CHAPTER 2

LITERATURE REVIEW

2.1. Basic Theory

Basic Theory contains theories used by researchers to analyze the results of

research. The theories used in this study include resource-based theory

2.1.1 Resource-Based Theory

The company in doing production activities will utilize the resources as input.

The quality of the input will directly affect the quality of the output. Resources or

input and internal capabilities will determine the strategic choices which will

determine the strategic choices that will be used by the company in achieving its

business objectives.

Resource-Based Theory discusses the resources owned by enterprises and

how companies can maximize process. Unique and inimitable resources become one

of the new superior resources owned by the company. Assumptions of resource-based

theory is how companies can utilize the resources and manage a valuable resource to

achieve a competitive advantage and can create added value for the company.

Valuable resources must meet the criteria VRIN in order to provide a

sustainable benefit for the company (Madhani, 2009). There are four criteria of

VRIN, such as:

1. Valuable (V): resources will be valuable if it can provide strategic value for

company . this criteria help the company to take advantage of market

opportunities and avoid the company from the threat of the market.

2. Rare (R): Scarcity portrait that the source of the company to be hard to find

and obtained by the company's competitors.

3. Imperferct Imitability (I): resources owned by a competitor, so that competing

companies cannot reproduce or make imitation of resources

4. Non-substitution (N): Non substitution means that resources cannot be

replaced with other alternative power sources.

Through this explanation by Resource-Based Theory, intellectual capital

meets the criteria as a unique resource and can be used as a social value for the

company. The Company has an obligation to maximize, manage and utilize its

intellectual capital. The added value that is created will give special characteristics to

the company in business competition.

2.1.2 Intellectual Capital

2.1.2.1. Understanding Intellctual Capital

In recent year, intellectual capital is become the attention of the company.

Intellectual capital is referred to as a determining factor in the success of the strategy

in order to achieve a competitive advantage. Because intellectual capital has

advantages, which can create value added for the company. This given unique added

value to the company so the company are able to compete with other companies.

The definitions of the intellectual capital which generally accepted has not

been determined until now (Ze'ghal and Maaloul, 2010). The concept of intellectual

capital are likely still new. A clear and understandable explanation of definition of

intellectual capital needed by management of company in order to understand

intellectual capital.

Definition which explained by Organisation for Economic Coperration and

Development (OECD, 1999) and Edvinson and Malone (1997) in Ulum (2008)

describes the intellectual capital as an economic value of two categories of intangible

assets are: (1) organizational (structural) capital; (2) human capital.

Society of Management Accountants Canada (SMAC) in Iswati and Anshori

(2007) explains that Intellectual capital is described as items of knowledge held by

individuals then incorporated into the company to obtain the gain benefits in the

future.

Intellectual capital is also a group of assets of knowledge which is used as an

attribute of the organization and has contributed significantly to improve the

competitive position by adding value for interested parties (Marr and schiuma, 2001

in Solikhah et al, 2010)

From the definitions above, it can be concluded that the intellectual capital are

an important attribute in organizations which obtained from the combination of the

three essential elements. There are human capital company, structural capital, and

customer capital. The third important element have connection with the knowledge

and technology so it can create an added value for the company. This added value

gives special characteristics to the company so the company can achieve competitive

advantage.

2.1.2.2 Components of Intellectual Capital

Some experts have argued that there are elements in the intellectual capital,

but in the end there are only three elements that are often used in various studies.

Bontis et al. (2000) explains that there are three elements that create the intellectual

capital, such as:

1. Human Capital

2. Structural capital

3. Customer capital

2.1.2.2.1 Human Capital

The existence of human capital is essential, especially in the knowledge-based

industry. Human capital as a source of innovation and development for the

sustainability of the company's life. Human Capital described as capability of

company employees to perform tasks in order to achieve the objectives of the

company (Hariyanto et al., 2013). Stewart (1997) and Edvinsson and Malone (1997)

in Zeghal and Maaloul (2010) can interpret human capital as the knowledge,

qualifications, and abilities of employees

The characteristics that can be measured in this capital are training program ,

experience, recruitment, learning programs, individual potential and personality

(Brinker, 2000). If companies can manage to improve the performance of human

capital better , then the better the performance of the intellectual capital in the

company

2.1.2.2.2 Structural Capital

Structural capital is the knowledge created by the company and cannot be

separated from the company (Joshi et al., 2010). Structural capital described all non-

human knowledge within the company such as hardware, software, databases,

organizational structure, patent, trademark and all about the company's ability to

support employee productivity (Hariyanto et al., 2013).

