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Abstract
There are many models have been presented to determine the common facts of IC, like Tobin’s
Q, Skandia Navigator and Value Added Intellectual Coefficient (VAIC TM) introduced by
Australian researcher (Pulic, 2000). In this paper VAICTM calculation technique is applied to
investigate the significance of the IC on financial performance and investment decisions of non-
financial sector of Pakistan. Secondary data have been used in the unique study collected from
the financial statements of 396 companies of non-financial sector in Pakistan. Data was collected
from financial statements from 2006 to 2015 for this motive. The outcomes of the study express
that the intellectual capital has meaningful association with financial performance and
investment decisions.
Keywords: Knowledge based economy, Organizational performance, Intellectual capital, VAIC,
Investment Decisions.
Right after the end of Second World War in 1945, majority of the cultivation oriented
economies in North America and Europe shifted into industrialized economies, from shifting the
attention of land-living and manual labor, fiscal and physical assets were resources. Today, the
world economy is changing rapidly towards knowledge-based from the agricultural and
industrial based economies. In the 21st century, managements of organizations are focusing more
on intangible assets as compared to tangible assets. That's why many companies and even
national strategic plan to reposition their emerging knowledge-based economy. In the present
time of information economy, commercial capitals, comprising of tangible assets. Therefore,
there is desiring to monitor the operation through different ways to achieve the maximum
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productivity of enterprise's intangible resources. One of the vital value driver in the latest
economies where organizations are rich in knowledge and significant for the economic growth is
Intellectual capital. Knowledge based resources have got the position in main strategies to gain
competitive advantage by any company (Sveiby, 1997) studied intellectual capital as the primary
framework of formation of value in the modern business entities. By using financial ratios like
ROE, ROA or sales to total assets ratio; the impact of intellectual capital can be measured for
short term perspective.
To test the growing worth of the IC for the effective firm performance, the facts and
figures of the previous research-oriented study are analyzed how the business firms have been
enhancing the valuable portion of intellectual capital in handling all kinds of organizational
affairs efficiently. The previous studies have been shown in statistical and chronological manner,
in 1990, proportionate value of intellectual capital increased as compared to the total assets of
business firms of US, German and Japan, the valuable ratio of the intellectual capital of US,
German and Japan had grown from 10.5% to 14.5% in 2001, gradually, this figure of US
business firms had attached from 30.6% to 46.9 % while this figure of German enterprises had
increased from 15% to 30.7% simultaneously. Some researchers have found the increment of
intellectual capital approximately 70% of total assets in hi-tech enterprises of US firms, proving
the significance of the intellectual capital in the domain of business administration discipline
(Ding, 2010).
In 1969, the notion of intellectual capital was put forward by the prominent economist of
America, James K. Galbraith; he theorized that the IC was not only the type of fixed
indescribable asset in its nature but also a type of vibrant capital without fixation of capital, a
continuous process of utilizing the knowledge efficiently, a type of measuring tool to evaluate
the targets of the business firms. The intellectual capital is very assistive tool of getting
competitive advantage in the market observed by Stuart (Ding, 2010).
In the novel economy, information is the outmost indefensible key for monetary resource
and the prime and reasonably it’s the simply foundation of onward inexpensive advantage
(Drucker, 2009). Kaplan and Norton (2004) Said that in a knowledge-based economy, a firm has
its core assets namely, human, interactive and operational resources along with the scholarly
assets which together make Intellectual capital. They further stated that IC (Intellectual capital)
has primary / core significance to produce competitive advantages. Intellectual capital has been
become the crucial factor supporting to the organizational persistence and maintenance for the
gaining of competitive advantage and improvement of companies and businesses performances
(Leana & Van Buren, 1999 ).
Naquiyuddin and Heong (1992) Stated that the number of knowledge based workers and
the various prospects are anticipated to rise in the future and it will enhance the capabilities and
abilities of the businesses and companies to further improve their Intellectual capital. Human
capital is the integration of multi-faceted skills, awareness and experience of the employees
which are essential for the sustainability, practicability, usability and feasibility of the enterprise.
