International Journal of Arts & Sciences,

CD-ROM. ISSN: 1944-6934 :: 4(09):283–298 (2011)

Copyright c 2011 by InternationalJournal.org

INTELLECTUAL CAPITAL AS A VALUABLE DRIVER OF

CORPORATE PERFORMANCE: EMPIRICAL RESEARCH
ON THE BANKING SECTOR IN SERBIA

Biserka Komnenić, Radovan Tomić

Higher School of Professional Business Studies Novi Sad, Serbia

Dragana Pokrajčić

University of Belgrade, Faculty of Economics, Serbia

According to resource-based theory, firms gain competitive advantage and attain superior
performance by holding, acquiring, and effectively using strategic assets. These assets include
tangible, physical assets as well as intangible assets that have been internalized, developed and
used by the firm in pursuing competitive and profitable strategies. Intangible assets are
valuable, rare, non-substitutable, hard to imitate and that’s why they are treated as strategic
assets capable of generating sustainable competitive advantage and superior financial performance.
While numerous types of intangible assets may be qualified as strategic assets, the strict
application of the above criteria reduces their number to few in general, and to intellectual
capital in particular. Often regarded as a fourth factor of production, beside land, labor and
financial capital, intellectual capital (IC) embodies intangible value drivers and for that reason
it has an increasingly important role in achieving high business performances. The purpose of
this paper is to investigate empirically if intellectual capital (IC) as a strategic asset has an
impact on the organizational performance as well as to identify the IC components that may be
the drivers of the traditional indicators of business success. The study sought evidence from
the banking sector in Serbia. Applying the VAIC methodology for IC measurement,
regression models were constructed to examine the relationships between IC and the selected
corporate performance measures. In general, the empirical findings of our study support
hypothesis regarding positive relationship between firms IC and the chosen corporate
performance measures.

Keywords: Intellectual capital, Strategic resources, Measurement, Business performance.

INTRODUCTION

According to the resource-based theory, firms gain competitive advantage and attain superior
performance by holding, acquiring, and effectively using strategic assets. These assets include
tangible, physical, assets as well as intangible assets that have been internalized, developed and
used by the firm in pursuing competitive and profitable strategies (Wernerfelt, 1984). The
physical assets (plant, property, equipment, and physical technologies) are easily imitable and
substitutable, and can be traded with in the market. Intangible assets are valuable, rare, non-
substitutable, hard to imitate and that’s why they are treated as strategic assets capable of generating

283
284 Biserka Komnenic, Dragana Pokrajcic and Radovan Tomic

sustainable competitive advantage and superior financial performance (Barney, 1991). While
numerous types of intangible assets may be qualified as strategic assets, the strict application of
the above criteria, reduces their number to few in general, and to intellectual capital in particular
(Hall, 1992).
Often regarded as a fourth factor of production, beside land, labor and financial capital,
intellectual capital (IC) embodies intangible value drivers and for that reason it has an
increasingly important role in achieving high business performances. In the theoretical sense,
concept of IC mostly relies on resource-based theory of firm and its variation – the concept of
dynamic and core capabilities. The authors dealing with the concept of IC suggest that it should
be kept in mind that in addition that firm should have the ability to integrate, create and manage
knowledge, it must provide the necessary infrastructure in the form of adequate physical
resources (tangible assets) and the appropriate organizational structure that will interact with
intangible resources and contribute to creating superior value. This is in line with the resource-
based theory of firm by which resources are defined as those tangible and intangible assets that
are permanently connected with the firm in a given period of time.
The main characteristic of this concept is that it offers a holistic approach to the process of
value creation, providing the framework that allows identification and classification of all
strategic assets (tangible and intangible) that a firm possesses, and, more importantly, that
uncovers the ways of their interaction in the process of value creation. Concept of IC determines
five resource categories which can be used as a framework for facilitating the identification of all
firms’ strategic resources. These categories are human, organizational and external resources on
the intangible side and physical and monetary resources on the tangible side (Ross and Ross,
1997). Since the role of physical assets in value creation is well known in the literature and in
practice, the concept of IC has directed research attention to the intangible assets as strategic
resources and their role in creating value. Its focus is on the stocks and flows of resources based
on knowledge which has direct impact on the firm’s economic and financial performances.
Human resources include the knowledge, competence, relationship ability, intellectual agility
and attitude of employees. The firm does not own these resources. Organizational resources
represent firms codified and articulated knowledge and experience and these resources are
ownership of the firm. They include the structures, systems and processes that the firms use to
support their operations. Also this component of IC includes brands, culture, image, documented
information, blueprints, and intellectual property. Finally, there are relationship resources which
embrace all external relationship, such as customers, suppliers, media, strategic partners, and
other types of alliances. These resources are not owned by firm, and are controlled also by other
party.
The concept of intellectual capital has successfully integrated knowledge-related aspects of
existing theories and presented them from management perspective. Regarding formulation of
firm’s strategic architecture framework, concept of IC has focus on a description of the key
capabilities the firm utilizes for building unique combination of capabilities to create strategic
differentiation in the chosen market space and to ensure the achievement of its strategic
intentions. The core capabilities need to be further clarified in sense of their individual
identification and definition of their potential contribution, allowing the establishment of
reference points for the direction of present and future firm’s strategic behavior. It is necessary to
devise indicators for each firm’s core capability. Indicators should be the subject of firm’s core
capabilities measurement system, in other words, measurement of intellectual capital. This
process should stimulate ideas on the leveraging and bundling of core capabilities as value-added
processes. In this way, management receives information and ideas about how it can create the
 Intellectual Capital as a Valuable Driver of Corporate Performance..... 285

