THE INFLUENCE OF INTELLECTUAL CAPITAL AND INNOVATION … · prestasi syarikat masih menjadi salah...

THE INFLUENCE OF INTELLECTUAL CAPITAL AND INNOVATION ON

PERFORMANCE OF AGRICULTURAL INSURANCE COMPANIES OF IRAN

MOHAMMAD RAHMANI KARCHAGANI

UNIVERSITI TEKNOLOGI MALAYSIA

THE INFLUENCE OF INTELLECTUAL CAPITAL AND INNOVATION ON

PERFORMANCE OF AGRICULTURAL INSURANCE COMPANIES OF IRAN

MOHAMMAD RAHMANI KARCHEGANI

A thesis submitted in fulfilment o f therequirements [Or (he award of 'degree of

Doctor of PhMof>nhy (\Lnhy:ememi

Faculty o f Management

Universiti Teknologi Malaysia

DECEMBER 2015

iii

DEDICATION

This thesis is dedicated to my late father; Hajj. Rahim Rahmani Karchegani,

who about 35 years ago told me that he would support my study even by selling his

coat (He died during my PhD study).

iv

ACKNOW LEDGEM ENT

Alhamdulillah, thanks to Allah for his providence.

I am extraordinarily indebted to my dear supervisors; Associates Professors

Dr. Saudah Sofian and Dr. Salmiah Mohamad Amin. I have found a new experience

about patience and sagacity of guidance of these kind and respectful coaches in my

Ph.D study.

My gratitude goes to my dear mother; Hajiyah. Rezvan Arehkesh for her

continuous prayer and encouragement, and my wife Niloofar Vaziri, and my

daughters; Mehraveh and Mehrafarin for making this work an enjoyable experience

to study abroad and for inspiring me to finish this study.

I would like to specially thank all the management and staff of UTM,

particularly in the Management Faculty (FM), SPS, and the librarians in UTM

International Campus in Kuala Lampur, who provided me with all the assistance I

needed during my study. My special thanks also to the board of director members of

Agricultural Insurance Fund of Iran, especially Mr. Safarpoor, Dr. Javadian, and

Mr. Hssan-nejhad for their continuous support and granting me study leave. Last but

not least to my sister and brother, too; Mehdi and Masoud for all their emotional

support and motivation during the past five years.

v

ABSTRACT

The 21st century, which is known for its knowledge-based economy,

performance of companies is still one of the continuously discussed topics in strategic

management field. As knowledge intensive company, performance of insurance

companies is affected by factors such as intellectual capital (IC) as intangible assets and

innovation as intangible activities. However, IC and innovation are very important to

the profitability of this kind of business, but contemporary literature remains scant on

the role of these factors in influencing the performance of insurance sector. Thus, this

study fills this existing gap by empirically investigating the mediating effect of

innovation on the relationship between IC and companies’ performance. This study

undertook a comprehensive examination of the relationship among IC components,

innovation and companies’ financial, non-financial, and overall performance. The

subject of the study is the agricultural insurance companies in Iran. Data were collected

through a questionnaire survey of 294 agricultural insurance companies and analysed

using correlation, simple regression and multivariate regression methods to disclose the

relationship between three constructs of the study using Statistical Package for the

Social Sciences (SPSS) software. Accordingly, the framework of the study was tested

through confirmatory factor analysis and path analysis methods of Structural Equation

Modelling (SEM) with the aid of Analysis of Moment Structures (AMOS) software.

Findings of the study show that IC and its components are positively related to the

innovation which is positively linked to the companies’ performances. The results also

indicated a partial mediation role of innovation in the relationship between IC

components and overall companies’ performance. Based on the results, innovation

partially mediated the relationship between IC and both financial and non-financial

performance. However, innovation fully mediated the relationship between IC and the

overall performance. The study has shown that IC and innovation are two important

variables to improve performance of the agricultural insurance companies in Iran. Thus,

managers of insurance companies should pay more attention to disclose, measure, report

vi

and manage their IC and innovative capabilities to better achieve the goals of their

companies.

vii

ABSTRAK

Pada abad ke 21 yang dikenali sebagai ekonomi berasaskan pengetahuan,

prestasi syarikat masih menjadi salah satu topik yang sering dibincangkan dalam bidang

pengurusan strategik. Sebagai syarikat berintensifkan pengetahuan, prestasi syarikat

insurans dipengaruhi oleh faktor-faktor seperti modal intelektual (IC) sebagai aset tak

ketara dan inovasi sebagai aktiviti tak ketara. Walau bagaimanapun, IC dan inovasi

adalah penting kepada keuntungan jenis perniagaan ini, namun literatur semasa masih

kurang mengenai peranan faktor-faktor ini dalam mempengaruhi prestasi sektor

insurans. Maka, kajian ini mengisi kekosongan yang wujud dengan menyiasat secara

empirik kesan pengantara inovasi ke atas hubungan di antara IC dan prestasi syarikat.

Kajian ini menjalankan satu pemeriksaan komprehensif mengenai hubungan di kalangan

komponen IC, inovasi dan kewangan syarikat, bukan kewangan dan prestasi

keseluruhan. Subjek kajian ialah syarikat insurans pertanian di Iran. Data telah

dikumpul melalui tinjauan soal selidik ke atas 294 syarikat insurans pertanian. Data telah

dianalisa menggunakan kaedah korelasi, regresi mudah dan regresi multivariat bagi

menunjukkan hubungan antara tiga konstruk kajian melalui perisian Statistical Package

for the Social Sciences (SPSS). Seterusnya, rangka kerja kajian telah diuji melalui

analisa faktor pengesahan dan kaedah analisa laluan pemodelan persamaan struktur

(SEM) dengan bantuan perisian Analysis of Moment Structures (AMOS). Hasil kajian

menunjukkan IC dan komponennya secara positif berkait kepada inovasi yang

dihubungkan secara positif terhadap prestasi syarikat. Keputusan juga menunjukkan

peranan pengantara separa inovasi dalam hubungan di antara komponen IC dan

keseluruhan prestasi syarikat. Berdasarkan keputusan, inovasi mengantara secara separa

hubungan antara IC dan kedua-dua prestasi kewangan dan bukan kewangan. Namun

inovasi mengantara secara penuh hubungan antara IC dan prestasi keseluruhan. Kajian

telah menunjukkan bahawa IC dan inovasi adalah dua pemboleh ubah penting untuk

meningkatkan prestasi syarikat insurans pertanian di Iran. Maka, para pengurus syarikat

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insurans harus memberi lebih perhatian bagi mendedah, mengukur, melapor dan

mengurus IC dan keupayaan inovasi bagi mencapai matlamat syarikat mereka.

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TABLE OF CONTENTS

CHAPTER TITLE PAGE

DECLARATION ii

DEDICATION iii

ACKNOW LEDGEM ENT iv

ABSTRACT v

ABSTRAK vii

TABLE OF CONTENTS ix

LIST OF TABLES xviii

LIST OF FIGURES xxii

LIST OF ABBREVIATIONS xxvi

LIST OF APPENDICES xxviii

1 INTRODUCTION 1

1.1 Overview 1

1.2 Background of the Study 3

1.3 Importance o f Insurance Services in Iranian

Agricultural Sector 7

1.3.1 Agricultural Insurance Fund of Iran 10

1.3.2 IC and Innovation in Insurance Companies 11

1.4 Problem Statement 15

1.4.1 Influence of IC on F irm Performance 16

1.4.2 Influence of Innovation on F irm Performance 17

1.4.3 Relationship between IC and Innovation 18

1.4.4 Mediation Effect o f Innovation between IC

and Firm Performance 19

1.5 Research Questions of the Study 20

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1.6 Purpose of the Study 21

1.7 Objectives of the Study 21

1.8 Scope o f the Study 21

1.9 Significance o f the Study 22

1.10 Operational Definitions Key Terms o f the Study 23

1.10.1 Intellectual Capital (IC) 23

1.10.2 Innovation (INO) 24

1.10.3 Overall F irm Performance (OFP) 26

1.10.4 Agricultural Insurance Fund (AIF) 26

1.11 Structure o f the Thesis 27

2 REVIEW OF THE LITERATURE 28

2.1 Overview 28

2.2 Firm Performance 28

2.2.1 Firm Performance Management System 30

2.2.2 Firm Performance Measurement Methods 32

2.2.3 BSC as Performance Measurement Method 35

2.2.4 Firm Performance and Intellectual Capital 37

2.3 Intellectual Capital 38

2.3.1 Definition and Classification of IC 42

2.3.2 Human Capital 52

2.3.3 Structural Capital 54

2.3.4 Relational Capital 56

2.3.5 Spiritual Capital 59

2.3.6 Intellectual Capital Management 61

2.3.7 Measurement and Reporting o f IC 64

2.3.8 IC Measurement via BSC Method 72

2.3.9 Importance of IC in Knowledge-based

Economy 75

2.3.10 Conclusion of IC 77

2.4 Innovation 78

2.4.1 Definition and Classifications o f Innovation 79

2.4.2 Innovation Management 84

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2.4.3 Innovation Measurement 85

