PICMET 2007 Proceedings, 5-9 August, Portland, Oregon - USA 2007 PICMET
Determinants of Enterprise Performance in Small Technology-Intensive Enterprises:
Intellectual Capital and Innovation Capability in the Firm
George Tovstiga, David W. Birchall, Ekaterina Tulugurova
Henley Management College, Greenlands, Henley-on-Thames, Oxfordshire, UK
Abstract--The findings of an empirical study that examines
the impact of intellectual capital on enterprise performance in
small innovative enterprises (SIEs) are presented in this
developmental paper. The study examines the impact of effective
intellectual capital exploitation against the background of key
external (socio-political, technological, and economic) factors.
This research reported in this study is part of a greater effort
that is examining intellectual capital practices in regions of high-
technology clusters including St. Petersburg (Russia), the so-
called "Medicon Valley" of Denmark, the Silicon Valley in the
USA, and German and Swiss "Mittelstand" clusters in Southern
Germany and the Zurich region are compared and analysed for
patterns, similarities and differences. This paper focuses on the
findings of the Russian part of the study.
The key questions of this research address the relative
impact of intellectual capital practices (internal factors) and
prevailing socio-political, economic, and technological factors on
the performance of small innovative enterprises. This work
seeks to provide new insights in several areas: (1) While a
number of studies have looked at the impact of intellectual
capital on enterprise performance per se, relatively little work to
date has focused on the specific case of intellectual capital
deployment in small innovative enterprises (SIEs); (2) Very
little, if any, work has focused on the impact of intellectual
capital and its implications for private enterprise performance
in transitional economies [3]. This study provides empirical
evidence suggesting that internal factors have a greater impact
on enterprise performance than external ones - even in the
transitional economy of Russia.
In this paper the notion of the knowledge-based theory of the
firm forms the conceptual basis of a framework that is
developed to relate intellectual capital (human capital and
structural capital) and key external factors (socio-political,
economic and technological) to enterprise performance in SIEs.
A survey instrument designed on the basis of this model was
applied in the field research involving SIEs in the various
regions. The research data was subjected to exploratory and
confirmatory factor analysis using standard and advanced
statistical analysis based on regression, correlation analysis. In a
final step, structural equation modelling on the basis of a partial
least squares technique was used for examining the validity of
the hypothesis in view of the research findings.
I. INTRODUCTION
Increasingly intellectual capital is being viewed a key
determinant of business performance in enterprises.
Relatively little, however, is known about how intellectual
capital really impacts the firm's performance. Given the
highly complex and ambiguous nature of intellectual capital,
this is hardly surprising. The premise explored in this paper
is that the firm's internal resource base - foremost its
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intellectual capital - is a determining factor of competitive
performance in small innovative enterprises.
This approach is not necessarily new. There is an
extensive literature that examines various enterprise-specific
factors involved in creating a position of competitive
advantage for the firm and the complex interplay between the
firm's internal organizational and external environmental
factors. Research evidence suggests that while environmental
contexts can be influential, they do not necessarily outweigh
internal factors of the enterprise [5, 11, 8]. Sanchez and
McKinley [6] suggest that "whether or not environmental
regulation inhibits or promotes product innovation seems to
depend at least in part on certain internal features of an
organization ".
Thacker and Handscombe [8] argue that people in the
organization and the interaction between the organization's
people inevitably play a large part in enabling or constraining
the organization's innovation process. The literature appears
to be suggesting that competitive advantage increasingly is
achieved by those firms that succeed in mobilizing their
intangible assets in the form of knowledge, technological
skills and experience, and strategic capabilities.
The research discusssed in this paper addresses the
following questions:
* What is the potential impact of the small innovative
enterprise's internal resource base on its competitive?
* What is the impact of prevailing environmental factors
on the SIEs' performance?
* What is it about firms in this sector and their
management of their intellectual capital that we need to
understand for enhancing SIE performance?
II. A KNOWLEDGE-BASED VIEW OF THE SMALL
INNOVATIVE ENTERPRISE
The knowledge-based view of the firm is essentially an
extension of the resource-based theory of the firm, which has
been described exhaustively in the strategic management
literature [1]. Conner and Prahalad (2002) remind us that the
knowledge-based view of the firm capturess the very essence
of the resource-based view of the firm. Increasingly, the
firm's stock of strategically relevant knowledge is being seen
to be its fundamental source of competitive advantage. The
knowledge-based view of the firm argues that knowledge, in
the form of the firm's competencies, capabilities,
relationships and not least, experience, endow it with this
differentiation potential (see also Grant, 2002; Birchall and
Tovstiga [2]; Tovstiga [9]). The enterprise uses its
 PICMET 2007 Proceedings, 5-9 August, Portland, Oregon - USA 2007 PICMET
knowledge-based advantage to build the product / service
offering features that appeal to the market (Clark, 1987).
This work examines performance in small innovative
enterprise from the perspective of the knowledge-based
theory of the firm. It explores the impact of the SIE's
knowledge and capabilities base on its competitive position,
whereby the firm's knowledge and capabilities base is
represented by its intellectual capital. The firm's intellectual
capital is assumed to consist of its human and structural
capital. The study therefore begins by examining the SIE's
intellectual capital and its internal manifestation and
exploitation. The study then looks at the relationship between
the firm's intellectual capital and its external environment
represented by socio-political, technological and economical
factors that might have an impact on the firm's competitive
position.
III. INTELLECTUAL CAPITAL AND THE SMALL
INNOVATIVE ENTERPRISE (SIE)
The conceptual framework used in this work draws on the
knowledge-based view of the enterprise. Intellectual capital,
unlike numerous external factors such as the enterprise's
socio-political or economic environment, represents a set of
internal factors that the small innovative can influence
directly [10]. The enterprise can be viewed to be a dynamic
repository of knowledge. Dynamic and continual conversion
and recombination of the various forms of the enterprise's
knowledge leads to new knowledge and this contributes to
HC1:Competence HC2: Attitudinal
*Knowledge *Motivation
*Capabilities *Behavior
-Skills *Mindset
I I-Adaptation
Internalal 3s1t1
Factors
SC. StructurAI liita
SCl: Relational SC2: Organizational
*Network partners *Structure
*Ailiance partners -Infrastructure
-Customers / suppliers -Processes
-Culture
EFl: Socio-Political |EF2: Technological |EF3: Economical
Figure 1. Conceptual framework showing internal and external factors, and enterprise performance.
the enterprise's ability to differentiate itself competitively in
the marketplace.
Although it is very difficult to accurately measure and
evaluate intellectual capital, its competitive impact of the
firm's intellectual capital remains undisputed. Stewart [7]
defines intellectual capital as the firm's intellectual material -
its knowledge, information, intellectual property and
experience base that can be put to use to create wealth. For
our research, we assume that the firm's intellectual capital
constitutes the internal determinant of competitiveness in the
SIE. It is broadly broken down into two sub-categories -
human capital and structural capital. Human capital
embodies competence), attitude and intellectual agility..
Structural capital consists of relationships, organization, and
renewal and development.
The external factors of the enterprise include socio-
political, technological and economical dimensions. The
conceptual framework is presented in terms of a causal map,
as shown in Figure 1.
Conceptual framework and underlying hypotheses
The conceptual model and the underlying assumptions are
based on the notions relating to intellectual capital and
external factors described in the foregoing discussion. The
internal (intellectual capital) and external factors
(environmental) each constitute sub-factors in the construct.
Collectively, they are assumed to have an impact enterprise
performance. The conceptual framework (Figure 1) shows
how these factors relate to each other.
HC3: Intellectual
Agility
*Innovation
*Imitation
EPl: Performance
Outcomes
EP2: Comparative
Competitiveness
_
(- )
SC3: Renewal &
Developmental
-R&D
-Organizational learning
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 PICMET 2007 Proceedings, 5-9 August, Portland, Oregon - USA 2007 PICMET