Pakistan's government is functioning for the well-organized economy age which is ready
for the trials of globalization. "Vision 2030", the inclusive economic strategy, dedicated to the
competence of intellectual capital funding on the well-paid 83 educationalists, skills
improvement, and science and technology, value gross national product (GNP) amounted to 1%.
Amjad (2006) Pointed out that Pakistan may finance in post-enhancement knowledge,
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technology and new products and become economical in the global economy, upsurge the
percentage of competent graduates from 4 percent to 20 by 2020. Kalim, Lodhi, and Haroon
(2002) Argued that our country Pakistan should take radical steps to mark the economy more
knowledge-oriented if standing as it is right now may become the reason to lose its current share
of world exports.
Literature Review
We can found ample of literature on financial sector locally and globally but on non-
financial sector we have not enough. Brooking (1996) Laid emphasis upon the significant
impacts of the IC to improve the economy of the undertaking which is knowledge-based on the
intellectual caliber of the people who add value to the organization with their contribution in
organizational performance. The expert team of the organization is very helpful to provide the
best possible solutions to all challenging problems of the organization and accomplish all
organizational goals diligently. Without the skillful knowledge and intellect of the workforce,
the organization can’t boost up the performance of its all departments which are well-organized
and well-managed by the people of the organization (Bontis, Chua Chong Keow, & Richardson,
2000).
In the challenging era of business where the competition among the business firms is
growing rapidly and the firms have to innovate the products and services for getting competitive
advantage and retention of the market (Hartono, 2001). The traditional financial statement of the
accounting paradigm is entirely different from the current accounting paradigm which plays an
instrumental role for decision making functions for the business owners and stakeholders.
Traditional accounting paradigm has been evaluated in the context of IC paradigm (Guthrie,
Wigfield, Metsala, & Cox, 1999).
To boost up the efficiency and productive benefits in the context of economic
development and reputation of the organization, the collective contribution of the workforce of
the organization is very significant. Therefore, the expenditures related with the training, health
and other basic allowance are not counted as expenses but an investment to get the advantageous
impacts upon the performance of the organization. When the collective skills, expertise, and
competencies are polished by training courses, the people of the organization would perform
better to achieve the targets of the organization successfully and the facilities like health
insurance and other basic pay allowances and bonuses are good incentives to motivate the people
to work with dedication and honesty and it is good for improving the performance of the
organization (Erickson, Bramhandkar, & Applebee, 2007).
Bontis et al. (2000) Affirms the importance of the human capital as compared with the
structural and customer relational capital to boost up the business enactment of the business. It is
the efforts and intellectual faculties of the employees of the organization which help to organize
and develop organization’s operational systems, information system, manufacturing processes,
corporate values, culture and ethics and managerial behavior. All these factors are very important
to highlight the organizational performance on the higher level.
Gan and Saleh (2010) stated that the organization’s capacity is the main focus in
evaluation of the organizational performance how an organization accomplishes its operational
tasks to generate profitable revenues. The intellectual capital is very valuable instrument to help
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the organization to meet the expectations of creditors, investors and stakeholders to enhance the
financial growth of the firm by formulating such strategic plans, policies and rules and
regulations which are supportive the possibility of successful future prospects of the
organization.
Ghaida, Ousama, Hammami, and Shreim (2016) Concluded from the results of their
empirical study, the intellectual capital is very assistive to retain the individualistic as well as
collective performance of the organization by giving sufficient space in the marketplace to earn
profitable gains. They have conducted study to boost the Qatar economy by evaluating the
knowledge-based economy and governance practices of the business firms, it would be
beneficial for Qatar Government and other business organization how the business plans and
strategies can be formulated by intellectual capital to improve the economy.
In the modern era of organizational performance, the managers, investors and
stakeholders always give significance to accounting system of any economy for decision-making
process which is taken as an index for taking decisive measures according to the strategic plans
of the top-level management. Conversely in the awareness oriented age where IC indicates the
greater portion of the value of the produce, conventional financial statement per annum, and
fractional value of the intangible assets which include the concessions, trademark, licensees and
patents etc. in other words, intellectual capital is the major significant feature of the organization
by which the organization may get competitive advantage by influencing the market efficiently
(Cao & Wang, 2015).
