Journal of Intellectual Capital

Emerald Article: Intellectual capital and performance in causal models: Evidence from the information technology industry in Taiwan Wen-Ying Wang, Chingfu Chang

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To cite this document: Wen-Ying Wang, Chingfu Chang, (2005),"Intellectual capital and performance in causal models: Evidence from the information technology industry in Taiwan", Journal of Intellectual Capital, Vol. 6 Iss: 2 pp. 222 - 236 Permanent link to this document: http://dx.doi.org/10.1108/14691930510592816 Downloaded on: 27-05-2012 References: This document contains references to 42 other documents Citations: This document has been cited by 2 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 2689 times.

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JIC 6,2

Intellectual capital and performance in causal models

Evidence from the information technology industry in Taiwan
Wen-Ying Wang and Chingfu Chang
Department of Accounting, National Chengchi University, Taipei, Taiwan
Abstract
Purpose This paper seeks to investigate the impact of intellectual capital elements on business performance, as well as the relationship among intellectual capital elements from a cause-effect perspective. Design/methodology/approach The partial least squares approach is used to examine the information technology (IT) industry in Taiwan. Findings Results show that intellectual capital elements directly affect business performance, with the exception of human capital. Human capital indirectly affects performance through the other three elements: innovation capital, process capital, and customer capital. There also exists a cause-effect relationship among four elements of intellectual capital. Human capital affects innovation capital and process capital. Innovation capital affects process capital, which in turn inuences customer capital. Finally, customer capital contributes to performance. The cause-effect relationship between leading elements and lagged elements provides implications for the management of rms in the IT industry. Research limitations/implications The model proposed in this study is applicable to the high-tech IT industry. Modication of the proposed model may be needed in applying this model to other industries. Practical implications This study helps management identify relevant intellectual capital elements and their indicators to enhance business performance. Originality/value This paper is a seminal work to propose an integrated cause-effect model to investigate the relationship among elements of intellectual capital for IT in Taiwan. Keywords Intellectual capital, Performance appraisal, Taiwan, Communication technologies Paper type Research paper

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Journal of Intellectual Capital Vol. 6 No. 2, 2005 pp. 222-236 q Emerald Group Publishing Limited 1469-1930 DOI 10.1108/14691930510592816

Introduction The information technology (IT) industry in Taiwan has gained a reputation of rapid growth and global competitive capabilities. The literature contends that a rms competitive power and performance are largely inuenced by its intellectual capital. Many researchers recognize that intellectual capital, which contains non-nancial measures and other related information, is the value driver of an enterprise (Amir and Lev, 1996; Edvinsson and Malone, 1997; Ittner et al., 1997; Stewart, 1997; Bontis, 1999, 2001). They claim that intellectual capital assists enterprises in promoting competitive advantage and value. Therefore, intellectual capital can be viewed as the most valuable asset and the most powerful competitive weapon in business. This is especially so in the IT industry, as its intangible assets are much more important than tangible assets. The theoretical impact of intellectual capital on rm performance has never been over emphasized in the literature. However, there is far from enough empirical research investigating this issue. In particular, studies examining this issue in Taiwans IT

