102. analyzing the relations between intellectual capital and performance in local governments

8/3/2019 102. Analyzing the Relations Between Intellectual Capital and Performance in Local Governments

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1

AnalyzingtheRelationsbetweenIntellectualcapitalandPerformance

inLocalGovernments1

Sandra

Cohen

2

and

Orestes

Vlismas

AthensUniversityofEconomicsandBusiness

DepartmentofAccountingandFinance

76PatissionStreet

GR10434Athens.GreeceP

Pleasedonotquotewithoutauthorspermission

ThisDraft:May,2011

Abstract

This paper examines the relation between intellectual capital (IC) and organizational performance in local

governments (LGs) in Greece. Existing research literature argues that public organizations seem to be more

intellectual capital idiosyncratic than private sector organizations. Therefore, it is expected that effective

intellectual capital management would have a positive effect on their performance. However, empirical

evidence in this field is lacking. We address this issue within the context of two intellectual capital

epistemological viewsproposedbyMouritsen(2006);theIC1ostensiveviewandtheIC2performativeview.We

employadualapproach inourresearchbycombiningpublishedandsurveydata.Wehavegatheredfinancial

information through accrual accounting financial statements in order to measure inferred intellectual capital

(according

to

IC1ostensive

view).

Additionally,

we

have

collected

data

suitable

for

analyzing

the

perceived

intellectual capital through a structured questionnaire addressed to a sample of Greek LGs (according to IC2

performativeview).Oursamplerefersto92LGs.Ourempiricalevidenceadvocatestheexistenceofsignificant

positive relations among the sub categories of intellectual capital. Further, data analysis reveals that the sub

categoriesofintellectualcapitalarerelatedwithimprovedperformancemeasuredbothwithfinancialratiosand

perceptions of performance. Therefore, our empirical findings hold irrespectively of the intellectual capital

epistemological viewandoffercorroboratingevidencethatLGswithhighICperformbetterthatlowICLGs.

Keywords:IntellectualCapital,ICostensiveview,ICperformativeview,FinancialPerformance,Local

Governments,Greece

1. Cohen is an Assistant Professor of Accounting at the Department of Business Administration in Athens University of

Economics and Business and Vlismas is a Lecturer Adjunct of Accounting at the Department of Accounting & Finance in

AthensUniversityofEconomicsandBusiness.

Emailaddresses:

[email protected]

(Sandra

Cohen),

[email protected]

(Orestes

Vlismas).

2.Correspondenceauthor.


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2

1.Introduction

Thesunrise ofknowledgeeconomyhas increased theeconomicsignificance of intangibleassets for

the operational performance of organizations (McGrattan and Prescott, 2007). Initially, research

efforts for establishing empirical relationships of intangibles with operational performance and

subsequentlywithmarketperformancefocusedonspecifictypesofintangiblesassociated,primarily,

withadvertisingandresearchanddevelopment (R&D)expenses(e.g.HirscheyandWeygandt,1985;

Chauvin and Hirschey, 1993; Sougiannis, 1994; Lev and Sougiannis, 1996; Eberhart et al. 2004).

Progressively, the relationship of intangibles with operational performance started to be examined

undertheprismofhumancapital (Hanson,2004;PantzalisandPark,2009)ororganizationalcapital

(Levetal.2009).

Agrowingnumberofrecentresearcheffortsexaminestheeconomicsignificanceofintangibleswithin

the context of a broader and more abstract concept, that of intellectual capital (Steward, 1991).

IntellectualCapital(IC)isabroadconceptincludingtheknowledgeandthelearningcapabilitiesofan

organization.Itismanifestedasthesynergyofknowledgeresourcesassociatedwiththehumanassets

(i.e. human capital), the organizational structures (i.e. structural or organizational capital) and the

externalsocial

partners

(i.e.

customer,

or

relational

or

social

capital)

of

an

organization.

Existing empirical research has, primarily, focused on investigating the relations between IC and

operational and financial performance of profit seeking organizations. The relationship of IC and

intangibleswithoperationalandsubsequentmarketperformancehasbeenconfirmedacrossdifferent

industrialsettings,nationaleconomies,firmcharacteristicsandotherenvironmentalororganizational

contingencies (e.g. Lin and Edvinsson, 2008). At the same time, an emerging literature argues that

public organizations are intellectual capital idiosyncratic and, thus, effective intellectual capital

managementisexpectedtoimprovetheefficiencyofthepublicsectororganizationsaswell(Kongand

Thomson, 2006; Kong, 2007; Kong and Prior, 2008; Kong, 2010). This strand of literature can be

viewedthroughthelancesofNewPublicManagement,inthesensethatintellectualcapitalisasource

ofeconomicefficiencyforpublicsectororganizations.However,empiricalevidencefortherelationof

intellectualcapital

with

the

operational

efficiency

of

public

sector

organizations

is

lacking.

Thescopeofthisstudyistoanalyzetherelationbetweenintellectualcapitalandperformancewithin

thecontextofthepublicsectororganizationsandLocalGovernmentsinparticular.Inordertoattaina

moreholistic approach to this investigation theaforementioned relationship isexamined under the

twoprincipalintellectualcapitalepistemologicalviewsrecognisedbyMouritsen(2006).Thesearethe

IC1ostensiveviewandtheIC2performativeview.Ouranalysisisbasedonasampleof92Greeklocal

governments.

Webelievethatourstudy istimelybytaking intoaccountthefinancialproblemsfaced inthepublic

sector in Europe and in Greece in particular. Unrevealing the relations between IC and financial

performanceisexpectedtohaveusefulimplicationsforpublicsectormanagement.

Webelievethatourstudycontributesto literature inseveralaspects.Firstly,weattempttoapply in

practicethetwoepistemologicalviewsofICasrecognisedbyMouritsen(2006).Thereforeweadopta

dual approach in our research by combining financial statements and survey data in order to

operationalize and measure IC under the two different IC approaches. Secondly, we propose an

approachinordertoassessthelevelofICsubdomains(i.e.humancapital,organizationalcapitaland

socialcapital)inlocalgovernmentsbyusingaccrualbasedfinancialdata.Ourapproachisinnovativein

thesensethattriestoadapttotheidiosyncraticcharacteristicsoflocalgovernmentsthatdeviatefrom

those of private sector companies. Finally, we develop a categorization scheme to distinguish local

governmentsaccordingtotheirICintensity.

Theremainingofthepaper isorganizedasfollows.Section2presentsthebackgroundandSection3

the

theoretical

framework,

the

research

objectives

and

the

hypotheses

of

the

study.

Section

4


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3

analysesthemethodologyofthisresearchinitiative.InSection5wepresenttheempiricalresults.The

lastsectionofthepaperincludesourconclusions.

2.Background

Thissectionprovidesthetheoreticalbackgroundforthestudy.Initially,thetermintellectualcapitalis

definedbyreviewingavarietyoftheoreticalpropositions(Mouritsen,2006;Swart,2006;Martnde

Castroetal.,2011).Then,theidiosyncraticroleofintellectualcapitalinpublicsectorisanalyzed.

2.1.DefinitionofIntellectualCapital

The term intellectual capital is usually employed by the research community as a synonym for

intangible assets (Steward, 1991) which can be transformed to economic value. Yet, there is not a

commonacceptedunifieddefinitionforintellectualcapital.

In the endeavour to clarify intellectual capital, related literature demonstrates a proliferation of

theoreticalpropositionsandpossiblereportingframeworksforvisualising intellectualcapitaltoboth

internal and external agents. A diversity of theoretical propositions for the nature of intellectual

capitalisobservedwithintherelevantliterature(Swart,2006;MartinDeCastroetal.,2011).Yet,by

reviewing

Table

1,

which

presents

various

definitions

of

intellectual

capital,

we

can

draw

someconclusions. Firstly, intellectual capital refers to three dimensions; the organizational knowledge of

the humanassets, the organizationalstructuresand theexternalsocialpartnersofanorganization.

Secondly,intellectualcapitalistransformedtoeconomicvaluethroughorganizationalaction.Thirdly,

intellectual capital is related to the existence of competitive advantage because intellectual capital

enhances the environmental responsiveness of the firm. The ability to manage knowledge for

improvingenvironmentalresponsivenessisassociatedwithorganizationallearning(ArgyrisandSchn,

1996). For the purposes of this study, we define intellectual capital as the stock of organizational

knowledge and the collective ability to transform this knowledge to action by leveraging

organizationallearningphenomena.

InsertTable1

As already mentioned, intellectual capital is usually analysed to, at least, three dimensions: human

capital, structural capital and relational (or social capital) (MartndeCastro et al., 2011). Human

capitalreferstotheknowledge,capabilitiesandbehavioursofthehumanfactor(CabritaandBontis,

2008;HsuandFang,2009).Structuralcapitalincludestheknowledgeincorporatedintotechnological

infrastructures(e.g.EdvinssonandMalone,1997;Sveiby,1997)andorganizationalforms(Changetal.