2.1.2.3 Measurement of Intellectual Capital

Methods of measurement latest intellectual capital has been widely used by

many previous researchers (Joshi et al., 2010; Kamath, 2007; Saleh et al., 2008)

which is the method VAIC ™. This method was developed by Ante Pulic (2004), by

combining three important components companies (human capital, customer capital

and structural capital) in calculating the intellectual capital of the company. This

research use VAIC ™ to measure the performance of intellectual capital because this

method measure intellectual capital using the company's main resource (human

capital, structural capital, and capital employed).

2.1.2.3.1 Value Added Intellectual Coefficient (VAIC ™)

Pulic (1998,2004) has developed a method to measure the ability of the

company in presenting information on value creation efficiency of tangible assets and

intangible assets owned by the company (Ulum,2008). There are several reasons that

this research use VAIC ™ method:

1. VAIC ™ provides basic measurement standards and consistent. The data

are available on the company's financial statements , so that will be more

effective to compare in sample in various industry sectors (Pulic, 1999)

2. The data used is derived from information which has been audited so

that the calculation can be considered objectively and can be

diversification (Pulic, 1998.2000)

This model starts with the company's ability to create value added. Value

added is the most objective indicator to assess the success of a company and shows

the ability to create value (Pulic, 2008), which is calculated as the difference between

output and input (Pulic, 1999). The output (OUT) describes income earned from the

sale of the entire product or service being sold. Input (IN) describe all the loads used

by companies in obtaining income (Ulum, 2008). This model emphasizes that the

burden of labor is not counted as a cost but as an asset. That is because a key aspect

of this model is to treat labor as an entity of value creation (Tan et al., 2007). The

higher the coefficient VAIC ™, the more efficiently the company uses its intellectual

capital (Pulic, 2000)

This method is very easy and very possible because this constructed from the

existing accounts in the financial statements, there are the balance sheet and income

statement (Purwanto, 2011). The advantages of the use of this method according to

Joshi et al., (2010), among others:

1. Results from these methods can be easily quantified and no need to describe it

further

2. Can be applied to any kind of company sizes ranging from small companies to

large enterprises

3. Can improve the utility of traditional financial report by combining the

performance of intellectual capital.

4. This method is simple and very easy to calculate, especially for calculations

and derivations

5. The results are easy to understand by anyone who still have very basic

understanding of accounting information

6. Results from these methods can be used for comparison of the different

entities in terms of size and industry

7. This method is in accordance with the measuring intellectual capital from a

variety of organizations

VAIC ™ is the sum of:

1. Capital Employee Efficiency (CEE)

Capital Employee Efficiency (CEE) is an indicator of the efficiency of the value

added of capital employed. CEE is calculated by dividing the VA and CE. VA

calculated from the reduction of expenditures (OUT) and revenue (IN) company.

Intellectual capital cannot create their own value and thus require their physical and

financial capital to put into account intellectual capital. This is done to obtain a

thorough view of the efficiency of those resources in creating value

2. Human Capital Efficiency (HCE)

Human Capital Efficiency (HCE) is used as an indicator of the efficiency of the

added value of human capital, as seen from the total salaries and wages of employees

of a company HCE describe how much value added (VA) can be generated with the

cost spent on labor (Ulum, 2008). VAIC ™ doesn’t describe expenses for employees

as an expense but is treated as an investment. HCE is calculated from the division

between VA and HC

3. Structural Capital Efficiency (SCE)

Structural Capital Efficiency (SCE) are used as indicators of the efficiency of the

value-added of the capital structure of the company. SCE is calculated by dividing the

SC with VA. SC represents the difference between the value added by the HC. SCE

shows how much value creation generated by SC

2.1.3. Barrier to entry

Barriers to entry of new competitors is barriers which made for preventing the

entry of potential competitors (Porter, 2008). The entry of potential competitors in an

industry other than to bring and increase the capacity of the new product, also aim to

seize and market share, as well as trying to take over a great resource owned by the

company competitors. According with Hitt et al. (2001) the entry of new competitors

is become disadvantage because new competitor often have the potential to threaten

companies because they bring additional production capacity. The threat of entry of

new competitors in an industry is clearly there and it depends on the barriers to entry

of new competitors that exist.

