Intellectual Capital Investments and Company's Profitability French Context
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Abstract
The purpose of this paper is to investigate the effects of R&D investments on the company profitability, with special focus on the French most innovative companies. The study is divided into three parts aiming to address the three key research questions raised in the study: the first research question examines the influence of R&D investments on company intangible assets; second research question calculates efficiency of capitalized or transformed intangible assets value coming from R&D investments, whereas the third research question examines generated returns on capitalized assets. The method used in this study is the Efficiency of Intellectual Capital (EIC) method developed by Krstić and Bonić (2016). This method investigates the process of Intellectual Capital (IC) value creation within French companies. The study proves that R&D investments influence positively the intangible assets value after a long-term period of investments. After the new intangible assets are created and developed, they positively influence their efficiency, whereas the impact on the company profitability is not determined in the same year. The main research limitations come from the fact that the observed sample of companies is small, and the access to the financial information related to the R&D expenses is limited to the official accounts of companies, whereas companies are not obliged to disclose this information by accounting rules. This study confirms that high-innovative French companies transform long-term R&D investments into concrete intangible assets values. On the practitioners’ side, the study represents a motive for managers to focus more on the investments in IC that will create a concrete value and generate further economic benefits from that value, rather than to concentrate only on short-term improvements of financial performance.
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References
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Chauvin, K.W. and Hirschey, M. (1993). “Advertising, R&D Expenditures and the Market Value of the Firm”, Financial Management, Vol. 22 No. 4, pp. 128-140.
Christensen, C.M. and van Bever, D.C.N. (2014). "The Capitalist's Dilemma", Harvard Business Review, Vol. 92 No. 6 (June 2014), pp. 60–68.
Chu, S. K. W., Chan, K. H., Yu, K. Y., Ng, H. T. and Wong, W. K. (2011). “An Empirical Study of the Impact of Intellectual Capital on Business Performance”, Journal of Information & Knowledge Management, Vol. 10 No. 1, pp. 11–21. https://doi.org/10.1142/S0219649211002791
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Dumay, J.C. (2012). “Grand Theories as Barriers to Using IC Concepts”, Journal of Intellectual Capital, Vol. 13 No. 1, pp. 4–15. https://doi.org/10.1108/14691931211196187
Francis, J. and Schipper, K. (1999). “Have Financial Statements Lost Their Relevance?”, Journal of Accounting Research Vol. 37 No. 2, pp. 319–52. https://doi.org/10.2307/2491412
Fuller, S. (2002). “Knowledge Management Foundations”, [Hartland Four Corners, Vt] : Boston: KMCI Press ; Butterworth-Heinemann.
García-Zambrano, L., Rodríguez-Castellanos, A. and García-Merino, J.D. (2018). “Impact of Investments in Training and Advertising on the Market Value Relevance of a Company’s Intangibles: The Effect of the Economic Crisis in Spain”, European Research on Management and Business Economics, Vol. 24 No. 1, pp. 27–32. https://doi.org/10.1016/j.iedeen.2017.06.001
Gigante, G. (2013). “Intellectual Capital and Bank Performance in Europe”, Accounting and Finance Research, Vol. 2 No. 4, pp. 120-129. https://doi.org/10/gf35xj
Gogan, M.L. (2014). “An Innovative Model for Measuring Intellectual Capital”, Procedia - Social and Behavioral Sciences, Vol. 124 No. March, pp. 194–99. https://doi.org/10.1016/j.sbspro.2014.02.477
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Joshi, M., Cahill, D., Sidhu, J. and Kansal, M. (2013). “Intellectual capital and financial performance: An evaluation of the Australian financial sector”, Journal of Intellectual Capital, Vol. 14 No, 2, pp. 264–285. https://doi.org/10.1108/14691931311323887
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Kontic, L. and Čabrilo, S. (2009). “A Strategic Model for Measuring Intellectual Capital in Serbian Industrial Enterprise”, Economic Annals LIV, Vol. 183, pp. 89–117.
Krstic, B. and Bonic, Lj. (2016). “EIC: A New Tool for Intellectual Capital Performance Measurement”, Prague Economic Papers, Vol. 25 No. 6, pp. 723-741. https://doi.org/10.18267/j.pep.586
Lentjushenkova, O. and Lapina, I. (2014). “The Classification of the Intellectual Capital Investments of an Enterprise”, Procedia - Social and Behavioral Sciences, Vol. 156 No. November, pp. 53–57. https://doi.org/10.1016/j.sbspro.2014.11.118
Lentjushenkova, O., Titko, J. and Lapina, I. (2016). “Intellectual capital investments: analysis of the predicted outcomes”. In Proceedings of the 21st international scientific conference "Economics and Management (ICEM-2016), May 19-20, 2016, Brno, Czech Republic.
