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Intellectual capital in the quoted Turkish ITC sector

lu Fethi Calisir, Cigdem Altin Gumussoy, A. Elvan Bayraktarog and Ece Deniz
Department of Industrial Engineering, Istanbul Technical University, Istanbul, Turkey
Abstract
Purpose The purpose of this paper is to apply Value Added Intellectual Coefcient (VAICe) of Pulic to compare quoted information technology and communication companies on the Istanbul Stock Exchange (ISE), in terms of intellectual capital efciency. This study also examines VAICe, and its components impact on company performance. Design/methodology/approach Multiple regression analysis was employed to identify the variables that signicantly contribute to the company performance. Data required to calculate VAICe and its components were obtained from the 2005-2007 annual reports and balance sheets of the companies. Findings As a whole, all the companies had a relatively higher human capital efciency than structural and capital efciencies. In 2007, Turkcell was the most efcient company based on VAICe assessment, while Link Bilgisayar and Plastikkart were the least efcient companies. Additionally, the results of the study revealed that factors such as human capital efciency, rm leverage, and rm size, predicted protability well. Among them, human capital efciency had the highest impact. In addition, capital employed efciency was found to be a signicant predictor of both productivity and return on equity, and the only determinant of market valuation was the rm size. Practical implications This study allowed ITC companies to benchmark themselves according to the intellectual capital efciencies and develop strategies to enhance their companys performance. Originality/value This study is the rst that measures intellectual capital performance and its impact on the company performance of the quoted information technology and communication companies on the ISE. Keywords Company performance, Intellectual capital, Turkey Paper type Research paper

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1. Introduction Traditional accounting systems do not fully reect the success of a company. Each companys unique knowledge, skills, values, and solutions can be transformed into value in the market, which may in turn affect the competitive advantage, and increase the productivity and market value (Pulic, 2002). These intangible assets dene 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). Several successful companies realize the importance of investing in intellectual capital for their business, to create high value products and services (Chang, 2007) from the companys physical assets (Wang, 2006). However, establishing an evaluation system, which also focuses on value creation and not only on cost, is a challenge for many companies (Pulic, 2000). Several methods have been developed to measure intellectual capital, such as, market capitalization approach, direct intellectual capital

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measurement approach, scorecard approach, economic-value added approach, and VAICe (Chan, 2009a). In this study, the authors have used VAICe, developed by Pulic in 1998, to calculate the intellectual capital performance of ITC companies. This method provides a standardized and consistent measure that can be used to compare companies (Shiu, 2006). The authors have selected the ITC industry, to compare them in terms of intellectual capital performance of companies, as the ITC industries are knowledge-intensive industries. Therefore, the gap between the companys tangible assets and its market value increases, especially for service and high-technology companies. For example, Leadbeater (1999) mentioned that only about 7 percent of Microsofts stock market value was accounted by tangible assets, whereas, the remaining portion (93 percent) of the companys value was due to intangible assets, such as, brands, research and development, and employees. According to Tekbulut (2008), the Turkish information technology sector grew more than 10 percent every year. In 2008, the information technology market had reached a 19.1 billion Euro mark, with an 11 percent growth rate. In addition, Turkey was ranked sixth in the European information technology market after Germany, United Kingdom, France, Italy, and Spain. Therefore, ITC companies comprise an important area of economic activity in Turkey as well as in Europe. This study has two main aims. The rst is to measure the intellectual capital performance of the quoted information technology and communication companies on the ISE during the period 2005 to 2007. The second is to investigate whether intellectual capital has an impact on the organizational performance of the companies. The next section consists of a literature review related to studies that used VAICe and its components as potential predictors of company performance. This is followed by the studys methodology and research method. Subsequently, the results of the study are discussed. The paper article concludes with a discussion of the ndings. 2. Literature review There is a growing body of research, which uses VAICe as a performance measure for the comparison of companies and as a predictor for company performance (Chan, 2009a; Chan, 2009b; Ghosh and Mondal, 2009; Kamath, 2008; Kamath, 2007; Appuhami, 2007; Tan et al., 2007; Ozturk and Demirgunes, 2007; Shiu, 2006; Yalama and Coskun, 2007; Goh, 2005; Chen et al., 2005; Mavridis, 2004; Firer and Williams, 2003). Chan (2009a) has explored the effects of VAICe, and its components on market valuation, protability, productivity, and return on equity, using data collected from all the constituent companies of the Hong Kong Stock Exchange during the period 2001 to 2005. Ghosh and Mondal (2009) have analyzed the relationship between intellectual capital and productivity, and protability and market valuation of Indian software and pharmaceutical companies, for a period of ve years, from 2002 to 2006. Tan et al. (2007) have investigated the association between the intellectual capital of rms and their nancial performance, such as, return on equity, earnings per share, and annual share returns, among 150 publicly listed companies on the Singapore Exchange between the years 2000 and 2002. Firer and Williams (2003) have analyzed the effects of VAICe and VAICes components on protability, productivity, and market valuation among 75 publicly traded rms from South Africa. Shiu (2006) has analyzed