2.4.4 Using Oslo Manual for Measurement of INO 87

2.5 Influence of IC on Firm Performance 90

2.6 Influence o f Innovation on Firm Performance 96

2.7 Relationship between IC and Innovation 102

2.8 Mediating Role o f Innovation between IC and Firm

Performance 110

2.9 Theories of the Study 114

2.9.1 Resource-based View Theory 115

2.9.2 Knowledge-based View Theory 118

2.10 Conceptual Framework of the Study 122

2.11 Summary o f Chapter 2 124

3 RESEARCH M ETHODOLOGY 125

3.1 Introduction 125

3.2 Research Philosophies of the Study 125

3.2.1 Positivism Philosophy 126

3.2.2 Holism Philosophy 126

3.3 The Research Framework and Hypotheses 128

3.4 Variables o f the Study 132

3.4.1 Intellectual Capital as the Independent

Variable 133

3.4.2 Innovation as the Mediator Variable 134

3.4.3 Firm Performance as the Dependent Variable 135

3.5 The Research Design 140

3.5.1 Target Population, Unit of Analysis and

Sample o f the Study 142

3.5.2 Instrument of the Study 143

3.5.2.1 Translation and Back-translation of

the Questionnaire 144

3.5.2.2 Expert Panel of the Questionnaire 145

3.5.3 Validity o f the Questionnaire 146

3.5.3.1 Content Validity 146

3.5.3.2 Construct Validity 147

3.5.4 Reliability of the Questionnaire 149

3.5.5 Pilot Study 150

3.6 Data Collection 152

3.7 Goodness of the Data 152

3.8 Data Analysis Techniques of the Study 153

3.8.1 Descriptive Statistics Analysis 154

3.8.2 Inferential Analysis 154

3.8.2.1 Correlation Analysis 154

3.8.2.2 Testing Mediation with

Multivariate Regression Analysis 156

3.9 Structural Equation Modeling 162

3.9.1 Key Concepts and Terms of SEM 164

3.9.2 Confirmatory Factor Analysis 165

3.9.3 Item Parceling Method 167

3.9.4 Creating of SEM Model 169

3.9.5 Guidelines o f the Acceptable Fit Model

Indices in SEM 170

3.9.6 SEM Assumptions via AMOS 173

3.9.6.1 Sample Size 173

3.9.6.2 Normality, Linearity and Outliers 175

3.9.6.3 Items per Construct 175

3.10 Summary o f Chapter 3 176

4 ANALYSIS AND FINDINGS 177


4.1.1 Normality and Linearity Assumption 178

4.1.2 Missing Data of the Study 179

4.1.3 Outliers Data of the Study 181

4.2 Descriptive Analysis o f the Data 183

4.3 Inferential statistics of the Multivariate Analysis 186

4.3.1 CFA of the Construct Variables 187

4.3.1.1 CFA of the Human Capital 188

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4.3.1.2 CFA of the Structural Capital

4.3.1.3 CFA of the Relational Capital

4.3.1.4 CFA of the Spiritual Capital

4.3.1.5 Evaluation Measurement Model

of theIC

4.3.1.6 Second-order Method of the IC

4.3.1.7 Parceling Method of the IC

Construct

4.3.1.8 CFA of the Process Innovation

4.3.1.9 CFA of the Service Innovation

4.3.1.10 CFA of the Marketing Innovation

4.3.1.11 CFA of the Organizational

Innovation

4.3.1.12 Evaluation Measurement Model

of the Innovation

4.3.1.13 Second-order Method of the

Innovation

4.3.1.14 Parcel Model of the Innovation

Construct

4.3.1.15 CFA of the Customer Perspective

4.3.1.16 CFA of the Business Perspective

4.3.1.17 CFA of the Learning & Growth

Perspective

4.3.1.18 CFA of the F inancial Perspective

4.3.1.19 Evaluation Measurement Model of

the Overall Firm Performance

4.3.1.20 Second-order Method of the Firm

Performance

4.3.1.21 Parcel Model of the OFP Construct

4.3.1.22 Evaluation of Full Measurement

Model of the Study

4.3.1.23 Validity o f the Full Measurement

Model

190

191

192

193

196

197

199

199

200

202

203

207

208

209

209

211

212

213

217

218

220

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223

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4.3.2 Testing Hypothesis o f the Study 226

4.3.2.1 H1: Intellectual capital has a

positive and significant impact on

overall performance of the

agricultural insurance companies in

Iran 227

4.3.2.2 H1a: Human capital has a positive

and significant impact on overall

performance of the agricultural

insurance companies in Iran 228

4.3.2.3 H1b: Structural capital has a




Iran 229

4.3.2.4 H1c: Relational capital has a


overall performance of agricultural

insurance companies in Iran 230

4.3.2.5 H1d: Spiritual capital has a




Iran 230

4.3.2.6 H1t : Intellectual capital has a


non-financial performance of the


Iran 232

4.3.2.7 H12: Intellectual capital has a


financial performance of the


Iran

4.3.2.8 H2: Innovation has positive and

significant impact on overall


insurance companies in Iran

4.3.2.9 H2]_: Innovation has positive and

significant impact on non-financial



4.3.2.10 H22. Innovation has a positive and

significant impact on financial



4.3.2.11 H3: There is a positive and

significant relationship between

intellectual capital and innovation

in the Iranian agricultural

insurance companies

4.3.2.12 H3a: There is a positive and


human capital and innovation in

the Iranian agricultural insurance

companies

4.3.2.13 H3b: There is a positive and


structural capital and innovation in


companies

4.3.2.14 H3c: There is a positive and


relational capital and innovation in

Iranian agricultural insurance

companies

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232

233

234

235

236

237

237

238

4.3.2.15 H3d: There is a positive and


spiritual capital and innovation in


companies

4.3.3 SEM to Testing Mediation Effect of

Innovation

4.3.3.1 H4a, H4b, H4c, H4d: Mediating

Effect of Innovation between IC

Components and Overall Firm

Performance (SEM Model 1)

4.3.3.2 H4i. Evaluating Mediating Effect

of Innovation between IC and NFP

(SEM Model 2)

4.3.3.3 H42. Evaluating Mediating Effect

of Innovation between IC and

FFP (SEM Model 3)

4.3.3.4 H 4 : Evaluating Mediating Effect

of Innovation between IC and

OFP (SEM Model 4)

4.4 Summary o f Chapter 4

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5 DISCUSSIONS AND CONCLUSION 264


5.2 Summary o f the Study 264

5.3 Summary o f the Main Findings 266

5.4 Discussions of the Findings 269

5.4.1 Influence o f IC on Firm Performance 270

5.4.2 Influence o f Innovation on Firm Performance 275

5.4.3 Relationship between IC and Innovation 277

5.4.4 Mediation Role o f Innovation between IC

and Firm Performance 280

239

240

243

253

255

257

263

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5.5 Contributions and Implications of the Study 282

5.5.1 The C ontributions 283

5.5.2 The Theoretical Implications 286

5.5.3 The Managerial Implications 290

5.6 Limitations of the Study 292

5.7 Suggestions for Future Studies 293

5.8 Conclusion of the Study 294

REFERENCES 297

Appendices A - E 327 - 342

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LIST OF TABLES

TABLE NO. TITLE PAGE

1.1 Demography of the Employees in Agricultural Insurance

Sector in Iran 10

1.2 Previous Researches on IC in Insurance Industry 12

2.1 Intellectual Capital Indicators in the Report of Skandia 40

2.2 Short History of the IC Publications in the World 41

2.3 Summary o f the IC Components 46

2.4 Summary o f Theoretical Perspectives on IC 49

2.5 Selected Definitions for IC Components in this Study 51

2.6 Subcategories Elements of Human Capital 53

2.7 Subcategories Elements of Structural Capital 55

2.8 Subcategories Elements of Relational Capital 58

2.9 Subcategories Elements of Spiritual Capital 61

2.10 Categorization of the IC Measurement Methods 67

2.11 Ten Attributes of Innovation 83

2.12 Four Stages of Evolution of Innovation Metrics 86

2.13 Previous Studies on Influence o f IC on FP 94

2.14 Previous Studies on Influence o f Innovation on FP 98

2.15 A Matrix of IC Components and Innovation in Service

Sector 105

3.1 Research Hypotheses of the Study 131

3.2 Measurement Items of the Variables 137

3.3 Cronbach’s Alpha for the Research Variables in the Pilot

Study 151

3.4 Rules of Thumb on Correlation Coefficient Size 155

3.5 Four Steps to Testing Mediation Effect 157

3.6 Difference Coefficients of Mediation 158

3.7 Sobel-test Product of Coefficients 159

3.8 Differences between SEM and other Multivariate

Methods 162

3.9 Demonstrating Goodness of Fit across the Different

Model Situations 172

4.1 Test of Data Normality based on Skewness and Kurtosis 179

4.2 Analysis of the Outliers Observations Farthest from

Centroid 181

4.3 Distribution Coverage by the Respondents of

Questionnaire 183

4.4 Distribution Coverage by the Nature of Firms 184

4.5 Characteristics of the Firms in Agri-insurance of Iran 185

4.6 Educational Level o f Employees in the Agricultural

Insurance Firms in Iran 185

4.7 Covariances of Human Capital (Modification Indices) 189

4.8 Covariances of Relational Capital (Modification Indices) 192

4.9 Covariances of IC (Modification Indices) 194

4.10 Summary o f the Fit Indices for IC Measurement Model 195

4.11 Covariances Indices to Parcel of IC 198

4.12 Covariances of PI (Modification Indices) 199

4.13 Covariances of SI (Modification Indices) 200

4.14 Fit Indices for Measurement Model of Innovation after

Modification 206

4.15 Correlations of Innovation Measurement Model 206

4.16 Regression Weights of Innovation Measurement Model 206

4.17 Fit Indices for Measurement Model of Innovation 208

4.18 Covariances of BP (Modification Indices) 210

4.19 Covariances of LP (Modification Indices) 211

4.20 Covariances of FP (Modification Indices) 212

4.21 Covariances of OFP Model (Modification Indices) 214

4.22 Fit Indices for Measurement Model of OFP 216

4.23 Correlations of OFP Measurement Model 216

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4.24 Regression Weights of the OFP 217

