EFFECTS OF INTELLECTUAL CAPITAL ON PERFORMANCE: EXAMINING THE ROLE OF MEDIATORS

Abstract

In the last few decades, the business environment has evolved from “the Industrial Age” to “the Information Age” resulting into change of the resource structure of organizations from financial capital to intellectual capital. In this context, intellectual capital has been acknowledged as a vital driver of sustainable corporate performance and competitive advantage. Taking into consideration this worth of intellectual capital, it is necessary to enhance understanding on the specific mechanisms that facilitate leveraging intellectual capital for realization of superior firm performance. With regards to this, literature has shed light on the role of two key concepts namely knowledge management process and dynamic capabilities in capitalization of intellectual capital. However, it has been observed that there is a dearth of studies which takes into consideration knowledge management process and dynamic capability view of intellectual capital with firm performance. Specifically, no research has examined knowledge management process and dynamic capability as mediators between the intellectual capital and firm performance relationship in an integrated model and that too in an empirical manner. Consequently, the specific mechanisms through which the effects of intellectual capital on performance can be realized in a better way constitute an area worthy of investigation. In addition, few studies pay attention to interrelationships amongst intellectual capital, knowledge management, dynamic capabilities and firm performance, despite the fact that firm performance is not only the function of firms’ intellectual capital, but also the function of the processes through which firms manage knowledge, and the function of capabilities through which firms enhance their potential to react to environmental dynamism. In an endeavour to do away with this dearth of studies, the current research aims at investigating into the relationships amongst intellectual capital, knowledge management process and dynamic capabilities, and their effect on firm performance. Further, it intends to elucidate the role of knowledge management process and dynamic capabilities as mediators between the intellectual capital and firm performance relationship. The scope of intellectual capital in the present study constitutes human capital, organizational capital and social capital. To achieve the study objective, a theoretical framework encompassing these concepts is developed grounded on the insightful literature review. In due course, seven hypotheses are formulated. Data were collected using 397 structured questionnaires, which were administered via a field survey in banking firms operating in the northern region of India. Respondents were selected based on the convenience sampling technique. Data were analysed using the structural iv equation modeling technique. The mediating effect of knowledge management process and dynamic capability on the relationship between intellectual capital and firm performance was examined by using structural equation modeling and sobel test. Results of the structural model endorse the significant effects of intellectual capital on knowledge management process and dynamic capabilities; knowledge management process on dynamic capabilities; and further that of knowledge management process and dynamic capabilities on firm performance. Results from structural equation modeling and sobel test consistent with the hypotheses suggest that knowledge management process and dynamic capabilities mediate the effect of intellectual capital on performance. These results offer convincing support for the significance of knowledge management process and dynamic capabilities through accumulating intellectual capital over time, in so doing enhancing firm performance. Additionally, results also throw light on a few interesting findings. It was found that human capital plays a vital role in elevating knowledge management process and developing dynamic capabilities in comparison to organizational capital and social capital. This finding reveals the relative significance of investment in human capital, organizational capital and social capital corresponding to the enhancement of knowledge management process and building of dynamic capabilities. As compared to dynamic capabilities, knowledge management process turned up as the major contributory factor for transforming intellectual capital into enhanced firm performance. Overall, the study offers a comprehensive framework that validates worthy interrelationships among intellectual capital, knowledge management process and dynamic capabilities for enhancing firm performance in the context of Indian banking firms. The offered framework can guide these firms in revising their operating models to realization of outstanding performance in today’s competitive and dynamic environment. As a final point, the empirical findings, subsequent discussion and noteworthy implications emerging from this study will be of interest for managers and professionals.