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Intellectual capital and business performance: the role of dimensions of

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Article  in  Journal of Intellectual Capital · January 2020

DOI: 10.1108/JIC-11-2018-0199

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Intellectual
Intellectual capital and business capital and
performance: the role of business
performance
dimensions of absorptive capacity
Syed Saad Ahmed and Jia Guozhu
School of Economics and Management, Beihang University, Beijing, China
Received 15 November 2018
Shujaat Mubarik Revised 20 February 2019
5 May 2019
Department of Management Sciences, 11 June 2019
Mohammad Ali Jinnah University, Karachi, Pakistan, and 21 July 2019
22 August 2019
Mumtaz Khan and Essa Khan Accepted 31 October 2019
Department of Management Sciences,
Bahria University – Karachi Campus, Karachi, Pakistan

Abstract
Purpose – The purpose of this paper is to empirically examine the mediating role of potential and realized
absorptive capacity in intellectual capital (IC) and business performance. It also investigates the direct impact
of the components of IC on business performance.
Design/methodology/approach – Partial least square-structural equation modeling (PLS-SEM) was used to
assess the effect of IC dimensions on performance and to analyze the mediating role of absorptive capacity in
this relationship. Data were collected from 192 managers using a survey questionnaire with Likert scale items.
Findings – The findings of the study show that potential absorptive capacity does not intervene in the
relationship between the components of IC and those of business performance. However, realized absorptive
capacity, measured as the transformation and exploitation of knowledge, played a positive mediating role in
the relationship between the dimensions of IC and those of business performance. Social capital was also
noted as a weak predictor of business performance, while human capital and organizational capital had a
profound positive influence.
Originality/value – This study contributes to the literature on IC by examining the role of realized and
potential absorptive capacity in the relationship between IC components and firm performance. This research
also helps practitioners recognize the importance of transformation and the exploitation of knowledge for
business performance.
Keywords Performance, Social capital, Intellectual capital, Human capital, Organizational capital,
Absorptive capacity
Paper type Research paper

