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Intellectual Capital and Firm Performance of U.S. Multinational Firms: A Study of The Resource-Based and Stakeholder Views
Intellectual Capital and Firm Performance of U.S. Multinational Firms: A Study of The Resource-Based and Stakeholder Views
Intellectual Capital and Firm Performance of U.S. Multinational Firms: A Study of The Resource-Based and Stakeholder Views
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Intellectual Capital and Firm Performance of U.S. Multinational Firms: A Study of the
Abstract
The resource-based view of the firm maintains that firms achieve a sustainable comparative
advantage and earn superior profits by owning or controlling tangible as well as intangible
strategic assets. The stakeholder view recommends that a better measure of financial
performance than accounting profit is the total wealth created or net value added. Accordingly,
this study examines the relationship between a return on total assets based on net value added ( `a
la stakeholder view) and the specific intangible asset of intellectual capital to test the resource-
based view of firm. The results using a sample of U.S. multinational firms are statistically
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Intellectual Capital and Firm Performance of U.S. Multinational Firms: A Study of the
According to the resource-based view of the firm, firms gain competitive advantage and superior
performance through the acquisition, holding and subsequent use of strategic assets-assets that
are vital for competitive advantages and strong financial performance (Wernerfelt, 1984; Lev,
1987). Both tangible and intangible assets are perceived as potential strategic assets. This
resource-based view of the firm, including the benefits of both tangible and intangible assets, is
gaining acceptance in the accounting, economic and strategic management literature, following
positive results of linkages between firm resources and measures of performance (Mouritsen,
1998; Jennings, Robinson, Thompson and Duvall, 1998; Griliches, 1990; Ittner and Larcker,
1998; Michalisin, Kline and Smith, 2000; Amir and Lev, 1996: Chauvin and Hirschey, 1996;
Canibano, Garcia-Ayuso and Sanchez, 2000; Aaker and Jacobson, 1994). The inclusion of
intangible assets derives from their ability to possess all of the characteristics of strategic assets
(Barney, 1951; Godfrey & Hill, 1995; McGrath, MacMillan & Venkatraman, 1995). While most
intangible assets do not qualify as strategic assets, intellectual capital is generally considered to
be a vital strategic asset (Mouritsen, 1998; AAA, 1998; Michalisin, Smith and Kline, 1997,
Griliches, 1990; Reed and DeFillippi, 1990; Nonaka and Takeuchi, 1995). By intellectual capital,
it is meant the specific and valuable knowledge that belongs to the organization. This
intellectual capital on one hand and firm performance on the other hand (Seethamraju, 2000). A
stakeholder view regards firm performance as being the total wealth generated by the firm before
distribution to the various stakeholders rather than the accounting profit allocated to the
3
shareholders. Accordingly, this study tests the empirical relationships between intellectual capital
and net value added over total assets for a sample of U.S. multinational firms. Multinational
rather than domestic firms are used. The assumption in internalization theory is that
multinational firms invest abroad to exploit firm-specific strategic intangible assets that cannot
be copied or exchanged and that can only be transferred to subsidiaries. In short, multinational
firms can increase their value by internalizing this market for such strategic intangible assets.
The study’s results support the positive contribution of intellectual capital ( `a la resource-based
view) to total firm performance based on net value added over total assets ( `a la stakeholder
view).
Stakeholder View
The stakeholder view maintains that firms have stakeholders rather than just shareholders to
account for (Donaldson and Preston, 1995). The gospel of corporation having obligations only to
stockholders, holders of the firm’s equity, as espoused by the shareholder view is replaced by the
notion that there are other groups to whom the firm is responsible in addition to the stockholders
as espoused by the stakeholder group. The groups that have a “stake” in the firm include
shareholders, employees, customers, suppliers, lenders, the government and society. This
definition is known as the narrow sense of stakeholder, as it is limited to the groups on which the
organization is dependent for its continuous survival (Freeman and Reed, 1983, p.91). A wide
sense of stakeholder would include any group that can affect the achievement of the firm’s
objectives, or that is affected by the achievement of a firm’s objectives (such as public interest
groups) (Freeman and Reed, 1983, p.91). Whatever the choice of the type of definition of
stakeholder, a consensus arising from the stakeholder view is that the accounting profit is only a
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measure of the return to the shareholder, and that value added is a more accurate measure created
by the stakeholders and then distributed to the same stakeholders (Meek and Gray, 1988).
