International Journal of Arts & Sciences,

CD-ROM. ISSN: 1944-6934 :: 4(15):213223 (2011)

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THE IMPACT OF INTELLECTUAL CAPITAL ON INTERNATIONAL

BUSINESS AN ANALYSIS OF INVESTMENTS IN INTELLECTUAL
CAPITAL AND EXPORT PERFORMANCE
V. Kavida
Pondicherry University, India
Sivakoumar. N
Indira Gandhi College of Arts and Science, India
International Business is understood as commercial activity which transcends borders. In the
era of Globalization, the distinction between domestic business and international business has
become insignificant. Most of the domestic firms go international due to some proactive /
reactive factors prevailing in the international economy and in the domestic economy. The
competitive edge gives the firm an opportunity to expand its market both domestic and
overseas. The characteristic change in the economy - from that of natural resource based to
that of knowledge based - has not altered the game rules of competition. No more the
competitive edge of a firm lies in the possession of tangible wealth, but in intangible assets.
The competitive advantage of the firms in Knowledge economy depends on the effective
utilization of the Intellectual Capital generated by them.
International Business takes many forms, viz. Technology Licensing, Franchising,
Joint Ventures, Contract Manufacturing apart from, Exports and Imports. Many studies have
substantiated the economic rationale for cross border investments and business on the plank of
technology. But studies on the role of Intellectual Capital, acting as a proactive agent of
International Business finds limited mention. Exports in knowledge economy is driven and
composed of Intellectual Capital. Strengthening this supposition, the Agreement on Trade
Related aspects of Intellectual Property Rights (TRIPS) has brought to prominence the role of
Intellectual Capital in International Business. This paper attempts to analyze the relationship
between Intellectual Capital and Exports of Pharmaceutical industries in India to theorize that
Intellectual Capital is a prominent determinant of export competitiveness for knowledge based
companies.
Keywords: Intellectual Capital, International Business, Knowledge Based Industries, Pharmaceutical
Industry, Export Performance.

International Business is understood as commercial activity which transcends borders. In the

era of Globalization, the distinction between domestic business and international business
has become
insignificant. Most of the domestic firms go international due to the
proactive/reactive factors prevailing in the international economy and in the domestic
economy. While profit advantage and growth opportunities are the major proactive factors,
domestic market constraints, competition, domestic policies and regulations are some of the

213

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V. Kavida and Sivakoumar. N

reactive factors. International Business takes various forms in the global economy, ranging
from Exports to Strategic alliances. But, exporting continues to be the most significant and
widely practiced form of International Business. Defying the traditional theories of International
Trade, wherein a firm either posses an absolute or comparative advantage in order to export,
exports in the knowledge based industries like the Pharmaceutical industry is dependent on
competitive advantage. The competitive advantage of the knowledge based industries lies in
its effective utilization of Intellectual Capital. In this paper we attempt to analyze the role
of Intellectual Capital as a proactive factor in International Business orientation.
INTELLECTUAL CAPITAL
There is no generally accepted definition of Intellectual Capital. However, many have offered
views that provide a general concept. One of the most succinct definitions of intellectual capital
is given by Stewart (1997), as packaged useful knowledge. He explains that this includes an
organizations processes, technologies, patents, employees skills, and information about
customers, suppliers, and stakeholders. Various other definitions use concepts such as ability,
skill, expertise, and other forms of knowledge that are useful in organizations. A comprehensive
definition of Intellectual Capital is offered by Brooking (1996). Intellectual Capital is the term
given to the combined intangible assets which enable the company to function. Petty and
Guthrie (2000) observed Intellectual Capital is instrumental in the determination of enterprise
value and national economic performance.
Components of Intellectual Capital

The classification of different components of Intellectual Capital facilitates to apply the concept
at strategic and operational level. According to Edvinsson and Malone (1997), Intellectual
Capital takes three basic forms: human capital, structural capital, and customer capital.
Human capital includes knowledge, skills, and abilities of employees. Human capital is an
organizations combined human capability for solving business problems. Human capital is
inherent in people and cannot be owned by organizations. Human capital also encompasses how
effectively an organization uses its people resources as measured by creativity and innovation.
Structural capital is everything in an organization that supports employees (human capital)
in their work. Structural capital is the supportive infrastructure that enables human capital to
function. Structural capital includes such traditional things as buildings, hardware, software,
processes, patents, and trademarks. In addition, structural capital includes such things as the
organizations image, organization, information system, and proprietary databases. Because of its
diverse components, Edvinsson and Malone classify structural capital further into organizational,
process and innovation capital.
Organizational capital includes the organization philosophy and systems for leveraging
the organizations capability. Process capital includes the techniques, procedures, and programs
that implement and enhance the delivery of goods and services. Innovation capital includes
intellectual properties and intangible assets. Intellectual properties are protected commercial
rights such as patents, copyrights and trademarks. Intangible assets are all of the other talents and
theory by which an organization is run.
Customer capital is the strength and loyalty of customer relations. Customer satisfaction,
repeat business, financial well-being, and price sensitivity may be used as indicators of customer

The Impact of Intellectual Capital on International....

