The impact of intangible assets on companies in emerging markets.
All countries, but especially OECD countries, deal with the issue of the development and growth of firms' capital, especially of the part of the capital that can grow continuously and consistently, exceeding the amount of equipment, called intangible capital or intellectual capital. The market value of the companies is influenced by this type of capital, as reflected in the huge difference between the market value of the companies and their book value. Although this difference varies greatly depending on the analyzed countries, the impact of the intangible assets has not to be proven anymore.
Currently, to underscore the importance of intangible assets, there are pursuing projects which seek to improve the valuation of intangible assets, both at macroeconomic and at microeconomic level, analyzing their contribution to the economic growth and their relationship with new business models.
The aims of these projects are:
* To provide strong evidences on the economic value of intangible assets as a new source of growth;
* To assess the relationship between intangible assets and economic crisis and how they can influence the value of the companies;
* To improve understanding of the new challenges over the theory.
So far, comparative international analysis of data is in its infancy, especially because of different ways of recording and evaluation, as well as of regulatory gaps that may occur due to the diversity and to the novelty of the analyzed domain.
The resource-based perspective of strategic management has become a more and more popular explanation of the causes which determine the competitiveness of the firms. This theory considers companies as distinctive packages of resources and skills which evolve over time (Pitelis, 2009). The resources of a company may be defined as those assets (tangible and intangible) that enable the company to develop and implement strategies to improve its efficiency and effectiveness (Daft, 1983).
The resource-based strategy theory claims that the company's unique and valuable resources that meet specific criteria, such as the inimitability, i.e. the inability to be substituted and transferred, are real causal factors of a successful business and provide a competitive advantage (Peteraf, 1993). Inimitability refers to the extent to which the competitors can imitate a skill or a resource.
The above theory, determined the focusing on the intangible resources which play a critical role in the competitive advantage (DeCarolis and Deeds, 1999). Resources or intangible assets such as knowledge, patents, technology and brand loyalty prove to be sources of sustainable competitive advantage.
The emphasis on intangible resources has led to an extension of the resource-based vision to the vision of a knowledge-based company where knowledge is the most important strategic resource of the company (Grant, 1996). Knowledge companies have specific assets that are not easy to imitate and that are non-tradable (Barney, 1986). Recent research considers knowledge creation, transfer and application of knowledge as the main reason for the existence of a company.
The current study presents a series of empirical data, to provide the link between knowledge and business performance.
2. Intangible Assets' Impact on the Competitive Advantage and on the Market Value of the Firm
All experts agree that the most common estimation (not determination or calculation) of the intangibles value is through the difference between the market capitalization of the company and the book value of the assets. Even if this type of estimation implies errors, it is an indicator which determines satisfactorily the market value of the intangible assets. This approach represents a significant theory evolution to the traditional one, 10 years old. The old theories were based only on tangible assets and did not explain the value excess for some companies but not for others, nor their different market success.
In 2001, Gu and Lev initiated a method of assessing the intangible assets which are not accounted. This method assumes that the economic performance of the companies (representing their operational and financial earnings) is generated by their physical and financial assets as well as of their intangible assets. The value of intangible capital is obtained by subtracting the average contribution of physical and financial assets from revenues (the contribution of the physical and financial assets is considered in accordance with the industrial activity of the company from which they derive). The gain is the contribution of the intangible assets to the company's performance and provides estimation for the evaluation of intangible capital.
There are two main research directions conducted in this area:
--First, most of the previous researches were conducted in developed countries such as USA, Canada, Australia, or in Europe, etc. but there is no analysis of the emerging economies in the developing countries;
--Second, it needs to strengthen the previous researches conducted by Villalonga (2004) and Salamudin et al. (2010); they added as a variable the type of industry where the company operates. Villalonga (2004) did not use as the variable the specificity of the industry while Salamudin et al. (2010) did not use variables at all. On the other hand, Barnes (2010) found that the total investment in intangible assets is more intense in services than in manufacturing. Based on these findings, researchers use the industry as a moderating variable in order to know if it has a vital role or not.
