Relationship Between Intellectual Capital Accounting and Business Performance in the Pharmaceutical Firms in Kenya

Abstract

From the human resource point of view, intellectual capital is an investment in the organization and it is perceived to be the strategic resource and a source of competitive advantage and therefore not indicated on the statement of the financial position of a firm. Intellectual capital in conventional accounting is indicated as a cost rather than an investment. The purpose of the study was to test the relationship between intellectual capital accounting and business performance of the pharmaceutical firms in Kenya and why these firms do not account for human resources as competitive and strategic assets which offer firms a competitive advantage. The specific objectives were to determine whether human capital, structural capital and relational capital individually and collectively influence business performance of pharmaceutical firms in Kenya. The study was carried out in Nairobi since most of the pharmaceutical firms were located here apart from a few, which were based outside Nairobi. At present, the existing research on intellectual capital accounting is concentrated on developed countries and the policies and frameworks are derived from them as they are only suitable to developed countries. However, none of these studies identify the relationship between intellectual capital accounting and business performance in pharmaceutical firms in Kenya and therefore the need to carry out the research. The research study adapted three research designs namely: Quantitative, explanatory and descriptive research design. The target population constituted 89 pharmaceutical firms and the sample frame was comprised of 31 local pharmaceutical firms licensed by pharmacy and poisons board in 2010-2011 which formed the sample size, thus represented 35% of the total population. Purposive sampling procedure was used to arrive at 31 pharmaceutical firms while judgemental sampling was used to target the human resource managers. The instrument of data collection was a structured questionnaire with questions anchored on a five (5) point likert type ranking scale which was administered to the respondents. The data processing and analysis was done mainly by the use of logarithmic multiple linear regression analysis. The researcher also employed inferential statistics to test the hypothesis of the study. The results and findings of the study indicated that human capital, structural capital and relational capital influenced business performance of pharmaceutical firms in Kenya. Human capital and structural capital relationship strongly existed among the studied pharmaceutical firms; and that the two positively and significantly influenced business performance. In addition to confirming that human capital, structural capital and relational capital are dimensions of intellectual capital accounting, relational capital did not interact with human capital and business performance but univariately it did. The developed model confirmed that the theory fitted data with fit indices above or below the required thresholds and the empirical results provided strong support for the model. Two independent variables namely human capital and structural capital were found to have high significance and positive influence on business performance of pharmaceutical firms in Kenya. A final modified research model, named “intellectual capital accounting model” was developed. The conceptual model indicated that the factors extracted explained 92.8% representative of the full model with a goodness of fit index of 0.928 and root mean residuals of 0.009. The study provides strong practical value in that the results can assist investors, policy makers, and present pharmaceutical firms in understanding the dynamics and processes of intellectual capital accounting. This understanding can promote the development and sustainability of business performance of pharmaceutical firms in Kenya. This research is a first attempt to show that human capital and structural capital are critical to business performance of pharmaceutical firms in Kenya.