1. IC & Innovation



1. IC & Innovation
International Journal of Business and Management Studies,
CD-ROM. ISSN: 2158-1479 :: 2(1):561–581 (2013)
c 2013 by UniversityPublications.net
Mohammad Rahmani Karchegani, Saudah Sofian, Salmiah Mohd Amin
Universiti Teknologi Malaysia
There are many factors that influence firm performance. In order to sustain competitive
advantage and increase performance, a firm needs to offer high-quality products at low cost.
Many firms have responded to these competitive demands by being innovative in their
practices and have shown enough flexibility to meet the expectations of their stakeholders.
Economists assert that intellectual capital (IC) is a vital asset that helps organizations to create
value in present economic syndrome and enables the organizations to be innovative. IC can
boost the organizational performance through knowledge, experiences, skills of employees
and also by defining new methods of task performance and being innovative in their
processes. Thus, IC of a company indicates the value of ideas and capability of being
innovative for a longer period. Many authors have examined the relationship between IC and
firm performance. Their finding indicates the existence of positive and significant relationship
and this inspires the idea to review the literature on the relationship between innovation and
intellectual capital, the topic of this paper.
Keywords: Intellectual Capital, Innovation, Firm Performance
Structures of organizational resources have shifted from material to intangible assets during the
last two decades. Many proponents avouch that the “Product-based Economy” and “Retail
Economy” has been converted to the “Knowledge-based Economy” (Alcaniz et al., 2011;
Cambra-Fierro et al., 2011; Canibano et al., 2000; Fagerberg et al., 2012; Huang and Kung,
2011; Malhotra, 2000; Nonaka et al., 1996).
Economists (Augier and Teece, 2005; Marr, 2005a) claim that “knowledge” and
“intellectual capital” is two vital and intangible assets that help organizations to create value and
wealth in this “Knowledge-based Economy.” Drucker (1993) asserted that human knowledge
leads to innovation and transformation of “Human Society” to a “Knowledge Society.” Recently,
Lin and Edvinsson (2011) also stated that “knowledge society” is incredibly accelerating the
economic and social development. These knowledge societies are comprised of knowledge
workers and according to Drucker (1993) knowledge workers include; knowledgeable
executives, employees and professionals who possess the organizational knowledge.
Theoretically, IC scholars suggest that IC components; human, structural, and relational
capitals are important factors for creating knowledge and innovation (Edvinsson et al., 2004).
These both have been known as the two drivers of competitive advantage for increasing financial
and non-financial organizational performance (Aas and Pedersen, 2011; Amidon, 1997, 2003a;
Andriessen, 2004b; Bontis, 2002; Brown, 2009; Chan, 2009; Ismail, 2005; Kramer et al., 2011;
Marr, 2005a; Tayles et al., 2007). Human resource scholars also concluded that intellectual
Mohammad Rahmani Karchegani et al.
capital leads to innovative creation which in turns plays a significant role in influencing firm
performance (Santoso, 2012; Sharabati et al., 2010; Spahiü and Huruz, 2012; Wang and Wang,
2012; Wiig, 1997).
Amidon (2003b) believes that at the beginning of the third Millennium, innovation is not
only the source of competitive advantage but also plays a significant role in the next wave of
influence, called “collaborative advantage.” Rose et al. (2009) noted that innovation has been
recognized as an important driver of economic growth, and it enables the firms to offer new
products and services with better-quality at less price. Edvinsson (2004), Kramer (2011) and
Vincent et al. (2005) emphasize that being an innovative is necessary to a firm to create a
sustainable competitive advantage in today’s turbulent environment. On the other side, Augier
and Teece (2005) believe that if organizations do not have any plans to discover and managing
their IC will face unwanted consequences. Based on multidisciplinary literature review of IC,
Alcaniz et al. (2011) and Marr (2005b) concluded that the IC concept has emerged with different
perspectives such as: Economic, Strategic, Accounting, Finance, Reporting, Marketing, Human
resource, Information system, and the Legal perspective. IC and innovation are two crucial and
vital resources to increase firm performance (Brown, 2009; Zschockelt, 2009), companies must
disclose and manage them in a well manner.
In relation to the above, this paper will discuss intellectual capital components that foster
innovation in companies in increase firm performance. The paper highlights the relationship
between intellectual capital components and organizational innovation , particularly in
companies that invest highly in intellectual capital.
Intellectual Capital (IC)
At the beginning of 21st century, many of the researches have argued that knowledge and
intellectual capital play a fundamental role in modern enterprises of knowledge-based economy
(Andriessen, 2004b; Bontis, 1999; Dumay, 2011; Edvinsson, 1997; Edvinsson et al., 2004;
Erickson and Rothberg, 2009; Marr and Roos, 2005; Roos and Roos, 1997). Stewart (2002)
claims that IC is the third ‘big idea’ of the two past decades of management theory besides the
total quality management and re-engineering. Thus, enterprises with better IC management have
gained a better competitive advantage over those enterprises which relatively place less
importance on IC management (Wiig, 1997).
