Clarifying The Effect of Intellectual Capital On Performance

British Journal of Management, Vol. *, ** (2010) DOI: 10.1111/j.1467-8551.2010.00718.
Clarifying the Eect of Intellectual Capital on Performance: The Mediating Role of Dynamic Capability
Li-Chang Hsu and Chao-Hung Wang1
Department of Finance and 1Department of Marketing and Logistics Management, Ling Tung University, 1 Ling Tung Road, Nantun, Taichung, Taiwan 40852, Republic of China Corresponding author email: chw@mail.ltu.edu.tw
Recent studies suggest a potential relationship between intellectual capital and dynamic capability in achieving performance. This is unsettling for managers because these studies contain little eort to develop a framework for understanding the relationship. To examine this unnerving potential, we develop and test a theoretical model that explains how dynamic capability mediates the impact of intellectual capital on performance. In this study, the scope of intellectual capital includes human capital, relational capital and structural capital. This study examines the pooled data of 242 high-technology rms from 2001 to 2008. Results from Bayesian regression analysis suggest that the eect of structural capital on performance is completely mediated by dynamic capability. Furthermore, the ndings show that dynamic capability does not completely mediate the respective eects of human capital and relational capital on performance, but does so only partially. These results provide convincing support for the importance of dynamic capability through accumulating R&D and marketing capability over time, thereby enhancing rm performance. The empirical ndings and the ensuing discussion will be of interest to managers and practitioners.
Introduction
The business environment has already progressed from the Industrial Age to the Information Age. Traditional economic theory frequently describes the basic resources necessary for a rm in terms of the classic assets of land, labour and other economic assets (Sullivan, 2000). However, according to the resource-based view (RBV), a rms resources, particularly intangible ones, are more likely to contribute to the rms attaining
The authors would like to thank Veronique Ambrosine, associate editor of the British Journal of Management, and two anonymous reviewers for their helpful suggestions. We also wish to acknowledge the National Science Council of the Republic of China, Taiwan, for nancially supporting this research under Contract NSC 98-2410-H-275-001, and the substantive contributions made by Dr Shyh-Rong Fang.
and sustaining superior performance (Eisenhardt and Schoonhoven, 1996). During the past two decades, intellectual capital (IC) has been embraced by most organizations worldwide. IC plays a fundamental role within modern organizations and is part of the foundation of business in the 21st century. Studies have begun to examine the IC process by which those eects are ultimately realized (Martinez-Torres, 2006; Rudez and Mihalic, 2007). IC has thus been identied as one of the key drivers of rm-level performance (Teece, 1998; Youndt, Subramaniam and Snell, 2004). Although the importance of IC in pursuing performance is known, the specic means through which IC inuences organizational performance are still underresearched. Moreover, the interaction of the external environment with organizational strategy is expected
r 2010 The Author(s) British Journal of Management r 2010 British Academy of Management. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
2 to be related to performance. To maximize performance, managers need to pursue competitive strategies that best match the conditions of the external environment. In other words, managers perceptions of the external environment are expected to aect a rms strategy. Therefore, a rms strategy must be to deploy its resources to seize opportunities in the market. Dynamic capability (DC) oers a bridge that debates in the strategy eld proposing either an RBV of the rm or the emerging discourse surrounding the external dynamic business environment. While there is a wealth of literature on IC (Batjargal, 2007; Bontis, 1999; Bozbura, 2004; Bukh, Larsen and Mouritsen, 2001; Das, Sen and Sengupta, 2003; Edvinsson, 1997; Fincham and Roslender, 2003; Guthrie, 2001; Mayo, 2000; Nahapiet and Ghoshal, 1998; Nielsen, 2006), research incorporating DC into IC is scant. Existing IC studies mainly focus on ascertaining their impact and consequently their business value (Moon and Kym, 2006), but few studies utilize a theoretical focused approach to understand how DC mediates the impact of IC on rm-level performance. Drawing on previous studies related to dynamic theories (Teece, Pisano and Schuen, 1997; Winter, 2003), we posit an alternative mechanism for the ICperformance relationship whereby DC mediates the eect of IC on performance. Organization learning theory provides a conceptual framework for hypothesizing the mediating role of DC in the relationships between IC and performance (Brown and Duguid, 1991; Fiol and Lyles, 1985; Hong, Easterby-Smith and Snell, 2006). Cyert and March (1963) were the rst to propose that an organization might be able to learn in ways that are distinct from the accumulated learning of individuals. They built their views on a model of decision-making within rms which emphasizes the role of rules and procedures in response to external shocks. This suggests that learning plays a signicant role in the creation and development of DC. Eisenhardt and Martin (2000) and Zollo and Winter (2002) also argued that learning is at the base of DC, and guides its evolution. DCs are organizational routines that can accumulate knowledge via learning processes (Nelson and Winter, 1982). Previous studies have posited that DCs exist in special operating routines and arise from learning (Argyis and
L.-C. Hsu and C.-H. Wang Schon, 1978; Huber, 1991). Argote (1999) identied the path of DCs as being more accurately described as a learning mechanism that guides knowledge creation. Using the perspective of organizational learning, we posit that organizational learning mechanisms are important in understanding the capability rms have and will have in meeting and addressing the challenges and changes in their environment. More specically, DC contributes to rms IC to handle changing situations. From a dynamic perspective, successful performance depends on consistent and competitive behaviour that relies on a rms ability to learn and adapt by building and exploiting IC by DC. Over time, this can move the rm in the required direction, toward an ecient response to dynamic market conditions. This paper develops a model to explain how a rms performance is inuenced by IC through DC, which serves as a rms managerial interface to the external environment. This framework is a major contribution to the literature on strategic management because it provides a theoretical basis for cumulative additions to our understanding of the concepts of IC and DC. The paper is organized as follows. First, we review the literature relating to the constructs of the theoretical model. We aim to contribute to the eld of strategic decision-making by providing a directed application of resource and capability dimensions and by examining the mediating role of DC in rm-level performance. Second, we develop a series of hypotheses which constitute an integrated theoretical framework that oers a richer and more formalized account of the relationships than have been provided in the literature to date. We next take the high-tech industry as an empirical example by using pooled data. Finally, we conclude with a discussion on some implications, limitations and directions for future research derived from the ndings of this paper. Figure 1 presents the theoretical model proposed to explain the underlying processes through which investments in IC lead to DC accumulation and thus to improved performance.
Explaining intellectual capital eects

Intellectual capital Edvinsson and Malone (1997) divide IC into human capital and structural capital. The former
r 2010 The Author(s) British Journal of Management r 2010 British Academy of Management.
Clarifying the Eect of Intellectual Capital on Performance

Intellectual capital Human capital H2a, b, c Structural capital Dynamic capabilities H3 Performance H1a, b, c
Relational capital
Control variables Firm size Leverage Firm age Export intensity

