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Impact of Intellectual Capital Efficiency on Profitability (A Case Study of LSE25 Companies)

Author

Listed:
  • Muhammad Abdul Majid Makki

    (Islamia University of Bahawalpur, Pakistan.)

  • Suleman Aziz Lodhi

    (National College of Business Administration & Economics, Lahore, Pakistan.)

Abstract

The aim of this study is to examine the relationship between intellectual capital efficiency and the firm's profitability. The importance of intellectual capital (IC) and the related philosophy of the knowledge economy have captured the attention of researchers and business enterprises in the World Trade Organization (WTO) era. IC is widely recognized as a tool that is critical to running a successful business in a highly competitive environment. Various models have been introduced to measure the numerous facets of IC, including the Skandia navigator, Tobin's Q, and value added intellectual coefficient (VAIC). This article examines the role of IC efficiency in the firm’s net profit using the VAIC developed by Ante Pulic (1998). It also investigates its correlation with the firm’s profitability, using regression models. A five-year data set for Lahore Stock Exchange Index companies (LSE-25) was obtained from audited financial reports, and used to calculate human capital, structural capital, and capital-employed efficiency of companies in different industrial sectors. The results obtained using multiple regression analysis supports the argument that IC efficiency contributes significantly to the firm's profitability. Practically, IC efficiency can be used as a benchmark and strategicindicator to direct financial and intellectual resources in the right direction, i.e., to enhance the firm’s ultimate corporate value. It can also be developed as a management tool to create a sustainable comparative advantage in the competitive global knowledge economy. The study is a pioneering attempt to measure the impact of IC efficiency on net profit using cross sectional time series data.

Suggested Citation

  • Muhammad Abdul Majid Makki & Suleman Aziz Lodhi, 2008. "Impact of Intellectual Capital Efficiency on Profitability (A Case Study of LSE25 Companies)," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 13(2), pages 81-98, Jul-Dec.
    • Handle: RePEc:lje:journl:v:13:y:2008:i:2:p:81-98
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    References listed on IDEAS

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    1. World Bank, 2004. "Sri Lanka : Development Policy Review," World Bank Publications - Reports 14577, The World Bank Group.
    2. Rashid Amjad, 2006. "Why Pakistan Must Break-into the Knowledge Economy," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 11(Special E), pages 75-87, September.
    3. Rukhsana Kalim & Suleman Aziz Lodhi, 2002. "The Knowledge-based Economy: Trends and Implications for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 41(4), pages 787-804.
    4. World Bank, 1998. "World Development Report 1998/1999," World Bank Publications - Books, The World Bank Group, number 5981.
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    Cited by:

    1. Snezhana Hristova & Dusica Stevceska-Srbinovska, 2019. "MANAGING TECHNOLOGY IN MACEDONIAN SMEs CONTEXT: PERCEPTIONS, PRACTICES AND CHALLENGES," JOURNAL STUDIA UNIVERSITATIS BABES-BOLYAI NEGOTIA, Babes-Bolyai University, Faculty of Business.
    2. Erika Kulcsar & Claudia-Izabela Crenganes, 2019. "The End Product Of The Imagine Dragons’ And Lady Gaga’S Music, Or The Nature Of Marketing Mix In The Music Industry," JOURNAL STUDIA UNIVERSITATIS BABES-BOLYAI NEGOTIA, Babes-Bolyai University, Faculty of Business.
    3. N. Kanchana & R. R. Raja Mohan, 2017. "A Review of Empirical Studies in Intellectual Capital and Firm Performance," Indian Journal of Commerce and Management Studies, Educational Research Multimedia & Publications,India, vol. 8(1), pages 52-58, January.
    4. Abdul Azeez Badir Alnidawi & Fatimah Musa Omran, 2016. "Learning Organization Impact on Internal Intellectual Capital Risks: An Empirical Study in the Jordanian Pharmaceutical Industry Companies," International Business Research, Canadian Center of Science and Education, vol. 9(10), pages 176-185, October.
    5. Zakaria Nejjari & Hanane Aamoum, 2023. "The Impact of Intellectual Capital on Profitability, Market Value, Productivity, and Return on Equity: Empirical Evidence from Moroccan ICT Firms," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(2), pages 1734-1748, June.
    6. Stefano Fontana & Daniela Coluccia & Silvia Solimene, 2019. "VAIC as a Tool for Measuring Intangibles Value in Voluntary Multi-Stakeholder Disclosure," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 10(4), pages 1679-1699, December.
    7. Mohammad Kazem Emadzadeh & Nadia Afzali & Asiya Bagheri & Mahboobe Rahimpoor & Fatemeh Ezadi & Mojgan Rahmani, 2013. "Effect of Intellectual Capital on Firm Performance," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(2), pages 98-103, April.
    8. Lassaad Ghachem & Costinel Dobre & Reza Etemad-Sajadi & Anca Milovan-Ciuta, 2019. "The Impact Of Cultural Dimensions On The Perceived Risk Of Online Shopping," JOURNAL STUDIA UNIVERSITATIS BABES-BOLYAI NEGOTIA, Babes-Bolyai University, Faculty of Business.
    9. Tajudeen Lawal & Daniya Adeiza Abdulazeez & Mohammed Yabagi Ibrahim, 2019. "Human Capital Efficiency And Profitability Of Quoted Integrated Oil And Gas Companies In Nigeria," JOURNAL STUDIA UNIVERSITATIS BABES-BOLYAI NEGOTIA, Babes-Bolyai University, Faculty of Business.

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    More about this item

    Keywords

    Knowledge Economy; Intellectual Capital; Value Added; VAIC; LSE-25.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other

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