the same model used in Firer and Williams (2003) study, but has constrained the data to 80 technological rms in Taiwan. Appuhami (2007) has investigated the impact of intellectual capital efciency on the investors capital gains, by collecting data from 33 banking, insurance, and nance companies in Thailand for the year 2005. Mavridis (2004) has analyzed the intellectual and physical capital of the Japanese banking sector for the nancial period 1 April 2000 to 31 March 2001, and has discussed their impact on the banks value-based performance. Chen et al. (2005) have investigated the relation between VAICe, its components, research and development expenditures, and advertising expenditures and market valuation and nancial measures, such as, return on equity, return on total assets, growth in revenues, and employee productivity, for all rms listed on the Taiwan Stock Exchange Market during 1992-2002. Goh (2005) has measured the intellectual capital performance of commercial banks in Malaysia, for the period 2001 to 2003, by using VAICe, and has compared domestic and foreign banks in terms of intellectual capital performances. Kamath (2007) has analyzed the intellectual and physical capital performance of the Indian banking sector by using VAICe for the ve-year period, and has then discussed the impact 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 for the years between 1996 and 2006, in the drug and pharmaceutical industry in India. As can be seen, only a small part of the studies have analyzed the intellectual capital performance of companies for a specic sector, such as, the banking sector (Kamath, 2007; Appuhami, 2007; Goh, 2005; Mavridis, 2004), technological rms (Shiu, 2006), drug and pharmaceutical industry (Kamath, 2008). In addition, only a small part of the studies have analyzed the intellectual performances of companies in Turkey (Yalama and Coskun, 2007; Ozturk and Demirgunes, 2007). Yalama and Coskun (2007) have analyzed the intellectual capital performance of the quoted banks on the Stock Exchange Market in Turkey for the period 1994 to 2004 using VAICe. They have also explored the effect of intellectual capital performance on protability. Ozturk and Demirgunes (2007) have analyzed the effect of intellectual capital on company performance measures (protability, productivity, market-to-book value) by collecting data from 30 manufacturing companies listed in the Istanbul Stock Exchange, during the period of 2000 to 2002. However, to our knowledge, there is no study that measures the effects of intellectual capital performances to explain protability, productivity, market valuation, and return on equity of the quoted information technology and communication companies on the Istanbul Stock Exchange Market, for the period 2005 to 2007. 3. Methodology In this study, a two-step approach was used to analyze the effects of the intellectual capital and its components on the organizational performance measures. First, the intellectual capital performances of the ITC companies were calculated using VAICe. Next the effects of VAICe and its components on the organizational performance were analyzed using multiple regression analyses. Annual reports, especially consolidated income statements and balance sheets of the companies for the relevant years, were used to obtain data.