best combination of core capabilities which will be firm-specific and will possess the greatest
potential for value creation. Therefore, the IC concept expands and elaborates on strategic and
operative understanding of firm’s core capabilities. In particular, it highlights the need to develop
a conscious and systematic framework of the process of value creation, which should result in
new methods for management and measurement of strategic intangible assets. Those methods
should enable better understanding of the interdependence, dynamic exchanges, feedback effects
and all the complexities that are present in the interactions of firm’s strategic resources. The
defining of the intellectual capital and its taxonomy, strategic and operative management of
intellectual capital and identification of its key components, constitute a homogenous framework
which reflects holistic approach in creating firm’s value. For the strategic theory implications of
this perspective, is the shift of focus from the traditionally dominant theme of developing ways
of value appropriation to aiming at process of value creation.

RESEARCH ISSUE AND PRIOR EMPIRICAL STUDIES

The concept of IC stresses that organizations create value through number of linkages and
interactions between all relevant resources, within and outside of them. Accordingly, external
resources, in the different forms of strong and intensive linkages with organization stakeholders, are
equally important as internal resources. The stakeholders include shareholders, employees,
customers, suppliers, lenders, the government and society, and they are treated as organization
partners in the process of value creation. Therefore, within the context of IC, the firm performance
should be explained from stakeholder perspective, implying that firm performances are seen as a
total wealth generated by the firm, before its distribution to the various stakeholders. Since the
accounting profit measures return to the shareholders only, value added (VA) represents a more
accurate measure of the wealth created by the stakeholders, and then distributed to them (Meek and
Gray, 1998; Riahi Belkaoui, 2003). Therefore, to evaluate firm performance a stakeholder view calls
for the use of the value added as a measure of the total wealth creation.
Using data from Austrian companies, Pulic (1998), found that VA is very highly correlated
with IC, while the correlation between VA and capital employed (physical and financial) is low.
These results suggest that IC has become the main source of value creation in the new
knowledge-based economy. In other words, the ability of modern enterprises to compete in the
global economy increasingly depends on the creation of the higher levels of VA by investing in
IC and its efficient and effective use. Nowadays, the majority of investments by enterprises go to
intangibles, such as R&D, education and training, systems for managing organizational
knowledge, efficient IT solutions, development of relationship with clients and business partners,
efficient work and management processes, corporate branding and identity etc. Empirical data
shows that in total cost of production today’s production share of material costs became
insignificant comparing to situation fifteen years ago when 80% of total cost was related to
material assets. For example, the share of intangible assets in automotive industry is 60 per cent
(Jelcic, 2004). Data released by the UK Department of Trade and Industry (DTI), shows that
successful UK companies recognize that investing in IC is essential to their ability to create
products and services with high level of value added.
Since the qualification of IC as a strategic asset rests on a potential link between the
intellectual capital, on one hand and firm performances, on the other, the main objective of our
study is to investigate empirically if intellectual capital has an impact on the firm performance as
well as to identify the IC’s components that may be the drivers for the traditional indicators of
business success. The study sought evidence from the banking sector in Serbia. Using data of 24
286 Biserka Komnenic, Dragana Pokrajcic and Radovan Tomic