Figure 1. Theoretical model
is grounded on the knowledge created by and stored by an organizations employees, while the latter is based on the embodiment, empowerment and supportive infrastructure of human capital. Structural capital is further divided into organizational capital (knowledge created by and stored in an organizations information technology systems and processes that speeds the ow of knowledge through the organization) and customer capital (the relationships that an organization has with its customers). In recent years, although IC has captured the interest of many researchers and practitioners, it is still dened in various ways. Many denitions of IC were proposed as IC matured and are still being used and discussed in current studies (Carson et al., 2004; Reed, Lubatkin and Srinivasun, 2006). Klein, Crawford and Alchian (1998) argue that IC is knowledge, expertise and associated soft assets, rather than their hard physical capital. Sullivan (2000) posits that IC basically constitutes knowledge, lore and innovations. A list of denitions of IC proposed by researchers is shown in Table 1. Following relevant research, we dene IC as the stored knowledge possessed by an organization, which is tacit knowledge, personal knowledge possessed by employees and available to network relationships through interaction (Mouritsen, Larsden and Bukh, 2001). Although IC and its dening components have been made explicit, which helps understand the notion of IC, there are a growing number of models for institutionalizing IC at the rm level (Roos and Roos, 1997). Recent research conducted by Reed, Lubatkin and Srinivasun (2006) concludes that IC can be divided into human,
organizational and social capital. Zerenler, Hasiloglu and Sezgin (2008) create a similar distinction, in which IC has three components: employee capital, customer capital and structural capital. Although earlier researchers may not agree on the precise categorization and shape of IC, there is broad consensus that it contains human capital (HC), relational capital (RC) and structural capital (SC) (Edvinsson and Sullivan, 1996). Following this consensus we integrate previously used elements of IC and assess IC in terms of HC, RC and SC. There are some signicant dierences between these categories. HC can leave the rm whenever it desires since the rm does not own it. SC, on the other hand, is knowledge that has been converted into something owned by the rm (e.g. a patent). The implementation of SC relies on HC and the quality of HC determines the quality of SC. From the organizations point of view, RC is dierent from HC since the organization is concerned with network relationships (i.e. those relationships that are established and maintained by related partners). As external RC is formed through organizational internal HC, the RC may be the important relationship-specic assets of an organization. Organizational HC can inuence the formation and maintenance of RC. Human capital HC is at the heart of IC and it is dened as the combined knowledge, skill, innovation and ability of employees (Bontis, Keow and Richardson, 2000). Similarly, Wright, McMahan and McWilliams (1994), working from an RBV, argue that in certain circumstances sustained competitive
4
Table 1. Denitions of intellectual capital Authors Bassi (1997) Bontis (1999) Booth (1998) Bradley (1997) Brennan and Connell (2000) Brooking (1997) Choong (2008) Denition
L.-C. Hsu and C.-H. Wang
Edvinsson and Malone (1997)
Edvinsson and Sullivan (1996) Harrison and Sullivan (2000) Heisig, Vorbeck and Niebuhr (2001) Kim and Kumar (2009) Mouritsen, Larsden and Bukh (2005)
Pablos (2003)
Petty and Guthrie (2000) Rastogi (2003) Roos and Roos (1997)
Stewart (1997) Subramaniam and Youndt (2005) Sveiby (1998) Zerenler, Hasiloglu and Sezgin (2008)
All types of organizationally relevant knowledge and its basic components are HC, SC and customer capital Encompassing HC, SC and RC The ability to translate new ideas into products or services The ability to convert invisible assets such as knowledge into resources that create wealth, not only within corporations but within a nation Can be thought of as the knowledge-based equity of a company The dierence between the book value of the company and the amount of money someone is prepared to pay for it IC has been dened to include expenditures on advertising (marketing), training, startup, R&D activities, human resource expenditures, organizational structure, and values that come from brand names, copyrights, covenants not to compete, franchises, future interests, licences, operating rights, patents, record masters, secret processes, trademarks and trade names The procession of knowledge, applied experience, organizational technology. Customer relationships and professional skills that provide Skandia with a competitive edge in the market Knowledge that can be converted into value Knowledge that can be converted into prot IC is valuable, yet invisible IC as the mixture of human, structural and relational resources of an organization IC mobilizes things such as employees, customers, information technology, managerial work and knowledge. IC cannot stand by itself as it merely provides a mechanism that allows the various assets to be bonded together in the productive process of the rm The dierence between the companys market value and its book value. Knowledgebased resources that contribute to the sustained competitive advantage of the rm from IC Indicative of the economic value of two categories (organization and HC) of the intellectual asset of a company The holistic or meta-level capability of an enterprise to coordinate, orchestrate and deploy its knowledge resources towards creating value in pursuit of its future vision The sum of the hidden assets of the company not fully captured on the balance sheet, and thus includes both what is in the heads of organizational members and what is left in the company when they leave Intellectual material knowledge, information, intellectual property, experience that can be put to use to create wealth IC is the sum of all knowledge stacks rms utilize for competitive advantage Composed of individual competence, internal structure and external structure Total stocks of all kinds of intangible assets, knowledge, capabilities and relationships etc. at employee level and organization level within a company, and can most commonly be split into three types: HC, SC and RC
advantage can accrue from a pool of HC. The RBV theory holds that organizations evaluate the strengths and weaknesses of their resources and then select a strategy that is achievable. HC, one of the underlying strategic resources, is both supportive and necessary for success since employees knowledge and skill are essential in todays fast-paced, changing competitive climate (Subramaniam and Youndt, 2005). The knowledge and skill of individuals is an area addressed by HC theory. HC theory maintains that knowledge provides individuals with increased cogni-
tive abilities, leading to more productive and ecient activity (Davidsson and Honig, 2003). It follows that capability addresses whether or not individuals have the necessary levels and combinations of knowledge and skill to complete the tasks that they are responsible for (Hitt et al., 2001). Organizations specializing in advanced technologies need individuals who are knowledgeable, with excellent problem-solving skill and the ability to make eective decisions. Furthermore, HC theory addresses the worth of an organizations human resources based in
Clarifying the Eect of Intellectual Capital on Performance the context of performance (Brown, Adams and Amjad, 2007). HC focuses on the value that is added to an organizations business, ultimately in terms of protability, solely by its stock of human resources (Dakhli and de Clercq, 2004). Following Colombo and Grilli (2005), companies with greater HC (i.e. higher education or skill) are likely to have better entrepreneurial judgement. As long as HC continues to be developed, sta can improve their job performance and ultimately improve the rms performance (Hsu, 2007). Dulewicz and Herbert (1999) conrm that successful strategy must be strongly focused on the competences of human resources, which are related to the qualities that individuals possess. We can expect that the higher a rms stock of HC the more successful the rm will be and the greater its competitive advantage will be. HC increases as sta accumulate specialized information, skill and know-how. This allows them to communicate eciently and eectively, which reduces decision-making errors, thereby enhancing quality and improving performance (Luthans and Youssef, 2004). Thus, for an organization, HC will be positively related to its performance. Relational capital Conceptualized for over a decade (Bontis, 2002; Canibano, Garcia-Ayuso and Sanchez, 2000; Pablos, 2003; Reed, Lubatkin and Srinivasun, 2006; Sanchez, Chaminade and Olea, 2000), RC has evolved to be described as the basis for collective action in communities (Burt, 1992; Granovetter, 1973). At its core, RC is concerned with the mobilization of resources through a social structure. RC is dened as the organizations implicit set of available resources and ongoing relationships implemented through interactions among individuals or organizations (Kostova and Roth, 2003; Shipilov and Danis, 2006). Signicantly, this denition means that the characteristics of RC will vary both with the relationships under review and the resources that can be employed through these relationships. An organizations RC draws on the tangible links between organizational sta and members external to the organization (Burt, 1997). An organizations RC enhances the quality of its members and the richness of information exchanged among exchange partners. RC is epito-
mized in how it facilitates interactions and the exchange of information. An organization can gain important information or support from its suppliers, clients or other external partners. The extant RC literature has argued that, as the level of interaction between partners increases, organizational routines are established (Nelson and Winter, 1982), and thus the investment in relation-idiosyncratic assets and the level of bilateral dependence also increase (Teece, 1986). Social exchange theory (Macneil, 1980) supports the rationale of this argument. It views inter-organizational relationships in the context of a social structure whereby rms are interdependent and rely on reciprocation. Thus, relationships are embedded in a social structure (Granovetter, 1985). Social exchange concentrates on the relationship rather than the transaction so that over time a complex personal and organizational structure evolves between organizations. The key process of the relationship in social exchange is trust (Morgan and Hunt, 1994). This process moderates the impact of power and determines the perception of fairness in an exchange relationship. A prior history of cooperation between organizations has been found to reduce the exchange hazards (Deeds and Hill, 1998). RC established through prior exchanges can substitute for explicit contracts (Dyer and Singh, 1998). Through repeated interactions the parties appear to develop trust in one another such that they may no longer need to rely on formal contracts to ensure performance (Zaheer and Venkatrman, 1995). Experience with a trustworthy partner is said to raise collaborative expectations and stimulate learning as the relationship evolves (Doz, 1990). In other words, a positive eect due to relationship exchange occurs. Organizations choosing a relationship perspective as their strategic approach almost inevitably have to focus on the relationship with their customers and other stakeholders. Customer relationships are considered by many as the most important component of RC (Duy, 2000). As the relational literature suggests, involving customers who have had close and embedded relationships with a rm showed improved rms performance (Bonner and Walker, 2004). Many manufacturing rms are becoming involved in closer relationships with their suppliers in order
6 to utilize their skills, capabilities and information to develop new products faster and at less cost so that close relationships with suppliers have a positive inuence upon rms performance (Walter, 2003). Reuer, Zollo and Singh (2002) argued that repeated partner-specic relationships have a stronger eect on accumulated knowledge than repeated general experience relationships. Thereby, we postulate that RC has a positive eect upon performance. Structural capital SC is conventionally used to refer to the processes and procedures that are created by, and stored in, a rms technology system that speeds the ow of knowledge through the organization (Carson et al., 2004; Youndt, Subramaniam and Snell, 2004). The above denition is dierent from the approaches previously taken in the strategic management literature (e.g. Gibson and Birkinshaw, 2004; Kang and Snell, 2009). Gibson and Birkinshaw (2004) placed organizational capital in contextual ambidexterity by building a set of systems and processes that collectively dene a context that allows the meta-capabilities of alignment and adaptability to sustain rm-level performance. Kang and Snell (2009) classied organizational capital into two alternatives forms: mechanistic versus organic. These alternative forms of organization capital have dierent eects on acquisition and integration of knowledge within a rm. We conceptualize SC in terms of organizational processes and information systems. Organizational process refers to the manner in which people actually use the information or knowledge resources available to them in the workplace (Hobley and Kerrin, 2004). Once an organization obtains a unique routine or process for performing tasks and activities, it becomes a potential source of rm-level performance. Information systems, the second component of SC, refer to the information technology used in managing knowledge. Information exchanges made as part of these established structures and processes thus tend to follow well-established and codied guidelines. Consequently, knowledge intrinsic to SC tends to accumulate and be utilized in an established way (Brown and Duguid, 1991). It is also reected in an organizations customary structure and processes. Thus, SC provides an
L.-C. Hsu and C.-H. Wang environment that enables organizations to create and leverage knowledge. If an organization has poor procedures and systems by which to track its actions, the organizations performance will not achieve its potential (Widener, 2006). Conversely, an organization with strong SC will have a supportive culture that encourages employees to try and learn new knowledge (Florin, Lubatkin and Schulze, 2002). Recent research suggests that organizations operation processes and the organizational commitment of sucient resources have an important impact on performance (De Brentani and Kleinschmidt, 2004). Moreover, SC, such as operations, procedures and the processes of knowledge management, propels organizations value creation activities which have a positive eect on their performance. Since organizations are increasingly employing advanced technologies to compete in todays economy, they should take great care to properly manage SC so that performance is achieved. We posit that investments in SC can be expected to improve performance. Hence, we hypothesize: H1a: HC is positively related to performance. H1b: RC is positively related to performance. H1c: SC is positively related to performance.
Intellectual capital and dynamic capability