industry are rare, even though Taiwan is one of the IT kingdoms of the world. Moreover, most of the research focuses on the impact of individual intellectual capital on performance without looking into an integrated framework that describes the relationship among individual intellectual capital elements. However, as the cause-effect relations among perspectives is emphasized, rather than merely looking into the relationship between measurable proxies of perspectives, in the Balanced Scorecard system (Kaplan and Norton, 1996, 2001), the relationship among intellectual capital elements should also be of interest to our research. Many factors, such as corporate strategy and industrial characteristics, may affect a rms value drivers. Thus, it would be appropriate to put emphasis on the interrelationship between intellectual capital elements from a more macroscopic perspective, rather than paying attention only to certain measures of intellectual capital and performance when we examine the effect of intellectual capital on performance. If the cause-and-effect relationship among elements could be understood, the improvement of business performance may be facilitated through the appropriate management of leading elements of intellectual capital in advance and input more resources in leading elements. Furthermore, for interested outside parties such as investors and creditors, understanding the items that affect business performance and bringing the related information into consideration is helpful for evaluating the companys true value and developmental potential. Although some researchers point out that there exists a relationship among elements of intellectual capital, there is a lack of empirical studies on this issue. Following this line of argument, we attempt to form an integrated framework on which we investigate the relationship among intellectual capital elements and the impact of these elements on rms performance. Hypothesis development A consensus on the classication of intellectual capital elements has not yet been reached in the literature, but there emerges a converged view that intellectual capital is composed of three forms of intellectual capital human capital, customer capital (or relation capital), and structure capital which can be divided into innovation capital and process capital (Edvinsson and Malone, 1997; Bontis et al., 1999; Buren, 1999; Joia, 2000; Bontis, 2002; Choo and Bontis, 2002). Our study follows this view and classies intellectual capital into four elements human capital, customer capital, innovation capital, and process capital. Each element could directly inuence performance, as Figure 1 shows. Moreover, there may exist a cause-effect relationship among human capital and other elements of intellectual capital (Bontis and Fitz-enz, 2002). That is, human capital, the most fundamental intellectual capital element, may affect other the three elements rst, and then these three elements, in turn, affect performance, as indicated in Figure 2. Besides, as shown in Figure 3, there may also exist a cause-and-effect relationship among innovation capital, process capital and customer capital. These elements of intellectual capital ultimately affect performance indirectly through their interrelationship. Based on the cause-effect framework, this study forms the hypotheses as follows. Direct inuence of intellectual capital elements on performance Many researchers nd that there is a signicant and positive correlation between research and development (R&D) expenditures and business performance as well as

Intellectual capital and performance 223

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market value (Cockburn and Griliches, 1988; Hall, 1993; Chauvin and Hirschey, 1993). Sougiannis (1994) shows that when the company has a $1 increase in R&D expenditure, it has a $2 increase in earnings and $5 increase in market value over the next seven years. According to Lev and Sougiannis (1996), $2.328 operating income will be brought in the future if a company increases $1 R&D expenditure. Deeds (2001) nds that R&D intensity, the late period technology development capability, and technology absorption capability have a positive correlation with market value added. From the above studies, it could be inferred that companies R&D expenditure not only inuences current performance and market value, but also future performance. Canibano et al. (2000) review a few of the research projects conducted relating to the value relevance of intellectual capital items which include R&D expenditure, advertisement expenses, patents, brand name, customer satisfaction, and human resources. It implies that there are intellectual capital items other than R&D expenditure that could affect performance. Besides, many researchers emphasize that

Figure 1. Conceptual framework of the direct impact of intellectual capital elements on performance

Figure 2. Conceptual framework of the indirect impact of human capital on performance

Figure 3. Conceptual framework of the interrelationship between intellectual capital elements and their impacts on performance

human capital and customer capital play a very important role in business performance or even in businesses survival (Pfeffer, 1994; Uzzi, 1996). According to Lee and Witteloostuijn (1998), companies that have existed longer, have accumulated more abundant experience, use more highly-educated employees, or have higher connective intensity with potential customers go bankrupt much more rarely. Although some studies address the relationship between customer satisfaction and nancial performance, only very few studies actually provide empirical results. However, their conclusions are inconsistent. Some researchers nd a signicantly positive relationship between customer satisfaction and nancial performance (Ittner and Larcker, 1998a; Banker et al., 2000), but others do not (Ittner and Larcker, 1998b; Arthur Andersen & Co., 1994; Anderson et al., 1994). We regard customer satisfaction as merely an indicator of customer capital elements while investigating the relationship between customer capital and performance from a more integrated perspective. Based on the cause-effect relation between customer perspectives and nancial perspectives in the Balanced Scorecard framework, we infer that customer capital would have a positive impact on performance. In the era of the knowledge-based economy, the key factor that drives and creates a rms value is intellectual capital. Consequently, we infer that the creation and accumulation of intellectual capital should be reected in a rms performance. Whichever an indicator belongs to human capital, customer capital, innovation capital, or process capital, there is research supporting its relation with performance. However, most of the prior research focuses on the relation between an individual indicator of some intellectual capital element and performance, neglecting that between elements of intellectual capital and performance. In our rst hypothesis, the primary focus is the inuence of each intellectual capital element, measured by several indicators, on performance. As shown in Figure 1, H1 and its four sub-hypotheses are developed as follows: H1. Each intellectual capital element directly and positively affects performance. H1a. Human capital directly and positively affects performance. H1b. Innovation capital directly and positively affects performance. H1c. Process capital directly and positively affects performance. H1d. Customer capital directly and positively affects performance. Indirect inuence of intellectual capital elements on performance Although elements of intellectual capital have a direct impact on performance, a companys performance cannot rely solely on any single element. There is such a close linkage between elements that a certain element may be improved or expanded through improvement on other elements. Consequently, if a company wants to create value, adequate combination of all elements is necessary (Edvinsson and Malone, 1997; van der Meer-Kooistra and Zijlstra, 2001; Hussi and Ahonen, 2002; Bukh, 2003). Edvinsson and Malone (1997) emphasize the importance of interaction between intellectual capital elements, and point out that rm value is created through the combination of each element. The Balanced Scorecard system indicates that there exist linkages among the nancial perspective, customer perspective, internal process perspective, and learning