banks and applying the VAIC methodology for IC measurement, regression models were
constructed to examine the relationships between a relevant measure of intellectual capital and the
three commonly used measures of firm’s business and financial performance: profitability (ROA),
return on equity (ROE), productivity (ATO).
Prior empirical studies using VAIC methodology for measuring IC were conducted in
Europe, Africa and Asia. In Finland, for example, VAIC methodology has been applied on more
than 60.000 cases or sample of firms from 11 major industries between 2001 and 2003
(Kujansivu and Lo¨nnqvist, 2005). The Finnish study provided empirical evidence that the IC is
positively associated with the firm’s productivity and profitability. Using a sample of US
multinational firms, Riahi-Belkaoui (2003), also discovered a significantly positive association
between IC and firms business performance. In Taiwan, Shiu (2006b) conducted a cross-
sectional study of 80 Taiwan listed technology firms in 2003. The study found a significant
positive association between VAIC and profitability as well as market valuation, but a negative
association with productivity. Well-documented research project has been undertaken in Taiwan
by Chen et al. (2005). The results of Chen study uncovered a stronger association between IC
and profitability compared to earlier studies. Another research conducted in Singapore by Tan et
al. (2007) using data from 150 publicly traded Singapore firms confirmed positive correlations
between IC and firms economic and financial performance. This research also found that the
contribution of IC to a firm’s performance differs by industry. Most recent research by Zeghal
and Maaloul (2010) using data of 300 UK companies shows significantly positive association
between IC and firm’s economic and financial performances. On the other hand, the study
conducted in South Africa by Firer and Williams (2003) didn’t find conclusive evidence of an
association between VAIC and traditional corporate financial performance, measured by
profitability, productivity and market valuation. Also, study conducted by Chan K. H. (2009) on
Hong Kong firms provided generally limited and mixed results considering influence of IC on
financial and productivity performance measures of the firm.
IC study in Serbia. There is a relatively few studies dealing with IC in Serbia. The most of
them may be found under the broad heading of knowledge management (KM); only few directly
deal with the IC. Research carried out by Kontic and Cubrilo (2009) reveals a lack of both
employee innovativeness and permanent competence development of top management and
employees. The study suggests that Serbian managers are not sufficiently aware of the
importance of IC as strategic asset and its critical influence on overall corporate performance.
This study, exploratory in nature and descriptively oriented, made significant contribution to the
IC awareness among Serbian managers. However, further researches are needed to shed a light
on how the recognition of IC may affect Serbian firms and may influence their corporate
performance.
In general, the empirical findings of our study supports results of prior research which
indicate a positive association between overall corporate intellectual ability (VAIC) as
independent variable and the chosen, above mentioned, three corporate performance measures.
On the whole, the regression models involving the three VAIC components as independent
variables (human, structural and physical capital) has provided much better explanatory power
than the models that use aggregate coefficient VAIC in the prediction of the chosen corporate
performance measures. Results show that banks in Serbia appear to be putting emphasis on the
two strategic resources, namely human and physical capital, as a way of enhancing return on
investments, return on equity and productivity.
 Intellectual Capital as a Valuable Driver of Corporate Performance..... 287