2008);andtheabilitytoimproveit.Relationalcapitalwhichremainsratherunderexploredrelatively

totheothertwoaforementioneddimensionsofintellectualcapital(Swart,2006;MartindeCastroet

al., 2011), concerns the knowledge and the ability of an organization to manage its relations with

externalsocialpartnerstocreateeconomicvalue.Customers,suppliers,allies,othersocialagentsas

wellascorporatereputationcanbeconsideredasvariablesassociatedwithexternalenvironment.In

thecase

of

local

governments

and

public

organizations

relational

capital

is

referred

as

social

capital.

The three dimensions of intellectual capital are highly interrelated. Human capital is an input to

structuralandsocialcapital.Structuralcapital isan input tosocialcapital.Finally,the interactionof

intellectualcapitalwiththeenvironmentgoesthroughsocialcapital.

Theimpliedcausalrelationshipbetweenintellectualcapitalandorganizationalperformance(Levetal.

2009)andtheabsenceofsufficient informationwithinthecontextoftraditionalfinancialaccounting

paradigm (Canibano et al. 2000) stimulated the development of a number of intellectual capital

reporting frameworks (see e.g. Kaplan and Norton, 1992; Brooking, 1996; Edvinsson and Malone,

1997, Roos et al., 1997, Sveiby, 1997; Bontis et al., 1999; Andriessen, 2005). Intellectual capital

reporting frameworks are classified as: (a) returnonassets, (b) market capitalization, (c) balanced

scorecard, and (d) direct measurement methods. The information provided by intellectual capital

reporting

frameworks

is

market

oriented,

i.e.

it

is

addressed

to

stakeholders

external

to

the

organization.Yet,intellectualcapitalreportingframeworkshavebeendevelopedwithinthecontextof


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4

management control systems. Existing research initiatives for developing and analysing intellectual

capital reporting frameworks are primarily oriented towards private sector (see e.g. Kaplan and

Norton,1992;Brooking,1996;EdvinssonandMalone,1997,Roosetal.,1997,Sveiby,1997;Bontiset

al.,1999;Andriessen, 2005).Theyemphasizeon the provisionofqualitative information that isnot

accountedforintraditionalfinancialstatementsinordertoaccesstheeffectsofintellectualcapitalon

economicperformance.

2.2.IntellectualcapitalinNonProfitSector

Intellectual capital has been mainly studied within the context of the private sector (Kong, 2010).

However, the rise of the new management paradigm for public sector organizations and the

idiosyncraticnatureofthepublicsectortriggeredresearchinitiativestoinvestigateintellectualcapital

within its context. More specifically, the changes in the public sector since 1980s, such as the

extensiveuseofcommercialization,theincreasedlevelsofcompetitionandthedemandforimproved

efficiency in service delivery, posed requirements for a new management philosophy for public

organizations usually described with the umbrella term of New Public Management (Hood, 1995).

New Public Management (NPM) dismantles the distinction between private and public sector by

proposing ideasborrowedfromtheconceptualframeworkofprivateadministrativepractise(Power,

1997).NPM

provides

atheoretical

rationalization

for

intellectual

capital,

as

aprivate

sector

oriented

metaphor, to be viewed as a new conceptual framework for public strategic management (Kong,

2007;KongandPrior,2008;KongandThomson,2006).

Preliminaryresearchinitiativesindicatethattheroleofintellectualcapitalinnonprofitsectorismore

criticalthaninthecaseofprivatesector.Ramrez(2010)arguesthatthegrowingsignificancegivenby

literaturetotheapplicationofmodelsfor intellectualcapitalmanagement inthenonprofitsectoris

duetothefactthat intangibility isevenmorepresentthan inthecaseofprivateorganizations.The

intangibility of the public sector organizations concerns their goals, production process and their

outputs.Publicorganizationstendtohavemultipleobjectivesofnonfinancialnature(Ramrez,2010).

Moreover, the public sector has always been human capitalintensive in its production process

(Serrano

et

al.,

2003).

Finally,

public

sector

organizations

focus

on

intangible

outcomes

(Wall,

2005).

3.TheoreticalFramework,ResearchObjectivesandHypothesesDevelopment

Theresearchobjectiveofthisstudyistoinvestigatetherelationshipbetweenintellectualcapitaland

performance within the context of the public sector. The relationship of intellectual capital with

operationalperformancehasbeendocumented intheprivatesector(e.g.Levetal.,2009)albeitnot

extensively. Inourstudywechooseatypicalpublicsectorsetting,thatof localgovernmentstotest

therelationbetweenintellectualcapitalandperformance.Aslocalgovernmentsaremoreintellectual

capitalintensivethanprivateorganizations(Cincaetal.,2003,Kong,2007;KongandPrior,2008)we

expectthatthisrelationwillbeevidentaswell.

Thisleadstothefollowinghypothesis:

H1: In the case of local governments, Intellectual Capital ispositively correlated with

performance.

Inourstudy,weoperationalizethevalueofIntellectualcapitalunderthetwoprismsthatcorrespond

to the two different epistemological views developed by Mouritsen (2006). Mouritsen (2006)

distinguishestwocentralthemeswithin intellectualcapital(IC)research:IC1ostensiveviewandIC2

performative view. IC1ostensive research stream adopts a positivistic view and argues that

intellectual capital can be analyzed to its components (i.e. human, organizational and relational

capital)andthecontributionofthesecomponentstoorganizationalperformancecanbemeasuredin

termsoftheirimplicationsonfinancialfundamentals(e.g.riskandreturns,markettobook,etc.).On

the other hand, IC2performative research stream recognises that intellectual capital is part of a

configuration

of

knowledge

management

and,

consequently,

the

nature

of

intellectual

capital

is,idiosyncratically,definedwithinthespecificorganizationalcontextanditseffectsonperformanceare


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5

realisedbyinterpretingitsroleonmakingorganizationscapableofperformingtowardsendogenously

defined values. IC2performative research stream emphasises on narratives, qualitative information

anddescriptions.

Under the prism of IC1 ostensive research stream, the positive effects of intellectual capital on the

performanceoflocalgovernmentscanbemeasuredintermsofimprovedfinancialperformance.Yet,

IC1ostensive

stream

has

not

developed

common

accepted

unified

metrics

for

measuring

the

value

of

theintellectualcapitalofanorganization(see,e.g.Bontis,1998,Swart,2006).Onlyinferencesofthe

economic value of intellectual capital can be derived which are expected to be homeostatic to its

latent truevalue.For thisreason,consistentlywith the IC1ostensiveperspective ,weusethe term

inferred intellectual capital to denote the value of the intellectual capital that could be captured

throughtpubliclyavailablefinancialinformationreportedinfinancialstatements.

Following hypothesis H1, it is expected that higher values of inferred intellectual capital would be

positivelycorrelatedwith financialperformance.Further,as IC1ostensiveresearchstreamtheorizes

intellectualcapitalasthesumofdiscretebutinterrelatedcomponents(e.g.humancapital,structural

capital,socialcapital), it is expected thatall thesecomponentsof inferred intellectualcapitalaffect

financialperformanceinapositivemanner.Summarizingtheaboveanalysis,thefollowinghypotheses

arederived:

H11:Inthecaseoflocalgovernments,InferredIntellectualCapitalanditsComponents

arepositivelycorrelatedwithFinancialPerformance.

Financialperformanceisassessedintermsofefficiency,liquidityanddebtmanagement.Thecriteria

usedfortheselectionofthesedimensionsarethattheyconstitutebothcommonlyencounteredand

distinctive aspects for financial performance assessment. Thus, from hypothesis H11, the following

hypothesesarederived:

H11.1:Inthecaseoflocalgovernments,InferredIntellectualCapitalanditsComponents

arepositivelycorrelatedwithefficiency.

H11.2:In

the

case

of

local

governments,

Inferred

Intellectual

Capital

and

its

Components

arepositivelycorrelatedwithliquidity.

H11.3:Inthecaseoflocalgovernments,InferredIntellectualCapitalanditsComponents

arepositivelycorrelatedwithdebtmanagement.

Adopting the IC2performative epistemological view, the research question of the relationship

between intellectualcapitalandperformanceshouldbeexaminedby interpreting itsroleonmaking

organizations capable of performing towards endogenously defined values. Decoding the intra

organizationalroleof intellectualcapitalrequiresanalysingtheperceptionsofthe internalagentsof

the organization towards perceived intellectual capital. Perceived intellectual capital, in contrast to

inferredintellectualcapital,reflectsthequalitativecharacteristicsthatinternalagentsattributetothe

intellectual

capital.

Further,

perceived

intellectual

capital

is

evaluated

by

its

ability

to

makeorganizations capable of achieving endogenously defined values. This implies that IC2performative

epistemological view opposes to the direct linkage between intellectual capital and financial

performance and attempts to visualise the effects of perceived intellectual capital on perceived

performanceusingnarratives,qualitativeinformationanddescriptions.Perceivedperformancerefers

to what extent internal agents believe that the perceived intellectual capital serves organizational

goals.Perceptionsareviewsthatdonotnecessarilycorrespondtoreality.