Intellectual capital and performance 225

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and growth perspective, as well as cause-effect relations among these four perspectives. Except for the nancial perspective, three of these four perspectives almost belong to intellectual capital categories; they correspond to intellectual capital elements. Based on the Balanced Scorecard concept, we could infer that relationships exist among our four elements of intellectual capital, and that business performance would be inuenced by these elements in a cause-effect relationship. Indirect impact of human capital on performance In this section we describe how human capital affects business performance through other elements of intellectual capital including innovation capital, process capital, and customer capital. Among the elements of intellectual capital, human capital is the most fundamental. van der Meer-Kooistra and Zijlstra (2001) point out that human knowledge and experience is the main element, which is the base of other elements and which will impact a companys value through affecting other elements. Employees knowledge and capabilities are the source of innovation. In order to accumulate innovation capital, besides relying on the rms encouragement and active input, raising employees capabilities is also an important impact factor. Consequently, it would be appropriate to infer that human capital is closely linked to innovation capital. Employees must be relied on to carry out the internal processes of a company, while employees also perform all customer services. Because employees provide the quality of service while implementing internal processes, the capability of employees would affect process efciency, quality, and customer satisfaction. According to the cause-effect relationship between the learning and growth perspective and internal process perspective, a similar result, stating that human capital possibly affects process capital, could be obtained. Stewart (1997) emphasizes the relationship between employee capabilities and customers. It indicates that employees should possess suitable knowledge or skills to serve customer needs, which must also be the emphasis of the company. Therefore, in the model of the relationship between intellectual capital and performance, accumulating human capital would be helpful to improve the other forms of intellectual capital. As shown in Figure 2, we build the hypotheses as follows: H2. Human capital directly and positively affects the other three intellectual capital elements, which, in turn, affect performance. H2a. Human capital positively affects innovation capital. H2b. Human capital positively affects process capital. H2c. Human capital positively affects customer capital. H2d. Innovation capital positively affects performance. H2e. Process capital positively affects performance. H2f. Customer capital positively affects performance. Interrelationship of intellectual capital elements and their impacts on performance Fornell et al. (1996) propose the American Customer Satisfaction Index and contend that customer expectations, perceived quality, and perceived value could inuence