There are six sources of barriers to entry of new competitors that proposed by

Porter (2008), namely: (1) Economies of scale; (2) Product Differentiation; (3)

Prerequisites Capital; (4) Losses Cost Remove From Size; (5) access to distribution

channels and (6) Government Policy. Meanwhile, according to Morvan, (1991) in

Depoer, (2000) the source of barriers to entry of new competitors, namely: regulatory,

product differentiation strategy, and the objective conditions for establishing the

processes of production and / or sales. The first two obstacles which are not visible in

the annual report, while the category of third hurdle is the amount of investment

required to enter a sector (ie, total fixed assets). This amount represents the financial

input necessary to be competitive as a company that is well established in certain

sectors. These inputs increase as well as the quantity that would be produced if the

company wants competitive, and increases if a particular business is capital-oriented.

2.1.4 Efficiency

Efficiency can be defined as the ratio between the output (output) and the

input (input). A company can be said to be efficient if (Hansen and Mowen, 2007:

685):

1. Using less input to produce the same output

2. Using the same input to produce more output.

3. Using fewer inputs to produce more output.

Efficiency can be viewed from two aspects, in terms of output and input

(Syamsul, 2007: 6). Efficiency in terms of output that is set output to be achieved,

then set the maximum number of inputs to be used. Maximum number of inputs is

normal limits of knowledge to produce output. If the number of inputs that are used

less than specified, it qualify as efficient. But if the input is used more, it qualify as

inefficient.

In terms of input efficiency means the set input first then set the minimum

output to be achieved. If the output achieved was below the minimum output is set, it

can qualify as inefficient. If the outputs are achieved exactly the same as the

minimum result,it can be qualified as normal. But if the output is achieved over the

set minimum output, it qualified efficient. If the input is greater than the predefined

maximum input, means it is not efficient.

2.1.5. Firm Size

Size describe a large company or a small company that can be viewed from

the value of equity, value of sales or total assets of the company (Riyanto, 2008). The

greater the total assets, the greater the size of a company. The larger the company, the

higher the demand for the company to open in conveying information about the

activities of the company (Nugroho, 2012). One of them is about the performance of

intellectual capital.

The size of the company used as a variable with the assumption that large

companies usually conduct business activities with large quantities and have a

business unit that variety, in which each business unit is having success factor in

creating long-term value (Purnomosidhi, 2006). By maximizing the full potential of

the company, both employees (human capital), physical assets (physical capital), as

well as structural capital, good management can create added value for companies

which then can maximize the company's financial performance. (Ulum, 2009).

Companies that have a large amount of assets and sufficient funds can make

investments in the form of intellectual capital. With these investments, the company

can manage and perform maintenance for maximum performance in order to optimize

intellectual capital performance.

2. Previous Studies

Research on intellectual capital have been done by previous researchers.

There are several previous studies are:

Firer and William (2003) in a study entitled "Intellectual Capital and

traditional measures of corporate performance". This study used a sample of 75

financial statements of South African public company listed on the Johannesburg

Stock Exchange (JSE). This study aimed to investigate the relationship between the

efficiency of value added (VA) with component company resources (physical capital,

human capital and structural capital) and three-dimensional performance of the

company (profitability, productivity, and market valuation).

Iswati and Anshori (2007) in his research entitled "The Influence of

Intellectual Capital to Financial Performance at Insurance Companies in the Jakarta

Stock Exchange (JSE)". Results from this study showed that intellectual capital has a

positive relationship with financial performance. The aim of the study was to

investigate whether there was an effect of intellectual capital on the financial

performance of insurers. Data taken from the Indonesian Capital Market Directory

2005 issued by the Jakarta Stock Exchange (JSE).

Ulum (2008) also tested the performance of intellectual capital in the banking

sector in Indonesia in 2004 - 2006. The results of these studies is that there is a shift in

the performance of banks in Indonesia from 2004-2006 were reviewed from the

perspective of its IC. In 2004 and 2006, the overall performance of the banking

company in Indonesia in the category of "good performers" with a score of VAIC

2:07. Whereas in 2005, the performance dropped to "common performance" with a

score of VAIC 1.95. Research also shows that the overall relative owned banks are

more extravagant in using wealth as compared to private banks, including the

management of labor.