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3.1 Measures of IC performance using VAICe VAICe measures the efciency of physical capital and intellectual potential (Pulic, 1998), and indicates corporate value creation efciency of tangible and intangible assets within a company during operations (Pulic, 2000; Tan et al., 2007). Ease of data acquisition and conducting data analysis on other data sources are some of the advantages of the Pulics method. Data needed to derive the components of VAICe are standard nancial numbers derived from audited nancial reports of companies (Tan et al., 2007). The Pulics method suggests that human capital efciency (HCE), structural capital efciency (SCE), and capital employed efciency (CEE) are the components of VAICe. Therefore, VAICe is calculated by the sum of these components and dened as: VAIC TM HCE i SCE i CEE i where, VAIC e the sum of value added for the company i, HCE i human capital efciency of the company i, SCE i structural capital efciency of the company i, CEE i capital employed efciency of the company i. To calculate these components, rst on has to nd out how competent a company is to create Value Added (VA). The aim is to create as much value added as possible with a given amount of nancial and intellectual capital (Pulic, 2000a). The calculation of VAi (the sum of value added for company i ) is dened as follows (Chang, 2007): VAi Gross Margin 2 Sales General Administrative Expenses Labor Expenses: In this formula, employees are not taken as costs, but taken as an investment for companies (Pulic, 2002). CEE is the ratio of total VA divided by the total amount of capital employed (CE). CEE is dened as: CEE i VAi = CE i where, CEE i capital employed efciency of the company i, VAi the sum of value added for the company i, CE i book value of net assets for the rm i. HCE is the ratio of total VA divided by the total salary and wages spent by the rm on its employees. HCE shows how much VA created by a unit of money is spent on employees (Tan et al., 2007). HCE is dened as: HCE i VAi = HC i where, HCE i human capital efciency of the company i, VAi the sum of value added for the company i, HC i total salary and wage expenditure of the company i. SCE is the ratio of structural capital (SC) divided by total VA. The structural capital includes proprietary software systems, distribution networks, supply chains, brand, organization management process, and customer loyalty (Tan et al., 2008; Goh, 2005). The structural capital is the difference between a companys total value added and its human capital. The calculation of SCi and SCEi can be dened as follows: SC i VAi 2 HC i SCE i SC i = VAi

where, SC i structural capital of the company i, HC i the total salary and wage expenditure of the company i, SCE i structural capital efciency of the company i, VAi the sum of value added for company i. The abbreviations for the formulas can be seen in Table I. 3.2 Research hypotheses To conduct the relevant analysis in the present study, four dependent variables market valuation, protability, productivity, and return on equity are designed, to be explained by the VAICe and its components. The research model is adapted from Chans (2009a) study. 3.2.1 Market valuation. Market valuation is the ratio of market capitalization to book value of common stocks (Chan, 2009a). Market capitalization is equal to price per share multiplied by the total number of outstanding shares. Several studies have conrmed the effects of VAICe, human capital, structural capital, and physical efciencies on market valuation (Firer and Williams, 2003; Chen et al., 2005; Ozturk and Demirgunes, 2007). Firer and Williams (2003), have found that capital employed efciency is signicantly and positively correlated with market valuation, Chen et al. (2005) have shown that market-to-book value ratios of equity are positively related to VAICe, human capital, capital employed, and structural capital efciencies, Ozturk and Demirgunes (2007) have found that human capital efciency is signicantly related only to the market-to-book value ratio. Therefore the authors hypothesize that: H1a. VAICe has a positive effect on market valuation. H2a. Human capital efciency has a positive effect on market valuation. H3a. Structural capital efciency has a positive effect on market valuation. H4a. Physical capital efciency has a positive effect on market valuation. 3.2.2 Protability. Protability is the ratio of operating income-to-book value of total assets (Chan, 2009a). The effects of VAICe, human capital, structural capital, and physical efciencies on protability were conrmed by several studies (Shiu, 2006; Ozturk and Demirgunes, 2007; Erickson and McCall, 2008; Kamath, 2008; Makki and Lodhi, 2008; Ghosh and Mondal, 2009). Shiu (2006) explored that capital employed efciency explained 79.46 percent of protability together with a return on equity and rm size; Ozturk and Demirgunes (2007) found that an increase in capital employed efciency, structural capital efciency or human capital efciency had positive effects on protability; Erickson and McCall (2008) concluded that rms with signicantly
Abbreviation HCEi SCEi CEEi VAi CEi HCi SCi Description Human capital efciency for company i Structural capital efciency for company i Capital employed efciency for company i The sum of value added for company i Book value of net assets for rm i Total salary and wage expenditure for company i Structural capital for company i

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Table I. Abbreviations and their description