In the words, IC is becoming more significant in determining the performance of enterprises
in today’s global economic system (Andriessen, 2004a, 2004b; Augier and Teece, 2005; Bontis
et al., 2000; Cabrita and Bontis, 2008; Chan, 2009; Díez et al., 2010; Erickson and Rothberg,
2009; Tam, 1997; Zigan and Zeglat, 2010). Starovic and Marr (2005) argue that currently IC is
essential to both companies and societies. IC can be a cause of competitive advantage for
businesses and encourage innovation (Andriessen, 2004a, 2004b; Edvinsson et al., 2004; Kong,
2010b; Lindgren et al., 2009). Thus, to determine the success of company at all levels intangible
assets often plays the most important roles than in material ones (Liu, 2010). According to Roos
et al. (1997), the theoretical roots of IC come from two different streams of strategy and
management. While the former focus upon the development and leverage of knowledge, the
latter focuses on the development of new information systems that measure the value of
Andriessen (2004b) highlighted some reasons that encourage firms to manage, measure and
report their IC:
The Relationship Between Intellectual Capital and Innovation...
To improve internal management
To improve external reporting
To satisfy statutory and transactional factors
Skandia as a Swedish insurance company is the first company that provided a complete
report on IC in insurance industry. Edvinsson (1997) believes this was because Skandia needed a
new logic accounting for the development of knowledge-intensive services. In the Skandia’s
report intellectual, capital was defined as the possession of knowledge, applied experiences,
organizational technology, customer relationships and professional skills. Skandia breaks IC into
two components of human and structural capital. Human capital is not a form of property that
can be owned by an enterprise. Its value is attributed to employee training, know- how, and
competencies. Structural capital, on the other hand, is dividable into customer capital, and
organisational capital and this remains in the possession of enterprise even after employees have
left at the end of the day. Later, Holmen (2005) suggested that organisational capital can be
further categorized into process capital and innovation capital. Based on the Skandia experience,
Edvinsson (1997) formulated IC into three basic insights, that are used in further implementation
of IC term as a starting point:
IC is s supplementary to financial information; it is not subordinate information.
IC is a non-financial capital; it depicts a non-visible difference between book value and value
market value.
IC is a debt issue, not an asset issue.
The IC report of Skandia in 1996 not only was new (Edvinsson, 1997), but also was the first
empirical analysis on the relationship between IC and firm performance in insurance industry.
According to the Skandia navigator method, this type of report provides a more systematic
description of the company’s ability and potential to transform IC into financial capital.
Sveiby and Lloyd (1988) reported that IC gained popularity in management literature due to
three main reasons. First, the discontent over the 500-years-old system that runs accounting. This
system treats accounting as a money-driven system; consequently, financial indicators could end
up giving misleading signals about organizations with intensive knowledge basis regarding the
maintenance of intangible's assets. Second, the ever-increasing differences that exist between
Market Value and Book Value, and third, due to the increased influence of globalization require
transparency in business reporting.
Andriessen (2004b) views IC as a holistic view of the enterprise. Accordingly, IC is not
regarded solely in relation to people (like Human Resource Accounting); it also includes nonvisible assets that are not human (like organizational processes). Since the last fifteen years of
Skandia’s report, IC has remained one of the focal terms in business, economics, and humanresource management contexts, despite the fact, the level of disclosure of IC is still low in
business annual reports (Bontis and Nikitopoulos, 2002; Chen and Wang, 2010; Petty and
Guthrie, 2000).
The Saint-Onge model is one of the most popular models for classifying intellectual
property. It was developed in the early 1990s, and it splits intellectual capital into three
components: human capital, structural capital, and customer capital (Saint-Onge, 1996).
Edvinsson extracted two components for intellectual capital; first, human capital which is a
combination of knowledge, skill, ability, and innovativeness. Second, structural capital which is
Mohammad Rahmani Karchegani et al.
the combination of hardware, software, databases, organisational structure, patents, trademarks,
and everything other than organisational capability .
Andriessen (2001), in a critical analysis of many core competencies concluded that the
combination of intangible assets like certain knowledge and skills flourish under the particular
organizational culture. Andriessen (2004b) recognizes two main resources for creating value
added in companies: capital employed (which is a physical and financial capital), and intellectual
capital (which includes human and structural capital). Value added is defined as output (sales
revenue) minus the input (everything that comes from outside of the organization).
The Organizational Economices Center Development (OECD, 2005) recognizes IC as the
economic value of two kinds of capitals, a company possesses, are Structural Capital and
Human Capital. Iswatia and Anshori (2007a) argue that intellectual capital is essential to transit
from industrial era to information era. Zschockelt (2009) reports that organizational capital is
often seen as institutionalized knowledge and codified experience stored in databases, routines,
patents, manuals, structures and the likes. Marr and Moustaghfir (2005) assert that there is no
agreement on a clear definition and component of IC. Despite, the general acceptance of IC, it is
not a one-dimensional construct rather resides at various levels such as the individual, network
and organizational level (Bontis et al., 2000; Edvinsson and Malone, 1998; Roos and Roos,
1997; Stewart, 1997).