Nugroho (2012) in penelitiaanya entitled "Factors Memperngerahi Intellectual

Capitak Disclosure (ICD)". The study aimed to analyze the effect of firm size, firm

age, independent commissioners, keverage and concentration of ownership of the

intellectual capital disclosure (ICD). Sample used was the financial statements and

annual report of companies listed on the Stock Exchange in 2010. The results that firm

size, firm age, leverage, independent directors and the concentration of ownership has

no effect on intellectual capital disclosure.

Joshi et al, (2010) examined the performance of intellectual capital by using a

sample of 11 banking firm in Australia. The research goal is to discuss the relationship

VAIC ™ and firm size (as measured from the total assets, total employment, and total

shareholders' equity) of the banking companies in Australia during 2005-2007. The

results showed that the bank had total assets, total employees and total shareholders'

equity slightly performance VAIC ™ produces the most good, namely Elder Rural

Bank. Instead, the bank had total assets, total employees and total shareholders' equity

of large quantities of VAIC ™ did not produce a good performance.

Zeghal and Maaloul (2010) in his research entitled "Analysing value added as

an indicator of intellectual capital and its consequences on company performance".

The aim of the study was to analyze the role of value added (VA) as an indicator of

intellectual capital (IC) and its influence on economic performance, financial, and

market shares. Zegah and Maaloul use until the 300 companies in the UK over than

2005 and is divided into three industry groups: traditional high technology, and

services. Research produced findings that a significant positi relationship VAIC (value

added intellectual capital coefficient) on economic performance (OI / S) and ROA but

significantly positive only on the performance of the stock market (MB) for the high-

tech industry.

Mavridis (2004) with the title "The intellectual capital Japannese performance

of the banking sector". Mavridis using a sample banking company in Japan during the

period 1 April to 31 March 2001. The objective of the research adalh to analyze

intellectual capital or HC and CA of the Japanese banking sector and discuss the

performance of the banking system. His findings show that sebagain intellectual

performance resulting from the HC.

Kamath (2007) also conduct research related to the performance of

intellectual capital. Kamath used a sample of 98 banks in India during 2000-2004. The

study aimed to analyze the VAIC ™ in measuring the performance of 'value-added'

the banking company in India. Research results show that the performance of

intellectual capital of foreign banks in India better than domestic banks.

Bannany (2008) with the title "a study of determinants intelligent capital in

banks performance: UK case '. Bananny took samples from banks in the United

Kingdom. The purpose of this study for Investigating determinants of intellectual

capital performance of UK banks from 1999 to 2005. Result indicate that bank

profitability and risk banks are important. This study shows that information

technology system, bank efficiency, barriers to entry and efficiency of investment in

intellectual capital have significant impact.

Results from previous studies are summarized and presented in table 2.1 as

follows:

Table 2.1

Previous Research Summary

No. Researcher Variables Research Method Research Result 1 Firer and

William (2003)

Dependent: Profitability (ROA), Productivity (ATO), and market valuation (MB)

Independent:

VAIC ™ (HCE, CEE, and SCE)

Control:

Firm size, leverage, ROE, Industry type

Regression CEE significantly negative with ATO (p <0.05), with significant positive MB (p <0.01): and not significant with ROA

HCE showed a significant negative correlation with the ATO (p <0.01) and did not have significant influence with ROA and MB

SCE does not have significant influence

with ROA, ATO and MB

2 Sri Iswati and Muslich Anshori (2007)

Dependent: Financial Performance

Independent: Intellectual Capital (IC)

Regression IC has a positive relationship with financial performance (with p <0.05)

3 Ihyaul Ulum (2008)

VAIC ™ Linear regression model of ordinary least squares (OLS)

There is a shift in the performance of the bank - a bank in Indonesia dar year 2004-2006, which is viewed from the perspective of its IC

In 2004 and 2006, the bank's performance in the category of good performers

State-owned banks are relatively more extravagant in using his wealth

4 Ahmadi Nugroho (2012)

Dependent: Intellectual capital disclosure (ICD)

Independent: The size of the company, firm age, leverage, independent directors, and the concentration of ownership

Regression Firm size, firm age, leverage, independent directors, and the concentration of ownership has no effect on intellectual capital disclosure

5 Joshi et al (2010)

Dependent: VAIC ™

Independent: The size of the company (total assets, equity, number of employees, equity)