Lev, B. (2001). “Intangibles: Management, Measurement, and Reporting”, Washington, D.C.: Brookings Institution Press, Retrieved December 21, 2020, from http://www.jstor.org/stable/10.7864/j.ctvcj2rf2
Lev, B. (2004). “Sharpening the Intangibles Edge”, Harvard Business Review, Vol. 82 No. 6, pp. 108–116.
Lev, B. and Schwartz, A. (1971). “On the use of the economic concept of human capital in financial statements”. The Accounting Review, Vol. 52, pp. 3–5.
Luthy, D. H. (1998). “Intellectual capital and its measurement” Available at https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.200.5655&rep=rep1&type=pdf. Access on 13.12.2020.
Maggina, A. (2011). “R & D in Greek Listed Companies: A Test of Prediction Models”, Research in Applied Economics, Vol. 3 No. 2, pp. 1-15. https://doi.org/10.5296/rae.v3i2.797
Marr, B., Gray, D. and Neely, A. (2003). “Why Do Firms Measure Their Intellectual Capital?”, Journal of Intellectual Capital, Vol. 4 No. 4, pp. 441–64. https://doi.org/10.1108/14691930310504509
Martín-de-Castro, G., Delgado-Verde, M., López-Sáez, P. and Navas-López, J.E. (2011). “Towards ‘An Intellectual Capital-Based View of the Firm’: Origins and Nature”, Journal of Business Ethics, Vol. 98 No. 4, pp. 649–62. https://doi.org/10.1007/s10551-010-0644-5
Megna, P. and Klock, M. (1993). “The Impact on Intangible Capital on Tobin's q in the Semiconductor Industry”, American Economic Review, Vol. 83 No. 2, pp. 265-269.
Milkovich, G.T., Gerhart, B. and Hannon, J. (1991). “The Effects of Research and Development Intensity on Managerial Compensation in Large Organizations”, The Journal of High Technology Management Research, Vol. 2 No. 1, pp. 133–150. https://doi.org/10/b245n9
Molodchik, M., Shakina, E. and Bykova, A. (2012). “Intellectual capital transformation evaluating model”, Journal of Intellectual Capital, Vol. 13 No. 4, pp. 444-461. https://doi.org/10.1108/14691931211276089
Pal, K. and Soriya, S. (2012). “IC performance of Indian pharmaceutical and textile industry”, Journal of Intellectual Capital, Vol. 13 Issue 1, pp. 120–137. https://doi.org/10.1108/14691931211196240
Petković, M., Krstić, B. and Rađenović, T. (2020). “Accounting-based Valuation Methods of Intangible Assets: Theoretical Overview”, Ekonomika, Vol. 66, No. 1, pp. 1-12. doi: 10.5937/ekonomika2001001P
Piekkola, H. (2011). “Intangible capital: The key to growth in Europe”, Intereconomics, Vol. 46 No. 4, pp. 222–228. https://doi.org/10.1007/s10272-011-0387-2
Pulic, A. (2000). “VAICTM an Accounting Tool for IC Management”, International Journal of Technology Management, Vol. 20 No. 5/6/7/8, pp. 702-714. https://doi.org/10.1504/IJTM.2000.002891
Rodriguez-Castellanos, A., Garcia-Merino, J.D. and Garcia-Zambrano, L. (2011). “Organisational Knowledge, Intangible Resources And Business Performance”, Journal of Knowledge Management Practice, Vol. 12 No. 2.
Sardo, F. and Serrasqueiro, Z. (2017). “Intellectual Capital and Firms’ Financial Performance: A European Empirical Study”, Business and Economic Research, Vol. 7 No. 2, pp. 1-18. https://doi.org/10/gf35xm
Seggie, S. H., Cavusgil, E., and Phelan, S. E. (2007). “Measurement of return on marketing investment: A conceptual framework and the future of marketing metrics”. Industrial Marketing Management, Vol. 36 No. 6, pp. 834–841. https://doi.org/10.1016/j.indmarman.2006.11.001
Seleim, A., Ashour, A., and Bontis, N. (2004). “Intellectual capital in Egyptian software firms”. The Learning Organization, Vol. 11 No. 4/5, pp. 332–346. https://doi.org/10.1108/09696470410538233
Serenko, A. and Bontis, N. (2004). “Meta-Review of Knowledge Management and Intellectual Capital Literature: Citation Impact and Research Productivity Rankings”, Knowledge and Process Management, Vol. 11 No. 3, pp. 185–98. https://doi.org/10.1002/kpm.203
Sharabati, A. A., Naji Jawad, S., and Bontis, N. (2010). “Intellectual capital and business performance in the pharmaceutical sector of Jordan”. Management Decision, Vol. 48 No. 1, pp. 105–131. https://doi.org/10.1108/00251741011014481
Śledzik, K. (2012). “The Intellectual Capital Performance of Polish Banks: An Application of VAICTM Model”, SSRN Electronic Journal, https://doi.org/10/gf35xh
Stewart, T.A. (1991). “Brainpower: intellectual capital is becoming corporate’America’s most valuable asset and can be its sharpest competitive weapon”, Fortune, Vol. 123 No. 11, pp. 44-60.
