The role of intellectual capital in firm financial performance : a local analysis

Abstract

Purpose: This research primarily aims to investigate the relationship of IC, and its components, with financial performance in a local context. Insight is provided on whether IC varies across different firms as a subject of their size, or the industry in which they operate. The study also analyses whether the relationship deduced is the product of proper IC management. Design: Following a review of international and local literature in the field, a mixed methodology is adopted in order to experience the full benefits of triangulation. Primarily, regression models are constructed, using 542 data points, to examine the relationship between IC, measured using the VAIC Model (Pulic, 1998), and financial performance. Conversely, a qualitative analysis through 7 semi-structured interviews, is carried out to provide an understanding as to what degree local companies acknowledge IC as a vital resource in their structure. Findings: The findings support the hypotheses that IC has a positive influence on financial performance. HC is the most significant component, corroborated with the attention received by local companies. Moreover, the results indicate that IC is not dependent on industry or size, thus outlining no standard approach to better managing it. Finally, qualitative analysis present a slight improvement in IC literacy, however, several companies do not employ any standard IC measurement technique. Conclusion: Investing in IC is deemed beneficiary, as firms displaying higher IC values experience better performance. HC, although not reported in financial statements, carries indispensable value to local entities. In fact, several foreign corporations, such as the more recent Satabank p.l.c., are branching their operations locally quoting, the diversified pool of intellectual individuals present. Other components must not be neglected but are ought to be included in a holistic IC strategy to reach maximum potential. Furthermore, a firm’s IC profile should be inherent to its strategic direction and goals, not adapted from other players in the market. Conclusively, this study recognises that, although local firms might not be employing an IC measurement technique, each company recognises the benefits assimilated to higher IC values, and thus strive towards increasing its standing. Value: This study is the first of its nature carried out in the Maltese scenario, with its importance increasing given Malta’s position as a knowledge-oriented economy. Given the results discussed, this research sheds light on the importance that IC should receive by local corporations, whilst providing the foundation for IC to be explored in a more in-depth nature, thus aiding local firms as they strive to constantly increase their holistic value.