4.25 Covariance of the OFP in the Parcel Model 219

4.26 Comparing of the Accepted and Unaccepted Items in

CFA 220

4.27 Fit Indices o f Full Measurement Model of the Study 222

4.28 Convergent and Discriminate Validity of the Full

Measurement Model 223

4.29 Correlations between Latent Variables o f the Study 226

4.30 Correlation between IC and OFP 228

4.31 Correlation between HC and OFP 229

4.32 Correlation between SC and OFP 229

4.33 Correlation between RC and OFP 230

4.34 Correlation between SpC and OFP 231

4.35 Regression Coefficients of IC Components and OFP 231

4.36 Correlation between IC and NFP 232

4.37 Correlation between IC and FFP 233

4.38 Correlation between Innovation and OFP 234

4.39 Correlation between Innovation and NFP 234

4.40 Correlation between Innovation and FFP 235

4.41 Correlation between IC and Innovation 236

4.42 Correlation between HC and Innovation 237

4.43 Correlation between SC and Innovation 238

4.44 Correlation between RC and Innovation 238

4.45 Correlation between SpC and Innovation 239

4.46 Regression Coefficients of the IC Components and the

Innovation 240

4.47 Contains Variables of the Final SEM of the IC

Components 242

4.48 Covariances in SEM Mediation Model of Innovation

between IC Components and OFP 245

4.49 GOF Indices in SEM Mediation Model of Innovation

between IC Components and OFP 247

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4.50

4.51

4.52

4.53

4.54

4.55

4.56

4.57

4.58

Model Fit on Akaike Information Criterion for IC,

Innovation, and OFP

GOF Indices of Mediation Effect of Innovation between

IC and NFP


Innovation and NFP

GOF index SEM Mediation Effect of Innovation

between IC and FFP


Innovation, and FFP

GOF Indiex o f SEM Mediation Effect of Innovation

between IC and OFP


Innovation, and OFP

Comparison of Fit Index Four SEM Mediation Model of

the Study

Summary of Mediating Effect of Innovation between IC

and Firm Performance

247

254

255

256

257

259

259

260

261

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LIST OF FIGURES

FIGURE NO. TITLE PAGE

2.1 Dependencies o f the BSC Perspectives 36

2.2 Theoretical Roots of Intellectual Capital 39

2.3 Intellectual Capital as Intangible Assets Categories by

Sveiby 43

2.4 Intellectual Capital Categories by Edvinsson and Malone 43

2.5 Intellectual Capital Categories by Stewart 44

2.6 Intellectual Capital Categories by Roos and Roos 45

2.7 The Second-order Model of IC 45

2.8 The Elements of Intellectual Capital 49

2.9 Classification of Intellectual Capital Investments 51

2.10 Spiritual Capital as Court of the IC Components 60

2.11 Market Capitalization Value over Time 62

2.12 The Roots of Intellectual Capital Management (ICM) 63

2.13 The Conceptual Framework of BSC 74

2.14 Transformation of Organizational Asset from Tangible to

Intangible 76

2.15 The Six Generations of Organizational Assets 79

2.16 Role of Innovation between Tangible/Intangible Assets

and Performance 86

2.17 Four Stages in Organizational Innovation Process 99

2.18 The Relationship between Innovation and Performance 99

2.19 Six Dimensions of Innovation in Organizations 103

2.20 Relationships between IC and Innovation in Service

Sector 106

2.21 Relationships between Organizational Innovation and

Firm Performance 111

2.22 Moderating Role of Organizational Innovation 112

2.23 Mediating Role of Innovation between Market

Orientation and Firm Performance 113

2.24 IC as Subset of Firm’s Strategic on RBV 117

2.25 Conceptual Framework of the Study 123

3.1 Research Framework of the Study 130

3.2 Research Design of the Study Adopted from Anvari 141

3.3 Indirect Effect, Partial and Full Mediation Models 158

3.4 Decision Tree for Understanding Types of Mediation 161

3.5 Six Stages of SEM Process Adopted from Hair et al. 163

3.6 Generic Example o f a Confirmatory Factor Analysis 164

3.7 A Sample o f First-order Method of CFA 166

3.8 A Sample o f Second-order Method of CFA 167

3.9 A Sample o f Homogenous Parceling Method of CFA 168

3.10 A Sample o f SEM Model via AMOS 170

4.1 Sample of Normal Probability Plot & Box Plot of the

Data 182

4.2 CFA of the Human Capital (Model 1) 188

4.3 CFA of the Human Capital (Model 2) 189

4.4 CFA of the Structural Capital (Model 1) 190

4.5 CFA of the Structural Capital (Model 2) 191

4.6 CFA of the Relational Capital (Model 1) 191

4.7 CFA of the Relational Capital (Model 2) 192

4.8 CFA of the Spiritual Capital 193

4.9 Measurement Model of the IC Components (Model 1) 194

4.10 Measurement Model of the IC Components (Model 2) 196

4.11 Homogenous Second-order Method for IC 197

4.12 Homogenous Parceling Items for IC Components 198

4.13 CFA of the Process Innovation 199

4.14 CFA of the Service Innovation 200

4.15 CFA of the Marketing Innovation (Model 1) 201

xxiii

4.16 CFA of the Marketing Innovation (Model 2) 201

4.17 CFA of the Organizational Innovation (Model 1) 202

4.18 CFA of the Organizational Innovation (Model 2) 203

4.19 Full CFA Measurement Model o f the Innovation

Dimensions (Model 1) 204

4.20 Full CFA Measurement Model o f the Innovation

Dimensions (Model 2) 205

4.21 Homogenous Second-order Method for Innovation 207

4.22 Homogenous Parceling Item for Innovation Dimensions 208

4.23 Measurement Model of the Customer Perspective 209

4.24 CFA of the Business Perspective (Model 1) 210

4.25 CFA of the Business Perspective (Model 2) 210

4.26 CFA of the Learning and Growth Perspective (Model 1) 211

4.27 CFA of the Learning and Growth Perspective (Model 2) 212

4.28 CFA of the Financial Perspective 213

4.29 Full Measurement Model of the OFP (Model 1) 214

4.30 Full Measurement Model of the OFP (Model 2) 215

4.31 Homogenous Second-order Method for the OFP 218

4.32 Parceling Items of the OFP (Model 1) 219

4.33 Parceling Items of the OFP (Model 2) 219

4.34 Full Measurement Model of the Study 221

4.35 Research Framework of the Study in Graphic of SEM 241

4.36 Unstandardized SEM Model of the Study 244

4.37 Estimated Path Coefficients of the Mediation Effect of

Inovation between IC Components and OFP 246

4.38 Estimated Path Coefficient of the Direct Effect of the IC

Components on OFP 249

4.39 Estimated Path Coefficients of the Indirect Effect of IC

Components on OFP 251


Innovation between IC and NFP 253


Innovation between IC and FFP 256

xxiv

xxv


Innovation between IC and OFP 258

xxvi

LIST OF ABBREVIATIONS

AIF - Agricultural Insurance Fund

AM OS - Analysis of Moment Structures

BP - Business Perspective

BSC - Balanced Scorecard

CEO - Chief Executive Officer

CFA - Confirmatory Factor Analysis

CP - Customer Perspective

FL - Factor Loadings

FP - Financial Perspective

FFP - Financial Firm Performance

GOF - Goodness of Fit indices

HC - Human Capital

HRM - Human Resource Management

IC - Intellectual Capital

INO - Innovation

KBV - Knowledge-based View

LP - Learning and Growth Perspective

M I - Marketing Innovation

OECD - The Organization for Economic Co-operation and Development European

OI - Organizational Innovation

NFP - Non-financial Firm Performance

OP - Overall Firm Performance

P I - Process Innovation

RBV - Resource-based View

RC - Relational Capital

xxvii

R&D - Research and Development

SC - Structural Capital

SEM - Structural Equation Modeling

SI - Service Innovation

SpC - Spiritual Capital

SPSS - Statistical Package for Social Sciences

VRIN Valuable, Rare, Inimitable and Non-substitutable

xxviii

LIST OF APPENDICES

APPENDIX TITLE PAGE

A The Research Questionnaire (English Version) 325

B UTM Verification Letter of the Survey toAgricultural Insurance Fund of Iran to Cooperation 331

C Cooperation Letter of Agricultural Insurance Fund 332 of Iran to Survey

D1 Estimates (Mediation Effect of Innovation inFinal SEM Model of IC Components) 333

D2 Modification Indices: Mediation Effect ofInnovation in Final SEM Model of IC Components 339

D3 Model Fit Indices of Final SEM 340

E List of Relative Publications 342

1

CHAPTER 1

INTRODUCTION

1.1 Overview

Firm performance is an obvious indicator of a firm’s success within an

industry. It is influenced by many factors, such as selected business definition, size

of enterprises, structure of organizational resources, policies and strategic planning,

and Human Resource Management (HRM) practices. Therefore, the management of

organizations should carefully monitor, measure, report and manage firm

performance based on the nature of their business (Houthoofd et al., 2010). Karanja

(2011) suggested that in order to improve the firm’s profit, it must be capable of

offering products and services with high quality at low cost in a competitive

environment. Further, Iazzolino et al. (2013) believed that many companies have

responded to these competitive demands by implementing advanced manufacturing

technologies and innovative managerial practices, emphasizing quality and product

delivery, and being flexible to meet the stakeholder needs.

