Research Article:Intellectual Capital and

Financial Performance in Serbia

Iqra Javed FAL14-MBI-003

Purpose: This research paper explores the impact of intellectual capital and its various components on financial performance of 100 Serbian companies with in the real sector.

Methodology: The performance measures used were net profit, operating profit, operating revenues, return on equity (ROE) and return on assets (ROA), whereas IC efficiency was measured using value added intellectual coefficient. A multiple regression model was used to evaluate the relationship among individual components of VAIC and financial performance.

Abstract

Findings: Net profit and operating profit are not the consequence of the efficient use of IC in Serbians companies. On the other hand, human and structural capital affects ROE and ROA, whereas physical capital influence ROE.

Originality: There is no previous empirical work on IC and its effects on financial performance have been carried out among Serbian companies in the real sector.

Abstract

Firm resources are important for achieving and maintaining competitive advantage.

According to Grant (1991), the resource based view of the firm assumes that firms own different types of resources, which enable them to develop different strategies.

Different sets of resources enable firms to perform differently compared with competitors.

Introduction

Within the current knowledge era, resources that do not have a physical form are gaining increasing interest and are therefore becoming critical factors.

Prahalad and Hamel (1990) used the term “core competencies” in order to describe a company’s ability to learn, to coordinate diverse production skills, and to incorporate different streams of technology.

Introduction

The non-tangible resources and the ability to utilize them accordingly form the essence of intellectual capital (Bontis, 1996).

According to Lev (2003), economic crises highlight the importance of investing in IC; that is, these investments represent the best way of coping with today’s demanding economic climate.

However, despite its importance, determining the value and effects of IC remains highly challenging (Choo and Bontis, 2002).

Introduction

This is important for the Serbian economy because the current low competitiveness level of its real sector (which includes all companies in Serbian economy highlights the need for a proactive strategy.

Amit and Schoemaker (1993), managers are the ones that face the challenge to identify, develop, protect, and deploy resources and capabilities in a way that provides the firm with a sustainable competitive advantage and a superior return on capital.

Serbia’s economy produces GDP per capita of $5233 (compared with $48 442 for the USA and $38 818 for the UK).

Introduction

Definition and nature of IC: IC is defined in a variety of ways because it

is not homogenous. In attempts to define and categorize IC, its potential benefits and its reliance on non-material resources tend to be stressed.

Stewart (1997) uses IC to mean the packaging of useful knowledge while defining it as expertise that may be used for value creation.

Literature Review

Sullivan (2000) focuses on the importance of knowledge, which represents the most significant part of IC and defines IC as knowledge that can be converted into value.

Edvinsson and Malone (1997) view IC as being equal to human capital (HC) plus structural capital (SC).

Value created by IC is indirect, potential, and contextual.

Literature Review

Sveiby (1997) states that IC is made up of employee competencies, internal structure, and external structure.

A similar concept is used when categorizing IC into HC, SC, and relational capital by Bontis (2001).

Financial statements and business ratios based on these statements do not supply sufficient relevant and timely information for adequate understanding of the impact of IC on future value creation.

The nature and potential of IC demands a new set of performance measures.

Literature Review

Intellectual Capital Measurement: According to Choong (2008) and Dess et al.

(2006), the measure of IC is the difference between a company’s market and book value.

One empirical study (Dess et al., 2006) examined the market to book ratios of 3500 US companies and found this

Literature Review

IC and financial performance: A number of studies have dealt with the

impact of IC on company financial performance. (Bontis and Fitz-enz, 2002; Pulic, 2002; Firer and Williams, 2003).

Firer andWilliams (2003) conducted research on 75 companies listed on the Johannesburg Stock Exchange. The companies were in industries expected to be characterized by high volumes of investments in IC and dependence on the efficient exploitation of IC.

Literature Review

Further research, undertaken in Taiwan, aimed to provide insights into the relationship between IC and market value and the financial performance of listed companies (Chen et al., 2005).