1. Introduction
In the current challenging business environment, intangible assets, such as learning
capability, human capital, knowledge management and relationships with stakeholders
are now the major sources of competitive advantage (Mubarik et al., 2016; Haskel and
Westlake, 2017; Jones et al., 2018; Rupcic, 2019). The growing importance of intangible
assets has opened up many new areas of research in the last few decades. The amount of
research produced on intellectual capital (IC) has exhibited a sharp upward trend
(Ribière and Walter, 2013). Stewart (1991, p. 4) defined IC as “the intangible assets that
could be used by an organization to create value.” Numerous other definitions and
classifications of IC that use various terminologies have been put forward; however, three
main dimensions of IC have been agreed upon by most scholars, namely, human capital,
social capital and structural capital (Bontis, 1998; Sumedrea, 2013; Secundo et al., 2018).
Many scholars agree that all three dimensions of IC play an instrumental role in Journal of Intellectual Capital
leveraging firm performance (Subramaniam and Youndt, 2005; Chen et al., 2006; © Emerald Publishing Limited
1469-1930
Mehralian et al., 2018). Likewise, Mubarik et al. (2016) call IC a key component, which DOI 10.1108/JIC-11-2018-0199
JIC exerts a significant positive effect on firms’ financial and non-financial performance, both
directly and indirectly.
Absorptive capacity appears to be among the possible instrumental factors in the
relationship between the three dimensions of IC and performance. Cohen and Levinthal
(1990) introduced the concept of absorptive capacity and defined it as the organization’s
capacity to acquire, assimilate, and apply knowledge. They also indicated that the
possession of prior knowledge is an important precursor for absorptive capacity.
Although many studies have analyzed the impact of absorptive capacity on organizational
outcomes, the focus of the majority of these was examination of the relationship of absorptive
capability to innovation capabilities (Cepeda-Carrión et al., 2010; Tseng et al., 2011;
Leal-Rodríguez et al., 2014; Lewandowska, 2015; Engelman et al., 2017; Hussinki et al., 2017).
These studies found a significant positive impact for absorptive capacity on firm
innovation. Such studies paid less attention to the interaction of absorptive capacity with
intangible assets like IC (Mariano and Walter, 2015; Mehralian et al., 2018). Likewise, the
majority of studies examining absorptive capacity took it as a single construct, irrespective
of the differences between realized and potential absorptive capacity. Further, studies of the
relationships among the three major dimensions of IC on performance through realized and
absorptive capacity have been few.
Moreover, some researchers have claimed that absorptive capacity moderates the
relationship between IC and performance, while others argue for its role as mediator. The
inconclusive results of these studies indicate that more research is required to clarify the role
of realized and potential absorptive capacity in the relationship between the components of
IC and business performance. Recently, scholars have begun to examine the mediating role
of knowledge management in IC, but here again, innovation was under the spotlight, not
overall business performance (Han and Li, 2015; Obeidat et al., 2017). Some studies have
found that the acquisition, assimilation and exploitation of knowledge rely on knowledge
already existing in the organization (Aribi and Dupouët, 2016; Curado and Bontis, 2007).
This study examines the role of potential and realized absorptive capacity in the
relationship between IC and performance.
Further, this study also examines the direct impact of each dimension of IC on
business performance, thus contributing to the literature on IC in three different ways.
First, it demonstrates how the three important dimensions of IC affect performance
through potential and realized absorptive capacity. Although there has been much
work on the overall impact of IC (Firer and Williams, 2003; Inkinen, 2015; Dzenopoljac
et al., 2017), its indirect impacts through absorptive capacity have seldom been
investigated separately.
Likewise, most studies that examine the role of absorptive capacity have taken it as a
single construct, irrespective of any consideration of the difference between realized and
potential absorptive capacity. Interrogating the effects of absorptive capacity without
differentiating its types can be risky and even misleading. Second, this study clarifies the
role of organizational absorptive capacity between IC and business performance (Petti and
Zhang, 2016; Shafique and Kalyar, 2018). The literature is inconclusive on the role of
absorptive capacity as a mediator or a moderator (Rafique et al., 2018). This study can help
practitioners recognize the importance of transformation and the exploitation of knowledge
for business performance.
Section 2 of this paper reviews previous scholarly contribution that formed
the theoretical base for the constructs and their relationships. Section 2.5 presents the
hypotheses and conceptual model. Section 3 highlights the research design and methodology.
Section 4 exhibits data analysis whereas discussion and conclusion appear in Sections 5
and 6, respectively. Section 7 assesses limitations of the study and possibe direction for
future research.
2. Literature review Intellectual
2.1 Absorptive capacity capital and
Absorptive capacity was developed by Cohen and Levinthal (1990) in their published paper business
introducing organizational absorptive capacity as a new notion that improves
organizational learning and innovation. They defined organizational absorptive capacity performance
as the ability to acquire new knowledge, absorb it, and apply it to gain a competitive edge.
Cohen and Levinthal’s model considered the absorptive capacity of an organization, which
was invariably due to previous knowledge and background diversity. For this reason, they
emphasized research and development, considering it to be sine qua non for the
development of absorptive capacity. They also encouraged the organization to employ
diverse team members (Chen et al., 2009; Aribi and Dupouët, 2016). They believed that
diversity can be a novel lens that an organization can use, allowing it to look at problems
from varied perspectives.
Zahra and George (2002) then redefined absorptive capacity as the capacity of an
organization to acquire, absorb, transform, and utilize knowledge, identifying two
dimensions in it, namely, potential absorptive capacity and realized potential capacity. This
classification allowed scholars to deepen their investigations, dividing this concept into
constituent parts.
2.1.1 Potential absorptive capacity. Potential absorptive capacity is reviewed here first.
According to Zahra and George (2002), it includes two components. The first is knowledge
acquisition, explained as the capability organizations have to recognize and obtain
information from external sources that is crucial for the organization’s processes and
operations. The second, knowledge assimilation, referring to the ability of the organization
to construe and process obtained knowledge. Large organizations enhance their
performance by developing their potential absorptive capacity, which grants strategic
gain to organizations, such as, providing effective knowledge to reconfigure processes at
competitive cost and in less time ( Jansen et al., 2005; Chaudhary and Batra, 2018). Thus,
when organizations acquire and refine potential absorptive capacity, this affects realized
potential capacity positively, which leads to better business performance.
2.1.2 Realized absorptive capacity. Then, the second type of absorptive capacity, in this
view, is realized absorptive capacity, defined as organizational capability to transform and
exploit knowledge. Transformation capability can be gauged by the number of novel
initiatives taken, with exploitation capacity as the outcome, which is based on the application
of information. This could be in the form of the introduction of a new service and or product or
it could also be a modification and improvement to existing products and services (Flor et al.,
2018; Ferreras-Méndez et al., 2016). Additionally, knowledge acquisition is insufficient for
firms to achieve a competitive advantage; available resources should be assimilated,
developed, and reconfigured to do the tasks well (Helfat and Peteraf, 2003; Schilke et al., 2018).
Verona (2003) and Flor et al. (2018) have suggested that managerial relationships with
government and business partners allow organizations to acquire knowledge. However,
realized absorptive capacity is very important for absorbing knowledge and blend it in with
the knowledge currently available in the organization. If an organization lacks the realized
absorptive capacity to incorporate and customize knowledge into their procedures and
structures, it cannot take full advantage of acquired knowledge to enhance performance.