Triki D. S. and Halioui, K. (2013). “Accounting treatment of R&D expenditures and earnings management: an empirical study on French listed companies”, Global Business and Economics Research Journal, Vol. 2 No. 1, pp. 50-71.
Vaisanen, J., Kujansivu, P., and Lonnqvist, A. (2007). “Effects of intellectual capital investments on productivity and profitability”. International Journal of Learning and Intellectual Capital, Vol. 4 No. 4, pp. 377-391. https://doi.org/10/fw3c5f
Wang, W., and Chang, C. (2005). “Intellectual capital and performance in causal models: Evidence from the information technology industry in Taiwan”. Journal of Intellectual Capital, Vol. 6 No. 2, pp. 222–236. https://doi.org/10.1108/14691930510592816
Warfield, T. D., Weygandt, J.J. and Kieso, D.E. (2008). Intermediate Accounting: Principles and Analysis. 2nd ed. Hoboken, NJ: John Wiley & Sons.
Younes, B. R. G. (2015). “R&D Expenditures and Earnings targets: Evidence from France”. Journal of Economics, Finance and Accounting, Vol. 2 No. 2, pp. 164-180.
Bandeira, A.M. and Afonso, O. (2010). “Value of Intangibles Araising from R&D Activities”, The Open Business Journal, Vol. 3 No. 2010, pp. 30–43.
Barnes, P. and McClure, A. (2009). “Investments in Intangible Assets and Australia’s Productivity Growth”, Productivity Commission, No. 2009, Available at SSRN: https://ssrn.com/abstract=1616921
Belo, F., Linc, X. and Vitorino, M.A. (2014). “Brand capital and firm value”, Review of Economic Dynamics, Vol. 17 No. 1, pp. 150–169.
Bloom, N. and Van Reenen, J. (2010). “Why Do Management Practices Differ across Firms and Countries?”, Journal of Economic Perspectives, Vol. 24 No. 1, pp. 203–224. https://doi.org/10.1257/jep.24.1.203
Bontis, N. (1998). “Intellectual capital: An exploratory study that develops measures and models”. Management Design, Vol. 36 No. 2, pp. 63–76.
Chang, W. S. and Hsieh, J.H. (2011). “Intellectual Capital and Value Creation-Is Innovation Capital a Missing Link?”, International Journal of Business and Management, Vol. 6 No. 2, pp. 3-12. https://doi.org/10.5539/ijbm.v6n2p3
Chauvin, K.W. and Hirschey, M. (1993). “Advertising, R&D Expenditures and the Market Value of the Firm”, Financial Management, Vol. 22 No. 4, pp. 128-140.
Christensen, C.M. and van Bever, D.C.N. (2014). "The Capitalist's Dilemma", Harvard Business Review, Vol. 92 No. 6 (June 2014), pp. 60–68.
Chu, S. K. W., Chan, K. H., Yu, K. Y., Ng, H. T. and Wong, W. K. (2011). “An Empirical Study of the Impact of Intellectual Capital on Business Performance”, Journal of Information & Knowledge Management, Vol. 10 No. 1, pp. 11–21. https://doi.org/10.1142/S0219649211002791
Department for Business Innovation & Skills. (2012). “The Impact of Investment in Intangible Assets on Productivity Spillovers.” Final Report for the Department for Business, Innovation and Skills Prepared by London Economics, May, 173.
Dumay, J.C. (2012). “Grand Theories as Barriers to Using IC Concepts”, Journal of Intellectual Capital, Vol. 13 No. 1, pp. 4–15. https://doi.org/10.1108/14691931211196187
Francis, J. and Schipper, K. (1999). “Have Financial Statements Lost Their Relevance?”, Journal of Accounting Research Vol. 37 No. 2, pp. 319–52. https://doi.org/10.2307/2491412
Fuller, S. (2002). “Knowledge Management Foundations”, [Hartland Four Corners, Vt] : Boston: KMCI Press ; Butterworth-Heinemann.
