellectual Capital on the firm performance
indicators (ROA, ATO, M/B ) of 75 listed south African companies and concluded
a mixed association between IC and Performance. Min Chin Chen (2005) tested the
effect of IC on the performance of Taiwanese listed companies using VAICTM
tool and concluded IC had a positive impact on the performance and market to
book ratio(M/B ratio). Anvari Rostami et.al. (2005) tested the impact of IC on
firm value of the financial companies in Ireland and found a positive impact of
IC on the performance of the firm.
Bharathi
Kamath (2007) Examined the Impact of IC on firm performance of Indian Banking
sector during the period 2000 to 2004 and concluded there is a vast difference
in the intellectual capital and performance of Indian banking sector. Yalama
and Goskun (2007) analyzed the impact of IC on performance (ROA, ROE,LDR) of
all the banks listed in Istanbul Stock Exchange, Turkey using
VAICTM tool. The study concluded that IC is an important factor to
boost the earnings than that of the physical capital.
Kamath
(2008) analyzed the effect of IC on firm performance of 25 pharmaceutical
companies in India. The study failed to show any relationship between IC and
firm performance in terms of profitability. Kamath (2008) examined the impact
of VAIC on ROA, ATO and M/B of 25 companies listed in Bombay Stock Exchange ,
India. The study concluded that the Human Capital Efficiency significantly influences
the firm performance and profitability.
Nik
Maheran and Nik muhamed et. al (2009) has tested the impact of IC on the
performance of Malaysian financial sector using empirical panel data analysis
with Ante Pulic’s VAICTM tool and concluded a positive and
significant relationship on the firm performance indicators of profitability
and ROA. Ting and Lean (2009) tested the impact of IC on financial companies in
Malaysia during the period 1999 to 2007 using ante Pulic’s VAICTM
tool and a positive and significant relationship have been concluded. Gosh and
Mondal (2009) found a significant impact of IC on Return On Assets , Asset Turn
Over ratio and Market to Book ratio of the 50 software and 30 pharmaceutical
companies in India. Makki and Lodhi (2009) analyzed the impact of IC on firm
performance ( ROI) of 25 companies listed in Lahore Stock Exchange and
concluded a significant and positive relationship between IC and ROI. Muhamed
Ismail (2009) studied the impact of VAIC on operating profit, Sales, ROA, M/B ratio
of 18 financial companies in Malaysia. The study reported a positive and
significant relationship of VAIC with the listed performance measures. Fethi
Calisir et.al. (2010) studied the impact of IC by applying VAIC to compare
quoted IT and Communication companies listed in Istanbul Stock Exchange ,Turkey
during the period 2005 to 2007 . After running a multiple regression analysis
the study was concluded that Capital Employed efficiency (CEE) found to be the
significant predictor of ROE and productivity. Maditinos (2011) found a
strategically important asset to boost up the firm performance by analyzing the
effect of IC on financial performance of 96 Greek companies listed in Athens
Stock Exchange. The study concluded a statistically significant relationship
between HCE and financial performance. Wang (2011) has done a panel data
analysis on the impact of IC on firm performance of Taiwanese listed companies
Using VAICTM and its components and concluded a positive significant
relationship of IC with the firm performance parameters ROA and M/B ratio.
Abdula and Solian (2012) examined the correlation between IC components and
corporate performance and reported a significant and positive relationship of
all the VAIC components (HCE, SCE, CEE) with performance measures. Relational
Capital efficiency showed the highest Correlation.
Muhamed
Gorban Mehri et.al (2013) analyzed the impact of IC on ATO, ROA , ROE and M/B
ratio of high intangible intensive companies and concluded that IC has a
positive significant relationship with all the performance indicators taken for
study. Muhamed Ziqul Haq (2014) examined the efficiency of IC of the Commercial
Banks in Pakistan Using VAICTM tool and ROA, ROE
and ATO as the performance indicators. The study concluded a positive impact of
IC on ROA and ROE but not on ATO. Dominique and Zaenab (2015) analyzed the
impact of IC on performance in times of financial disturbances in Pakistan
during the period 2004 to 2011 using VAICTM and concluded HCE and
CEE (VAICTM components) were positively related to firm performance
mainly after the crisis.
A
majority of the studies mentioned above followed traditional OLS regression
estimates for data analysis. The studies done using a recent econometric
methods are very rare and moreover the performance of IT sector, which is rich
in intellectual assets, was not given much attention previously for an industry
specific or sectoral index specific study which is indeed considerable due to
the nature of IT sector where intellectual capital is normally high. This study
is a benign attempt to analyze the impact of Intellectual Capital of the IT
companies listed in NSE-IT index by using panel data for the period 10 years
from 2007 to 2016. The estimates derived from the panel data analysis are more
reliable over other conventional estimation techniques.
Theoretical
Model:
The
following theoretical models are formulated keeping in view the relationship
with Variables.
Research
Hypothesis:
H1a:
There is a positive relationship between
Value Added (VA) And Financial Performance Indicators (ROE, ROA, NPM).