That IC improves performance is not a novel proposition, and the contribution of the present study lies not in testing the hypotheses noted above but rather in exploring whether DC provides a mechanism for explaining these eects. We are not aware of any research linking the three IC components to DC, but there are conceptual reasons to expect a relationship. This linkage is frequently seen as a response to the question of how and why some rms appear to create and sustain competitive advantage. Dynamic capability The study of DC, also known as core capability (Collis and Montgomery, 1998), organizational routine (Cohen and Levinthal, 1989), core

Table 2. Denitions of dynamic capability Authors Ambrosini, Bowman and Collier (2009, p. 10) Denition
Collis (1994) Eisenhardt and Martin (2000, p. 1107) Grith and Harvey (2001, p. 597)
Helfat (1997) Helfat et al. (2007, p. 1) Lee, Lee and Rho (2002, p. 734) Macpherson, Jones and Zhang (2004, p. 162) Nielsen (2006, p. 61) Stahle (2008, p. 165) Teece (2007) Teece, Pisano and Schuen (1997, p. 516) Wang and Ahmed (2007, p. 35)
Zahra, Sapienza and Davidsson (2006) Zollo and Winter (2002, p. 340)
There are three levels of dynamic capabilities related to a managers perceptions of environmental dynamism. At the rst level we nd incremental dynamic capabilities . . . , at the second level are renewing dynamic capabilities . . . , at the third level are regenerative dynamic capabilities The capability to develop the capability that innovates faster (or better), and so on The organizational and strategic routines by which rms achieve new resource congurations as markets emerge, collide, split, evolve and die The creation of a dicult-to-imitate combination of resources, including eective coordination of inter-organizational relationships, on a global basis that provides a rm with a competitive advantage The subset of competences/capabilities which allow the rm to create new products and processes and respond to changing market circumstances The capacity of an organization to purposefully create, extend or modify its resource base A source of sustainable advantage in Schumpeterian regimes of rapid change The ability of managers to create innovative responses to a changing business environment An extension of the RBV where the rm is conceived as a collection of resources, e.g. technologies, skills and knowledge-based resources A learned pattern of collective activity through which the organization systematically generates and modies its operational routines in pursuit of improved eectiveness Dicult-to-replicate enterprise capabilities required to adopt to changing customer and technological opportunities The rms ability to integrate, build and recongure internal and external competences to address a rapidly changing environment A rms behavioural orientation constantly to integrate, recongure, renew and recreate its resources and capabilities, and upgrade and reconstruct its core capabilities in response The processes to recongure a rms resources and operational routines in the manner envisioned and deemed appropriate by its principal decision-makers A learned and stable pattern of collective activity through which the organization systematically generates and modies its operating routines in pursuit of improved eectiveness
competence (Collis, 1994; Hamel and Prahalad, 1989), architectural competence (Crowston, 1997) and absorptive capability (Cyert and March, 1963), has been ongoing since the early 1990s. Table 2 lists the denitions of DC provided by various researchers. The wide array of studies across disciplines has created a broad range of denitions and emphases, as well as a wide of range of propensities that can be considered to be DC. These studies make distinct contributions; but there is a good deal of overlap in ideas. DC emerged as a complement to the RBV in an attempt to explain competitive advantage in rapidly changing environments. There is a great deal of concern with dynamism, which seeks to address how competences are renewed over time so as to provide innovative responses to market changes. Some authors have termed DC to be as
vague and tautological as absorptive capability (e.g. Dutta, Narasimhan and Rajiv, 2005). However, DC diers from the more familiar term of absorptive capability (Cohen and Levinthal, 1990). Zahra and George (2002) dened absorptive capability as a set of organizational routines and processes by which rms acquire, assimilate, transform and exploit knowledge to produce a dynamic organizational capability. Absorptive capability is an organizations ability to understand new external knowledge, assimilate it, and apply it to commercial ends (Lane, Salk and Lyles, 2001). The term DC points to the concept of the capacity to renew competences so as to achieve congruence with the changing business environment (Teece, 1998). We here distinguish DC from absorptive capability since DC is considered to be the systematic change of eorts and the cumulative eort of capabilities over
8 time. In contrast, absorptive capability can be regarded as a static theory because it addresses the fundamental issues of rms capability to acquire new and external knowledge and to assimilate such knowledge with existing and internal knowledge rather than accumulating it. Eisenhardt and Martin (2000) argue that, while much of the strategy literature is vague on the nature of DC, there are a number of specic examples from other research areas. These include product development routines, strategic decision-making routines and resource-allocation routines. Routines refer to stable patterns of behaviour that characterize organizational reactions to variegated internal or external stimuli. Routines seek to bring about desirable changes in the existing set of operations. For instance, a decision is made to upgrade the R&D process; many predictable and interrelated actions are initiated which will eventually conclude with the launch of the new R&D system. In this case, R&D routines are regarded as constitutive of DC and enhance future performance. The primary role of an organization, Grant (1996) argues, is to devise and establish routines that achieve knowledge integration. The concept of DC was rst introduced by Teece and Pisano (1994) and Teece, Pisano and Schuen (1997) who asserted that in a dynamic environment a rms competitive advantage will rest on the rms internal routines that enable the rm to renew its stock of organizational capabilities. DC can therefore be perceived as the routines in an organization that guide and facilitate the development of the organization capabilities (Eisenhardt and Martin, 2000). Following this thinking, in this paper we adopt the denition of DC by Teece, Pisano and Schuen (1997) as the processes for reconguring an organizations resources and operational routines in response to the changing environment. Examples of DC are R&D and marketing capabilities. Firms with interrupted past investments in R&D processes may have weaker knowledge endowment and consequently a more limited assimilative capability over time. In contrast, rms with a consistent increased eect in developing technological know-how over time may gain a strategic competitive advantage over their competitors who show weak commitment to R&D capability. An overall marketing capability can satisfy the current and future needs of
L.-C. Hsu and C.-H. Wang customers who typically require persistent and timely investments in marketing. A rms history of past investments in marketing can have continued economic value for the rm over time because these investments help the rm accumulate new knowledge more eciently. Therefore, R&D activity and marketing activity are related directly to DC creation processes. This technique is also applied in the managerial literature (e.g. Kor and Mahoney, 2005; Thornhill, 2006).
Mediating role of DC It is important to realize that intangible resources alone are not enough to create a rm-level performance; they need to be leveraged through capabilities (Szulanski, 1996). Indeed, capabilities are the transformational process by which resources are utilized and converted into an organizations output (Dutta, Narasimhan and Rajiv, 2005). We contend that resources are the source of an organizations capabilities, and furthermore, that capabilities are the main source of its performance (Grant, 1991). Thus, it has been recognized that the utilization and deployment of resources working in combination with capabilities can improve a rms performance.
HC and DC We argue that DC mediates the eect of HC on performance. The RBV focuses on organizational decision and suggests that such decisions are taken within organizational boundaries. Since these decisions are taken by organizational managers, the decisions referred to are the ones which help organizations to deal with their environment better. An organizations diculty in sustaining itself presents numerous choices, and the organization must then determine which of the choices will suit it best (OShannassy, 2008). This choice is contingent upon the environmental dynamics. In this situation, DC is a framework which suggests how an organization, especially a high-tech rm in a turbulent environment, can achieve sustained competitive advantage, and even enhance performance. The focus of DC is the development of management capability and the combination of linked HC and performance in such a way that they can function in a rapidly changing environment. This attempt
Clarifying the Eect of Intellectual Capital on Performance to address such a development is to address the mediating role of DC. The extant literature, however, is not clear about how DC mediates the impact of HC on performance. HC theory posits that people are a valuable organizational resource, and organizations should have strategies to recognize that these people possess valuable skills which contribute to the long-term deployment of competitive capability (Collis and Montgomery, 1998; OReilly and Pfeer, 2000). Employees knowhow, as an essential part of HC, is perceived as one of the most valuable resources associated with rms competitiveness. Substantial work by many researchers (Lepak and Snell, 1999; Mueller, 1996) has discriminated between valuable and unique HC on the one hand and organizational eectiveness on the other. In other words, based on the DC view, an organization needs to ensure HC that leads to competitive advantage is constantly updated and altered in a way that other competitors are unable to imitate it; such HC is hence dynamic in nature (Skaggs and Youndt, 2004). HC is not independent of environmental context and needs to be seen in light of the organizations continuous attempt to adapt itself to the ever-changing environment (Chadwick and Dabu, 2009). More specically, capability may fail to be accumulated and recreated by poorly performing companies because of their lack of endowment in HC. Hence, we propose that DC mediates the eect of HC on performance. RC and DC To our knowledge, RC is a jointly generated asset in an exchange relationship that cannot be generated by either rm in isolation and can only be created through joint relation-specic assets (Rocks, Gilmore and Carson, 2005). Otherwise, it would be easy for rms to switch partners with little penalty when other partners oer virtually identical products (Ulaga, 2003). Asanuma (1989) was among the rst to point out how the relationspecic skills developed between suppliers and automakers generate competitive capabilities. Similarly, Dyer (1996) pointed to a positive relationship between relation-specic investment and innovating performance in automakers and their suppliers. Additionally, Saxenian (1994) found that Hewlett Packard and other Silicon
Valley rms eectively redeploy and recongure their resources by developing long-term partnerships with suppliers. These studies indicate that DC generated through RC investments is realized by greater relation-specic assets. However, RC also has a number of costs and risks, Establishing RC requires investments of time and other resources, and without maintenance relationships may decay over time (Burt, 2002). While strong relationships provide solidarity benets that facilitate the pursuit of common goals, they may also result in groupthink (Janis, 1982). These negative eects of longterm RC are called their dark side. Previous studies have identied the role of the dark side in long-term relationships (Grayson and Ambler, 1999). This dark side consists of a loss of objectivity and opportunism. A loss of objectivity occurs when the partners perception of an organization becomes stale or they are too similar in their thinking (Moorman, Zaltman and Deshpande, 1992). This similarity in thinking can result in overly similar behaviour within an organization and thus a lower innovativeness that further decreases performance. Opportunism is generally dened as taking advantage of opportunities with little regard for principles. Opportunism appears to have a negative impact on performance, as shown by Rindeisch and Heides literature review (1997). With knowledge of the dark side of RC, DC can facilitate the unpacking of those problems with existing organizational resources. We believe that the potential to create organizational competitive advantage is dependent not only on its relationship with other external partners but also on its development of DC (Dyer and Singh, 1998). This is especially true in a dynamic environment where an organization must do something unique to deal with the dark side of RC. By developing long-term capability deployments in the value chain, organizations are more willing to face the problem of the dark side of RC in a ercely dynamic environment (Westerlund and Svahn, 2008). In line with this reasoning, the key features establishing RC are the necessity of organization resources and operational routines reconguring, in return for the benets of improved performance and joint value creation (Zajac and Olsen, 1993). Thus, DC tends to be the relationship spanners that collectively shape and are inevitably inuenced by the RC in
10 network relationships. In other words, DC is also created by an inter-organizational network that contains greater resources, knowledge and relational idiosyncratic assets (Mowery, Oxley and Silverman, 1996). SC and DC SC is the knowledge that has been captured by the rm and embedded in the organization through organizational routines, practices and processes (Jansen et al., 2009). Furthermore, Schroeder, Bates and Junttila (2002) provide empirical evidence that SC is a critical strategic resource for organizations. SC is codied, and its creation, preservation and enhancement occur through repetitive activities (Nelson and Winter, 1982). Such codication is manifested in organizations that use it to retain and accumulate knowledge. Information exchange made as part of these established structures and resources thus tends to follow well-established and codied guidelines. Consequently, SC tends to be accumulated and utilized in established ways (Moran, 2005). However, an organizations exposure to a variety of new and overlapping environmental challenges inuences its performance. Rather than relying on established ways for problemsolving, organization requires questioning prevailing resources and looking for fundamentally dierent solutions to existing problems. Exposure to diverse resource domains enlightens organizations about new ways by which existing problems can be solved (Rosenkopf and Nerkar, 2001). Organizations consequently begin to question the promises behind prevailing organizational processes and systems and broaden their repertoires of problem-solving approaches, thereby increasing their likelihood of deploying DC (Zahra, Sapienza and Davidsson, 2006). If an organization is viewed as a bundle of resources, DC underlies the functions of transforming organizational resources into performance in such forms as organization processes and systems that deliver value superior to that of competitors; such transformation is implemented in a swift, precise and creative manner in line with environmental changes. Barney, Wright and Ketchen (2001) argued that the capabilities to change quickly in the dynamic market are costly for other competitors to imitate and thus can be a source of sustained
L.-C. Hsu and C.-H. Wang competitive advantage, further improving performance. Accordingly, we posit that SC per se may not be the source of a rms performance; and it is only possible if it is applied sooner and more astutely than competitors to create capability congurations. Therefore, we argue that the ability to apply resources sooner and more astutely is, indeed, the major function of DC. Thus, we contend that DC is the mediator between SC and performance. Accordingly, we posit the following hypotheses: H2a: DC mediates the relation between HC and performance. H2b: DC mediates the relation between RC and performance. H2c: DC mediates the relation between SC and performance.
Eects of dynamic capability