2.2 IC and performance

IC has been defined and classified in multiple ways. However, in general, the classification is
split into three categories: human, organizational and social capital. This division is the
premise for building and measuring models (Inkinen, 2015). This review also takes into
account the relationship to business performance.
JIC 2.2.1 Human capital. Human capital theory is part of the foundation of the concept of IC
(Schultz, 1961). This theory holds that all assets of the organization combined are not close to
the potential of its human beings. Schultz (1961) also noted that human beings expend energy
and time on themselves. Blaug (1976) found that people invest in themselves for various
reasons, in a way that is centered on the future for many reasons, monetary and
non-monetary. He also stated that people might want a job without significant economic value
but with greater prospects for training and development. Many scholars have found that
human capital preserves both implicit and explicit knowledge and can produce valuable
knowledge for an organization (Becker, 1962; Bontis and Fitz-Enz, 2002; Mubarik et al., 2018).
Resource-based theory (Wernerfelt, 1984) extends this theoretical basis to the role of
human capital and demonstrates that intangible resources like human capital can
play a pivotal role in attaining competitive advantage. Wernerfelt (1984) explains that
intangible resources may have four major attributes: they are valuable, rare, inimitable and
non-substitutable (VRIN). Human capital has the capability to acquire all four of these
characteristics. Evidence from the study of IC informs us that the construct of human capital
encompasses the creativity, motivation, learning capacity, training, education and loyalty of
employees (Edvinsson and Malone, 1997; Martín-de‐Castro et al., 2006; Sharabati et al., 2010).
It has been widely argued that business performance is primarily driven by the proper
utilization of human capital (Colombo and Grilli, 2005; Sullivan, 1999). The components of
IC, such as process, customer and innovation capital are depending on human capital first
and only then affect business performance. In other words, human capital affects processes
and innovation that increase the number of customers, which finally lead to better business
performance (Agostini and Nosella, 2017).
Johnson (2002) asserted that the human capital is an indispensable part of IC as without
humans there cannot be any IC. Moreover, according to Jardon and Susana Martos (2012),
the development of human capital paves the way for the improvement of organizational
capital, which, in turns, improves social capital and business performance. Similarly, it has
been found that human capital is the most important component of IC, accounting for more
than 50 percent of its value (Curado, 2008).
2.2.2 Organizational capital. Edvinsson and Malone (1997) defined organizational capital
as everything remaining inside organizations when employees go home. According to Martín-
de‐Castro et al. (2006), this concept appears straightforward but is strategically distinct. In the
same way that the employees are the owners of the human capital, it is organizations that own
and manage organizational capital, which includes organizational culture, technological
processes and formal mechanisms all of which help organizations absorb and refine
knowledge. Similarly, Brusoni et al. (2001) found that when people come to an organization
from a diverse range of backgrounds, organizational capital provides them the framework for
cooperation. It gives everyone a shared reference point in the form of processes and procedures.
Ordonez de Pablos (2004) investigated the strategic implications of the structural
architecture of human resource management (HRM) systems and concluded that structural
capital influences performance significantly more than relational or human capital. In a
similar study, the power of structural capital was considered twice as good as other IC
dimensions (Yang and Lin, 2009). Finally, Ling (2012) examined organizational performance
and IC from a global perspective, finding a positive relationship between structural capital
and business performance.
2.2.3 Social capital. Social capital is sometimes also called relational capital. It could be
defined as embedded interactional knowledge, which specifies the nature and level of
interaction among its members. The primary function of social capital is enabling the
gathering and distribution of knowledge across an organization. It also allows interactions
with other communities and institutions (Ortiz et al., 2018).
 According to Welbourne and Pardo-del-Val (2009), the relationships maintained by Intellectual
employees are more valuable than the employees themselves. Lavie (2006) asserts that for capital and
companies, relationships are more important than resources, particularly in networked business
environments. Social capital facilitates knowledge acquisition and creation through external
and internal resources. performance
Problem-solving can be refined through improvements in social capital, which enhance
organization performance (Youndt et al., 2004). Additionally, Huang and Hsueh (2007a) indicated
that human capital is prerequisite for social capital, which leads to business performance.

