Intellectual capital efficiency and firm performance rrelationship in Turkish manufacturing sector

The primary objective of this study is to analyze the intelectual capital efficiency of manufacturing sector and the relationship between intelectual capital performance and firm performance for manufacturing firms listed in Istanbul Stock Exchange for the period 2003-2013. For the last 20 year, there has been a transition in the manufacturing sector from labour intensive, conventional manufacturing to knowledge intensive, high value added, innovative manufacturing aspect. Despite this transition, industries, which have the highest share in the Turkish manufacturing sector's export, are still considered as low-/medium technology intensive industries. To enhance the development of technology intensive products, there is a clear need for reinforcement of innovativeness and increasing investments in R&D. However, this is only possible by recognizing the importance of intangible assests, namely intellectual capital, in regards to industrial operations and firm performance. Eventhough there seems to be a consensus on intellectual capital's positive effects on firms' performances and competitiveness, there is not any universally accepted definition for this concept in the literature. Still, intellectual capital can be identified as intangible assets which can be converted into profit, but are not reflected on firms' financial reports. This description encompasses a vast area ranging from knowledge and skills residing in employees, to the knowledge that remains at the firm when the employees go home. The most evident indicator of the intellectual capital, which is intangible by the course of its nature, is the difference between the market value and book value of a firm. This difference is the economical value of the intangible capital. Although there are various classifications in the literature regarding the components of intellectual capital, most of the classifications overlap on three distinct descriptions. So, it has been generally accepted that the intellectual capital is composed of three components; human capital, structural capital and relational/customer capital. Human capital can be described as the sum of all knowledge, skills, abilities, expertise and experiences of people working in an organization, which can be used to achieve the goals of the firm. Human capital is the kind of knowledge that is implicit by its nature. Dimensions of human capital on personal basis also include leadership, education, creativity, expertise, motivation, entrepreneurship, risk awarenessas well as problem solving abilities. Although human capital can be regarded as an asset depending substantially on personal attributes, it is mentioned in the literature that the abilities and knowledge gained by the synergistic effect originating from employee teams or networks are also included in the definition of human capital. Structural capital, which can be defined as the knowledge that stays at firm after employees go home, mainly refers to "non-human stocks of codified knowledge in an organization". Structural capital constitutes the infrastructure, which is required by the human capital to create value added. By means of this infrastructure, the knowledge residing in the firm can be used, shared and transfered in and outside the firm. In other words, structural capital is the sum of all structures, procedures, rutins and cultural aspects that enable the knowledge and practice generated by human capital to be compiled, arranged, enhanced and spread throughout the firm and even to be transformed into intellectual property of the firm. Firms do not really own human capital, however, although structural capital is not reflected on the balance sheet, it completely belongs to firms. Structural capital includes processes, constructions, systems, brands and even culture, vision and values owned by a company. Relational capital refers to the sum of existing and potential resources that are either originated from individual and/or organizational relation networks or acquired through these networks. Relational capital plays an important role in terms of determining and directing firm's relation with its environment. In this definition 'environment' mainly refers to firm's clients, stakeholders, opponents and society, however among all of them relationships with customers are considered as the most important one. In line with this argument, some studies tend to use customer capital instead of relational capital as one of the three components of intellectual capital. According to the Resource Based View, competitive advantage and high level performance can only be achieved by owning strategic resources and appropriate usage of these resources. These resources might be tangible or intangible. The more valuable, scarce, untransferable, inimitable and unreplaceble these resources are, the more important they become for ensuring competitiveness and high level performance. All these attributes that are used to describe the features of strategic resources, are also ascribed to intellectual capital in the literature. In this case, the relationship anticipated to exist between efficient usage of strategic resources and competitiveness and high level performance, could also exist between intellectual capital and firm performance. In other words, if intellectual capital is a resource providing competitive advantage, it should also have a positive effect on firm's financial performance. According to the notion "you can manage what you can measure", to be able to manage intellectual capital efficiently, which is intangible, mostly unrecognized and still anticipated to have a significant effect on firm performance, firms need to detect where intelectual capital elements lay in the firm, measure them and report them regularly. Firms undoubtedly require using certain methods to determine and measure the use of intellectual capital. To this end, various methods are developed in the literature. These methods can be separated into two groups: financial valuation of intellectual capital and non-financial valuation of intellectual