1. business and industrial

1
International Conference on Economics, Energy, Environment and Agricultural Sciences
1-2 November, 2014, Pearl International Hotel, Kuala Lumpur, Malaysia
ISBN : 978-969-9952-08-1
Importance of Intellectual Capital and
Innovation in Agricultural Insurance Sector
Mohammad Rahmani Karchegani1, Saudah Sofian2, Salmiah Mod. Amin3
1,2 Faculty of Management, University Technology Malaysia (UTM)
3International Business School, University Technology Malaysia (UTM)
Abstract:
There are many factors that influence performance of insurance companies.
In order to sustain competitive advantage and increase satisfaction of customer and
stakeholders, an insurance company needs to offer high-quality services at low cost.
Economists assert that intellectual capital (IC) is a vital asset that helps organizations
to create value in present economic syndrome and enables organizations to be
innovative. Many authors have examined the relationship between IC and
“Innovation” to influence firm performance. Their findings have shown that IC can
boost the organizational performance through knowledge, experiences, skills of
employees and also by defining new methods of task performance and being
innovative in their processes. Further, prior studies concluded that IC of an insurance
company indicates the value of ideas and capability of being innovative for a longer
period. Therefore, this paper presents the importance of innovation and IC in
insurance companies by focusing on agricultural insurance sector.
Keywords: Intellectual Capital, Innovation, Firm Performance, Insurance Industry,
Agricultural Insurance Sector
1- Corresponding Author: [email protected]
1. Overview
There are different perspectives of identifying and recognizing IC in
organizations. For example, from the economics perspective, Augier and Teece
(2005) provided a historical overview of the growing significance of knowledge and
IC as a driver for innovation and Research and Development (R&D) activities
(Abhayawansa and Guthrie, 2014). Also, Johanson (2005) elucidated the role of IC
from the Human Resource Management (HRM) perspective. The authors have
defined IC 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 assets. These IC proponents
argued that the development of strategy from a market-based to a resource-based
paradigm is based on IC. Stewart (1994, 1997) stated that IC is everything that has
been known by individuals and what they have given individuals to their
organizations. It is supposed to be the source of organizational competitive
advantage. IC incorporates intellectual material such as knowledge, information,
expertise, intellectual property, copyrights and experiences that create wealth in
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, 2007a).
Additionally, a number of scholars have recognized the relationship between
IC as unobservable assets and firm performance as a key factor for the success of 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 focal points that foster and develop
innovation and creativity in organizations. Therefore, visually the concept of IC has
been as a large and growing body of theoretical and empirical research with a
multidisciplinary term in knowledge management. 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.
Besides, scholars have stated that organizational knowledge plays the crucial
role through a creation of innovative activities that influence firm performance
(Amidon, 1997, 2003b; Andriessen, 2004; 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
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; JiménezJiménez and Sanz-Valle, 2011; Laursen and Salter, 2006). Many innovation
specialists view innovation as a powerful explanatory factor behind current
differences in organizations performance, 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 order, 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 firms in the manufacturing sector. However, service sector has
received less attention from scholars in field of innovation (Amidon, 2003b; Bowen
et al., 2010; Gonin et al., 2011; Walker et al., 2011; Zschockelt, 2009). In this order,
Aas and Pedersen (2011) investigated whether firms which are focusing on service
innovation perform better financially than firms not focusing service innovation,
because the researcher find that innovation directly have positive impact on financial
performance of service companies
In recent years, a major shift has been witnessed on the innovation field of
how various innovative tactics boost firm performance through human, structural and
relational capital, as three components of IC (Edvinsson et al., 2004; García-Álvarez
et al., 2011; Ismail, 2005; Zschockelt, 2009). While, from resource-based view of the
firm theory (RBV), 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 intangible assets (or IC) on HRM
practices (Jinchveladze et al., 2009) to growing profitability and performance of
firms. An in-depth review of the literature shows 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), particularly
in insurance industry.
The main mission of 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 structural capital (SC) (Mahul,
2011; Mahul and Stutley, 2010; Mills, 2009).
