Intellectual capital and firm performance: evidence from developed, emerging and frontier markets of the world

Abstract

Over the past decade, intellectual capital and firm performance (IC-FP) has become an emerging strand of accounting and finance. The evolution of various theories such as Resource-Based View (RBV), Resource-Dependency (RD) and Learning-Organisation (LO) has further amplified the importance of intangibles for firms as well as for economies. RBV argues that a firm should build its competitive advantage based on the unique values, knowledge and skills of the employees and production processes of the firm. These unique attributes have been combined in the literature under one term “Intellectual Capital” (IC). The transformation from physical resource-based to knowledge-based economies has led policy-makers to rethink their investment levels in intellectual resources. The past decade has witnessed an increasing number of studies linking IC efficiency with firm performance. These studies, however, have reported divergent results, which not only make IC disclosure limited but also left the managers indecisive about their investments in IC. The literature attributes these divergent results to a number of factors such as small samples in the studies, short time period, IC measurement models and/or economic development level of the economy under study. Moreover, the IC-FP relationship has always been considered static hence the literature ignores the potential endogeneity existence. This study is the first attempt to investigate the IC-FP relationship in developed, emerging and frontier markets using over 7,100 listed firms for the period 2005-2014. We apply the system generalized method of moments (SGMM) to overcome the problem of endogeneity and so produce unbiased results. The findings reveal that IC efficiency is highest for developed markets followed by emerging and lowest for frontier markets. Empirical evidence suggests a significant positive relationship between IC and FP in almost all types of market. The significant positive relationship between human capital (HC) and FP in static models disappears when SGMM is applied. This study makes some important adjustments in the value added intellectual coefficient (VAIC) model and presents A-VAIC model to overcome criticism of the original VAIC model. We then test A-VAIC on developed and emerging markets and report more consistent results where HC is also significant and positive with FP in almost all markets. Furthermore, the results reveal that IC efficiency remained unchanged during the 2008 financial crisis. The final results, though endorsing RB, RD and LO theories, posit that IC increases FP in all types of economy (developed, emerging and frontier) and that investment in IC should be on-going process.