METHODLOGY SPECIFICATION

Stating, that in the context of value creation, corporate performance depends not only on the
investment in the strategic resources, but also on the capability of the firms managers to
efficiently use them in the process of value creation; theoretical and empirical evidence about
positive correlation between IC and Value Added; and that measurement of the IC should be based
on the stakeholder perspective of firm’s performance, for the purpose of our study, we have
applied Value Added Intellectual capital coefficient (VAIC) as a method for IC measurement.
The VAIC method was created by the Austrian Intellectual Capital Research Centre
(AICRS) under professor Pulic (1997). The VAIC methodology provides a measurement system
that is consistent with the resource – based view and stakeholder perspective by using a value
added approach for measuring IC. This method of measuring firm’s performance demonstrates to
stakeholders that the firm is focused on creating greater value added available for employee’s
remuneration, interests for financial means (banks), dividends for investors (shareholders), taxes
(state) and investments into future development. Building stone of the VAIC methodology is
corporate intellectual capability. It refers to the capability of the firm to create value by efficient
and effective use of its all strategic resources (intellectual and physical capital). The basic
assumption is that IC alone can’t operate independently without the support of, for example,
financial and physical capital. Or, in another words, corporate intellectual ability, measured by
the VAIC coefficient, is an indicator of the overall efficiency or ability of a firm to use the total
resources of IC and physical capital in process of value creation. The one of the advantages for
using this methodology is that it has a track record in deployment and application in IC research
in many countries, to which researchers may refer in reviewing published papers.
The hypothesis to be tested is that efficient use of intellectual capital is positively associated
with future firm performance, measured by corporate performance indicators ROA, ROE and
ATO. The hypothesis is in line with the resource-based view of the firm by anticipating a
positive contribution of intellectual capital as a strategic asset, and in line with the stakeholder
view by using as independent variables measures of firm performance which are based on value
added, concretely ones which are generated from IC measurement method “Value added
intellectual capital coefficient” – VAIC.
The first set of hypotheses is proposed to examine the association between VAIC and the
three measures of corporate performance, which is expected to be positively associated:

H1a. Firms with higher IC (VAIC) have higher return on investments ROA
H1b. Firms with higher IC (VAIC) have higher return on equity ROE.
H1c. Firms with higher IC (VAIC) have higher productivity ATO.

The aim of the next three of hypotheses is to investigate the impact of the three components of
VAIC (human, structural and physical capital) on corporate performance for which a positive
association is expected to be found:

H2a. Human capital (HCE) is positively associated with ROA

H2b. Human capital (HCE) is positively associated with ROE
H2c. Human capital (HCE) is positively associated with ATO
H3a. Structural capital (SCE) is positively associated with ROA
H3b. Structural capital (SCE) is positively associated with ROE
H3c. Structural capital (SCE) is positively associated with ATO
288 Biserka Komnenic, Dragana Pokrajcic and Radovan Tomic

H4a. Physical capital (CEE) is positively associated with ROA

H4b. Physical capital (CEE) is positively associated with ROE
H4c. Physical capital (CEE) is positively associated with ATO

Independent variables. VAIC methodology offers the constructs for the independent variables
for regression analysis. For independent variables are chosen:

• VAIC - the aggregated indicator of the overall efficiency of a firm and its intellectual ability.
• HCE - Human capital efficiency
• SCE – Structural capital efficiency
• CEE – Capital employed efficiency

The computation of VAIC and his subcomponents involves five steps. First, it is necessary to
compute a firm’s value added which is calculated as the difference between output and input.
The basic definition is as follows: VA = OUT – IN

Where: VA = value added

OUT = total Sales
IN = cost of bought – in materials, components and services

Value added can be calculated from firm’s accounts as follows: VA = P + C + D + A

Where: P = operating profit

C = employee costs
D = depreciation
A = amortization

Human capital efficiency (HCE) may be obtained by treating the total expenditure on employees
as investment that captures the total human effort in the firm in value creation. This is a key
assumption of the VAIC methodology. Therefore, HCE may be expressed as the amount of
value-added generated per money unit invested in employees. Human capital efficiency is
received as a result: HCE = VA / HC

Where: HCE = human capital efficiency coefficient

VA = value added
HC = total salaries and wages

According to the methodology, structural capital (SC) may be viewed as the contribution to the
value creation process for a given period, which may be obtained by subtracting the human
capital from the amount of value added. Structural capital, as the second component of IC is
calculated as following: SC = VA – HC

Where: SC = structural capital

VA = value added
HC = total salary and wages
Structural capital efficiency (SCE) is reflected by the share of SC in the total value created and it
is calculated in the following manner: SCE = SC / VA
 Intellectual Capital as a Valuable Driver of Corporate Performance..... 289

Where: SCE = structural capital efficiency coefficient

SC = structural capital
VA = value added

According to the VAIC methodology, IC may not operate independently and so needs to
function together with financial and physical capital in order to create value for a firm. Capital
Employed Efficiency is calculated in the following manner: CEE = VA / CE

Where: CEE = capital employed efficiency coefficient

VA = value added
CE = book value of the net asset

Finally, the aggregate indicator VAIC is obtained by adding HCE, SCE and CEE:
VAIC = HCE + SCE + CEE

