intellectual capital and organizational performance of firms listed on nairobi securities exchange...

Intellectual Capital and organizational Performance of Firms Listed on Nairobi

Securities Exchange

Dr. Anne KariukiProf. Peter K’obonyoProf. Martin Ogutu

Emerging Issues• Do brilliant people make brilliant companies?• HC is hired and not possesed-highest mobility (private)Does the loss of an employee affect firms financial statement?• SC- relationship=networked society- public good• OC-capital owned by the organization• Creating reciprocal relationship• IC-Tripartite dimensions knowledge embedded in people,

network relationship, organizational routines

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Introduction• Rise of knowledge economy, one driven by knowledge, information and

brainpower as primary source of competitive advantage is attributed to increasing prominence of intellectual capital (Quinn et al. 1996; Stewart, 1997)

• Ling and Hung (2012) -intellectual capital-company’s key factor for future success and long-term profitability in the age of knowledge based economy where tangible assets are slowly being replaced by intangible assets.

• Emergent theme- combination or integration of intellectual capital components leads to competitive advantage and higher performance (Youndat, Subramanian and Snell, 2004; Cabrita and Bontis, 2008).

• Integrated approach• NSE-inter-industry effect

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Concepts• Intellectual Capital-sum of knowledge and knowing capabilities that can

be utilized to give a competitive advantage. • multi-dimensional concept that resides at individual level, network and

organization.(Tripartite dimension)• Human capital, social capital and organization capital(Cabrita and Bontis,

2008)

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• long held the position that firms with high intellectual capital achieve a higher competitive advantage

• Confusion on the definition and close relation to other terms-embryonic stage, no convergence on measurement

• Examined subcategories (uni-dimensional) ignore integrated effect –

• RBV assertion that unique configuration of firm resources creates a sustainable competitive advantage that cannot be explained by isolated factors.

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•Organizational Performance•Financial measures-not adequate for decision making•Kaplan and Norton (1992; 1996) balanced approach incorporating financial and nonfinancial ,

•stakeholder’s theory- propositions that a firm has multiple responsibilities to a wider set of groups other than the shareholders. •BSC complements information provided by financial measures with three additional measures; customer perspective which measures how well the business is satisfying the needs of the customer, internal business process measures how efficiently and effectively an organization is meeting its goals and objectives

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Human Capital

• origin of human capital can be traced to the work of Schultz and Becker in 1960’s. Earlier studies, Schultz (1961) and Becker (1964) focused on economic behaviour especially how accumulation of knowledge and skills enables individuals to increase their productivity and their earnings.

• Economic perspective• Psychological perspective

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Social Capital

• Nahapiet and Ghoshal (1998) defined social capital as the sum of actual or potential resources embedded within and available through network of relationship possessed or developed by individuals or social units.

• most scholars consider social capital as a resource that is jointly owned rather than controlled by an individual.

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Organizational Capital

• Nahapiet and Ghoshal (1998) defined social capital as the sum of actual or potential resources embedded within and available through network of relationship possessed or developed by individuals or social units.

• most scholars consider social capital as a resource that is jointly owned rather than controlled by an individual.

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IC-Organizational Performance

• Empirical studies presented two conflicting strands that yield inconsistent and inconclusive research findings

• isolated effect Riahi-Belkaouli (2003)_trademark, did not incorporate non-financial performance

• Fire and William (2003)- did not incorporate non-financial• Uadiale and Uwigbe (2011)-focused on market-oriented performance

• Shabarati et al. (2010) and Ngari et al. (2011) –Homogeneous population

• Amedieu and Vivian (2010) revealed negative relationships• Latter strand-interconnectedness and coexistence of intellectual capital

with performance and found a positive relationship (Youndat et al. 2004; Cabrita and Bontis, 2008

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Intellectual Capital•Human Capital•Social Capital•Organizational

Capital

Organizational PerformanceFinancial

Non-financial

• H1: Human capital has a significant influence on organizational performance

• H2: Social capital has significant influence on organizational performance

• H3: Organization capital has significant influence on organizational performance

• H4: Intellectual Capital has a significant influence on organizational performance

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METHODOLOGY• Research Design-Cross sectional survey-Collected data at time of study, across

the population, establish association among variables, enhance uniform data collection

• Target Population-Firms Listed on NSE from 2009- 2012, 50 companies• Data collection-primary and secondary (Supported by Primary-Questionnaire-perceptual measures (Self-administered questionnaire)Secondary-Financial measures (NSE Handbooks)• Respondents-HR managers-best placed -organization characteristics measured were

known to selected members in upper echelons, provide more reliable information • Reliability- pilot test with 10 organizations, Cronbach alpha Intellectual capital (0.861),

non-financial(0.877)• Unit of Analysis-organization• Analysis –Inferential,

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Analysis and Results

Multi-collinearity-VIF <10(Hair et al.1998)•Response Rate-68% saunder et al. 2009-30-50 as acceptable response rate•Correlation Analysis-test for multi-collinearity•VIF is 10 and above (Hair et al. 2006). The VIF for this study ranged from 1.112 to 2.484 indicating no problem of multi-collinearity between the study variables. Hierachical multiple regression performed -allow one to specify the fixed order of entry of variables in order to control for the effect of covariate•Control Variables- we included the age of the firm, size of the organization measured by number of employees and ownership structure of the organization as control variable in our statistical analysis.

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Hypothesis Testing-Non financial

• Conflicting strand- Synergetic effect rather than isolated effect (RBV)• Performance measures, population, context

• Similar studies (Youndat et al. 2004; Cabrita and Bontis, 2008)

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Model

Model 1 Model 2 Model 3 Model 4

Ownership stt.

. -033

Yrs of operation

-.033

Size -.003

HC .438 .243

SC .432* .281

OC 244* 224*

IC-P

R2 .145 .264 .368 .353 .543

R2 change .116 .220 .205 .395

F

Hypothesis testing-Financial• Linear regression- insignificant (ROE, ROA and

DY)• Optimal scaling-group variables into similar

categories• ROE and DY – insignificant• Study utilized ROA

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H1: Intellectual capital has a relationship with corporate performance-ROA

Model R2 F B

HC .115 2.017 .339*

SC .285 6.179 .534*

OC .115 2.006 -.339*

IC .183 3.464* .427*

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H1a: Human capital has a relationship with financial performance.H1b: Social capital has a relationship with financial performance.H1c: organization capital has a relationship with financial performance.

Implications• Theoretical-RBV(the combined effect of intellectual capital

components is greater than the individual effect of components of intellectual capital in respect to non-financial performance.

• -Difficult for a firm to imitate the three variables• RBV-Joint Effect-. The findings demonstrate that the explanatory power of

the three factors was greater than the predictor variables in regard to non-financial performance (Not tested in a developing country context)

• Signaling theory-Mediating effect of corporate reputation

Policy and Practice-education and training-vision 2030-globally competitive and prosperous

country(linkage between the industry and the education sytem)-combined effect of human capital, social capital and organization capital create

synergies that help companies increase their performance instead of solely relying on performance.

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Thank You

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