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The Effect of Intellectual Capital on Value Creation: Malaysian Evidence.


An intellectual capital (IC) can be defined as a non-monetary in nature and without physical substance which controlled by the companies whether it is fully or partly thus generated value creation to the companies (Roos, Pike and Fernstrom, 2005). There maybe a few misunderstanding on how IC differs from intangibles, intangible assets or intellectual property. There may be no commonly agreed definition of intangibles, hence, the phrase is frequently used as a noun to intend widely similar to IC (Meritum, 2002).

According to Wang (2008), IC has been recognized as an important value driver for companies functioning in the new market and has turned into a most effective factor for some companies in increasing their competitive ability and obtaining companies achievement. Nakamura (2008) also stated, a lot of people has claimed that the nature of investment in the global market is shifting from tangible to intangibles and many companies has spent a huge amount of capital for intangible investment. This shifting highlights the needs and importance of measuring the contribution of intangible assets to the welfare of the company. Edvinsson and Malone (1997) and Sveiby (1998) also conclude that these assets have been identified as key assets and need to be properly identified, estimate, manage and disclose in order to create value.

Literature Review

Overview of Intellectual Capital (IC)

Stewart (1997), a discoverer in the study of such intangible assets is credited with having created the term IC to refer to these assets. In addition, they all refer to the similar things such "intangibles in accounting literature, knowledge assets by economist and IC in the management and legal literature" (Lev, 2001, p. 5). IC is commonly defined as "Knowledge that can be transformed into value" (Edvinsson and Malone, 1997). IC is a combination of intangible assets, i.e., knowledge, abilities, skill, client relationship, information, database organizational structures and inventions (Khalique and Bontis, 2015) that firms can use to gain human capital-structural capital competitive advantage (Claver-Coter and Zaragosa-Saez, 2015). According to Hosomi (2014), IC must not only be produced but must be used to improve firm performance as well as firm value and the improved role of intangible assets is a characteristic of the information and knowledge economies.

Similarly, Bose and Thomas (2007) mentioned that knowledge, skills and expertise can generate profitability by converting them into IC, while Hsu and Fang (2009) concludes IC can support the organisation to achieve their targets, creating value and produce competitive benefits based on the total capabilities, knowledge, culture, strategy, process, intellectual property, and social links. IC can be categorized as a group of knowledge assets and used by organisation to enhance value creation to their stakeholder (Marr and Schiuma, 2001). IC is the sum of all knowledge, companies can use in conducting business to create value (Zeghal and Maaloul, 2010). Firm value is created not only from its physical and financial assets, but also its IC which comprises its expenses on research and development, human capital, abilities, firm structure, strategies and relationship that the firm continues with customers and suppliers (Kamath, 2015). Jurczak (2008) mention that IC is split into three types based on their economic conduct which is relational (customer) capital, organizational (structural) capital and human capital.

Human Capital (HC) refers to employees used in achieving their tasks and organizational targets on education, skills, knowledge, experience, attitude and ability (Edvinsson and Malone, 1997). Structural Capital (SC) includes databases, organizational structure, organizational procedures, handbooks, strategies, patents, trademarks, culture and norms organizational knowledge owned by a firm and not embedded in employees (Bontis, 1999). Relational Capital (RC) refers to employees, customers, suppliers, competitors, and government agency as there are social relations and networks exist between internal and external economic factors (Bontis, 1999).

Intellectual Capital and Value Creation

IC indicates to the intellectual resources from a strategic and worldwide perception (Viedma, 2002). Cabrita and Vaz (2006) stated that from a strategic perception, IC is used to create firm value. Many researchers claim that IC becomes the only crucial competitive advantage for firms in the new economy (Bontis, 2003; Wade and Hulland, 2004). IC has been determined as a combination of intangibles (capitals, functions and capabilities) that drive the firm performance and value creation (Roos and Roos, 1997). In achieving company's goals, company needs to apply systematic value-creation management. These orientations of value creation usually apply on long term strategy as it is impossible to increase profits in short term. Hence, the company supposed to include investments in intellectual capital for creating value over the long term. To ensure the success, the company need to analyse and improve the value-added chain (Gigante, 2013).