In this perspective, the structures of organizational resources have shifted

from material to intangible assets during the last two decades. Accordingly, many

proponents assert that the “Product-based Economy" and “Retail Economy" have

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; Jalali et al., 2013; Nonaka et al., 1996). The authors claimed that “Knowledge”

and “Intellectual Capital” (IC) are two vital intangible assets that help organizations

create value and wealth in this “Knowledge-based Economy’ (Augier and Teece,

2005; Marr, 2005a), and recently, the scholars have stated that IC is more and more

2

recognized as a cause of firm performance, which stands for the “Value Creation”

impending of human, structural and relational capital and their relations

(Abhayawansa and Guthrie, 2014). They also believed that with knowledge critical

to network society, information technology, innovation and creativity, IC has become

a vital source of value added for organizations and economic situations.

In addition, IC is a highly discussed topic within the field of knowledge

management. Edvinsson and Sullivan (1996) suggested that knowledge firms derive

their profit from innovation and knowledge-intensive services, and that such firms

are called high IC firms. Examples of high IC firms are law firms, consulting firms,

financial services firms and media companies (Edvinsson and Malone, 1997) as well

as software companies, banks, insurance companies and hotels (Rosenbusch et al.,

2011). In comparison, IC scholars have asserted that low IC firms do not invest

highly in IC in their organizations and do not apply knowledge properly, thus,

knowledge, structures and relationships could not be used, in such firms as drivers to

create value added (Sofian et al., 2004). Therefore, Nik-Muhammad and Ismail

(2009) asserted that in the knowledge-based economy, the IC of organizations is

pivotal for gaining competitive advantage. In line with its importance, Usoff et al.

(2002) also suggested that firms with high IC are more likely to use performance

measures for the determination of a manager’s compensation. Thus, organizations

must develop procedures that capture IC and change their traditional performance

measurement system in order to achieve long-term success.

Theoretically, IC scholars suggested that IC is an important factor for

knowledge creation and innovation (Edvinsson et al., 2004). In today’s

organizations, knowledge and innovation are acknowledged to be 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 have also noted that IC leads to

innovative creation, which, in turn plays a significant role in influencing firm

performance (Santoso, 2012; Sharabati et al., 2010; Spahic and Huruz, 2012; Wang

and Wang, 2012; Wiig, 1997).

3

Amidon (2003b) believed that at the beginning of the third Millennium,

innovation is not only the source of competitive advantage, but will also play a

significant role in the next wave of influence, which is known as “Collaborative

Advantage”. Additionally, Rose et al. (2009) noted that innovation has been known

as being an essential driver of economic improvement, and enables companies to

offer new products and services with better-quality at a lower price. Edvinsson

(2004), Vincent et al. (2005), and Kramer (2011) emphasized that being innovative is

necessary for a firm to create a sustainable competitive advantage in today’s

turbulent environment. On the other hand, Augier and Teece (2005) believed that

organizations which do not have any plans to discover and manage their IC will face

unwanted consequences. Based on a multidisciplinary literature review of IC,

Alcaniz et al. (2011) and Marr (2005b) concluded that the IC concept has emerged

from the work of various scholars from different disciplines, such as “Economics”,

“Strategy”, “Accounting”, “Finance”, “Human Resources”, “Marketing”, “Legal",

and “Information System”. Thus, IC and innovation have appeared as two crucial and

vital resources to increase firm performance (Brown, 2009; Zschockelt, 2009), what

companies must disclose and manage them well to succeed.

In light of the above discussion, this study has highlighted the IC components

that foster innovation in insurance companies in order to improve firm performance.

This is a pioneer study, which focuses on the mediating effect of innovation between

IC and firm performance in the agricultural insurance sector of Iran.

1.2 Background of the Study

There are different perspectives for identifying and recognizing IC in

organizations. For example, from the economics perspective, Augier and Teece

(2005) provided a historical overview of the growing significance o f knowledge and

IC as a driver for “Innovation” and “Research and Development” (R&D) activities,

which, recently, was confirmed by Abhayawansa and Guthrie (2014). Also, Johanson

(2005) elucidated the role o f IC from the HRM perspective. The authors defined IC

4

in these contexts and then discussed various tools developed to manage IC. Marr and

Roos (2005) stated the strategic importance of IC resources and differentiated

between the static and dynamic nature of the assets. These IC proponents argued that

the development of strategy from a market-based to a resource-based paradigm is

based on IC. Earlier, Stewart (1997) stated that IC is everything that has been known

by individuals and what they have given individuals to organizations. It is supposed

to be the source of organizational competitive advantage. IC incorporates intellectual

material such as “Knowledge”, “Skills”, “Experience”, “Information”, “Intellectual

property”, “Networks”, “Brand”, “Copyrights” and “Expertise”, which create wealth

for companies. Thus, for corporations and in the macro view of societies, IC is

essential for a smooth transition from the industrial era to the information and

knowledge era (Iswatia and Anshoria, 2007).

A number of scholars have recognized the positive relationship between IC

and firm performance as a key factor for the success o f a knowledge-intensive

business (Bontis, 1999; Bontis et al., 2000; Edvinsson, 1997; Ismail, 2005; Kianto et

al., 2010; Komnenic and Pokrajcic, 2012; Ling, 2012; Maditinos et al., 2011; Roos et

al., 2004; Sullivan, 1999). Further, Brown (2009), Bontis and Serenko (2009),

Laforet (2011), and Yitmen (2011) focused on the characteristics of IC (or intangible

assets) as a focal point of the characteristics, which foster and develop innovation

and creativity in organizations. Therefore, visually, the concept of IC constitutes a

large and growing body o f theoretical and empirical research with a multidisciplinary

term in knowledge management. Augier and Teece (Augier and Teece, 2005)

believed that growing recognition of the importance of knowledge and intangible

assets, their tacit nature, and the desire to understand what creates a competitive

advantage for a firm, have stimulated many diverse streams of research on

technological innovation and knowledge management.

In addition, scholars have stated that organizational knowledge plays a crucial

role through the creation of innovative activities that influence firm performance

(Amidon, 1997, 2003b; Andriessen, 2004b; Brockmann and Anthony, 1998; Egbu,

2004; Hormiga et al., 2011; Jinchveladze et al., 2009; Nonaka et al., 1996).

Similarly, several studies have been conducted on the direct effect of innovation on

5

firm performance (Aas and Pedersen, 2011; Bowen et al., 2010; Cambra-Fierro et

al., 2011; Chen and Wang, 2010; Gopalakrishnan, 2000; Gunday et al., 2011;

Jimenez-Jimenez and Sanz-Valle, 2011; Laursen and Salter, 2006). Many

organizational innovation specialists view innovation as a powerful explanatory

factor behind the current differences in the performance of organizations, and they

assert that it must be known and managed (Fagerberg et al., 2012; Luecke and Katz,

2003; Vincent et al., 2005; Weiser, 2003).

In this respect, researchers have mainly focused on the relationship between

different dimensions of innovation, such as radical, incremental, process, product,

horizontal, vertical and firm performance (Cainelli et al., 2004; Kemp et al., 2003;

Rosenbusch et al., 2011; Wang and Wang, 2012). Asa and Pedersen (2011)

discovered that firm performance in the service sector is influenced more by

innovation than in firms in the manufacturing sector. However, the service sector has

received less attention from scholars in the field of innovation (Amidon, 2003b;

Bowen et al., 2010; Gonin et al., 2011; Walker et al., 2011; Zschockelt, 2009). In

this respect, Aas and Pedersen (2011) investigated whether firms that focus on

service innovation perform better financially than firms that do not focus on service

innovation, because the researchers found that innovation has a direct positive impact

on the financial performance of service companies.

