Impact Intellectual Capital On Performance Of Pakistan Universities Accounting Essay

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Nowadays organizations need to exploit all their resources to sustain success including tangible and intangible assets. The intangible assets are often called an organization's intellectual capital, which is a critical success factor, not only for knowledge-intensive organizations, but also for other organizations. Sa´nchez, Elena and Castrillo, (2009) defined Intellectual Capital (IC) as "it is about how to let the knowledge of an organization work for it and have it create value" and the intellectual capital of an organization is sum of human capital, structural capital and customer capital (Edvinsson and Malone, 1997). This research deepens the understanding of the role of intellectual capital in organizational performance from the perspective of universities in developing nation like Pakistan. In a different economic setup the study contributes to intellectual capital literature of developing countries where different political, economic and cultural environment provide different opportunities and challenges to organizations. Universities are major source that transfer scientific and technical knowledge to society and to the business organizations which reveals its significant contribution to economic growth of country. This study will investigate the relationship and effect of universities' intellectual capital (IC) with performance of universities in Pakistan. The IC of university will be used as independent variable and university performance as dependent variable. The Skandia Navigator will be taken as measuring method of IC because it considers both financial and non financial aspects of whole system. Besides descriptive analysis, testing hypotheses correlation and multiple-regression will be selected and data will be gathered from both public and private sector universities by questionnaire. The result will support the hypotheses that IC of university has an effect and relationship with university performance as it revealed in other business organization.

INTRODUCTION:

Nowadays, economic conditions of doing business in developing countries are changing very rapidly due to reasons like scarcity and depletion of resources, political and economic environment, development of new technologies and ignorance of importance of key institutions those help in the growth and development of developing countries. Higher educational institutions/Universities are one of critical institutions that can play crucial role in the development of any nation especially for developing counties. Universities can make a unique contribution to economic development through knowledge-based activities like new product development, industry formation, and job creation, sources of capital, marketing, quality of life, development of social networks and human capital resources. During last ten years, Government of Pakistan is spending a large amount of financial resources to transform Universities' system to improve quality, so the performance and quality of these universities can be compared with local and international universities. Financial and social pressures also force universities to manage their capital in such a way that produce high quality output and that can attract local market/industry, investors as well as make place in international market to hire their output in multinational organizations. Capital, in the business context, refers to any asset that will produce future cash flows. The most well known asset types are tangible and intangible. Tangible capital refers to the physical and financial assets of the organization (land, machinery, inventory, plants, trucks, shareowners equity, retained earnings, working capital, prepaid expenses, accounts receivables, etc). Intangible assets are the skills of the workforce and its organization. The term Intangible Assets can often be found in the accounting literature, whereas the term Knowledge Assets is used by economists and intellectual capital (IC) is used in the management and legal literature, but all refer essentially to the same thing: "the intangible value contained in the heads and relationships of employees, management staff, customers and other stakeholders". IC encompasses not only the contents of employees' minds but also the complex intangible structure that surrounds them and makes the organization function. The terms Intangible Assets, Knowledge Assets/Capital or Intellectual Assets/Capital are often used as synonyms. Stewart (1998) used the term 'Intellectual Capital' first time. There is a consensus that Intellectual Capital itself is composed of three distinct types of capital - Human Capital, Structural Capital and Relational Capital.

• Human Capital is the availability of skills, talent and know-how of employees that is required

to perform the everyday tasks that are required by the firm's strategy.

• Structural Capital is the availability of information systems, knowledge applications, databases,

processes and other infrastructure required to support the firm in executing it's strategy.

• Relational Capital is the external linkage of the Company with Suppliers and Customers that

enables it to procure and sell goods and services in an effortless manner.

The growing interest regarding intangibles and intellectual capital (IC) has extended from business firms to public, private institutions, universities and government departments but still couple of researches on universities and research centers to study impact of intellectual capital on performance. Universities are unique in its characteristics as that these institutions use intangible as their input and transform it and produce intangible output to market. The performance of universities directly affects the performance of other organizations because output of universities is utilized by other organizations. Therefore, measuring university's performance and efficiency are important in all aspects. Can˜ibano and Sa´nchez, (2009), Sa´nchez and Elena, (2006) studied the importance of measuring and managing IC in universities and some methodological and conceptual framework developed within an Observatory of European Universities (OEU).