Comparison with traditional methods with methods VAIC ™

VAIC ™ is a great performance generated by the banking company in Australia is banking that have total assets, total employees, and the amount of equity that is little that Elders Rural Bank

6 Daniel Zeghal and anis Maaloul (2010)

Dependent: ROA, MB, OUS

Independent: Vain, VACA

Control: The size of the company and leverage

Multiple regression

There is a positive relationship between coefficient Value added intellectual capital and economic performance, kinrja financial and stock market performance

VACA a positive relationship with economic performance, financial performance, and the performance of the stock market

7 Mavridis (2004)

Dependent: VAIC ™

Independent: HC, CA

Multiple Regression

Most IC performance resulting from HC

Dilaporakan VAIC ™ highest value of 7.48 obtained by Kansai bank Sawayaka

8 Kannath (2004)

Human Capital, VAIC ™

Multiple Regression

IC performance of foreign banks in India better than the domestic bank

9 Bannany (2008)

Dependent: Barriers to entry, bank efficiency, Technology system, efficiency in investment

Multiple Regression

information technology system, bank efficiency, barriers to entry and efficiency of investment in intellectual capital have significant impact.

Independent: Intellectual Performace

Source: Secondary Data processed, 2015

Differences in current research with previous studies (Joshi et al., 2010) and

(Bannany, 2008) is located on the type of data and research samples. The sample used

in this study of the banking sector companies listed on the stock exchanges of

Indonesia 2010-2013. The data sample used is a banking company's financial

statements in 2010-2013.

3. Conceptual Framework

This study describe the framework influence of barrier to entry,bank

efficiency,the amount of employee, and firm size on the performance of intellectual

capital as follows:

Independent Variables

Barrier to Entry (X1)

Bank Efficiency(X2)

The amount of employee (X3)

Firm Size (X4)

Dependent Variable

Intellectual Capital Performance (VAIC™)

(Y)

Figure 2.1

Conceptual Framework

2.4 Hypothesis

2.4.1 Barrier to entry to the performance of Intellectual Capital

Barriers to entry of new competitors is made barriers to prevent the entry of

potential competitors (Porter,2008). A heavy barrier to entry are able to reduce value

added so it can decreased intellectual performance which can give special

characteristic in firm ,

According to (Depoer, 2000) an investment required to enter a business

sector. The availability of capital investment in large numbers would intellectual

capital performance more optimal. Based on the description above, the first

hypothesis to be tested in this study is

H 1: Barrier to entry negatively affect the performance of intellectual capital

2.4.2 Efficiency Bank on the performance of intellectual capital

Bank efficiency is the role of human capital in the company6to reduce

production costs (cost benefit) and differentiate their products (gain competitive

advantage) which is reflected in the increasing market share of the company

(Bannany, 2008). The more efficient performance reflected the better performance in

firm. So, Firm can gain competitive advantage in market which allow maximizing

value added. Based on the description above, the second hypothesis to be tested in

this study is

H 2: Barrier to entry a positive effect on the performance of intellectual capital

2.4.3 Total amount of employee companies on the performance of intellectual

capital

The company's ability to create added value is directly related to the

company's workforce. As in the study Kamath (2007), the banking firm in the

category of "best-performing" is a company that successfully uses less labor and

utilize their maximum. Research Joshi et al., (2010) found that the performance of

VAIC ™ is the best result of banks that have less employee ( elders rural banks ) that

only have 310 employee. This indicates that the large amount of labor that would

make burden to the company. Some large workforce will affect the value of HCE

companies that will make Nikai VAIC ™ is also declining. Based on the description

above, the third hypothesis to be tested in this study are:

H 3: The number of workers a negative effect on the performance of

intellectual capital

2.4.4 The size of the company against the performance of intellectual capital

The size of the company described the large or small the companies involved

from the amount of equity value, or the total value of sales of corporate assets

(Riyanto, 2008: 313). The amount of total assets owned by the company reflected the

size of company. The large size of companies can be use to provide added value to

the company so that it can improve the performance of intellectual capital that will

provide for the company's special characteristics.

The amount of the larger size of the company described the company's funds

to be invested in the form of intellectual capital (Putri, 2013). The availability of

funds in large numbers would make the management and maintenance of intellectual

capital more optimal. Based on the description above, the fourth hypothesis to be

tested in this study are:

H 4: The size of the company a positive effect on the performance of intellectual

capital.