Further, in recent years, a major shift has been witnessed in the innovation

field concerning how various innovative activities boost firm performance through

human, structural and relational capital three components of IC (Edvinsson et al.,

2004; Garcia-Alvarez et al., 2011; Ismail, 2005; Zschockelt, 2009). While, from the

Resource-based View (RBV) of the firm theory, any effort exerted to determine the

relationship between IC and innovation among both managers and employees within

an organization can be one step forward to disclose the important effects of IC as

intangible assets on HRM practices (Jinchveladze et al., 2009) to growing

profitability and performance of firms. An in-depth review of the literature showed

that only a few empirical studies have focused on the influence of innovation in the

relationship between IC and financial business performance (Brown, 2009;

Kamukama et al., 2010; Osman, 2014), particularly in the insurance industry.

6

The main mission of the insurance industry is to provide exceptionally secure

investment opportunities to investors (Alipour, 2012; Mahul, 2011). Thus, the

management tries its level best to offer secure and innovative products to their

customers (Mills, 2009). Economists believe that in order for insurance companies to

successfully accomplish their goals to boost their firm performance, they must

manage their IC, such as human capital (HC) and SC for structural capital (Mahul,

2011; Mahul and Stutley, 2010; Mills, 2009).

Researchers have shown that in the insurance industry, which is a subset of

the financial sector, the IC components have a significant positive relationship with

firm profitability. Some insurance companies, such as Skandia in Sweden

(Edvinsson, 1997), Panin in India (Ordonez de Pablos, 2005), Insurance Association

in Pakistan (Ul-Rehman et al., 2011), Indonesian insurance companies on the Jakarta

Stock Exchange (Iswatia and Anshoria, 2007), and Malaysian insurance companies

(Nik-Muhammad and Ismail, 2009), have improved their performance by realizing

and understanding the importance o f IC and reporting it in their business.

Additionally, scholars believe that financial companies like insurance and banks,

which have been acknowledged to be knowledge-intensive firms, must focus on

innovation to increase their performance (Ul-Rehman et al., 2011). Recently,

Yeganeh et al. (2014) found that in Iran there is a difference between private and

public insurance companies in terms of IC and that private insurance companies are

more advanced in this regard. The authors also determined that among the

components of IC, human capital plays a major role in insurance companies as

knowledge intensive organizations, and is considered to be the most important

competitive advantage factor in today’s knowledge-based economy.

Harvesting from the above discussion, this study focuses on the IC

components that encourage innovation to influence the financial and non-financial

performance of the Iranian agricultural private insurance companies. The findings of

this study revealed the extent to which the identification o f the internal (human,

structural, relational and spiritual capital) and external components of IC are

important in the performance of agricultural insurance companies in Iran. The

7

findings of this study also paved the ways for top managers of insurance companies

to improve overall service quality thereby making their companies more profitable.

This study has achieved its main aim to examine the influence of IC

components on the firm performance and to investigate the mediating role of

innovation on this relationship, especially in the agricultural insurance sector of Iran.

1.3 Im portance of Insurance Services in Iranian A gricultural Sector

Iran’s economy has a number of key sectors. In 2008, the services sector,

including financial services, represented about 44% of Iran’s economy. Agriculture

continues to be one of the economy’s largest employers, representing one-fifth of all

jobs based on a 1991 census. Iran’s economic sectors remain heavily dominated by

the state, but there are some privatization efforts under way (Ilias, 2010). In Iran

same as many others developing countries, the agricultural sector is a critical

economic sector of livelihood as important creator of food security in the country.

Normally, agricultural producers are often vulnerable to the effects of adverse natural

events, such as pest and bird attacks, various natural disasters, unfavorable weather

conditions (drought, hail, flood, heat, storm and hot wind), and so on. In fact, these

conditions have significant negative impacts on agricultural production. Therefore,

governments, through agricultural insurance services, provide assistance and

sustainability situation to agricultural producers who successfully develop risk

management and adaptation strategies to survive these unfavorable events. Actually,

these conditions have significant negative impact of agricultural production.

Arguably, this makes agricultural insurance an important financial service

that is needed for a comprehensive agricultural risk management strategy in

developing countries (Mahul, 2011). Although, in some developing countries,

agricultural insurance services have been offered for more than a century, this kind

of insurance service remains under serviced in middle- and low-income countries.

However, since the late 1990s, reduced government funding for agricultural

8

producers in emerging markets has heralded renewed interest in agricultural

insurance. A recent study conducted by the World Bank revealed that various

agricultural insurance schemes are in place in more than 100 countries, either as

well-developed programs or pilots (Mahul and Stutley, 2010).

In a similar vein, and as part of an overall agricultural risk management

framework, the global financial network supports the development of agricultural

insurance schemes. In these schemes, developing countries are also assisted with the

necessary institutional and capacity-building support to design and implement

traditional and innovative agricultural crops and livestock insurance services. The

World Bank also plays a role in forming agricultural insurance pools in various

countries across the world in the past twenty years.

In a general sense, these projects are usually linked to supportive efforts in

agricultural extension and financing to more agricultural products to successful

economic independence for developing countries (Mahul and Stutley, 2010). Mahul

(2011) argued that the potential role o f agriculture insurance in emerging economies

is being revisited due to the notable expansion of agricultural risk modeling

techniques and the materialization of a number of insurance corporations and index-

based insurance. It was thus suggested that the innovativeness of insurance for

agricultural products might reduce the economic returns to farmers, herders,

agricultural financing institutions, and governments in the case of unfavorable

natural events. This may be particularly true for developing countries, which rely

heavily on their agricultural sector.

However, Roberts (2013) posited that the management of insurance

companies, as well as business firms, has several developmental stages. These

include market identification; service development; marketing; setting indemnity and

premium levels; collecting premiums; and handling claims. However, the extent of

involvement of the public sector varies from country to country. Roberts (2013),

further contended that it always has a role, even if this is exercised mainly through

setting supportive and regulatory policies. It may be particularly important in the

9

early stages of the development of the agricultural insurance sector, as well as in

situations where financial support is considered both desirable and possible.

Agricultural insurance has known as a professional area of insurance services

that is technically demanding. Among the many challenges in the insurance industry

are maintaining the skills and expertise of the underwriter and loss adjuster, as well

as the reinsure levels, not only to provide adequate levels of insurance, but also to

assist the agricultural sector improve its risk-management practices to enhance

production in each relative country.

There is no single universal insurance service that meets all the demands of

producers. Each agricultural insurance service is suitable for a certain set of

conditions. The assessment of the suitability of any agricultural insurance service has

to consider the agricultural production system, the type of asset to be covered, the

key peril to which the insured is exposed, the risk location, data and information

availability, farmer size, delivery and loss adjustment needs, and distribution

channels of insurance services. In fact, in insurance companies, employees, as human

resources, play an important role in building competitive advantage for the

sustainability o f their firms. For instance, the insurance trend is constantly dynamic,

changing as lifestyle changes. Once changes in insurance patterns are identified, the

onus lies on employees to develop new services that match the expectation of

consumers.

In such situations, knowledgeable employees rise to the occasion with

creative and innovative ideas to meet the desires of consumers. As a result, the

introduction o f technical, customized insurance services in the market may enable a

firm to gain competitive advantage over its contemporaries and competitors.

Arguably, such a company tends to eventually occupy a greater market share in the

insurance industry.

10

1.3.1 A gricultural Insurance Fund of Iran

In Iran headquarter of the agricultural insurance sector is called the

“Agricultural Insurance F und ’ (AIF), which was established by the Iranian

government in 1982 (A.I.F, 2013) into the Agricultural Bank of the country. At this

time, the AIF is a unique agricultural insurance organization, which delivers

insurance services to coverage agricultural products, while other 27 insurance

companies in the country have not any insurance services for agricultural products in

Iran. The AIF, which is managed by the governmental headquarters, located in

Tehran, extends its administration to 32 states across the country through

approximately 775 branches of the Agricultural Bank, and 294 agricultural insurance

firms, which are active as insurance brokers of the private sector in Iran (Table 1.1).

The AIF is as the headquarter of the agricultural insurance services, which have

supervising, coordinating, and controlling role in professional activities of private

insurance firms to better regulation insurance services in all 32 states of the country.

Table 1.1 compares demographic situation of the government and the private sector

of agricultural insurance services in Iran as below:

Table 1.1: Demography of the Employees in Agricultural Insurance Sector in Iran

Dependency OrganizationalDivision

Location Job Title of Employees

Number of Employees

GovernmentalSector

Headquarter(A.I.F)

Tehran (Capital of Iran)

Board of Director Member

5

DepartmentManager

12

Staff of the Headquarter 148

ProvincialBranch

32 States (Across the Country)

Administrator 32

Insurance Expert 1030

PrivateSector

Agricultural Insurance Firm

32 States (Across the Country)

Top/SeniorManager

294

Insurance Expert 4650Total Employees 6171

Source: Annual report of Agricultural Insurance Fund (2013)

11

The AIF is designated to make the insured producer transfer a major portion

of their growing risk to a multi-peril crop insurance, which, in turn, spreads the risk

among many producers over time. The main mission of the AIF in the nation, in

concert with its vision o f development by year 2020, is to develop diversity and

increase the quality o f insurance services across the country. However, according to

the official statistics (World Bank, 2014), there are more than 23 million rural people

constituting 4.8 million producer farms (small, medium, and large farms) in the

agricultural sector throughout the country, of which only 2.3 million are insured

(A.I.F, 2013). Thus, to achieve the aspiration of making Iran a developed program in

the agriculture sector, and to survive in a highly competitive and challenging

business environment, the AIF has to improve its compatibility through increasing

human resource competency and managing innovation.

