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Intellectual Capital and Firm Performance of U.S. Multinational Firms: A

Study of the Resource-Based and Stakeholder Views

Article  in  Journal of Intellectual Capital · December 2002

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Intellectual Capital and Firm Performance of U.S. Multinational Firms:
A study of the Resource-Based and Stakeholder Views

1
 Intellectual Capital and Firm Performance of U.S. Multinational Firms: A Study of the

Resource-Based and Stakeholder Views

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

significant in support of both the resource-based and stakeholder views.

2
 Intellectual Capital and Firm Performance of U.S. Multinational Firms: A Study of the

Resource-Based and Stakeholder Views

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

qualification of intellectual capital as a strategic asset rests on a potential link between

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

4
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

and Gray, 1988).

Resource-Based View of the Firm

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

Pandian, 1992; Grant, 1991).

Intangible as Strategic Assets

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,

5
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

and non-substitutable, are strategic assets capable of generating sustainable competitive

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

firm as measured by the net wealth or value added created.

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

find themselves on shakier and shakier ground.”

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

6
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

organization as a whole in terms of technologies, inventions, data, publications, strategy and

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

firm performance by the net value added created.

7
 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

by investors as a means of diversifying their portfolios internationally is assumed to enhance the

share price of multinational firms, independently of the information-based, proprietary intangible

assets possessed by these firms.

The managerial objectives theory, which falls in the general area of agency theory,

assumes differences of objectives and motives between management and shareholders.

8
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

management's decisions. Management may favor international diversification as it leads to a

reduction of firm specific risk. The situation may lead to a reduction in the market value of

multinational firms. (Morck and Yeung, 1991)

Two studies examined the implication of internalization, imperfect capital markets or

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

a firm's Tobin q is enhanced by multinationality, but multinationality itself has no significant

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

that investors value multinational firms as a means of diversifying their portfolios

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).

9
 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

benefits (Rugman, 1980). With internalization advantages present, it is to the benefit of

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

intangibles increases with the degree of a multinational firm’s expansion in developing

locations—a result, which is consistent with the notion that internalizing markets for the cross-

border transfer of intangibles leads to competitive advantages.

Methods

Dependent Variable: Value Added/ Total Assets

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

costs plus interest charges. An alternate approach to computing value-added is to deduct

“bought-in” costs from sales revenues, where “bought-in” costs represent all costs and expenses

incurred in buying goods and services from other firms.

Functionally, the value-added statement may be conceived as a modified version of

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:

R = Changes in Retained earnings

S = Sales Revenues

B = Bought-in materials and services

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

left-handed side the subtractive method.

Net value added is used in this study as a measure of the total wealth created in a given

year. It is measured as follows:

11
Net value added (NVA) = The sum of labor expenses corporate taxes, dividends, interest

expenses, minority shareholders in subsidiaries and retained earnings. (2)

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,

et al. 1996; Riahi-Belkaoui, 1999).

Independent Variable: Intellectual Capital

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

12
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

trademarks and all state trademarks.

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

tend to act as an anchor and is reproduced in future year 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,

1990; Porter, 1980).

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

Gobelli, 1998; Sullivan, 1994).

13
 Model

To determine if the intellectual capital of multinational U.S. firms is indeed a strategic

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

related to higher value added over total assets in 1992-96.

Two regression models are used to investigate the hypothesis:

1. The first regression model, Model 1, is used to test the relationship between RVATA (1992-

96) and the control variables. It is expressed as follows:

Model 1: RVATA (1992-96) = β 0 + β1 RVATA (1987-91)

+ β 2 (assets) + β 3 (debt/assets) + β 4 (multinationality ) (1)

2. The second regression model, model 2, is used to test the collective impact of the

independent and control variables on RVATA (1992-96). It is expressed as follows:

Model 2: RVATA (1992-96) = β 0 + β1 RVATA(1987-91)

+ β 2 (assets) + β 3 (debt/assets) + β 4 (multinationality)

+ β 5 (intellectual capital) (2)

14
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

meet the following selection criteria.

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

coverage database, and lexis-nexus.

The complete sample consists of 81 U.S. multinational firms that met the above criteria.

Results

Descriptive Statistics and Correlation Analysis

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

confirmed that it was not a problem.

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-

15
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

adjusted R2 of .06 to a 0.15%. Intellectual capital and multinationality are significant at

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

resource based and stakeholder views.(4)

Discussion and Conclusions

Intellectual capital is considered in this study as a strategic, intangible asset. According to the

resource-based view, it should be associated with the above-median sample performance. To be

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

a value-added measure of financial performance over measures such as ROA or shareholder

returns; however, other broader measures should be used in future studies.

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

measures of intellectual capital. It is measured by the number of trademark applications. Other

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.

17
 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:

McGrath, MacMillan and Venkatranan, 1995; Prahalad and Hamel, 1990).

2. The net value added is defined using COMPUSTAT’s annual industrial data definitions

as follows:

NVA = (42t + 6 t + 15 t + 21 t + 15 t + 45 t + 36 t - 36 t-1)

3. The results were similar when the median number of trademarks for all firms in the same

industry was used.

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.

18
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 Table 1

Descriptive Statistics and Correlations

Variables Mean SD 1 2 3 4 5

1. RVATA -1.38 13.82

(1992-1996)
2. RVATA -0.31 8.97 0.31*
(1986-1990)
3. Assets 13.28 18.23 -0.13 -0.01
4. Debt/Assets 0.57 0.13 -0.12 -0.30* 0.46*
5. Multinationality 56.71 32.13 0.23** 0.21* 0.14* 0.09*
6. Intellectual 26.32 81.16 0.26* 0.13 0.01 -0.03 0.23**
Capital
* p < .05
** p < .01

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***

1. Standardized regression coefficients

2. p < .10
* p < .05
** p < .01
*** p < .001

26

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