InsertFigure1

In thecaseof localgovernments, IC2performativeepistemologicalview isvaluable inexamining H1

hypothesisfromamultifacetedperspective.Empiricalresearchdocumentsthediversitythatexistsin

termsof

the

awareness

and

the

perceptions

of

non

profit

organizations

regarding

intellectual

capital

(e.g.Scheimer andSamkin,2008,Guthrieetal.,2009,BeneveneandCortini,2010).Publicsector is


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6

characterisedbylowermotivationtoadoptnewmanagementpractises,bureaucracyandlessurgency

toquantifyeconomicvaluesthanprivatesector(Cincaetal.,2003).Theseidiosyncraticorganizational

contingencies of public sector formulate an unfriendly internal environment for intellectual capital

cultivation.Undertheseconditions,interorganizationalperceptionstowardsintellectualcapitalhave

significant implicationsontheorganizationalbehaviour,attitudesandabilitiesoftheseorganizations

to manage the available intellectual capital for creating organizational value. Yet, the relationship

between perceived intellectual capital and its perceived effects on performance has not been

consistentlyinvestigatedinliterature.Nevertheless,weexpectthatthefactorssynthesizingperceived

intellectual capital are positively associated with perceived performance. This is because this

relationshipisexistentonthecollectivecognitivemapsofthemembersofthelocalgovernmentsand

thathigher(lower) levelsofperceived intellectualcapitalareassociatedwithhigher(lower)levelsof

perceived performance. The level of perceived intellectual capital can be only captured through

analysing the views of the actors in local governments.Thereforeas this typeof information isnot

reported in financial statements, it should be collected through survey instruments. Based on the

aforementionedanalysis,thefollowinghypothesisisstated:

H12:Inthecaseoflocalgovernments,PerceivedIntellectualCapitalanditsFactorsare

positivelycorrelated

with

Perceived

Performance.

Perceivedperformance isanalysed intermsofcost,qualityandquantityoftheservicesprovidedby

localgovernmentstothelocalcommunities.Thus,fromhypothesisH12,thefollowinghypothesesare

derived:

H12.1:Inthecaseoflocalgovernments,PerceivedIntellectualCapitalanditsFactorsare

negativelycorrelatedwithPerceivedCostofServicesProvidedbyLocalGovernments.


positivelycorrelatedwithPerceivedQualityofServicesProvidedbyLocalGovernments.


positively

correlated

with

Perceived

Quantity

of

Services

Provided

by

Local

Governments.

Both inferred intellectual capital and perceived intellectual capital are theoretical constructs that

allowstudyingtherelationshipbetweenintellectualcapitalandperformanceunderthetwodifferent

epistemologicalviews.Sinceeachoftheabovetheoreticalconstructsexaminesdifferentperspective

oftheorganizationsreality,amoreholisticapproach isrequired inordertocapturethebreadthof

theinteractionbetweenintellectualcapitalandperformance.

Alocalgovernmentmaybeclassifiedinadifferentrankintermsofitsinferredintellectualcapitaland

itsperceivedintellectualcapital.Forsimplicityreasons,localgovernmentsmaybeclassifiedashighor

low intensive in terms of either their inferred or perceived intellectual capital. This categorization

creates a matrix of four quarters in which all local governments can be plotted to. Figure 2 is a

graphicalpresentationoftheaboveclassification.

InsertFigure2

Local governments with high both perceived and inferred intellectual capital are classified as high

intellectual capital local governments. Local governments with low both perceived and inferred

intellectual capital are classified as low intellectual capital local governments. These two groups

represent local governments which are classified uniformly under both IC1ostensive and IC2

performativeviews.Thereforethereisunanimityin localgovernmentcategorizationirrespectivelyof

theICtheoreticalperspective.Forallotherlocalgovernmentsthetwotheoreticalviews(IC1ostensive

and IC2performative)result intodifferentcategorizations.Thereforetheirclassification isrelianton

the theoretical view employed; they can be classified either as low (high) perceived or high (low)

inferred

intellectual

capital

intensive.


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7

Usingtheaforementionedclassificationschemaandthe impliedpositiveeffectof intellectualcapital

onperformancethefollowinghypothesisisderived:

H13:LocalgovernmentswithhighIntellectualCapitalshowbetterperformanceboth

financialandperceivedthanlocalgovernmentswithlowintellectualcapital.

4.Methodology

Inthepresentstudy,therelationbetweenintellectualcapitalandperformanceisexaminedunderthe

two different epistemological views of the intellectual capital research, the IC1 ostensive and IC2

performative.Inordertoaccommodatethedifferencesinintellectualcapitalquantificationaswellas

themethodologicalrequirementsconsideringthenatureofdata,variablesemployed in theanalysis

and data processing dictated by the two intellectual capital viewpoints, we adopt a twofold

methodologicalapproach.

UnderIC1ostensiveresearchstream,wecalculateinferredintellectualcapitalbyusingdatafoundin

theannualfinancialstatementsoflocalgovernments.Moreover,financialstatementsdataisused in

order to calculate financial ratios commonly used to evaluate the financial performance of an

organization.

Under IC2informative research stream, we calculate perceived intellectual capital by using data

gathered through questionnaires in a field survey. The questionnaire serves a dual scope; firstly to

write down the perceptions of local governments in terms of several propositions related to

intellectualcapitalwithinthe localgovernmentandsecondlytogatherinformation inrelationtothe

perceivedlevelofperformance.

4.1.DefinitionofVariablesfortheInferredIntellectualCapital

Thissectionanalysestheproxymeasuresusedtovisualizethecomponentsoftheinferredintellectual

capital using the financial statements data of local governments. These proxy measures rely only

merely on measures that have been previously proposed within the strand of existing intellectual

capital

reporting

literature.

The

reason

is

that

the

measures

encountered

in

literature

have

been

analysed through the lens of the private sector and, they therefore correspond to measurement

techniqueswith astrong marketorientation,which doesnot fit to thepublicsector (Guthrieetal.,

2009). Inferred intellectual capital is analysed into inferred human capital, inferred organizational

capitalandinferredsocialcapital.

4.1.1.InferredHumanCapital

Humancapitalincludesknowledge,skills,innovativenessandtheabilitytoresponseeffectivelyattask

performance(EdvinssonandMalone,1997,MartindeCastroetal.,2011).Undertheassumptionofa

homogeneousproductionfunction,differencesonthelevelofhumancapitalareassociatedpositively

with productivity differentials (Aliaga, 2001, Becker, 1964) and, for a given level of resource

consumption,withabnormalproduction.

Weconsidertwomaininputsintheproductionfunctionoflocalgovernments:capitalandlabour.Asa

proxyofcapitaltheamountoftotalassetsisused,whereasasaproxyoflabourweusethenumberof

employees. A local government with higher levels of human capital is expected to record higher

averageperemployeeproductivity.

AssumingthatthereisahomogenousCobbDouglasproductionfunctionacrossthelocalgovernments

oftheresearchsite,theinferredhumancapitalofjlocalgovernmentIN_HCjismeasuredintermsof

theabnormaloutputQjoverthenumberofemployeesN

j.

jj

j

QIN_HC =

N (1)

Abnormaloutput

Qj

is

the

estimation

error

of

the

following

OLS

model:


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8

j j j j j j j

0 1 2log(S )=log(a )+a log(TA )+a log(N )+e (2)

where:

Sjdenotesrevenuesfromownoperationsofthejlocalgovernment,

TAjcorrespondstothetotalassetsofthejlocalgovernment,and

Njisthenumberofemployeesinthejlocalgovernment.

We use revenues from own operations as a surrogate for output. Local governments are service

oriented organizations and thus the level of revenues represents the output for a given fiscal year.

Revenues correspond to the sales of goods and services as well as the taxes imposed by local

governments to citizens and businesses. We exclude government subsidies from revenues, as

subsidiesaregrantedtolocalgovernmentsonthebasisofasetofpoliticalandsocialcriteriathatare

notdirectlycontrolledoraffectedbytheactionsoflocalgovernments(e.g.population,location).

4.1.2.InferredOrganizationalCapital

AccordingtoSubramaniamandYoundt(2005)organizationalcapitalisdefinedastheinstitutionalized

knowledgeand

codified

experience

residing

within

and

utilized

through

databases,

patents,

manuals,

systems, and processes. Prior literature uses selling, general and administrative (SGA hereafter)

expensesasanaccountingfundamentalassociatedwithorganizationalcapital(see,e.g.Edvinssonand

Malone, 1997,RoosandRoos,1997,Levetal.,2009). Theunderlining rationale is that thenormal

operation of each organization requires a minimum level of SGA expenses and the remaining part

representsinvestmentsondevelopingorganizationalcapital.Thisrationalhasbeenheavilyusedinthe

ICprivatesectorliterature.

Following,thesameparadigm,the inferredorganizationalcapitalIN_OCjofthej localgovernment is

measuredintermsofabnormalSGAexpensesscaledbythenumberofemployees:

jj

j

AB_SGAIN_OC =

N

(3)

where:

AB_SGAjdenotestheabnormalSGAexpensesofthejlocalgovernment,and

Njisthenumberofemployeesofthejlocalgovernment.

