Applying Value Added Intellectual

Coefficientness to Businesses
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For the purposes of this study, Intellectual Capital is defined as the sum of all
intellectual material, knowledge, information, intellectual property, and experience
that can be put in by a company to create wealth (Pulic). As such, this definition
attempts to encapsulate all aspects of the term 'intangible assets', a fact that would be
made further clear when the individual components of VAIC (Value Added
Intellectual Coefficient) are analysed.
Developed by Pulic in 1998, VAIC is a developing tool used as a performance
measure for comparison of companies and also as a predictor of company
performance. According to Pulic's method, VAIC is modelled as the sum of the
following three efficiency terms:
Human Capital Efficiency (HCE)
Structural Capital Efficiency (SCE)
Capital Employed Efficiency (CEE)
Each company's own knowledge, skills, values, and solutions can be tangibalized into
value in the market, which in turn affects the competitive advantage, and increases
the productivity and market value (Pulic, 2002)

These intangible assets together form the intellectual capital (Yalama and Coskun,
2007) Intellectual capital is an "intellectual material, knowledge, information,
intellectual property, and experience that can be put to create wealth"(Stewart,
1997).
Leadbeater (1999) mentioned that only about 7 percent of Microsoft's stock market
Value was accounted by tangible assets, whereas, the remaining 93% of the
company's value was created by intangible assets.

Kamath(2007) has analyzed the Intellectual and Physical capital value creating
ability of the Indian banking sector by using VAIC for the 5-year period, and has then
discussed the effect of intellectual and physical capital performance on value-based
performance Kamath(2008) has studied the relationship between intellectual capital
components and traditional performance measures, such as, protability,
productivity, and market valuation between 1996 and 2006, in the drug and
pharmaceutical industry in India.

Intellectual Capital Measurement Methods

Several methods have been developed to measure Intellectual capital, such as,
Market Capitalization Approach,
Direct Intellectual Capital Measurement Approach,
Scorecard Approach,
Economic Value Added Approach
VAIC Approach

Methodology
A 2 step process was followed in this project
Calculation of the intellectual capital performances of the IT companies using VAIC
Effects of VAIC and its components on the organizational performance were analyzed
using multiple regression analyses

The first step: Calculating 'Value Added - VA':

Prior to computing the three efficiencies, it is necessary to calculate the value
addition capability of a company ith a given amount of financial and intellectual
capital. Chang (2007) gives the formula for VA as follows:

VA = Gross Margin - Sales & Administrative

Expenses + Labour Expenses

As evident from the formula, employees are viewed not as expenses but as
investments that drive future growth. This philosophy is consistent with the modern
treatment of human capital.

Human Capital Efficiency:

This component of VAIC attempts to capture how much VA created by a unit of
money is spent on employees.

HCE = VA/HC
where HC = total salary and wage expenditure for the company

Capital Employed Efficiency:

This term captures the VA created by a unit of money spent on capital expenditures

CEE = VA/CE
Where CE = book value of net assets for the company

Structural Capital Efficiency:

Structural Capital is a construct designed to include proprietary software systems,
distribution networks, supply chains, brand, organization management process, and
customer loyalty. It is the difference between a company's total value added and its
human capital.

SC = VA - HC
and

SCE = SC/VA
After calculating the three efficiency terms, VAIC is calculated as

VAIC = HCE + CEE + SCE

Dependent Variables

The dependent variables in the regression analysis are the tradition measures of
company competence. A list of these measures and their associated definitions is
provided below:
Market valuation - Market Valuation is the ratio of market capitalization to book
value of common stocks"(Chan,2009)
Protability - Protability is the "ratio of operating income-to-book value of total
assets" (Chan, 2009)
Productivity - Productivity is "the ratio of total revenue to book value of total assets"
(Chan, 2009)
Return on equity - Return on equity is "the ratio of net income to total shareholders'
equity" (Chan, 2009)

Control variables:
Firm leverage and rm size were used as control variables in this project, to
remove the effects they might produce on the dependent variables in the regression
models
Firm Leverage - It is calculated as the ratio of total debt to book value of total assets
Firm Size - It is calculated as the natural logarithm of market capitalization, are
designated as control variables in order to remove their effects on the dependent
variables in the regression models.
A composite view of the model is presented in the diagram:
Data Collected (collated view presented in attached excel file)
The following companies were chosen from the IT sector. The financial data from
Capitaline database for the last 5 years for each of these companies was used to
construct a panel data-set:
Wipro
HCL
Mphasis

Tech Mahindra
Patni
Satyam
Infosys
Polaris
TCS
Oracle

Regression Results
The linear OLS multiple regression was conducted on the software "R". The
dependent variables were Profitability, Productivity, Market Value and Return on
Equity. The independent variables were VAIC, HCE, SCE, CEE with Firm Size and
Firm Leverage as Control Variables. Two models were evaluated for each dependent
variable, one in which the independent variables (apart from the control variables)
were HCE, SCE and CEE and another in which the independent variable was VAIC.
Below we present the results of the regression.

Regression of Productivity
CEE is the only significant parameter while HCE, SCE, size and leverage have p
values greater than 0.05 and hence insignificant. The coefficient of determination is
45% and CEE explains 34% of the variability in productivity. When we use VAIC as
the independent variable, the percentage explanation is just 23%.

Regression of Profitability
CEE, HCE and SCE are all significant in the regression of profitability. The model
explains 91.1% of the variability in profitability with CEE explaining 61.4% and SCE
explaining 14.2% of the variability. . When we use VAIC as the independent variable,
the percentage explanation is just 80%.

Regression of Market Value

Firm size is the only significant predictor of market value. The coefficient of
determination is 38.8% of which firm size determines 26% of the variability. When
using VAIC, the model has an explanation rate of 37.3%

Regression of Return on Equity

The coefficient of determination for the regression of Return on Equity is 91.4%.
CEE, HCE, SCE and firm leverage are all significant estimators. CEE explains 61.2%
of the variability while HCE explains 5.5% and SCE explains 15.6% of Return on
Equity. When using VAIC, the coefficient of determination is 75%.

Conclusion
Uses
Limitations