Intellectual capital efficiency and competitive advantage of firms: an empirical analysis

Abstract

This paper empirically tests the strategic importance of intellectual capital for firms and assesses its impact on their market returns. The study builds on the premise that intellectual capital provides a firm competitive advantage over other firms, which then translates into superior market returns. The sampling frame for the study constitutes of Indian firms listed on the Bombay Stock Exchange’s index for medium-sized companies (BSE Midcap). Accordingly, seven-year data is drawn from authentic sources such as the Prowess-IQ database of the Centre for Monitoring Indian Economy (CMIE) and the company annual financial statements. For ascertaining the extent of the intellectual capital efficiency of firms, the Value-Added Intellectual Coefficient (VAIC) model, first proposed and conceptualized by Ante Pulic has been adopted in this study. The excess rate of return that a firm earns above the average rate of return prevalent in the market, alpha (α), is used as an indicator of the firm’s competitive advantage and a measure of superior performance in the market. Results of the analysis provide irrefutable evidence in support of the fundamental premises and affirm that intellectual capital is the root of competitive advantage, which bestows a firm with higher-than-normal returns on investments.