Researchers have shown that in insurance industry, which is a subset of the
financial sector, IC components have significant positive relationship with firm
profitability. Some insurance companies like Skandia in Sweden (Edvinsson, 1997),
Panin in India (Ordoñez de Pablos, 2005), Insurance Association in Pakistan (Ul
Rehman et al., 2011), Indonesian insurance companies in Jakarta Stock Exchange
(Iswatia and Anshoria, 2007b), and Malaysian insurance companies (Nik
Muhammad and Ismail, 2009) have improved their performance by realizing and
understanding the importance of IC and reporting it in their business. Additionally,
scholars believe that financial companies like insurance and banks which have been
known as knowledge-intensive firms, must focus on innovation to increase their
performance (Ul Rehman et al., 2011).
Harvesting from the above discussion, this paper has focused on the IC
components that encourage innovation to influence performance of insurance
companies, particularly, in agricultural insurance sector. The findings of this paper
revealed the extent to which the identification of internal (human and structural), and
external component (relational capital) of IC which are important in the performance
of agricultural insurance companies. The discussions of this paper also paved the
ways for top managers of insurance companies to improve overall service quality
thereby making their companies more profitable.
2. Importance of Insurance Services in Agricultural Sector
In many developing and developed countries, the agricultural sector is a
critical economic sector of livelihood (Mahul, 2011). Normally, agricultural
producers are often vulnerable to the effects of adverse natural events, such as pest's
attacks, various natural disasters, and unfavorable weather conditions (drought, hail,
flood, heat, storm, hot wind, sparrow attack). In fact, these conditions have
significant negative impacts of agricultural production. Therefore, governments
through agricultural insurance companies, provide assistance to agricultural
producers who successfully develop risk management and adaptation strategies to
survive these unfavorable events. Actually, these conditions have significant negative
impacts of agricultural production. Thus, governments through agricultural insurance
companies, provide assistance to agricultural producers who successfully develop
risk management and adaptation strategies to survive these unfavorable events.
Agreeably, this makes agricultural insurance an important financial service that is
needed for a comprehensive agricultural risk management strategy (Mahul, 2011).
Utilization of insurance service in agricultural activities can psychologically,
economically, and socially improve the lives of farmers. Undoubtedly, farmers
lacking security cannot actively participate in programs for boosting production.
Even attractions of investments in agricultural production activities would face
difficulties in the absence of security (Rahmani Karchegani, 2002).
Although, in the some industrial countries, agricultural insurance services
have been offered for more than a century, this kind of insurance services remains
under serviced in middle- and low-income countries. However, since the late 1990s,
reduced government funding for agricultural producers in emerging markets have
heralded renewed interest in agricultural insurance. A recent study conducted by the
World Bank has 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, middle- and low-income countries are also
assisted with institutional and capacity-building support needed to design and
implement traditional and innovative agricultural crops and livestock insurance
products. The World Bank also plays a role in forming agricultural insurance pools.
In a generalist sense, these projects are usually linked to supportive efforts in
agricultural extension and financing (Mahul and Stutley, 2010).
Mahul (2011) argues that the potential role of agriculture insurance in
emerging economy 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 innovativeness to insurance of
agricultural products may lessen economic returns to farmers, herders, agricultural
financing institutions, and governments as the case of unfavorable natural events.
This may be particularly true for developing countries, which rely heavily on their
agricultural sectors. However, Roberts (2013) posited that the management of
insurance companies, as well as business firms, has several developmental stages.
These include market identification; service's 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), furthers 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 early stages to developing of agricultural insurance sector, and in situations
where financial support is considered both desirable and possible.
Agricultural insurance is an area of insurance that is technically demanding.
One of the many challenges in the insurance industry are maintaining the skills and
expertise at the underwriter, loss adjuster, and reinsure levels, not only to provide
adequate levels of insurance, but also to assist the agriculture industry improve its
risk-management practices to enhance production. There is no single universal
insurance product that meets all the demands of producers. Each agricultural
insurance product is suitable for a certain set of conditions. The assessment of the
suitability of any agricultural insurance product has to consider the production
system, the type of asset to be covered, the key peril to which the insured is exposed,
the risk location, data availability, farmer size, distribution channels, and delivery
and loss adjustment needs.