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customer satisfaction. Since customer expectations and perceived value are not controllable, a rms primary task to enhance customer satisfaction is to increase perceived quality. Zeithaml et al. (1988) and Zeithaml and Bitner (1996) also point out that the quality perceived by customers is the key factor of customer satisfaction. The higher the perceived quality, the more they are satised. Through its internal process a company provides service quality to its customers. The improvement in process capital leads to customer satisfaction and enhancement of customer relations. Therefore, process capital is somewhat of a leading intellectual capital element, which affects customer capital element, while the customer capital element in turn inuences nancial performance. The implementation of process capital relies on employees, which belong to human capital element. The quality of employees determines the internal process quality and service quality. The Balanced Scorecard system emphasizes the cause-effect relation of those four perspectives in the model in which learning and growth perspective, internal process perspective, customer perspective, and nancial perspective are interrelated. Correspondingly, in our model human capital affects process capital, which in turn inuences customer capital, and then nancial performance. However, innovation capital could not be mapped into the Balanced Scorecard concept. Customers may cherish a rms excellent innovative capabilities. In such a circumstance, innovation capital affects customer capital. On the one hand, innovative ideas may be turned into products and services through the transformation of the internal process. The enhancement of innovation capabilities helps to increase the quality of the internal process. We therefore infer that innovation capital may affect process capital. As shown in Figure 3, we propose the following hypotheses: H3. Human capital directly and positively affects innovation capital and process capital, and process capital affects customer capital, which then affects performance. H3a. Human capital positively affects innovation capital. H3b. Human capital positively affects process capital. H3c. Innovation capital positively affects process capital. H3d. Innovation capital positively affects customer capital. H3e. Process capital positively affects customer capital. H3f. Customer capital positively affects performance.

Intellectual capital and performance 227

Research design In literature, studies on the relationship between intellectual capital and business performance usually use regression analysis or the principal component method. These methods deal with only one dependent variable or component and cannot examine the cause-effect relation between them. In regression analysis, we may frequently encounter a multi-collinearity problem if we include related variables as independent variable in order to lessen the error-in-variable problem. To avoid the multi-collinearity and measurement errors, while addressing the cause-effect

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relationship between intellectual capital and business performance, we adopt the partial least squares (PLS) method, which is a variance-based structural equation modeling approach used in previous intellectual capital research studies (see Bontis, 1998, 2004; Bontis et al., 2000; Bontis and Fitz-enz, 2002). In this study we have three samples for three corresponding models. Each of these samples consists of all listed rms in the IT industry during the period 1997-2001. We delete observations with any missing values. Data have been retrieved from the database of the Taiwan Economic Journal (TEJ), annual report, and prospectus. Although the samples are not too small, we, for the sake of conservative considerations, still use bootstrap re-sampling methods to conduct inference. In an attempt to maximize stockholders wealth, management usually tries to increase operating earnings and stock price. Accounting earnings reect past performance, while the stock price is an index of market expectation of a rms performance in the future. Both accounting earnings and stock price are included as performance measures. The indicators of each intellectual capital element, as shown in Table I, are adopted from the literature on the measures of intellectual capital or determinants of business performance (Sougiannis, 1994; Kaplan and Norton, 1996; Lev and Sougiannis, 1996; Edvinsson and Malone, 1997; Stewart, 1997; Sveiby, 1997; Bontis, 1998; Financial Management Accounting Committee, 1998; Lee and Witteloostuijn, 1998; Bukh et al., 2001; Deeds, 2001; Mouritsen et al., 2001). Empirical results This section presents the empirical results regarding the direct inuence of intellectual elements on performance, the indirect impact of human capital on performance, and the interrelationship of intellectual capital elements as well as their impacts on performance. Direct inuence of intellectual capital elements on performance In our rst hypothesis, we conjecture that each element of intellectual capital directly and positively affects performance. Figure 4 shows the empirical results. All the coefcients, with the exception of human capital, are shown to affect performance signicantly ( p-value , 0:01). It supports our H1b, H1c, and H1d. Innovation capital, process capital, and customer capital have signicant and positive inuences on performance. Creating and accumulating these three elements of intellectual capital contributes to performance. Process capital has the strongest direct impact on performance because Taiwans IT rms are mostly original equipment manufacturing(OEM-) or original design manufacturing- (ODM-) oriented businesses and their production efciency relies on the improvement of the production process. Therefore, production efciency is the most important factor for the industry. Table II summarizes the loadings of the indicators for each element of intellectual capital and performance for the model in Figure 4. The signicant loadings for innovation capital are R&D intensity, current R&D density, last R&D density, and R&D employee ratio. The results are consistent with those in the relevant literature in that it suggests that the higher the R&D ratio, the better performance will be in the next period. The signicant loadings in order of magnitude for process capital are value added per employee, administrative expense per employee, plant assets turnover, productivity per employee, and rm age. One noteworthy thing is the negative loading

