The Assessment of Intellectual Capital Efficiency on Performance Efficiency of Listed Companies in Tehran Stock Exchange

Transcription

1 The Assessment of Intellectual Capital Efficiency on Performance Efficiency of Listed Companies in Tehran Stock Exchange Darush Farid Associate Professor of Yazd University of Yazd Mohammad Alikhasi*(Corresponding author) M.S in Business Management of Yazd University of Yazd Mehrafarin Bakhshizade M.S in Information Technology Management of Sistan and Baluchestan University of Zahedan Abstract 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 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 899

2 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 900

3 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 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 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. 901

4 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 L nnqvist (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 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 902

5 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. The empirical research found that firms intellectual capital has a significant positive relationship with its investors capital gain on shares. The studies mentioned above clearly indicate the usefulness of intellectual capital and this motivates the present researchers to undertake an empirical study on the impact of the intellectual capital on the corporate financial performance in the Indian context. Makki and Lodhi (2009) examine the relationship between intellectual capital and return on investment (ROI) using the VAIC developed by Ante Pulic (1998). The study results indicate, IC efficiency can be used as a benchmark and strategic indicator to direct financial and intellectual resources towards the right direction to enhance the firm s ultimate corpora t e value. G. Bharathi Kamath (2010)measures the performance of banks in Pakistan on a new dimension of intellectual capital. The study estimates the value added intellectual capital (VAIC) of the banks in Pakistan for a 2 year period. The study concludes that the private sector banks were doing much better than all other banks in Pakistan on intellectual capital efficiency levels. The good performance is attributed to efficient usage and management of human resources. Ghorbani et al. (2010) studied effect of intellectual capital on financial performance in Iranian pharmaceutical industry between 2004 and The results showed no reason for the attribution of changes in market values of firms to performance of intellectual capital and it seemed that pharmaceutical market of Iran still showed more sensitivity to material capitals than intellectual capitals. Abbasi and Sedghi (2010)studied effect of intellectual capital efficiency on financial performance of the firms in Tehran Stock Exchange between 2000 and The results indicated that structural and human capital efficiency coefficient on dividend per share was positive but effect of structural capital efficiency coefficient was significantly negative. Effect of structural and human capital efficiency coefficient and on annual return rate was positive but effect of human capital efficiency coefficient was significantly negative. The results also showed that the firms with higher intellectual capital had better financial performance. In addition, mean of intellectual capital efficiency coefficient was significantly different between 7 industries. Ahangar (2011) studied The relationship between intellectual capital and financial performance: An empirical investigation in an Iranian company between 1980 and The results showed that the relationships between the performance of a company s intellectual capital and profitability, Employee productivity, and Growth in sales are informative. In addition, suggest that the performance of a company s intellectual capital can explain profitability and productivity. Asgari (2013) studied effect of intellectual capital components on financial performance of Iranian family firms, between 2006 and The results showed the presence of a significant effect of intellectual capital components on the operating cash flow and average return on assets in Iranian family firms. 3- Expressing the Model and Research Variables 3-1- independent variables: Palic mentioned the Value Added Intellectual Coefficient (VAIC) in 1997, expanded it in 1998 and completed it in Palic used VAIC for measuring intellectual capital of Australian stock exchange companies. In his model, value added was obtained by 903

6 subtracting outputs from inputs: Value added (VA)=Outputs inputs Inputs refers to the income obtained from the selling goods and services and outputs means all costs applied for the production of goods and services, except personnel salary and wage expenses and depreciation costs because cost payment is a kind of investment in manpower and, as a result, helps to create intellectual and structural value added due to correction of processes and regulations. Depreciation cost is a part of non-cash costs of the companies: Depreciation costs + personnel salary and wage expenses +operating profit =value added Value Added Intellectual Coefficient has the following components: A) Value Added Capital Coefficient (VACA): this coefficient shows the generated value added as a result of applying tangible physical assets; i.e., for 1 Rial tangible physical asset, several Rial value added Rials will be obtained. This coefficient is obtained by the following relation: Intangible assets total assets =CA-tangible assets 3-2- Dependent Variables: Performance Efficiency was dependent variable of this study. It was measured with the use of Data envelopment analysis. Data envelopment analysis is used to determine whether a company is inefficient or no Data Envelopment Analysis Data envelopment analysis (DEA) is a linear programming application that compares a number of service units of the same type based on their inputs and outputs. The model solution result indicates if a particular unit is less productive, or inefficient, compared to other units. The value of outputs is forced to be 1 or less by the next set of constraints. In general terms, the efficiency of a particular unit can be defined as=it is not possible for any service unit to be more than 100% efficient; thus, the efficiency of a unit must be less than or equal to 1.1 value of inputs Converting this to standard linear form, value of outputs A standard model can be expressed as (Talluri, 2000).= s.t / 1;n= 1,2,,N 904