H1b:
There is a positive relationship
between Value Added Intellectual Coefficient (VAICTM) and financial
performance Indicators (ROE, ROA, NPM)
H1c:
There is a positive relationship
between VAICTM Components i.e. (VACA, VAHU, STVA) and financial
performance Indicators (ROE, ROA, NPM)
MATERIALS AND METHODOLOGY
Ante
Pulic’s VAICTM Model:
VAIC™
an Austrian approach is one of the important and consistent approaches
for measuring the IC’s performance of insurance sector. This approach is
alternative to traditional approaches in which IC performance is based on
assets, net profit and shareholder equity. Many researchers, practitioners and
academicians have used this approach in their research work. For details see,
Bontis et.al. (2000), Goh (2005), Mavridis (2005), Goo and Tseng (2005), Ji
Jian et.al. (2006), Kamath (2007), Tan et.al.(2007), Abeysekera (2008), Makki ,
Lodhi and Rehman (2008), Cahill and Sindhu (2010), Ahangar (2011),
Maditinos(2011) etc..
Definitions
of Variables Used in the Analysis:
VA
(Value Added) = Operating Profit + Personnel Cost + Depreciation + Amortization
HC
(Human Capital) = Personnel cost (Employee costs including Wages and Salaries)
treated as an investment.
Table
2 depicts the empirical results of three models, Model 1 (M1) For ROE, ROA and
NPM depicts the relationship of Value Added and Firm performance measures of
the firm. The results in Table 1 depicts that Value Added (VA) is positively
related to ROE (β=0.14), ROA (β=0.15), and NPM (β=0.1) and these
relationships are statistically significant. The F-Prob. Value shows that the
model is statistically significant for ROE at (p<0.01), ROA at (p<0.01)
and NPM at (p<0.01) The projected model 2 (M2) shows the empirical outcomes
of VAICTM (Measure of Intellectual Capital as per Ante Pulic-2000)
with financial performance indicators. The result depicted that VAICTM
has a positive and statistically significant relationship with all financial
performance indicators. F-Prob. value shows that this model is also significant
for ROE(p<0.01), ROA (p<0.01) and NPM (p<0.01).
The
projected model 3 (M3) for ROE , ROA and NPM depicts the empirical relationship
of VAICTM components (i.e. STVA , VAHC , VACA ) with financial
performance indicators. The analytical results shows that the Value Added
Structural capital efficiency (STVA) has a positive and statistically
significant relationship with ROA and NPM at (p<0.01) but a negative significant
relationship with Return On Equity (p<0.05). Value Added Human Capital
efficiency (VAHC) shows positive and statistically significant relationship
with Return On Assets (p<0.01)( Ahangar (2011), Maditinos et al (2011)) but
negative and significant relationship with Return On Equity (p<0.05). VAHC
depicts a positive but insignificant relationship with Net Profit Margin.
Value
Added Capital Employed (VACA) failed to show any statistically significant with
any of the financial performance indicators. The projected model M1 for ROE
contributes 38% positive variation in profitability. The projected model M3 for
NPM contributes 27% positive variation in profitability where STVA is shown to
be as most significant component.
CONCLUSION
AND DISCUSSIONS:
The
current study is a benign trial to study the empirical performance of
Intellectual Capital through VAICTM, VA models and components of
VAICTM and its relationship with financial performance measures (
ROE, ROI and NPM) with special reference to the IT industry in India. This
study has concluded the following inter-linkages financial performance
Indicators and VAICTM components.
· A positive and statistically significant relationship
of VA and Financial Indicators (ROE, ROA, NPM)
· A positive and statistically significant relationship
of VAICTM with profitability (ROE, ROA, NPM) at (p<0.01).
· A positive and statistically significant of structural
capital efficiency with ROA and NPM at (p<0.01) but a negative and
statistically significant relationship with ROE at (p<0.02)
· Value Added Human Capital efficiency shows positive
and statistically significant relationship with ROA at (p<0.01) but a
negative and significant relationship with ROE at (0.05). VAHC shows a positive
but insignificant relationship with NPM.
· Value Added Capital Employed efficiency failed to show
statistically significant relationship with profitability and firm performance.
This is also concluded by a previous study by Firer and William (2003).
The
results of this study keep its consistency with the results of other similar
studies conducted across the world. The study reveals that the Intellectual
capital is a driving force to the organization’s future performance. STVA
contributes more to the performance being a component of IC. It may be due to
the stringent IPR maintenance and abeyance of IPR rules IN India. Moreover The
IT industries in India is enriched with Intellectual Properties due to its
appreciable role in introducing innovative software and hardware components and
licensing it along with exporting and carrying BPO and KPO activities.
The
study suffers some drawbacks like the tool used to measure Intellectual Capital
i.e. VAICTM is criticized by many researchers as it is not close to
the reality and suffers estimation defect. As the study is industry specified,
The sample is only 11 companies in the NSE-IT index. The result cannot be
generalized to other financial sectors as the external validity is puny. The
alternative IC valuation tools like EVA, MVA, Tobin’s q, Skandia IC Navigator
etc. can be used by future researchers by taking more companies into the sample
and a bifurcated study of software and hardware firms can be even possible.
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