capital. Both groups have their own advantages and disadvantages. Non-financial valuation methods enable us to monitor what kind of intellectual capital elements a firm has, where in the firm these elements reside and what kind of unique effects these elements have. On the other hand, financial valuation methods help us to determine the economic value of the intangible assets a firm possesses and to compare a firm's intellectual capital performance to its competitors. Developed by Pulic in 1998, Value Added Intellectual Coefficient (VAIC) is a standardized, logical and easy to use intellectual capital efficiency measuring method. It uses financial data retrieved from financial reports for the calculations of corporate value creation efficiency of the firms, which also renders it possible to compare firms with each other. There is a growing body of research, which uses VAIC as an intellectual capital performance measure for the comparison of companies and as a predictor for company performance. In VAIC due to employees active role in creation of value added, employees are treated as a resource not as an expense, which is the opposite of the case in traditional accounting systems. The calculated VAIC value is the sum of human capital efficiency, structural capital efficiency and capital employed efficiency. In this study VAIC method has been used to determine the intellectual capital efficiency in Turkish manufacturing sector, to discover which intellectual capital efficiency components have an effect on firms' financial and market performances for Turkish manufacturing sector and its sub industries. 400 firmXyear observations belonging to firms operating in seven sub industries of Turkish manufacturing sector and listed in Istanbul Stock Exchange has been included in the analysis. As financial performance indicators and dependent variables in the statistical models ROA (Return on Asset), ROE (Return on Equity), which are profitability indicators, and ATO (Assets Turnover Ratio), which is productivity indicator, have been used in the analysis. As market performance indicator MB (market value/book value ratio) has been adopted. To investigate the effect of VAIC and its components on firm performance, multiple regression analysis has been used. In this study intellectual capital efficiencies for manufaturing sector and its sub industries have been investigated first. Then, it has been investigated which VAIC components have an impact on firm performance and the results have been compared with the ones of the firms listed in the BIST100 index. In the second part of the study three extended VAIC models have been proposed. First two models are based on Nazari and Herremans' extended VAIC model. In these models, instead of structural capital efficiency, its sub components, renewal capital efficiency, customer capital efficiency and process capital efficiency, have been included in the model. In the third porposed extended VAIC model, customer capital efficency has been included in the model as the third intellectual capital efficiency component. In addition to that, interaction effect of renewal capital efficiency and structural capital efficiency and interaction effects of intellectual capital efficiency components and capital employed efficiency have been included and investigated in the third proposed model. According to the results, in terms of average intellectual capital efficiencies and firm performance, the most successful industry is "Metal products, machinery", whereas the least successful ones are "Basic metal" and "Wood, paper, printing" among manufacturing sector sub industries. As the descriptive statistics results of all industries examined, compared to human capital efficiency and structural capital efficiency values, capital employed efficiency values of different industries are more closer to each other, indicating that the performance value differences among the industries might arise from intellectual capital efficiency differences between industries. According to the classic VAIC method results there is a relationship between firms' financial performance, profitability especially, and intellectual capital efficiency. Structural capital efficiency, capital employed efficiency and human capital efficiency have an impact on profitability indicators, especially on ROA. For manufacturing firms listed in BIST100 index, intellectual capital components explain higher proportions of variance of profitability variables compared to the firms not listed in BIST100. As all proposed models' results were compared to the classic VAIC model's and Nazari and Herremans' model's results, third model proposed as an extended VAIC model explained the highest proportion of variance in firm performance. In addition to that, third proposed model provides more detailed information regarding the impact of interaction between intellectual capital components' efficiencies on firm performance. According to the results of third proposed model, for manufacturing sector renewal capital efficiency has a moderating effect on the relationship between structural capital efficiency and profitability, meaning, depending on an increase in R&D expenses, the effect of structural capital efficiency on profitability also increases. On the other hand, it has been found that renewal capital efficiency has a direct impact on firms' productivity. The results also showed that intellectual capital efficiency components have a moderating role on the relationship between capital employed efficiency and profitability. This study contributes to the intellectual capital literature by exhibiting the intellectual capital efficiency levels of Turkish manufacturing sector, by determining which intellectual capital efficiency components are predictors of manufacturing firms' financial performance and by proposing an extended VAIC model that has a higher explanatory power and takes the interaction effect of different intellectual capital components into account. This study is important for manufacturing firm managers who want to increase the firm performance through efficient usage of the intellectual capital residing in the firm.