CHAPTER 3: THEORETICAL FRAMEWORK AND HYPOTHESES
3.1. Mediating effect of strategic management accounting practices in the relationship
3.1.3. Intellectual capital impacts on corporate performance (H 3 )
The resource-based view (RBV) of the organizations is the foundation theory used in the field of knowledge management and intellectual capital named “knowledge-based theory”. The resource-based view was first introduced by Penrose (1959), and then developed by Wernerfelt (1984); Rumelt and Lamb (1984). Penrose (1959) holds, according to this view, that a firm’s sustainable competitive advantages can be given by its resources, thereby a firm can create economic value not only due to mere possession of its resources but also owing to effective and innovative management of resources. RBV considers assets or knowledge as generic resources and does not appropriately address specific characteristics of assets or knowledge. The distinct types of assets or knowledge based their characteristics may or not may be recognized in the resource-based view. It should therefore identify which assets or knowledge have their characteristics to readily generate a firm’s core competencies. Afterwards, expanded by Wernerfelt (1984), according to the resource-based view of a firm, a firm achieves core competences and superior performance through the acquisition, holding and subsequent usage of strategic assets. Wernerfelt (1984) argues that there are two types of resources a firm possesses, such as tangible assets and intangible assets, that both are perceived as potential strategic
assets. It raises the question of how the strategic assets are identified. Barney (1991a) identifies four criteria for such strategic assets:
Valuable: They must be able to exploit opportunities or neutralize threats in the firm’s environment;
Rare: Competitors must not have them too, otherwise they cannot be a source of relative advantage;
Imperfectly imitable: Competitors must not be able to obtain them;
Non-substitutability: It must not be possible for a rival to find a substitute for this asset.
The first type of assets, generally tangibles, such as property, plants, equipment and physical technologies are common place in the market, thereby easily imitable and substitutable and can be easily traded on the open market. Therefore, it is dissatisfied to recognize as a firm’s strategic assets because of not generating a superior performance if only based on these resources. The second types of assets, generally intangibles not being identified on the financial statement, are valuable, rare and mostly inimitable and non- substitutable to be assessed as a firm’s strategic assets which are capable of generating sustainable competitive advantages and superior financial performance (Barney, 1991a).
3.1.3.2. Hypotheses development (H3)
Following the concept of strategic assets of the resource-based theory, the key characteristics of intellectual capital as strategic assets are their rarity, inimitability, non- substitutability and their unobservability (Riahi-Belkaoui, 2003). Together with the strict application of the above criteria, intellectual capital is a mix of human capital, relational capital and structural capital, that these components of intellectual capital are recognized as strategic assets (Hall, 1992). For example, structural capital, which is owned by the firm and is assumed not to be reproduced and shared, is regarded as the best approximation of IC (Riahi-Belkaoui, 2003). Relational capital is a valuable intangible asset and is evaluated to be distinctive amongst companies as well not to be similarly reproduced by competitors because they are only generated during business operations. Holland (2003) identifies human and structural capital plays the central role of firm value creation. The views of Alum and Drucker (1986); Prahalad (1990) also recommend that in a turbulent and competitive environment, an enterprise’s structural capital is the key to rising its value. As such, intellectual capital in the view of strategic assets available only to a unique firm is its
main driver of competitive advantages and growth determining how these assets are deployed to generate new competitive products or services (Amit & Schoemaker, 1993) with the aim of superior financial performance. Accordingly, the testable hypothesis is that intellectual capital is positively associated with corporate performance.
Hypothesis 3a: There is a positive association between human capital and corporate performance (asset turnover, investment efficiency, return on equity, Tobin q).
Hypothesis 3b: There is a positive association between structural capital and corporate performance (asset turnover, investment efficiency, return on equity, Tobin q).
Hypothesis 3c: There is a positive association between relational capital and corporate performance (asset turnover, investment efficiency, return on equity, Tobin q).
As presented in the second chapter, corporate performance is measured by asset turnover, investment efficiency, return on equity and Tobin q as financial indicators of corporate performance measurement. The relationships between intellectual capital and each of these financial indicators, except for investment efficiency were explored in many prior studies. Applying VAIC intellectual coefficients with Taiwanese listed companies, Ming-Chin et al. (2005) discover that human capital and structural capital have positive impact on a firm’s financial performance measured by return on equity, return on assets, growth in net sales and its market value measured by market-to-book value. In addition to using VAIC model, Ming-Chin et al. (2005) also utilize research and development expenditure as a proxy variable for structural capital to have a positive correlation with profitability. Similarly, S.-L. Chang (2007)’s work indicates that the indexes of VAIC have significantly positive relationship with firms’ market value (market-to-book value and price to earnings per share) and profitability (profit margin, ROE, ROA) in broad information technology industry. Long Kweh, Lu, and Wang (2014) investigate the effect of intellectual capital on the operating efficiency of non-life insurance firms in China. This study suggests that managers of the Chinese non-life insurers should devote attention to the investments in IC to stay sustainable (Long Kweh et al., 2014). The empirical studies have been conducted in many countries, including but not to limited to, North America (Bontis, 1998; Riahi-Belkaoui, 2003), China (J. Chen et al., 2004), Australia (Dumay, 2009), Taiwan (Ming-Chin et al., 2005), Germany (Bollen et al., 2005), Singapore (Hong Pew et al., 2007) and South Africa (Firer & Mitchell-Williams, 2003), but a scarcity of study investigates in Vietnam.
Here, this study develops the correlation between IC components and investment efficiency, that little is known in the prior studies. The role of employees and well- organized structure such as processes or procedures is to facilitate the efficient allocation of capital. It is can be explained with two reasons. A well-organized infrastructure, i.e.
better internal control system, makes managers more accountable by allowing a better monitoring, thereby it has the potential to alleviate both under- and overinvestment problems. On one hand, the well-standardized processes or procedures could also improve investment efficiency by allowing managers to make better investment decisions through a better identification of adequate projects based on more truthful accounting information for internal decision makers (Bushman & Smith, 2001; McNichols & Stubben, 2015).
Based on this discussion, this study examines that higher IC helps underinvestment companies to make more investments, and overinvestment companies to decrease their investment level to gain the state of sustainable investment efficiency.