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

James Mark Ngari Karimi

A Thesis Submitted in Partial Fulfillment for the Degree of Doctor of
Philosophy in Human Resource Management in the Jomo Kenyatta
University of Agriculture and Technology

2012

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DECLARATION
This thesis is my original work and has not been presented for a degree in any other
university
Signature:……………………………

Date:…………………………

James Mark Ngari Karimi

This thesis has been submitted for examination with our approval as University
Supervisors.
Signature: ……………………...

Date: ........................................

Dr. Robert Gichira


guidance from Dr. Gichuhi Anthony Waititu; I‟m sincerely indebted to him, Ombui
Monari and Alex Mwaniki who tirelessly worked on his SAS, AMOS and SPSS
software as I analyzed the data. Simon Machiri for his valuable input in formatting of
the final document, Catherine Kiragu was instrumental in her professional editorial work
while the PhD faculty members provided invaluable input to the study.

Am equally grateful to my doctoral colleagues among them Ben, Robert, Jane, and Mary
with whom we have had robust discussions in our peer group

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TABLE OF CONTENTS
DECLARATION ............................................................................................................... ii
DEDICATION .................................................................................................................. iii
ACKNOWLEDGEMENT ............................................................................................... iv
TABLE OF CONTENTS .................................................................................................. v
LIST OF TABLES .......................................................................................................... xii
LIST OF FIGURES ....................................................................................................... xiv
APPENDICES ................................................................................................................ xvi
ACRONYMS AND ABBREVIATIONS ..................................................................... xvii
DEFINITION OF OPERATIONAL TERMS .............................................................. xx
ABSTRACT .................................................................................................................. xxiv
CHAPTER ONE ............................................................................................................... 1
INTRODUCTION ............................................................................................................. 1
1.1 Background ................................................................................................................... 1
1.2 Statement of the Problem .............................................................................................. 8
1.3 General objective ........................................................................................................ 10
1.4 Hypothesis ................................................................................................................... 11
1.5 Importance of the study............................................................................................... 12

2.2.14 Systems and programs ............................................................................... 49
2.2.15 Research and Development ....................................................................... 50
2.2.16 Intellectual Property Rights ....................................................................... 51
2.2.17 Relational Capital ...................................................................................... 53
2.2.18 Strategic Alliances, Licensing Agreement ................................................. 54
2.2.19 Relation with Partners, Suppliers and Customers ...................................... 55
2.2.20 Knowledge about Partners, Suppliers and Customer................................. 56
2.2.21 Business Performance ................................................................................ 57
2.2.22 Human Productivity ................................................................................... 59
2.2.23 Profitability ................................................................................................ 60
2.2.24 Market Valuation ....................................................................................... 60
2.3. Critique of the existing literature ............................................................................... 61
2.4 Summary ..................................................................................................................... 63
2.5 Research Gap .............................................................................................................. 66
CHAPTER THREE ........................................................................................................ 68
RESEARCH METHODOLOGY .................................................................................. 68
3.1 Introduction ................................................................................................................. 68
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3.2 Research Design .......................................................................................................... 72
3.2.1 Measurement of Dependent Variable .......................................................... 74
3.2.2 Measurement of Independent Variables ...................................................... 75
3.3 Population ................................................................................................................... 78
3.4 Sampling Frame .......................................................................................................... 78
3.5 Sample and sampling technique .................................................................................. 79
3.6 Instruments .................................................................................................................. 80
3.7 Data Collection Procedure .......................................................................................... 81
3.8 Pilot Test ..................................................................................................................... 83
3.9 Data Processing and Analysis ..................................................................................... 85

4.8.3 Objective 2: Goodness of fit ...................................................................... 134
4.9. Influence of Relational Capital on Business Performance ....................................... 137
4.9.1 Scatter plot for Relational Capital and Business Performance .................. 137
4.9.2 Regression line fitting ................................................................................ 138
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4.9.3 Objective 3: Goodness of fit ...................................................................... 140
4.9.4 Hypothesis 3: Relational capital positively influences Business
Performance of Pharmaceutical Firms in Kenya ................................................ 142
4.10 Hypothesis Results .................................................................................................. 143
4.11 Association among variables................................................................................... 144
4.12. Full Regression Model of Human Capital, Structural Capital and Relational
Capital with Business Performance ................................................................................ 150
4.13 Characteristics of collected data.............................................................................. 151
4.13.1 Checking for the normality of the residuals (errors)................................ 151
4.14. Model fitting .......................................................................................................... 154
4.14.1 Multiple Linear Regression Model .......................................................... 154
4.14.2. Multiple correlation coefficient .............................................................. 154
4.14.3. Significance of Individual Coefficients .................................................. 155
4.15. Data Transformation .............................................................................................. 157
4.15.1. Correlations for Logs of overall variables .............................................. 158
4.15.2 Linear Regression for Log Human Capital, Log Structural Capital, Log
Relational Capital and Log Business Performance............................................. 159
4.15.3 Significance of the overall Model ............................................................ 159
4.15.4 Regression of Log Human Capital, Log Structural Capital, Log Business
Performance ........................................................................................................ 161
CHAPTER FIVE ........................................................................................................... 165
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS .............................. 165
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Table 4

