Page 1 of 7

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 03

March 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 314

Financial Performance of Indian

Software Industry: A Data Analysis

Akula Mallaiah

MBA

Abstract:

Intellectual Capital is an important for running a business successfully. Intellectual Capital is the key for

creating and sustaining competitive edge over other businesses. Today the companies need to invest in

Intellectual Capital to stand for the gain. Thus, this paper seeks to analyze the relationship between

intellectual capital and corporate financial performance of Indian software companies for a period of

eleven years from 2001 to 2011. 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. The sample of

51 software companies has been selected from Business Standard (BS) 1000 on the basis of net sales. The

Value Added Intellectual CoefficientTM (VAIC) method developed by Public, 1999 is applied for

measuring the value based performance of the companies. Data have been analyzed by using Panel

Regression. The intellectual capital (human capital and structural capital) and physical capital of the

selected companies have been analyzed and their impact on corporate performance has been measured.

Results indicate that profitability and intellectual capital are positively associated. However, Physical

capital has been found to be the most significant factor affecting the performance of the firms.

Keywords: Intellectual capital, Software industry, VAIC, Panel Regression, Profitability.

INTRODUCTION

The advent of science and technology has

transformed the traditional production system,

where the main emphasis was on the optimum

use of the physical assets. The traditional

accounting systems have failed to show a true

picture of the companies as they take only

tangible assets into consideration for measuring

their performance. Consequently, the gaps

between market value and book value of the

companies widened. This gap may be perhaps

due to the absence of intangible assets from our

accounting systems. Therefore, intangible assets

demand a legitimate justification for their

absence from the annual statements. Present era

is the era of Knowledge and information and

these are seen as the prime resources in today's

“knowledge-economy”. Drucker defines

knowledge as the only meaningful resource

today. Knowledge, information and experience

can be collectively termed as intellectual capital.

Intellectual Capital is an important for running a

business successfully. Intellectual Capital is the

key for creating and sustaining competitive edge

over other businesses. Wiig (1997) states that it

is due to knowledge and Intellectual Capital, that

the companies are creating a competitive edge

over others.

Intellectual Capital is an issue that has been

defined by various authors but no universal

definition has been found till date. Hudson

(1993) defines intellectual capital as a personal

asset of individuals and a combination of genetic

inheritance, education, experience, and attitude

about life and business. Brooking (1996) defines

intellectual capital as the term given to the

“combined intangible assets of market,

intellectual property, human-centered and

infrastructure – which enables the company to

function”. According to Roos and Roos (1997)

intellectual capital in the broadest sense is

human capital (knowledge capital, skill capital,

motivation capital, task capital), business

process capital (flow of information, flow of

Page 2 of 7

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 03

March 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 315

products and services, cash flow, co-operation

forms, strategic processes), business renewal

and development capital (specialization,

production processes, new concepts, sales and

marketing, new co-operation form), as well as

customer relationship capital (customer

relationship capital, supplier relationship capital,

network partner relationship capital, investor

relationship capital). Roos et al. (1997) defines

IC as “the sum of knowledge of company's

members and practical translation of this

knowledge like trademarks, patents and brands”.

Furthermore, Bontis (1998) argues that

“Intellectual capital is elusive, but once it is

discovered and exploited, it may provide an

organisation with a new resource-base from

which to compete and win”. Stewart (1999) says

Intellectual Capital is “knowledge, information,

intellectual property, experience – that can be

put to use to create wealth”. Similarly, Harrison

and Sullivan (2000) describe IC as “knowledge

that can be converted into profit”. Chartered

Institute of Management Accountants (CIMA),

2001 defines intellectual capital as: “possession

of knowledge and experience, professional

knowledge and skill, good relationship, and

technological capacities, which when applied

will give organisation competitive advantage”.

Bouteiller (2002) suggests the following

alternate definition: “Intellectual Capital – is a

developmental knowledge that is human,

structural, and customer-based, and needs to be

aligned with the corporate strategy and

formalized / packaged in some way.” Mouritsen

et al. (2004) explains Intellectual Capital as the

force that “mobilizes 'things' such as employees,

customers, IT, managerial work and

knowledge”. According to Roos et al. (2005)

“Intellectual Capital can be defined as all non- monetary and non-physical resources that are

fully or partly controlled by the organisation and

that contribute to the organization’s value

creation”. Salleh and Selamat (2007) describe IC

as the aggregation of human capital, structural

capital and customer capital”. To conclude

Intellectual Capital is a combination of all

intangible assets and resources of an

organisation, as well as its practices, patents, and

the implicit knowledge of its members and their

network of partners and contracts (Jacob Ben- Simchon, 2005).