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higher levels of intellectual capital also had signicantly higher performances in terms of return on assets, return on equity, and return on investment; Makki and Lodhi (2008) concluded that companies with greater intellectual capital efciency also achieved greater protability; Ghosh and Mondal (2009) found that VAICe had a signicant positive effect on protability for the years 2002 to 2006. Therefore the authors hypothesize that: H1b. VAICe has a positive effect on protability. H2b. Human capital efciency has a positive effect on protability. H3b. Structural capital efciency has a positive effect on protability. H4b. Physical capital efciency has a positive effect on protability. 3.2.3 Productivity. Productivity is the ratio of total revenue to book value of total assets (Chan, 2009a). Several studies found a signicant relationship between productivity and VAICe, human capital, structural capital, and physical efciencies (Ozturk and Demirgunes, 2007; Kamath, 2008). Ozturk and Demirgunes (2007) explored the signicant effect of capital employed efciency on productivity; Kamath (2008) found that human capital was the most signicant variable and had a positive correlation with both the productivity and protability of the pharmaceutical industry. Therefore the authors hypothesize that: H1c. VAICe has a positive effect on productivity. H2c. Human capital efciency has a positive effect on productivity. H3c. Structural capital efciency has a positive effect on productivity. H4c. Physical capital efciency has a positive effect on productivity. 3.2.4 Return on equity. Return on equity is the ratio of net income to total shareholders equity (Chan, 2009a). Several studies conrmed the signicant relationship between return on equity and VAICe and its components (Tan et al., 2007; Chen et al., 2005; Erickson and McCall, 2008). Tan et al. (2007) found that a companys intellectual capital performance was positively related to the performance measures, which were, return on equity, earnings per share, and annual share returns; Chen et al. (2005) explored the positive effects of VAICe, human capital efciency, and capital employed efciency on return on equity, by collecting data from rms listed on the Taiwan Stock Exchange during 1992-2002. Therefore the authors hypothesize that: H1d. VAICe has a positive effect on return on equity: H2d. Human capital efciency has a positive effect on return on equity. H3d. Structural capital efciency has a positive effect on return on equity. H4d. Physical capital efciency has a positive effect on return on equity. 3.2.5 Control variables. Firm leverage and rm size are used as control variables in this study, to remove their effects on the dependent variables in the regression models. Firm leverage is the ratio of total debt to book value of total assets, and rm size is calculated by the natural logarithm of market capitalization. The

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authors included rm size and rm leverage as control variables, as several studies explored the effects of rm size and rm leverage on performance measures (Chan, 2009b; Abidin et al., 2009; Shiu, 2006; Firer and Williams, 2003). Chan (2009b) explored the importance of rm leverage and rm size, to analyze the impact of intellectual capital and intellectual capital components on the companys performance, when designing regression models. In light of the hypotheses discussed earlier, this study aims to explore the effects of VAICe, rm size, and rm leverage on market valuation, protability, productivity, and return on equity, among all the information technology and communication companies on the Istanbul Stock Exchange Market in Turkey. Additionally, the effects of VAICe components, which are, human capital, structural capital, and physical capital, on these performance measures were also examined. The summary of all the variables can be seen in Table II. In addition, the research model tested in this study is shown in Figure 1. 4. Results 4.1 Descriptive statistics Table III shows the background information of 14 ITC companies in Turkey covered in this paper. As shown, Turkcell is the largest company in the quoted ITC sector in Turkey, in terms of total assets, net prot, shareholder equity, and number of employees. Turkcell has assets which are approximately seven times more than the assets of Aselsan, the second largest company in this sector. Turkcell also made almost all the prot gained in 2007. The smallest ITC company is Link Bilgisayar, which has an asset of 7,160 in thousands of Turkish Liras (TL) and has only 95 employees. In addition, Logo Yazilim, Link Bilgisayar and Plastikkart are the only companies that have shown a loss in 2007. Table IV presents the means, standard deviations, and the minimum and maximum values of dependent and independent variables in the research model. Among the dependent variables, market valuation has the highest mean with the highest standard deviation. The mean of VAICe is 2.817 with a range of 2 25.800 to 7.610, which suggests that the ITC rms have created 2.817 TL on an average, for every TL employed. In addition, comparison of HCE, CEE, and SCE suggests that during the period between 2005 and 2007, the information technology and communication companies were generally more effective in generating value from its human resource assets than from its structural and capital assets. This is the quality of the human

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Measurement/computation Dependent variables Market valuation Protability Productivity Return on equity Control variables Firm size Firm leverage The The The The ratio ratio ratio ratio of market capitalization to book value of common stocks of operating income to book value of total assets of total revenue to book value of total assets of net income to total shareholders equity

Natural log of market capitalization Ratio of total dept to book value of total assets