García-Zambrano, L., Rodríguez-Castellanos, A. and García-Merino, J.D. (2018). “Impact of Investments in Training and Advertising on the Market Value Relevance of a Company’s Intangibles: The Effect of the Economic Crisis in Spain”, European Research on Management and Business Economics, Vol. 24 No. 1, pp. 27–32. https://doi.org/10.1016/j.iedeen.2017.06.001
Gigante, G. (2013). “Intellectual Capital and Bank Performance in Europe”, Accounting and Finance Research, Vol. 2 No. 4, pp. 120-129. https://doi.org/10/gf35xj
Gogan, M.L. (2014). “An Innovative Model for Measuring Intellectual Capital”, Procedia - Social and Behavioral Sciences, Vol. 124 No. March, pp. 194–99. https://doi.org/10.1016/j.sbspro.2014.02.477
Hollanders, H, Es-Sadki, N. and Kanerva. M.M. (2016). European Innovation Scoreboard 2016. European Commission.
Holmstrom, B. (1989). “Agency Costs and Innovation”, Journal of Economic Behavior & Organization, Vol. 12 No. 3, pp. 305–27. https://doi.org/10.1016/0167-2681(89)90025-5
Joshi, M., Cahill, D., Sidhu, J. and Kansal, M. (2013). “Intellectual capital and financial performance: An evaluation of the Australian financial sector”, Journal of Intellectual Capital, Vol. 14 No, 2, pp. 264–285. https://doi.org/10.1108/14691931311323887
Kaplan, R.S. and Norton, D.P. (2004). “The Strategy Map: Guide to Aligning Intangible Assets.” Strategy & Leadership, Vol. 32 No. 5, pp. 10–17. https://doi.org/10.1108/10878570410699825
Kontic, L. and Čabrilo, S. (2009). “A Strategic Model for Measuring Intellectual Capital in Serbian Industrial Enterprise”, Economic Annals LIV, Vol. 183, pp. 89–117.
Krstic, B. and Bonic, Lj. (2016). “EIC: A New Tool for Intellectual Capital Performance Measurement”, Prague Economic Papers, Vol. 25 No. 6, pp. 723-741. https://doi.org/10.18267/j.pep.586
Lentjushenkova, O. and Lapina, I. (2014). “The Classification of the Intellectual Capital Investments of an Enterprise”, Procedia - Social and Behavioral Sciences, Vol. 156 No. November, pp. 53–57. https://doi.org/10.1016/j.sbspro.2014.11.118
Lentjushenkova, O., Titko, J. and Lapina, I. (2016). “Intellectual capital investments: analysis of the predicted outcomes”. In Proceedings of the 21st international scientific conference "Economics and Management (ICEM-2016), May 19-20, 2016, Brno, Czech Republic.
Lev, B. (2001). “Intangibles: Management, Measurement, and Reporting”, Washington, D.C.: Brookings Institution Press, Retrieved December 21, 2020, from http://www.jstor.org/stable/10.7864/j.ctvcj2rf2
Lev, B. (2004). “Sharpening the Intangibles Edge”, Harvard Business Review, Vol. 82 No. 6, pp. 108–116.
Lev, B. and Schwartz, A. (1971). “On the use of the economic concept of human capital in financial statements”. The Accounting Review, Vol. 52, pp. 3–5.
Luthy, D. H. (1998). “Intellectual capital and its measurement” Available at https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.200.5655&rep=rep1&type=pdf. Access on 13.12.2020.
Maggina, A. (2011). “R & D in Greek Listed Companies: A Test of Prediction Models”, Research in Applied Economics, Vol. 3 No. 2, pp. 1-15. https://doi.org/10.5296/rae.v3i2.797
Marr, B., Gray, D. and Neely, A. (2003). “Why Do Firms Measure Their Intellectual Capital?”, Journal of Intellectual Capital, Vol. 4 No. 4, pp. 441–64. https://doi.org/10.1108/14691930310504509
Martín-de-Castro, G., Delgado-Verde, M., López-Sáez, P. and Navas-López, J.E. (2011). “Towards ‘An Intellectual Capital-Based View of the Firm’: Origins and Nature”, Journal of Business Ethics, Vol. 98 No. 4, pp. 649–62. https://doi.org/10.1007/s10551-010-0644-5
Megna, P. and Klock, M. (1993). “The Impact on Intangible Capital on Tobin's q in the Semiconductor Industry”, American Economic Review, Vol. 83 No. 2, pp. 265-269.
