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

Muhammad Abdul Majid Makki () and Suleman Aziz Lodhi ()
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Muhammad Abdul Majid Makki: Islamia University of Bahawalpur, Pakistan.
Suleman Aziz Lodhi: National College of Business Administration & Economics, Lahore, Pakistan.

Lahore Journal of Economics, 2008, vol. 13, issue 2, 81-98

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.

Keywords: Knowledge Economy; Intellectual Capital; Value Added; VAIC; LSE-25. (search for similar items in EconPapers)
JEL-codes: C22 C59 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (9)

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