Intellectual Capital Transformation into Companies Value: Supporting and Obstructing Factors

Posted: 9 Feb 2012

See all articles by Elena Shakina

Elena Shakina

National Research University Higher School of Economics

Mariya Molodchik

National Research University Higher School of Economics, Perm Campus

Date Written: February 8, 2012

Abstract

The idea of this study is to investigate factors that support or obstruct value creation of the intellectual capital. The key role of intellectual capital in company’s value creation is determined by the rich body of empirical studies (Tseng and Goo, 2005; Tan et al. 2007; Zeghal and Maaloul, 2010). The evidence is represented that investing in intangibles leads to sustainable innovation as also to upturning company’s performance (Lev, 1999; Youndt et al., 2004; Huang and Liu, 2005). Research design is related to the assumption that the process of creating value for investors is influenced by many internal and external factors.

We argue that there is the lack of attention to these factors. Only few studies take into account specific features of the company such as: age, size and structure of ownership (Chen et al., 2005). Several papers investigate external factors: industry, economic and technological factors (Tovstiga et al., 2007). Despite the fact that some researches are devoted to the issues being studied by us; many of them present empirical analysis of a particular industry or a particular country (Kimura et al., 2010). It should be noted that this work is focused on the comparative study. Leaving on a higher level of abstraction, we seek to analyze companies from different countries.

The purpose of our research is to determine the robust relationship between intangibles employed and company's value created for investors, as well as to identify factors that facilitate or hinder this transformation.

In this study we consider an intellectual capital as a portfolio of strategic company’s resources that enable an organization to create sustainable value. These resources are not available to a large number of competitors, lead to potential future benefits which cannot be taken by others, and are not imitable by others, or substitutable using other resources. Because of their intangible nature, they are non-physical, non-financial, are not included in financial statements, and have a finite life (Kristandl and Bontis, 2007). The distinction between human, organizational and relationship capital is mostly accepted (Pike et al., 2005).

The indicators for these three intellectual capital components are proposed in different models (Mouritzen, 2003; Sveiby, 2005; InCas, 2008). As we are interested in the transformation 'Intellectual Capital – Company’s Value' we need to identify factors that are relevant and important for this process. Taking into consideration the results of the previous studies and common sense we put forward following hypotheses: Countries institutional factor such as economic incentives, innovation structure, education and IT are positively associated with company’s value creation driven by intellectual capital. More innovative industries are more successful in intellectual capital transformation process. Location in the capital has positive effect on the intellectual capital transformation process. Company’s age is an obstacle factor in intellectual capital transformation process. Company’s size is an enhance factor in intellectual capital transformation process.

Testing these hypotheses we face following problems: Firstly, we need to understand how to identify and measure the volume of investments, including investments in intellectual resources, and companies' value for investors. We base our study on the indicators that can be obtained on the public information: companies annual reports, rankings, patent bureau reports, companies’ sites and others.

Secondly, we have to specify the model taking into account all relevant factors that increase the value of the company.

Thirdly, we need to address the obvious endogeneity, as stated in this way the problem of independent variables and determinants are mixed and there are some simultaneity and unobservable omitted variables.

To meet these challenges a range of models are constructed, including non-linear relationship based on Cobb-Douglas function. Several statistical methods are provided for the empirical issues of this research, including common cross-sectional and panel data analysis. The data base collected for this study consists of financial and economic indicators underlying the intellectual capital evaluation, such as strategic performance indicators (EVA© and FGV©). We analyze the data of more than 900 companies from Europe, USA and Russia. The companies present different industries: financial services, wholesale and retail trade, machinery and equipment manufacture, chemical industry, and, finally, transport and communications. Investigated time period covers five years – from 2005 till 2009.

We draw some preliminary conclusions that are based on theoretical and empirical parts of our research: A number of significant internal and external factors of intellectual capital transformation are revealed. For instance: company age, country, industry and location. Significant differences between developed and developing markets are found out. Relational and human capital show a higher significant in developed countries, while in Russia structural characteristics present growing point in most of corporations. However, some indicators affect on company’s performance not so obviously. For example, a negative correlation between R&D expenses and value added is revealed for Russian companies. This phenomenon can be explained by high risk of this investment and low protection of intellectual property. The pillars of Knowledge Economy Index developed by World Bank are used to identify impact of countries institutional factors on intellectual capital efficient employment. Drivers of the economic incentive regime, as well as the level of education in the country, have a negative link to the value added of a company and its potential growth. Several empirical studies address the question of losing the motivation to invest in high-risk assets by the companies in a highly-developed infrastructure, and in developed economies, in particular. That confirms that our results are probably resistant and clear. We can also realize that a high level of the education in the country makes this factor no longer a competitive advantage for a particular company. Potential return on investment in human capital in such conditions is relatively low.

Our results should be interpreted with a certain dose of caution and require further precise analysis. Despite this fact we assume that the study presented in this paper can be implemented by investment decision making. It extends the understanding of intellectual capital transformation process marking countries infrastructure, industry belonging and location as important factors for success.

Keywords: intellectual capital, value creation

JEL Classification: O12

Suggested Citation

Shakina, Elena and Molodchik, Mariya Anatolievna, Intellectual Capital Transformation into Companies Value: Supporting and Obstructing Factors (February 8, 2012). Available at SSRN: https://ssrn.com/abstract=2001144

Elena Shakina (Contact Author)

National Research University Higher School of Economics ( email )

Studencheskaya str., 38
Perm, Perm krai 614070
Russia

Mariya Anatolievna Molodchik

National Research University Higher School of Economics, Perm Campus ( email )

Studencheskaya street, 38
Perm, Perm 614017
Russia

HOME PAGE: http://www.hse.ru

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