Table II. Dependent and control variables and their measurement

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Figure 1. Research model

Total assets (in thousands of TL) Turkcell Aselsan Indeks Bilgisayar Netas Telekom Arena Bilgisayar Alcatel Teletas Karel Elektronik Anel Telekom Datagate Bilgisayar Armada Bilgisayar Logo Yazilim Escort Bilgisayar Plastikkart Link Bilgisayar Total 9,770,052 1,382,344 348,910 249,602 186,062 159,817 98,108 95,741 80,635 61,831 43,155 32,267 27,209 7,160 12,782,481

Net prot (in thousands of TL) 1,758,625 100,187 12,649 8,857 10,723 1,444 8,084 5,311 1,855 3,027 2 5,766 237 2 285 2 1,717

Shareholders equity (in thousands of TL) 6,670,916 499,968 86,222 171,732 34,442 30,534 70,399 64,240 16,845 19,078 37,396 21,317 22,466 6,315 7,860,462

Number of employees 9,989 3,332 323 1,025 301 246 673 412 41 130 235 91 99 95 17,328

Table III. Information about ITC companies in Turkey, 2007

n Dependent variables Market valuation Protability Productivity Return on equity Independent variables VAICe HCE CEE SCE Firm leverage Firm size 38 41 41 41 39 39 42 39 41 38

Minimum 0.280 2 0.335 0.273 2 0.272 2 25.800 0.040 0.002 2 25.840 0.000 6.650

Maximum 43.256 0.245 4.435 0.558 7.610 6.230 1.340 0.840 0.343 10.450

Mean 7.482 0.041 1.596 0.124 2.817 2.736 0.403 2 0.338 0.069 7.908

SD 10.748 0.107 1.335 0.153 5.250 1.694 0.336 4.254 0.088 0.921

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Table IV. Descriptive statistics of dependent and independent variables

resource of the companies (Tan et al., 2007) and their efciency to generate value added for every TL spent on human capital. 4.2 Intellectual capital performance Table V shows the performances of companies in terms of VAICe and VA values. In terms of human capital performance, all companies have relatively higher HCE efciency than SCE and CEE efciencies. Among the companies, Turkcell tops the list with an HCE of 5.61, followed by Datagate Bilgisayar (HCE of 5.03). Turkcell is also the best performer for SCE. Alcatel Teletas is the only company that has a CEE value greater than 1. This shows that Alcatel Teletas has created more value than capital employed in 2007. With regard to the VAICe ranking, Turkcell has the highest efciency ranking with a VAICe of 6.81, followed by, Datagate Bilgisayar (VAICe of 6.46), Indeks Bilgisayar (VAICe of 6.24), and Logo Yazilim (VAICe of 5.81). This means that these four companies were the most efcient companies in the year 2007. In addition,
VA (in terms of TL) 2,568,780,560 10,678,452 67,445,454 16,291,153 10,102,851 193,502,050 13,599,084 31,199,096 41,007,105 4,521,798 9,143,784 5,469,207 625,418 488,139

VAICe ranking 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Turkcell Datagate Bilgisayar Indeks Bilgisayar Logo Yazlm Anel Telekom Aselsan Karel Elektronik Arena Bilgisayar Alcatel Teletas Escort Bilgisayar Armada Bilgisayar Netas Telekom Link Bilgisayar Plastikkart