Combining these terms and associating them together would create a platform for a
preliminary denotative definition of the elements of IC. Intellectual capacity includes any
intangible asset with value that is obtained through learning and experience, which in turn would
result in production of wealth. Figure 1 sums up the essential factors of each term, whih make up
the technical definition.
The Relationship Between Intellectual Capital and Innovation...
Relating to the capacity of
understanding, reasoning, and
Material Wealth
Stock of accumulated
Value of accumulated goods
Assured belief
Intellectual Capital
Unable to be touched
Not solid
Vague and abstract
Supplementary asset
Useful or valuable thing
Item property
Figure 1. The Essential Elements of Intellectual Capital.
Source: Marr and Moustaghfir (2005)
Marr (2005b) shows that IC topic has emerged as a range of perspectives in the multidisciplinary terms of organizational management. This includes economic perspectives, strategic
perspectives, managerial perspectives and accounting perspectives where the term “intangible
asset" is often used as a synonym for IC (Alcaniz et al., 2011). For example, taking the human
resource (HR) approach, intellectual capital relates to expertise, knowledge and employees’
attitude. Accountants tend to focus on intangible properties, which as defined by IASB (2004)
Mohammad Rahmani Karchegani et al.
are non-financial fixed assets and are not physically substantiated. However, they can be
identified and managed by the entity through the legal rights and custody. On the other hand,
from a marketing point of view, intangibles like customer satisfaction, brand recognition, etc. are
located at the heart of business success. Furthermore, from an Information Systems approach,
intellectual capital is described as software applications and also as network capabilities (Marr,
Consequently, there is no universally accepted definition for IC. In a nutshell, IC is a
multidisciplinary concept that has out stretched to many functions and disciplines. Still is has
equivocal nature due to multidisciplinary perpectives. In addition, applicable tools for exploiting
this concept in organizations are still vague. Based on comparison of numerous IC models, most
of the models are based on a more or less similar classification. Logically, the frameworks have
indicated that IC is a result of inter-relations among three main components of intangible assets
viz: human capital, structural capital and relational capital (Bontis, 2002; Edvinsson and Malone,
1997; Mouritsen et al., 2001; 2000; 1994). Recently, a new element called spiritual capital was
also added as the fourth component by Gillett (2002) and Ismail (2005). Thus, current study will
consider the above mentioned four IC components described by Meritum (2002) and these are
discussed in Table 1:
Table 1. Comprehensive of Definition of Intellectual Capital Components.
IC Component
Human *
Spiritual** Capital
-Is the knowledge that employees take with them when they leave the firm.
-It includes the knowledge, skills, experiences and abilities of people.
-Some of this knowledge is unique to individual, some may be generic.
-Examples are innovation capacity, creativity, know-how and previous experience, teamwork
capacity, employee flexibility, tolerance for ambiguity motivation, satisfaction, learning capacity,
loyalty, formal training and education.
-Is the knowledge that stays within the firm at the end of the working day.
-It comprises the organizational routines, procedures, systems, cultures, databases, etc.
-Examples are organizational flexibility, a documentation service, the existence of a knowledge
centre, the general use of Information Technologies, organizational learning capacity, etc.
-some of them may be legally protected and become Intellectual Property Rights, legally owned by
the firm under separate title.
-Is all resources linked to the external relationships of the firm, with customer, suppliers or R&D and
-It comprises that part of Human and Structural Capital involved with the companies relations with
stakeholders investors, creditors, customers, suppliers, etc., plus the perceptions that they hold about
the company.
-Examples of this category are image, customer loyalty, customer satisfaction, links with suppliers,
commercial power, negotiating capacity with financial entities, environmental activities.
The tacit knowledge, faith, belief and emotion embedded in the minds and hearts of individuals
within organizational employees that to the overall impact on performance of the firms.
Source: * Meritum Guidelines (2002) and ** Mazlan Ismail (2005)
Human Capital (HC)
Human Capital includes anything associated by the people within the organization. It includes
elements such as employees’ tacit knowledge, skills, experience and their attitude (Bontis and
The Relationship Between Intellectual Capital and Innovation...
Serenko, 2009). HC can be seen as a primary tool for an organization to learn by influencing the
ability to acquire new knowledge (Kang and Snell, 2009). As indicated in Table 2, HC focuses
on competencies, attitudes and intellectual agility. Among human capital elements, competency
is the most frequently cited element of human capital (Andriessen, 2004a, 2004b; Marr and
Moustaghfir, 2005; Roos et al., 2004). Brooking (1996) suggests six elements of human capital:
educational levels, job-related licences or qualifications, job-related knowledge, job potential,
personality traits and job-related abilities. Ross et al. (1998) in the context of their study
described HC as inclusive of the knowledge, skills, attitudes and intellectual agility of
employees. However, Stewart (1997) has linked HC with the New Growth Theory as a source of
innovation and renewal. Recently, Alcaniz et al. (2011) expressed the advantages HC over the
other forms of IC, and thus drove significant implications on how enterprises employ and grow
their stocks of human capital.
