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UNIVERSITY OF CALGARY An Investigation of the Relationship between the Intellec

UNIVERSITY OF CALGARY An Investigation of the Relationship between the Intellectual Capital Components and Firm’s Financial Performance by Jamal Aldin Nazari A THESIS SUBMITTED TO THE FACULTY OF GRADUATE STUDIES IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY HASKAYNE SCHOOL OF BUSINESS CALGARY, ALBERTA AUGUST, 2010 © Jamal Aldin Nazari 2010 Library and Archives Canada Bibliothèque et Archives Canada Published Heritage Branch Direction du Patrimoine de l’édition 395 Wellington Street Ottawa ON K1A 0N4 Canada 395, rue Wellington Ottawa ON K1A 0N4 Canada Your file Votre référence ISBN: 978-0-494-69495-4 Our file Notre référence ISBN: 978-0-494-69495-4 NOTICE: The author has granted a non- exclusive license allowing Library and Archives Canada to reproduce, publish, archive, preserve, conserve, communicate to the public by telecommunication or on the Internet, loan, distribute and sell theses worldwide, for commercial or non- commercial purposes, in microform, paper, electronic and/or any other formats. . AVIS: L’auteur a accordé une licence non exclusive permettant à la Bibliothèque et Archives Canada de reproduire, publier, archiver, sauvegarder, conserver, transmettre au public par télécommunication ou par l’Internet, prêter, distribuer et vendre des thèses partout dans le monde, à des fins commerciales ou autres, sur support microforme, papier, électronique et/ou autres formats. The author retains copyright ownership and moral rights in this thesis. Neither the thesis nor substantial extracts from it may be printed or otherwise reproduced without the author’s permission. L’auteur conserve la propriété du droit d’auteur et des droits moraux qui protège cette thèse. Ni la thèse ni des extraits substantiels de celle-ci ne doivent être imprimés ou autrement reproduits sans son autorisation. In compliance with the Canadian Privacy Act some supporting forms may have been removed from this thesis. While these forms may be included in the document page count, their removal does not represent any loss of content from the thesis. Conformément à la loi canadienne sur la protection de la vie privée, quelques formulaires secondaires ont été enlevés de cette thèse. Bien que ces formulaires aient inclus dans la pagination, il n’y aura aucun contenu manquant. ii Abstract In the knowledge economy, intellectual capital has become one of the primary sources of competitive advantage for a firm. Given the remarkable shift in the underlying production factors of a business within the new knowledge economy, it is important for firms to be aware of the elements of intellectual capital that would lead to value creation. Building upon knowledge based view of the firm, my study aims to explore and recognize the relationship between components of intellectual capital and a company’s financial success. My research offers a unique contribution by linking two disparate fields in the intellectual capital literature: components of intellectual capital and a firm's financial success. The data for the current study has been obtained from archival sources. I used a secondary archival database, Research Insight, in order to collect data on variables of interest. The sample includes 775 firm-year observations from 1996 to 2006. Based on the research objectives, I have used six variables: three variables to measure IC, and three variables to measure financial performance. Initial data analyses were conducted through SPSS. The hypothesized model was then tested using Structural Equation Modeling (SEM). Maximum likelihood estimation from LISREL 8.4 was used to determine the model estimates. The results of my study add to the body of literature by providing additional evidence on the interconnection of IC components. The empirical results showed that human capital is positively and significantly associated with structural capital. iii Furthermore, I found a positive significant relationship between human capital and firm’s financial performance. Finally, the results did not provide evidence for a positive relationship between structural capital and firm’s financial performance. What has been documented in this study is that investment in organizational structures and databases, computer software, and increased advertising, in themselves, might not necessarily lead to improved financial performance. Furthermore, better output variables of structural capital need to be used, but are not yet available in the current disclosures in financial statements. However, the value of IC might be realized through the interaction of structural capital and human capital as these two components are highly correlated. iv Acknowledgements This dissertation is the result of a journey in which the help and support of many has been instrumental. First and foremost, I am very thankful to my supervisor and friend, Dr. Irene Herremans. These few words are not capable of conveying how thankful I am to you for your continuous support. I cannot imagine how I could finish the program without your support and encouragement. What I have learned from you goes far beyond this dissertation. You are my role model for scholarship, integrity, and compassion. Thank you for your friendship. I would like to thank Dr. Theresa Kline from my supervisory committee. Theresa, I am so grateful to you for your continuous support. I wish I could have taken all of my PhD courses with you. The statistical techniques I have learned from you have been very instrumental in developing my research capabilities. I hope I can continue to benefit from your advice and guidance in the future. I would also like to thank Dr. Philip Beaulieu, a member of my supervisory committee, and Dr. Mitchell Van der Zahn. Your helpful comments and suggestions were very helpful to improve the quality of my work. Thanks to Dr. Hussein Warsame, my spiritual mentor, for your continuous support. I have benefited from the support and encouragement I have received from my wonderful colleagues Daphne Taras, Wendelin Fraser, Ilene Gilborn, Harjinder Deol, Maliheh Mansouri, Clifford Spyker, Akinloye Akindoyami, Shujun Ding, Darlene Himick, Linda Ambrosie, Micheline Campanaro, Sylvia Fueck, Louise McDonald, Sarah Amery. Thank you! v vi Dedication This dissertation is dedicated to my family who have supported me through the entire process. To my lovely wife, Fereshteh You carried the burden of this dissertation during all these years while managing to make us a dream family with happy kids. To my darling sons, Rodin and Artin Nothing in the entire world makes me happier than the smile on your faces. I wish you a life filled with a passion for learning, a desire to acquire knowledge, happiness, and success. vii viii Table of Contents Approval Page ..................................................................................................................... ii Abstract ............................................................................................................................... ii Acknowledgements ............................................................................................................ iv Dedication .......................................................................................................................... vi Table of Contents ............................................................................................................. viii List of Tables ..................................................................................................................... xi List of Figures and Illustrations ........................................................................................ xii CHAPTER ONE: INTRODUCTION ..................................................................................1 1.1 Objective of the Study ...............................................................................................1 1.2 Data Collection and Overview of the Research Method ...........................................2 1.3 Overview of the Results .............................................................................................4 1.4 Overview of the Dissertation .....................................................................................6 CHAPTER TWO: LITERATURE REVIEW ......................................................................8 2.1 Definition of intellectual capital ................................................................................8 2.1.1 Human Capital .................................................................................................11 2.1.2 Structural capital ..............................................................................................12 2.1.3 Relational capital .............................................................................................12 2.2 Existing Theories of IC measurement .....................................................................13 2.2.1 Strategy ............................................................................................................14 2.2.1.1 The competitive forces paradigm ..........................................................15 2.2.1.2 The resource based paradigm ................................................................16 2.2.1.3 Evolutionary dynamics paradigm ..........................................................19 2.2.2 Influencing behaviour ......................................................................................20 2.2.3 External validation (Communication to external stakeholders) ......................21 2.2.4 Measurement theory ........................................................................................23 2.3 Intellectual Capital Measurement Models ...............................................................25 2.3.1 Market Models- Market Capitalization Methods (MC) ..................................28 2.3.1.1 Tobin’s q ................................................................................................28 2.3.1.2 The Invisible Balance Sheet ..................................................................30 2.3.1.3 Market-to-Book Value Ratio .................................................................31 2.3.2 Market Models- Return on Assets Methods (ROA) ........................................33 2.3.2.1 Value Added Intellectual Capital Coefficient (VAIC) ..........................34 2.3.2.2 Calculated Intangible Value (CIV) ........................................................36 2.3.2.3 Economic Value Added (EVA) .............................................................38 2.3.2.4 Knowledge Capital Earnings (KCE) ......................................................39 2.3.3 Management Models-Direct IC methods (DIC) ..............................................40 2.3.3.1 Human resource costing and accounting ...............................................41 2.3.3.2 Citation Weighted patents ......................................................................45 2.3.3.3 Technology broker .................................................................................46 2.3.3.4 Inclusive Valuation Methodology (IVM) ..............................................49 2.3.3.5 Total Value Creation ..............................................................................51 2.3.3.6 Intellectual Asset Valuation ...................................................................52 2.3.3.7 The Value Explorer ................................................................................53 ix 2.3.3.8 FiMIAM: Financial Method of Intangible Assets Measurement ...........55 2.3.4 Management Models- Scorecard Methods (SC) .............................................58 2.3.4.1 Balanced Scorecard ................................................................................58 2.3.4.2 Intangible Asset Monitor .......................................................................63 2.3.4.3 Skandia Navigator ..................................................................................65 2.3.4.4 Holistic Accounts ...................................................................................69 2.3.4.5 IC-Index .................................................................................................72 2.3.4.6 Value Creation Index (VCI) ..................................................................74 2.3.4.7 Knowledge Asset Map ...........................................................................75 2.3.4.8 Meritum Guidelines ...............................................................................77 2.3.4.9 Value Chain Scoreboard ........................................................................81 2.3.4.10 IC Rating ..............................................................................................83 2.3.4.11 IC-dVAL ..............................................................................................87 2.3.4.12 Danish guidelines .................................................................................89 2.3.4.13 National Intellectual Capital Index ......................................................92 CHAPTER THREE: RESEARCH METHODOLOGY AND DESIGN ...........................95 3.1 Underlying Theoretical Framework .........................................................................95 3.2 Development of Research Hypotheses and Empirical Model ...............................100 3.3 Extended VAIC Model ..........................................................................................106 3.3.1 Human capital (HC) ......................................................................................109 3.3.2 Structural capital (SC) ...................................................................................110 3.3.3 Decomposing Structural capital into Customer capital, Process capital, and Innovation capital ....................................................................................111 3.3.3.1 Customer Capital Efficiency ................................................................112 3.3.3.2 Innovation Capital Efficiency ..............................................................113 3.3.3.3 Process Capital Efficiency ...................................................................113 3.3.4 Financial capital (FP) ....................................................................................113 3.4 Definition of Variables ..........................................................................................115 3.4.1 Exogenous constructs to measure IC .............................................................117 3.4.2 Endogenous constructs to measure performance and control variables ........119 3.5 Sampling and Data Collection Procedures ............................................................119 CHAPTER FOUR: RESULTS ........................................................................................129 4.1 Characteristics of the data ......................................................................................129 4.1.1 Correlations ...................................................................................................134 4.2 SEM Results ..........................................................................................................136 4.2.1 Fit Indices ......................................................................................................137 4.2.1.1 Chi Square ............................................................................................138 4.2.1.2 Goodness of Fit Index (GFI) and Adjusted Goodness of Fit (AGFI) ..139 4.2.1.3 Standardized Root Mean Residual (SRMR) ........................................139 4.2.1.4 Root Mean Square Error of Approximation (RMSEA) .......................140 4.2.1.5 Normed uploads/Finance/ 15.pdf