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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:
(Sandra
Cohen),
(Orestes
Vlismas).
2.Correspondenceauthor.
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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
8/3/2019 102. Analyzing the Relations Between Intellectual Capital and Performance in Local Governments
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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
8/3/2019 102. Analyzing the Relations Between Intellectual Capital and Performance in Local Governments
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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.
H12.2:Inthecaseoflocalgovernments,PerceivedIntellectualCapitalanditsFactorsare
positivelycorrelatedwithPerceivedQualityofServicesProvidedbyLocalGovernments.
H12.3:Inthecaseoflocalgovernments,PerceivedIntellectualCapitalanditsFactorsare
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.
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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
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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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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
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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
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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.
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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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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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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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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.
SectionA:Descriptives
Mean Std.Deviation N
KnowledgeManagement
3.6014
0.75470
92
Innovation 3.4094 0.88964 92
InternalIntegration 3.3859 0.90512 92
egovernance 3.0761 0.87581 92
SectionB:Correlations
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(**)
Pearsoncorrelationsaboutthediagonal;spearmancorrelationsbelowthediagonal.*and
**indicate
statistical
significance
at
5%,
and
1%
levels
respectively.
Table5:DescriptivesandCorrelationsbetweentheFactorsofPerceivedSocialCapital
SectionAreportssimplestatisticsforthefactorsofPerceivedSocialCapital.SectionBreportsthecorrelationstatisticsfor
thefactorsofPerceivedSocialCapital.
SectionA:Descriptives
Mean Std.Deviation N
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
SectionB:Correlations
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(**)
Pearsoncorrelationsaboutthediagonal;spearmancorrelationsbelowthediagonal.*and
**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