Kang and Snell (2009) argue that domains of specific knowledge and skills can be related to
the more effective acquisition and assimilation of new, in-depth knowledge within a narrow
range of parameters. This can be connected to exploitation and incremental types of innovation
(O'Reilly and Tushman, 2004). The authors state that these can all be related to more exploratory
learning, and exploratory organizations are related to more radical innovations. O’Reilly and
Tushman (2004) believe that investment in education may reflect a higher ability to create or
improve new knowledge and skills. They also highlight that knowledge and skills of employees
are basic requirements for generating new and creative ideas. At the same time, scholars
concluded that knowledge and skills individually cannot contribute towards innovation.
Table 2. Some Definitions of Human Capital.
Definition of HC
Roos et al.
-Competence knowledge and skills,
-Attitudes motivations and behaviors,
-Intellectual agility innovation, imitation, adaptation and packaging
-Know-how, Education, Vocational qualification, Work-related knowledge, Occupational
assessments, Psychometric assessments, Work-related competencies, Entrepreneurial,
Innovativeness, Proactive and , Reactive abilities, Changeability
Guthrie and Petty
Seetharaman et al.
-Employees’ tacit knowledge, skills, experience and attitude
-Employees’ Competence, Know-how, Work-related knowledge, Innovativness, Education
Management: Education, Experiences, Skills
Employees: Education, Experiences, Skills
Marr and Moustaghfir
Know-how, Education , Vocational qualification, Work-related knowledge, Occupational
assessments, Psychometric assessments, Work-related competencies , Entrepreneurial,
Innovativeness, Proactive and reactive abilities, Changeability
Structural Capital (SC)
Structural or organizational capital is the second component of IC. Scholars believe that SC
represents everything of value that is remaining in organization, when the employees have left
the workplace, which includes codified knowledge, procedures, processes, goodwill, patents, and
culture (Edvinsson and Sullivan, 1996). Scholars state that SC is the organisational competencies
which includes organisational routines, procedures, processes, systems, culture, databases,
Mohammad Rahmani Karchegani et al.
structures and intellectual property. The scholars also believe that SC is an intangible asset that is
formed by the intellectual inputs of the firm' employees. Some authors opine that HC creates SC,
and that the quality of SC is most likely a reflection upon the quality of HC (Edvinsson and
Malone, 1998). However, Stewart (1997) explains that talented individuals do not automatically
make a case for smart enterprises and SC strengthens HC for creating value. Actually, Edvinsson
and Sullivan (1996) suggested that SC is essential to support employee activities. Further, they
believe that SC is the infrastructure firms develop to commercialize their intellectual capital.
Cohen and Kaimenakis (2007) state that while firms do not own HC, structural capital belongs in
the organization as a whole. It can be reproduced and shared. A good SC will provide a good
environment for rapid knowledge sharing, collective knowledge growth, shortened lead times
and more productive people (Stewart, 2002). Moon and Kym (2006) state that SC facilitates the
use of available knowledge resources.
By the empirical study, Ismail (2005) finds out that SC has a significant relationship with
HC, RC, and SpC. His finding confirmed Bontis et al. (2000) earlier have been reported that SC
is positively associated with RC and HC. Bontis et al. (2000) and Ismail (2005) also finding that
SC is positively associated with overall business performance. Some scholars address process
capital and innovation capital as parts of structural capital (Edvinsson and Malone, 1997).
Therefore, companies utilize SC as a guidance and reference in their operations. Companies also
rely on SC to ensure that their functions are consistent with rules, standards and procedures for
achieving a company's goals. Table 3 lists the elements of structural capital.
Table 3. Some Elements of Structural Capital.
Elements of SC
Roos et al.
Internal Structure
-Design Rights
-Trade Secrets
Petty and
Marr and
Seetharaman et
_ patents
_ copyrights
_ design rights
_ trade secrets
_ trademarks
_ service marks
-Spirit of Firm
-Internal Databases
External Structure
-Relationship with customer and suppliers
-Brand names
-Company’s reputation and image
Infrastructure assets_
-Management philosophy
-Corporate culture
Management Processes
-Information Systems
-Networking Systems
Infrastructure assets
_ management philosophy
_ corporate culture
_ management processes
_ information systems
_ networking systems financial relations
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Relational Capital (RC)
Relational Capital is the third component of IC, which represents the relationship with
customers, suppliers, strategic partners and shareholders. The value of RC is determined by the
company’s reputation or image (Meritum-Guideline, 2002). Based on Stwart (2002), RC
includes network, brand, and customer capital. Further, Bontis (1998), stated that RC or
customer capital referred to all the relations the firm has established with its stakeholder groups,
such as customers, suppliers, community, and government. Stewart (2002) points out that the
purpose of a relationship with these external stakeholders is to turn it into money. While
customer and market orientation is important. In this order, Cohen and Kaimenakis (2007)
suggest that Market Orientation, which include customer capital is a set of behaviours and
processes or an aspect of culture to create a superior customer value. The scholars state that
markets orientation is to coordinate the customer’s needs by obtaining and using customer’s
information, competitor’s capabilities and provision of other significant market agents and
authorities (Keskin, 2006). This integrated effort upon the part of employees across departments
of an organization, results in higher or superior performance within an organization.
