KNOWLEDGE CAPITAL AND INNOVATION ACROSS FIRMS IN ASIAN ECONOMIES: A BALANCED INVESTMENT APPROACH

Abstract

The difference between knowledge capital and innovation and their combined impact on firm market performance remains a puzzle. Firms can utilise their accumulated stock of knowledge to create value, and at the same time, allocate their resources each year to create innovation, hoping to sustain their performance and make a better future. Using time fixed effects panel regression with industry and country dummies, this study investigates how knowledge capital and innovation impact firm performance by analysing the sample of 2,958 listed companies of Asian countries during 2015–2019. We observe that different sectors exhibit strong variations in their levels of knowledge capital and innovation. This study finds that more knowledge capital negatively impacts firm performance, but up to a certain point. The U-shaped relationship found suggests that learning and accumulating capabilities to exploit knowledge capitals’ potential is essential to achieve higher firm value. We also find that firms’ more spending on innovation positively impacts firm performance, but only up to a certain level. An inverted U-shaped relationship found suggests a balanced investment in innovation activities to attain improved firm performance. Implications for management and potential for further research are provided.