Intellectual Capital in Information Technology Companies in India: An Impact Study on Firm Performance

Intellectual Capital in Information Technology Companies in India: An Impact Study on Firm Performance

Mugdha Kulkarni (Symbiosis Centre for Information Technology, Symbiosis International (Deemed University), India) and Vijayakumar Bharathi. S. (Symbiosis Centre for Information Technology, Symbiosis International (Deemed University), India)
Copyright: © 2020 |Pages: 24
DOI: 10.4018/IJISSS.2020100103

Abstract

The purpose of this research is to study how intellectual capital impacts firm performance in information technology companies in India. Based on an extensive review of the existing literature, critical factors of intellectual capital (human capital, structural capital, and relational capital), and firm performance (financial performance and brand reputation) were defined to build a theoretical (causal) model. Senior executives of Indian IT companies (N=112) formed the sample for the empirical study. Using structural equation modeling, the study found human capital and structural capital impact brand reputation and financial performance. Interestingly, relational capital impacted financial performance and not brand reputation. The outcome of this research is significant in two ways: one, it explored the impact of intellectual capital on brand reputation and financial performance, which underpins research directions from the literature, and two, it contributed to the comparatively less-researched contextual relevance from an Indian information technology company perspective.
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1. Introduction

In the modern economy, sustaining a competitive advantage is all about how companies make optimum use of their intellectual capital (Teece, 2014; Wang et al., 2016). Intangible assets are now essential drivers to achieve competitive strength. Corporate cultures, knowledge relationships, patents, know-how, trademarks, R&D expenditures, brands, intellectual capital, global customer base, satisfied customers, the internet and e-commerce, organization structures, worldwide networks, skilled employees, etc., are intangible assets (Ayuso and Manuel, 2003; Sydler et al., 2014; Bratianu, 2018). Financial reporting requirements and compliance to corporate governance have added to the growth and competitive challenges (Frias-Aceituno et al., 2014; Gokalp et al., 2017). Economic growth at a macro level hugely depends on the performances of these companies both at industry and at the firm levels. Today, it is imperative for organizations to report and disclose the application and effectiveness of intellectual capital (Cabrita et al., 2017; Nielsen et al., 2017). Knowledge and technology investments have impacted business performance from several dimensions, including financials. On the flip side, there has been a long debate in the accounting world about the adequacy and the maturity of accounting standards and associated reporting environments to judiciously incorporate and recognize the value of intellectual capital (Low et al., 2015). Investment decisions are no longer dependent only on the top line and the bottom line surges but are equally reliant on the ability of corporations to provide a holistic view of the utilization and evaluation of their intellectual capital (Mention, 2012; Zambon, 2017; Tyskbo, 2019). Intellectual Capital (IC) is recognized as the real capital cost because investment in it or replacement thereof is equivalent to, and at times more difficult than investment or replacement of physical assets (Seetharaman et al., 2004).

The company boards face problems of defining, managing, measuring, and reporting intellectual capital (Petty and Guthrie et al., 2000; Firer and Mitchell Williams, 2003). Intellectual capital has close linkages to critical corporate governance constructs such as monitoring the strategic vision of senior management, accountability, diligence of stakeholders, practices of internal control, risk, and compliance. Studies have explored and measured the impact, relationship and contribution of intellectual capital to key result areas of business such as overall performance, financial performance, top-line and bottom-line growth and stock performance across different industry segments such as banking, insurance, pharma, manufacturing (Bukh et al., 2001; Nimtrakoon, 2015). Studies also attempted to examine the relationship between intellectual capital and brand reputation (Yang et al., 2015).

Intellectual capital in India is transitioning brand perception of the information technology (IT) industry from being service-centric to innovation-centric with several IT firms from around the world establishing their innovation and research and development centers in the country. However, academic and industry studies on intellectual capital in the Indian IT industry is still evolving. Joshi et al., (2011) identified, lack of interest in intellectual capital measurement, low levels of IC reporting by the IT industry, lack of consistency in reporting as some of the critical problem areas. They emphasized the need for improvements in IC reporting and also recommended impact studies of IC measurement on select indicators of financial reporting.

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