In fact, in insurance companies, employees as human resources play an
important role in building competitive advantage to sustainable of the their firms. For
instance, the insured 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 of technical, customized
insurance services in the market may see to a firm gaining competitive advantage
over its contemporaries and competitors. Agreeably, such company tends to
eventually occupy a greater market share in the insurance industry.
3. Definitions of Intellectual Capital and Innovation in Service Sector
Skandia a Swedish insurance company, was the first company that provided a
complete report on IC in insurance industry. Lief Edvinsson, who was the OEC of
the company promoted IC concept through the illustration of the “Skandia Navigator
Model”. Edvinsson believed that this model insurance industry needed a new logic
accounting for the development of knowledge-intensive services. In Skandia’s
annual report, IC has been defined as the possession of knowledge, applied
experiences, organizational technology, customer relationships and professional
skills. This insurance company divided IC into two components of human and
structural capital. Human capital is not a form of property that can be owned by an
enterprise. Its value is attributed to employee training, know-how, and competencies.
On the other hand, structural capital is broken down into customer capital and
organizational capital and remains in the possession of enterprise, even after
employees have gone home at the end of the day (Edvinsson, 1997). Based on
Skandia’s experience, Edvinsson (1997) categorized IC into three basic insights used
in further implementation of IC term as follows:

IC is supplementary to financial information; it is not subordinate
information.

IC is a non-financial capital; it depicts a non-visible difference
between book value and market value.

IC is a debt issue, not an asset issue.
The above IC report of Skandia in 1997 was not only novel, but was the first
empirical analysis on the relationship between IC and firm performance in insurance
industry. This type of report provided a more systematic description of the
company’s ability and potential to transform IC into financial capital (Table 1).
Table 1: Intellectual Capital Indicators in the Report of Skandia
Focus Area
Financial Focus
Customer Focus
Human Focus
Innovation And
Development Focus
Process Focus
Intellectual Capital Indicators
-Return on Invested Funds
-Operating Margin
-Value Added/Employee
-Number of Contracts
-Savings/Contract
-Redemption Ratio
-Points of Sale
-Number of Full-time Employees
-Number of Managers
-Female Managers
-Training Expenses/Employee
-Increase in Net Premiums
-Development Expenses / Admin Expenses
-Staff Under
-Number of Contracts/Employee
-Administrative Expenses/Gross Premiums
-IT Expenses/Administrative Expenses
-Time Spent Processing New Contracts days
Source: Skandia Report (Edvinsson, 1997)
IC or intangible assets that create profit for insurance firms normally is tacit
and cannot define it clearly. Based on the definision of IC components by European
Union in Meritum Guidelines for managing and reporting on intangibles or IC
(Meritum, 2002), three main components of IC, which human, structural, and
relational capital are defined as follows:
Human 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, know-how and previous experience, teamwork capacity, employee
flexibility, tolerance for ambiguity motivation, satisfaction, learning capacity,
loyalty, formal training and education.
Structural 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.
RelationalCapital (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, negotiating
capacity with financial entities, environmental activities.
On the other hand, according to “Organization for Economic Co-operation
and Development” (OECD) in newest perspective to measurement agenda for
innovation (OECD, 2010), measurement of innovation is crucial to managing
organizations. It helps decision-makers to assess the efficiency of their policies and
the contribution of innovation in achieving social and financial objectives of
organizations. Rose et al. (2009) suggested that the main purpose of this
measurement is to improve the understanding of the growth of firm performance. In
addition to the enormous measures that can be used for measuring and collecting
data on innovation, Milbergs and Vonortas (2004) classified innovation metrics in
four main generations (Table 2).