Although the exact relation between a rms internal capability and its external environment remains unclear (Zajac, Kraatz and Bresser, 2000), a rms capability is usually inuenced by the external dynamic environment. As rms analyse their capabilities, they are usually eager to understand their advantages over competitors. The commonly employed framework, which seeks to explain the competitive capabilities of a rm by the application of resources developed in a specic time period, tends to regard a rms capabilities as passive responses to the external environment. However, a rm confronted with a competitive crisis will need to utilize the rms accumulated capabilities to deal with it. In explaining such a phenomenon, in place of a static strategy, what is needed is an analysis that examines the dynamic strategy, which may be applied to exploit a rms DC. Thus, DC enhances the rms capability to face a erce external environment. Although rms may be confronted with many threats emerging from a dynamic environment, at the same time, many opportunities are created for growth and protability (Utterback, 1994). Consequently, rms in a dynamic environment need to develop many new products to secure performance. However, exploiting these opportunities requires strong and patient DC for R&D invest-
Clarifying the Eect of Intellectual Capital on Performance ments as well as continuous innovation (Blonigen and Taylor, 2000). Large amounts of R&D investments accumulated by DC to maintain excellent research capabilities and state-of-theart facilities are especially important for rms to build their technological competences (Pike, Roos and Marr, 2005). Continuous R&D activities accumulated by DC also ensure the control of key knowledge and allow the rms to build proprietary research platforms that lead to future success. Thus, when rms are heavy and longterm investors in R&D activities, it is expected that this will also result in long-term improvements in performance (Lantz and Sahut, 2005). Similarity, once a rms marketing strategy has been established, its managers must decide how the available resources should be allocated. Of course, the major objective of this strategy is to attract their target markets, establishing the competitive position of their product within these markets, and to generate cash ow from each product entry. In order to achieve these goals, a rm typically requires persistent investment in marketing activity over a long period. Especially from a relationshipbased marketing viewpoint (Hunt and Morgan, 1995), a rms history of past marketing investment can have continued economic value for the rm both in the present and the future because this investment helps the rm retain stronger customer relationships, which are important for protability and paramount for the future direction of business (Rauyruen and Miller, 2007). Accordingly, we infer that rms may be dierentiated in DC regarding R&D capability (Helfat, 1997) and marketing capability (Deeds, DeCarolis and Coombs, 1999; Grith and Harvey, 2001), which are associated with rm-level performance. This leads to the following hypothesis: H3: The possession of dynamic capabilities for R&D and marketing is positively related to the achievement of performance.
11
Method
Data and sample High-tech industries are identied according to the classication suggested by Hall (1994) and Chandler (1994) according to the research intensity of the industries and an informal assessment of those industries that are likely to
grow faster. Therefore, this study examines the high-tech industries in Taiwan. According to a report in Spring 2006 by the World Semiconductor Trade Statistics, Taiwanese integrated circuit foundries and integrated circuit packaging achieved the highest sale growth rates for that industry worldwide. Taiwanese high-tech industries have overall consistently achieved signicant accomplishments, making Taiwan the third largest producer of semiconductors. Taiwanese high-tech rms, however, face ercely competitive rivals in other Asian countries such as Korea and Japan, and so the dynamic strategy of its high-tech industry has emerged as an imperative issue for Taiwan. The important role of Taiwanese high-tech industry in the world economy demonstrates that this sample is suitable for the issue of this study. The top high-tech rms, ranked by company assets, were extracted from 2001 to 2008. The observation of this time period could reect the interactions of intangible assets and rms performance. Although the period 20012008 may be perceived as not enough long to measure DC, it may still account for the relationship between IC and performance. The original observations of 300 rms were matched with rm-level data from the Taiwan Economic Journal, which annually compiles a list of rms nancial reports. These lists are well received in the professional economic and nancial communities and various indexes of these surveys have been used to support numerous research projects (Chen and Huang, 2006; Chu et al., 2006; Hsieh, Kim and Yang, 2009; Ke, Chiang and Liao, 2007; Liu, Tseng and Yen, 2009; Peng and Fang, 2010). However, many rms did not report the type of information we require in this study, and those with rm-level information missing from the database were eliminated from the sample. The nal data set consisted of 242 valid rms from the following industries: communication technology rms (SIC code 3663) (23%), electronic equipment rms (SIC code 3641) (18%), semiconductor and related device rms (SIC code 3674) (31%), computer rms (SIC code 3571) (12%), other machinery equipment rms (SIC code 3541) (16%). The industry classication system is based on the US-based Standard Industrial Classication (SIC), which was created by the US government (1941).
12 Variables and measure Dynamic capability. In line with the denitions of DC in this study, the following properties of DC will receive attention to operationalize the notion of DC: (1) DC needs investment in specic resources; (2) the investment in DC needs to be continuous over a long time period, rather than in intervals; and (3) DC is asset-specic to a certain extent. As argued earlier we operationalize the notion of DC in terms of R&D and marketing capabilities. In doing so, we use the percentage increase in R&D and marketing deployment to capture the magnitude of change in a rms resource deployment over a 3-year period. In a high-tech industry, the DC for R&D and marketing requires at least 3 years for conversion into a successful product (Kor and Mahoney, 2005). Accordingly, to capture the historical dynamics in investment levels, we establish the functions to calculate the average percentage increases in two proposal indexes for DC during period t, t 1 and t 2. We created a composite measure of DC based on the two specic capabilities (R&D capability and marketing capability). The overall score is an average of the two items. Intellectual capital. Both theoretical and empirical research has been undertaken on IC in recent years. Measuring and managing IC has been found to be important for a companys long-term success, and thus numerous IC indicators have also been identied. With regard to the empirical research on the indicators that have been proposed and are used to measure IC, researchers have developed various measurements for each category of IC that enable the intangibles reported to be compared with other rms. Published IC measurement models can be divided into three groups, including scorecards (Edvinsson and Malone, 1997; Sveiby, 1997), monetary value (Brooking, 1997; Sullivan, 2000) and market value (Mouritsen, Larsden and Bukh, 2001; Stewart, 1997). Choong (2008) regards each measure as a reection of the dierent facets of IC. We measured HC using three ratios, covering (1) educational level, (2) work ability and (3) the value and uniqueness of the organizational workforce. Our method of measurement was drawn in principal from Edvinsson and Malone (1997), Huselid, Jackson and Schuler (1997), Youndt,
L.-C. Hsu and C.-H. Wang Subramaniam and Snell (2004) and Wang (2008). We use average educational level to measure employee profession. Employees have a higher educational level that enables them to do their job successfully. We use employee productivity to operationalize work ability. A higher employee productivity reects a stronger work ability of employees. The value and uniqueness of the organizational workforce was measured by the ratio of employee added value, indicating the added value created by employees in relation to the value of the organization. As in the research of Canibano, Garcia-Ayuso and Sanchez (2000), Liu, Tseng and Yen (2009), Lynn and Dallimore (2002), we used two indexes to measure SC. Information system process is measured by the ratio of information technology expense to total administrative expense (i.e. the information technology expense ratio). In this process we see more inter-unit exchange; furthermore, innovation of information technology expense can facilitate inter-rm learning and cross-functional team eectiveness. Product development process is operationalized as the ratio of administrative expense to total revenue. A product development process refers to the sequence of activities which an enterprise employs to conceive, design and commercialize the product (Ulrich and Eppinger, 2003). Many of these activities need high-level R&D employees and precision equipment. Administrative expenses include items such as salaries (e.g. information technology employee salaries) and rent (e.g. facilities rent) (Bernstein and Wild, 2000). There is a tendency for these expenses to increase, especially in prosperous times (i.e. the period of successful product development). Therefore, higher administrative expense represents faster growth of product development (Moon and Kym, 2006). Although the use of the ratio of R&D expense to total operating expense has been adopted in many studies (e.g. Chan, Lakonishok and Sougiannis, 2001), we were concerned about the occurrence of the multicollinearity of DC for R&D. Therefore, we deleted this ratio. We also adopted two ratios from Lynn and Dallimore (2002), Van Buren (1999) and Pablos (2003) to measure RC. The ratio of 5% of key account sales divided by the total sales represents a proxy of the customer relationship measure. According to the 80/20 principle, 20% of key account sales account for 80% of company sales.