Theoretical Framework and Hypothesis Development

Resource Based View Theory

The Resource Based View (RBV) Theory relates firm core ability to its outer Industry environment (Murale, Jayaraj and Ashrafali, 2010). Its main presumption point is that resources having specific characteristics such to be important and limited in amount, uncommon, unique and non-substitutable will be the key elements of the firm's success and are known as strategic resources (Amit and Schoemaker, 1993). Hall (1992) states that intangible resources mention about "what a company has" such as intellectual property, organizational and reputation. Though intangible resources categorized as skills are a company's expertise or "what a company does indeed", its managers specifically, company and employee experience, and these abilities are generally known as competencies. This view firmly equivalents to a broadly debated issue through the 1990s, known as the RBV, where researchers in this field decisively recognized intangible resources as the main basis to obtain a firm's success (Newbert, 2008). This is in line with Villalonga (2004), who argued that RBV theory proposes each company have different sustainability of performance and intangible assets as their main key. Thus, the study employed this theory to express the importance of IC in creating value to the company.

Hypotheses Development

According to Pulic (2008), VAIC[TM] indicates the new value would be generated by each monetary unit invested in resources. The greater this coefficient, the better is a company's IC in creating value for its stakeholders. IC has been identified as a set of intangibles (resources, capabilities, and competencies) that drives the organizational performance and value creation (Roos and Roos, 1997). Berzkalne and Zelgalve (2014) measured the IC and company value for Estonia, Latvia and Lithuania for seven years (2005-2011). They discovered that there is a significant relationship between company value and VAIC[TM], and it is stronger in 2010. Besides, a study on VAIC[TM] and value creation in 24 Brazilian capital intensive companies listed in BM and FBovespa has been conducted by Tessler, Poker Jr., Silveira, Milano and Belli (2016). They found a relationship between the components of VAIC[TM] and the market-to-book ratio, indicating that IC contributes in creating value for these organizations. Therefore, the following hypothesis is developed:

H1: There is a significant relationship between VAIC and value creation.

The importance of staff's knowledge has increased and human capital efficiency (HCE) is significantly considered as a tool for obtaining sustainable competitive advantages. Fitz-enz (2000) argued those tangible assets are only in a position to add value when some individual put them into process. "People, not cash, buildings or equipment, are the critical differentiators of business enterprise" (Fitz-enz, 2000, p.1). Becker, Huselid and Ulrich (2002) explained that HC in an organization should be estimated based on its performance. Yusuf (2013) argued that successful execution of business strategies is determined by the effective use of intangibles, particularly HC, therefore proper investment in HC is of a substantial importance. The need for HC and its own way of measuring has been significantly considered to be able to control intangible asset and lessen its costs while increasing its benefits (Yusuf 2013). Becker et. al (2002) presumed that HC performance definitely have an impact on customers buying experience and subsequently the basis of firm's financial performance. Using balanced scorecard terminology, Kaplan and Norton (2004) assert that HC is a valuable indicator and the main way to obtain value creation for companies. Improvement in HC performance will favorably affect the internal process, customer and financial results of an organization (Becker et al. 2002). Hence, following hypothesis is posited:

H1a: There is a significant relationship between HCE and value creation.

Pulic's definition of structural capital efficiency (SCE) was the part of his framework that was most criticized and least understood for most of the researchers. Chen, Cheng and Hwang (2005) argue that RandD and advertising expenses are one of the contributors to SC. However, it only has a positive relationship with M/B value and a negative relationship with profitability. Venugopal and Subha (2015) measured the impact of IC on the corporate performance of two major Indian industrial sectors namely Banking and Information Technology and found that SC is less capable of creating values compared to other components of VAIC. Al-Shubiri (2011) investigate the relationship between VAIC[TM] and three traditional dimensions of banks financial performance; profitability, productivity and market valuation. He used 14 commercial banks data drawn from Amman Stock Exchange (ASE) reporting period from 2002-2007. The result showed that the Jordanian financial sectors bank market value have been created more by SCE. Based on the above, the following hypothesis is proposed:

H1b: There is a significant relationship between SCE and value creation.