Usingthenumberofemployeesasameasurementvariable forthe levelofSGAexpenses ina local

government,thelevelofabnormalSGAexpensesAB_SGAjofthejlocalgovernmentisdefinedasthe

estimationerrorofthefollowingOLSmodel:

j jj

0 1 AB_SGAj j

SGA N=b +b +e

TA TA (4)

BothdependentandindependentvariableoftheOLSmodelofEq.(4)arescaledwiththetotalassets

TAj

of

thej

local

government.

The

reason

is

to

take

into

consideration

the

size

effect

of

the

local

governmentonthelevelofSGAexpenses.

4.1.3.InferredSocialCapital

Thethirdcomponentof intellectualcapitalreferstotheabilityofanorganizationtoabsorb,exploit

andexplorenewknowledgefromitsenvironmentsoastoobtainandsustaincompetitiveadvantage

positions (MartindeCastro et al., 2011). Within the context of private sector, it is referred as

relational capital. However, the term social capital seems more appropriate to describe the third

component of the intellectual capital of the local governments due to their social oriented

physiognomy.

Highlevelsofsocialcapitalindicatethatthelocalgovernmenthasincreasedabilitytoobtaineconomic

benefits on behalf of its citizens. Local governments provide monopolistic services to the local

communitiesandtheirrelationshipwiththeircitizenscanbeviewedwithinthecontextofanagency


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9

model.Citizensrepresenttheprincipalsitewhichsupplytheirlocalgovernmentwithcapitalthrough

taxation, bear risk in case that local government fails to serve local community and construct

incentives ranging from social acceptance of specific policies to the approval of economic benefits

obtained by public servants. Local government represents the agent site that makes decisions on

behalf of the citizen relying on superior knowledge about the social environment. This superior

knowledgeisthesocialcapital.

Withinthecontextoftheaboveagencymodel,localgovernmentsareexpectedtomaximizecitizens

economic welfare. The internal economic value of the services provided, the economic sacrifices

required to produce and to deliver services,equals the costof goods sold. The higher the levelsof

socialcapitalindicatesthatlocalgovernmenthasincreasedabilitytoabsorb,exploitandexplorenew

knowledgefromitsenvironmentinordertoprovidebetterand,thus,morevaluableservices.

Abnormal levelsofcostofgoodssoldforagivenquantityofservices indicatethat localgovernment

eitherprovidestothecitizenryservicesofhigherinternaleconomicvalueoroperatesinefficiently.A

localgovernmentisefficientiftheabnormalrevenuesexceedtheabnormalcostofgoodssold.Inthat

casesocialcapitalenables localgovernmentto improve itsefficiencyandtoreservehigher levelsof

economicwealthforitscitizens.

Based on the aforementioned analysis, the inferred social capital ofj local government IN_SOCj is

measured as the difference between abnormal own revenues from operations AB_Sj and abnormal

costofgoodssoldAB_COGSjscaledwiththenumberofemployeesofthejlocalgovernmentN

j:

j jj

j

AB_S AB_COGSIN_SOC =

N (5)

AbnormalcostofgoodssoldAB_COGSjistheestimationerrorofthefollowingOLSmodel:

j jJ

0 1 AB_COGSj j

COGS P=c +c +e

TA TA (6)

where

COGSj

denotes

the

cost

of

goods

sold

of

the

jlocal

government,

and

Pjisthepopulationofjlocalgovernment.

Bothdependentand independentvariablesoftheOLSmodeloftheEq.(5)arescaledwiththetotal

assetsTAjofthejlocalgovernment.

AbnormalownrevenuesfromoperationsAB_SjistheestimationerrorofthefollowingOLSmodel:

j jj

0 1 AB_Sj j

S P=d +d +e

TA TA (7)

whereSjdenotesrevenuesfromownoperationsofthejlocalgovernment,and

Pjisthepopulationofjlocalgovernment.

BothdependentandindependentvariablesofEq.(5)arescaledwiththetotalassetsTAjofthejlocal

government.

Eq.(5)can,alternatively,restated istermsoftheestimationserrorsoftheestimatedOLSmodelsof

Eqs.(6)and(7):

j jAB_S AB_CGSj

j

e eIN_SOC =

N (8)

4.1.5.DefinitionsofVariablesofFinancialPerformance

Various

financial

ratios

can

be

employed

in

order

to

measure

the

financial

performance

of

a

local

government.Theratiosusedinthisstudycorrespondtoratiosusedintraditionalfinancialanalysisto

evaluate(i)profitability,(ii)liquidityand(iii)debtmanagement.


10/33

10

Thefinancialratioselectedtoevaluatetheprofitabilityoflocalgovernmentsisthefollowing:

i. ReturnonAssets:theratioofnetincomeovertotalassetsforagivenfiscalyear.Thefinancialratiosthatareusedtoevaluatetheliquidityofalocalgovernmentarethefollowing:

i. Liquidity:theratioofcurrentassetsovercurrentliabilities.ii. TotalAssetsTurnover (Total SalesRevenue): the ratioof total revenues (own revenues plus

subsidies)overtotalassets.

iii. Plant,Property,EquipmentTurnover (Total Sales Revenue): the ratio of total revenues overPlant,PropertyandEquipment.

iv. Total Assets Turnover (Own Revenues from Operations): the ratio of own revenues fromoperationsovertotalassets.

v. Plant, Property, Equipment Turnover (Own Revenues from Operations): the ratio of ownrevenuesfromoperationsoverPlant,PropertyandEquipment.

Finally,thefinancialratiosthatarecalculatedinordertoevaluatethequalityofdebtmanagementof

alocal

government

are

the

following:

i. LiabilitiesoverTotalAssets:theratioofliabilitiesovertotalassets.ii. DebtoverTotalAssets:theratiooflongtermdebtovertotalassets.

4.2.DefinitionofFactorsIdentifiedforthePerceivedIntellectualCapital

This section analyses the factors that constitute the perceived intellectual capital. These factors

emergedfromananalysisoftheanswersobtainedthroughthequestionnairethatwasdevelopedfor

thepurpose of thestudy.Thesurvey instrument, requested the respondents toexpressonaLikert

scaletheextentoftheiragreement(where5correspondedtototallyagree)ordisagreement(where1

corresponded to totallydisagree)onsixtyone (61)statements.Atranslatedcopyofthestatements

includedin

the

questionnaire

is

found

in

the

appendix.

The

selection

of

the

statements

was

based

on

previous literature properly adjusted for the setting of local governments and Greek reality. The

questionnaire has been pilot tested in one local government where we sought at spotting unclear

questions or sources of possible misunderstanding. The statements corresponding to different

intellectual capital subdimensions were scatted in the questionnaire. Moreover there were six (6)

reverse coded statements. The questionnaire was addressed to 340 randomly selected local

governments out of the 577 that are obliged to issue accrual accounting financial statements. The

questionnairewasaddressedtotheMayorofthe localgovernment.Atotalof92 localgovernments

participated in the survey by returning completed questionnaires. Thus, the response rate of our

researchstudywas27%.Thefieldstudytookplaceduringthesummerof2010.Anonresponsebias

analysisdidnotrevealanystatisticallysignificantdifferencesbetweenearlyandlaterespondents.

Thequestionnaires

were

mainly

answered

by

either

the

Mayor

or

the

Vice

Mayor

(25%)

or

the

Officer

ofAdministrativeServices(64%).Theexperienceoftherespondentswasindicativeoftheirknowledge

regarding localgovernmentoperations.The33%ofrespondentshadworkingexperience inthe local

governmentfor610yearswhile51%hadmorethan11yearsofexperience.

The answers that we received were grouped together so as to create factors that are coded as (i)

perceived human capital (factors HC_1 to HC_6), (ii) perceived structural capital (factors SC_1 to

SC_4),(iii)perceivedsocialcapital(factorsSOC_1toSOC_4)and(iv)perceivedperformance (factors

Qual., Quant. and Cost). A Cronbachs Alpha test was used to assess the validity of the identified

factors. Table 2 presents a brief summary of the factors, their definition and the Cronbachs Alpha

valueforeachfactor.

Insert

Table

2


11/33

11

The factors presented in Table 2 are consistent with the intellectual capital theory. According to

MartindeCastro et al., (2011) human capital is an amalgamation of knowledge, abilities (including

learningandcollaboration)andbehaviours(includingmotivation,commitmentandthussatisfaction).