VAICe 6.81 6.46 6.24 5.81 4.92 4.77 4.18 3.64 3.06 2.66 2.56 0.26 2 1.20 2 1.84

HCE 5.61 5.03 4.67 4.59 4.01 3.65 3.29 2.19 1.42 1.96 1.68 0.69 0.37 0.31

CEE 0.38 0.63 0.78 0.44 0.16 0.39 0.19 0.91 1.34 0.21 0.48 0.03 0.10 0.02

SCE 0.82 0.80 0.79 0.78 0.75 0.73 0.70 0.54 0.30 0.49 0.40 2 0.46 2 1.68 2 2.18

VA ranking 1 8 3 6 9 2 7 5 4 12 10 11 13 14

Table V. VAICe and value added ranking of companies for the year 2007

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Turkcell created the highest value added with the value of 2.5 billion TL. Although Aselsan ranked sixth in terms of VAICe, among the 14 companies, it created the second highest value of 193 million. In addition, Link Bilgisayar and Plastikkart were the least efcient companies and had the lowest value added values. These two companies were also the smallest companies in terms of total assets and had losses in 2007. Based on the three years annual reports, the authors also assessed the change in efciency level over time, as shown in Figure 2. Escort Bilgisayar is the only company that has shown an increasing trend of VAICe from the year 2005 to 2007, which indicates an improvement in the efciency level of this company. In contrast to Escort Bilgisayar, Netas Telekom, Armada Bilgisayar, and Arena Bilgisayar have shown a decreasing trend of VAICe. Karel Elektronik and Anel Telekom have shown an improvement in efciency from 2005 to 2006, but a decline in 2007. Similarly, Turkcell, Datagate Bilgisayar, and Indeks Bilgisayar have shown a decrease in efciency from 2005 to 2006, but an increase in 2007. Alcatel Teletas and Logo Yazilim have shown improvements in efciency from 2006 to 2007. Additionally, the low value of VAICe for Plastikkart in 2006 was caused by inefciency in structural capital, thereby showing that Plastikkart created a low value through the work of human capital.

4.3 Regression on organizational performance First, multicollinearity among the variables was checked with the Variance Ination Factor (VIF). Colinearity existed among variables if the VIF value was greater than 5 (Shiu, 2006). In our study, the VIF values ranged from 1 to 1.662, thus no multicollinearity was found among the variables. Subsequently, multiple regression analysis was employed to identify the variables that signicantly contributed to each of the organizational performance indicators. A total of 16 hypotheses were tested and the results of these tests are summarized in Tables VI and VII.

Figure 2. VAICe of information technology and communication companies from 2005 to 2007

Sum of squares df Mean square 0.221 0.212 0.433 2 0.548 0.005 0.068 0.670 26.667 35.190 61.858 0.911 11.008 0.272 0.501 0.773 2 0.543 1.085 0.075 807.851 2887.482 3695.393 1 34 35 807.851 84.926 9.512 0.004 2 33 35 0.136 0.015 8.954 0.001 0.212 2.169 0.414 1 34 35 26.667 1.035 25.765 0.000 0.137 0.003 0.017 0.194 0.185 0.103 0.176 0.185 0.288 0.464 8.944 5.904 11.870 0.005 0.021 0.002 3 32 35 0.074 0.007 11.108 0.000

Prob . F

Beta

Std error Partial R 2 Model R 2 F Prob. . F

Regression on protability Regression Residual Total Predictors Intercept VAICe Firm size Firm leverage

Regression on productivity Regression Residual Total Predictors Intercept Firm leverage

0.414

25.765

0.000

Regression on return on equity Regression Residual Total Predictors Intercept Firm leverage Firm size 0.198 0.283 0.024

0.139 0.173

0.139 0.312

6.671 9.559

0.014 0.004

Regression on market valuation Regression Residual Total Predictors Intercept Firm size

2 33.938 5.179

13.303 1.679

0.196

0.196

9.512

0.004

Notes: Dependent variables: Protability; Productivity; Return on equity; market valuation; Independent variables: VAICe, Firm size, Firm leverage

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Table VI. The effect of VAICe on protability, return on equity, productivity and market valuation

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Regression on protability Regression Residual Total Predictors Intercept HCE Firm leverage Firm size Regression on productivity Regression Residual Total Predictors Intercept Firm leverage CEE Regression on return on equity Regression Residual Total Predictors Intercept CEE HCE Regression on market valuation Regression Residual Total Predictors Intercept Firm size 0.275 0.159 0.433 2 0.417 0.033 0.613 0.042 38.017 23.841 61.858 0.356 8.010 1.882 0.406 0.367 0.773 2 33 35 0.203 0.011 18.237 0.000 0.226 1.964 0.475 2 33 35 19.008 0.722 26.311 0.000 0.124 0.008 0.167 0.017 0.451 0.083 0.066 0.451 0.534 0.600 3 32 35 0.092 0.005 18.467 0.000 0.414 0.177 0.414 0.591 2 0.067 0.262 0.028 807.851 2887.482 3695.333 1 34 35 807.851 84.926 9.512 0.004 0.036 0.056 0.011 0.409 0.087 0.409 0.496 2 33.938 5.179 13.303 1.673 0.196 0.196

Notes: Dependent variables: Protability; Productivity; Return on equity; market valuation; Independent variables: CCE, SCE, CCE, Firm size, Firm leverage

