An Analysis of Intellectual Capital and Firms’ Profitability: with Reference to Indian IT Companies

The emergence of the quaternary sector has given rise to the knowledge based economy, which has led to a huge market for intangible assets or Intellectual Capital (IC). The purpose of the study is to explore the effect of Value Added Intellectual Coefficient (VAIC) on IT firms’ profitability for the time period of 2011 to 2018. The data used in the study is collected from Capital IQ database and annual reports of companies. Correlation and multiple regression are applied to investigate the relationship between IC and firms’ profitability. The results obtained show that Indian IT companies’ intellectual capital has a positive effect on firms’ profitability. Further, human capital and structural capital have a significant and positive relationship with firms’ financial performance whereas capital employed was found to be insignificant. Overall, structural capital has a vital effect on firms’ profitability and therefore, should be given more emphasis by companies. This study contributes to the existing literature by providing a more generalized result in this field.
Keywords: VAIC, Profitability, India, ROA

With the evolution of a knowledge-based economy, the foundation of organizations now includes not only tangible or financial assets, but also intangible assets or Intellectual Capital (IC). Both these kinds of assets
can be used for the purpose of assessing firms’ profitability. The fundamental assets of the organization incorporate not only tangible assets, but also intangible assets that are precious, uncommon, imperative and unending. The existing cut-throat competition has made companies increase their investment in IC, which is a blend of Employee Training
and Development, Networking and Information Systems, Research and Development, Intellectual Property, etc.

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