2.3 IC dimensions and potential absorptive capacity

The acquisition of talented human capital through recruitment and selection is paramount for
the absorptive capability of an organization (Mubarik et al., 2018). Cohen and Levinthal (1990)
considered the capability to use and develop information is inherited from existing knowledge.
Zahra and George (2002) suggested that existing experience and contacts with various sorts of
knowledge allow for refined absorptive capacity. According to Minbaeva et al. (2014), if
employees receive more education and training, the capability for absorbing and utilizing new
knowledge increases. Furthermore, the acquisition and management of new knowledge also
requires leaders to play a dynamic role ( Jensen et al., 2011; Shafique and Kalyar, 2018).
Cohen and Levinthal (1990) found that organizational structure plays a very important
role in knowledge absorption and transfer. Storage and documentation in an organization
are explicitly related to organization capital. The friendlier the systems and processes
(i.e. standard operating procedures, manuals and databases), the better the relationship with
the facilitation of knowledge sharing within and outside the organization. Jansen et al. (2005)
learned that organizational processes and mechanisms help the obtaining and incorporation
of external knowledge.
Moreover, according to Curado and Bontis (2007), organizational capital can preserve
and develop knowledge for its own operations, mainly through its structure and culture.
Jansen et al. (2005) showed that designed policies and procedures facilitate HRM practices
and cross-functional interactions, which lead to the facilitation of new ideas. It has also been
seen that information systems facilitate knowledge spread, which subsequently leads to
knowledge absorption. Adler and Kwon (2002) highlighted that networking ability is the
cornerstone of social capital, establishing a positive relationship with stakeholders, which in
return improves knowledge acquisition and its quality and relevance. Social capital plays a
very significant role in inter- and intra-organization knowledge sharing and exchange.
Ortiz et al. (2018) stressed that the efficient management of social capital enables
companies to identify and acquire complex knowledge. Moreover, it was discovered that
organizations’ social capital could be developed by developing strong interpersonal
relationships on staff, which could facilitate knowledge acquisition and assimilation
(Cabello-Medina et al., 2011).

2.4 IC dimensions and realized absorptive capacity

The possession of an appropriate level of prior knowledge enhances the organizational
capability to apply knowledge, both prior and pertinent, which paves the way for creativity.
In addition, according to Soo et al. (2017), human capital has a direct relationship to the
firm’s capability to absorb and exploit outside knowledge.
Lund Vinding (2006) studied the relationship of human capital with absorptive capacity,
specifically its relationship to innovative performance in an organization. They studied
1,544 service and manufacturing organizations in Denmark. They found a negative
attitude of top manager and heads of departments regarding innovation performance.
They suggested that their results led to the conclusion that it is indispensable to upgrade
JIC knowledge and skills in employees, specifically in high tech industries. By contrast,
Shih et al. (2010) commented that human capital plays an important role in knowledge
creation, and it influences other two intellectual components.
Organizational capital not only establishes the system and mechanisms of knowledge
acquisition, but it also paves the way for the translation of acquired knowledge to
organizational knowledge (Kang and Snell, 2009). Lund Vinding (2006) found that an
organization’s active processes and its internal capability are the sine qua non for the
effective acquisition, assimilation, and exploitation of knowledge. Aribi and Dupouët (2015)
conducted a qualitative, interview-based study and concluded that knowledge absorption
involves time and complexity while relying on organizational capital, also showing that
worldwide innovations also owe much to organizational capital.
Jansen et al. (2005) found a direct relationship between social capital and realized
absorptive capacity. The relationships and networking of employees in organizations
facilitate knowledge exploitation that enhances performance over the long term.
According to Soo et al. (2017), social capital is not limited to intra-organization knowledge
sharing but leads to the application of knowledge that produces better results.
Moreover, social capital was found to be a strong predictor of knowledge sharing (Van
Dijk et al., 2016). Furthermore, Aribi and Dupouët (2015) commented that speed and
reactivity play a crucial role in the construction of social capital, which leads to creating new
knowledge for an organization.