Table VII. The effects of HCE, SCE and CCE on protability, productivity, return on equity and market valuation Sum of squares df Mean square F Prob. . F Beta Std error Partial R 2 Model R 2 F Prob. . F 29.756 7.054 6.401 0.000 0.012 0.017 25.765 15.709 0.000 0.000 25.249 6.868 0.000 0.013 9.512 0.004

The effects of VAICe, rm leverage, and rm size on market valuation, protability, productivity, and return on equity are shown in Table VI. The rst analysis, which predicted the factors affecting protability of the companies, yielded a regression function with R 2 0:464, based on three signicant variables: VAICe, rm size, and rm leverage. It should be noted that VAICe was weighted most heavily in the regression model predicting protability. Second, 41.4 percent of the productivity was explained by only rm leverage. Third, 31.2 percent of return on equity was predicted by rm leverage and rm size. Finally, rm size was found to be only a predictor of market valuation. The effects of human capital efciency, structural capital efciency, physical capital efciency, rm size, and rm leverage on market valuation, protability, productivity, and return on equity are shown in Table VII. HCE is the strongest predictor of protability, which accounts for 45.1 percent of the variance in protability. In addition to the criteria of HCE, rm leverage and rm size are also found to be signicant predictors of protability and the explanation rate of protability is 60 percent. The relatively high R 2 value indicates that the criteria selected in this study can explain most of the total variance in protability. The explanation rate of productivity is 59.1 percent and is predicted by CEE and rm leverage. Return on equity is explained by CEE and HCE, with an explanation rate of 49.6 percent. Finally, rm size is the only predictor of market valuation. 5. Conclusion and discussion Companies look for methods to create as much value with the given intellectual and nancial capital (Pulic, 2000), to achieve competitiveness. The competitive success of companies is based less on physical and nancial resources, and more on management of intellectual capital (Tseng and Goo, 2005). However, traditional nancial systems do not fully reect whether a company is successful (Pulic, 2002). A method developed by Pulic, VAICe, was used in this study to calculate the company value creation efciency. This study has two main aims. First, the intellectual capital performances of the companies in the year 2007 and the change of VAICe during the years 2005 to 2007 were compared. This allowed companies to benchmark themselves with their competitors in the sector. Next, nancial statements were calculated for the period 2005 to 2007, to use as independent and dependent variables in the regression analyses. The nancial accounts of companies were obtained from the websites of the companies. The comparison of companies in terms of intellectual capital performances revealed that Turkcell had the highest efciency followed by Datagate Bilgisayar, Indeks Bilgisayar, and Logo Yazilim. Our results also showed that companies with higher intellectual capital might not create higher value added values. For example, although Datagate Bilgisayar ranked second in terms of VAICe, among 14 companies, it created the eighth highest value of ten million TL. In addition, Link Bilgisayar and Plastikkart were the least efcient companies and had the lowest value added values. Based on three years annual reports, the authors also assessed the change in efciency levels over time. Escort Bilgisayar was the only company that has shown an increasing trend of VAICe from the years 2005 to 2007. The regression analysis revealed that VAICe was the only signicant predictor of protability, while its effect was found to be insignicant on productivity, return on