Shiu (2006), who practiced VAIC[TM] to gauge the value creation efficiency of 80 Taiwan technological companies based on their special feature to be intelligent-intensive. The regressions results illustrate that capital employed efficiency (CEE) have a significant positive effect on profitability. This is consistent with Puntillo (2009), who discovered that only CEE shows a significant positive relationship with various methods of firm's performance in a traditional Western market. Goh (2005) implemented Pulic's VAIC[TM] to compute the IC performance of commercial banks in Malaysia, noticed that all the 12 banks relatively shows higher CEE. Khalique, Isa, and Shaari (2013) in their study found that organizational performance represent the strongest relationship with CEE, for electronics small and medium enterprises (SMEs). Furthermore, Britto, Monetti and Lima (2014) examined whether IC elements or traditional accounting measures of efficiency can better assess value creation of Brazilian real estate companies. They discovered a significant inverse relationship between IC and market value, except for CEE. Thus, the following hypothesis is developed:

H1c: There is a significant relationship between CEE and value creation.


Purposive sampling is employed as the population of this study consists of recipients of the Randstad Awards 2016 in Malaysia. Out of 75, 20 companies are chosen as the sample for this study because they are more representative after excluded non-public listed companies, financial institutions and considering data availability. The final sample is 100, denotes five years firm-observations covering financial years 2011 to 2015 as this represent the most available data at the time this study is conducted. Data on VAIC[TM] and its components are extracted from the company's annual reports, meanwhile, the Return on Asset (ROA) as the measurement for value creation is obtained from Thomson Reuters (

Nimtrakoon (2015) argued that there are several methods applied by previous researchers to measure IC and its performance as to react of the prerequisite for IC valuation. Each one of these techniques offers different benefits and drawbacks. Lu, Tsai and Yen (2010) declare that there is absolutely no best or consensus solution for IC measurement. Nimtrakoon (2015) states that mostly Pulic's VAIC[TM] has been employed by academics and practitioners instead on measuring the IC and reflection on the market value of corporations. This is supported by Rehman, Ilyas and Rehman (2011) and Young, Su, Fang and Fang (2009), who stated that VAIC[TM] is a well-known and trusted method among broadly available methods since it analyse IC and its components (HCE, SCE and CEE) entirely. Therefore, this study utilised VAIC[TM] model to evaluate the value of IC.


Table 1 shows the descriptive statistics of the variables. It can be clearly seen that the value of mean for 20 companies varies considerably across the five years. The maximum value of VAIC and HCE is led by Shell Company in year 2015. Whereas the maximum value of SCE and CEE is dominated by TM Company and Nestle Company, respectively, both in year 2015.

As the data is more than 100, Kolmogorov-Smirnov test is used for normality test (Haryadi and Winda, 2011). All the data are not normally distributed since the p-value is less than 0.05, hence non-parametric test is applied to test all the hypotheses (Hair, Black, Babin and Anderson, 2005).

Table 2 shows that VAIC have significant positive relationship with value creation. Therefore, H1 is accepted. This outcome may represent a significant sign that most of the companies efficiently used their intangible resources to ensure high achievement of value. The result is consistent with Berzkalne and Zelgalve (2014) and Tessler et al. (2016), whereby they found a significant relationship.

The results also show that there is a significant positive relationship between HCE and value creation. Hence, H1a is accepted. The result supports Fitz-enz (2000), Kaplan and Norton (2004) and Yusuf (2013) whereby they consider human capital as the powerful element in value creation. It can be concluded that most of the companies appear to focus on their human capital as the main source of value creation and a strategic tool for improving financial performance. However, results in Table 2 show that there is no significant relationship between SCE and value creation. Thus, H1b is rejected and its supports Venugopal (2015). The result indicate that structural capital is less capable to create values compared to other components of VAIC. It is also consistent with Nik Maheran, Filzah and Nik Rozhan (2009) whereby they found that, SCE does not influence the company's profitability.