The following factors forperceivedhumancapitalaredefined:Knowledge&Skills (HC_1),Learning,

Adaptation&HumanResourceDevelopment(HC_2),SynergywithEnvironment(HC_3),Commitment

(HC_4), Motivation (HC_5) and Satisfaction (HC_6). As far as organizational capital is concerned,

SubramaniamandYoudnt(2005)defineitastheinstitutionalizedknowledgeandcodifiedexperience

residingwithinandutilizedthroughdatabases,patents,manuals,systems,andprocesses.Thefactors

recognized in the case of organizational capital are Knowledge Management (OC_1), Innovation

(OC_2), Internal Integration (OC_3) and egovernance (OC_4). Knowledge Management and

Innovationrefertothecodifiedknowledge,theabilitytomanagethisknowledgeandthesupporting

IT infrastructure. In order local governments to efficiently manage organizational capital they must

supportitsdisseminationwithinorganizationalboundaries.Anecessaryconditionforthistohappenis

theexistenceof Internal Integration (OC_3).Finally,special reference is made to theabilityof local

governments to employ IT infrastructure for supporting theirs operations, that is, egovernance

(OC_4).Definitionsforsocialcapitalapproximatethoseforrelationalcapital.Changetal.(2008)argue

that relational capital represents the knowledge embedded in the relationships with the outside

environment.ThefirstfactorofsocialcapitalisdefinedasKnowledgeofSocialEnvironment(SOC_1).However, theabilityofa localgovernmenttoutilizetheavailableKnowledgeofSocialEnvironment

depends on the level of its integration with its social environment. Three different aspects of

integration have been recognized: social (External Integration SOC_2, Communication SOC_5 and

Social Culture SOC_6),economic (Economic RelationsSOC_3)and governmental (Collaborationwith

CentralGovernmentSOC_4).

Additional empirical evidence provides support for the theoretical validity of the factors described

above. Recognizing the distinct factors within each dimension of perceived intellectual capital is a

processthatenablesitsstudyinasystematicway.Moreover,thefactorsfoundineachdimensionof

perceived intellectualcapitalare expected tobe positivelycorrelated witheach othersince theyall

constitutefundamental

elements

of

abroader

entity

(i.e.

either

perceived

human

capital

or

perceived

organizationalcapitalorperceivedsocialcapital)andoperatewiththesameteleologicalway.Tables

3, 4 and 5 provide empirical evidence that the factors of perceived human capital, perceived

organizationalcapitalandperceivedsocialcapitalarepositivelycorrelatedat1%statisticalsignificance

level.Further,eachofthedimensionsoftheperceivedintellectualcapitalisexpectedtobepositively

correlated with the other two. This is empirically verified by the correlation statistics that are

presentedinTable6.

InsertTables3,4,5and6

4.3.Definition

of

Factors

of

Perceived

Performance

Except for the factors identified in relationtoperceived intellectualcapital, factorsproxying for the

perceived organizational performance of the local governments were calculated as well. Local

governments, primarily, provide services to the citizenry. Accessing the performance of a service

orientedorganizationisamultidimensionalanddifficulttask.Forsimplicityreasons,theemphasiswas

givenonthreebasicdimensions,thoseof,quantity,qualityandcost.Thefactorsthatconstitutethe

perceivedperformancearetherefore:theperceivedQualityofservices(Qual.),theperceivedQuantity

of service provision (Quant.) and the perceived Cost of services rendered (Cost). These factors

correspondtotheselfassessmentoflocalgovernmentsinrespecttothelevelofquantity,qualityand

the costof the servicesprovided. The valuesof these perceived measures were retrieved from the

questionnairewherelocalgovernmentsmadetheir(self)assessments.


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12

5.Results

This section presents the empirical results of the study. Initially, the relationship between inferred

intellectualcapitalandinferredfinancialperformanceasitisassessedintermsofefficiency,liquidity

and debt management is discussed. Secondly, the relationship of perceived intellectual capital with

perceivedperformanceisexamined.Asafinalstep,theempiricalrelationbetweenintellectualcapital

andperformance

is

examined

irrespectively

of

the

theoretical

perspective

on

intellectual

capital

(i.e.

IC1ostensivevieworIC2performativeview).

5.1.InferredIntellectualCapitalandFinancialPerformance

The data used to calculate the inferred intellectual capital is based on public available information

included in the financialstatementsofGreek localgovernments. Localgovernments inGreece that

satisfyspecificsizeorrevenuecriteriaareobligedtopublishyearlyauditedfinancialstatementsthat

mainly includeaBalanceSheetandaProfitandLossAccount. Ourdata isobtainedbythefinancial

statementspublishedattheendof2008andcorrespondstothefiscalyearof2007.Dataaboutthe

employees in localgovernmentscorrespondsto thesameperiodandwasretrievedbytheNational

StatisticalAuthority.

Population

information

refers

to

the

2001

census.

Table7presentstheresultsoftheestimatedOLSmodelsofEq.(2),Eq.(4),Eq.(6)andEq.(7).Further,

Table8 presentsbasicdescriptivesofthe ratiosused toevaluate the financialperformance of local

governmentsandsummarystatisticsofthebasicvariablesretrievedbytheOLSmodels.

Inferred human capital and inferred social capital seem to be positively correlated with Return on

Assets at 1% and 5% significance level respectively. All three components of inferred intellectual

capital are positively correlated with turnover ratios at 1% level of significance but they are no

correlatedwithliquidity.Furthermore,theyarepositivelycorrelatedwithLiabilitiesoverTotalAssets

andDebtoverTotalAssetsratiosat1%significancelevel.

Summarizing

the

aforementioned

analysis,

inferred

intellectual

capital

seems

to

be

positively

correlatedwithbothefficiencyandliquiditybutpresentsnocorrelationwithdebtmanagement.This

indicates that the presence of inferred intellectual capital improves efficiency and turnover ratios

withoutunderminingthefinancialstructureoflocalgovernments.

InsertTables7,8and 9

5.2.PerceivedIntellectualCapitalandPerceivedPerformance

Thecorrelationbetween the factorsofeachdimensionoftheperceived intellectualcapitaland the

perceivedorganizational ispresented inTable10. Itseems that theeffectsofperceived intellectual

capitalonperceivedperformancearerealisedthroughtheprovisionofsuperiorqualityservicesandto

a lesser extent though cost savings. Further, the presence of a high level of perceived intellectual

capitalseems

not

to

be

associated

with

the

level

of

the

quantity

of

service

provision.

Withinthecontextofperceivedhumancapital,allfactorsarepositivelycorrelatedwiththeperceived

qualityoftheservicesrenderedat1%levelofstatisticalsignificancewiththeexceptionofthefactor

entitled Commitment (HC_4) which is,also, positively correlatedalbeit at5%significance level.The

factors Synergy with Environment (HC_3) and Satisfaction (HC_6) present the highest correlation

values with perceived quality of service rendering relatively to the other factors of the perceived

human capital. A possible reason for that is that the level of synergy with environment and the

satisfaction of human assets are both critical factors that mediate so as the core dimensions of

perceivedhumancapital(i.e.Knowledge&SkillsandLearning,Adaptation&HumanResource)tobe

transformedintoimprovedperformance.Asfarastherelationshipbetweenperceivedhumancapital

and

perceived

cost

is

concerned,

only

the

factors

Learning,

Adaptation

&

Human

Resource

Development (HC_2), Synergy with Environment (HC_3) and, Satisfaction (HC_6) exhibit negative

correlationswithperceivedcostofserviceprovision.NegativerelationsmeanthanhumanICisrelated


13/33

13

with cost savings. Finally, there is no significant correlation between the factors corresponding to

perceivedhumancapitalandthoserelatedtoperceivedquantityofserviceprovision.

A similar pattern in terms of the existing correlations is observed in the case of the two other

dimensionsofperceivedintellectualcapitalaswell.Bothperceivedorganizationalandperceivedsocial

capital have no correlation with perceived quantity of service provision. However, the exhibit a

positive

correlation

with

perceived

quality

of

service

rendering

and

a

negative

correlation

with

perceivedcostofserviceprovision.

Morespecifically,inthecaseofperceivedorganizationalcapital,thefactorsKnowledgeManagement

(OC_1) and Innovation (OC_2) have the strongest positive correlation with perceived quality at 1%

significance level. Contrary to the relations revealed in relation to the factors corresponding to

perceivedhumancapital,thefactorscapturingtheessenceofperceivedorganizationalcapitalareall

negatively correlated with perceived cost. That can be interpreted as a positive contribution of

intellectual capital on resource consumption and efficiency improvement. Moreover, the factor

Internal Integration (OC_3) exhibits the strongest negative correlation with that of perceived cost

amongsttheotherfactorsofperceivedorganizationalcapital.

Inthe

case

of

perceived

social

capital,

the

factors

External

Integration

(SOC_2)

and

Collaboration

with

CentralGovernment (SOC_4) have thestrongestpositive correlation with perceived quality and the

strongestnegativecorrelationwithperceivedcostat1%significancelevelamongstallotherfactorsof

perceivedsocial capital. However, the factorsKnowledgeofSocialEnvironment (SOC_1),Economic

Relations(SOC_3)andSocialCulture(SOC_6)oftheperceivedsocialcapitalarenegativelycorrelated

withperceivedquantity.

The aforementioned analysis implies that in the case of local governments perceived intellectual

capital is positively correlated with perceived performance. More specifically, the perceived

intellectualcapitalispositivelycorrelatedwithperceivedqualityofservicerenderingacrossallfactors

thatcorrespondtothethreesubdomainsof intellectualcapital.Nevertheless,perceived intellectual

capital is in some cases negatively correlated with perceived cost. Moreover, perceived intellectual

capital

is

only

sparsely

correlated

with

perceived

quantity.