Seleim, Ashour, and Bontis (2004) asserted that the organizational performance can’t be
increased on the basis of macroeconomic policies but on the basis of technological advancement,
innovation, quality of intellectual, relational and structural elements, affecting the knowledge-
based research and development and education, training and intellectual caliber. Sydler,
Haefliger, and Pruksa (2014) Highlighted the significance of the conceptual theory of the IC in
the era of awareness where the monetary development has been influenced directly by the
intangible assets. In their view, the IC is vital component for the attainment of organizational
performance on higher levels.
The pragmatic literature discloses that IC emboldens the financial performance of the
firms. Sharabati, Naji Jawad, and Bontis (2010) stated that the performance of pharmaceutical
industry of Jordan has positive and significant impact of intellectual industry. Wei Kiong Ting
and Hooi Lean (2009) Defined IC or human capital as knowledge-based experience, know-how,
dedication, devotion, honesty, learning aptitude, teamwork spirit, satisfaction of employees and
customers. The competitors use this capital as competitive edge for their firms too. It can also be
supported by the argument in this way that the human capital has unification of knowledge,
skills, experience, talents of humans within the frim which are very supportive to maximize the
productivity and profitability of the business firms and ultimately the net performance of the
firms is also increased.
Pulic (2004) Considered the intellectual capital as the foundation of value making or
destroying factor of the organization employees’ capabilities which develop value added services
for the business success of the firm. James Guthrie, Petty, and Ricceri (2006) relates IC theory
with stakeholders and legitimacy theory in this sense that the stakeholders have the right of
updating information about the organizational routine works so that they may play a constructive
role within the organization on basis of the informative data and their vested interests. According
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Abasyn Journal of Social Sciences – Special Issue: AIC 2017.
to stakeholder theory, the stakeholders encompass all prospective and existing investors,
government and public, creditors, employees, customers, suppliers and distributors etc.
(Donaldson & Preston, 1995).
Intellectual capital is representation of indescribable assets or knowledge-based assets.
Traditionally, the business firms are much inclined to value the tangible assets for the
enhancement of organizational performance. But in the globalized era, the hi-tech firms give
valuable space to knowledge-based or intellectual assets for the development of financial growth,
effectiveness and performance firms (Rehman et al., 2011).
In the advanced age, the intellectual capital is very critical to create the productive
impacts upon the performance of the firms. But still some firms tend to focus upon the financial
and tangible assets rather than the intellectual capital effectiveness. Though such firms consider
their financial performance the most sufficient yet there is insufficient intellectual capital
efficiency in fact (Makki & Lodhi, 2008).
Intellectual capital is the key factor of the economic development for the firms which are
knowledge-based, giving value-added attribute to IC. The IC is the fundamental source of
developing valuable economy which can be evaluated significantly to produce profitable impacts
upon the firms (Holienka & Pilková, 2014). In the old times, the world economy has been
dependent upon the industrialization-based data but in the modern times, the knowledge based
economy with tangible sources has gained much significance as management of information
system with the investment of intellectual capital is very important to earn massive revenue
(Holienka & Pilková, 2014).
The intellectual capital is measured and managed in the context of two main features,
external and internal ones. According to internal feature, there is need of better resource
allocation to boost up the efficiency with the reduction of costs within the organizational set up
while external feature relates with the accessibility of information about the current and
prospective monetary endowment of the organizations for the anticipation of the future growth in
terms of long-term forecasting. The intellectual capital is taken as the possible source of
developing monetary growth which can be assistive tool to anticipate the future performance of
the business firms (Abeysekera, 2011).
Ramezan (2011) observed the correlation between the organizational gradual structure
and IC development which has not been evaluated through researches so systematically. The
results of the study showed the strong affinity of organizational gradual structure and IC growth,
having positive influences of the gradual structure upon the IC. That’s why organic structure is
corresponding agent to enlarge the intellectual capital of the firms. The results of the study are
very supportive to the managers for developing flexible and dynamic organizational structure so
that the intellectual capital can be improved to surpass other competitive business organizations
successfully.