215

capital. The notion that customer capital is separate from human and structural capital indicates
its central importance to an organizations worth. The relationship with customers is distinct
from other relationship either within or outside an organization.
Brooking (1996) suggests that Intellectual Capital is comprised of four types of assets: (i)
market assets, (ii) intellectual property assets, (iii) human-centered assets and (iv) infrastructure
assets. Market assets consist of such things as brands, customers, distribution channels, and
business collaborations. Intellectual property assets include patents, copyrights, and trade secrets.
Human-centered assets include education and work-related knowledge and competencies.
Infrastructure assets include management processes, information technology systems,
networking, and financial systems.
Pharmaceutical Industry as KnowledgeBased Industry

Worldwide, Pharmaceuticals is one of the most intense Knowledge Driven industries, which
is continually in a state of dynamic transition. The process of invention of a drug is elaborate,
requiring on an average 8-10 years, at a cost of US$ 300 million, for a new drug to reach the
market. The huge investment made in learning, knowledge generation and its transformation
to value added knowledge necessitates protection of these investments, which take the form of
assets, like patents, trademarks, designs and copy rights. Globally, these tools of Intellectual
Property Rights (IPRs) are key components of strategy formulation and implementation by
Pharmaceutical Corporations. As protected Intellectual Capital preserve exclusive markets,
maintain profit margins, provide market access and give freedom to operate. Intellectual Capital
has now become an effective platform for benchmarking of innovative capabilities of
corporations, business entrepreneurs and researchers. This is extensively being used in the world
of mergers, acquisitions, strategic alliances, and collaborations, licensing arrangements and
venture capital funding in pharmaceutical and allied industries.
An overview of the Indian Pharmaceutical industry

The Indian pharmaceutical industry was mostly dependent on imports until the early 1970s.
During the early 1970s, the government put into place a series of policies aimed at breaking
away Indias dependence on the Multinational Corporations for the production of bulk drugs
and formulations and moving the country towards self- sufficiency in medicines. The
introduction of the Patent act 1970 was perhaps the single most significant policy initiative taken
by the government that laid the foundation of the modern pharmaceutical industry. This Act did
not allow product patents on medicines, agricultural products and atomic energy. For these only
process patents could be registered. This act enabled Indian companies to develop skills in
reverse engineering and to produce alternate processes for drugs. Exempt from paying for
licenses and royalties, Indian companies could now access the newest molecules from all over
the world and reformulate them for sale in the domestic market. As a result, after 1970, many
new drug firms were set up. These companies developed R&D base, which was later leveraged
by them to move up the R&D value chain. By the mid 1980s, India had emerged as a major
pharmaceutical producer and the indigenous sector had captured a substantial proportion of the
market. The Pharmaceutical industry in India is highly fragmented both in terms of number of
manufacturers, with over 23,000 licensed units and a range of over 100,000 drugs. The
Pharmaceutical industry can be broadly divided into organised and unorganized sectors. There
are around 300 manufacturing and formulation units in the organised sector and it accounts for

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V. Kavida and Sivakoumar. N

70 percent of the total sales of the industry. Around 100 players in the organised sector account
for about 90 percent of the total industry turnover. The market is concentrated at the top with the
top 30 players controlling about 70 percent of the market share. Moreover, the growth rate of the
top 30 players is around 18 percent per annum as compared with the industry growth rate of
about 15 percent. Currently, the Indian pharmaceutical industry is one of the worlds largest and
most developed, ranking fourth in terms of volume, with 8 % of global production, and
thirteenth in terms of value, accounting for 2 % of the global market share. Most of the domestic
pharmaceutical drug requirements are met by the domestic industry. Apart from being selfsufficient, the industry is emerging as one of the major contributors to Indian exports with export
earnings rising from a negligible amount in early 1990s to USD 7.24bn by 2007-08.
The International Business orientation of the Indian Pharmaceutical industry