Milkovich, G.T., Gerhart, B. and Hannon, J. (1991). “The Effects of Research and Development Intensity on Managerial Compensation in Large Organizations”, The Journal of High Technology Management Research, Vol. 2 No. 1, pp. 133–150. https://doi.org/10/b245n9
Molodchik, M., Shakina, E. and Bykova, A. (2012). “Intellectual capital transformation evaluating model”, Journal of Intellectual Capital, Vol. 13 No. 4, pp. 444-461. https://doi.org/10.1108/14691931211276089
Pal, K. and Soriya, S. (2012). “IC performance of Indian pharmaceutical and textile industry”, Journal of Intellectual Capital, Vol. 13 Issue 1, pp. 120–137. https://doi.org/10.1108/14691931211196240
Petković, M., Krstić, B. and Rađenović, T. (2020). “Accounting-based Valuation Methods of Intangible Assets: Theoretical Overview”, Ekonomika, Vol. 66, No. 1, pp. 1-12. doi: 10.5937/ekonomika2001001P
Piekkola, H. (2011). “Intangible capital: The key to growth in Europe”, Intereconomics, Vol. 46 No. 4, pp. 222–228. https://doi.org/10.1007/s10272-011-0387-2
Pulic, A. (2000). “VAICTM an Accounting Tool for IC Management”, International Journal of Technology Management, Vol. 20 No. 5/6/7/8, pp. 702-714. https://doi.org/10.1504/IJTM.2000.002891
Rodriguez-Castellanos, A., Garcia-Merino, J.D. and Garcia-Zambrano, L. (2011). “Organisational Knowledge, Intangible Resources And Business Performance”, Journal of Knowledge Management Practice, Vol. 12 No. 2.
Sardo, F. and Serrasqueiro, Z. (2017). “Intellectual Capital and Firms’ Financial Performance: A European Empirical Study”, Business and Economic Research, Vol. 7 No. 2, pp. 1-18. https://doi.org/10/gf35xm
Seggie, S. H., Cavusgil, E., and Phelan, S. E. (2007). “Measurement of return on marketing investment: A conceptual framework and the future of marketing metrics”. Industrial Marketing Management, Vol. 36 No. 6, pp. 834–841. https://doi.org/10.1016/j.indmarman.2006.11.001
Seleim, A., Ashour, A., and Bontis, N. (2004). “Intellectual capital in Egyptian software firms”. The Learning Organization, Vol. 11 No. 4/5, pp. 332–346. https://doi.org/10.1108/09696470410538233
Serenko, A. and Bontis, N. (2004). “Meta-Review of Knowledge Management and Intellectual Capital Literature: Citation Impact and Research Productivity Rankings”, Knowledge and Process Management, Vol. 11 No. 3, pp. 185–98. https://doi.org/10.1002/kpm.203
Sharabati, A. A., Naji Jawad, S., and Bontis, N. (2010). “Intellectual capital and business performance in the pharmaceutical sector of Jordan”. Management Decision, Vol. 48 No. 1, pp. 105–131. https://doi.org/10.1108/00251741011014481
Śledzik, K. (2012). “The Intellectual Capital Performance of Polish Banks: An Application of VAICTM Model”, SSRN Electronic Journal, https://doi.org/10/gf35xh
Stewart, T.A. (1991). “Brainpower: intellectual capital is becoming corporate’America’s most valuable asset and can be its sharpest competitive weapon”, Fortune, Vol. 123 No. 11, pp. 44-60.
Triki D. S. and Halioui, K. (2013). “Accounting treatment of R&D expenditures and earnings management: an empirical study on French listed companies”, Global Business and Economics Research Journal, Vol. 2 No. 1, pp. 50-71.
Vaisanen, J., Kujansivu, P., and Lonnqvist, A. (2007). “Effects of intellectual capital investments on productivity and profitability”. International Journal of Learning and Intellectual Capital, Vol. 4 No. 4, pp. 377-391. https://doi.org/10/fw3c5f
Wang, W., and Chang, C. (2005). “Intellectual capital and performance in causal models: Evidence from the information technology industry in Taiwan”. Journal of Intellectual Capital, Vol. 6 No. 2, pp. 222–236. https://doi.org/10.1108/14691930510592816
Warfield, T. D., Weygandt, J.J. and Kieso, D.E. (2008). Intermediate Accounting: Principles and Analysis. 2nd ed. Hoboken, NJ: John Wiley & Sons.
Younes, B. R. G. (2015). “R&D Expenditures and Earnings targets: Evidence from France”. Journal of Economics, Finance and Accounting, Vol. 2 No. 2, pp. 164-180.