The Relationship between Intellectual Capital and Financial Performance: An Empirical Study of Indian Pharmaceutical Industry
Author(s)
Karam Pal Narwal (Professor, Haryana School of Business, Guru Jambheshwar University of Science and Technology, Hisar, Haryana, India) and Ramandeep* (Ph.D. Candidate, Haryana School of Business, Guru Jambheshwar University of Science and Technology, Hisar, Haryana, India), *Corresponding author'sEmail
Citation
Narwal, Karam Pal and Ramandeep (2014), “The Relationship between Intellectual Capital and Financial Performance: An Empirical Study of Indian Pharmaceutical Industry”, MERC Global’s International Journal of Management, Vol. 2, Issue 4, pp. 151-169.
Article history
Submitted: April 05, 2014, Revision received: May 13, 2014, Accepted: August 14, 2014
This paper empirically examines the relationship between intellectual capital (IC) components (i.e., human, structural and physical capital) with the financial performance measures (i.e., profitability, return on equity, productivity and market valuation) of Indian pharmaceutical industry. Value added intellectual coefficient (VAICTM) method is exercised to examine the intellectual capital performance. Moreover, correlation and panel regression models were employed to examine the relationship between IC and measures of financial performance. Empirical data were accumulated from the CMIE Prowess Database, over the ten-year period of 2002-03 to 2011-12. The results evince that intellectual capital has a significant and positive association with measures of financial performance respectively. The results also divulge that Indian pharmaceutical industry still depends on physical capital efficiency. The study concludes that individually, structural capital and physical capital positively influences financial performance of companies; whereas human capital efficiency, a major component of intellectual capital does not characterise any significant role in increasing the financial performance of the companies. There is an immediate necessity for companies to start voluntary disclosure of non-financial information.
Keywords
Intellectual capital, Pharmaceutical industry, Productivity, Profitability, ROI, Market valuation, India.
References
Bollen, L.; Vergauwen, P. and Schnieders, S. (2005), “Linking intellectual capital and intellectual property to company performance”, Management Decision, Vol. 43, Issue: 9, pp. 1161-1185.
Bontis, N. (1998), “Intellectual Capital: An Exploratory Study that Develops Measures and Models”, Management Decision, Vol. 36, Issue: 2, pp. 63-76.
Bontis, N. (2001), “Assessing knowledge assets: a review of the models used to measure intellectual capital”, International Journal of Management Reviews, Vol. 3, Issue: 1, pp. 41-60.
Bontis, N. (2004), “National intellectual capital index: a United Nations initiative for the Arab region”, Journal of Intellectual Capital, Vol. 5, Issue: 1, pp. 13-39.
Bontis, N.; Chua, W.; Keow, C. and Richardson, S. (2000), “Intellectual capital and business performance in Malaysian industries”, Journal of Intellectual Capital, Vol. 1, Issue: 1, pp. 85-100.
Bornemann, M.; Alwert, K. and Will, M. (2009), “Does intellectual capital reporting matter to financial analysts?”, Journal of Intellectual Capital, Vol. 10, Issue: 3, pp. 354-368.
Cabrita, M. R. and Bontis, N. (2008), “Intellectual capital and business performance in the Portuguese banking industry”, International Journal of Technology Management, Vol. 43, Issue: 1-3, pp. 212-37.
Canibano, L.; Garcia-Ayuso, M.; Sanchez, P. and Chaminade, C. (2002), “Guidelines for Managing and Reporting on Intangibles (Intellectual Capital Report), Airtel-Vodafone Foundation, Madrid, available at: www.uam.es/meritum.
Chan, K. H. (2009a), “Impact of intellectual capital on organisational performance: an empirical study of companies in the Hang Seng Index (part 1)”, The Learning Organisation, Vol. 16, Issue: 1, pp. 4-21.
Chan, K. H. (2009b), “Impact of intellectual capital on organisational performance: an empirical study of companies in the Hang Seng Index (part 2)”, The Learning Organisation, Vol. 16, Issue: 1, pp. 22-39.
Chen, M.; Cheng, S. and Hwang, Y. (2005), “An empirical investigation of the relationship between intellectual capital and firms’ market value and financial performance”, Journal of Intellectual Capital, Vol. 6, Issue: 2, pp. 159-176.
Cheng, M. Y.; Lin, J. I.; Hsiao, T. and Lin, T. W. (2010), “Invested resource, competitive intellectual capital, and corporate performance”, Journal of Intellectual Capital, Vol. 11, Issue: 4, pp. 433-50.
CIMA (2002), “Understanding corporate value: Managing and reporting intellectual capital”, CIMA Research Project.
Clarke, M.; Seng, D. and Whiting, R. H. (2011), “Intellectual capital and firm performance in Australia”, Journal of Intellectual Capital, Vol. 12, Issue: 4, pp. 505-530.
Edvinsson, L. and Malone, M. S. (1997), “Intellectual Capital: Realising Your Company’s True Value by Finding Its Hidden Brain Power”, Harper Business, NYork.
Firer, S. and Williams, S. M. (2003), “Intellectual capital and traditional measures of corporate performance”, Journal of Intellectual Capital, Vol. 4, Issue: 3, pp. 348-60.
Fontana, R.; Geuna, A. and Matt, M. (2006), “Factors affecting university-industry R&D projects: the importance of searching, screening and signalling”, Research Policy, Vol. 35, Issue: 2, pp. 309-23.