The aggregated indicator VAIC represents corporate intellectual ability which refers to the
overall value creation efficiency of all firms’ resources - IC and physical capital (Pulic, 2002a).
In simple words, VAIC indicates how much new value has been created per invested monetary
unit in each strategic resource. Efficiency means creating more and more value out of one
invested monetary unit in utilized resources – physical/financial and intellectual capital.
Therefore, the relationship between the created value added and intellectual capital (human and
structural) is of decisive importance.
Dependent and control variables. Considering the dependent variables, corporate
performance is measured by the accounting ratios of return on investments, return on equity and
productivity as a ratio of total revenue to book value. Those measures are used as proxies of a
corporate performance (see Table 1). The size of a firm determined as a book value of total
assets may have an impact on the dependent variables, and it is used as a control variable (see
Table 2.) Its inclusion as control variable is consistent with prior studies (Chan, 2009; Firer and
Williams, 2003; Shiu, 2006; Riahi-Belkaoui, 2003, Zeghal and Maaloul 2010).
Table 1. Dependent variables.
Dependent variables Subject of measurement Measurement/Computation
ROA Financial profitability The ratio of operating income to
book value of total assets
ROE Financial profitability The ratio of operating income to
total shareholders equity
ATO Productivity The ratio of total revenue to book
value of total assets
Note: ROE is computed on the basis of the EBIT data

Table 2. Control variable.

Control variable Meaning Measurement/Computation
FSize Size of the firm Natural log of firms book value
of total assets

The regression analysis consists of the six regression equations (models). Models 1-3 examine
the association between indicator VAIC and the three measures of corporate performance after
controlling for firm size. They are used to investigate hypotheses H1a, H1b, H1c respectively.
290 Biserka Komnenic, Dragana Pokrajcic and Radovan Tomic

(1) ROA = β 0 + β 1 ∗ VAIC + β 2 ∗ ln FSize

(2) ROE = β 0 + β 1 ∗ VAIC + β 2 ∗ ln FSize
(3) ATO = β 0 + β 1 ∗ VAIC + β 2 ∗ ln FSize

In regression models 4-7, the three components of aggregate indicator VAIC are employed as
predictors for each of the three measures of corporate performance. In these models, firm size as
a control variable is also included in regression equations and it is treated as a predictor.

(5) ROA = β 0 + β 1 ∗ HCE + β 2 ∗ SCE + β 3 ∗ CEE + β 4 ∗ ln FSize

(6) ROE = β 0 + β 1 ∗ HCE + β 2 ∗ SCE + β 3 ∗ CEE + β 4 ∗ ln FSize
(7) ATO = β 0 + β 1 ∗ HCE + β 2 ∗ SCE + β 3 ∗ CEE + β 4 ∗ ln FSize

Data source. The analysis is conducted on the Serbian banking sector. The sample consists from
24 banks which have consistency in producing positive value added amount trough observed
four year period, on which base 96 “company-year observations” were collected for the period
from 2005 to 2008. Data for analysis were obtained partly from the National Bank of Serbia and
partly from the banks annual financial reports - balance sheets and income statement founded on
their websites.

RESULTS

Multiple linear regressions (MLR) for predictive analysis of multiple independent variables is
used to test the hypotheses developed earlier. The descriptive statistics of the independent,
dependent and control variables are shown in Table 3.
In presenting the results of the regression analysis, the explanatory power (R adjusted) of the
regression models, Fisher test and Durbin Watson test are presented. Also the values of the
standardized regression coefficients (β) are presented, because by inspecting the values of
standardized regression coefficient, the predictive strength, or power, of the independent
variables, can be compared and assessed. The statistical significance for the regression models is
determined at the level: p < 0.05.
Table 3. Descriptive statistics of the independent and dependent variables.

Variables N Mean Median Minimum Maximum Std.Dev.