The important reason to measure intellectual capital for university is that intellectual capital of universities are assumed to be in highest level and these institutions are the source that produce new knowledge. For this contribution Higher Education Commission of Pakistan provided assistance and funds to transform universities' system for better performance and quality enhancement to make them more comparable, flexible, transparent, and competitive to contribute for expanding economic growth of Pakistan.

Study Objectives:

The objectives of this thesis are to analyze some fundamental challenges regarding the measurement of the intellectual capital (IC), impact and relationship of IC with performance of a university. A large amount of governmental funds has been given to both public and private sector universities to improve system and quality of output produced. Universities are one of important institutions of learning industry that have unique characteristics of both input and output in the form of intangibles. Most of researchers have selected IT, Financial institutions, Engineering firms, Hotel, Hospital and Auto industry to study the impact of intellectual capital on organizational performance. Although, there is no published study conducted in Pakistan related to Intellectual capital's effect on organizational performance. Only few studies were conducted related to human capital or human development in Pakistan. Few studies were carried out in developing countries like 'Malaysia, Thailand and Indonesia' related to intellectual capital reporting and measurement methods used in business organizations.

Therefore the main objectives for my study are as follows:

To investigate the role of intellectual capital in the context universities of Pakistan.

To study the relationships and impact of IC with university performance/efficiency.

To examine the role of IC to compare universities of both public and private sector.

To understand consequences of IC for developing countries.

Problem Statement:

Intellectual capital is a newly emerging discipline. Organizations whether for profit and not for profit in Pakistan competing for market share and try to utilize their resources better to take advantage over their competitors. The dynamic economic conditions force organizations to use their resources efficiently and perform effectively. The performance of organizations is normally a gauge of any country's economic growth. Intellectual capital has a crucial role in performance of organizations (Bontis, Keow and Richardson 2000). Traditionally, universities have been performing the two main functions of teaching and research for a long time. In recent years universities are required to play the third role of economic and social development. There are not many researches and case studies available, regarding intellectual capital that covers universities of developing country, especially in the context of Pakistan. Mostly the literature focuses around knowledge intensive service companies such as consultancies, auto, hotel, hospitals, telecom, banks and retail companies. The impact of intellectual capital on performance in universities of a developing country was not explored extensively with reference to Pakistan. Therefore, "it is very significant to investigate the role and impact of intellectual capital on overall performance and efficiency of universities in Pakistan."

Literature Review and Hypothesis Development:

Generally, IC is defined as creative abilities of human brain or mind. Bontis, Keow and Richardson (2000), Ying, Wang and Chang, (2005) investigated the inter-relationship among the independent variables, human capital, structural capital and customer capital and the dependent variable, business performance in both service and non service industry in Malaysia and information technology (IT) industry in Taiwan. Based on Partial least square (PLS), they found that intellectual capital has a significant and substantive relationship with business performance regardless of industry sector. The result supported hypothesis that "Each intellectual capital element directly and positively affects performance". Future research may show that this link can be generalized to other countries and virtually all industries.

Kok (2007) described human capital, structural capital and customer capital as important variables of intellectual capital, which forms part of the knowledge management initiatives of institutes of higher learning. The skills and expertise of university staff as part of its human capital were focused. Structural capital encompasses aspects such as the role of innovation and intellectual property rights. Customer capital of the university and the knowledge of stakeholders in the field of tertiary education are becoming more important. The study results done at the Rand Afrikaans University, indicated that the effective management of the institution's intellectual capital can enhance performance and this framework could be used with great success at other institutions of higher education that wish to measure their intellectual capital.