1.3.2 IC and Innovation in Insurance Companies

Ul-Rehman et al. (2011) believed that knowledge is in abundance in

insurance companies and that they are known for being good in creating knowledge

and for knowledge-based acquisition. Although IC is extensively researched in large

organizations, it is yet to be explored in-depth in insurance companies. Given the fact

that competitive advantage is becoming critical in the knowledge-based economy, an

approach that uses “Knowledge Management" and performance to effectively

achieve this purpose is increasingly popular. More and more companies, which are

trying to explore optimal methods of managing knowledge-based assets, usually

consider IC as a means to evaluate their performance (Subramaniam and Youndt,

2005). The customers of these firms, as well as the insured, regulators, shareholders,

and brokers are eager to see insurers offer more and new services that extend

coverage to the economic activities, expand their efforts to improve disaster

resilience and be proactive in terms of the threat of climate change (Mills, 2009).

The first empirical analysis concerning the relationship between IC and firm

performance was in the Skandia report compiled by a Swedish insurance company

12

by Edvinson and Malone (1997). However, review of the literature in this study

illustrates that only a few studies have been undertaken on the evaluation of IC and

its comparison in insurance industry, but these studies confirmed that IC influences

the performance of this kind of business (Table 1.2). According to Kong (2010b),

based on the emerging economic conditions, more recent concerns about the concept

of IC have shifted to analyze what and how various innovative attributes influence

firm performance through IC components, such as human, structural, and relational

capital.

Investigation concerning employees’ innovation in insurance companies is

particularly interesting. This is because, although in previous studies, the researchers

have already analyzed the relationship between IC and innovation (Pardede, 2010) as

well as the linkage between innovation and firm performance (e.g. Bowen et al.,

2010; Cambra-Fierro et al., 2011; Cassia et al., 2009; Freel and Robson, 2004;

Gopalakrishnan, 2000; Medina and Rufin, 2009; Ogbonna and Harris, 2003; Vincent

et al., 2005), to date, complex investigation into the relationship among IC,

innovation, and firm performance in insurance companies has not been conducted.

Based on the research findings by Chen and Chen (2005), evaluation and

improvement of knowledge management performance is often promoted, particularly

in companies within the life insurance industry. Widen-Wulff and Suomi (2007)

explored how Finnish insurance companies share organizational knowledge. Their

analysis showed that effective knowledge sharing positively correlates with business

success in the insurance companies under consideration.

Table 1.2: Previous Researches on IC in Insurance Industry

Author/sYear

CountryTitle of the Study Findings

Skandia(1996)

Sweden

-Visualizing Intellectual Capital in Skandia

-IC is as hidden assets in the company

Iswati and Anshori (2007)

Indonesia

-The Influence of Intellectual Capital to Financial Performance at Insurance Companies in Jakarta Stock Exchange

-IC rests on a potential link between IC on one hand and corporate performance on the other hand. Companies will grow up if a growing number of physical capitals in the same line with a growing number of IC.

Ak and Oztay;i -Performance Measurement -Financial perspective is not enough to

13

(2007)Turkey

of Insurance Companies By Using Balance Scorecard and Analytical Network Process in

explain an insurance company performance

Appuhami(2007)

Thailand

-The Impact of Intellectual Capital on Investors' Capital Gains on Shares: An Empirical Investigation of Thai Banking, Finance & Insurance Sector

-IC has a significant positive relationship with its investors' capital gains on shares. His finding indicated enhance the knowledge base of IC and develop a concept of IC in achieving competitive advantages in emerging economies such as Thailand's.

Chen and Chen (2010)

Taiwan

-How to Manage Knowledge Well? Evidence from the Life Insurance Industry

-Companies in the life insurance industry are encouraged to successfully evaluate and improve knowledge management performance to bring about radical change in the existing state of affairs and to develop future strategies efficiently and solidly.

(Continued)Table 1.2: (Continued)

Author/sYear

CountryTitle of the Study Findings

Pardede(2010)

Indonesia

-An Investigate on Effect of Intellectual Capital on Financial Performance in the Insurance Companies listed on the Jakarta Stock Exchange

-IC influence on Financial Performance in the insurance companies.

Ul Rehman (2011)

Pakistan

-Intellectual Capital Performance and its Impact on Financial Returns of Companies: An Empirical Study from Insurance Sector of Pakistan

-The results have shown that human capital efficiency plays a significant role in IC performance of both life and non life insurance sector. The firm having more efficient people means having better performance of IC. Where as a significant and positive relationship was measured between value added creation and financial performance.

Alipour(2012)Iran

-The Effect of Intellectual Capital on Firm Performance: An Investigation of Iran Insurance Companies

- The findings confirmed that value added intellectual capital and its components have a significant positive relationship with companies' profitability. Insurance companies better to benchmark themselves according to the IC efficiencies and develop strategies to enhance their company's performance.

Lu et al. (2014) China

- Intellectual Capital and Performance in the Chinese Life Insurance Industry

- Intellectual capital is significantly positively associated with firm operating efficiency and IC can make a company rich. Insurers' managers should invest and fully utilize IC to gain a competitive advantage.

Yeganeh et al. (2014)

Iran

- A Survey of Intellectual Capital in Public and Private Insurance Companies of Iran Case: Tehran City

- The type of ownership of the insurance companies only has significant effect on human capital and has not any significant effect on structural and relational capital. The type of ownership of the insurance companies has significant effect on IC and

14

that the condition of IC in private insurance companies is more appropriate compared with public insurance companies.

Chen et al.(2014)

Malaysia

-Intellectual Capital and Productivity of Malaysian General Insurers

- The regression analysis reveals that IC, namely VAIC (Value Added Intellectual Coefficient) and its individual components (VAHC, SCVA, and VACA) and individual components have significantly positive impacts on changes in productivity. Thus, the researchers suggest that general insurers in Malaysia should invest in IC, including to improve their managerial skills, to gain sustainable growth in productivity.

Appuhami (2007) investigated the impact of IC on investors’ capital in the

Banking, Finance and Insurance Sector of Thailand and found that IC had a

significant positive relationship with its investors’ capital gains on shares. The

finding indicates that an enhancement of the knowledge base of IC and development

of its concept enhances the achievement of competitive advantage in an emerging

economy. However, Chen and Chen (2005) noted two main observations in the life

insurance industry in Taiwan. First, it is one of the main mechanisms that could

significantly exert its effect on the Taiwanese economic growth; and, second, the

knowledge is needed for high performance itself. Furthermore, the results o f a study

by Pardede (2010) showed that IC influences financial performance in insurance

companies in Indonesia.

Although, a number of studies have focused on the IC concept, particularly in

the IT and financial sector in various countries, Alipour (2012) believed that there is

a lack of both theoretical and empirical studies on IC in the Iranian insurance sector.

However, the researcher stated that, in Iran, IC studies on the other sectors are still

weak and limited. While, at the same time, the hypotheses concerning whether the

Iranian insurance industry focuses on IC remains ambiguous.

15

1.4 Problem Statem ent

In insurance sector, profitability is vital point to success and achieving their

goals that affects by various factors such as size and/or age of enterprise, structures,

policies, strategics, rules, routines, structure of organizational resources, quality of

services, customer/employees satisfaction, and human resource management

practices (Houthoofd et al., 2010). In knowledge-based economy, that started since

beginning of the 21st century, some researchers have shown that in the service

provider firms such as insurance companies, banks, hotels, consulting firms, which

are called high IC firms, their performance is more related to their IC and

innovativeness capabilities compared to implementation of IT, tools, machines and

hardware (Edvinsson et al., 2004; Usoff et al., 2002).

Therefore, IC and innovation have received considerable attention and have

become well recognized as two worthy factors in the business studies in across the

world (Amidon, 2003b; Besharati et al., 2012; Bollen et al., 2005; Brown, 2009;

Canibano et al., 1999; Chen et al., 2015; Dickson, 2007; Edvinsson et al., 2004;

Egbu, 2004; Grajkowska, 2011; Hervas-Oliver et al., 2011; Intan-Soraya and Chew,

2010; Jafari et al., 2011; Jinchveladze et al., 2009; Kramer et al., 2011; Ngah and

Ibrahim, 2009; Wu et al., 2008; Yitmen, 2011; Zerenler et al., 2008; Zschockelt,

2009). Conversely, insurance companies, which have known as knowledge-based

companies, have not given sufficient attention to disclose, measure and report of IC

and innovation capabilities in their businesses yet. Thus, focusing on relationship

between IC and innovation in insurance companies is very suited study.