The

lack

of

correlation

of

perceived

intellectual capital with perceived quantity of service rendering does not undermine the overall

conclusion that the perceived intellectual capital is correlated with performance. A plausible

explanationforthatisthatthequantityofservicesrequiredbycitizensisstableand,thus,theutility

thatcitizensobtainbythoseservicesismainlyaffectedbytheirquality.Thus,localgovernmentsmay

employtheavailableintellectualcapitalsoastoofferservicesofhigherqualitytotheircitizens.

InsertTable10

5.3.IntellectualCapitalandFinancialPerformance

This section attempts to examine the relationship between intellectual capital and financial

performance irrespectivelyof theepistemologicalviewused instudying intellectualcapital (i.e. IC1

ostensiveandIC2performative).Byanalysingtheresultsofeachepistemologicalviewwithouttakinginto consideration the results of the other limits the generalization of the research findings. It is

therefore required to examine the empirical findings presented on previous paragraphs under an

integratedperspective.Forthisreason,foreachcomponentofintellectualcapital(i.e.humancapital,

organizational capital, social capital), we categorise local governments as high or low intensive for

eachdimension(i.e.inferredversusperceived).Themedianvaluesofinferredhumancapital,inferred

organizational capital and inferred social capital are used as corresponding critical values for

classifying local governments as high (above or equal to median value) versus low (below median

value) intensiveforeachICsubcategory.Inthecaseofthefactorsofperceived intellectualcapitala

twostageprocedureisfollowedinordertoseparatelocalgovernmentsashighversuslow.Initial,for

each dimension of perceived intellectual capital (i.e. perceived human capital, perceived

organizational

capital

and

perceived

social

capital)

the

numerical

values

of

the

related

factors

are

added to formulate a total score. Then, the median values of the total score of perceived human


14/33

14

capital, perceived organizational capital and perceived social capital are used as critical values for

classifying local governments as high (above or equal to median value) versus low (below median

value)intensive.

Toexaminetherelationshipofintellectualcapitalwithbothfinancialandperceivedperformance,we

comparethemeanvaluesoffinancialratiosandfactorsofperceivedperformanceofthehighICgroup

andthe

low

IC

group.

The

test

is

performed

by

using

the

2independent

samples

ttest.

Therefore,

we

definethreepairsoftwoindependentsamples(highICLGsandlowICLGs)foreachICsubcategoryi.e.

humancapital,organizationalcapitalandsocialcapital.

Highhumancapitallocalgovernmentsseemtoperformbetterthanlowhumancapitalonesasfaras

turnoverratiosareconcerned at1%significance level.Further,highhumancapital isequatedwith

improvedperceivedqualityoftheservicesprovidedby localgovernmentsat1% levelofsignificance

(Table11).

The relationship of organizational capital with financial performance and perceived organizational

performance isexamined inTable12.Organizationalcapitalseemstoimprovetotalassetsturnovers

at1%levelofsignificanceandtheperceivedqualityofservicesrenderedat4%levelofsignificance.

Finally,social

capital

seems

to

have

effects

on

efficiency,

turnover

ratios

and

perceived

organizational

performance.Morespecifically, localgovernmentswithhighsocialcapitalreporthighermeanvalues

for Return on Assets and Plant, Property and Equipment turnover ratios at a, at least, 3% level of

significance. As far as perceived organizational performance is concerned, social capital is equated

withhigherlevelsofperceivedqualitybutwithlowerlevelsofperceivedquantityandperceivedcost

oftheprovidedservices(Table13).

InsertTables11,12and13

6.Conclusions

The research motivation of this study was to analyse the relationship of intellectual capital with

organizationalperformance

within

the

context

of

local

governments.

We have analysed intellectual capital from two epistemological stances recognised by Mouritsen

(2006): IC1ostensive view and IC2performative view. We proxied for inferred intellectual capital

which is consistent with IC1ostensive view by using information retrieved by accrual accounting

financialstatements.Weassessedperceivedintellectualcapitaloflocalgovernmentsthatiscompliant

with IC2 perspective view by using survey data collected through questionnaires. We built a

classificationschemethatallocateslocalgovernmentstoamatrixaccordingtotheirscoresintermsof

the two intellectual capital views. Within this matrix local governments that are considered

intellectualcapital intensiveunderbothviewsaredistinguished fromthosethatare less intellectual

capitalintensive.

Empiricalevidence

indicates

that

intellectual

capital

is

equated

with

improved

financial

and

perceived

performance.Thishasbeenconfirmedirrespectivelyofthetheoreticalviewadoptedforthestudyof

intellectualcapital.Morespecifically,intellectualcapitalseemstoimprovetheefficiencyandturnover

ratioswithoutcreatingseriousdebtmanagementissues.Further,localgovernmentofficerspositively

associate perceived intellectual capital with perceived quality and negatively with perceived cost of

theservicesrendered.

Ourstudy thereforeverifiesthatthepositiverelationbetween ICand financialperformancehold in

thepublicsectoraswell.Apart fromthat,ourfindingshavesignificantpractical implications forthe

public sector especially at this period in time where there is a need for all efforts to be motivated

towardsperformanceimprovementand3Es(efficiency,effectivenessandeconomy)attainment.

However,

our

results

are

subject

to

the

following

limitations.

Firstly,

our

analysis

is

based

on

a

sample

ofGreekmunicipalities.Thereforethereisalwaysthequestionwhethertheresultscanbegeneralized

totheentirepopulation.Secondly,wehaveusedsomeproxiesinordertooperationalizeinferredIC.


15/33

15

There may be other proxies that could better encapsulate inferred IC through the information

presented in financial statements. Finally, the statements used in the questionnaire are considered

suitable for addressing the scope of our study. Nevertheless, the reliability of answers gathered is

subjecttothelimitationsembeddedinanyfieldstudy.

The above research findings might be the starting point for various other research initiatives. A

replication

of

this

study

to

local

governments

is

other

European

countries

would

improve

our

understandingon theway IC is translated into financialperformance.Moreover, furtherresearch is

required to recognize and analyze the organizational mechanisms thatenable localgovernments to

realizeeconomicbenefits from intellectualcapital.Thisknowledgewill improvethemanagementof

intellectual capital and will contribute towards the implementation of New Public Management in

localgovernments. Another importantresfearch issue istoanalyze inamoreexplicitwayhow local

governmentsperceivetherelationshipofintellectualcapitalwithperformance.Thiswouldenablethe

recognition of behavioral issues that are responsible for the lack of motivation on behalf of public

sectororganizationstoexploittheiravailableintellectualcapitalforimprovingtheirperformance.

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Sougiannis,T.,1994,TheAccountingBasedValuationofCorporateR&D,TheAccountingReview,69,pp.4468.

Subramaniam, M. and Youndt M. A., 2005, The Influence of Intellectual capital on the Types of Innovative

Capabilities,AcademyofManagementJournal,48,pp.450463.

Sveiby,K.E.,1997,TheNewOrganizationalWealth:ManagingandMeasuringKnowledgeBasedAssets,Berrett

Koehler,SanFrancisco,CA.

Stewart,T.A.,1991,Brainpower,Fortune,123,pp.4450.

Swart,J.,2006,Intellectualcapital:DisentanglinganEnigmaticConcept,JournalofIntellectualcapital,7,2,pp.

136159.

Teece,D.J.,2000,ManagingIntellectualcapital,OxfordUniversityPress,NewYork.

Wall,A.,2005,TheMeasurementandManagementofIntellectualCapitalinthePublicSector.TakingtheLead

orWaiting

for

Direction?,

Public

Management

Review,

7,

2,

pp.

289

303.


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Appendix:Questionnaire

Questionnaireconsistsof61statements.Theresponsescaleforeachstatementwasfrom(1)totallydisagreeto

(5)totallyagree.ThequestionnairesindicatedwithRwherereversecoded.

Statements:

1. Localgovernmentpersonnelhavesufficientcapabilitiestosuccessfullyperformtheirduties.2. Localgovernmentpersonnelarewillingtoperformtheirduties.3. Citizenryisasourceofknowledgeandskillsforlocalgovernment.4. Localgovernmentpersonnelaresufficientlyexperiencedfortheexecutionoftheirduties.5. Localgovernmentpersonnelaresatisfiedwiththeworkingenvironment.6. LocalGovernmentmanagementmindsfortheintroductionofinnovativemanagementstyles.7. Thereisamediumterm(25years)trainingprogrammeforlocalgovernmentpersonnel.8. Localgovernmentpersonnelrelyontheirpeerswhentheyneedhelp.9. Localgovernmentcaresforthetrainingofthenewemployees.10. Thelevelofcooperationamongthelocalgovernmentemployeesishigh.11. Citizenryandlocalorganizations(e.g.athleticorganizations, socialassociations,localbusinesses,citizen

associations,

etc.)

cooperate

for

the

implementation

of

local

government

decisions.

12. Localgovernmentutilizestheexperienceofmunicipalemployeeswithseveralyearsinservice.13. Localgovernmentemployeesdirectlyabidebylocalgovernmentdecisions.14. Localgovernmentofferscitizenryandlocalbusinessesdirectinformationandsupportfortheactivities

theywanttodevelop.