HCE 96 2,54735 1,93399 0,0544 14,13608 2,55991

SCE 96 -0,00603 0,47295 -17,3726 0,92926 2,53415
CEE 96 0,22871 0,21039 0,0157 0,91230 0,13269
VAIC 96 2,77003 2,67812 -17,2899 15,25544 4,04844
ROA 96 2,28471 1,44469 -7,9064 23,34787 4,31732
ROE 96 7,02482 7,45872 -53,1802 35,45230 11,74724
PI 96 20,14712 17,08000 0,9240 75,27265 12,61445
LnAKT 96 16,87264 16,97552 12,8234 19,33777 1,42931
 Intellectual Capital as a Valuable Driver of Corporate Performance..... 291

The results of the regression analysis for models 1, 2, and 3 are shown in Table 4. Those three
models are used to test the hypotheses H1a, H1b, and H1c, which investigate the association
between VAIC and the three chosen measures of corporate performance. The results of the
regression analysis for models 4, 5, and 6 are shown in Table 5. Those models are employed in
the testing of the hypotheses relating to each of the three components of VAIC and the three
corporate performance indicators.
Results of regression analysis for model 1, 2, and 3 shows that statistical evidence was found
to support positive correlation between aggregate indicator VAIC and the measures of corporate
performance ROA, ROE, and ATO (see table 4). In those three models regression coefficient of
the independent variable VAIC shows positive correlation with dependent variables and it has
high statistical significance. Aggregate coefficient VAIC is the strongest predictor in model 2,
which can account for 64 per cent (Adjusted R²=, 640) of variance of profitability measure ROE.
Furthermore, regression coefficient of independent variable VAIC in Model 2, (β = 0,793) has a
highest value comparing with other two models (Model 1, and 3). Despite the fact that all of
these three models has the highest statistical significance (p <, 00000), the predictive effects of
model 3 may be considered small when comparing with model 1 and 2. The predictive strength
of independent variable VAIC in model 3 is further diminished in the presence of the control
variable (firm size), which is found to be negatively associated with productivity measure ATO.
Results of regression models 4, 5, and 6 reveal that model 5, which test relationship between
human, structural and physical capital and financial profitability measure ROE, recorded the
highest explanatory power (Adjusted R²= 0,770) of 77 per cent. Other two models, also has their
analytical value, but more for the purpose of detecting the nature of relationship between
independent and independent variables than for predicting purpose. Generally, determination
coefficients of the models which investigate relationship between each VAIC components (HCE,
SCE, and CEE) and chosen corporate performance measures are higher than those for models 1
to 3, where the overall intellectual corporate capability is presented through aggregate measure
VAIC which is treated as an independent variable.

Table 4. Multiple regression results of Model 1, 2 and 3.

Model 1 (relationship between ROA and VAIC indicator)

Standardized
regression t-value p-level
coefficient β
VAIC 0,655836* 8,12120 0,000000*
Ln Fsize -0,157740 -1,95329 0,053791
Adj R² = , 402
F(2,93) = 33,062 p < ,00000
DW = 2,154
Model 2 (relationship between ROE and VAIC indicator)
Standardized
regression t-value p-level
coefficient β
VAIC 0,793354* 12,66119 0,000000*
Ln Fsize 0,052694 0,84094 0,402536
292 Biserka Komnenic, Dragana Pokrajcic and Radovan Tomic

Adj R² = ,640
F(2,93) = 85,651 p < ,00000
DW = 1,970
Model 3 (relationship between ATO and VAIC indicator)
Standardized
regression t-value p-level
coefficient β
VAIC 0,402229* 4,30605 0,000041*
Ln Fsize -0,325966* -3,48963 0,000741*
Adj R² = ,201
F(2,93) = 12,966 p < ,00001
DW = 2,145

Table 5. Multiple regression results of Model 4, 5 and 6.

Model 4 (relationship between ROA and IC components)

Standardized
regression t-value p-level
coefficient β
HCE 0,542077* 7,03760 0,000000*
SCE 0,191290* 2,43630 0,016785*
CEE 0,289563* 3,78325 0,000277*
Ln Fsize -0,168038* -2,23999 0,027527*
Adj R² = ,490
F(4,91) = 23,826 p < ,00000
DW = 1,940

Model 5 (relationship between ROE and IC components)