Table 2: Four Stages of Evolution of Innovation Metrics
First Generation
Input Indicators
(1950s–60s)
• R&D
expenditures
• S&T personnel
• Capital
• Tech intensity
Second Generation
Output Indicators
(1970s–80s)
• Patents
• Publications
• Products
• Quality change
Third Generation
Innovation Indicators
(1990s)
• Innovation surveys
• Indexing
• Benchmarking
innovation capacity
Fourth Generation
Process Indicators
(2000s plus emerging
focus)
• Knowledge
• Intangibles
• Networks
• Demand
• Clusters
• Management techniques
• Risk/return
• System dynamics
Source: Milbergs and Vonortas (2004)
Based on the table above, first generation metrics simply portrayed a linear
conception of innovation with a focus on inputs such as R&D investment. While,
second generation metrics played supportive roles for input indicators by accounting
for the intermediate outputs of science and technology activities. Third generation
metrics dwelled more on the robust array of innovation indicators, and indices are
reliant on surveys and publicly available data. The last, fourth-generation metrics is
founded in a knowledge-based networked economy, and are the subject of
measurement.
Agreeably, it is realizing that innovation as an essential factor for firm
competitive advantage. However, currently available innovation measurements do
not adequately take in order to account on the complete role of innovation in today’s
economy (OECD, 2010). Based on the different attributes of innovation, a number
of metrics have developed by experts to measure innovation (Guidelines for
Collecting and Interpreting Innovation Data, 2005; Milbergs et al., 2007) in
different ways.
Innovation encompasses the full spectrum of creative idea generation
through full profitable commercialization. Successful innovation depends on
converting knowledge stocks and flows into marketable goods and services. Based
on the Oslo-Manual as international guidance for innovation measurement (OECD,
2010), there are four dimension of innovation which have applied in insurance
industry as below:
Process Innovation, which is the introduction of a new or significantly
improved production.
Srvice Innovation, which is the introduction of a goods or service that is new
or substantially improved.
Marketing Innovation, which is the implementation of new marketing
methods and introducing significant changes in product design, packaging, product
promotion and pricing.
Organizational Innovation, which is the creation or alteration of business
practices, workplace organization and external relations.
4. Relationship between Intellectual Capital and Innovation
Knowledge often defined in terms of intellectual capital is the source of new
economic wealth. Innovation is the process by which that wealth is converted into
action, products, services, or initiatives. Although activities can be based at the level
of the group, function, enterprise, or nation, ultimately real value is in what flows
between the borders, creating collaborative advantage (Amidon, 2003b). Roos et al.
(1997), Edvinsson et al. (2004), and Zerenler et al. (2008), stated that the importance
of innovation and renewal in their IC framework. Edvinsson et al. (2004) contributed
to the Dvir et al. (2002) model, which is called “Innovation Cube” (Figure 1), by
introducing the six dimensions for organizational innovation. Their results indicated
some direct cause and effect relations between “knowledge reuse” and “invention”.
Reuse of Assets
-Knowledge assets reuse
-Reuse process
-Reuse organization
-Reuse library use
Stakeholder
Contribution
-Customer
-Supplier
-Senior management
-Production/Delivery
Exploitation
-Market information
-Customer orientation
-Realization capability
Performance
-Customer
-Supplier
-Senior management
-Production/Delivery
-Marketing
-Marketing
Invention of Assets
-Creation of new assets
-Source of new assets
-Invention portfolio
-Invention organization
and tools
Operating Context
-Human resource
management
-IT infrastructure
-Organizational structures
-Competitive context
Figure 1: Six Dimensions of Innovation Adopted (Edvinsson et al., 2004)
Amidon (2003b), in her book “The Innovation Superhighway”, presented a
revolutionary view of innovation as nothing more than developing good ideas and
implementing them to realize their value. The author forwarded this vision to define
the global imperatives contributing to a new world order based on IC. Amidon
argues that innovation is not only a “competitive advantage”, in this Millennium, it is
also the next wave of influence, tagged “collaborative advantage”.
Based on the literature above, numerous studies have been reported on the
relationship between innovation and firm performance, and today, most innovation
scholars seem to agree that innovation is a powerful explanatory factor behind
differences in performance among firms (Fagerberg et al., 2012). Nevertheless,
research on the relationship between innovation and firms’ financial performance has
traditionally focused primarily on innovations related to the development production
and marketing of goods, while the effects of innovations related to services have
been given less attention (Aas and Pedersen, 2011).