2.5 Conceptual framework and hypothesis development

The theoretical basis for this study is rooted in the human capital theory (Schultz, 1961;
Becker, 1962), and the theory of the firm (Penrose, 1959). Likewise, the work of Bontis (1998)
and Bontis and Fitz-Enz (2002) paved the way to model the relationship between IC and
performance. In addition, this study has drawn insights from the work of Zahra and George
(2002) for the incorporation of the absorptive capacity dimensions as a mediator between
thecomponents of IC and business performance. They indicated that organizational
antecedents play a critical part in firms’ absorptive capacity dimensions. This supports our
model, as this study examines the mediating role for the dimensions of absorptive capacity.
Figure 1 depicts the relationships among the variables in the proposed model:
H1. The components of IC (human, organizational and social capital) significantly affect
potential absorptive capacity.
H2. The components of IC (human, organizational and social capital) significantly affect
realized absorptive capacity.
H3. The components of IC (human, organizational and social capital) significantly
improve business performance.

Human
Capital
Realized
Absorptive
Capacity
Organizational Performance
Capital
Potential
Absorptive
Capacity
Figure 1. Social Capital
Conceptual framework
 H4. Potential absorptive capacity mediates the relationship between the components of Intellectual
IC (human, organizational and social capital) and business performance. capital and
H5. Realized absorptive capacity mediates the relationship between the components of business
IC (human, organizational and social capital) and business performance. performance
As reviewed above, resource-based view (Wernerfelt, 1984) identifies the four major
characteristics for a resource to act as a pivotal source of performance. These are VRIN.
According to Mubarik et al. (2019), “the IC has the capability to have all these elements, thus
making it a potential source of competitiveness and ambidexterity.” In this context, all the
dimensions of IC can improve firm performance. For this reason, this study hypothesizes a
direct effect of all IC dimensions on business performance. Further, a firm’s capacity to
absorb outside knowledge can improve the impact of IC on performance. Nevertheless, the
question whether realized and potential absorptive capacity mediates between IC and
performance is inconclusive. Hence, this study also hypothesizes the mediating role of
realized and potential absorptive capacity separately.

3. Design and methodology

This study adopts the deductive approach, attempting to explain causal relationships among
the variables chosen. This led to the development of a number of hypotheses for which
quantitative data were obtained to test the mediating role of the dimensions of absorptive
capacity between the components of intellectual performance and business performance. This
study used a survey strategy, which allows for economical collection of quantitative data from
a large population that can then be statistically analyzed (Saunders et al., 2009). Below, this
study explains the instruments of measurement, sampling and data collection.

3.1 Measurement and sampling

All items were measured on a five-point Likert scale. These items were adapted from
previous studies. The scale for absorptive capacity (realized and potential) was taken from
Flatten et al. (2011); it measures the two dimensions of organizational absorptive capacity.
Potential absorptive capacity was assessed with seven items and reviews organizational
capability to recognize, acquire, and assimilate new information from outside sources
(Zahra and George, 2002). Realized absorptive capacity was also measured with seven items.
It measures the transformation and exploitation of new knowledge to produce new ideas
and products. The construct of the components of IC: human, organizational, social capital
and business performance consists of five items each, drawn from (Sharabati et al., 2010;
Subramaniam and Youndt, 2005).
The population for this study was large and concentrated in the medium manufacturing
sector of firms in Pakistan. This study adopted the sampling procedure suggested by
Mubarik et al. (2016) to select respondents. The questionnaire was delivered to 300
managers and 192 returned completed documents. The demographic distribution of the
respondents is displayed in Table I.

3.2 Analytical technique

This study employed with partial least squares-structural equation modeling (PLS-SEM).
SEM is a multivariate technique, widely used to study structural relationships. It enables
several variables to be analyzed in an integrated model at once (Hair et al., 2016). PLS-SEM
provides useful insight into the conceptualization of constructs and theories that can be
tested with empirical data. It also can reveal causal modeling complexities. Moreover, as
Akter et al. (2017) note, it ensures the estimation of a model using a small sample with many
latent variables, another important reason to use it in this study. PLS was preferred over
JIC Gender
Male 81.2%
Female 18.8%
Age
30 or less 33.5%
31 to 40 36.7%
41 to 50 22.0%
51 to 60 7.3%
More than 60 0.5%
Qualification
Intermediate 1.6%
Graduation 42.2%
Masters 53.6%
PhD 2.6%
Designation
General manager 8 (4%)
Senior Manager 52(27%)
Table I. Manager 85 (44%)
Demographic Deputy Manager 35 (18%)
distribution of Assistant Manager 12 (6%)
the respondents Note: n ¼ 192

other techniques due to the small sample and non-parametric nature of the data. PLS-SEM
can estimate from a relatively low sample size. Likewise, this approach is effective for
analyzing data that are not normally distributed (Hair et al., 2016).