7 , 0; k= 1,2,..,K ; L= 1,2,,LWhere Z : efficiency score : k-th input value of n-th DMU : l-th output value of n-th DMU,weights attached to outputs and inputs of DMU n Converting this to standard linear form, value of outputs value of inputs implies value of outputs -value of inputs 0 s.t = =1 0; =1,2,., ; =1,2,., ; =1,2,., 905

8 According the DEA calculation rules, both input and output factors can not have negative values (Halme et al. 2002). If negative value occurred in any factor, a positive value should be added to all DMU for adjusting to be positive. In this study we chose the output oriented model and used to solve the problems. In this study, 3 inputs and 3 outputs were employed. The outputs are net sales,p/e and ROA whereas the inputs are assets,equity and Number of Employees Research Questions Questions of this research can be expressed as follows: Main Questions: is a significant relationship between intellectual capital efficiency and performance efficiency of manufacturing companies? 1- is a significant relationship between Human capital efficiency and performance efficiency of manufacturing companies? 2- : is a significant relationship between Structural capital efficiency and performance efficiency of manufacturing companies? 3- : is a significant relationship between Customer capital efficiency and performance efficiency of manufacturing companies? 3-5- RESEARCH METHOD, POPULATION AND STATISTICAL SAMPLE Because the goal of this research was to study the relationship between intellectual capital efficiency and performance efficiency of manufacturing companies, the data were studied and extracted from financial statements of the sample companies considering the necessary conditions. Statistical population was the manufacturing companies accepted in Tehran Stock Exchange and 240 firms were selected as the statistical population. Among them, 100 firms were considered the statistical sample which had the following conditions: 1- Financial statements of the firms were available from 2005 to Their financial year ended to March There was no financial change in time domain of the research. 4- Conclusion and suggestions Since the main purpose of this research is scrutinizing the impact of intellectual capital effectiveness on the efficiency of productive companies, which are accepted in Tehran Stock Exchange Organization, after calculating intellectual capital effectiveness ratio and its element, using PALIC-method, and finding function effectiveness coefficients, with the aid of DEA (Data Envelopment Analysis) used for a five-year period starting from 2005 to the year 2010,regression model has been used for describing the relation between dependent and independent variables of the research. Accordingly, results show that there is no meaningful relation between intellectual capital effectiveness and its elements (which are communicative, human and structural capital), and performance efficiency of companies. Findings also shed light on the fact that it is probable that variables used in DEA in the mean which was adopted for measuring the effectiveness would neutralize other variables and it is likely that this has caused absence of any meaningful relation between dependent and independent variables. Based on profound studying proposed questions of the research, applicable suggestions for companies whose traits mentioned above are as below: 906