Table 3. Denitions of independent variables Constructs Intellectual capital (IC) Human capital (HC) Variables AEL: average educational level of employee Adapted from
13
Edvinsson and Malone (1997); Huselid, Jackson and Schuler (1997); Youndt, Subramaniam and Snell (2004); Wang (2008)
Structural capital (SC)
EP: employee productivity EAV: employee added value ITR: information technology expense ratio
Lynn and Dallimore (2002); Edvinsson and Malone (1997); Canibano, Garcia-Ayuso and Sanchez (2000); Liu, Tseng and Yen (2009)
Relational capital (RC)
ARR: ratio of administrative expense to total revenue KA: key account ESR: percentage of total expenses paid to main suppliers RD: % increase in R&D development 5 (1/2) f [(RDEt1 RDEt2)/ RDEt2]1[(RDEt2 RDEt3)/RDEt3] g MK: % increase in marketing development 5 (1/2) f [(MKEt1 MKEt2)/ MKEt2]1[(MKEt2 MKEt3)/ MKEt3] g ROA: return on assets
Lynn and Dallimore (2002); Van Buren (1999); Pablos (2003)
Dynamic capability (DC)
Kor and Mahoney (2005); DEste (2002); Thornhill (2006)
Performance
Control variables
FS: rm size FA: rm age LE: leverage
EI: export intensity 5 export sales/total sales
Firer and Williams (2003); Hitt, Hoskisson and Kim (1997); Lant, Milliken and Batra (1992) Heimeriks and Duysters (2007); Hsu and Pereira (2008) Huergo and Jaumandreu (2004); Thornhill (2006) Smith and Warner (1979); Delios and Beamish (1999); Geringer, Tallman and Olsen (2000) Aulakh, Kotabe and Teegen (2000); Chiao, Yang and Yu (2006)
Key account: customers who exchange with a rm more than 10% of total sales are included. RDE, R&D expenditure; MKE, marketing expenditure.
As stated by Piercy and Lane (2006), the clients of most companies are diverse, with some representing an extremely high share of their sales. As a consequence, rms dedicate most of their resources to their key accounts (Homburg, Workman and Jensen, 2002; Workman, Homburg and Jensen, 2003). A core assumption in the key account literature is that rms are willing to increase their input to important customers because they hope to enhance the relationships (e.g. Ivens and Pardo, 2007). We use the percentage of total expenses paid to major suppliers over total revenue to measure the relationships between rms and their major supplier partners. Table 3 shows the operationalization, indicators and sources of all the constructs in the proposed model.
Performance. Performance is operationalized in terms of the monetary terms that a rm receives in exchange for the price it pays for products or services. Transaction cost theory (Williamson, 1985), which supports this rationale, has dominated theoretical and empirical research in this area. Traditional performance measurement employs a nancial-based index (Uso, Thibodeau and Burnaby, 2002) such as return on assets (ROA), return on sales and return on equity. Return on equity is ruled out because it is seen to be more sensitive to capital structure dierence. Both ROA and return on sales generate similar ndings and are highly correlated (r 5 0.76). The average pre-tax earnings of a company for a period of time are divided by the average tangible
14 assets of the company, i.e. ROA. The result is a company ROA that is then compared with the industry average. While some studies have made use of ROA and return on sales simultaneously (Grant, 1987), others have used ROA only (Hitt, Hoskisson and Kim, 1997). Nevertheless, some researchers (e.g. Stewart, 1997) argue that ROA is more appropriate in IC studies because ROA is useful in high-tech industry for stock market valuations. It can be used to illustrate the nancial value of intangible assets. This feature tends to get the attention of CEOs. For these reasons, this study uses ROA, which is collected from the Taiwan Economic Journal Database for 242 high-tech rms over the period 20012008, as the measure of rm-level performance. Control variables. To support the theoretical model in this study, we also include four control variables because of their potential impact on performance, as suggested by the extant literature. Firm size is proxied by the natural logarithm of total capital (Segars and Grover, 1995). Huergo and Jaumandreu (2004) also controlled for rms age because they predicted that IC creation was inherently revolutionary in nature and would thus be inuenced by a rms age (Rosen, 1991; Zahra, 1999). Leverage, which is another control variable, is employed as a proxy of a rms capital structure. It reects a rms nancial risk, which might limit the rms available economic resources to support long-term intangible investment (Smith and Warner, 1979). It is calculated as the reaction of longterm debt over total assets. Following Shoham (1996) and Geringer, Tallman and Olsen (2000), we also used an environmental variable, which measures internationalization using the index of export intensity. International markets, in general, can aect the success of the rms innovation activities. One reason is that companies must address diverse and inconsistent laws, national cultures and industry forces (Rosenzweig and Singh, 1991; Zahra and Garvis, 2000). This seems to be a good relative indicator and has been widely used. The operational denition of internationalization is export intensity (Aulakh, Kotabe and Teegen, 2000). Bayesian regression model Dynamic environments are often complex, and the relationship between predictor and the
L.-C. Hsu and C.-H. Wang resulting risks must be explored over the long term rather than at a specic point in time. One dierence between Bayesian regression and the classical approach is that Bayesian methods can incorporate information external to the study for analysis (Gelman et al., 2004). Such information is specied in a prior distribution and is combined with the study data in the form of the probability of producing a posterior distribution on which inferences are based (Zhao et al., 2006). Thus, the basic motivations for adopting a Bayesian approach to analyse a dynamic model is that prior knowledge or pilot information can easily be incorporated into such a model. The incorporation of prior information often results in inferences that are more precise than those obtained with traditional methods (De la CruzMesia and Marshall, 2003). Among methods based on probability methods, Bayesian inference oers several advantages over traditional statistical estimates. The rst is that prior information can be incorporated into the analysis. In analysing DC, the inclusion of prior information leads to an important pragmatic advantage. Many statistical models often require information about the underlying unknown parameters, and some parameter values are just not applicable to the underlying management theory (e.g. RC and HC in our model). A Bayesian analysis makes it very easy to incorporate such information directly. A second advantage is the comparative ease with which various sources of uncertainty can be incorporated accurately into the analysis. Bayesian methods estimate the probability distribution of parameters in complex models without relying on large sample approximation to normality (Congdon, 2003). Any conclusion derived from a traditional statistical analysis should include an indication of the uncertainty of the conclusion. For example, the point estimate of an unknown parameter is more or less worthless without an indication of the uncertainty underlying the estimate. Bayesian regression is not the main topic of this paper; we give the brief concept of the Bayesian method in the Appendix. Bayesian treatment of the regression model in this paper is a simple case of hierarchical regression analysis (Shively, Sager and Walker, 2009). A recent example for application of Bayesian regression is taken from an optimal policies of inventory
Clarifying the Eect of Intellectual Capital on Performance model study carried out by Azoury and Miyaoka (2009). In order to investigate the mediating eect of DC, the following three Bayesian regressions are constructed: ^ i1 c^ ^ e1 FS ^ f1 FA ^ ROA IC d1 LE ^ g1 EI ^ i2 a^ ^ e2 FS ^ f2 FA ^ IC d2 LE DC ^ g2 EI ^ i3 c0^ ^ d3 LE ^ e3 FS ^ ROA IC bDC ^ g3 EI ^ f3 FA 3 2 1
A c IC B a IC c ROA
15
DC
b ROA
Figure 2. (a) Direct eect: IC aects ROA. (b) Mediation design: IC aects ROA indirectly through DC.
Result
Table 4 presents variable descriptive statistics and a correlation matrix. The most common method for testing mediation was developed by Kenny and his colleagues (Baron and Kenny, 1986; Kenny, Kashy and Bolger, 1998). Following this method, there are four steps in establishing whether DC mediates the relation between IC and performance by performing the abovementioned three Bayesian regressions. Table 5 presents the estimates obtained from the Bayesian analysis. First, equation (1) shows that there is a signicant relation between HC (b1 5 0.9371, po0.001), RC (b2 5 0.1806, po0.001) and SC (b3 5 0.1321, po0.01) and performance (see path c in Figure 2(a)). Thus, Hypotheses 1a, 1b are 1c are supported. This result agrees with Carpenter, Sanders and Gregersen (2001) and Youndt, Subramaniam and Snell (2004). Second, equation (2) shows that there is a signicant eect of HC (b1 5 0.6641, po0.01), RC (b2 5 0.8670, po 0.001) and SC (b3 5 0.6753, po0.01) on DC (see path a in Figure 2(b)). Thus, Hypotheses 2a, 2b and 2c are supported. Third, the mediating role of DC related to performance is estimated controlling for the eects of DC on performance (b2 5 0.3344, po0.01). Thus, Hypothesis 3 is also supported. These results are in agreement with previous studies (Zott, 2003). The nal step is to show whether or not the strength of the relation between IC and performance is reduced when the mediator (i.e. DC) is added to the model. More specically, we need to compare path c in 2(a) and path c 0 in 2(b). When the eect of IC on performance decreases to zero (i.e. not statistically signicant) with the inclusion of DC, perfect
where LE is leverage, FS is rm size, FA is rm age, EI is export intensity, i is the intercept, and a, b, c, d, e, f, g and c 0 are parameters. In order to estimate parameters of regression, most previous studies investigating a dynamic system are based on traditional statistical methods such as original least squares, partial least squares and maximum likelihood. However, estimating methods that need to capture the dynamic characteristic and consider uncertainty are necessary. Here we use the Markov chain Monte Carlo (MCMC) method (Cowles and Carlin, 1996; Gimenez et al., 2009), which has been proved to be appropriate for handling such issues and can be used in dynamic prediction (Spiegelhalter et al., 1996), although it has not been used in the management literature as much as it could be. Thus, parameter estimates were produced by an MCMC algorithm, Gibbs sampling, using Version 1.4 of the program BUGs (Bayesian inference using Gibbs sampling) (Spiegelhalter et al., 2003). A variable that accounts for the relation between the predictor and the criterion is referred to as a mediator (Baron and Kenny, 1986). According to Mackinnon (2000), regression is the most common method for testing mediation. Figure 2(a) represents the eect of IC on rmlevel performance, which is often referred to as the direct eect. We use equation (1) to estimate parameter c. Figure 2(b) represents the simplest form of mediation, in which DC mediates the eect of IC on performance. We refer to it as the total eect (Frazier, Barron and Tix, 2004; Preacher and Hayes, 2004). We use equation (2) to estimate parameter a and equation (3) to estimate parameters b and c 0 (i.e. total eect).
16
1 0.095 1 0.054 0.198** 1 0.009 0.159* 0.046 1 0.003 0.186** 0.095 0.049 1 0.040 0.207** 0.209** 0.113 0.040 1 0.092 0.057 0.025 0.035 0.099 0.147* 1 0.076 0.009 0.032 0.127 0.036 0.362** 0.024 AEL, average educational level of employee; EAV, employee added value; EP, employee productivity; ITR, information technology expense ratio; ARR, ratio of administrative expense to total revenue; KA, key account; ESR, percentage of total expenses paid to main suppliers; RDE, R&D expenditure; MKE, marketing expenditure. *po0.05; **po0.01. 13
L.-C. Hsu and C.-H. Wang mediation is said to have occurred, which is referred to as complete mediation (James and Brett, 1984). When the eect of IC on performance is a non-trivial amount, but not zero, partial mediation is said to have occurred. In equation (3), SC (b4 5 0.0805, p40.1) is not statistically signicant. This indicates that the eect of SC is completely mediated by DC. Here, HC (b2 5 0.5524, po0.001) and RC (b3 5 0.1068, po0.001), which are smaller than those of equation (1), are statistically signicant. Thus, the results provide evidence for the partial mediating role of DC in the HCperformance link and the RCperformance link.
10
11
12
Discussion and managerial implications

