Indian software and pharmaceutical sector IC and financial performance

Abstract

Purpose This paper seeks to estimate and analyze the relationship between intellectual capital and corporate conventional financial performance measures of Indian software and pharmaceutical companies for a period of five years from 2002 to 2006. Design/methodology/approach Annual reports, especially the profit and loss accounts and balance sheets of the selected companies for the relevant years have been used to obtain the data. International literatures on intellectual capital with specific reference to measurement tools and techniques have been reviewed. Value Added Intellectual Coefficient TM (VAIC) method is applied for measuring the value based performance of the companies. Corporate conventional performance financial measures used in this analysis are: profitability; productivity; and market valuation. It is an empirical study using multiple regression analysis for the data analysis. The intellectual capital (human capital and structural capital) and physical capital of the arbitrarily selected companies have been analyzed and their impact on corporate performance has been measured using multiple regression technique. Findings The analysis indicates that the relationships between the performance of a company's intellectual capital and conventional performance indicators, namely, profitability, productivity and market valuation, are varied. The findings suggest that the performance of a company's intellectual capital can explain profitability but not productivity and market valuation in India. Research limitations/implications The study has been conducted on a small sample of 80 companies belonging to the India software and pharmaceutical sectors. For a better understanding, a larger data set covering all prominent industry segments will be helpful. Practical implications Intellectual capital is an area of interest to numerous parties, e.g. shareholders, managers, policy makers, institutional investors. This paper throws some light on the new performance indicator, which Indian managers can use in order to evaluate the corporate performance and benchmark it with global standards. This is useful particularly in the context of the “knowledge economic” environment. Originality/value The paper represents a pioneering attempt to understand the implications of the business performance of the Indian software and pharmaceutical sectors from an intellectual resource perspective.