There is a growing interest in universities because universities´ main goals are the production and diffusion of knowledge and their investments are in research and human resources. Prejmerean and Vasilache (2008) applied three-way analysis to the components of academic capital at Romanian University of Economics, Bucharest by using Skandia Intellectual capital Value Scheme, with data (2003/2004, 2004/2005, 2005/2006, 2006/2007 and 2007/2008) showed the positive relations between the various components of IC of academic. Sa´nchez, Elena and Castrillo, (2009), Elena, et.al, (2006) analyzed the implementation of intellectual capital (IC) management and reporting mechanisms in universities and research organizations, traditionally used by private companies. They presented an IC report specially designed for universities, suggesting a battery of indicators for resources related to research activity, and discussed current challenges in relation to establishing standards for universities to manage and report on their IC and the difficulties in capturing the process dynamics.

Peng, Pike, and Roos, (2007), referred Intellectual capital as "valuable, intangible and inimitable resources for value creation of a firm". They linked the IC perspective with hospital performance by using Balance Score Card to focus on four aspects: 1) Clinical utilization & outcomes; 2) Financial performance & condition (financial viability, efficiency, liquidity, capital, and human resources);3) Patient satisfaction; 4) System integration & management innovation (information use, internal coordination of care, and hospital-community integration). The results revealed relationship between intellectual capital elements and performance.

Truls, Westnes and Siren, (2003) evaluated the intellectual capital of hotels in the Radisson SAS Hotels and Resorts hotel chain by using the ICAP methodology and questionnaire, 16 hotels were included in the research (total of 254 questionnaires). The study explored the potential relationship between intellectual capital and business performance. The findings indicated that it is useful to evaluate a hotel's intellectual capital due to its potential relationship with business performance. Saldamli (2008) examined the relation among performance factors, quality measures and the intellectual capital of hotels in Istanbul. A specific scorecard is defined in order to analyze the focus points, the barriers and the relations among the human, structural and customer capital strategies. The linear regression analysis found the relationship between performance and the intellectual capital and supported the hypotheses: "Quality performance is dependent on Intellectual Capital factors" and "Financial performance is dependent on Intellectual capital factors". It was suggested that the business performance can be calculated as an integration of quality, financial and intellectual performances. It was also observed that financial performance is no longer sufficient to define the performance of a hotel.

Muhammad and Ismail, (2009) investigated the efficiency of intellectual capital and its performance in 18 Malaysian financial companies for 2007. It was found that the banking sector relied more on intellectual capital followed by insurance companies and Brokerage firms and also found that intellectual capital has significant and positive relationships with company's performance measured by profitability and Return on Assets (ROA) by using (VAICTM). Multiple regression analysis was used to investigate the effect of intellectual capital (measured by human capital efficiency, structural capital efficiency and capital employed) on firm's performance. Zhang, Zhu, and Kong (2006) used listed auto firms in the China's Securities Market; and examined the relation between intellectual capital and enterprise's performance. They found that IC was having more and more important influence on enterprise's achievement compared to matter capital. The study used (VAIC) method. The results showed that matter capital and intellectual capital play a positive promoting role on the enterprise performance, and intellectual capital plays a more significant relationship and role on the enterprise performance than physical capital do; the components of intellectual capital, human capital and structure capital also play positive promoting roles on business performance. Chen, Cheng and Hwang (2005) investigated empirically the relation between the value creation efficiency and firms' market valuation and financial performance. Using data from Taiwanese listed companies and (VAICTM) as the efficiency measure of intellectual capital, and used regression models to examine the relationship between corporate value creation efficiency and firms' market-to-book value ratios, and explore the relation between intellectual capital and firms' current as well as future financial performance. The results support the hypothesis that "firms' intellectual capital has a positive impact on market value and financial performance", and may be an indicator for future financial performance.

Bramhandkar, Erickson, and Applebee (2007) measured the impact of intellectual capital management on organizational performance of pharmaceutical firms/drug industry. From data of 139 firms, they found firms with the highest level of intangible assets clearly performed better than those with lower levels. The high level firms had significantly better returns and significantly less variability in stock price. The hypothesis "Firms within an industry doing a better job of managing IC should see better performance" was used. Researchers measured IC by Tobin's Q. In terms of performance, return on assets (ROA), return on equity (ROE), and return on investment (ROI) were taken and only one year of data was used. Results suggested that a strong relationship exist between successful development of intellectual capital and organizational performance.

