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The Role of Intellectual Capital and

Organizational Innovation in
Organization Performance: A Case of
Commercial Banks in Pakistan

Thesis Defense
Presented by: Sara Shafaqat
I.D: 12014092003
MS (MGT)
University of Management and Technology, Lahore.

Presented to:
The Graduate Research committee
Centre for Graduate Research
University of Management and Technology, Lahore.
Introduction
Intellectual Capital is, in present broadly
accredited as Intangible resources and capabilities,
which could be of great help to companies to get
value and competitive advantage (Youndt et al,
2004; Drucker, 1993; Grant, 1996).
Innovation is another critical part of performance
at firm-level and has long been a key driver of
abundance of productivity and economic growth
(Griffith et al., 2006).
Therefore, it is theoretically proposed that
innovation could be a mediating variable between
IC and OP.
Literature Review
IC is useful knowledge that includes an
organizations processes, technologies,
patents, employees, skills and information
about customers, supplier and stakeholder
(Stewart, 1997).
This study is focusing on the main sub
constructs of IC (Bontis, 1996; Edvinsson
and Malone, 1997) and these are human
capital, customer capital and structural
capital.
Literature Review
Human capital referred as the knowledge,
skills, and experience of all employees and
managers of a company (Bontis 2002).
Structural capital is the overall system and
process of problem solving and value
creation of a company (Bontis 2002) .
Relational capital is the establishment,
maintenance and development of external
relationships by the organization including
customers, suppliers and partners (Mei-
Chen 2001; Hsuand Fang, 2009).
Organizational innovation
Organizational innovation is defined here
into two sub-constructs
One is technical innovation and second is
administrative innovation.
Types of Organizational Innovation
Administrative Innovation refers to a new
management system, administrative process, and
staff development program (Subramanian and
Nilakanta, 1996).
Technical innovation is defined as an adoption of
new ideas related to new products or services,
and an introduction of new elements in an
organization's production process or service
operations (Subramanian and Nilakanta, 1996).
Research Gap
It is theoretically proposed that innovation
could be a mediating variable between IC
and OP. Therefore, this thesis will
empirically test this relationship.
Research objective

This thesis first aims to study the relationship


of IC and Organizational Performance.
Secondly, in this same relationship of IC and
OP an attempt would be make to understand
the role of Organizational Innovation.
Finally, the thesis will empirically determine
the strategic importance of all sub constructs
of IC for Organizational Innovativeness and
Organizational Performance.
Research questions

What is the nature of relationship between


IC and organizational performance?
Do all IC components have the same
impact on innovativeness in the
organization as well as its performance?
Does innovation have any role in the
relationship between IC and
Organizational Performance.?
Significance
Academic Perspective:
This thesis could improve academics
understanding of the importance of intangible
resources for gaining higher performance with
minimum cost in a context of Pakistan.
Practical Perspective:
Organizations could be determined and focus on
factors those are more effective or vice versa for
the sake of creating innovation heading towards
the better performance of the organizations in
Pakistan.
Conceptual model of the study

OI

IC OP

OI = Organizational Innovation
IC = Intellectual Capital
OP = Organizational Performance
Hypotheses
H1: There is a positive relationship between
intellectual capital and organization
performance
H0: (a)All components of IC (HC, RC, and SC)
have the same impact on innovativeness.
H0: (b) All components of IC (HC, RC, and SC)
have the same impact on performance.
H3: Organizational innovation mediates the
relationship between IC and OP.
Methodology
Strategy & Method
Quantitative research strategy and cross
sectional research method is used to collect
data. Sample Convenient sampling method is
used in order to collect the data.
Research Instrument
To investigate intellectual capital concept,
current research is used items developed by
Bontis in 1998.
To investigate the Organizational innovation
concept, Current research is used items
developed by Subramanian and Nilakanta,
1996).
Pilot testing
Fifty questionnaires were filled from
different private commercial banks of
Faisalabad, Lahore, and Multan.
Inter item correlation
To check whether items within a context
scale related to construct under study an inter
item correlation test was run.
The result of correlation test enabled us to
eliminate those items which, have scores less
than .30.
After successful inter item correlation test
we run a reliability test on present items of
the constructs.
All values of cronbach Alpha results were up
to acceptable level.
Methodology
Data Analysis
Data is analyzed using SPSS 20 version.
Regression analysis is applied on the first
hypothesis of the study.
ANOVAs test is applied on the second and
third hypothesis of the study.
For the fourth Hypothesis procedures of
Andrew F. Hayes is used.
Results
Demographics Freque %
ncy
Participants profile
Gender
Male 107 73.8
Female 38 26.2
Total 145 26.2
Designation
Regional head 14 9.7
Branch Manager 47 32.4
Ass. Branch Manager 36 24.8
Officer 48 33.1
Total 145 100.0
Name of Bank
Allied Bank 82 56.6
Meezan Bank 7 4.8
Habib bank 5 3.4
Bank Alfallah 19 13.1
Participants Profile Name of Banks
Bank Alhabib 7 4.8
MCB 13 9.0
United Bank 8 5.5
Faisal Bank 4 2.8
Total 145 100.0
Branch Location
Lahore 87 60
Faisalabad 32 22.1
Multan 26 17.9
Year of exp.
Minimum 1
Maximum 9
Average 7.18
Linear Regression Analysis for first hypothesis of
the study
R2 B Sig.
Intellectual Capital .532 .000
Overall first model impact .278
ANOVA TABLE
Mean S.D t-value F Sig.