Standardized
regression t-value p-level
coefficient β
HCE 0,331901* 6,42702 0,000000*
SCE 0,543410* 10,32293 0,000000*
CEE 0,355658* 6,93094 0,000000*
Ln Fsize 0,079341 1,57752 0,118145
Adj R² = ,770
F(4,91) = 80,868 p < ,00000
DW = 1,982
Model 6 (relationship between ATO and IC components)
Standardized t- value p-level
 Intellectual Capital as a Valuable Driver of Corporate Performance..... 293

regression
coefficient β
HCE 0,478297* 5,33633 0,000001*
SCE -0,039041 -0,42731 0,670166
CEE 0,219542* 2,46502 0,015577*
Ln Fsize -0,349058* -3,99869 0,000129*
Adj R² = ,309
F(4,91) = 11,647 p < ,00000
DW = 2,136

Regarding all three VAIC components, human capital efficiency (HCE) as an independent
variable in models 4, 5 and, 6 was found to be the strongest predicator with highest statistical
significance. All three hypotheses involving human capital were found to be statistically supported.
Results show that human capital efficiency has positive correlation with all three corporate
performance measures, and in all three models regression coefficient of this independent variable has
highest statistical significance. In particular, human capital was found to be strongest predictor in model
4 (β = 0,542) which tests its relationship with financial performance measure ROA and model 6 (β =
0,478) which test its relationship with productivity measure ATO.
For structural capital, it was found to be a statistically significant predictor in models 4 and
5. Therefore, one of three hypotheses involving this component of IC is not confirmed. The
regression analysis revealed that structural capital is not associated with measure of productivity
ATO. The lack of association of structural capital with ATO appears to support an argument
advanced by Chen (2009), when investigating Hong Kong companies. It was argued that
structural capital in the VAIC methodology might be incomplete because the expenditure on
research and development (R&D) and advertising is treated as expenses and therefore not
captured as part of the structural capital. This suspected incompleteness of VAIC might provide
an explanation for this lack of association. However, the results of our study show that structural
capital is significant in predicting return on assets and return on equity. Structural capital is,
particularly, strong predictor in model 5, with value of regression coefficient of β = 0, 543, which
shows highest statistical significance (p < 0, 0000).
The empirical results reveal that all three hypotheses relating to physical capital, namely,
H2a, H2b, and H2c are strongly statistically supported. Physical capital is positively associated
with return on investment, return on equity and productivity performance. In particular, physical
capital was found to be strongest predictor in model 5 which tests its relationship with return on
equity (ROE), where the value of its standardized regression coefficient (β) is 0,355. Taking in to
consideration the definition used for physical capital in the VAIC methodology may shed light
on this finding. In the context of the VAIC methodology, physical capital consists of all the
material and financial assets of a firm (Pulic, 2002b). On the other hand, since the one of the core
business and activities of financial companies is the efficient management of their own and
clients financial assets, those companies put strong emphasize on developing their ability for
efficient management of financial capital.
Turning to the control factor - Firm size, measured through natural logarithm of firm’s book
value, results shows that it has statistical significant negative correlation with return on assets
and productivity measure ATO.
294 Biserka Komnenic, Dragana Pokrajcic and Radovan Tomic