Meanwhile, CEE has a significant positive relationship with value creation, therefore, H1c is accepted. Higher value of CEE will result in greater amount of value creation. The result is in line with previous studies by Shiu (2006), Puntillo (2009) and Khalique et. al (2013). They mentioned that organizational performance is developed through CEE. It can be established that most of the companies has good relationship between business and their customers.

Discussion and Conclusion

A diversity of different approaches for evaluating IC has been presented by numerous researchers, but each approach has their own advantages and limitations in actual implementation; and, required much room for further discussion (Hsiung and Wang, 2012). VAIC is one of these approaches, providing easy access to information on a company's IC efficiency (Clarke, Seng and Whiting, 2010). This study examines the influence of IC on value creation among 20 out of 75 companies listed in Randstad Awards 2016, covering the financial period of 2011 to 2015. Using VAIC method from Pulic (1998), the study investigates the relationship between IC and value creation. The results reveal that VAIC and its component (SCE and CEE) positively affect the companies' value creation. Nevertheless, no such relationship is observed for SCE and value creation. The results show that the intellectual capital provide value to the firm and at the same time measures the efficiency of their corporate strategy and fine tune it. It is discovered that VAIC is essential in creating corporate value, reveal that greater value creation efficiency affects firm's profitability. Among the three intellectual capital components, HCE particularly and VAIC generally shows stronger association to financial performance, thus, it can be concluded that HCE may bring success to the organization as a whole. The effect of CEE towards value creation can be established that most of the sample companies has good relationships among employees, customers and suppliers which lead to decrease of organizational cost in many ways that greatly benefited the company. However, SCE does not represent a major role in creating value to the company compared to other components of IC and are also less capable in reducing company's cost. The results of HCE and CEE supports the resource-based view theory which argue that company's human capital, structural capital, relational capital and partnership quality are important assets that are deemed valuable by the clients and are utilized by the company in achieving higher value creation. This study contributes to the literature by providing the empirical evidence on whether the VAIC and its components (HCE, SCE, CEE) influence the company's value creation in Malaysia. The results may provide some insights to the managers to understand more on the roles of IC towards the company's value creation. Since date of this study only limited to 20 companies from the Randstard Award 2016, future research may extend to other top listed companies based on their market capitalization, besides make a comparison across companies.


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Fatimah Hanim Abdul Rauf (*)

College of Business Management and Accounting, Universiti Tenaga Nasional, Malaysia


Faizah Mohd Khalid

Universiti Tenaga Nasional, Malaysia

Nur Amira Mustafa

Universiti Tenaga Nasional, Malaysia

Nor Faezah Mohd Isa

Universiti Tenaga Nasional, Malaysia

Jamielah Na Jeeha Johari

Universiti Tenaga Nasional, Malaysia

Ganes A/L Krishnan

Universiti Tenaga Nasional, Malaysia

(*) Corresponding Author
Table 1: Descriptive Statistics

                               Minimum  Maximu   Mean      Std.
                                        m                  Deviation

Value Added
Intellectual Coefficient       -4.6833  12.2735  4.721717  2.2166283
Human Capital Efficiency       -4.5122  10.4548  2.773128  2.2086231
Structural Capital Efficiency   .3732    3.3849  1.544084   .5622520
Capital Employed Efficiency     -.9494   2.8887   .390602   .5289337
Return on Assets                -.3261    .2813   .069187   .0705424

Table 2: Correlation analysis

                                           P-value  Correlation

Value Added Intellectual Coefficient (H1)  0.000     0.450
Human Capital Efficiency (H1a)             0.000     0.407
Structural Capital Efficiency (H1b)        0.078    -0.177
Capital Employed Efficiency (H1c)          0.007     0.270
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Author:Rauf, Fatimah Hanim Abdul; Khalid, Faizah Mohd; Mustafa, Nur Amira; Isa, Nor Faezah Mohd; Johari, Ja
Publication:Global Business and Management Research: An International Journal
Geographic Code:9MALA
Date:Apr 1, 2018
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