How do investments in intellectual capital create profits?

Abstract

This paper aims to determine how investments in Intellectual Capital (IC) are transformed into profits. It is assumed that IC investments first increase the value of IC and the efficiency of using IC, which are then expected to lead to higher productivity and finally to profitability improvements. These relationships are studied by analysing correlations between the results of performance measures representing the above-mentioned factors. The data used comprises information from the financial statements of Finnish companies during the period 2001 and 2003. Overall 60,304 cases are included representing the 11 largest industries in Finland. The analysis is carried out on the level of the whole data set, in different industries and in both SMEs and large companies. The results provide empirical evidence to support some of the assumptions concerning the relationships between IC investments and profitability. However, contrary to expectations, the results showed no linear relationship between investments in IC and profitability.