On the other hand, in recent years like other countries IC has become an

interesting subject among Iranian researchers (Ahangar, 2011; Ahmadi et al., 2011a;

Ahmadi et al., 2011b; Dolat-Abadi and Tavakoli, 2011; Hassani and Mortazavi,

2014; Iranmahd et al., 2014; Khani et al., 2011; Mehralian et al., 2012; Meihami and

Karami, 2014; Mosavi et al., 2012; Norozi et al., 2013; Piria et al., 2014; Yaghoubi

et al., 2010; Yeganeh et al., 2014), but no study has been done on disclosing and

reporting of IC in the agricultural insurance sector in this country.

16

However, Mobasheri (2010) claimed that most of the IC studies in Iran

provided an understanding of where the organizations are situated relative to

international terms (Boroujerdi, 1996) and just a few studies have tried to utilize

some measures o f reporting and managing of IC in Iran, such as Moslehi et al.

(2006), Sharifi and Taleghani (2011) and Damirchi et al. (2012). The dearth of

empirical research in the Iranian agricultural insurance sector affects the general

ability o f the findings from earlier studies to this sector.

Based on the above discussion, the major concern o f this study is to

investigate the effect of IC and innovation on performance of insurance companies in

Iran. Because an acknowledgement and a critical understanding of IC as intangible

assets in insurance companies can enhance their organizational innovation as

intangible activities. This is so because IC and innovativeness are perceived and

considered to be sources of competitive advantage for insurance companies, which

have known as knowledge-based companies.

In light of the above, it could be concluded that the existing literature on IC

components and organizational innovation is inconclusive; thereby indicating that the

insurance industry in Iran particularly insurance services in the agricultural sector,

needs an in- depth investigating. Therefore, this study has filled this knowledge gap

by an investigation on the influence of IC components on the performance through

mediating role of innovation in the agricultural insurance companies in Iran. Issues

related to the main area of this study were addressed as follows:

1.4.1 Influence of IC on Firm Perform ance

Based on the background of the study, IC scholars have reported that

enterprises, that managed their IC better have a stronger competitive advantage than

those that do not, and based on the reports, it could be concluded that the companies

that manage their IC well, tend to perform better than those companies that do not.

IC scholars have also often considered the impact of three components of IC

17

(Human, Structural and Relational Capital) on firm performance, while, Ismail

(2005) suggested “Spiritual Capital” as the fourth element of IC in determining the

impact of IC on the firm performance. However, there are very few studies on

spiritual capital. Harvesting from the above discussion, the following two issues were

raised and examined:

• Does IC significantly influence performance of the agricultural insurance companies in Iranian?

• Which one of the IC components has the strongest impact on overall firm performance of the agricultural insurance companies in Iran?

1.4.2 Influence of Innovation on Firm Perform ance

Innovation is an attempt to develop new business opportunities that generate

a platform for competitive advantage (Andersen, 2008). Because, according to Oslo

Manual (OECD, 2005), an organizational innovation is the implementation of a new

organizational method in firms’ business practices, workplace organization or

external relations. It can intend to increase firm performance by reducing

administrative costs or improving workplace satisfaction, with the aim to maximize

labor productivity. For example, an organizational innovation in business practices is

implementation of education or training systems. However, the distinction between a

process innovation and an organizational innovation is perhaps not as clear since

both try to decrease costs through more efficient ways of production, i.e. output.

In this order, many knowledge-intensive enterprises increasingly invest in

innovation in order to vary business opportunities and boost company flexibility

(Chen et al., 2004). Therefore, most of the empirical studies such as Aas and

Pedersen (2011), Bowen et al. (2010), Cainelli et al. (2004), Cambra-Fierro et al.

(2011), Gunday et al. (2011), Jimenez-Jimenez and Sanz-Valle (2011), Karanja

(2011), Kemp et al. (2003), Mazzanti et al. (2006), Ogbonna and Harris (2003), Rhee

18

et al. (2010), Salim and Sulaiman (2011) Vincent et al. (2005), and Wang (2011a)

reported a positive relationship between innovation capability and firm performance.

On the other hand, Aas and Pederson (2011) noted that there is a paucity of

empirical research on the linkage between service innovation and financial

performance. Since performance is a focal point for all firms, understanding the

relationship between performance and innovation may help firms to gain better

competitive advantage (Salim and Sulaiman, 2011). Thus, it has been suggested that

firms should try to recognize the crucial link between innovation activities and their

performance. In line with the above discussion, a third issue was put forward and

investigated:

• Does innovation significantly influence firm performance o f the agricultural insurance companies in Iran?

1.4.3 Relationship between IC and Innovation

In the recent years, IC scholars have argued that in the knowledge intensive

companies, IC has known as “Intangible Assets” and innovation seems like as source

of “Intangible Activities” (Goodridge et al., 2012; Kheng et al., 2013; Succurro,

2014). Therefore, Edvinsson et al. (2004), Roos et al. (2010a), and Zerenler et al.

(2008) stressed the importance of innovation, renewal or development in their IC

framework. Further, according to the resource-based view (RBV), determining the

relationship between IC and innovation activities among managers and employees

can be one of the steps to reveal the importance of HRM (Jinchveladze et al., 2009),

strategic management (Marr and Roos, 2005), knowledge management (Wiig, 1997),

and accounting management (Mouritsen et al., 2001) in enterprises.

Moreover, according to the definition adopted by OECD (2005), in Oslo

Manual, organizational innovation is implementation of a new organizational method

in the firm’s business practices, workplace organization or external relations. Based

on this definition implementation of new organization methods includes acquisitions

19

of other external knowledge and other capital goods that are specifically related to

organizational innovations. The manual states that organizational innovation and all

contribute to strengthen the competitive advantage of a certain company. Therefore,

innovation sustainability is the only way companies and sector growth as this will

lead to the next level o f competitive advantage.

By realizing and understanding the importance of IC and innovation to

improving firm performance, insurance companies as knowledge-intensive

companies can improve their profitability and performance. Therefore, managers

within this kind of firms should protect, develop and manage IC to increase

innovation capabilities as a creator of competitive advantage to their companies

(Amidon, 2003b). Therefore, the fourth and fifth issues related to the above were

raised and examined:

• Does IC have a significant relationship with innovation in the agricultural insurance companies in Iran?

• Which one of the IC components has the strongest relationship with innovation in the agricultural insurance companies in Iran?

1.4.4 M ediation Effect of Innovation between IC and Firm Perform ance

Intellectual capital can boost organizational performance in various ways,

such as knowledge, experience, skills of employees (Bontis, 2002), and also by

defining new methods of task performance and being innovative in the offerings.

Thus, the IC of a company creates the value of ideas and the capability o f being

innovative for a longer period (Bontis, 1999).

Kamukama et al. (2011) examined the mediating role o f competitive

advantage between IC and firm performance and found that competitive advantage

significantly mediated this relationship. The follow-up analysis revealed that a partial

mediation of competitive advantage on IC and financial performance was detected.

Therefore, it is good to assess the role of innovation in respect of both the partial and

20

full mediator effect between IC and firm performance. Thus, the last issues

investigated were:

• Does innovation have a mediation role between IC and performance of the agricultural insurance companies in Iran?

• Which one of the IC components is more mediated through innovation in terms of the performance of the agricultural insurance companies in Iran?

The discussions above are supported by Resource-based View (RBV) and

Knowledge-based View (KBV) as two important and related theories of these issues,

where according to RBV, resources and capabilities of the firms are viewed as

bundles of tangible and intangible assets or IC, including employees and

management’s skills, processes and routines in organization (Barney, 2001). On the

other hand, according to KBV, “Organizational Knowledge” plays the crucial role in

the firms, through the creation of innovative activities that influence firm

performance (Amidon, 2003b; Egbu, 2004; Hormiga et al., 2011; Jinchveladze et al.,

2009).

1.5 Research Questions of the Study

Based on the objectives above, this study has focused on the following

research questions:

> Does IC influence performance of the agricultural insurance companies in Iran?

> Does innovation influence performance of the agricultural insurance companies in Iran?

> Is there any relationship between IC and innovation in the agricultural insurance companies in Iran?

> Is innovation a mediator between IC components and performance of the agricultural insurance companies in Iran?

21

1.6 Purpose of the Study

The main purpose of this study was to investigate the mediation role of

innovation between IC and firm performance in the insurance sector in Iran. The

study was designed specifically to identify the effect of both the partial and full mode

of mediation of innovation on the components of IC ( human, structural, relational,

and spiritual capital) and firm performance in the agricultural insurance sector of Iran

in enhancing the company’s financial, non-financial, and overall performance.

1.7 Objectives of the Study

There were six objectives of the study as follow:

> To examine the influence of IC on firm performance of the agricultural insurance companies in Iran.

^ To examine the influence of innovation on firm performance of the agricultural insurance companies in Iran.

> To examine the relationship between IC and innovation in the agricultural insurance companies in Iran.

> To investigate the mediating role of innovation between IC components and firm performance in the agricultural insurance companies in Iran.

1.8 Scope of the Study

Based on the purpose of the study, this study investigated the influence of IC

on firm performance through innovation as a mediator. Four components of IC

(human, structural, relational and spiritual capital) are included in this study. This

investigation also focused on four dimensions of innovation (process, service,

marketing, and organizational innovation). Further, firm performance was measured

based on four perspectives of the Balanced Scorecard (BSC) method, which

comparise the customer, internal business processes, learning and growth, and

financial perspectives. In order to empirically test these relationships, this study was

22

carried out in agricultural insurance companies operating in the private sector in Iran.