Variable Performance Return on assets (Per1) Adjusted return on assets (Per2) Return on stockholders equity (Per3) Adjusted return on stockholders equity (Per4) Operating income ratio (Per5) Stock price (Per6) Market value (Per7) Market value book value (Per8) Market-to-book (Per9)

Denition Net income after tax/average total assets Operating income/average total assets Operating income/average common stockholders equity (Operating income 2 interest expense)/average common stockholders equity Operating income/net sales Year-end the closing price Year-end market value Year-end market value year-end book value Year-end market value/year-end book value

Intellectual capital and performance 229

Human capital Number of employees (H1) Total number of employees Number of advanced educational background (H2) Total number of college graduates Average education degree (H3) Employees are divided into Masters, college, and high school or below, with the weight of 3, 2, 1, and 0 for each category to compute average education degree of total employees Ratio of advanced educational background (H4) College graduates/total number of employees Average years of service with company (H5) Average employees work years in the company Average age (H6) Average age of employees Ratio of change in number of employees (H7) (Number of employees at the end of the period 2 number of employees at the beginning of the period)/number of employees at the beginning of the period Payroll expense ratio (H8) (Salary expense direct labor cost indirect labor cost)/net sales Innovation capital Current R&D density (I1) R&D expense this year/net sales this year Last R&D density (I2) R&D expense last year/net sales last year Current R&D expense (I3) Last R&D expense (I4) Income per R&D expense (I5) Net income after tax/R&D expense Number of R&D employees (I6) R&D employee ratio (I7) Number of R&D employees/number of total employees R&D per employee (I8) R&D expense this year/number of R&D employees R&D intensity (I9) R&D expense this year/average total assets Patent fee (I10) Process capital Productivity per employee (P1) Value added per employee (P2) Firm age (P3) Organizational stability (P4) Current capital turnover (P5) Administrative expense ratio (P6) Net sales/total number of employee Net income after tax/total number of employee Years of establishing the company to year-end of the year Employees average work years/corporation age Net sales/average current assets Administrative expense/net sale (continued)

Table I. Variable denition

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Variable Administrative expense per employee (P7) Inventory turnover (P8) Plant assets turnover (P9) Customer capital Number of main customers (C1) Growth rate (C2) Advertising expense (C3) Marketing expense (C4) Marketing expense ratio (C5) Acceptance rate (C6) Concentration (C7)

Denition Administrative expense/number of total employee Cost of goods sold/average inventory Net sales/average plant assets Number of customers whose share in sales above 10 percent Growth rate in sales Advertising expense Marketing expense Marketing expense/net sales 1 2 (sales returns and allowances/net sales) Net sales from the rst big three customers/net sales

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Table I.

Figure 4. Empirical results for direct impact of intellectual capital elements on performance

Construct Innovation capital Process capital Customer capital Performance I9 0.906* (38.549) P2 0.909* (33.158) C6 0.806* (7.778) Per2 0.950* (102.122) I1 0.890* (16.515) P7 0.717* (2.418) C2 0.764* (7.022) Per1 0.921* (70.882)

Signican t indicator I2 0.870* (15.235) P9 0.669* (6.025) I7 0.775* (13.142) P1 0.485* (4.786)

P3 2 0.437* (2 4.015)

Per4 0.890* (40.201)

Per3 0.881* (38.673)

Per5 0.743* (18.663)

Per6 0.684* (8.770)

Per9 0.645* (6.170)

Table II. Signicant indicators for direct impact of intellectual capital elements on performance