15. LocalGovernmentgetsthenecessaryinformationandknowhowforthesupportofitsoperationsbytheMinistryofInterior.

16. Thequalityofserviceswouldbeimprovediftheywereassignedtoaprivatecompany(R).17. SuppliersconstituteasourceofknowhowfortheLocalGovernment.18. Someemployees,inordertohidetheirdeficientproductivity,negativelyaffecttheperformanceof

theirpeers(R).

19. LocalGovernmentrewardsemployeesperformingactionsthatimproveitsoperations.20. LocalGovernmentpersonnelwanttoactivelyparticipateindecisionmaking.21. Localgovernmentfinancialhealthisdirectlyrelatedwiththefinancialhealthofthebusinessesinthe

area.

22. ThelevelofcooperationbetweentheLocalgovernmentpersonnelandthelocalorganizationsishigh.23. Localgovernmentpersonnelarewillingtoundertakemoreresponsibilities.24. Localgovernmentoffersservicesthroughtheinternet.25. Thefinancialsurvivalofaconsiderablenumberoflocalbusinessesreliesonlocalgovernment

expenditures.

26. Localgovernmentpersonnelseekmoralrecognitionfromtheirsocialsurroundings.27. ThequantityofservicesofferedbytheLocalgovernmentcouldbeconsiderablyincreased(R).28. Theeducationallevellocalgovernmentpersonnelishighertowhatneededfortasksexecution.29. Citizenryconsiderslocaltaxburdentobeexcessive(R).30. LocalGovernmentusesbothlocalandnationalMediaasameansofcommunicationwiththecitizens.31. LocalGovernmentpersonnelfeelresponsibleforthesuccessoftheLocalGovernmentprogrammes.32. LocalGovernmentpersonnelaresatisfiedwiththedutiesassignedtothem.33. ThecooperationofLocalGovernmentwiththeMinistryofInteriorforlocalgovernmentpolicyissuesis

satisfactory.

34. Someemployeesexpresstheirdissatisfactiononasystematicbasis(R).35. Citizenryparticipatesactivelyindecisionmaking.36. LocalGovernmentpersonnelhavetheabilitytoadjusttothechangesthattakeplaceintheirworking

environment.

37. LocalGovernmentutilizestheexperienceandthecapabilitiesoflocalorganizations(e.g.athleticorganizations, socialassociations,localbusinesses,citizenassociations,etc.)toimproveitsoperations.

38. LocalGovernmentpersonnelwanttogetspecificandprecisedirectionsforperformingtheirtasks.39. LocalauthoritiesareasourceofknowledgeforLocalGovernment.40. Localgovernmentencouragesitspersonneltocooperateandshareknowledgeandexperiences.41. LocalGovernmentcaresaboutthepromotionofculturewithinthelocalsociety.


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42. Thefinancialhealthofthemajorityofcitizenryisinfluencedbylocalgovernmentexpenditure.43. LocalGovernmentiseffectivelysupportedbythecentralgovernmentinordertoconfrontproblems.44. LocalGovernmentisfamiliarwithnewtechnologyandinternetuse.45. Localgovernmentpersonnelandcitizenrycooperatesuccessfully.46. Suppliersareconsistentwiththeircontractualobligations.47. LocalGovernmentcaresforthequickintegrationofimmigrantsinthelocalcommunity.48. LocalGovernmentemployeesareencouragedtotakeinitiatives.49. Thefinancialhealthofthelocalgovernmentisdirectlyrelatedwiththefinancialhealthofthecitizenry.50. Localgovernmenthasinplaceandimplementsashorttermyearlyprogrammeforpersonneltraining

andeducation.

51. Culturalandeducationalexpenditurecorrespondstoasignificantpercentageoflocalgovernmentexpenses.

52. Localgovernmentencouragestheparticipationofemployeesindecisionmaking.53. Thequalityandthequantityofserviceprovisioncouldbesubstantiallyimprovediftightercontrolwas

inplace(R).

54. Localgovernmentpersonnelmindtobeinformedaboutchangesinthelegislationandthestatutoryframework.

55. Localgovernmentemployeesarewillingtoopenlyexpresstheirviews.56. Localgovernmentemployeesaresatisfiedwiththelevelofsafetyintheirworkingenvironment.57. Bothcitizenryandlocalbusinessesareconsistentwiththeirfinancialobligationstowardsthelocal

government.

58. Citizenryusestheinternettosubmittheircomplaints.59. Localgovernmentimplementsegovernanceprogrammes.60. Localgovernmentpersonnelcooperateswithcitizenryinharmony.61. LocalgovernmentcooperateswithrelevantMinistriesforfinancialissuesinasatisfactorymanner.


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InferredIntellectualCapitalDimension

(IC1ostensive)

PerceivedIntellectualCapitalDimension

(IC2performative)

Perceived

Intellectual

Capital

Perceived

Human

Capital

Perceived

Structural

Capital

Perceived

Social

Capital

Perceived

Quantity

Perceived

Quality

Perceived

Cost

DataSource:

Questionnaires

Performance

Intellectual

Capital

H1

H11.1 - H11.3 H12.1 - H12.3

H11 H12

PerformanceHighPerceived

andInferred

versuslow

Intellectual

Capital

H13

Inferred

Intellectual

Capital

Inferred

Human

Capital

Inferred

Structural

Capital

Inferred

Social

Capital

Debt

Mgnt

LiquidityEfficiency

DataSource:

AnnualFinancialStatements

Figure1:ResearchHypotheses


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21

Low

Perceived/High

Inferred

Intellectual

Capital

Low

Intellectual

Capital

High

Intellectual

Capital

Low

Inferred/High

Perceived

Intellectual

Capital

Low High

High

Low

PerceivedIntellectualCapital

Inferred

Intellectual

Capital

Figure2:ClassificationofLocalGovernmentsAccordingtotheDifferentDimensionsofIntellectualCapital


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22

Table1

DefinitionsofIntellectualCapital

Author(s) Intellectualcapitaldefinitions

Galbraith(1969) Thedifferenceofanorganizationsmarketvalueandbookvalue.

Bontis(1996) Thedifferencebetweenthemarketvalueofthecompanyandthereplacementcostofassets.

Brooking(1996)Thecombinationofmarketassets,humancentredassets,intellectualpropertyassets,and

infrastructureassets.

Sveiby(1997) Thegapbetweenmarketandbookvalueofthefirm.

Edvinssonand

Malone(1997)

Thegapbetweenafirmsmarketvalueanditsfinancialcapital(bookvalueofafirmsequity).

Nahapietand

Ghoshal(1998)

Knowledgeandknowingcapabilityofasocialcollectivity.

Granstrand(1999)

Essentiallycomprisesallimmaterialresourcesthatcouldbeconsideredasassets,beingpossible

toacquire,combine,transformandexploit,andtowhichitispossibletoassign,inprinciple,a

capitalizedvalue.

Dzinkowski(2000) Intellectualassets,knowledgeassets,totalstockofknowledgebasedequitypossessedbyafirm.

Teece(2000)Includesknowledge,competenceandintellectualproperty.Alsoincludesotherintangiblessuch

asbrands,reputations,andcustomerrelationships.

Bontisetal.(2002) Representsthestockofknowledgethatexistsinanorganizationataparticularpointintime.

Subramaniamand

Youndt(2005)

Thesumofallknowledgefirmsutilizeforcompetitiveadvantage.

MartnezTorres

(2006)Includes

those

intangible

assets

of

an

organization

that

are

not

recorded

in

financial

statements

butwhichmayconstitute80%ofthemarketvalueoftheorganization.

Reedetal.(2006)Basiccompetencesofintangiblecharacterthatallowcreatingandmaintainingcompetitive

advantage.

CabritaandBontis

(2008)

Theknowledgeassetsthatcanbeconvertedintovalue.Isamatterofcreatingandsupporting

connectivitybetweenofsetsofexpertise,experienceandcompetencesinsideandoutside

organization.

Changetal.(2008) Representsknowledgerelatedintangibleassetsembeddedinanorganization.

HsuandFang(2009)

Thetotalcapabilities,knowledge,culture,strategy,process,intellectualproperty,andrelational

networksofacompanythatcreatevalueorcompetitiveadvantagesandhelpacompanyachieve

itsgoals.

Source:Martn

de

Castro

et

al.

(2011).


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Table2:

Factors Identified for Perceived Human Capital, Perceived Structural Capital, Perceived Social Capital and Perceived

Performance

PerceivedHumanCapitalFactorCode Name

Definition CronbachsAlpha

HC_1 Knowledge&SkillsTheknowledge,experienceandskillsofthehumanresourcesto

performrequiredtasks(Statements1,4,28and44).

0.751

HC_2

Learning,Adaptation&

HumanResource

Development

Theabilitytorenewavailableknowledge,experienceandskillsof

thehumanresourcesthroughindividuallearning,informaland

formalorganizationalprocesses(Statements7,9,36and49).

0.751

HC_3 SynergywithEnvironment

Theabilityofhumanresourcestocollaborateeffectively(i)within

theorganizationalboundariesofthelocalgovernmentand(ii)with

agentsoperatingwithinthesocialandeconomicenvironmentof

thelocalgovernment(Statements8,10,45,52and59).