Although, there are many definitions to the brand concept, they are not feasible for brand
valuation. For example, Aaker (1991) states that the term “brand” is a set of assets and liabilities
linked to a brand’s name and symbol that adds to or subtracts from the value provided by a
product or service to a firm and/or that firm’s customers. According to Fernandez (2002), based
on the Marketing Science Institute the term “brand” is the strong, sustainable, and differentiated
advantage with respect to competitors that leads to a higher volume or a higher margin to the
company compared to the situation it would have without the brand. This differential volume or
margin is the consequence to the behavior of the consumers, the distribution channel and the
companies themselves (Table 4).
Table 4: Some Elements of Relational Capital
Guthrie and Petty
Saint-Onge (1997)
-Customer Loyalty
-Company Names
-Backlog Orders
-Distribution Channels
-Licensing Agreements
-Favourable Contracts
-Revenue Potential
-Customer Type
-Reference List
-Business relationship with alliances,
partners, suppliers, investors and government
Spiritual Capital (SpC)
Ismail (2005), on his viewpoint on spiritual capital in organizations argues about “characterizing
organisational spirituality." It was concluded that the “alignment between the values of
management and members is vital to organisational spirituality." Zohar and Marshall (2004)
defined spiritual capital as a wealth that helps to make the future of humanity sustainable as well
as wealth that nourishes and sustains the human spirit. It is reflected in what a community or an
Mohammad Rahmani Karchegani et al.
organization believes in, what a community or an organization exists for, what it aspires to, and
what it takes responsibility for. Furthermore, Ismail (2005), has contributed to the IC model by
adding spiritual capital (SpC) as the fourth component.
Ismail (2005) discussed IC based on the Islamic religion belief. According to the author, the
Islamic values system emanates from its world view, which is underlined by three fundamental
principles of unity, vicegerent and justice. Islamic belief system does not only affect the behavior
but also the character of individuals. Thus, from Ismail’s point of view, SpC has known as the
tacit knowledge, faith and emotion entrenched in the minds of individuals and in the heart of the
organization. This encompasses aspects of organizational vision, direction, guidance, principles,
values and culture. This belief system is inevitably founded upon the premise that the individual
and organization behave and act with honor, integrity, sincerity, honesty, truth, justice, trust,
love, moral and ethics. It also includes motivation, self-esteem, courage, strength, commitment,
determination, desire, enthusiasm and team spirit. Another unique dimension is that it focuses on
interrelationships, interconnectedness and interdependency for sustainable development from the
view to achieve final prosperity and happiness for all.
Gillet (2002), introduces three dimensions for Spiritual Capital: emotional energy; heart
power; and will power. Emotional energy captures enthusiasm, fun and spontaneity that result in
workers who are creative, authentic and productive. Heart power manifests as passion, integrity,
caring, courage, trust, and faith among business leaders, employees and customers. Will power is
what it takes to get results, i.e. to make it happen. These three complement to together
effectively lead to the competitive advantage sought by so many businesses. Following the
Skandia practices, Danish firms also started to focus on intellectual capital elements that
complement the financial information in their annual reports. Aboody and Lev (2000) argued
that the information asymmetry between managers and investors is more acute for investments in
IC than for investments in physical and financial assets. Because, IC is unique to specific firms
and cannot be inferred by looking at other firms. Beattie and Thomson (2010), through their
survey found that firms which are motivated to report IC information by market-related
incentives have the opportunity to increase transparency and reduce undervaluation of the firm’s
share price. Andriessen (2004b) suggests three key reasons for IC reporting:
Improving internal management: This is needed to make a further distinction between
measurements of the results of past events (retrospective) and improvements to the strategy
development process aided by the creation of resource-based view.
Improving external communication: IC report will enhance the communication of
organizational performance to external stakeholders.
Statutory and transactional issues: Mandatory reasons for valuing intangible resources are
borne out of the situations in which it is obligatory on conduct valuation exercise. Citable
examples are found in transaction pricing, taxation planning and impairment testing.
Consistent with this, Kristandl and Bontis (2007) showed that firms engaging in greater IC
disclosure have a lower cost of capital. In contrast, IC reporting may create a problem for
investors when undertaking share valuation because they have little or no information on the
productivity and value changes of IC investments (Beattie and Thomson, 2010). Alcaniz et al.
(2011) believe that IC reporting might not only expose the basis of competitive advantage but
may provide clues as to a firm’s weaknesses. Revealing this sort of information might provide
problems for managers, not only because their competitors can act or perform better, but also
The Relationship Between Intellectual Capital and Innovation...
with internal stakeholders, who now realize that, in fact, the business is not performing quite as
well as they thought it was.