Gan, K. and Saleh, Z. (2008), “Intellectual capital and corporate performance of technology-intensive companies: Malaysia evidence”, Asian Journal of Business and Accounting, Vol. 1, Issue: 1, pp. 113-30.
Ghosh, S. and Mondal, A. (2009), “Indian software and pharmaceutical sector IC and financial performance”, Journal of Intellectual Capital, Vol. 10, Issue: 3, pp. 1469-930.
Hausman, J. A. (1978), “Specification tests in Econometrics”, Econometrica, Vol. 46, Issue: 6, pp. 1251-71.
Hazlina, H. and Zubaidah, Z. A. (2008), “Relationship between intellectual capital and firms’ performance: evidence from public listed companies in Malaysia”, Proceeding International Accounting Business Conference in Johor Bahru, Malaysia.
Jewell, J. and Mankin, J. A. (2011), “What is your ROA? An investigation of the many formulas for calculating return on assets”, Academy of Educational Leadership Journal, Vol. 15, pp. 79-91.
Kamath, G. B. (2007), “The intellectual capital performance of the Indian banking sector”, Journal of Intellectual Capital, Vol. 8, Issue: 1, pp. 96-123.
Kamath, G. B. (2008), “Intellectual capital and corporate performance in Indian pharmaceutical industry”, Journal of Intellectual Capital, Vol. 9, Issue: 4, pp. 684-704.
Kennedy, P. (1985), A Guide to Econometrics, MIT Press, Cambridge, MA.
Komnenic, B. and Pokrajcic, D. (2012), “Intellectual capital and corporate performance of MNCs in Serbia”, Journal of Intellectual Capital, Vol. 13, Issue: 1, pp. 106-119.
Lev, B. (2001), Intangibles: Management, and Reporting, Brookings Institution Press, Washington, DC.
Maditinos, D.; Chatzoudes, D.; Tsairidis, C. and Theriou, G. (2011), “The impact of intellectual capital on firms’ market value and financial performance”, Journal of Intellectual Capital, Vol. 12, Issue: 1, pp. 132-51.
Mehralian, G.; Rajabzadeh, A.; Sadeh, M. R. and Rasekh, H. R. (2012), “Intellectual capital and corporate performance in Iranian pharmaceutical industry”, Journal of Intellectual Capital, Vol. 13, Issue: 1, pp. 138-158.
Mention, A. L. and Bontis, N. (2013), “Intellectual capital and performance within the banking sector of Luxembourg and Belgium”, Journal of Intellectual Capital, Vol.11, Issue: 3, pp. 348-367.
Meritum Project (2002), “Guidelines for Managing and Reporting on Intangibles”, Project Meritum.
Pal, K. and Soriya, S. (2011), “Financial reporting of intellectual capital and company’s performance in Indian information technology industry”, International Journal of Asian Business and Information Management, Vol. 2, Issue: 2, pp. 34-49.
Pal, K. and Soriya, S. (2012), “IC performance of Indian pharmaceutical and textile industry”, Journal of Intellectual Capital, Vol. 13, Issue: 1, pp. 120-137.
Patton, J. R. (2007), “Metrics for knowledge-based project organisations”, Academic Management Journal, Vol. 72, Issue:1, pp. 33-43.
Pulic, A. (1998), “Measuring the performance of intellectual potential in knowledge economy”, available at: www.vaic-on.net/start.htm (accessed 15 March, 2013).
Pulic, A. (2000), “MVA and VAIC analysis of randomly selected companies from the FTSE 250”, available at: www.vaic-on.net/start.htm (accessed 15 March, 2013).
Seethamraju, C, (2000), “The value-relevance of trademarks”, working paper, New York City.
Sharabati, A. A.; Jawad, S. N. and Bontis, N. (2010), “Intellectual capital and business performance in the pharmaceutical sector of Jordan”, Management Decision, Vol. 48, Issue: 1, pp. 105-31.
Starovic, D. and Marr, B. (2003), “Understanding corporate value: managing and reporting intellectual capital”, CIMA, available at http://www.valuebasedmanagement.net/articles_cima_understanding.pdf (accessed 15 March, 2013).
Sullivan, P. H. (2000), Value-driven Intellectual Capital: How to Convert Intangible Corporate Assets into Market Value, John Wiley and Sons, Toronto.
Sullivan, P.H. (1998), Profiting from Intellectual Capital, Extracting Value from Innovation, John Wiley, New York.
Tan, H. P.; Plowman, D. and Hancock, P. (2007), “Intellectual capital and financial returns of companies”, Journal of Intellectual Capital, Vol. 8, Issue: 1, pp. 76-95.
Ting, I. W. K. and Lean, H. H. (2009), “Intellectual capital performance of financial institutions in Malaysia”, Journal of Intellectual Capital, Vol. 10, Issue: 4, pp. 588-99.
Wang J. C. (2008), “Investigating market value and intellectual capital for S&P 500”, Journal of Intellectual Capital, Vol. 9, Issue: 4, pp. 546-563.
Yang, C. C. and Lin, C. Y. Y. (2009), “Does intellectual capital mediate the relationship between HRM and organisational performance? Perspective of a healthcare industry in Taiwan”, International Journal of Human Resource Management, Vol. 20, Issue: 9, pp. 1965-84.
Zeghal, D. and Maaloul, A. (2010), “Analysing value added as an indicator of intellectual capital and its consequences on company performance”, Journal of Intellectual Capital, Vol. 11, Issue: 1, pp. 39-60.