LITERATURE REVIEW

Chapter Overview

This chapter provides a deep and rich review of relevant literature that assists the researcher to address the effect of the intellectual capital (IC) on business performance. At first it provides an insight about the origin and definition of IC. Then it explores the elements that compose intellectual capital, which are, respectively, Human Capital (HC), Structural Capital (SC), and Relational Capital (RC). The chapter then continues by discussing relevant literature about how IC impact business performance and introduces the measurement indicators of IC and business performance. Finally the chapter addresses the current situation of design industry in Taiwan.

Literature of Intellectual Capital and Business Performance

The concept of “intellectual capital” (IC) was first proposed by an economic scholar named John Kenneth Galbraith (Edvinsson & Sullivan, 1996, p. 358;

Edvinsson, 1998, p.279; Roos, Roos, Edvinsson, & Dragonetti, 1998, p. 4). He used it to explain the difference between a company’s market value and book value and further advocated IC an intellectual action, instead of mere knowledge and intelligence (Taiwan Intellectual Capital Research Center [TICRC], & Market Intelligence Center [MIC], 2006). With the approach of “innovation era,” many scholars begin to discuss the issue of IC. It is seen as the most valuable economic resource (Drucker, 1993; Stewart, 1997; Sveiby, 1997; Bontis, 1999) and is considered to be a potential source of sustainable competitive advantage (Nonaka &

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Takeuchi, 1995; Edvinsson & Malone, 1997; Bontis, 2002; Choo & Bontis, 2002).

Edvinsson and Sullivan (1996) define IC as the knowledge assets that can be converted into value. Whereas Stewart (1997) argues IC is the sum of all the knowledge and abilities of the members that forms the company’s competitive advantage, including intellectual material like knowledge, information, intellectual property and experience that makes profit. Still yet, Ulrich (1998) considers intellectual capital originates from employees’ competence and commitment. Among the many studies, the definition of IC remains inconsistent (Table 2.1 and Table 2.2).

However, we can still see the common features of IC: its intangibility, the fact that it creates value, and the growth effect of collective practice (Cabrita, & Bontis, 2008).

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Table 2.1 Definitions of Intellectual Capital

Author Year Definition

Edvinsson

& Sullivan

1996 IC is the knowledge asset that can be converted into value.

Stewart 1997 IC is the intellectual material, such as knowledge, information, intellectual property, and experience, which creates wealth

Masoulas 1998 IC can be defined as the combination of intangible assets that add value to the organizational effort in reaching its transcendental goal, understanding as intangible assets the employees skills, experience, attitudes and information that allow them do their job adding value for themselves and for the organization

Molyneux 1998 IC resides in human, structural and relational (or external) capital. It can be used to raise revenue and to provide better services for members.

Nahapiet &

Ghoshal

1998 IC is the knowledge and knowing capability of a social collectivity, such as an organization, intellectual community, or professional practice.

Ulrich 1998 IC = competence x commitment. This equation suggests that within a unit, employees’ overall competence should rise but that competence alone does not secure intellectual capital.

Johnson 1999 A system (of elements and processes) that utilizes human intellect and innovation to create wealth.

Bassi &

Van Buren

1999 The brains of its employees, their know-how, the processes and customer knowledge that they create, which has always been a source of competitive advantage.

Dzinkowski 2000 IC can be thought of as the total stock of capital or knowledge-based equity that the company possesses.

McElroy 2002 Besides human capital and structural capital, “social innovation capital (SIC)” should be included in IC and used to not only measure and value a firm’s capacity to innovate, but also enhance performance and output

Source: This study

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Table 2.2 Connotations of Intellectual Capital

Author Year Content

Bontis 1996 Human capital: the firm’s collective capability to extract the best solutions from the knowledge of its people.

Structural capital: the firm’s organizational capabilities to meet market requirements

Relational capital: the organization’s relationships or network of associates and their satisfaction with and loyalty to the company

Grantham , Nichols, &

Schonberner

1997 Human capital: a firm’s capability to apply its employees’

knowledge to business problems

Structural capital: a firm’s capacity to respond to environmental changes

Customer capital: loyalty of customers Brooking,

Board &

Jones

1998 Market assets: those which belong to the company and give it power in the marketplace.

Intellectual property assets: property of the mind which belongs to the company and is protectable in law.