The research literature argues that the firm-level effects of service innovation
are different from those of other types of innovation. For example, service innovation
effects have a more qualitative nature, and for this reason, are less tangible than the
effects of other innovation efforts (Aas and Pedersen, 2011). For example, the
scholars suggested that service innovation typically transforms the state of the
customers and results in customer satisfaction and loyalty, rather than short term
financial performance. It has also been argued that due to the nature of services
(intangibility, heterogeneity), the impact of service innovations is harder to trace than
in manufacturing. In this order, Brown (2009) focused upon the characteristics of IC
that foster and develop innovation in both manufacturing and service sectors. The
study covered the presence of organizational and individual HC and the availability
of organizational networking systems (Table 3). The results indicate that there are
different impacts of IC on innovation in the contexts of manufacturing and service
sectors.
Table 3: Matrix of IC Components and Innovation in Service Sectors
Driver of
Performance
IC Component
Human
Capital
IC
Structural
Capital
Relational
Capital
(Network)
Physical
Services
Innovation
Human Services
Information
Services
Source: Brown (2009)
Observed
Variables
Knowledge that stays with
employees, Skills, Experience,
Ability
Knowledge that stays with the firm
Routines, Processes, Culture,
Datasets, R&D
Knowledge derived from networks
Resources linked to external
relationships customers, Suppliers,
Partners
Tangible products and networks
(e.g. telecommunications and
energy)
Social and individual wellbeing
(supported by technology)
Mass communications,
Infomediaries, (specialized knowledge
providers)
Latent
Variables
- Cross functional
or team working
-Human Capital
-Management
control of process
-Innovation process
-Extent of
networking
-Efficiency of
the innovation
process
-Effectiveness
(%revenue from new
products)
Based on the results of Brown’s model (Figure 2) in the service sector,
processes (SC) have no impact on innovation efficiency despite the strong link with
effective revenue share. Team working (HC) has a strong direct relationship to
innovation efficiency and a weak relationship in the innovation process.
Besides, HC is a key “individual” factor, which mediates innovation
efficiency through team work. While, direct influences of networking (RC) on
performance is negligible, networking does have a strong link to the innovation
process in new service development (Brown, 2009). Effective team work is
associated with better organizational performance, especially with creative and
innovative ideas (Tidd et al., 2005). Arguably, two different types of attitude can be
linked to the different skills and knowledge types:
Structural Capital
Innovation Performance
Management
Control
Innovation
Efficiency
Innovation
Process
Strong Link
Innovation
Effective
Team
Working
Networking
Weak Link
Human
Capital
Relational Capital
Human Capital
Figure 2: Relationship IC and Innovation in Service Sector (Brown, 2009)
In relation to the above, Wu et al. (2008) explored how a firm’s operational
mode can reinforce the advantages of IC on innovation. Their results supported the
mediating role of IC and the moderating roles of entrepreneurial orientation and
social capital on innovation. In addition, Zschockelt (2009) explored the influence of
IC on the linkage between human-resource management (HRM) and organizational
innovation. The results indicate positive relationships between different single subcomponents of IC and innovation.
Based on three case studies, Lindgren et al. (2009) presented ideas about how
to attract and apply IC capabilities to innovate network-level business models. The
results of the study indicated that there is a potential to develop a unique IC when
companies understand the innovation projects' value proposition. It was also
observed that the ability to understand and integrate the other partner's value
proposition is significant for the attractiveness of an innovation project. It is vital to
attract IC as it can greatly improve the results. Jafari et al. (2011) stated that
companies invest in innovations with a greater level of IC development and in
industries that have rapid knowledge growth. Additionally, scholars have emphasized
on the importance of organizational climate. Much emphasis was placed on fostering
facilities that support creativity and innovation as critical for competitive advantages
in order to ensure the strength and success of firms. For example, Parker et al. (2003)
employed meta-analytic review, showed that the organizational atmosphere is
characterized by the frequent patterns of behaviors, attitudes and feelings, which are
displayed in the daily environment within the organization and the organizational
employees directly experience and understand it. The scholars also noted that
organizational climate is a multidimensional construct with four dimensions
consisting of Autonomy and Control, Degree of Structure, Rewards and
Consideration, and Warmth and Support.