DISCUSSION

The results of our study reveal that firms overall intellectual capability expressed through
aggregate coefficient VAIC is positively associated with return on investments (H1a), return on
equity (H1b), and productivity measure ATO (H1c). In general, the empirical findings of this
study support results of prior research which indicate a positive association between overall
corporate intellectual ability - VAIC and the traditional corporate performance measures. In
particular, results show that aggregate coefficient -VAIC, in the context of practical significance
or predicting power, is strongest in predicting financial performance measure - return on equity
(ROE). On the whole, the regression models involving the three IC components has provided
much better explanatory power than the models that use aggregate coefficient VAIC as an
independent variable. Comparing with all the models used in the study, regression model 5, used
for testing relationship between three VAIC components and financial performance measure -
ROE, has recorded the highest explanatory power (77 per cent). Also, the other two models (4
and 6) which use three IC components as predictors, has high determination coefficients, and
they are higher than those recorded when using aggregate coefficient VAIC. This finding
indicates that the three components of VAIC may be a better tool than the aggregated VAIC
measure, for explaining chosen corporate performance measures. This finding support same
conclusion given by Chen (2005) and Chan (2009) in there studies conducted on the Taiwanese
and Hong Kong listed companies. Comparing with all the models, models 2 and 5, which investigate
influence of aggregate intellectual ability (VAIC), and influence of three VAIC components, HC, SC,
CE on return on equity, has strongest prediction power. Those models can explain 64 and 77 percent of
the variance of ROE respectively.
Considering relationship between three VAIC components and corporate performance
measures ROA, ROE and ATO, all three hypotheses considering human and physical capital are
confirmed and one hypothesis regarding structural capital is not empirically supported.
Concerning the three VAIC components: HCE, SCE and CEE, prior research conducted in
Taiwan and Finland (Chen, 2005; Shiu, 2006, Kujansivu, 2005) indicate positive relationship
between the efficiency of human and physical capital and chosen traditional corporate measures,
which is in the line with the results of our study However, our results shows that comparing with
all other independent variables Human Capital has strongest positive influence on the
performance indicators ROA and ATO, which is different from the results of the prior studies
where physical capital has strongest influence on the ROA and ATO indicators. This result
supports hypothesis that IC plays a major role in reducing production costs and enhancing
operating margins (Nakamura, 2001; Gu and Lev, 2003).
In general, it may be concluded that banks in Serbia appear to be putting emphasis on the
two strategic resources, namely human and physical capital, as a way of enhancing return on
investments, return on equity and productivity. One of the reasons why banks in Serbia put
greater emphasize on the efficient management of human than structural and physical capital
may lie in the fact that most banks in Serbia represents subsidiaries of multinational financial
institutions. According to the resource based perspective the main source of competitive
advantage and high profit performances of the MNC is a capability which is “ingrained within
the ‘walls’ of the firm and is difficult to separate from it” (Forsgren, 2008, pp.68). This
capability is linked to the managerial and organizational processes in the firm, through the firm’s
routines, current practice and history. The resource based theory emphasizes that every MNC
must sustain and develop its core capability which is a mixture of the multinational’s
organizational processes, developed over time and its employees. The employees are assumed to
 Intellectual Capital as a Valuable Driver of Corporate Performance..... 295

be holders of a large part of the knowledge on which the capability is based. Building and
upgrading skills of local people working for MNC has proved to be essentially important for host
country economy for raising the level of productivity and enabling to perform work routines
more efficiently. It is well known that whenever it is possible, MNC’s prefer to hire local people
than use expatriate employees. Therefore MNCs are often investing in capacity building
activities and often deliver education and training to groups in order to help them increase
production levels and to perform work routines more efficiently. On the other hand there is an
indication that banks, subsidiaries of multinationals in Serbia, spend less on structural capital
comparing with their sister companies in developed countries, and also on activities which
should enable them to efficiently transfer and implement their internalized codified knowledge.

CONCLUSION

As noted above, prior studies using the VAIC methodology have examined the impact of IC and
its components on firm’s performances. Varying degrees of linkage between IC and firms
performance measures have been reported. For example, the work of Firer and Williams (2003)
in South Africa and Chan (2009) in Hong Kong did not find conclusive evidence to support the
association between IC and financial performance. On the contrary, studies conducted in Asia
and Europe did find evidence to support such an association (Kujansivu and Lo¨nnqvist, 2005,
Chen et al., 2005; Shiu, 2006; Tseng and Goo, 2005, Zeghal and Maaloul (2010).
Thus far, the linkage between IC and a firm’s performance had been reported mainly in
relatively well-developed regions. Since the empirical findings of our study shows positive
association between IC as measured by VAIC methodology and chosen corporate performance
measures, results of our study support the results from studies conducted in relatively developed
countries and represents the evidence that intellectual capital, as a strategic asset, has important
influence on corporate performance also in less developed countries like Serbia. This conclusion
should be taken with some reserve since the research was conducted on the sample which mainly
consists from banks who represents the subsidiaries of multinational financial institutions in
Serbia.
This investigation contributes to IC literature and business practice in several ways. First,
the study discovers empirical evidence which support the association between corporate
performance and efficient use of firm’s intellectual capital. In addition, the results may enable
Serbian companies to better understand the IC drivers for corporate performance and to shed
light on Serbia aspiration to become a knowledge-based economy in which IC plays a crucial
role. Indeed, the empirical results may also enhance IC awareness among investment analysts,
accountants, managers and policy makers, which may, over time, result in recognition of the
need to implement some of the methods for measurement of IC as a valuable strategic tool which
provides basis for generating information necessary for making strategic and operative decisions
concerning optimal strategic resource allocation and improvement of the firm’s key capabilities.

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