Our interest in investigating the relationship between IC and performance was triggered by two observations, the rst of which was the inherent uncertainty of the fast changing dynamic environment widely noted in organizational studies as theorized by Peteraf (1993). Although the RBV shifts the focus of strategy to rms internal characteristics by identifying its resources in a specic time period and how these may have been created, we argue that under static circumstances the RBV is equally, if not more, relevant for understanding IC. The RBV can be regarded as a static theory (Priem and Butler, 2001) because it fails to address the fundamental issue of how future resources can be created and then accumulated for rms in a dynamic environment. Most studies argue that IC is grounded in RBV logic (Reed, Lubatkin and Srinivasun, 2006), but our ndings suggest that IC needs to be focused on dynamic strategic considerations. Since the association between IC and DC does indeed represent a causal connection between the two concepts, our results have important managerial implications. To provide further coherence to our conceptual model, we identied DC as the primary strategy that mediates the eects of IC on rm-level performance. DC underscores the accumulation of capabilities embedded in an organization and is posited to be directly associated with its nancial performance. There has to be a conscious strategy of seeking an advantageous position in IC and implementing it. An appreciation of the impact of IC on DC will
Table 4. Correlations matrix and descriptive statistics
1. ROA 2. AEL 3. EAV 4. EP 5. ITR 6. ARR 7. KA 8. ESR 9. RDE 10. MKE 11. LE 12. FS 13. FA 14. EI
0.089 0.135 0.506 0.44 1 0.097 0.231 0.678 1.034 0.188** 1.32 3.290 25.816 9.571 0.623** 12.032 12.595 71.570 1.942 0.254** 0.376 0.214 0.963 0.000 0.076 0.042 0.038 0.275 0.003 0.174* 0.720 0.249 0.997 0.013 0.097 0.173 0.317 1.500 0.677 0.322** 0.162 0.382 3.083 0.659 0.188** 0.486 2.804 28.319 0.618 0.006 0.494 0.248 0.983 0.002 0.394** 13.940 7.689 39.0 2.0 0.059 0.504 0.244 0.912 0.002 0.138 14.940 7.586 39 4 0.127
Mean
SD
Max
Min
1 0.463** 0.289** 0.276** 0.090 0.023 0.113 0.062 0.028 0.396** 0.150* 0.210** 0.431**
1 0.527** 0.089 0.327** 0.018 0.200** 0.270** 0.029 0.264** 0.152* 0.247** 0.202**
1 0.236** 0.357** 0.124 0.203** 0.072 0.024 0.147* 0.145* 0.300** 0.339**
1 0.094 0.001 0.012 0.019 0.111 0.057 0.301** 0.019 0.386**
1 0.093 0.313** 0.140* 0.039 0.208** 0.344** 0.115 0.042