Rotated Component Matrix of Human Capital .............................................. 98

Table 5

Rotated Component Matrix of Structural Capital ........................................ 101

Table 6

Rotated Component Matrix of Relational Capital ....................................... 103

Table 7

Component matrix of Business Performance .............................................. 106

Table 8

Descriptive Statistics of Business Performance........................................... 108

Table 9

Descriptive statistics of Human Capital....................................................... 111

Table 10 Descriptive statistics of Structural Capital................................................... 114
Table 11 Descriptive statistics of Relational Capital .................................................. 117
Table 12 Checking for Normality of Business Performance ...................................... 121
Table 13 Correlations between Human Capital and Business Performance............... 126
Table 14 Regression Coefficients ............................................................................... 128

Figure 1

Conceptual Framework ............................................................................ 45

Figure 2

Response rate ............................................................................................ 92

Figure 3

Scree Plot for Human Capital ................................................................... 96

Figure 4

Scree Plot for structural Capital ............................................................... 99

Figure 5

Scree Plot for Relational Capital ............................................................ 102

Figure 6

Scree plot of Business Performance ....................................................... 104

Figure 7

Box Plot for Human Capital ................................................................... 113

Figure 8



Figure 16

Scatter Plot of Relational Capital versus Business Performance ........... 137

Figure 17

Significance of the fitted regression lineFor the regression to be
significant, the following alternative hypothesis had to be true: ............ 139
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Figure 18

Histogram for Business Performance Responses ................................... 152

Figure 19

Normal probability plot of regression standardized residue for Business
Performance ............................................................................................ 152

Figure 20

Scatter Plot of residue errors of Business Performance ......................... 153

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APPENDICES
Appendix 1


Analysis of Moment Structures

ANOVA

Analysis of Variance

BP

Business Performance

CEE

Capital Employed Efficiency

CFI

Comparative Fit Index

CK

Customer Knowledge

CSR

Customer and Supplier Relations

COMESA

Common Market for Eastern and Southern Africa


Human Resources

ICE

Intellectual Capital Efficiency
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IC

Intellectual Capital

IC

Innovation and Creation

ICA

Intellectual Capital Accounting

IPR

Intellectual Property Rights

LE

Learning and Education

MB


RMR

Root Mean Residuals

RMSEA

Root Mean square error of approximation

ROA

Return On Assets

ROCE

Return on Capital Employed

SALA

Strategic Alliances, Licensing and Agreements

SAS

Statistical Analysis System

SC

Structural Capital
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organizational routines, strategies, process handbooks, and databases (Boisot, 2002;
Ordonez de pablos 2004; Walsh & Ungson, 1991, Roos et al., 1998).

Relational capital- This is the ability of an organization to interact positively with
business community members to motivate the potential for wealth creation by enhancing
human and structural capital (Marti, 2001, Dewhurst & Navarro, 2004, Sveiby, 2000).
Relational capital comprises the knowledge embedded in all the relationships an
organization develops. Whether it is with customers, competitors, suppliers, trade
associations or government bodies (Bontis, et al., 2000).

Intellectual capital- According to Edvision & Malone, (1997), Intellectual Capital is
knowledge that can be converted into value. Stewart (1997) broadened the definition to
intellectual capital as intellectual material, knowledge, information, intellectual property,
experience that can be put to use to create wealth by developing competitive advantage
in an organization.
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Intellectual Capital Accounting- This is a process of identifying, measuring,
communicating economic information and reporting the range of human and knowledge
based factors that create sustained economic value in a business enterprise (Fincham, R.
& Roslender, R. 2003).

Intangible assets- IAS 38 Defines intangibles as separately identifiable, non monetary,
without physical substance Cearns (1999). One intangible Asset is human capital related.
For example trained and assembled workforce. This category should be considered as an
Asset (Tollington, 1997). This will provide a future economic benefit to the
organization. Intangible Asset may commence its life as an intellectual asset. For
example, the case of laboratory notes which will be a patent when the notes are
guidelines to manufacture medicine.

Variable versus Independent Variable (Mugenda, 2008, Sekaran, 2008).

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Pharmaceutical firms – These are firms that develop produces and markets drugs
licensed for use as medication (Pharmaceutical society of Kenya, 2009).
Market valuation- This describes the degree to which a firm‟s market value exceeds its
book value. It is the ratio of the total market capitalization which is the average share
price time‟s number of outstanding common shares to book value of net assets hence
Human capital adds Shareholder Value (Watson, 2002),

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ABSTRACT
From the human resource point of view, intellectual capital is an investment in the
organization and it is perceived to be the strategic resource and a source of competitive
advantage and therefore not indicated on the statement of the financial position of a firm.
Intellectual capital in conventional accounting is indicated as a cost rather than an
investment. The purpose of the study was to test the relationship between intellectual
capital accounting and business performance of the pharmaceutical firms in Kenya and
why these firms do not account for human resources as competitive and strategic assets
which offer firms a competitive advantage.

The specific objectives were to determine whether human capital, structural capital and
relational capital individually and collectively influence business performance of
pharmaceutical firms in Kenya.

The study was carried out in Nairobi since most of the pharmaceutical firms were

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