Furthermore, Imran et al. (2010) found that organizational climate fosters
innovative work behavior. In addition, Patterson et al., (2005) recommended to
develop and test theories related to the relationship between specific climate
dimensions in or across model quadrants over a broad range of outcomes. Later, the
authors confirmed the importance of the impact of organizational climate on
innovation work behavior. However, their results do not support the significant role
of organizational size on innovative behavior. Their sample consisted of 320
managers from organizations countrywide. In contrast, the results of the study by
Zschockelt (2009) indicated that there is no clear-cut picture as to which of
components of IC are related to organizational innovation.
Following the above discussion, it is important to highlight that the different
forms of IC will not be characterized as “strong” or “weak”. Instead, the term
“appropriateness” of the different capital forms is more applicable. For example,
Leana and Van Buren (1999) posited that a certain form of HC could include highly
educated, skilled and knowledgeable people but this might not have an impact on
certain types of innovation due to some other reasons. This does not mean that this
particular form of HC is weak. It should rather be said that it is inappropriate with
respect to achieving certain types of innovation. While, HC of an organization might
develop single creative ideas, the actual implementation of new products, processes
or services is most of the time dependent on more than one person.
Zschockelt (2009), on a more institutional level of analysis, argued that
different skill profiles are related to different kinds of innovations. They said that
domain-specific knowledge, and skills can be related to the more effective
acquisition and assimilation of new, in-depth knowledge within a narrow range of
parameters. While Justarius (Justarius, 2007) believed that, this can be connected to
exploitation and incremental types of innovation. On the other hand, HC with its
multiple knowledge domains tends to have more various mental models and less
cognitive conflict, which makes possible a varied interpretation of problems and
situations. Therefore, based on discussion above, nature of a business built on
knowledge requires new management that can do more than execute strategy; it must
also stimulate innovation. Therefore, managers should attend to their hierarchical
organization structure that is ideal for the industrial era limits the potential of their
business in the knowledge era. When the success of business relies on the knowledge
of people, companies’ customers and partners of all kinds, need knowledge to flow
from the bottom up and outside in.
Consequently, firms need to think of organization in terms of a series of
collaborative networks, not just a pyramid-shaped organization chart. In other word,
companies need to take a fundamentally different approach to strategic management,
because managers cannot just rely on setting a course and executing single-mindedly.
They also need to build in a way to leverage the knowledge of organization’s IC such
as human, structural relationship and SpC, to find new opportunities, explore new
courses and stimulate innovation for their businesses (Adams and Oleksak, 2010).
By realizing and understanding the importance of IC and innovation,
companies can improve their competitive advantage. It shows the importance of
relationships between IC components and innovation and the importance of
investment and management of these capitals in organizations. Therefore, top
managers of the firm should sustain, protect, develop and manage IC to increase
organizational innovation as a creator of competitive advantage for the company.
5. Intellectual Capital and Innovation in Insurance Companies
Ul-Rehman et al. (2011) stated that in insurance companies, knowledge is in
abundance. Insurance companies are known for being good in creating knowledge
and as 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 knowledge-based economy, an
approach that uses KM and performance to effectively achieve this purpose is
increasingly popular. More and more companies are trying to explore optimal
methods of managing knowledge-based assets, usually referred to IC as a propose to
evaluating their performance in this regard (Subramaniam and Youndt, 2005).
Customers of these firms, as well as insured, regulators, shareholders, and brokers
are eager to see insurers offer more and new services (or products) that extend
coverage to the economic activities, expand their efforts to improve disaster
resilience and are otherwise proactive about the climate-change threat (Mills, 2009).
The first empirical analysis on the relationship between IC and firm
performance, was in the Skandia report compiled by a Sweden insurance company
by Edvinson and Maleon (1997). Although their report developed IC term for the
first time, but a review of the available literature shows the lack of studies that
mainly focus on the IC among insurance companies. In the literature review process
of this study, it was observed that just few studies have been undertaken on the
evaluation of IC and its comparison within insurance companies although available
studies (Edvinsson, 1997). These previous studies confirmed that IC influences
performance of the insurance companies (Table 4). According to Amidon (2003b),
Edvinsson (2004), and Kong (2010), based on 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.