Innovativeness 6.0226 .77720 23.171 0.000

HC 5.0241 .70998 2.361 0.020

SC 4.6303 .51049 3.041 0.003

CC 5.0793 .42074 5.262 0.000


ANOVA TABLE
Mean S.D t-value F Sig.

OP 5.0241 .70998 14.453 0.000

HC 5.0241 .70998 3.721 0.002

SC 4.6303 .51049 2.304 0.023

CC 5.0793 .42074 2.648 0.009


Indirect effect of IC on OP
Effect SE LLCI ULCI

.3496 .0902 .1999 .5635


Discussion
Results indicated that IC has an effect on
banks performance and this impact is
positive on bank performance. Results of
this study are in line with the Jamie Ivey
(2002) view that increased IC in Banks
gives rise to better Organizational
performance. This study while meeting its
first objective also finds a significant
positive relationship of IC for OP.
Analyzing organizational innovation as a
mediator theoretically is well established
contrarily the empirically attestation of this
relationship has not been seen.
This thesis, therefore, has tried to empirically
establish this role. However, in this thesis,
we test this relationship successfully and this
study will contribute to the current
challenging and competitive environment of
organizational performance of the banks and
provides evidence that OI has mediating role
between IC and OP
The results of the current study are
consistent with previous research work
on similar topic in different contexts and
countries (Conner 1991; Damanpour and
Evan 1984; Han et al 1998).
Since a second objective of this study is to
identify Do IC components have the same
impact on organization performance or
Innovativeness in the Pakistani private
commercial banks.
The effect of this research question shows
that IC components have not the same
impact on organizational performance and
organizational innovativeness. This research
benefited to practitioners and give them
advice to concentrate those variables what
are more value able or result oriented
i.e. should focus on more customer
capital when need to create
innovativeness and second important
variable is SC and least important is HC
for creation of innovativeness.
To achieve organizational performance
HC is important secondly SC and thirdly
CC (Chen, 2005).
Limitations and Future
Implications
This research contains specific limitations,
these limitations could be overcome with
the availability of resources such as the
study could be carried out as a whole
across Pakistan.
The next research could be done by
adding more types of innovation to
capture a holistic and comprehensive view
of banking sector organization.
Limitations and Future
Implications
Organizational innovation and
Organizational performance could vary
with sector to sector as well as with size
of the firm in organizations which is
limitation of this present study.
Key References
Griffith, R., Huergo, E., Mairesse, J., & Peters, B.
(2006).Innovation and productivity across four European countries.
Oxford Review of Economic Policy, 22(4), 483-498.
Lev, B. (2001). Intangibles management, measuring and reporting.
New York: Brookings Institution Press
Rastogi, P. N. (2000). Sustaining enterprise competitiveness is
human capital the answer? Human Systems Management, 19, 193-
203.
Subramaniam, M. and Youndt, M.A. (2005).The Influence of
Intellectual Capital on the Types of Innovative Capabilities.
Academy of Management Journal, 48, 450-463.
Tsai, W., &Ghoshal, S. (1998). Social capital and value creation:
The role of intrafirm networks. Academy of management Journal,
41(4), 464-476.
Youndt, M. A., Subramaniam, M., & Snell, S. A. (2004). Intellectual
Capital Profiles: An Examination of Investments and Returns*.
Journal of Management Studies, 41(2), 335-361.