The global pharmaceutical markets were estimated at USD 712bn in the year 2007 growing at
6.4 percent. The market size of USA is estimated at USD 295-305bn (growing at 4-5 percent)
followed by top 5 European countries (EU-5) with an estimated market size of USD135-145bn
(growing at 4-5%), emerging markets, viz., Brazil, China, India, Mexico, Russia, South Korea &
Turkey with an estimated market size of USD 85-90bn. (growing at 12-13%) and Japan with an
estimated market size of USD 64-68bn (growing at 1-2%). The pharmaceutical market size of
the rest of the world (ROW) is estimated at USD125-135bn. which is estimated to grow at 7-8
percent in the coming years. The global data on pharmaceutical market sizes and growth rates
suggest that while protected markets such as US and Japan, account for major chunk of the
global market, these are growing at a slow rate of 4-5% or even stagnant as in the case of UK &
Italy. Spain, Germany and Canada on the other hand are huge and are growing between 6-7
percent. Argentina, Australia and Brazil are amongst the high growth markets.
India exports full basket of pharmaceutical products comprising intermediates, APIs,
Finished Dosage Combinations (FDCs), biopharmaceuticals, vaccines, clinical services, etc.,
to various parts of the world. The country has achieved the distinction of providing healthcare at
very low cost while maintaining profitability. The export performance of Indian Pharmaceutical
industry has been commendable, the trade balance being positive through out the years. Over the
period 2003-04 to 2008-09 the compounded annual growth rate (CAGR) of exports has been
17.8 percent. The following table presents an overview of Indias pharmaceutical exports.
The International Business orientation of the Indian Pharmaceutical industry is looked
beyond exports. The areas of Contract Manufacturing, Clinical Trials, Patent Challenges emerge
as the new evolving forms of International Business. The global market for contract
manufacturing of prescription drugs is estimated to increase from a value of $26.2 billion to
$43.9 billion. India and China could potentially account for 35 percent to 40 percent of the
outsourced market share for active pharmaceutical ingredients, finished dosage formulations
and intermediates. Costs of clinical trials in India are around one-tenth of their levels in the U.S.
and it is estimated that they could be worth US$ 300 million to India by 2010. There has been a
great deal of interest in alternate remedies for some time now. World market for natural products
is estimated at US$62 billion and is exhibiting double-digit growth rate. The opportunities in
biopharmaceuticals will be the major attraction in the next decade. New technologies and
enhanced regulatory requirements are changing the rules of the game making production migrate
to east.

The Impact of Intellectual Capital on International....

217

Top Importing Countries of Drugs, Pharmaceuticals & Fine Chemicals (2007-08) (figs. in
Rs. Crores)
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Importing Country
USA
Germany
Russia
UK
China
Brazil
Canada
South Africa
Nigeria
Netherlands
Spain
Turkey
Ukraine
Viet Nam
Israel
Italy
Mexico
UAE
Singapore
Iran

Rs. Crores
5,534.68
1,357.72
1,199.02
1,077.72
818.46
752.62
738.03
650.35
644.08
504.17
485.88
485.47
475.88
466.07
430.83
428.16
426.28
412.13
401.23
366.21

% Share in India's
19.1
4.7
4.1
3.7
2.8
2.6
2.5
2.2
2.2
1.7
1.7
1.7
1.6
1.6
1.5
1.5
1.5
1.4
1.4
1.3

The Intellectual Capital of Indian Pharmaceutical Industry:

The success story of Indian Pharmaceutical industry is an exhibit of the significance of

its Intellectual Capital (Stewart, 1997). Undisputedly, the different International Business
orientations of Indian Pharmaceutical industry ranging from Exports to Patent Challenges,
lies in its Intellectual Capital. The sophisticated chemistry capabilities, lateral thinking abilities
in developing non-infringing processes, disciplined approach to adhere to any stringent
guidelines, dedication for manufacturing excellence, etc., make India as a most favourite
destination to source or outsource various components of value chain. Thus the Intellectual
Capital of Indian Pharmaceutical industry is manifest in its significant advantage of low cost
of innovation, low capital requirements and lower costs in running facilities, well
established manufacturing processes, R&D infrastructure. With the Government of
India
recognizing Pharmaceutical sector as an intellectual industry, the area of Intellectual
Capital is aining importance and will play a key role in the success of the Indian Pharmaceutical
industry.
FACTORS CONTRIBUTING TO EXPORT PERFORMANCE
Exporting as an activity is undertaken by the firms not only as a means to earn profits from
international operations, but also to earn profits in the domestic market by realizing the optimal