Table 5. Testing mediator eects using Bayesian regression Testing steps in mediation model Equation (1) Coecients Testing step 1 (path c) Outcome: ROA Predictor: HC (Hypothesis 1a) RC (Hypothesis 1b) SC (Hypothesis 1c) Testing step 2 (path a) Outcome: DC Predictor: HC (Hypothesis 2a) RC (Hypothesis 2b) SC (Hypothesis 2c) Testing step 3 (paths b and c 0 ) Outcome: ROA Mediator: DC (path b) (Hypothesis 3) Predictor: HC RC SC Control variables LE FS EI FA Constant Adj R2 F
*po0.05; **po0.01; ***po0.001.
17
Equation (2) Coecients t values
Equation (3) Coecients t values
t values
0.9371*** 0.1806*** 0.1321**
8.8420 4.8976 2.4396
0.6641** 0.8670** 0.6753***
3.0232 3.7923 4.2007
0.3344** 0.5524*** 0.1068*** 0.0805 0.3066*** 9.8876 4.0125 0.0573*** 0.0242 1.4525 0.0400*** 3.7073 3.6482 0.1707*** 0.4670 10.2931*** 0.3961*** 1.7890 0.0294* 2.7012 0.0103 1.5808 0.1011*** 4.8250 0.9861*** 5.1046 0.4731 16.2356***
2.832 7.4210 3.5270 0.5444
0.4398*** 10.837 0.0271* 2.5608 0.0299 1.1287 0.0170 0.1868 0.037 0.6914 0.5816 20.8360***
enhance the level of a rms performance and its sustainability. Second, by elaborating our theoretical model in terms of the three distinct sub-constructs of IC and two sub-constructs of DC, we oer a rich set of results. Our results show that DC completely mediated the SCperformance link, but only partially mediated the HCperformance link and the RCperformance link. This supports our conceptualization of the mediating role of DC between IC and performance. We nd that the eect of HC and RC on performance is partially mediated by DC. This result suggests that HC and RC might directly aect performance or indirectly aect performance through DC. We deduce this nding from two eects. First, we examine the sources of performance, especially HC. The direct eect of HC on performance is signicant, and this nding is in agreement with Carmeli (2004) and other authors, e.g. Barczak and Wilemon (2003), Bontis (1998) and Bosma et al. (2004). Second, we re-examine the source of performance with
particular attention to accumulated long-term resources. Our study is among the rst to explore the mediating role of DC between the HC performance link, nding that there is a plausible explanation to the partial mediation. This nding stresses that HC derived through DC accumulation strongly contributes to performance, which has important managerial implications. HC plays a central role not only in technology innovation, but also in new knowledge absorption. Today the success of any rm is measured in terms of continuous innovation, relying on retaining employees with skills and knowledge rather than high employee turnover. Organizational learning theory supports the rationale for this nding (Nelson and Winter, 1982). Organizational learning is an intrinsically social and collective phenomenon, involving joint problem-solving and coordinated search. It may require the skills and knowledge of individuals. Organizational learning is also cumulative and path-dependent; what is learned and practised is stored and exposed in the rms economic performance.
18 Thus, long-term HC accumulation can be seen as idiosyncratic problem-solving knowledge capital. As predicted, the results show that, although DC does not account for all the eects of RC on performance, it does act as an important mediator. The direct eect of RC on performance is consistent with our discussion about the main source of performance using RC in the context of this study. In the prevalent literature, RC and DC have rarely been studied together, with the exception of Blyler and Co (2003). The relationship between RC and performance is important, as DC signicantly mediates this link. This is a signicant nding due to its strategy implications that RC must be involved in DC for R&D activities and marketing activities, and this will aect performance. Our nding oers a relational view of competitive advantage that focuses on network routines and processes. This framework is valuable because it provides a theoretical basis for cumulative rm capability in our understanding of the resources of RC. This nding expands upon the work of Oliver (1990). Marketing channel theory (Frazier, 1983) provides a possible explanation for the nding. Entrepreneurial networks include relationships both on the supply side (e.g. with R&D institutions or research laboratories) (Lee, Lee and Pennigs, 2001) and on the demand side (e.g. with customers) (Ulaga, 2003). From the supply-side relationship, a rms relationships are with actors involved in research and technology development. In a dynamic environment, organizations develop close cooperation with specic partners and then nurture social ties with those partners. These social ties should support the rm. Partnerspecic experience facilitates dyadic relationship adjustments, which suggests that prior ties facilitate adjustment as a consequence of familiarity and the development of inter-organizational routines. In this study, we show that at least some of the RC manifests its inuence on a rms performance through establishing long-term relationships with supply-side partners. From the viewpoint of demand-side relationships, RC investments are made by rms for the development of customer relationships in order to acquire tangible benets such as lower cost, higher quality and more reliable delivery. RC investment in long-term customer relationship accumulation enables access to loyal customers
L.-C. Hsu and C.-H. Wang and new customers, as well as providing new market information and service (Rocks, Gilmore and Carson, 2005). In these situations, the customers may arguably be prepared to help the rm through information sharing, technical assistance and loyalty programmes, in return for the benets of improved performance. The prior literature has stressed the positive link between SC and performance (Bru derl and Preisendorfer, 1998). Interestingly, our ndings show that DC plays a fully mediative role in this relationship. This nding supports the important implication that DC should be employed as a signicant means of resource renewal and restoring capability diversity, as well as avoiding the inertia and simplicity that result from the scarcity of long-term ecient resource deployment within an organizational structure. Meanwhile, organizational processes, one component of SC, depend on employees actually using the information or knowledge resources available to them. Processes directly aect the eciency of the employees actions. Once rms obtain a unique routine process and stock this know-how, it ultimately becomes an important resource for performance. Another component of SC is the information system used in managing knowledge. An information system with an innovation component may not have a great eect on the performance of an organization, but when the information system comprises not only the knowledge created by but also stored in a rms technology system, SC would represent the principal source of rmlevel innovation. This interpretation is consistent with the nding of Dierickx and Cool (1989). We show that such a decomposition helps enrich the understanding of SC phenomena we discovered when SC is viewed as a dynamic resource; this should result in long-term competitive advantage and business-specic advantage, which should positively impact nancial performance, as predicted in our model. Given the cross-section and time series nature of our data set, we pool together observations across rms (242 high-tech rms) and years (20012008). Pooling data estimation methods have the advantage that they allow us to account for long-term performance of IC over time. The model may not represent rms that are driven by short-term orientation only. However, prior studies are mostly based on a cross-sectional design and qualitative research (e.g. Keil, 2004;
Clarifying the Eect of Intellectual Capital on Performance Lazonick and Prencipe, 2005; Meyer and Lieb czy, 2003; Noda and Collis, 2001) and do not Do fully capture the IC process. For example, RC investments may be reected in the future, something that is impossible to identify with cross-sectional data. Thus, the model developed and tested here could benet from being tested in a longitudinal design based on secondary data. The secondary data set, as well as the indexes, of methodology have been widely employed in the managerial literature (Firer and Williams, 2003; Krause, Handrld and Tyler, 2007; Le, Walters and Kroll, 2006; Rothaermel and Deeds, 2006; Subramaniam and Youndt, 2005).
19
manifests a meditative role on the relationships between IC and performance. Third, the Bayesian regression model is considered here as an alternative to the traditional approach. In response to the necessity of dynamic analysis, Bayesian statistics provides a formal model for uncertain environments. Bayesian regression, which is also called dynamic regression, can capture the nature of dynamic models because the parameter estimation is updated over time through iterative simulation (Gelman et al., 2004), although it has not been used in the study of management as much as it could be.
Limitations and future research directions Theoretical contribution