9 1)Regarding the issue that sell dependent variable is affected by a series of variables such as expiry, price, and the like, and this fact that these factors, in turn, cannot necessarily be in direct relation with intellectual capital of the company, we suggest that companies themselves can manipulate and affect the variables mentioned by timely investing and by putting their intellectual capital into practice in order to improve their sells-related affairs. 2)It is proposed that companies valuate their intangible assets, which includes intellectual capital (human, structural and customer) and send its report to the capital market. This announcement of intangible balance sheet and clarification of so called not-in-balance sheet assets can help market analysts valuate the real share value of the company more properly. 3)It is suggested to the companies that do their best to get higher performance by founding separate inner units to better assess and manage their intellectual capital as a part of their intangible assets. 4)It is likely that using less or more inconsistent elements for evaluating company performance in this research has been the reason why each of those elements has counteracted others and this, consequently, has caused not to find a meaningful relation between intellectual capital effectiveness and its elements on the one hand, and the outcome on the other. Hence, it is suggested to future researchers to utilize consistent and compatible variables in their researches for assessing performance efficiency in order for them to be able to specify how intellectual capital effectiveness can affect performance efficiency. 5)It is also suggested to the ones who want to conduct their research in similar subject to repeat this research using different intervals to assess the impact of cease augmentation on enhancing the relation between intellectual capital and its elements, and company performance. 6)It is highly recommended to future researchers to concentrate deeply on the impact of intellectual capital on company performance in organizations and other financial sectors. 7)Using other models of intellectual capital evaluation such as economic added value and the like, and testing them with company performance. 8)With regard to outcome of this research paper, it is suggested that productive companies take measures below into consideration in order to expand their intellectual capital for gaining higher performance: A)Human Capital - Designing a supportive system as well as encouraging system for outstanding ideas of staff in order to benefit from them in operational process of the company. - Knowledge management of human capital - Designing a framework as a basis for competence of staff and managers which includes knowledge, skills, their capabilities, and development planning based upon the merits. B)Structural Capital - Omitting the ineffective and halting regulations, excessive working means, and long and twisting bureaucratic hierarchy in order to reduce the level of red tape and useless bureaucratic processes in the company. - Making an effort to establish and institutionalize a supportive culture using motivating 907

10 systems and incentives as well for creativity empowerment. - Training and improving human resource of the company. - Structural knowledge management of the company C)Customer Capital - Making personnel well-aware of target markets and types of customers - Trickling the points gained by customer feed-back down into every single part of the company. - Customer knowledge management of the company 5-REFERENCES 1. Ahangar R,(2011).The relationship between intellectual capital and financial performance: An empirical investigation in an Iranian company, African Journal of Business Management Vol. 5(1), pp Asgari M.,(2013). Studying Effect of Intellectual Capital Components on Financial Performance of Iranian Family Firms, J. Basic. Appl. Sci. Res., 3(3) Bontis N, Chua W, Richardson S (2000).Intellectual capital and the nature of business in Malaysia. J. Intellect. Capital, 1(1): Bornemann, M (1999).Empirical analysis of the intellectual potential of value systems in Austria according to the VAIC. 5. Brennan N., Connell B,(2000). Intellectual capital: current issues and policy implications, Journal of Intellectual Capital 1(3): Davenport TH, Prusak L (1998).Working Knowledge: How Organizations Manage What They Know, Harv. Bus. Sch. Press, Boston, MA. 7. Edvinsson L, Malone MS (1997). Intellectual capital: The proven way to establish your company's real value by measuring its hidden brainpower. London: Judy Piatkus. 8. Flavio LR (2007), Intellectual Capital and the Creation of Values in the Brazilian Companies. Available Online. 9. Ghorbani, m., B. Shahayy, M.Mosavi, A.anvari,(2010). The impact of intellectual capital on the financial performance of the pharmaceutical industry. Journal of Outlook Business Administration, (4), Halme M., Tarja J., Matti K(2002).Dealing with Interval Scale Data in Data Dnvelopment Analysis, European Journal of Operational Research, 137, pp Jacob ben-simchon (2005).Reporting of intellectual capital in research intensive SME s final Dissertation, The University of Inholland. 12. Kamath GB (2007). The Intellectual Capital Performance of the Indian Banking Sector. J. Intellect. Capital, 8(1): Kamath GB (2010).The Intellectual Capital Performance of Banking Sector in Pakistan. Pak. J. Com. Soc. Sci., 4(1): Luthy DH (1998).Intellectual capital and its measurement. Available Online: 15. Makki MAM, Lodhi SA (2009). Impact of Intellectual Capital on Return on Investment in Pakistani Corporate Sector. Austr. J. Basic Appl. Sci., 3 (3): 908

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