4. Data analysis and results

4.1 Validity and reliability
The results of the validity and reliability checks are exhibited in Table II below. To test the
internal consistency, the values for composite reliability (CR) and Cronbach’s α was checked.
The results in Table II indicate that the constructs have internal consistency: the values for
CR and Cronbach’s α are greater than 0.70. Likewise, indicator reliability was checked by
analyzing factor-loading values. According to Hair et al. (2016), factor loading should be
greater than 0.70 to ascertain indicator reliability. In our case, the values for all the
indicators are greater than 0.80. This shows that all indicators meet their loading goals in
their respective constructs.
Furthermore, the convergent validity was confirmed of the constructs by checking the
values for average variance extracted (AVE). The AVE values for all constructs were greater
than the recommended threshold level of 0.50, indicating that all constructs were convergently
valid. The Fornell–Larcker criteria were used to ascertain discriminant validity, as shown in
Table III. According to those criteria, the square root of the AVE should be greater than the
inter-construct correlations. In this case, the square root values of the AVE were greater than
the inter-constructs correlation, confirming discriminant validity.
The estimated model is exhibited in Figure 2. The IC construct has three major
dimensions: human, social, and organizational capital. Each dimension has five items, for a
total of 15. The construct of the absorptive capacity has 14 items (seven potential and seven
realized absorptive capacity), and the construct of business performance has five items.
The results of the hypothesis testing are displayed in Tables IV and V. They showed that
human capital (0.30, p o0.000) and organizational capital (0.31, p o0.000) had a positive
and significant influence on business performance. However, the effect of social capital
Construct Items Loading AVE CR α
Intellectual
capital and
Human capital HC1 0.851 0.634 0.896 0.855 business
HC2 0.830
HC3 0.747 performance
HC4 0.808
HC5 0.741
Organizational capital OC1 0.639 0.596 0.880 0.828
OC2 0.809
OC3 0.801
OC4 0.839
OC5 0.759
Social capital SC1 0.798 0.658 0.905 0.869
SC2 0.829
SC3 0.866
SC4 0.803
SC5 0.756
Potential AC PAC1 0.698 0.570 0.902 0.873
PAC2 0.689
PAC3 0.732
PAC4 0.767
PAC5 0.820
PAC6 0.769
PAC7 0.801
Realized AC RAC1 0.763 0.623 0.908 0.879
RAC2 0.821
RAC3 0.809
RAC4 0.766
RAC6 0.795
RAC7 0.780
Business performance BP1 0.844 0.717 0.926 0.900 Table II.
BP2 0.761 Confirmatory factor
BP3 0.873 analysis with
BP4 0.891 reliability and
BP5 0.861 validity statistics

(1) (2) (3) (4) (5) (6)

Human capital (1) 0.80

Organizational capital (2) 0.34 0.77
Social capital (3) 0.42 0.22 0.81
Realized Absorptive capacity (4) 0.29 0.27 0.45 0.75
Potential Absorptive capacity (5) 0.38 0.33 0.31 0.62 0.79 Table III.
Performance (6) 0.44 0.39 0.28 0.49 0.51 0.85 Fornell–Larcker
Note: Italicized values in diagonal are the square root of AVE of respective construct criteria

(−0.078, p o0.000) was non-significant effect. The results also showed a positive and
significant impact of realized absorptive capacity (0.559, p o 0.000) on business
performance. Interestingly, potential absorptive capacity (−0.117, p ¼ 0.185) had a
non-significant but negative effect on performance. The results for the role of realized
absorptive capacity showed that it positively mediates the relationship that social (0.15,
p o0.000) and organizational (0.197, p o0.000) capital had to performance. It does not
mediate the relationship between human capital (−0.033, p ¼ 0.241) and performance.
JIC OC1 OC2 OC3 OC4 OC5