Infrastructure assets: those assets which belong to the

company and provide the infrastructure without which it could not effectively function.

Human-centered assets: assets which belong to the employees and contractors to the company, but which are used by the company in return for salaries and fees

Molyneux 1998 Human capital: the members’ and the staffs’ collective knowledge, skills, expertise and networks – their competence.

Structural capital: the systems (IT and others), policies,

culture and distribution channels that the American Society for Prevention of Cruelty to Animals (ASCPA) has at its disposal.

Relational capital: the external business relationships with suppliers of goods and services and with those business that have common interests with the ASCPA

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Table 2.2 (continued)

Author Year Content

Johnson 1999 Human capital: the force behind the human intellect and innovation of the firm

Structural capital: the structural ability of the firm to utilize human intellect and innovation to create wealth

Relational capital: the ability of the firm to interact positively with business community members to stimulate the potential for wealth creation by enhancing Human and Structural Capital

Van Buren 1999 Human capital: the knowledge, skills, and competencies of people in an organization

Innovation capital: the capability of an organization to innovate and to create new products and services

Process capital: An organization’s processes, techniques, systems, and tools

Customer capital: the value of an organization’s relationship with its customers

Dzinkowski 2000 Human capital: know-how, capabilities, skills and expertise of the human members of the organization.

Organizational (Structural) capital: organizational capabilities developed to meet market requirements such as patents.

Customer (Relational) capital: connections outside the organization

Chen, Zhu, &

Xie

2004 Human capital: the individual tacit knowledge embedded in the mind of the employees

Structural capital: the system and structure of an enterprise Innovation capital: the introduction of a new combination of the essential factors of production into the production system.

Customer capital: the value embedded in the marketing channels and relationships that an enterprise develops by conducting business

Source: This study

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Intellectual capital components

The above summary shows that the definition and classification varies due to research directions and the background of the researchers. However, as Cabrita and Bontis (2008) have pointed out, a common taxonomy has emerged in which intellectual capital adopts a tripartite dimension which includes: human capital, structural capital and relational capital. This statement can be observed from Table 2.3 produced in this study.

Table 2.3 Intellectual Capital Components

Author Year HC SC RC INC PC Explanation infrastructure asset are put to SC

Note: HC represents human capital; SC represents structural capital; RC represents relational capital; INC represents innovation capital; PC represents process capital Source: This study

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As a result, this study adopts the classification of Cabrita and Bontis’ (2008) study and defines these three major components of IC:

i) human capital represents the individual knowledge stock of an organization as represented by its employees (Bontis et al., 2002);

ii) structural capital is a valuable strategic asset, which is comprised of non-human assets such as information systems, routines, procedures and databases;

iii) relational capital is the knowledge embedded in relationships with customers, suppliers, industry associations or any other stakeholder that influence the organization’s life.

Measurement indicators of intellectual capital and business performance

Indicators used to measure IC varies from scholar to scholar, but many of the indicators falls into the three major categories. Table 2.4 gives us a brief view of some IC indicators. However, Bontis has developed a comprehensive Intellectual Capital Questionnaire in 2007, which was administered in Canada (Bontis, 1998), Malaysia (Bontis et al., 2000), and Portugal (Cabrita and Bontis, 2008). Within the questionnaire, fifty-three measurement indicators are used to measure IC. In 2008, Cabrita and Bontis (2008) further extended customer capital to relational capital by adding eight items to relational capital, which comprise of sixty-one IC measurement indicators (twenty HC indicators, sixteen SC indicators, and twenty-five RC indicators). With respect to business performance, ten measurement indicators are used to assess business performance, including industry leadership, future outlook, profit, profit growth, sales growth, after-tax return on assets, after-tax return on sales, overall response to competition, success rate in new product launch, and overall business performance. For the original questionnaire, please refer to the Appendix A.

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Table 2.4 Measurement Indicators of Intellectual Capital Author Human Capital

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Review of intellectual capital studies

Previous studies (Bontis, 1998; Bontis et al., 2000; Cabrita and Bontis, 2008) identified the positive relationship between IC and business performance. These are three empirical studies conducted respectively in Canada, Malaysia, and Portugal. All of the research results indicated that human capital (HC) significantly influences structural capital (SC) and relational capital (RC), and also impact business performance indirectly through SC and RC. Also, SC and RC showed significant influence on business performance (except in the study of Malaysia). Interestingly, Chen (2001) conducted an IC empirical study in Taiwan investigating the effect on information technology investment and intellectual capital on business performance, and the results support the studies of these three aforementioned studies.

