Impact of intellectual capital on firms’ profitability: Empirical evidence from industrials sector in Sri Lanka

Abstract

This study aims to explore the impact of intellectual capital on the firms’ profitability of the listed industrials sector in Sri Lanka. The data comprises 155- firm-year observations of 31 companies listed under the industrials sector in the Colombo Stock Exchange for the five years from 2018 to 2022. The industrials sector consists of the listed companies under the capital goods, commercial & professional services and transportation sectors. Modified Value-Added Intellectual Coefficient has been employed to measure the intellectual capital together with the value creation efficiencies of capital employed, human capital, structural capital and relational capital of listed firms. This study used return on equity, operating profit to assets ratio, and gross profit to assets ratio as a signal of the presence of firms’ profitability. The researchers used Pearson’s correlation and panel data regression to investigate the impact of intellectual capital on firms’ profitability. The results reveal that capital employed efficiency and human capital efficiency positively affect the firms’ profitability of listed companies in the industrials sector. However, structural capital efficiency and relational capital efficiency have not significantly impacted the firms’ profitability. The findings of this study are highly relevant for decision-makers, as they demonstrate the crucial role of intellectual capital in value creation. The results indicate that intellectual capital is a key driver of firms’ profitability, especially for industrials sector firms in developing economies. Therefore, governments and corporations in developing economies should prioritize investments in developing intellectual capital to enhance firms’ profitability and promote economic growth. It makes significant contributions by considering interaction variables and seeking consistency in results across different political regimes.