0.801
0.639 0.809 0.839 RAC1 RAC2 RAC3 RAC4 RAC6 RAC7

0.763 0.821 0.809 0.766

SC1 0.795 0.780

Org Capital 0.352

SC2 0.798
0.829 0.310
SC3 0.866
0.2720.360 BP1
0.803 0.691
SC4 0.756 0.844
0.559 BP2
Social Capital
0.282 0.761
SC5 Realized AC 0.873
0.779 BP3
–0.117 0.891
0.335 0.861 BP4
HC1 0.730 Business
Performance BP5
HC2 0.851 0.343
0.830 Potential AC
HC3 0.747
0.808 0.698 0.689 0.801
0.732 0.767 0.820 0.769
HC4 0.741
Human Capital
Figure 2. HC5
Estimated model
PAC1 PAC2 PAC3 PAC4 PAC5 PAC6 PAC7

Hypotheses Values Decision

Human capital → Performance 0.302** Supported

Human capital → Potential Absorptive Capacity 0.343** Supported
Human capital → Realized Absorptive Capacity 0.335** Supported
Organizational capital → Performance 0.31** Supported
Organizational capital → Potential absorptive capacity 0.36** Supported
Organizational capital → Realized absorptive capacity 0.352** Supported
Potential absorptive capacity→ Performance −0.117 Supported
Realized absorptive capacity→ Performance 0.559** Supported
Social capital → Performance −0.078 Not supported
Table IV. Social capital → Potential absorptive capacity 0.282** Supported
Direct impact of Social capital → Realized absorptive capacity 0.272** Supported
intellectual capital Note: *,**Significant at 5 and 1 percent, respectively

Hypotheses Value Decision

Human capital →Potential absorptive capacity → Performance −0.04 Not supported

Organizational capital → Potential absorptive capacity → Performance −0.042 Not supported
Human capital → Realized absorptive capacity → Performance 0.187** Supported
Social capital → Realized absorptive capacity → Performance −0.033 Not supported
Table V. Organizational capital → realized absorptive capacity → Performance 0.197** Supported
Mediating role of Social capital →Realized absorptive capacity → Performance 0.152** Supported
absorptive capacity Note: *,**Significant at 5 and 1 percent, respectively

The role of potential absorptive capacity appears to be non-significant in the relationship

of human and organizational capital to performance. However, it does mediate the
relationship between social capital and performance. The results on human capital and
organizational performance broadly concur with Minbaeva et al. (2014), Soo et al. (2017) and
Mubarik et al. (2018). Nevertheless, a non-significant and negative effect on performance Intellectual
was found for social capital, defying the conventional wisdom. This research justifies the capital and
result by noting that social capital alone may be counterproductive. business
performance
5. Discussion
IC, firm performance, and related issues have been extensively researched. This study
examined the dynamic role of absorptive capacity in the components of IC and business
performance. For this purpose, the effects of these components and the dimensions of
absorptive capacity on business performance were also investigated.
The findings support the argument that the components of IC are an important driver for
absorptive capacity. This means that a capable workforce, efficient organizational systems
and good relationships with stakeholders facilitate knowledge acquisition, assimilation,
transformation, and exploitation. This study shows that human capital positively affects
absorptive capacity and the performance of business in a way that is consistent with previous
research findings from Lund Vinding (2006), Minbaeva et al. (2014) and Soo et al. (2017).
It is evident, however, from past studies that the capacity and ability of human resources
significantly affect business performance. Nonetheless, organizations shy away from
investing in their people. This could be for many reasons, and some have been identified
long ago by economists, including that humans cannot be completely owned by their
organizations. For this reason, many organizations are reluctant to invest financial capital
into human capital.
Most studies that have analyzed organizational capital in relation to absorptive capacity
and business performance have found positive relationships (Aribi and Dupouët, 2015;
Curado and Bontis, 2007; Jansen et al., 2005). This study asserted that organizational capital
is a good predictor for absorptive capacity and business performance. However, it
contradicted the findings of Yang and Lin (2009) and Mubarik et al. (2016b), who concluded
that the power of organizational capital to predict was much higher than other IC
dimensions. This study found that social capital is a comparatively worse predictor of
absorptive capacity than other IC components.
This study also does not support Huang and Hsueh (2007b), who discovered that human
capital influences structural and social capital, but only social capital leads to business
performance. It also contradicts Chen et al. (2009), who found that social capital is the most
significant IC component.
These results, by contrast, show that social capital does not significantly affect business
performance. This is an interesting finding, as the increase of an employee network could be
the reason for a slight decline in performance. Nevertheless, the intervention of a realized
absorptive capacity construct makes the relationship between social capital and business
performance significant. Therefore, it can be assumed that stakeholder-related knowledge
absorption and application capability of employees positively influences business performance.
The findings also indicated that realized absorptive capacity mediates between the
components of IC and business performance, significant at the 1 percent level. It could be
argued that skilled employees within a refined organizational system with its processes can
apply new knowledge, which improves business performance. On the other hand, this study
also empirically confirms that potential absorptive capacity does not affect the relationship
between the components of IC and business performance, which was non-significant at the
5 percent significance.
According to Petti and Zhang (2016), the needs of knowledge transformation and
exploitation require capital (research funding, facilities) than knowledge identification and
absorption. Therefore, realized absorptive capacity could play a more significant role in
enhancing performance. By contrast, potential absorptive capacity might help absorb and
assimilate knowledge, but its role as a mediator for the association with performance might
JIC not be significant. In other cases, management might not be keen to encourage employees to
acquire knowledge, and there is less use for established communication channels among
them. Krishna et al. (2012) concluded that the role of information and communication
technology is very significant for knowledge management processes that help organizations
to achieve their goals. Furthermore, Jansen et al. (2005) found that when an organization
acquires and refines potential absorptive capacity, it affects positively on realized
absorptive capacity, which leads to better business performance.