IV. RESEARCH DESIGN * Regression Analysis

The survey instrument developed for the empirical field
research consists of a questionnaire that was originally
formulated in English but used in the Russian translation
version for the field research in St. Petersburg. It consists of a
total of 62 items; a 5-point Likert type scale (strongly agree
to strongly disagree) was employed for the scales relating to
intellectual capital, external factors and performance
outcomes. Comparative competitiveness was measured on a
10-point scale.
V. RESEARCH ANALYSIS AND DISCUSSION OF
RESEARCH FINDINGS
Sample description The survey was conducted with 35
small- and medium-size innovative enterprises in the St.
Petersburg region and its suburbs. All are research and
knowledge-intensive enterprises in the high-tech sector,
typically in the development and production of scientific-
technical devices and software for manufacturing, medical
and technology development applications.
Exploratory Factor Analysis Table 1 summarizes the
outcome of the statistical analysis, which was carried out
using SPSS for the MS Windows platform. The following
statistical analyses were executed:
* Cronbach's test for reliability
* Pearson Correlation Analysis
Reliability The results for the reliability test (Cronbach's
alpha) indicate a very high degree of consistency for each of
the factors. We attribute this high degree of reliability to the
fact that one of the authors (ET) personally administered the
survey questionnaire with the responding participants in their
native language.
Pearson Correlation The correlation analysis provides
some basic evidence of the linkage between the enterprises'
intellectual capital practices and enterprise performance by
indicating the level of association between the various factors
and outcomes. High correlations are seen to exist between
the various intellectual capital factors factors.
Regression Analysis The regression analysis is a much
more direct measure of impact of one variable on another.
Tables 2 and 3 summarize the regression analyses carried out
on the data gathered from the 35 Russian SIEs. It is apparent
that intellectual factors are determining for enterprise
performance. None of the external factors appear to be
significant. This is the case for both individualised as well as
averaged regression analyses. On the basis of these results,
our hypothesis concerning the relative importance of the SIEs
internal resources is therefore substantiated: internal
resources are a more important determinant of enterprise than
external factors.