Although substantial investments are made today in IC, the pays off and value will not be
visible in the financial accounting until some time later. Through systematic accounting of
developments in various areas (such as the customer base, staff competence, and processes), an
earlier indication of the company's future performance can be obtained. Measurement of IC and a
balanced reporting represent an important milestone in the shift from the “Industrial Era” into the
“Knowledge Economy."
Ensuring the economies continuing prosperity and improving productivity is a priority of
governments’ executives. These objectives can be met by encouraging innovation among
business community. This is particularly important for the more developed economies, which
have less scope for growth based on ‘capacity building’ and for cost competition (Dickson,
2007). In this order, in the beginning of 21st centuries, studies have frequently been conducted on
organizational innovation with respect to economics, strategic management, human-resource
management, and marketing fields. Results of these studies have indicated that innovation is
necessary element for sustainable organizational performance (e.g., Aas and Pedersen, 2011;
Amidon, 1997, 2003b; Armbruster et al., 2008; Cassia et al., 2007; Gonin et al., 2011;
Grajkowska, 2011; Gunday et al., 2011; Gutterman, 1996; Johannessen, 2009; Kiriyama, 2012;
Kong, 2010a; Lindgren et al., 2009; Mazzanti et al., 2006; Mel et al., 2009; Nonaka et al., 2003;
OECD, 2005; Rhee et al., 2010; Rose et al., 2009; Rosenbusch et al., 2011).
Rose et al. (2009) noted that innovation has been recognized as an important driver of
economic growth and normally enables the organizations to offer better quality products and
services at lower prices. In this direction, Edvinsson (2004), Kramer (2011) and Vincent et al.
(2005) stated that this effect is largely attributable to high sustainable competitive advantage.
Further, Amidon (2003b) argues that innovation does not only create competitive advantage but
collaborative advantage in organizations. Amidon (1997) a prominent author in organizational
innovation, suggested five main phases during the process of knowledge innovation. These
The product as an asset;
The project as an asset
The company as an asset;
The client as an asset;
Knowledge as an asset;
Edvinsson et al. (2004) added, “Future as an asset” on top of this life cycle.
Definition, Dimensions and Classifications of Innovation
There are various definition and dimensions of organisational innovation in the literature.
Armbruster et al. (2008) believe that there is no harmony on a definition of the term
‘‘organisational innovation’’. Jinchveladze et al. (2009) claim that scholars in different areas of
Mohammad Rahmani Karchegani et al.
study develop their own approaches and identify with the compound phenomenon of
organizational innovation.
Damanpour and Gopalakishnan (1998) enumerated an early quantitative view on
organisational innovation. Based on their definition, organisational innovation encompasses a
process that includes the generation, development and introduction of new ideas or practices
within organizations. Vincent et al. (2005) however, argued that the focus presented by this
definition was not holistic as it was limited to organization level variables and their impact on
organizational innovation. His results suggest that the relationships between these antecedents
and innovation. Instead, the relationships between these antecedents and innovation have
remained relatively stable across multiple studies and contexts.
A more comprehensive approach that presents guidelines for collecting and interpreting
innovation data is seen in the Oslo Manual. Innovation was defined as the implementation of
production and delivery processes with newer and relatively better quality. Interestingly, in a
more recent and third edition, this definition was extended to incorporate a new organizational
methods in business practices, workplace organization and external relations (OECD, 2005). In
this direction, Ngoc Ca (2009) suggested that innovation does not only include various kinds of
activities but also requires continuous improvement during the application process. This includes
learning activities, which are essential to the effective working within the technology system. To
make the concept more operational, the OECD, has proposed that the novelty of innovation
should be seen within the context of firms (Mel et al., 2009).
Armbruster et al. (2008) stated that innovation can be considered to be a complex
phenomenon, including technical (new products, new production methods) and non-technical
aspects (new markets, new forms of organization) as well as product innovations (new products
or services) and process innovations (new production methods or new forms of organization).
Jinchveladze et al. (2009) argued that one distinctive and frequently cited type exists
between product and process innovation. “Product Innovation” includes changes in the things
(products/services which an organization offers whereas “Process Innovation” includes changes
in the ways in which products or services are created and delivered. Ngoc Ca (2009) believes
that invention is the initial creation of an idea for a new product or process; whereas, innovation
is the first attempt to put an idea into practice. “Radical Innovation” is considered with basic and
revolutionary changes, which require a clear departure from existing practices of how things are
done and also fundamental adjustments to existing technology or the acquisition of modern
technology. “Incremental Innovation” on the other hand, contains minor improvements or just
simple changes in how things are done over a long time (Jinchveladze et al., 2009). Some
examples of different dimensions of organizational innovation based on various studies that have
developed this term include:
Process or Product Innovation (Niehoff et al., 2001)
Product innovation involves new or better material goods as well as newer intangible services.