One of the top managers of each insurance company was asked to participate in this

study. The data for the study were collected through a questionnaire survey.

1.9 Significance of the Study

Although numerous studies confirmed the positive and significant impact of

IC and innovation (separately) on firm performance, only a limited number

investigated the interactions o f IC components (Human Capital, Structural Capital,

and Relational Capital) and innovation on firm performance such as Chen and Wang

(2010), Egbu (2004), Grajkowska (2011), Lindgren et al. (2009), Ngah and Ibrahim

(2009), Wu et al. (2008), and Zerenler et al. (2008). In addition, these studies were

only conducted on the financial aspect of performance, even though the literature on

IC also suggested the existence of the effect of IC and innovation on non-financial

performance. In other words, so far, the effect of innovation between IC and firm

performance, particularly both financial and non-financial together, is still unclear.

Therefore, the main academic contribution of this study is the investigation of

the mediating effect of innovation on the relationship between the influence of IC

components and firm performance. In order to achieve this goal, this research

focused on further developing and testing the IC models that were outlined by prior

IC scholars. Moreover, in this study not only did IC include human, structural, and

relational capital, based on the results of past studies, the framework of the study is

developed through adding SpC as fourth component of IC, in keeping with Ismail

(2005), who previously asserted that it has a significant direct effect on firm

performance. Thus, this study has highlighted SpC as a new aspect of IC, and has

examined its effect on the performance of the agricultural insurance sector in Iran.

Although, Cainellin et al. (2004), and Aas and Pedersen (2011) suggested that

the effect of innovation is particularly related to the service sector, little attention has

been given to this subject, inasmuch as existing research about the relationship of

23

innovation and firm performance has focused on innovation related to the

development of products, marketing goods, and automation, mostly on IT products,

and only a few studies have focused on the service sector. This study was conducted

on insurance companies, which is part of the service sector.

To the knowledge of the researcher, this study is the first comprehensive

investigation concerning the relationships of IC components (Human Capital,

Structural Capital, Relational Capital, and Spiritual Capital), innovation, and firm

performance in both aspects, financial and non-financial performance. In addition,

focusing on the mediating effect of innovation on the relationship between IC and

firm performance is the valuable theoretical contribution of this study. As the final

contribution, based on the finding of this research, the developed SEM model

introduced includes the valuable factors of IC, and innovation; the aspects that have

the most positive interaction in boosting the financial and non-financial firm

performance in the insurance industry.

1.10 O perational Definitions Key Terms of the Study

In this section, the definitions of key terms in the study are offered. This

study mainly revolved around IC, its components, innovation and dimensions, and

firm performance from different perspectives in the agriculture insurance in the

private sector in Iranian. The descriptions of these terminologies are offered below:

1.10.1 Intellectual Capital (IC)

IC or intangible assets that create profit for firms which normally are tacit

and cannot be defined clearly. This study has utilized the four components of IC;

human, structural, relational, and spiritual capital as below:

24

> H um an Capital (HC): Is the knowledge, skills, experiences and abilities that employees take with them when they leave their firm. Some of this knowledge is unique to individual, some may be generic. Examples are innovation capacity, creativity, and previous experience, teamwork capacity, employee flexibility, tolerance for ambiguity motivation, satisfaction, learning capacity, loyalty, formal training and education (Meritum, 2002).

> S tructural Capital (SC): 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 (Meritum, 2002).

> Relational C apital (RC): Is all resources linked to the external relationships of the firm, with customer, suppliers or R&D and partners. 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 component are image, customers loyalty, customer satisfaction, links with suppliers, commercial power, environmental activities (Meritum, 2002).

> Spiritual Capital (SpC): Is 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 (Ismail, 2005).

1.10.2 Innovation (INO)

Innovation encompasses the full spectrum of creative idea generation

through full profitable commercialization. A comparable methodology capturing

innovation is proposed in the Oslo Manual (OECD, 2005), which provides general

guidelines for collecting and interpreting innovation data such as process innovation,

product/service innovation, marketing innovation, and organizational innovation. To

measure innovation, the manual developed a general innovation survey. The survey’s

primary idea is to provide an extensive framework for all developing economies in

how to formulate questions, how to gather data and how to measure innovation

activities in firms. This manual deals with innovation at the level of the firm. When

firms innovate, they are engaging in a complex set of activities with multiple

outcomes, some of which, moreover, can reshape the boundaries and nature of the

25

firm itself. According to OECD (2010) the four dimension of innovation were

applied in this study as follow:

> Process Innovation (PI) is the introduction of a new or significantly improved production. Such as: New rules, New rutins, New methods of loss assessments and loos adjustment, Developing procedures and internal practices to provide insurance services, New insurance operation, New appropriate software and hardware to decrease variable costs, Increasing delivery speed of support services to customers, Increase quality of support insurance services.

> Service Innovation (SI): Is the introduction of a goods or service that is new or substantially improved. Such as: Developing and improving new insurance services for better agricultural insurance capacity in the region, New plans to improve ease of use for customers and increase customer satisfaction, Developing new methods and services for agricultural insurance sector that are totally different in quality, and Increasing the quality o f insurance services by using information communication and technology.

> M arketing Innovation (MI): Is the implementation of new marketing methods and introducing significant chandses in product design, packaging, product promotion and pricing. Such as: Renewing and reviewing the current methods to introduce new services to the customers, Renewing and reorganizing the agricultural insurance distribution network, Renewing and reviewing current agricultural insurance services for customers, Creating new methods to better manage agricultural insurance market.

> Organizational Innovation (OI): Is the creation or alteration o f business practices, workplace organization and external relations. Such as: Reviewing the organization structure to facilitate team work, Renewing and review the organization structure in order to strengthen the coordination between various functions like marketing and insurance services, Rethinking policies and procedures of insurance services in order to guide the firm toward increasing innovative activities, Reviewing the human resource management system (how to choose personal, employment, employee training, division o f labor, monitoring and etc.), Reviewing how to engage stakeholders in the agricultural sector, Reviewing the organizational structure, and Reviewig and renewing of the management information system and methods of publishing and distributing the information.

26

1.10.3 Overall Firm Perform ance (OFP)

Firm performance refers to the subset of organizational effectiveness that

covers financial and non-financial performance. In this study overall firm

performance included non-financial firm performance (NFP) and financial firm

performance (FFP). In this study overall firm performance (OFF) followed the sum

of the four perspectives of organizational performance that were offered by Kaplan

and Norton (2008) in the BSC measurement method, as follows:

> Custom er Perspective (CP): Is seeks to explore customers’ viewpoint of the organization to answer the question;how do customers see us? (Kaplan, 2008).

> In ternal Business Process Perspective (BP): Is seeks to explore areas, core competencies, products or niches that the organization needs to excel and look at; where must we excel? (Kaplan, 2008).

> Learning and Growth Perspective (LP): Is seeks to explore opportunities for continuous improvement and creation of value; can we continue to improve and create value? (Kaplan, 2008).

> Financial Perspective (FP): Is seeks to explore the organizational approach to shareholders; how do we look at our shareholders? (Kaplan, 2008).

> Non-financial Firm Perform ance (NFP): In this study NFP is sum of theCP, BP, LP as above.

> Financial Firm Perform ance (FFP): In this study FFP is sum of the FP as above.

1.10.4 A gricultural Insurance Fund (AIF)

The Agricultural Insurance Fund is the governmental corporate headquarter

for agricultural insurance sector in Iran. It was established in 1982 into the

Agricultural Bank of Iran, and later, in 2000, became known as the government

sector with the remit of supervising and managing the private sector of agriculture

insurance companies of the country (A.I.F, 2013).

27

1.11 Structure of the Thesis

This thesis is structured based on the answer to the main question o f the study

and was conducted to determine the mediating effect of innovation between the IC

components and firm performance in the agricultural insurance industry in Iran.

Accordingly, in this study following the First Chapter as the introduction of the

study, Chapter 2 reviews the existing literature concerning the IC components and

innovation, and the impact of these two concepts on firm performance. In addition,

the relationship between IC and innovation is elaborated upon, and based on the

theories o f the study, particularly for knowledge-based companies, the conceptual

framework is illustrated in the last subsection of the second chapter. The output of

this literature review is a research framework that was developed to diagnose the

relationships between the three main concepts of the study (IC, Innovation, and Firm

Performance). Chapter 3 is arranged based on the methodology of deductive

research. In this chapter, the research philosophy, research design, hypotheses o f the

study, measurement of the variables, structure of the questionnaire survey, data

collection procedure, and data analysis methods are described. The results o f the

hypotheses testing and discussions of the findings are elaborated upon in Chapter 4.

As the last main section of the study, Chapter 5 follows the summary of the

hypotheses testing and answers to the research questions. Further, based on the

results of the data analysis, the four issues o f the study are discussed in this chapter.

In Chapter 5 as the final part, the conclusion, contributions, limitations of the study

and some suggestions for future studies are explained in Chapter 5.

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