Basically, value added is the increase in wealth generated by the productive use of the firm’s
resources prior to its allocation among shareholders, bondholders, workers and the government.
To evaluate firm performance created and accrued to all stakeholders, a stakeholder view of the
firm calls for the use of the value added (gross or net) as a measure of the total wealth created.
The value added report, containing the value added measure, has already found a certain degree
of acceptance in Britain (Morley, 1979), France (Haller and Stolowy, 1998), Germany (Pohmer
and Kroenlein, 1970), South Africa (Von Staden, 1988 a, b; 2000; Stainbank, 1997), Japan
(Shmizu et al., 1991), Korea (Kim et al., 1996), and recognition in the U.S. (AAA, 1991; Meek
The resource-based view of the firm views firm resources as the main drive behind
competitiveness and firm performance. These resources include both tangible physical assets as
well as intangible assets that have been internalized by the firm and used effectively and
efficiently to implement specific competitive and profitable strategies. While the role of physical
assets is well established in the literature and in practice, it is the role of intangible assets as
strategic resources that needs and deserves investigation (Itami and Roel, 1987; Mahoney and
Firms own resources that are just necessary for the conduct of operations, and resources that are
vital for competitive advantages and strong financial performance. The first type of assets,
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generally tangible, such as property, plant and equipment and physical technologies are common
place in the market, easily imitable and substitutable, and can be easily purchased and sold on the
open market. The second type of assets, generally intangible, valuable, rare, mostly unimitable
advantage and superior financial performance (Barney, 1991). The fundamental characteristics of
intangible assets as strategic assets are their rarity, imitability and non-substitutability as well as
their inobservability (Godfrey and Hill, 1995). While many types of intangible assets may
qualify as strategic assets, the strict application of the above criteria reduces the number to few in
general and to intellectual capital in particular (Hall, 1992, 1993). The next section argues that
intellectual capital is a strategic asset that has a positive impact on the future performance of the
Intellectual Capital
The need to recognize intellectual capital is best described as follows by Robert Reich (1991):
“Members of the accounting profession, not otherwise known for their public displays of
emotion, have fretted openly about how to inform potential investors of the true worth of
enterprises whose value rests in the brains of employees. They have used the term
‘goodwill’ to signify the ambiguous zone in the corporate balance sheets between the
company’s tangible assets and the value of its talented people. But as intellectual capital
continues to overtake physical capital as the key asset of the corporation, shareholders
The main argument of Robert Reich is the need for a competency theory of the firm that
recognizes the “value of talented people” to an organizational system. Stewart (1997) views
intellectual capital as a mix of human capital, structural capital and customer capital. Human
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capital generates innovation--whether of new products and services, or of improving business
processes (Steward, 1997, p. 86). Structural capital is the knowledge that belongs to the
culture, structures and systems, organizational routines and procedures (Stewart, 1997, pp. 108-
109). Finally, customer capital is the firm’s value of its franchise, its ongoing relationships with
the people or organizations to which it sells, like market share, customer retention and defection
rates, and per customer profitability (Stewart, 1997, p. 143). Similar classifications of the
components of intellectual capital are provided by various authors (Sveily, 1997, pp. 10-11;
Edvinsson and Malone, 1997, p. 11; Brookings, 1997, p. 13). Only structural capital, which is
owned by the firm, and is assumed not to be reproduced and shared, is the best approximation of
intellectual capital. Brookings (1997, p. 14) refers to it as the intellectual property assets, which
include know-how, trade secrets, copyright, patent and various design rights, and which
constitute legal mechanisms to protect the firm’s assets.(1) As such, intellectual capital in the
form of know-how available only to the firm, is its main driver of capabilities and growth
(Michalisin et al, 2000, p.95), determining how resources are deployed to generate new products
and services (Amit and Schoemaker, 1993; Itami and Roehe, 1987), new physical technologies
(Rumelt, 1989; Wernerfelt, 1989) and new resource strategies (Galunic and Rodan, 1998).