Table 4: Previous Researches on Intellectual Capital in Insurance Industry
Author/s
Year/
Country
Skandia
(1996)
Sweden
Iswati &
Anshori
(2007)
Indonesia
Ak & Öztayşi
(2007)
Turkey
Appuhami
(2007)
Thailand
Chen and
Chen
(2010)
Taiwan
Pardede
(2010)
Indonesia
Ul Rehman
(2011)
Pakistan
Alipour
(2012)
Iran
Title
Findings
-Visualizing IC in Skandia
IC is as hidden assets in the company
-The Influence of Intellectual
Capital to Financial
Performance at Insurance
Companies in Jakarta Stock
Exchange
-Performance Measurement of
Insurance Companies By
Using Balance Scorecard and
Analytical Network Process
-The Impact of Intellectual
Capital on Investors’ Capital
Gains on Shares: An
Empirical Investigation of
Thai Banking, Finance &
Insurance Sector
-How to manage knowledge
well? Evidence from the life
insurance industry
-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.
-Financial perspective is not enough to explain
an insurance company’s performance
-An Investigate on Effect of
Intellectual Capital on
Financial Performance in the
Insurance Companies listed on
the Jakarta Stock Exchange
Intellectual capital
performance and its impact on
financial returns of
companies: An empirical
study from insurance sector of
Pakistan
-The effect of intellectual
capital on firm performance:
an investigation of Iran
insurance companies
-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.
-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.
-IC influence on Financial Performance in the
insurance companies.
-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.
- 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.
Investigation on employees’ innovation in insurance companies is
particularly interesting. This is because, in the previous study, researchers already
have analyzed the relationship between IC and innovation (Pardede, 2010) and also,
the relationship between innovation and firm performance (e.g. Bowen et al., 2010;
Cambra-Fierro et al., 2011; Cassia et al., 2007; Freel and Robson, 2004;
Gopalakrishnan, 2000; Medina and Rufín, 2009; Ogbonna and Harris, 2003; Vincent
et al., 2005). But, complex investigation into the relationship between IC, innovation,
and firm performance, in insurance companies has not been conducted yet. Based on
the research findings by Chen and Chen (2005) evaluation and improvement of KM
performance is often promoted particularly in companies within the life insurance
industry. Widén-Wulff and Suomi (2007) explored how Finnish insurance companies
share organizational knowledge. Their analysis shows that effective knowledge
sharing positively correlates with business success in the considered insurance
companies.
Appuhami (2007) investigated the impact of IC on investor's capital in
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 emerging
economy. However, Chen and Chen (2005) noted two main observations in 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,
knowledge needed for high performance itself.
Furthermore, the results of study by Pardede (2010) has shown that IC
influences financial performance in insurance companies in Indonesia. In a
subsequent step, we determine with Eq. (2) the firms IC evolvement over a given
time period by applying the calculated accumulation rate and the amortization rated.
The profitability of the firm is defined as its return on asset.
Although, a number of studies have focused on IC concept, particularly in the
IT and financial sector in various countries, but Alipour (2012) believed that there is
a lake of both theoretical and empirical study on IC in 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 hypothesis that Iranian insurance industry
does or does not focus on IC remain ambiguous. Based on the above discussions, the
major concern of this study is to investigate the effect of IC and innovation activities
on performance of insurance companies in Iran. An acknowledgement and a critical
understanding of IC in insurance companies can enhance their organizational
innovation. This offers them the competitive advantage as they achieve sustainable
economic growth by focusing on IC (or intangible assets) unlike the traditional
approach of merely managing tangible assets. This is so because IC and
innovativeness are perceived and have known as sources of competitive advantage
for insurance companies. Therefore, this study has examined the influence of IC not
only on financial and/or non-financial of the firm performance, but also on overall
firm performance through mediating role of innovation.
On the other hand, Edvinsson et al. (2004), Roos et al. (2010), and Zerenler et
al. (2008) stressed the importance of innovation, renewal or development in their IC
framework. Further, according to resource-based view, 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. Zerenler et al. (2008)
investigated the impact of IC on innovation and confirmed that three components of
IC, human, structural, and customer capital have a significant positive relationship
with performance of innovation. Moreover, they noticed that among these IC
components, RC (or customer capital) has the greatest impact on innovation in
Turkish automotive supplier industry.