The literature, based on numerous studies, reveals intangible assets' "behavior" within the companies.
2.1 The competitive advantage of the firm
Villalonga shows that intangibility of the assets is positively associated with the profits or the losses of the companies. The interpretation of his study's results supports the idea that intangible assets play an important role in maintaining the competitive advantage of a company, as predicted by the resource-based theory. They also suggest that intangible assets have a similar role in supporting the competitive disadvantage of a company. Thus, intangible assets appear to be a double-edged sword. Ghemawat concluded that the firms' investment in intangible assets is the key managerial decision which can produce sustainable performance differences among firms.
To conclude, high levels of intangible assets cause a great competitive advantage for firms.
2.2 Market value of the firm
Numerous studies analyze the relationship between intangible assets and the market value of the firm. It is important to note that the advanced markets such as the US and the UK have reported a growing role of the intangible assets (particularly goodwill) in determining the market value of a firm (Lev and Daum, 2004).
This results in the assumption that a high degree of intangible assets lead to a higher market value of companies.
2.3. Type of industry
There are two reasons that could affect the impact of intangible assets on the firms' performances and which justify the performance variability:
First, the intangible assets, which can be a source of competitive advantage, are different in different industries and sectors. For example, technological knowledge generated through internal research and development is more likely to be a source of competitive advantage in the manufacturing sector than in accommodation and entertainment industry. Amit and Schoemaker noted that the potential of the firm's resources to create and to protect the competitive advantage depends not only on their unique characteristics, but also on the extent to which they overlap with the industrial strategic factors of the industry where the firm operates.
Secondly, the effectiveness of the various mechanisms that ensure the value generated by intangible resources also varies among industries (Villalonga, 2004). Other authors show that the effectiveness of various mechanisms to ensure the profits accruing in R & D varies considerably across industries.
The type of investment in assets, also vary depending on industry. These studies found that the total investment in intangible assets is generally more intense in manufacturing than in services. This could be expected, given the concentration of research and development in manufacturing, but the degree of difference between manufacturing and services vary considerably between countries.
In conclusion, the impact of intangible assets on the company's competitive advantage will be more intense in manufacturing companies than in non manufacturing companies. Also, the last conclusion is that the impact of intangible assets on the market value of the firm will be more intense in manufacturing companies than in non manufacturing companies.
All these conclusions have been confirmed in the extensive studies on emerging markets.
Given those presented in this article, we consider that intangibles assets research is still in the formulation of fundamental theories.
So far there have been unsystematic and empirical studies on correlations of investments in intangibles and some elements of emerging markets such as competitive advantage, market value, and type of industry where it operates. Their conclusions are:
1. A high level of investment and / or production of intangible assets causes a great competitive advantage for firms.
2. A high degree of investment and / or production of intangible assets lead to a higher market value of companies.
3. The impact of intangible assets on the company's competitive advantage will be more intense in production companies than in non manufacturing companies.
4. The impact of intangible assets on the market value of the company will be more intense in manufacturing companies than in non manufacturing companies.
DRAGOS MIHAI IPATE
Spiru Haret University
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Daft, R.L. (1983), Organization Theory and Design, West Pub. Co.
DeCarolis, D. M. and Deeds, D. L. (1999), "The Impact of Stocks and Flows of Organizational Knowledge on Firm Performance: An Empirical Investigation of the Biotechnology Industry", Strategic Management Journal 20(10): 953-968. Grant, R. M. (1996), "Toward a Knowledge-Based Theory of the Firm", Strategic Management Journal 17(S2): 109-122.
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Salamudin, N. et al. (2010), "Intangible Assets Valuation in the Malaysian Capital Market", Journal of Intellectual Capital 11(3): 391-405.
Villalonga, B. (2004), "Intangibles Resources, Tobin's q and the Sustainability of Performance Differences", Journal of Economic Behavior and Organization 54(2): 205-231.
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|Author:||Ipate, Dragos Mihai; Parvu, Iuliana|
|Publication:||Economics, Management, and Financial Markets|
|Date:||Mar 1, 2016|
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