Process innovation involves new ways of producing goods and services.
Individual or Organizational Innovation (Niehoff et al., 2001)
Individual innovation is a multidimensional cognitive state (the perception of being
Organizational innovation is set of activities and practices of managers leading to increased
employees’ contribution towards overall organization’s success.
The Relationship Between Intellectual Capital and Innovation...
Radical or Incremental Innovation (Kang and Snell, 2009; O'Reilly and Tushman, 2004)
Radical innovation is associated more associated with generalist, rapid and multi-typical
knowledge and skills of employees who could be used across domains.
Incremental innovation contains minor improvements or just simple changes in how things are
done over a long time. Incremental innovation is related to specializing, in-depth knowledge
and skills in one particular domain of employees.
• Horizontal or Vertical Innovation (Gancia and Zilibotti, 2005)
Horizontal innovation consists of producing a new product that does not displace existing
Vertical Innovation refers to the situation where the introduction of one product makes an
existing product obsolete.
• Object-based or Subject-based Innovation (De Jong, 2006)
Object-based innovation focused on new-product development, patterns of implementation and
diffusion, transfer and classification of technologies, and innovative business development.
Subject-based approach focuses on the subjects initiating and implementing innovation.
• Product, Process, Marketing or Organizational Innovation (OECD, 2005)
Product innovation is the introduction of a good or service that is new or substantially
Process innovation is the introduction of a new or significantly improved production.
Marketing innovation is the implementation of new marketing methods and introducing
significant changes in product design, packaging, product promotion and pricing
Organizational innovation is the creation or alteration of business practices, workplace
organization and external relations.
According to Andriessen (2004b), innovation is known as the “black box” in neoclassical
economics, because the complex and holistic nature of innovation makes it difficult to formalize,
despite of its important role in economic development. This explains why innovation studies
have been highly conducted by various disciplines of social sciences. In the last two decades, a
lot of efforts have been taken to formalize innovation into an economic analysis under a branch
of economics known as “new growth theories”. However, in practice and for policy purposes,
innovation should be looked at holistically (Andriessen, 2004b). Since, the different kinds of
innovation have different impacts in various organizational settings. Thus, varying expertise and
policy measures may be required to make all of them happen. Innovation and Intellectual Capital
Amidon (2003b), as pioneer of the Knowledge Economy Network, in her book titled “the
Innovation Superhighway,” presents a revolutionary view of innovation as “nothing more than
coming up with good ideas and implementing them to realize their value” (p.16). The author
carries this vision forward to define the global imperatives Figure 2: Innovation Cube (Dvir et al.
contributing to a new world order based on intellectual capital. Amidon argues that
innovation is not only a “competitive advantage,” in this Millennium, it is also the next wave of
influence, tagged “collaborative advantage.” Some other authors such as Edvinsson et al. (2004),
Mohammad Rahmani Karchegani et al.
Roos et al. (1997), and Zerenler et al. (2008), stated the importance of innovation and renewal in
their IC framework.
Edvinsson et al. (2004) contributed to the Dvir et al. (2002) model called “Innovation
Cube” (Figure 2) by simply introducing the six dimensions for organizational innovation. Their
results indicate some direct cause and effect relations between “knowledge reuse” and
Brown (2009) focused upon the characteristics of IC that foster and carries this vision
forward to define the global imperatives Figure 2: Innovation Cube (Dvir et al. 2002)
Reuse of Assets
-Knowledge assets reuse
-Reuse process
-Reuse organization
-Reuse library use
Stakeholder Contribution
-Senior management
-Market information
-Customer orientation
-Realization capability
-Senior management
Invention of Assets
-Creation of new assets
-Source of new assets
-Invention portfolio
-Invention organization
and tools
Operating Context
-Human resource management
-IT infrastructure
-Organizational structures
-Competitive context
contributing to a new world order based on intellectual capital. Amidon argues that
innovation is not only a “competitive advantage,” in this Millennium, it is also the next wave of
influence, tagged “collaborative advantage.” Some other authors such as Edvinsson et al. (2004),
Roos et al. (1997), and Zerenler et al. (2008), stated the importance of innovation and renewal in
their IC framework.
Edvinsson et al. (2004) contributed to the Dvir et al. (2002) model called “Innovation
Cube” (Figure 2) by simply introducing the six dimensions for organizational innovation. Their
results indicate some direct cause and effect relations between “knowledge reuse” and
Brown (2009) focused upon the characteristics of IC that foster and develop innovation in
both manufacturing and service sectors. The study covered the presence of organizational and
individual HC and the availability of organizational networking systems (Table 5).
manufacturing and service sectors.
The Relationship Between Intellectual Capital and Innovation...