Accordingly, the hypothesis to be tested is that intellectual capital will be positively associated
with future firm performance, as measured by the net value added created. The hypothesis is in
line with the resource-based view of the firm by anticipating a positive contribution of
intellectual capital as a strategic asset, and in line with the stakeholder view by measuring future
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Multinationality
With the increased portion of business activities conducted by multinational firms, the
international business literature raises the empirical question of whether multinationality does in
fact add to share value (Morck and Yeung, 1991, 1992; Mishra and Gobeli, 1998). Three theories
are commonly used to link multinationality to investment value, namely: a) the internalization
theory, b) the imperfect capital markets theory and c) the managerial objectives theory.
The internalization theory maintains that foreign direct investment will cause the increase
of the market value of the firm relative to its accounting value only if the firm can internalize
markets for certain of its intangibles. Examples of these firm specific intangible assets include
production skills, managerial skills, patents, market abilities, and consumer goodwill.1 If firms
possessing these intangibles can only transfer them to foreign subsidiaries they will in the
process internalize the markets for such assets. The immediate result is a potential link, for any
firm possessing these intangibles and operating abroad, between its value and its degree of
internationalization or multinationality.
The imperfect capital markets theory suggests that investors, constrained by institutional
constraints on international capital flows and the information asymmetries that exist in global
capital markets, invest in multinational firms to gain from the international diversification
opportunities provided by these multinational firms. This direct valuation of multinational firms
The managerial objectives theory, which falls in the general area of agency theory,
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Managers are in fact capable to act in their own interest given the complexity of the
multinational firm and the difficulties encountered by shareholders when attempting to monitor
reduction of firm specific risk. The situation may lead to a reduction in the market value of
managerial objectives theories and relied on firm level data. The first study by Morck and Yeung
(1991) showed that the positive impact of research and development and advertising spending on
impact. Their results support the internalization theory in that intangible assets are necessary to
justify the direct foreign investment and do not support the imperfect capital market theory in
internationally. The second study by Mishra and Gobeli (1998) examines the same issues as
those of Morck and Yeung (1991) and adds a managerial incentives alignment variable. Their
results are also consistent with internalization theory in that greater multinationality corresponds
to a higher valuation of the firm if technology investment is high, and the impact is even greater
if managerial incentive alignment is high as well. The results do not also support the imperfect
capital markets theory. The results are consistent with both internalization and managerial
objective theories. The intangible assets examined in three studies include research and
development, and advertising spending in the case of Morck and Yeung (1991), and reasarch and
development spending and managerial incentives alignment in the case of Mishra and Gobeli
(1998).
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The use of multinational firms in this study derives from the cited empirical results
consisting with the internalization of intangibles by multinational firms and the resulting market
multinational firms to transfer its ownership of intellectual capital abroad rather than sell it. The
perceived great costs of transactional failure lead the multinational firm to transfer their
intellectual capital across national borders rather than by contractual agreements with foreign
firms. As argued by Rugman (1981), the multinational firm has in a sense internalized the market
of intellectual capital for its use. As shown by Pantzakis (2000), the market value impact of
locations—a result, which is consistent with the notion that internalizing markets for the cross-
Methods
The stakeholder view holds that firm performance is best measured by the value added.