Notes: * Signicant at p-value , 0:01; Sample size is 131; t-value in brackets; For notation of variables, I1 denotes current R&D density, I2 last R&D density, I7 R&D employee ratio, I9 R&D intensity, P1 productivity, P2 value added per employee, P3 rm age, P7 administrative expense per employee, P9 plant assets turnover, C2 growth rate, C6 acceptance rate, Per1 ROA, Per2 adjusted ROA, Per3 ROE, Per4 adjusted ROE, Per5 operating income ratio, Per6 stock price, and Per9 market-to-book

for rm age that implies that rm age has a negative impact on performance. Sveiby (1997) and Lee and Witteloostuijn (1998) argue that the older a rm is, the more stable and reliable the rm is. Our result shows a different story. We conjecture that dramatic changes in the IT industry favor new comers for their adaptive capability to the changing environment. Figures 4 shows the insignicance of the coefcient of human capital. This does not imply human capital is not important to performance. Instead, human capital and performance may not have a direct relation, but rather an indirect relation. Next, we will conduct further investigation into this issue. Indirect impact of human capital on performance As discussed above, human capital does not directly inuence performance. We therefore conjuncture the two have an indirect relationship. Figures 5 and 6 show how human capital indirectly impacts performance through the other three elements. First, we assume Figure 5 describes the story, but nd the path to performance from innovation capital is insignicant. We therefore look into the model in Figure 6 which explains how human capital indirectly affects performance through innovation capital and process capital, and how innovation capital has an indirect impact on performance

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Figure 5. Empirical results for indirect impact of human capital on performance

Figure 6. Empirical results for indirect impact of human capital on performance

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through process capital. Figure 6 shows that the coefcient from innovation capital to process capital and the t-value are 0.341 and 2.435, respectively, and the coefcient from process to performance and its t-value are 0.606 and 12.645, respectively. This result explains the insignicance in the coefcient to performance from human capital in Figure 4. Although process capital is a very important factor affecting performance, it needs support from innovation capital and human capital, and human capital is most fundamental to a rms overall performance. Figures 5 and 6 support H2a, H2b, H2c, H2e, and H2f. Table III summarizes the loadings of the indicators for each element of intellectual capital and performance for the model in Figure 6. The signicant loadings in order of magnitude for human capital are the number of advanced educational background, number of employees, and average age. The rst two indicators have positive loadings, but the last item has negative loading. The negative loading of average age of employees implies that the younger the employees, the higher the possibility that they have creative thinking and learning capabilities to adapt to the rapidly changing IT environment. The signicant loadings in order of magnitude for process capital are value added per employee, administrative expense per employee, plant assets turnover, productivity per employee, rm age, and current capital turnover. All of the loadings are positive, except for rm age. The signicant loadings in order of magnitude for innovation capital are current R&D expenses, last R&D expense, and the number of R&D employees. The signicant loadings in order of magnitude for customer capital are marketing expenses, advertising expenses, and product acceptance rate. The rst two indicators have negative loadings while the last one
Construct Human capital Innovation capital Process capital Customer capital Performance H2 0.981* (209.732) I3 0.980* (120.393) P2 0.880* (26.942) C4 20.841* (218.510) Per2 0.951* (91.546) H1 0.972* (128.795) I4 0.970* (83.761) P7 0.744* (3.224) C3 20.772* (26.383) Per1 0.921* (68.431) Signicant indicator H6 20.378* (23.481) I6 0.913* (17.499) P9 0.743* (9.875) C6 0.390* (2.740) Per4 0.895* (36.040)

P1 0.569* (6.598)

P3 2 0.385* (2 3.187)

P5 0.263* (2.067)

Per3 0.887* (36.785)

Per5 0.736* (16.743)

Per6 0.686* (7.794)

Per9 0.644* (6.148)

Table III. Signicant indicators for indirect impact of human capital on performance

Notes: * Signicant at p-value , 0:01; Sample size is 131; t-value in parentheses; For notation of variables, H1 denotes number of employees, H2 number of advanced educational background, H6 average age, I3 current R&D expense, I4 last R&D expense, I6 number of R&D employees, P1 productivity, P2 value added per employee, P3 rm age, P5 current capital turnover, P7 administrative expense per employee, P9 plant assets turnover, C3 advertising expense, C4 marketing expense ratio, C6 acceptance rate, Per1 ROA, Per2 adjusted ROA, Per3 ROE, Per4 adjusted ROE, Per5 operating income ratio, Per6 stock price, and Per9 market-to-book