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equity, and market valuation. VAICe together with rm leverage and rm size explained 46.4 percent of the protability. This might imply that ITC companies gave importance to the intellectual capital performance, with the assistance of borrowing to enhance the protability of the company. Similar to our ndings, Shiu (2006) demonstrated that increase in value creation efciency inuenced both protability and market valuation among 80 technological rms in Taiwan. This showed that technology-related rms gave importance to the overall efciency of the company, to enhance protability. Another result of our study showed that human capital efciency had a positive effect on both protability and return on equity. Firm leverage and rm size were also found to be signicant predictors of protability, together with human capital efciency, and the explanation rate of protability was 62.6. Among the variables, human capital efciency had the highest impact on protability. This showed that the information technology and communication companies, which had higher performances in terms of protability, also put emphasis on human capital efciency. In contrast to our nding, Chan (2009b) found that human capital efciency was an insignicant predictor of protability among the constituent companies of the Hang Seng Index of the Hong Kong Stock Exchange. The difference could be explained using the sample characteristics. Our sample only consisted of information on the technology and communication companies in Turkey, whereas, Chan, 2009bs sample included all the constituent companies, which were in the sector of commerce and industry, nance, properties, and utilities. As human capital in the ITC companies had to have expertise and differentiated skills, such as, innovativeness, creativity for strategic sustainability, and competitiveness in the sector, human capital efciency was found to be more important for the ITC companies when compared to the constituent companies. Another result of this study was that human capital and capital employed efciencies had positive effects on return on equity. Among them, the capital employed efciency had the highest impact. These ndings were similar to those of Chen et al. (2005). They concluded that of the three components of VAICe, capital employed efciency was the most signicant variable related to the rms nancial performance. They explained this result by the fact that most Taiwanese rms were manufacturers, thus the efciency of capital assets was important for nancial performance. In our study human capital efciency was found to be important in addition to the capital employed efciency. As our data included both service providers and companies that produced telecommunication equipments, both the human factor and capital assets were found to be signicant for return on equity. Another result of this study is that capital employed efciency and rm leverage are found to be the predictors of productivity. This contradicts the ndings of Shiu (2006). Shius (2006) study reveals that 40 percent of productivity is explained by human capital efciency, rm leverage, and return on equity, whereas, the effect of capital employed efciency on productivity is found to be insignicant for the 80 Taiwan-listed technological rms. This may be explained by the differences in the independent variables entered in the model. In our research model, return on equity is a dependent variable, whereas, in Shius (2006) study, return on equity predicts productivity. The structural capital efciency did not have any signicant effect on any of these performance measures. Similar to our ndings, Firer and Williams (2003) had found

that structural capital efciency was not signicantly correlated with any of the dependent performance measures (productivity, protability, market valuation). This suggested that the ITC companies quoted in ISE paid signicantly less attention to the structural capital efciency than human and capital efciencies, for their nancial performances. Another result reveals that market valuation is explained only by rm size. As the size of the rm increases, market valuation also increases or vice versa. On the other hand, the effects of intellectual capital and its components are found to be insignicant. In contrast to our ndings, Pulic (2000) has found a high correlation between market value and VAICe. Moreover, Firer and Williams (2003) have found that 43.5 percent of market valuation can be explained by capital and human capital efciencies in 75 publicly traded rms from South Africa. However, human capital efciency has a negative effect on market valuation. This can be explained by differences in the economic conditions in South Africa and Turkey. In Turkey, investors may not be aware of the importance of intellectual capital for companies, on the other hand investors in South Africa react negatively to the market value if the company enhances human resources, due to the bad economical conditions. 6. Managerial implications This study is important for managers who want to determine the possible required changes for the development of intellectual capital in their companies. Although the overall efciency of intellectual capital is found to be important to increase the protability, human capital efciency of the companies has been found to be more important to enhance the protability and return on equity of the company. Therefore managers can give decisions about more resource allocation for employee training and development and less for equipment or software systems.
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About the authors Fethi Calisir is a Professor of Industrial Engineering at Istanbul Technical University. He graduated with a BS from Istanbul Technical University in 1989, a MS from the University of Miami in 1993, and a PhD from Purdue University in Industrial Engineering in 1996. His current research interests include intellectual capital, IT project management, software usability, and human computer interaction. His research papers have appeared in Computers in Human Behavior, Computers & Industrial Engineering, Total Quality Management, Accident Analysis & Prevention, Technovation, Managing Service Quality, International Journal of Information Management, Management Research News, and Internet Research. Fethi Calisir is the corresponding author and can be contacted at: calisirfet@itu.edu.tr Cigdem Altin Gumussoy is a Research Assistant in the Department of Industrial Engineering at Istanbul Technical University (ITU). She graduated with a BS from Marmara University in 2001, a MS from ITU in 2003, and a PhD from ITU in 2009. Her current research interests are intellectual capital, IT project management, and technology acceptance. Her research papers have appeared in Technovation, International Journal of Information Management, Management Research News, and Computers in Human Behavior. lu is a PhD student and research assistant in the Department of A. Elvan Bayraktarog Industrial Engineering at Istanbul Technical University (ITU). She graduated with a BS in Electrical Engineering and has a MS degree in Industrial Engineering from ITU. Her interests are intellectual capital, human computer interaction, and usability. Ece Deniz graduated with a BS degree in Computer Engineering from Yildiz Technical University Technical University in 2004 and a MS degree in Engineering Management from ITU in 2007. Her current research interests include intellectual capital and engineering management.

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