Another interesting study involved Malaysia’s entire financial sector (Ting and Lean, 2009), with the aim of determining the impact of IC on financial performance in the sector from 1999 to 2007.

Ting and Lean chose to analyze the financial sector after assuming its heavy dependency on IC performance.

Literature Review

The present research has two basic objectives:

The first is to determine whether there is interdependence between the amount of IC (measured by VAIC) and the financial performance of selected companies from the real sector.

The second basic objective is to analyze empirically the role of each component of IC on certain financial performance measures.

Research Objectives

Financial performance measures used are net profit, operating revenue, operating profit, ROE, and ROA.

H1. Serbian companies with higher VAIC tend to have higher net profits

H2. Serbian companies with higher VAIC tend to have higher operating revenue

Hypothesis

H3. Serbian companies with higher VAIC tend to have higher operating profit

H4. Serbian companies with higher VAIC tend to have higher ROE

H5. Serbian companies with higher VAIC tend to have higher ROA

Hypothesis

The current research study used a sample of 100 Serbian companies from the real sector that had achieved the highest net profits in 2010.

The study also used data drawn from the financial statements of each of these companies.

Software SPSS 20.0 was used to analyze the data statistically.

These 100 companies together realized 38% of total net profit of the Serbian economy.

Methodology and Data Sources

The majority of the companies in the sample are in the manufacturing (46%), wholesale and retail (21%), traffic and warehousing (6%), and construction (6%) sectors.

The research model employed involved dependent and independent variables.

The independent variables are VAIC and its sub-components: HCE, SCE, and CEE

The dependent variables selected are net profit, operating revenue, operating profit, ROE, and ROA

Methodology and Data Sources

Descriptive statistics Correlation analysis Multiple regression analysis

Findings

Summary of research results

Correlation Analysis: Correlation analysis confirmed that there is

linear fit between

operating revenue and CEE,operating profit and all of the elements of

VAIC,ROE and all of the elements of VAIC, and

ROA and CEE.

Findings

Multiple linear regression analysis: Results of multiple-regression analysis confirmed

hypotheses H4a, H5a, H4b, H5b, and H4c. The statistically most significant correlation is

that between ROE and CEE (hypothesis H4c) and between ROA and SCE (hypothesis H5b), the value of b is 0.766 and 0.490, respectively, with a high significance level in both cases.

Multiple-regression analysis failed to confirm hypotheses H1a, H2a, H3a, H1b, H2b, H3b, H1c, H2c, H3c, and H5c

Findings

Developed market economies base their competitiveness on knowledge, information, commercial innovativeness, corporate strategies, and the sophistication of their business models, and far less on natural resources and cheap labor.

A European Commission (2010) document entitled “Europe 2020—European Strategy for Smart, Sustainable, and Inclusive Growth” states that development based on knowledge and innovation must be a key pillar of future “smart” growth of European union member states.

Discussion

The competitiveness of the Serbian economy is low and as the Serbian real sector is currently in a state of crisis, the research results presented in this paper are logical and unsurprising.

Consequently, the level of IC is the limiting factor in growth in competitiveness. This is particularly relevant today, when investing in IC is the only real way of progressing business during times of economic crises.

Discussion

The main problem is in measuring the contribution of something that is not physical and cannot be easily quantified. Even if IC could be clearly defined and presented, the key issue is that the value created by IC is indirect.

Another important limitation relates to the inability of the model to assess companies’ future performance. Modern measures of performance start with cash flow rather than net profit.

Limitation

The measurement and valuation of IC and its impact on companies’ financial and market performance are crucial issues. Just as corporate performance cannot be analyzed using solely one measure, it is also impossible to assess IC from only one perspective.

The results indicate that corporate success is still achieved through intensive application of financial and physical capital, which cannot be sustained in the long run.

Conclusion

One possibility is to include more variables (e.g., different nonfinancial measures of performance). By doing this, the scope and validity of the research could be increased.

Another route would be to conduct the research on a larger sample, which could have a different structure and be more generalized.

Future Direction

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