In the last few decades, the conventional trends of business community have been
changed rapidly. The growing competition is the distinctive attribute of all kinds of firms and
industries which were not significant in the past. The main focus of corporate sectors has been
shifting from production to service business in all over the world due to the growing significance
of intangible assets. It is need of hour to accommodate and guarantee the future sustainability
and practicability of organization to maximize the financial growth of the organization
effectively (Kharal et al., 2014).
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Abasyn Journal of Social Sciences – Special Issue: AIC 2017.
Intellectual Capital has got good position in adding value in marketing performance and
financial results (Jen Huang & Ju Liu, 2005). By measuring the adequacy of IC and market to
book proportion with the assistance of VAIC model to decide the correct proportionality of
market execution as far as money related efficiency, the researchers disclosed in detail the
contribution of intellectual capital for the firms of Taiwan stock market. The outcomes of the
investigation uncovered the helpful result of intellectual capital on both monetary and arcade
development of the organizations in Taiwan.
A study on Australian firms undertaken by Clarke, Seng, and Whiting (2011) with the
application of VAIC model, the outcome of study concluded that the IC has direct impacts upon
the firm performance in Australian business environment.
Rehman, Chaudhary, Rehman, and Zahid (2011) Researcher of Hailey College of
Commerce Lahore Pakistan took creativity first time to detect about the association of monetary
performance of the Modaraba firms of Pakistan and IC. They took 12 Modaraba companies to
examine IC and its basic elements HC effectiveness, customer and capital employed efficiency.
He got the empirical outcomes by using VAIC method. According to his findings one of the
most controlling element of (IC) which is human capital explains that as more as we invest on
the employees we get the more productivity form them so the human capital effectiveness
exposed a resilient and progressive link with the efficiency of the Modaraba companies.
Kehelwalatenna and Kehelwalatenna (2016) Explored the productive link between IC and
monetary efficiency of firms including the internal as well as external performance. It also
indicated the association of intellectual capital of the firms and responsive approach of the
investors and stakeholders. The empirical study was conducted by them on basis of conceptual
and regression models, showing the positive contribution of intellectual capital of the firms for
developing the investor interest and value creation to the firm performance. The intellectual
capital is exclusively correlated with the performance of the firms and shareholder reaction,
generating the massive revenues and ultimately the financial growth. The financial growth and
organizational performance are linked directly with the knowledge, skills, experience, training,
honesty, loyalty and proficiency of the firm which may eventually lead to the progress and
prosperity of the business firms.
Cao and Wang (2015) affirmed the innovative and differentiation strategies are the most
instrumental tools to promote the organizational performance which is entirely based on the
managerial aspects of the people of the organization. If the people of the firms are dedicated and
loyal to their firms, they would tend to launch innovation and differentiation to take the
economical edge in the market and the brain power of humans are utilized to boost the general
performance of the organization. The firm performance can be enhanced on the basis of these
complementary components of firm, intellectual, relational and structural, without these tangible
and intangible assets, the workings of the department cannot be preceded productively.
In the changing world, competitive environment has been developing the risky factors as
well as favorable ones. In the era of globalization, the IC is the main factors of surviving the
existence of the firms in the competitive environment by creating the competitive advantage as
compared to other competitions in the market place. The successful business competition is
retained by managing the intellectual capital so strategically. The IC is known as the skills and
awareness of the employees within the organization to proceed all kinds of business affairs inside
and outside of the organization so effortlessly. Without the intellectual capital, it is difficult to
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handle all challenging issues of the business firms and boost up the firm performance
(Pongpearchan, 2016).
Conceptual Framework
(VAIC)Capital
Human Return on Assets (ROA)
Efficiency (HCE)
Return on Equity (ROE)
Structural Capital
Efficiency (SCE) FIRM’S INVESTMEMT
DECISIONS
Capital Employed
Investment in Fixed Assets
Efficiency (CEE)
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audited yearly reports of the non-financial organizations which is mostly accessible from their
official websites.