TABLE 1: ITEMISED FACTORS: MEANS, STANDARD DEVIATIONS, RELIABILITY, PEARSON CORRELATIONS, AND SIGNIFICANCE OF
MODEL VARIABLES FOR SAMPLE SIZE OF 35 ENTERPRISES

Pearson correlations for factors, significance (2-tailed) indicated in parentheses

Factors Means SD' Reliability2 HC1 HC2 HC3 SCi SC2 SC3 EFI EF2 EF3
HC1 3.860 .694 .766
HC2 3.640 .857 .747 5.02**
(.002)
HC3 3.370 .863 .756 .300 .532**
(.080) (.001)
SCi 3.650 .805 .752 .400* .628** .577**
(.017) (.000) (.000)
SC2 3.470 .986 .738 .531**
(.001)
*753**
(.000)
.700**
(.000)
.637**
(.000)
SC3 3.220 .986 .738 476** 757** .590** .515** .678**
(.004) (.000) (.000) (.002) (.000)
EFI 3.120 1.026 .797 .123 -.032 .121 .185 .116 .191
(.481) (.853) (.488) (.289) (.508) (.273)
EF2 EF2
2.560
2.560 .885 .813 | ~~~-.320 -.048 .076 .171 -.083 -.194 .251
(.061) (.785) (.665) (.325) (.637) (.265) (.145)
EF3 3.400 .786 .810
EF .80
340 .86 -.158 -.190 .086 .039 -.062 -.018 .077 .341*
(.365) (.273) (.624) (.826) (.723) (.919) (.660) (.045)
EPI 3.610 .554 .764 .526** .568** .365* .462** .571** .635** .258 -.074 -.062
(.001) (.000) (.031) (.005) (.000) (.000) (.135) (.673) (.724)
EP2 5.9103 1.764 .786 .584** .484** .259 .303 .426* .515** .123 -.085 -.073
(.000) (.003) (.134) (.077) (.01 1) (.002) (.481) (.626) (.676)
NOTES: Standard deviation; 2 Cronbach's alpha test; Scale of 1 to 10 (deciles); all other factors on a scale of 1 to 5

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 PICMET 2007 Proceedings, 5-9 August, Portland, Oregon - USA 2007 PICMET

TABLE 2: REGRESSION ANALYSIS: AVERAGED FACTORS (PREDICTORS) HC, SC AND EF

Dependent Factors (averaged) Adjusted R2 Standard Error of

the Estimate Significance

EPI: Performance Outcomes SC .406 .427 .000

HC .348 .448 .000
EP2: Comparative Performance HC .272 1.505 .001

TABLE 3: REGRESSION ANALYSIS: ALL FACTORS CONSIDERED

Dependent Factors Adjusted R2

Standard Error of the
Significance
__ Estimate
EPI: Performance Outcomes SC3 .385 .435 .000
SC2 .306 .462 .000
EP2: Comparative Performance HCI .321 1.454 .000

VI. SUMMARY, CONCLUSIONS AND OUTLOOK
This paper reports on work in progress. It reports on the
findings of the first part of a global comparative study that
was completed in Russia. Filed research in other regions is
now being finalized. These outcomes will be compared and
contrasted with the findings presented here. Particular focus
will be devoted to the relative importance and impact of the
small enterprise's internal and external factors for its
performance as results from various regions are compared. It
is expected that for the final paper the findings from at least
three other regions will be available for comparison. On the
basis of the Russian findings presented in this paper, it may
be concluded that the enterprise's internal factors are
determining for competitive performance.
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