Table 5. Matrix of IC Components and Innovation in Service Sectors
Driver of
Dimension of IC
Intellectual Capital
Human Capital
Physical Services
Human Services
Knowledge that
stays with the firm
Culture, Datasets,
Knowledge that
stays with
Skills, experience,
derived from
Resources linked
to external
suppliers, partners
Tangible products
and networks (e.g.
telecommunications and energy
- Cross functional
or team working
-Human Capital
Social and
(supported by
Mass communications,
control of process
-Innovation process
-Extent of
-Efficiency of
the innovation
-Effectiveness (% of revenue from
new products)
(specialized knowledge
Source: Brown (2009)
Based on the results of Brown’s model (Figure 2.5) in the service sector, processes (SC)
have no impact on innovation efficiency despite the strong link with effective revenue share.
Team working (HC) has a strong direct relationship to innovation efficiency and a weak
relationship in the innovation process. Besides, human capital is a key ‘individual’ factor, which
mediates innovation efficiency through team work. While, direct influences of networking (RC)
on performance is negligible, networking does have a strong link to the innovation process in
new service development (Brown, 2009). Effective team work is associated with better
organizational performance, especially with creative and innovative ideas (Tidd et al., 2005).
Arguably, two different types of attitudes can be linked to the different skills and knowledge
In relation to the above, Wu et al. (2008) explored how a firm’s operational mode can
reinforce the advantages of intellectual capital on innovation. Their results support the mediating
role of IC and the moderating roles of entrepreneurial orientation and social capital on
innovation. In addition, Zschockelt (2009) explores the influence of IC on the linkage between
human-resource management (HRM) and organizational innovation. The results indicate
positive relationships between different single sub-components of IC and innovation. Based on
Mohammad Rahmani Karchegani et al.
three case studies, Lindgren et al. (2009) presented how to attract and apply IC capabilities to
innovate network-level business models. The results of the study indicated that there is a
potential to develop a unique IC when companies understand the innovation projects' value
proposition. It was also observed that the ability to understand and integrate the other partner's
value proposition is significant for the attractiveness of an innovation project. As it is vital for
attracting IC, it can greatly improve the results. Jafari et al. (2011) believe that companies invest
on innovations with the greater level of intellectual capital development and on industries that
have rapid knowledge growth.
Additionally, scholars have emphasized on the importance of organizational climate. Much
emphasis was placed on fostering facilities that support creativity and innovation as critical for
competitive advantages in order to ensure the strength and success of firms. For example, Parker
et al. (2003) by employing a meta-analytic review, showed that the organizational atmosphere is
characterized by the frequent patterns of behaviors, attitudes and feelings, which are displayed in
the daily environment within the organization and the organizational employees directly
experience and understand it. The scholars also noted that organizational climate is a
multidimensional construct with four dimensions consisting of Autonomy and Control, Degree
of Structure, Rewards and Consideration, and Warmth and Support.
Furthermore, Imran et al. (2010) find out that organizational climate fosters innovative work
behavior (IWB). More research was recommended to develop and test theories related to the
relationship between specific climate dimensions in or across model quadrants over a broad
range of outcomes (Patterson et al., 2005). Later, Imran et al. (2010) confirmed the importance
of the impact of organizational climate on IWB. However, their results do not support the
significant role of organizational size on innovative behavior. Their sample consisted of 320
managers from organizations countrywide. In contrast, the results of study by Zschockelt (2009)
indicate that there is no clear-cut picture as to which of components of IC are related to
organizational innovation.
Following the above discussion, it is important to highlight that the different forms of
intellectual capital will not be characterized as “strong” or “weak.” Instead, the term
“appropriateness” of the different capital forms is more applicable. For example, Leana and Van
Buren (1999) posited that a certain form of HC could include highly educated, skilled and
knowledgeable people but this might not have an impact on certain types of innovation due to
some other reasons. This does not mean that this particular form of HC is weak. It should rather
be said that it is inappropriate with respect to achieving certain types of innovation. While, HC of
an organization might develop single creative ideas, the actual implementation of new products,
processes or services is most of the time dependent on more than one person.
Zschockelt (2009) on a more institutional level of analysis, argued that different skill
profiles are related to different kinds of innovations. They said that domain-specific knowledge,
and skills can be related to the more effective acquisition and assimilation of new, in-depth
knowledge within a narrow range of parameters. This can be connected to exploitation and
incremental types of innovation (O'Reilly and Tushman, 2004). On the other hand, human capital
with its multiple knowledge domains tends to have more various mental models and less
cognitive conflict, which makes possible a varied interpretation of problems and situations.
By realizing and understanding the importance of IC and innovation, companies can improve
their competitive advantage. It shows the importance of relationships between IC components
The Relationship Between Intellectual Capital and Innovation...
and innovation and the importance of investment and management of these capitals in
organizations. Therefore, top managers of the firm should sustain, protect, develop and manage
IC to increase organizational innovation as a creator of competitive advantage for the company.
In the light of above discussion, it is suggested that:
1. There is a positive significant relationship between intellectual capital and innovation.
2. There is a positive significant relationship between Human capital and innovation.
3. There is a positive significant relationship between Structural capital and innovation.
4. There is a positive significant relationship between Relational capital and innovation.
5. There is a positive significant relationship between Spiritual capital and innovation.
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