Huang and Hsueh, (2007) analyzed the correlation between intellectual capital and business performance. The investigation in Taiwan's engineering consulting firms was conducted for understanding the acquisition and development status of intellectual capital and exploring the influence of intellectual capital on business performance. Result from sample of 101 Taiwan's engineering consulting firms showed that the structural capital and relational capital showed better performance, while human capital has poorer performance. Iswati and Anshori, (2007) studied empirically the influence of intellectual on insurance company's performance, especially financial performance by using data from Indonesia Capital Market Directory 2005. The hypothesis "Intellectual Capital has influence to organization performance in Insurance companies in Jakarta Stock Exchange" was tested by regression model at 0.05. The main conclusion was intellectual capital has influence on bank's performance. Besides that, there was significant positive relation between human being capital and organization performance in both low knowledge base organization and high knowledge-base organization.

These previous studies support that elements of intellectual capital ultimately affect performance indirectly through their interrelationship. Based on the cause-effect framework, this study will use hypotheses as follows.

"There is a significant effect of intellectual capital on performance/efficiency of universities in Pakistan."

"There is a significant association between human capital and university performance."

"There is a significant association between relational capital and university performance."

"There is a significant association between structural capital and university performance."

Conceptual Model: Source: Huang and Hsueh, (2007)

RESEARCH METHODOLOGY:

The main objectives of this study are: to analyze some fundamental challenges regarding the measurement of the intellectual capital (IC) in university context; impact and relationship of IC with performance of a university. Therefore, study will use quantitative approach by using primary data from questionnaire as data gathering tool besides secondary sources. The one of the objective is to study cause-effect relation between variable in which intellectual capital will be used as "predictor variable" and university performance as "criterion variable".

Variables:

Independent variables

Intellectual capital will be taken as independent variable for the study. Stewart (1998) defines intellectual capital (IC) in terms of organizational resources relating to wealth creation through investment in knowledge, information, intellectual property, and experience, while it is defined by Edvinsson and Malone (1997) as 'the possession of knowledge, applied experience, organizational technology, customer relationships and professional skills to gain a competitive edge in the market'. A number of scholars described that IC has three primary interrelated non-financial sub-variables/components: human capital, structural capital and relational capital (Bontis, 1998; Roos et al., 1997; Stewart, 1997), which will be used as sub variables of IC.

Sa´nchez, Elena and Castrillo, (2009), defined IC for universities as:

Human Capital is defined as the knowledge that the human resources (Faculty, researches, PhD students and administrative staff) would take with them if they left the institution.

Structural/Organizational Capital is defined as the knowledge that stays within the institution at the end of the working day. It comprises university's governance principles, the organizational routines, procedures, systems, cultures, databases, intellectual property, etc.

Relational Capital is defined as all resources linked to the external relationships of the university such as "customers", "suppliers", R&D partners, Government, etc.

Dependant variable

The dependent variable for study will be performance of universities. The university performance will be measured based on five dimensions i.e. profitability (measured by growth and market share of university), quality (quality of services provided), expansion of university, satisfaction of university members and overall performance.

Intellectual capital measurement methods

In previous researches, there are various approaches used for the measurement of intellectual capital like intellectual capital indexes (Ying, Wang and Chang, 2005; Chu et al., 2005), and Value Added Intellectual Coefficient (VAICTM), Different Market to Book (DiffMtoB), Market Book Ratio (MBR) and Economic Value Added (EVA) (Chen, Cheng and Hwang, 2005; Goh, 2005; Kamaluddin and Sanusi, 2006). Peng, Pike, and Roos (2007), Saldamli (2008) used balanced scorecard, Kok (2007) Prejmerean and Vasilache (2008) used Skandia Intellectual capital Value Scheme to measure IC for higher learning Universities. There are four basic methods to classify measurement models for intellectual capital are Market capitalization, Return on assets, Direct intellectual capital method and Scorecard method.