6. Conclusion
The objective of this study was to examine the role of realized and potential absorptive
capacity in the relationship between IC and performance. The study hypotheses were
examined using data from 192 managerial-level employees in service and manufacturing
organizations. PLS-SEM was employed to estimate the hypothesized relationships. The study
found positive and significant impacts of organizational and human capital on business
performance and a non-significant negative impact of social capital on performance.
Further, it was found that realized absorptive capacity significantly and positively
mediates the relationships of human and organizational capital to performance. By contrast,
potential absorptive capacity only mediates the relationship between social capital and
performance. The results of our study in general align with the literature, but some results
do not support conventional wisdom. For example, management practitioners consider
absorptive capacity to be a major performance predictor, without considering its aspects.
The difference between the role of realized and potential absorptive capacity draws
attention toward the fact that absorptive capacity effects cannot be lumped together without
separately considering realized and potential absorptive capacity. This implies that the
acquisition and absorption of knowledge do not mediate the relationship between IC
components and business performance.
However, the transformation and exploitation of knowledge that is represented by the
construct of realized potential capacity positively affecting the relationship between IC and
business performance. In addition, this study also does not support the claims of studies
that have found social capital to be a predictor of business performance. Conversely, it was
found that it is a worse predictor than human and organizational capital. Findings imply
that knowledge acquisition, absorption and creation can accelerate and increase business
performance for organizations with highly productive workforces, better procedures,
well-developed databases, dynamic systems, and good relationships with stakeholders. In a
nutshell, our results clearly show a mediating role for both realized and potential absorptive
capacity in the relationship between IC components and performance. Nevertheless, the
magnitude of the impact may differ according to the individual dimensions of the IC.
The findings of this study enhance the understanding of IC in the context of the
developing country of Pakistan. The majority of the literature on IC, ambidexterity and
performance paradox focuses on developed countries and may have less applicability to
developing economies. Additionally, Pakistan also offers a number of aspects common with
other developing countries: weak enforcement of law, underdeveloped institutions and rapid
change. This study offers useful managerial implications for firms in similar settings by
guiding organizations to develop the right tools, systems, and cultures to exploit the outside
knowledge that leads to better business performance.

7. Limitations and future research directions

Future studies may pursue detailed analysis of absorptive capacity and investigate more
restricted components of potential and realized absorptive capacity. In most past studies, the
unit of analysis has been the group and organization, as absorptive capacity is considered at
the firm. Future studies may extend this into the individual level, with the inclusion of
variables from attitude and personality. Further studies could also explore the reasons why Intellectual
potential and realized absorptive capacity cannot be grouped together. This study had certain capital and
limitations, such as its cross-sectional nature. Future research could examine these ideas on business
longitudinal grounds to determine the performance of intangible assets with relation to the
capabilities of knowledge acquisition, assimilation, transformation, and exploitation. performance

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Further reading
Asiaei, K., Jusoh, R. and Bontis, N. (2018), “Intellectual capital and performance measurement systems
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performance: what structural relationships do they have in upper-upscale hotels?: Intellectual
capital and business performance in upper-upscale hotels”, International Journal of Tourism
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John Wiley and Sons, New York, NY.

Corresponding author
Syed Saad Ahmed can be contacted at: saadahmed@buaa.edu.cn

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