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V. Kavida and Sivakoumar. N

production capacity. But exporting as an activity emanates from the competitive advantage that
a firm posses. The competitive advantage of a firm may be derived fromits Technological
capabilities, Marketing capabilities, Advertising capabilities & its Tangible assets. These
capabilities are collectively called as firm- specific factors and are likely to have a pervasive
influence on the export performance of the firms. The literature on firm-specific determinants of
export performance and behaviour is extremely rich (see, for instance, Chetty and Hamilton,
1993, for a thorough review of the literature on the subject) and covers a wide spectrum of
issues, such as the relative importance of firms demographics (Bonaccorsi, 1992; Wagner,
1995), or the relative impact of the beliefs, attitudes and perceptions of the firms top
management (Bijmolt and Zwart, 1994). In this paper, we focus on these firm specific factors.
Technological Capabilities:

Pharmaceutical industry is one of the most research intensive industries. As the quintessential
science-based industry, pharmaceuticals depend heavily on high level manpower and
substantial R&D for new products and growth. R&D generates not only innovations but also
allows firms to better assimilate external technological knowledge. Indian firms are not
innovators but they need to perform R&D to absorb foreign technologies. The need to
perform R&D for assimilating foreign technologies in this sector is clear from the fact that the
pharmaceutical industry in India also is the most research intensive industry having the highest
R&D-sales ratio.
Marketing Capabilities and Advertising Capabilities:

Pharmaceutical Companies promotional practice is another important factor affecting this

industry. When a pharmaceutical company develops a new drug it gives the drug two names.
The first one is its generic name, which represents the chemical structure or chemical form
of the drug. The generic name of the drug never changes. The second name given to the drug is
its brand name. The use of brand name confers a considerable scope of product differentiation
between a brand name and its generics. Brand-generic differentiation encourages firms to spend
heavily on brand promotion. Generic companies also spend some funds on marketing but such
expenses for originator (branded) products are much higher than for generic products. Product
differentiation is not always between a brand and its generics only, but it is between different
brands of the same product also. At any time there may be different brands of the same product
in the market. Companies may vary an existing molecule through molecular restructuring and
introduce their own brands of the similar product. However the different brands attract
promotional campaign by the firms. The industry is thus characterized by product
differentiation at two different levels: brand-brand differentiation and brand-generic
differentiation. These activities are very much relevant to the International Marketing too.
Tangible Assets:

Tangible assets represent primarily the plant, property and equipments. The better the
management of tangible assets, the higher would be the sales. Therefore a firm acquires
competitive advantage in terms of enhanced productive capacity, if investments in tangible assets
are better. Of the above mentioned factors, R&D capabilities, Marketing capabilities and
Advertising capabilities correspond to Intellectual Capital. Therefore expenditures related to

The Impact of Intellectual Capital on International....

219

these activities are assumed as investments leading to Knowledge Assets, like Patents & Trade
Marks. We have therefore analysed these firm specific factors for our present study in an
attempt to understand the impact of these factors, on the Export Competitiveness of Indian
Pharmaceutical industry. We thus expect the following factors to influence the export
performance of firms: EXP= f (RDC, MKC, ADC, TAC).
OBJECTIVES OF THE STUDY
The main objectives of this study are to:

Evaluate the key drivers of export performance of the Indian Pharmaceutical industry;
Highlight the role of Intellectual Capital in the export performance of the Indian
Pharmaceutical industry;
Establish a theory that Intellectual Capital impacts significantly the International
Business of knowledge based industries.

Source of Data and Period of study

The Pharmaceutical industry can be broadly divided into organised and unorganized sectors.
There are around 300 manufacturing and formulation units in the organised sector and it
accounts for 70 percent of the total sales of the industry. Around 100 players in the organised
sector account for about 90 percent of the total industry turnover. The market is concentrated at
the top with the top 30 players controlling about 70 percent of the market share. Moreover, the
growth rate of the top 30 players is around 18 percent per annum as compared with the industry
growth rate of about 15 percent. 22 companies were selected from the BSE Health Care Index
for this study. Since these 22 companies represent the 30 top players, we assume that the sample
by and large represent the industry. We analysed the sample for a period of 14 years from 1996
to 2009. This period is significant for the Indian Pharmaceutical industry as it was a
TRIPS mandated transitionary period for migrating to TRIPS compliant Intellectual Property
system.
METHODOLOGY
We constructed the following Ordinary Least Square (OLS) model, employing Pooling of Time
Series and Cross-Section (PTSCS) technique to anlyse the impact of the firm specific factors
on the export performance of the sample pharmaceutical firms. The variables are scaled (divided)
by sales in order to mitigate the econometric problem of hetero-scedasticity, due to different
sizes of sample companies. The variable when scaled by sales gives us a popular ratio used in
the studies related to R&D and Intellectual Capital, namely Intensity i.e. the ratio of expenses
(investments) relative to sales.
EXPINT it = f (RDINT it, MKINT it, ADINT it, TAINT it)
Where,
EXPINT it refers to Exports as a proportion to Sales of a firm i in year t;
RDINT it refers to R&D spending (investment) as a proportion of Sales of a firm i in year t;