0.771

HC_4 Commitment

Thecommitmentofhumanresourcestowardstheorganizational

goalsandvaluesofthelocalgovernment(Statements13,18,23

and31).

0.673

HC_5

Motivation

The

level

of

motivation

of

human

resources

of

the

local

government(Statements2,20,26and38). 0.667

HC_6 SatisfactionThelevelofsatisfactionofhumanresourcesattaskperformance

(Statements5,32,34and55).

0.681

PerceivedOrganizationalCapitalFactorCode Name Definition CronbachsAlphaOC_1 KnowledgeManagement

IT investments and the available codified knowledge of the local

government and the collective ability to manage for serving the

goalsoftheorganization(Statements12,37and53).

0.683

OC_2 Innovation

Orientationtowardstheadoptionofnewmanagementsystems

andthedevelopmentofinnovativecultureamongstemployeesof

thelocalgovernment(Statements6,19and40).

0.775

OC_3 InternalIntegration

Managementpoliciesaimingtoimprovetheintegrationofhuman

resources with the organization of the local government(Statements22and51).

0.671

OC_4 EgovernanceTheintensityofelectronicservicesforsupportingtheoperationof

localgovernments(Statements57and58).

0.698

PerceivedSocialCapitalFactorCode Name Definition CronbachsAlphaSOC_1

KnowledgeofSocial

Environment

Theavailableknowledgesourcesoutsidelocalgovernments

(Statements3,15,17and39).

0.698

SOC_2 ExternalIntegrationThelevelofsocialintegrationofthelocalgovernmentwithlocal

community(Statements11,33,35and46).0.737

SOC_3 EconomicRelationsTheintensityofeconomicintegrationofthelocalgovernmentwith

localeconomy(Statements21,25,42and48).0.737

SOC_4Collaboration

with

Central

Government

Thelevel

of

collaboration

of

the

local

government

with

central

government(Statements43,60and61).0.616

SOC_5 CommunicationThelevelofcommunicationofthelocalgovernmentwithits

externalenvironment(Statements14,24,30and56).0.634

SOC_6 SocialCultureEffortsdevotedforthecreationofsocialculture(Statements41,

47,50and54).0.763

PerceivedOrganizationalPerformanceFactorCode Name DefinitionQual. Quality

Thequalityofservicesprovidedbylocalgovernmenttoitssocialenvironment

(Statement16).

Quant. QuantityThequantityofservicesprovidedbylocalgovernmenttoitssocialenvironment

(Statement27).

Cost Cost Thecostofservicesprovidedbylocalgovernmenttoitssocialenvironment(Statement29).


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Table3:DescriptivesandCorrelationsbetweentheFactorsofPerceivedHumanCapital

SectionAreportssimplestatisticsforthefactorsofPerceivedHumanCapital.SectionBreportsthecorrelationstatisticsfor

thefactorsofPerceivedHumanCapital.

SectionA:Descriptives

Mean Std.Deviation N

Knowledge&

Skills

3.6576

0.62097

92

Learning,Adaptation

&HumanResource

Development

3.3859 0.78307 92

Synergywith

Environment3.7261 0.58982 92

Commitment 3.6413 0.45889 92

Motivation 3.5272 0.60612 92

Satisfaction 3.4565 0.42518 92

SectionB:Correlations

PearsonKnowledge

&Skills

Learning,

Adaptation&

HumanResource

Development

Synergywith

EnvironmentCommitment Motivation Satisfaction

Knowledge&Skills 0.485(**) 0.595(**) 0.413(**) 0.463(**) 0.333(**)

Learning,Adaptation

&HumanResource

Development

0.477(**) 0.603(**) 0.361(**) 0.490(**) 0.455(**)

Synergywith

Environment0.620(**) 0.585(**) 0.457(**) 0.607(**) 0.445(**)

Commitment 0.422(**) 0.314(**) 0.388(**) 0.514(**) 0.275(**)

Motivation 0.481(**) 0.438(**) 0.575(**) 0.472(**) 0.292(**)

Satisfaction 0.349(**) 0.445(**) 0.460(**) 0.236(*) 0.296(**)

Pearsoncorrelationsaboutthediagonal;spearmancorrelationsbelowthediagonal.*and

**indicatestatisticalsignificanceat5%,and1%levelsrespectively.


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Table4:DescriptivesandCorrelationsbetweentheFactorsofPerceivedOrganizationalCapital

SectionAreportssimplestatisticsforthefactorsofPerceivedOrganizationalCapital.SectionBreportsthecorrelation

statisticsforthefactorsofPerceivedOrganizationalCapital.



KnowledgeManagement

3.6014

0.75470

92

Innovation 3.4094 0.88964 92

InternalIntegration 3.3859 0.90512 92

egovernance 3.0761 0.87581 92


PearsonKnowledge

ManagementInnovation InternalIntegration egovernment

KnowledgeManagement 0.688(**) 0.598(**) 0.593(**)

Innovation 0.701(**) 0.768(**) 0.643(**)

InternalIntegration 0.632(**) 0.775(**) 0.593(**)

e governance 0.608(**) 0.646(**) 0.617(**)


**indicate

statistical

significance

at

5%,

and

1%

levels

respectively.

Table5:DescriptivesandCorrelationsbetweentheFactorsofPerceivedSocialCapital

SectionAreportssimplestatisticsforthefactorsofPerceivedSocialCapital.SectionBreportsthecorrelationstatisticsfor

thefactorsofPerceivedSocialCapital.



KnowledgeofSocial

Environment3.1304 0.72388 92

ExternalIntegration 3.4348 0.69225 92

Economic

Relations

2.9783

0.74739

92

Collaborationwith

CentralGovernment3.4783 0.64867 92

Communication 3.4438 0.72849 92

SocialCulture 3.6549 0.74110 92


Pearson

Knowledgeof

Social

Environment

External

Integration

Economic

Relations

Collaboration

withCentral

Government

CommunicationSocial

Culture

KnowledgeofSocial

Environment0.631(**) 0.377(**) 0.441(**) 0.615(**) 0.524(**)

ExternalIntegration 0.602(**) 0.322(**) 0.704(**) 0.497(**) 0.617(**)

EconomicRelations 0.368(**) 0.324(**) 0.252(*) 0.216(*) 0.322(**)

Collaborationwith

CentralGovernment0.433(**) 0.691(**) 0.292(**) 0.388(**) 0.467(**)

Communication 0.659(**) 0.538(**) 0.255(*) 0.425(**) 0.637(**)

SocialCulture 0.566(**) 0.630(**) 0.334(**) 0.485(**) 0.641(**)


**indicatestatisticalsignificanceat5%,and1%levelsrespectively.


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Table7:OLSEstimationsandResidualsStatistics

ThistablepresentstheOLSestimationsandtheresidualsstatisticsforthefollowingOLSestimatedmodels: j j j j j j j

0 1 2log(S )=log(a )+a log(TA )+a log(N )+eModel1,

j jj

0 1 AB_SGAj j

SGA N=b +b +e

TA TA

Model2

j j

J0 1 AB_COGSj j

COGS P=c +c +eTA TA

Model

3

and

j jj

0 1 AB_Sj j

S P=d +d +e

TA TA

Model4

SectionA:OLSEstimations

Model1 Model2 Model3 Model4

IndependentVariables log(Sj) SGA

j/TA

jCOGS

j/TA

jS

j/TA

j

Constant 1.193 0.041** 0.031** 0.013

(1.522) (5.136) (2.411) (0.693)

log(TAj) 0.59**

(4.784)

log(Nj

)

0.421**

(4.145)

Nj/TA

j6144.057**

(3.000)

Pj/TA

j280.204** 197.664**

(14.044) (29.116)

AdjustedRSquare 0.694 0.096 0.727 0.375

NumberofObs. 76 76 76 76

F 86.089** 9.001** 197.237** 46.087**

SectionB:ResidualsStatistics

Qj AB_SGA

j AB_COGS

jAB_S

j

Mean 0.000 0.000 0.000 0.000

Std.

Deviation

0.301

0.040

0.058

0.055

*and

**indicatestatisticalsignificanceat2%,and1%levelsrespectively.tvaluesareinbrackets


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Table8:DescriptivesofVariables

Minimum Maximum Mean Std.Deviation

InferredHumanCapital 0.0491 0.2129 0.0031 0.0341

InferredOrganizationalCapital 0.0040 0.0209 0.0005 0.0032

InferredSocialCapital 0.0083

0.0090

0.0002

0.0022

ReturnonAssets 0.0600 0.1200 0.0013 0.0259

Liquidity 0.2500 23.8400 2.5942 3.6798

TotalAssetsTurnover(TotalSales

Revenue)0.0400 0.7300 0.2195 0.1219

Plant,Property,EquipmentTurnover

(TotalSalesRevenue)0.0100 0.4400 0.1074 0.0847

TotalAssetsTurnover(Revenuesfrom

OwnOperations)0.0445 1.0235 0.2513 0.1632

Plant,Property,Equipme

102. analyzing the relations between intellectual capital and performance in local governments

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