Computationally, the value-added amount can be determined by adding pre-tax profit to payroll
“bought-in” costs from sales revenues, where “bought-in” costs represent all costs and expenses
income statement. Consequently, it can be derived from the income statement as follows:
10
Step 1: The income statement computes changes in retained earnings as the difference
between sales revenue, on one hand, and costs and dividends, on the other hand:
R = S – B – DP – W – I – DD – T (1)
Where:
S = Sales Revenues
DP = Depreciation
W = Wages
I = Interest
DD = Dividends
T = Taxes
Step 2: The value-added equation can be obtained by rearranging the profit equation as follows:
S – B = W + I + DP + DD + T + R (2)
or
S – B – DP = W + I + DD + T + R (3)
Equation 2 expresses the gross value added method. Equation 3 expresses the net value added
method. In both cases, the left side of the equation shows the value added created by the groups
involved in or impacting the managerial production team (the workers, the shareholders, the
bondholders and the government); the right side illustrates the distribution of the wealth to the
same members of the team. The right-hand side is also known as the additive method and the
Net value added is used in this study as a measure of the total wealth created in a given
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Net value added (NVA) = The sum of labor expenses corporate taxes, dividends, interest
Financial performance is measured by the net value added over total assets (VATA). In addition
to the stakeholder view advocating the use of this measure, various empirical studies show that
value added ratios can produce more reliable and comparable assessments of firm performance
and market valuation than the more familiar accounting profit-based measures (Kay and Davis,
1990 a, 1009 b; Kay, 1993: Kwong et al. 1995; Haller and Stolowy, 1998; McLeary, 1984; Kim,
Measuring intellectual capital as a valuable, rare and imperfectly imitable intangible strategic
asset is a difficult task. Referring to it as the intellectual property assets, as in Brookings (1997,
p. 14), brings to mind an ability to create that cannot be reproduced easily because of both a
secret technology and a trademark protection attached to it (Hall, 1992; Griliches, 1990). In fact,
both trademarks and/or patents have been used as surrogate measures of intellectual capital
(Michalisin, 2000; Griliches, 1990; Acs and Audretsch, 1987; Griliches, 1984; Seethamraju,
2000). The approach taken in this study is to first measure the number of applications for
trademark protection for each sample firm for the ten-year period ending in 1991. The second
step is to compute the difference between the sample firm’s total trademarks and the median
number of trademarks for the total sample. (3) The result is a relative measure of trademarks that
control for differences in the number of trademarks across a sample of U.S. multinational firms
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and indicates whether a firm has more or less trademarks than the median number in the sample
of U.S. multinational firms. The data comes from Lexis-Nexis and includes all U.S. federal
Control Variables
Two types of control variables were used. One type of control variables included those
frequently used in the strategy literature as influencing firm performance (e.g. Robins and
Weisema, 1995; Michalisin et al., 2001). They included relative prior years’ performance, size
and debt structure. A second type of control variable included a measure of multinationality.
Relative prior years’ performance using relative value added over total assets for the
1987-91 period; RVATA (1987-91), was used to control for the impact of prior years’
performance on RVATA (1992-96). The assumption is that some of the prior years’ performance
Debt structure, or financial leverage, as measured by total debt over total assets in 1991,
is used to control for the impact of debt servicing on profitability and wealth.
Total size, as measured by total assets in 1991, is used to control for the impact of size on
wealth creation through economics of scale, monopoly power and bargaining power (Chandler,
Multinationality, as measured by 1991 foreign sales/ total sales is used to control for the
impact of internalization on firm performance and wealth (Morck and Yeung, 1991; Mishra and
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Model
asset, it is measured in one given year (1991), then evaluated in terms of its impact on firm
performance over the subsequent five-year period (1992-96) using the relative value added/ total
assets (RVATA). RVATA (1992-96) is computed as the difference between the sample firm
five-year average VATA (1992-1996) and the median five-year average for the industry (1992-
1996). The end result is that RVATA (1992-96) expresses what the firm earned in total wealth
compared to the sample median created wealth. The main contention of the resource-based view
as expressed in this study is that the intellectual capital created in 1991 should be positively
1. The first regression model, Model 1, is used to test the relationship between RVATA (1992-
2. The second regression model, model 2, is used to test the collective impact of the
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Sample:
In this study, the Forbes’ magazine “Most International” 100 American Manufacturing and
Service firms in 1991 constitute the population frame. To be included in the sample, a firm must
1. The firm must be included in Forbes’ list in 1991 and in the 1992-96 period.
2. Data necessary to compute the dependent, independent and control variables are
available from Standard and Poor’s Compustat primary, secondary, tertiary and full
The complete sample consists of 81 U.S. multinational firms that met the above criteria.