By realizing and understanding the importance of IC and innovation,
insurance companies can improve their competitive advantage. It shows the potential
importance of relationship between IC and innovation, and the importance of
investment and management of this capital, specifically in the insurance industry.
Therefore, the top management within the firm should protect, develop and manage
IC to increase organizational innovation as a creator of competitive advantage to the
company (Amidon, 2003b).
6. Conclusion
Firm performance is an obvious indicator of a firm’s success within insurance
industry. It is influenced by many factors such as diversity of insurance services,
policies and strategic planning, and human resource management practices, structure
of organizational resources and size of insurance companies. Therefore, management
of insurance companies should carefully monitor, measure, report and manage firm
performance based on quality of insurance services as their nature of 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 competitive environment. Many companies have responded to these
competitive demands by implementing advanced manufacturing technologies,
innovative managerial practices, and emphasizing quality, service delivery and being
flexible to meet the stakeholder needs (Iazzolino et al., 2013).
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; CambraFierro 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 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, have stated that IC is more and more recognized as a cause of firm
performance, which stand for “value creation” potential of Human Capital,
Relational Capital and Structural Capital and their interactions (Abhayawansa and
Guthrie, 2014), thus, with knowledge critical to the network society, information
technology and innovation and creativity, IC has become a vital source of value
creation for organizations and economics situations.
Besides, IC is a highly discussed topic within the field of knowledge
management. Edvinsson and Sullivan (1996) stated that knowledge firms derive their
profits from innovation and knowledge-intensive services, and such firms are called
high IC firms. Rosenbusch et al. (2011) believed that insurance companies same as
software companies, banking, and hotels, is an example of high IC firms. In
comparison, low IC firms do not invest highly in IC and do not apply knowledge
properly, knowledge, structures and relationships could not be used, in such firms as
drivers to create value added (Sofian et al., 2004). In line with its importance, Usoff
et al. (2002) suggested that firms with high IC are more likely to use performance
measures for the determination of a manager’s compensation. Thus, insurance
companies must develop services that capture IC and change their traditional
performance measurement system in order to achieve long-term success.
In addition, IC scholars emphasized that IC is an important factors for
knowledge creation and innovation (Edvinsson et al., 2004). Knowledge and
innovation have been known as two drivers of competitive advantage for increasing
organizational performance (Aas and Pedersen, 2011; Amidon, 1997, 2003a;
Andriessen, 2004; Bontis, 2002; Brown, 2009; Chan, 2009; Ismail, 2005; Kramer et
al., 2011; Marr, 2005a; Tayles et al., 2007). Human resource scholars also noted that
IC leads to innovative creation, which in turns plays a significant role in influencing
firm performance (Santoso, 2012; Sharabati et al., 2010; Spahić and Huruz, 2012;
Wang and Wang, 2012; Wiig, 1997).
Furthere, 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” (Amidon, 2003b).
Furtheremor, Rose et al. (2009) noted that innovation has been recognized as an
important driver of economic growth, and it enables firms to offer new products and
services with better-quality at a lower price. Edvinsson (2004), Kramer (2011) and
Vincent et al. (2005) 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 the multidisciplinary literature review of IC, Alcaniz et al. (2011) and Marr
(2005b) concluded that IC concept has emerged from the work of various scholars
with different perspectives such as Economic, Strategic, Accounting, Finance,
Reporting, Marketing, Human Resources, Information System, and Legal. Thus, as
IC and innovation are two crucial and vital resources to increase firm performance
(Brown, 2009; Zschockelt, 2009), companies must disclose and manage them well.
In light of the above discussion, this paper highlighted the IC components
which include Human Capital, Structural Capital, and Relational Capital, that foster
four dimensions of innovation include; Process Innovation, Service Innovation,
Marketing Innovation, and Organizational Innovation in insurance companies in
order to improve firm performance. This is a pioneer paper focusing on the influence
of innovation and IC on firm performance among agricultural insurance sector.
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