Econometric Models
There are two econometric approaches that are dynamic to approximation the coefficients
Fixed Effects Model and Random Effects Model respectively. To compare the findings of both
models Hausman Test is used. The association and the model organizations for the current study
are according to the work of (Demirgüç-Kunt & Huizinga, 1999; Flamini, Schumacher, &
McDonald, 2009; Saona, 2016). Following is the empirical form of the model:
FPit = β0 + ∑𝑘𝑘=1 𝛽𝑘𝑌𝑖𝑡𝑘 + 𝜖𝑖𝑡
FP = Financial Performance (dependent variable)
𝑖𝑡 = 𝑖 is individual unit and 𝑡 is the time period
β0 = Constant
𝛽 = Coefficient of Independent variables
𝜖 = Error term
For the current study following equations, using the four dependent variables are developed.
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Abasyn Journal of Social Sciences – Special Issue: AIC 2017.
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Investment Decisions
It is the ratio of total investment of a firm during an accounting year to its fixed assets.
Investments = Total Investment/Fixed Assets.
Investment decisions variable with using of (Umutlu, 2010) entitled the effect of
Intellectual Capital (IC) on investment decisions, obtains from the ratio of whole of the company
i in year t to fix assets.
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of the organization are only excluded from it. He auxiliary stated that all the prescribed
instructions and procedures of the organization are also the part of it. How much capital
employed is efficient can be measured by this way.
ST = VA – HC
Capital Employed Efficiency
It is the efficiency of capital employed of the organization and is calculated by taking net
book value of the total assets of the firm. It can be calculated as (CEE=VA/ CE)
Value Added Intellectual Coefficient (VAIC=ICE+CEE): Points out value creation
efficiency of the resources in all (summation of the preceding indicators). It articulates the
intellectual capability of a local or national economy, organization.
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VAIC does not offer the money price of IC. It simply sum-up the three efficiency aspects of
different kind of IC and an productivity index is calculated which shows by what means the IC
of an organization subsidizes to value addition. In order to amount IC efficiency, (Pulic, 2000)
also offers VAIC’s subsidiary idea that adds structural efficiency and human capital (ICE = HCE
+ SCE).
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of the non-financial firms. The results are in accordance with (Amjad, 2006; Andreeva &
Garanina, 2016; Cleary & Quinn, 2016; Holienka & Pilková, 2014). 0.7419 and 0.7124 are
values of R and Adjusted R-square respectively. Adjusted R2 presents the coefficient of all the
IVs explains that all the selected IVs give 71% change in the DV (ROA). F-statistics have value
25.14 with tabulated p-value of 0.0000 also supports the overall fitness of the model.
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The outcomes of Panel data (regression) 3rd Model are exhibited in above tables.
Financial performance has been measured by DV ROE. Significant P Value (0.0000) of cross-
secession Chi-square suggests to using fixed effects model. Significant P Value (0.0000) of
Hausman test endorses using the fixed effects model. The outcomes of table 4.5B signify that
coefficient of Capital Employed Efficiency (CEE) is 105.6505 which indicate that CEE have
positive relationship with the monetary performance measuring tool ROE. The p-value validates
that outcomes are massively significant in other words any addition or deletion in CEE will
sizably affect the ROE of the PSX listed companies. The value of (SCE) is 2.5545 which
illustrates positive relation between structural capital efficiency and financial performance
(ROE) of the non-financial firms. 0.6536 and 0.6140 are values of R and Adjusted R-square
respectively. Adjusted R2 exhibits the coefficient of all the IVs explains that all the selected IVs
give 61% change in the DV (ROE). F-statistics have value 16.5021 with tabulated p-value of
0.0000 also supports the overall fitness of the model.
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Hausman test endorses using the fixed effects model. The outcomes of table 4.6 B signify that
coefficient of Value Added Intellectual Coefficient (VAIC) is 2.4300 which direct that VAIC
have positive relationship with the monetary performance measuring tool ROE. The p-value
validates that outcomes are massively significant in other words any addition or deletion in
VAIC will considerably affect the financial performance return on equity (ROE) of the PSX
listed companies.
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research made by (Makki & Lodhi, 2008).The results also reveal that CEE, HCE and SCE has
significant and constructive relationship with that of ROE. VAIC also showed positive impact on
performance using ROA and ROE. Impact of CEE, HCE, SCE and VAIC is also positive on the
investment decisions. Form the outcomes it can be determined that IC has positive impact on
returns and investment decisions, and the same research findings are supported with past studies,
so firms can improve their financial performance by investing in intellectual capital.
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