Results
Table 1 presents the descriptive statistics and correlations for all the variables used in the
study. The low intercorrelation among the prediction variables used in the model indicate no
reasons to suspect multicollinearity and various diagnostic tests run in the derived regressions
The test of the hypothesis is performed by running regressions (1) and (2). Table 2
presents the results of the regression coefficients for all independent variables, using RVATA
(1992-1996) as the dependent variable. The Breusch and Pagau (1979) test for heteroscedasticity
yielded an X2 of a minimum of 131.15 and a maximum of 153.23 for regression (2), indicating
that heteoscedasticity could be a problem. Accordingly, the reported t-statistics are based on
White’s (1980) heteroscedasticity corrected covariance matrix. The hypothesis predicts that
intellectual capital will positively affect financial performance as measured by a net value added-
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based measure. Table 2 shows that the control variables in Model 1 collectively explain 9% of
the variation in relative future wealth performance. The relationship is only significant at
p < .10 and only multinationality is significant at p < .05. When the independent variable of
intellectual capital is added to the control variables, the results of Model 2 show an increase of
respectively p < .01 and p < .05. The overall regression is significant. The results appear to
support the hypothesis that intellectual capital is associated with future firm performance as
measured by a net value added or total wealth created-based indicator; in support of both the
Intellectual capital is considered in this study as a strategic, intangible asset. According to the
indicative of the total wealth created, and consistent with the stakeholder view, the performance
was based on the net value added created over total assets. The results of this study strongly
support both the resource-based view and stakeholder view. A test of the relationship between
intellectual capital and financial performance using 81 U.S. multinational firms yielded positive
and significant results. These results point to both a) the usefulness of intangibles in general and
intellectual capital in particular as a sustainable source of superior wealth creation, and b) the
relevance of net value added as a measure of wealth creation. The results call also for more
voluntary specific disclosures that would allow the measurement of both intellectual capital and
value added. The measure used in this study for organizational performance is value added.
However, one may argue that a stakeholder view considers organizational performance from a
16
much broader perspective. Specifically, outcomes are measured not only in terms of
stakeholder-oriented financial performance, but also things like customer satisfaction, employee
enrichment, and social performance. It may be true that proponents of stakeholder theory prefer
The results of this study are limited to U.S. multinational companies to capture the
specific effect of internalization of intellectual capital, and to the companies for which adequate
information existed for the measurement of both intellectual capital and value added. A possible
avenue of research is to replicate the study with non-U.S. multinationals and explore alternative
possible measures include trademarks received, patent applications, or patents received. One
may argue that research and development expenses intended to result in applications and awards
of patents, as well advertising expenses to promote a brand name may also constitute intellectual
capital.
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Notes
1. Intellectual capital, as valuable, rare and imperfectly imitable, has been also referred to in
the management literatures as distinctive competence (e.g., Lei, Hill and Bettes, 1996:
2. The net value added is defined using COMPUSTAT’s annual industrial data definitions
as follows:
3. The results were similar when the median number of trademarks for all firms in the same
4. Similar results were obtained with size measured by total revenues and multinationality
measured by either foreign assets, over total assets and foreign profits over total profits
and when gross value added is used instead of net value added.
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Table 1
Variables Mean SD 1 2 3 4 5
25
Table 2
Results of Multiple Regression Analysis
Model 1 Model 2
Control Values Beta1 T2 Beta T
RVATA (1986-90) 0.18 2.32* 0.15 1.15
Assets 0.03 0.81 0.01 1.63
Debt/Assets -0.07 -0.62 0.03 0.07
Multinationality 0.23 2.22* 0.22 2.12*
Independent Variables
Intellectual Capital 0.32 2.57**
Adjusted R2 0.09 0 0.15
F value 2.19 1 4.16***
Incremental R2 0.16
Incremental F value 1.97***
26