The present study is a modest attempt to

examine the relationship between Intellectual

Capital and financial performance of Indian

software industry. More specifically, the present

analysis is based on a sample of 51 software

companies.

LITERATURE REVIEW

Intellectual capital is considered as a crucial

factor in today's era. Many authors have made

an attempt to study the relationship between

Intellectual Capital and performance of the

companies.

Measurement of Intellectual Capital

Measuring Intellectual Capital is essential and

very important in order to compare different

companies, to estimate their real value and even

to control their improvement year by year. Also

to improve the way in which companies manage

its intellectual resources that generate value and

give back some benefits in consequences

maximizing advantages for the company

(Jurczak, 2008). But to measure Intellectual

Capital is necessary to determine exactly what

the Measurement Methods are, which are the

best and which the company should choose to

evaluate its assets in proper way. Properly using

Intellectual Capital Measurement Methods can

cause the creation of competitive advantage and

in consequence create development of the whole

company at the present day.

The most popular and widely used non-financial

measurement methods are The Balanced

Scorecard, VAICTM, Skandia's IC Navigator,

Intellectual Capital Navigator IC-IndexTM, The

Technology Broker's IC Audit, Sveiby's The

Intangible Asset Monitor (IAM). The financial

methods use financial criteria to evaluate the

intangible assets and they give only a global

value. The most commons are: Economic Value

Added (EVATM), Market to Book ratio,

Calculated Intangible Value, Market Value

Page 3 of 7

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 03

March 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 316

Added (MVA), Tobin's Q Ratio. But VAICTM

developed by Public is different and more

detailed method. This method uses the links

between the activities of the company, the

resources used and the financial outcome.

Ante Pulic (1998, 2000) developed the “Value

Added Intellectual Coefficient” (VAICTM) to

measure the IC of companies. The VAICTM

method is designed to provide information about

the value creation efficiency of tangible and

intangible assets within a company. However,

Value Added Intellectual Coefficient

(VAICTM) may be a better indicator and

method of reflecting the market value of

business (Young et al. 2009). VAICTM is used

to measure the value creation efficiency of a

company using accounting-based figures.

VAICTM is considered as a “universal indicator

showing abilities of a company in value creation

and representing a measure for business

efficiency in a knowledge-based economy”

(Pulic, 1998). Kamath (2007) also confirmed

that VAICTMis a management and control tool

that is “designated to monitor and measure the

IC performance and potential of the firm”. This

measuring tool has been used in many studies

(Firer and Williams, 2003; Mavridis, 2004,

2005; Goh, 2005; Mohiuddin et al. 2006; Tan et

al. 2007; Yalama and Coskun, 2007; Kamath,

2008; Zeghal and Maaloul, 2010)

Firer and Williams (2003) identified several

advantages of using VAICTM. Firstly,

VAICTM provides a standardized and consistent

basis for measurement, thereby, enabling the

effective conduct of an international

comparative analysis using a large sample size

across various industrial sectors. Secondly, all

data used in the VAICTM calculation is based

on audited information and therefore,

calculations are objective and verifiable. Finally,

VAICTM is a straightforwardtechnique that

enhances cognitive understanding and enables

ease of calculation by various internal and

external stakeholders. Due to ease of calculation

feature VAICTM has enhanced the universal

acceptance of many traditional measures of

corporate performance such as return on assets

(ROA), market-to-book value (MB).

Additionally, issues have also been raised about

difficulties in verifying information used in

calculating the indicators of other IC measures.

Other IC measures like (Skandia Navigator,

Economic Value Added (EVATM), market

value added (MVATM)are limited as only

internal parties can calculate them or rely upon

sophisticated models, analysis and principals.

But, IC measures are limited in that they: (a)

utilize information associated with a select

group of firms (for example stock data) (b)

involve unique financial and non-financial

indicators that can be readily combined into a

single comprehensive measure; and/or (c) are

customized to fit the profile of individual firm

(Roos and Roos, 1997; Edvinsson, 1997;

Sullivan, 2000). Consequently, the ability to

apply alternative IC measures consistently

across a large and diversified sample for

comparative analysis is diminished.

RESEARCH METHODOLOGY

Research objectives

The main objective of this paper is to examine

the impact of Intellectual Capital (IC) on the

performance of Indian software Industry.

Sample and time period: The sample for the

above study is taken from Business Standard

(BS) 1000 on the basis of net sales. 51 software

companies have been selected for the above

study. The time period for the study is eleven

years i.e. 2001-2011. The span of more than a

decade would be helpful to establish the

consistency and predictability for research

conclusions.

Data Source

The data is collected through secondary sources.

The relevant data required for present research is

collected from Electronic database 'PROWESS'

of Centre for Monitor Indian Economy (CMIE).

This database was chosen because all the

information required for the above study was

readily available in this.