Relationship between Company's Intellectual Capital and Performance: A Study of Indian IT Industry

Relationship between Company's Intellectual Capital and Performance: A Study of Indian IT Industry

Karam Pal Narwal (Guru Jambheshwar University of Science and Technology, India) and Sushila Soriya (Central University of Rajasthan, India)
DOI: 10.4018/978-1-4666-6441-8.ch015
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Abstract

This chapter examines the relationship between Financial Reporting of Intellectual Capital and Company's Performances in Indian Information Technology Industry. The sample consisted of 60 companies listed on NSE for a time period of 1999-00 to 2008-09. Value-Added Intellectual Coefficient (VAICTM) method developed by Pulic (1998) was used for the analysis of the data. The chapter uses VAICTM model and regression equation for the evaluation of intellectual capital and their relationship with productivity, profitability, and market valuation of the companies. The result of the chapter supports the hypothesis that profitability of the company can be explained by the intellectual capital. However, there is no significant association of intellectual capital with productivity and market capitalization of the companies for the selected time period of year 1999-00 to 2008-09.
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Introduction

Financial reporting of intellectual capital is one of the most debatable issues among the accounting professionals because of its intangible nature. Many researchers have tried to define it and developed different models to identify the accurate value of it. The information provided in the financial statements of the company was not able to capture the intellectual assets of the company. Different measures were used to calculate the amount of intellectual assets present in the company’s annual reports particularly the balance sheet. Various scholars and researchers have divided intellectual capital into three groups. These were human capital, structural capital and relationship capital or customer capital. Relationship between intellectual capital of the company and its market value of the companies has always gathered the attention of the academician and corporate.

Seleim, Ashour & Bontis (2004) investigated Egyptian software firms to know the components of the intellectual capital i.e. human, structural and relational capital present in them. These components were essential for the proper development of the theory and the model. The study found that intellectual capital which was widely present in software firms can be measured and utilized. Oliver & Porta (2006) developed a cluster model to analyze the components of the intellectual capital namely Intellectual Capital Cluster Index (ICCI®). It was developed to measure the intellectual capital in clusters. Many conceptual, exploratory and empirical studies have been carried out (Roos, 2005; Pike & Roos, 2004; Guthrie, 2001) to enhance the awareness of the concept. Intangible and tangible assets cannot be treated separately as both are necessary for the proper functioning of the organization. In fact intellectual capital is gaining importance over the physical assets of the company. This study is a modest attempt to analyze the relationship of intellectual capital with profitability, productivity and market valuation of the companies.

The chapter is divided into five sections. Section 1 gives overview of Indian IT Industry, Section 2 reviews literature of the exiting studies. Section 3 presents the methodology followed in this paper. Section 4 discusses the results and Section 5 concludes the paper.

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1. An Overview Of Indian It Industry

Information Technology (IT) industry is one of the growing sectors in India making its presence well felt all over the world. The IT industry sector is one of the many knowledge based industries. The growth of the IT industry may be due to the presence of intellectual capital in it. Table 1 shows industry size of IT and IT enables services (ITES) from the year 2007 to 2012 with compound annual growth rate (CAGR).

Table 1.
India IT/ITES Industry Size (2007-2012) (value in Crores)
200720082009201020112012CAGR
07-12
Domestic IT/ITES
Market
90,014110,177133,100158,053182,991209,69818.4%
IT/ITES
Export Revenue
156,594186,142218,104250,087284,666320,27815.4%
India IT/ITES
Industry Size
246,609296,319315,207408,139467,657529,97616.5%

Source: NASSCOM

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