By empirically validating a theoretically derived model, this study oers three major contributions to the study of strategic management. First, the role of IC in aecting performance is well discussed in previous management studies. What is less understood is how IC aects performance in dynamic environments over time. A static perspective suggests that IC is strongly and positively related to rms performance, but for dierent reasons. We extend prior IC research on the static concept of short-term discrete investment to the dynamic concept of long-term capability accumulation. We add to the conceptual richness of the construct by considering the implications of DC. Our ndings are particularly noteworthy. The results suggest that while a rm may have good performance in the short term, it may struggle with rivals in a turbulent environment, because accumulated capability may be scarce in the long term. Second, we investigate to what extent DC mediates the eect of IC on performance. The combination of DC and IC theory opens up a new domain of dynamic strategy. Our focus on DC complements the previous research that has begun to explore the process whereby IC is associated with performance. More specically, we integrate IC and the inuence of DC on performance into one model and reconcile what had previously been presumed to be independent. In the prevalent research, DC and the three subconstructs of IC are rarely studied together. In this study, we show that at least some DC While we believe we have developed a sound and rich theoretical model and tested it with reliable secondary data, there are some limitations. As discussed earlier, more dynamic capabilities exist beyond the realm of R&D and marketing. Capturing a more comprehensive picture of DC may allow researchers to capture a full rather than a partial mediating role of DC. Moreover, the partial mediating role of DC on HC and RC needs further investigation. Future research can explore in greater detail the real causes of the partial mediating role of DC on the HC performance link and RCperformance link. It is vital that its causes are explored and then used for the strategic space in the competitive horizon of the company. Moreover, it is also highly desirable to replicate this study with other types of rms and industries to generalize the empirical ndings and determine whether the same relationships hold. In the growing number of IC studies, no generally accepted conceptualization of performance has emerged (Krause, Handrld and Tyler, 2007). Some authors posit that performance does not necessarily employ nancial technique (Easton and Araujo, 1992). However, our proposed model indicates that performance is measured in terms of ROA. More research is necessary to show that rms with relatively high IC are more likely to employ non-nancial measures such as the balanced scorecard (Sveiby, 1997), the intangible assets monitor, or the Skandia navigator (Skandia, 1994). Such a measurement might also help companies identify
20 determinants which have matched with their performance. The inability of the measurement system to cope with the intangible nature of IC is often seen as a problem. An important area for further research involves identifying and operationalizing HC, RC and SC. Researchers could use other variables to operationalize the three sub-constructs of IC such as relationship benet and sacrice (Lapierre, 2000) used by RC, leadership index and employee retention used by HC (Skandia, 1994), and the outsourcing index used in SC (Skandia, 1994). If it is found that these variables can precisely measure the three subconstructs of IC, this will promote a fuller understanding of the concept of IC for the strategic manager. It is imperative that strategic managers fully understand the complexity of IC and the relative eectiveness of each context to help maximize rm-level performance. Finally, a limitation of using Bayesian regression is that the results are not based completely on observed data. Future research could extend the empirical analysis of our paper to observed data to examine how IC aects rm-level performance through DC. We hope that our study serves to support such an understanding.
L.-C. Hsu and C.-H. Wang (1) The likelihood function quanties the probability of observing the data given particular parameter values relative to the probability of the data under other parameter values. (2) Prior probability distributions, or priors, describe beliefs or information about parameter values prior to the observations that form the data set. Newcomers to Bayesian methods are often uncomfortable about specifying priors since this requires subjective decisions when little hard information is available for guidance. (3) Posterior probability distributions describe the degree of belief that can be assigned to possible values of the model parameters, summarizing information contained in the data and the prior distributions. As the sample size increases, the inuence of the priors on the posteriors diminishes.
Implementation of Bayesian models For this study, Bayesian models were implemented in WinBUGs 1.4 (Spiegelhalter et al., 2003). WinBUGs allows estimation of a wide variety of Bayesian models using MCMC simulation. MCMC methods approximate posterior distributions by drawing large numbers of samples from them. By increasing the lengths of the Markov chains, summaries of the distribution, such as means, can be estimated to an arbitrary degree of precision. The users manual demonstrates how to specify a model, how to use the software to estimate parameters and how to interpret the output. The following are the WinBUGs model specications for the examples in this paper. # The model 1 model; # Priors for regression parameters f a0 $ dnorm(0.0,1.0E-6) a1 $ dnorm(0.0,1.0E6) a2 $ dnorm(0.0,1.0E-6) a3 $ dnorm(0.0,1.0E6) a4 $ dnorm(0.0,1.0E-6) a5 $ dnorm(0.0,1.0E6) a6 $ dnorm(0.0,1.0E-6) a7 $ dnorm(0.0,1.0E6) # Dene the regression for(i in 1:N) f mu[i]o a01a1*HC[i]1a2*RC[i]1a3*SC[i]1a4*LE[i 1]1a5*FS[i]1a6*EI[i]1a7*FA[i] g
Appendix
This appendix is not a thorough review of Bayesian methods. But Bayesian methods are less familiar than some other statistical approaches in strategic management, and so it is appropriate to provide some methodological background. We provide a brief summary of the Bayesian regression methods employed for the analysis in this study.
Bayesian estimation Bayesian inference combines (1) a likelihood function with (2) prior probability distributions for the parameters of each model to produce (3) posterior probability distributions for quantities of interest. In essence, Bayesian analysis uses data to move from a state of great uncertainty about parameter values, described by prior probability distributions, to a state of greater certainty, described by posterior probability distributions.
21
for(i in 1:N) f ROA[i] $ dnorm(mu[i],tau) g # Priors for precision parameters tau $ dgamma(1.0E-3,1.0E-3) # Monitor the standard deviation sdo- 1/sqrt(tau) g # The data list(N 5 1452, HC 5 c(0.1915, 0.1688, 0.1737, . . .), RC 5 c(0.489, 0.266,0.2774, . . .), SC 5 c(0.1333, 0.129, 0.1385, . . .), LE 5 c(0.2034,0.1561,0.1276, . . .), FS 5 c(2.2648, 2.29, 2.301, . . .), EI 5 c(0.3164, 0.361, 0.31, . . .), FA 5 c(7, 8, 9, . . .), ROA 5 c(0.116, 0.039, 0.0112, . . .)) # The initial value list(tau 5 1)
HC
FA
sd mu[i] X[i]
ROA for (i IN 1: N)
tau
Figure 3. Graphical model for Bayesian regression
A graphical representation of the model appears in Figure 3.
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Li-Chang Hsu is an associate professor of economics at Ling Tung University, Taiwan. His current research interests are in the area of technology management, strategy management and forecasting theory. His papers have been published in the African Journal of Business Management, Technological Forecasting and Social Change, Expert Systems with Applications, Journal of Electronic Commerce Research, Service Business and others. Chao-Hung Wang is an associate professor of management at Ling Tung University, Taiwan. His current research interests are in the area of strategy management, relationship marketing and dynamic modelling. His papers have been published in the African Journal of Business Management, Asia Pacic Management Review, Technological Forecasting and Social Change, Tourism Management, Expert Systems with Applications, Journal of Electronic Commerce Research, Service Business and others.

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British Journal of Management, Vol. *, ** (2010) DOI: 10.1111/j.1467-8551.2010.00718.

Explaining intellectual capital eects

Clarifying the Eect of Intellectual Capital on Performance

Control variables Firm size Leverage Firm age Export intensity

L.-C. Hsu and C.-H. Wang

Edvinsson and Malone (1997)

Intellectual capital and dynamic capability

Clarifying the Eect of Intellectual Capital on Performance

Eects of dynamic capability

Clarifying the Eect of Intellectual Capital on Performance

Structural capital (SC)

Relational capital (RC)

Lynn and Dallimore (2002); Van Buren (1999); Pablos (2003)

Dynamic capability (DC)

Kor and Mahoney (2005); DEste (2002); Thornhill (2006)

FS: rm size FA: rm age LE: leverage

EI: export intensity 5 export sales/total sales

Discussion and managerial implications

Table 4. Correlations matrix and descriptive statistics

1 0.094 0.001 0.012 0.019 0.111 0.057 0.301** 0.019 0.386**

1 0.093 0.313** 0.140* 0.039 0.208** 0.344** 0.115 0.042

Clarifying the Eect of Intellectual Capital on Performance

Equation (2) Coecients t values

Equation (3) Coecients t values

0.9371*** 0.1806*** 0.1321**

8.8420 4.8976 2.4396

0.6641** 0.8670** 0.6753***

3.0232 3.7923 4.2007

2.832 7.4210 3.5270 0.5444

Limitations and future research directions Theoretical contribution

Clarifying the Eect of Intellectual Capital on Performance

Figure 3. Graphical model for Bayesian regression

A graphical representation of the model appears in Figure 3.

L.-C. Hsu and C.-H. Wang

Clarifying the Eect of Intellectual Capital on Performance

L.-C. Hsu and C.-H. Wang

Clarifying the Eect of Intellectual Capital on Performance

L.-C. Hsu and C.-H. Wang

Clarifying the Eect of Intellectual Capital on Performance

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1 0.094 0.001 0.012 0.019 0.111 0.057 0.301 0.019 0.386

1 0.093 0.313** 0.140* 0.039 0.208 0.344 0.115 0.042

0.9371* 0.1806* 0.1321**

0.6641 0.8670 0.6753***