Scorecard model: This model allows for measurement closer to actual inputs, processes, and outcomes. It is also particularly suitable for detection and correction of errors in aligning inputs and processes with the outputs and outcomes. Also it is the most applicable for measuring the intellectual capital of institutions of higher learning. There are fifteen models in scorecard.

It measures currently unmeasured intangible assets. An adaptation of the Skandia Navigator and the Skandia Value Scheme (SVS) seems to be the most appropriate for this study as the scheme focuses on the present, past and future of an organization. Although the past of the organization (financial reporting) will be a major component of future reporting by the university, as the financial willingness to increase intellectual capital will be directly influence by the availability of financial resources. With the Skandia Navigator the different areas that comprise intellectual capital are placed within the same framework as financial capital. Kok (2007) Prejmerean and Vasilache (2008) used the model Skandia Navigator to study IC in Universities of South Africa and Romania. This study will use this model to measure IC for universities in Pakistan.

Population and Sample

To accomplish study objectives the population of research will be consisting of those universities which are recognized by higher education commission (HEC) of Pakistan both in private and public sector and conducting PhD programs. There are 132 universities that are recognized by HEC and offering various programs in which 73 universities are in public sector and 59 universities in private sector. High competition among these private and public universities forces them to improve their quality in all areas and try to differentiate their institution on this basis. HEC allows universities to offer high level degree in all disciplines.

Sample will be collected from universities of Islamabad. The sample will consist of population elements that include faculty, higher administrative staff and students of graduate and post graduate level. These individuals are in better position to provide information related to study. There are sixteen universities in Islamabad in which thirteen are in public sector and three in private sector. The sampling will be randomly drawn from population of both private and public universities. The random sampling is selected because it provides equal chance to every member of population to be included in the study. It reduces biases or prejudices in selecting samples. The tool for this study will be questionnaire for data collection through primary and documents from both published and unpublished materials will be used for secondary data. Unit of analysis will be individuals (students, faculty and high rank administrative officers). For this study, intellectual capital will be measured based on perception of faculty, higher administrative staff and students on the intellectual capital in universities by using questionnaire and SPSS will be the software to analyze data.

Regression Test

Multiple regressions require a large number of observations. The number of participants must substantially exceed the number of predictor variables are using in regression. The absolute minimum is that study has five times as many participants as predictor variables.

Literature showed that Ying, Wang and Chang (2005), Bontis, Keow and Richardson (2000) used partial least squares to study the effect of IC on performance whereas Chen, Cheng and Hwang (2005), Saldamli (2008), Muhammad and Ismail (2009), Zhang, Zhu, and Kong (2006), Huang and Hsueh (2007), Iswati and Anshori (2007) used linear multiple regression model. Therefore, following regression equations will be used to test the hypothesis for this study:

University Performance = b1 structural capital + b2 Human capital + b3 Relational capital + ε

Y = b1 X1 + b2 X2 + b3 X3 + ε.

Y= University performance,

X1 = structural capital of university,

X2 = University's human capital,

X3 = relational capital of university,

ε = error term

Results of previous articles (Muhammad and Ismail (2009), Bramhandkar, Erickson and Applebee (2007), Huang and Hsueh (2007), Iswati and Anshori (2007), Peng, Pike, and Roos (2007), Zhang, Zhu, and Kong (2006), Ying, Wang and Chang (2005), Chen, Cheng and Hwang (2005), Truls, Westnes and Siren (2003), Bontis, Keow and Richardson (2000) showed that there is a positive relationship among the elements of intellectual capital and with performance of organizations and intellectual capital has significant effect on performance of organizations. It is observed that there is a significant positive correlation among the three dimensions of intellectual capital (human, structural and relational) and business performance. The expected results (both descriptive and inferential analysis) of this study will show that significant effect of IC on performance of universities and will have positive correlation among the dimensions of intellectual capital of universities and with university performance as in previous studies.

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