has a positive loading. Most IT rms in Taiwan are ODM or OEM manufacturers and their customers are not consumers. Marketing and advertisement may not promote their products. However, product acceptance rate is a positive indicator of customer capital and has positive contributions to performance. Interrelationship of intellectual capital elements and their impacts on performance As previously discussed, human capital has a direct impact on the other three elements and an indirect impact on performance. There may also exist an interrelationship between innovation capital, process capital, and customer capital. Therefore, we propose a model that presents the interrelationship between intellectual capital elements and their impacts on performance, as shown in Figure 7. The signicance of the coefcients in the gure supports H3a, H3b, H3c, H3e, and H3f, except H3d. It implies that human capital has a direct impact on innovation capital and process capital, and that innovation capital directly inuences process capital, which in turn affects customer capital, while nally the customer capital affects performance. Although innovation capital has a direct impact on process capital, it does not have an inuence on customer capital. Customer satisfaction comes from the perceived quality of products or services, which relies on process capital, but not innovation. Innovation has only an indirect effect on customer capital through process capital. Figure 7 shows human capital is the most important element of intellectual capital, for it has a direct inuence on process capital (direct coefcient at 0.538) and an indirect inuence on process capital through innovation capital (indirect coefcient at 0:738* 0:339 0:250). As such, the total coefcient of human capital to process capital is 0:788 0:538 0:250. In addition, process capital has the most direct inuence on performance in all of these models, as shown in Figures 4-6. If we want to improve process capital, we need to improve innovation capital and human capital. If we want to improve innovation capital, we need to improve human capital, too. Therefore, human capital is the most important element of intellectual capital for an enterprise. For each element of intellectual capital and performance for the model in Figure 7, Table IV summarizes the loadings of the indicators. One thing worth noting is that the signicant indicators in Table IV are very similar to those in Table III, although the models are different. This may show evidence that the variables adopted in the models are robust.

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Figure 7. Empirical results for the interrelationship between intellectual capital elements and their impacts on performance

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Construct Human capital Innovation capital H2 0.967* (39.232) I3 0.980* (98.723) P9 0.900* (19.456) C6 0.777* (6.420) Per2 0.973* (165.424) H1 0.966* (45.974) I4 0.969* (77.270) P1 0.794* (11.646) C2 0.643* (2.671) Per1 0.940* (79.281)

Signicant indicator H6 20.395* (23.668) I6 0.914* (15.932) P2 0.701* (7.704) C3 20.407* (21.815) Per4 0.936* (66.323) H8 0.248* (3.021)

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Process capital Customer capital Performance

P7 0.652* (4.261)

P5 0.548* (3.822)

Per3 0.926* (55.067)

Per5 0.795* (23.565)

Per9 0.527* (5.817)

Table IV. Signicant indicators for interrelationship between intellectual capital elements and their impacts on performance

Notes: * Signicant at p-value , 0:01; Sample size is 131; t-value in parentheses; For notation of variables, H1 denotes number of employees, H2 number of advanced educational background, H6 average age, H8 payroll expense ratio, I3 current R&D expense, I4 last R&D expense, I6 number of R&D employees, P1 productivity, P2 value added per employee, P5 current capital turnover, P7 administrative expense per employee, P9 plant assets turnover, C2 growth, C3 advertising expense, C6 acceptance rate, Per1 ROA, Per2 adjusted ROA, Per3 ROE, Per4 adjusted ROE, Per5 operating income ratio, and Per9 market-to-book

Conclusion With a sample of listed rms in the IT industry in Taiwan, this study investigates the cause-effect relationship between elements of intellectual capital and business performance. We try to nd out, step by step, the interrelationship among four elements of intellectual capital and how they inuence performance. The results show that, with the exception of human capital, innovation capital, process capital, and customer capital all have a direct effect on performance. Although human capital does not have a direct impact on performance, it has a direct impact on the other capital elements, which in turn affect performance. There also exists an interrelationship between intellectual capital elements. Human capital directly affects innovation capital and process capital. Innovation capital and process capital further inuence performance. Process capital has something to do with innovation capital in that innovation capital directly inuences process capital. In sum, human capital is the primary leading factor in which management should put the most effort. This study, showing how intellectual capital elements affect business performance in Taiwans IT industry, provides some implications for management in the IT industry.

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