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Literature of Taiwanese Design Industry

According to the statement of “Challenge 2008 – National Development Plan”

proposed by the CEPD (2005), Executive Yuan, Taiwan is faced with the highly-industrialized economy which used to be manufacturing-oriented; it has lost its advantage under the challenge of China. As a matter of fact, the highest value-added industry is the one that is creativity or design-based, especially the design which originates from aesthetics. This kind of industry, named cultural and creative industry, features its variety, dispersion, small-scale staff but the number of employment and the industry value of it have kept on growing, which enriches the quality of life. It is also an industry that all developed countries, such as north European countries, the UK, and Japan, have been progressively promoting. However, this industry has relatively been ignored in Taiwan’s past economical policies.

Within the cultural and creative industry, the design industry shows great potential to contribute to the nation’s economy. According to the latest statistics (2003-2006 Taiwan Cultural and Creative Industry Relevant Statistics, n. d.), the sales growth of the design industry contributed 55.69 billion NTD to the economy in 2006, which accounted for 9.5% of the entire cultural and creative industry. It also ranked the second highest sales growth among all Taiwan’s cultural and creative industry.

This showed the great potential of the design industry with regard to its contribution to Taiwan’s economy. Potential to increase employment and, hopefully, Taiwan could be saved from the dilemma of micro-profit competition.

Realizing the importance and emergence to foster the development of design industry, the government founded Taiwan Design Center (TDC) to function as a foundation to construct an environment for developing domestic design and art (CEPD, 2005). Consequently, TDC become one of the most important organizations

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that integrate industry resources and enhance the high value-added from Taiwanese design industry.

Characteristics of design industry

According to Oakley (1990), design projects are usually more irrational, unpredictable, and changing. Also, it requires much creativity from individuals.

Design companies are usually more like organic organizations; this idea was proposed by Burns and Stalker (1961), which is suitable for companies situated in an unpredictable and changing environment. This kind of organizational structure provides the company with more flexibility and adaptability, and encourages creativity and innovation. On the other hand, it requires higher cost and more complicated administration to maintain the structure, which could be an obstacle to business performance.

Definition and scope of Taiwanese design industry

Based on Taiwan Ministry of Economic Affairs[MOEA] (2004) definition, the design industry refers to business that are involved in product design and planning, product exterior design, mechanism design, prototype and model production, fashion design, patent logo design, brand visual design, graphic design, packaging design, webpage/multimedia design, and design consultancy. Additionally, TDC represents the key organizations of Taiwanese design industry, however, this research decided to take the companies in the TDC sector catalog as research samples. In the classification of TDC, the design industry falls into the following four categories:

product design, service design, activity design, and space design. TDC included space design as its business scope, which is the slight difference from MOEA’s definition.

For the TDC classification of the deign industry, please see Table 2.5.

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Table 2.5 Taiwan Design Center Classification of the Design Industry Category Content

Major domain

Product design Industrial design, computer aided design (CAD), package design, fashion design, crafts design

Service design Corporate identification system (CIS) design, brand design, graphic design, ad design, web and multimedia design, product planning

Minor domain

Product design Mechanism design, mold design

Service design Game software design, animation design

Activity design Exhibition planning, public relations (PR) planning, trade show planning

Space design Landscape design, architectural design, interior design, show window design, lighting design, exhibition design, stage design

Source: Taiwan Design Center Web site (http://www.tdc.org.tw)

Summary

From the above review, it can be seen that the knowledge of design companies plays a vital role in enhancing business performance. Instead of the tangible assets, it is the intangible assets of the firm that make it high value-added. This indicates the importance of studying the effects of IC on Taiwanese design industry performance.

Through assessing the IC and investigating how it influences the performance in design companies, the managers can understand how to utilize or manage IC to create value, and the government can make more favorable policies that promote industry development. Hopefully, the entire economy can benefit from knowing more about making the most of this valuable resource.

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