220

V. Kavida and Sivakoumar. N

MKINT it refers to Marketing expenditure (investment) as a proportion of Sales of a firm i in year

t;
ADINT it refers to Advertisement expenditure (investment) as a proportion of Sales of a firm i in
year t; and
TAINT it refers to value of Tangible Assets as a proportion of Sales of a firm i in year t.
EMPIRICAL EVIDENCE
Dependent Variable: Export Intensity

Independent Variable
RDINT
MKINT
ADINT
TAINT
INTERCEPT
Adjusted R sq.
* Statistical significance at 5% level

Coefficients
2.754
(3.459)*
-2.068
(2.337)*
-7.196
(-5.581)*
0.159
(2.583)*
0.406*
(5.253)
0.42

The results of the OLS model specified for gauging the impact of the Intellectual Capital on the
Export performance of Pharmaceutical firms specified for this study is presented in the above
table. From the table it is ascertained that the investments made in Research & Development
(RDINT), Tangible Assets (TAINT), are significantly and positively influencing the export
performance of the sample companies, during the study period. The co-efficient of Research &
Development Intensity (RDINT) indicates that when one unit is invested in Research &
Development relative to the Sales, the Exports relative to Sales increases by 2.75 units. The coefficient of the Tangible Assets relative to Sales indicate that a one unit increase in Tangible
Assets intensity does not increase the Export intensity matchingly. Whereas, the
Marketing Intensity (MKI) and Advertising Intensity (ADI) though influence the Export
intensity significantly, causes a negative impact on export performance.
INFERENCES
Among the variables, that significantly and positively influence the Export performance, are the
R&D and Tangible Assets. Though investments related to R&D, Marketing and Advertising are
investments in Intellectual Capital, investment related to R&D is very important for this study.
In the context of Exports, Marketing or Advertisement plays an insignificant role in the

The Impact of Intellectual Capital on International....

221

positive outcome of Exports, as these variables are mainly concerned with domestic sales.
Therefore the results for Marketing intensity and Advertising intensity is not unexpected in this
study.
Further, it may also be seen that the average Marketing intensity (MKI) is 4.11% and the
average R&D intensity (RDI) is 4.83%. Though the intensities are similar for these variables, the
co-efficients differ largely from integer to value. Though this is intriguing statistically, it
strengthens our understanding that the Export performance of Indian Pharmaceutical
industry is driven mainly by the R&D investments.
Likewise, though the Tangible Assets intensity influences the Export performance
significantly and positively, along with the R&D intensity, the co-efficients differ largely in
value. The coefficient of R&D intensity is higher than the Tangible Asset intensity. From the
above it may be inferred that, investments made in R&D relative to Sales, an indicator of
Intellectual Capital significantly influences the Export performance of the sample firms.
Therefore the impact of Intellectual Capital is discernable in International Business orientation of
the Knowledge based industries.
CONCLUSION
Worldwide, Pharmaceuticals is one of the most intense Knowledge Driven industries, which is
continually in a state of dynamic transition. The success story of Indian Pharmaceutical industry
is an exhibit of the significance of its Intellectual Capital (Stewart, 1997). The Intellectual
Capital of Indian Pharmaceutical industry is manifest in its significant advantage of low cost of
innovation, low capital requirements and lower costs in running facilities, well established
manufacturing processes, R&D infrastructure. The sophisticated chemistry capabilities, lateral
thinking abilities in developing non- infringing processes, disciplined approach to adhere
to any stringent guidelines, dedication for manufacturing excellence, etc., make India as a
most favourite destination to source or outsource various components of value chain.
Therefore the different International Business orientations of Indian Pharmaceutical
industry ranging from Exports to Patent Challenges lies in its Intellectual Capital.
Further, the Intellectual Capital of Pharmaceutical industry can help India transform
itself into a knowledge driven economy with firm routes in science and intricate knowledge of
production and manufacturing engineering. The industry has risen in its importance from a sector
to an important part of development process. The country has to look at pharmaceutical sector as
a strategic & flagship industry. The Current success is due to amalgamation of R&D
(developing non infringing processes and reverse engineering), manufacturing excellence
(designing and running world class facilities with economies of scale) and globalisation
ability (establishing presence/ acquisitions/ mergers in the international markets). Such
multidimensional excellence will make Pharmaceutical industry as the torch bearer of the
nation paving way for R&D led global market leadership in various goods and services. Our
study also lends support to optimism that Intellectual Capital would be a significant
determinant of International Business.

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