Corporate Social Capital and Firm Performance in the Global Information Technology Services Sector
Laurence Lock Lee
The confluence of a number of marketplace phenomena has provided the impetus for the selection and conduct of this research. The first is the so called value relevance of intangibles in determining share market performance of publicly listed companies. The growing gap between market and book values has been proposed as an indication of the impact of intangibles on share price values. A second related phenomenon is the increasing reliance on share price appreciation as the principal means for shareholder return as opposed to returns through dividends. This suggests that share prices are becoming an even more critical firm performance measure than traditional accounting-based firm performance measures like return on investment (ROI). A third phenomenon is the rapid growth in marketplace alliances and joint ventures, the number of which has grown rapidly over the past 30 years. The explanation for these phenomena may lie in the concept of corporate social capital (CSC) which, as an intangible asset (IA), has been proposed in several normative studies. CSC has been defined as "the set of resources, tangible or virtual, that accrue to a corporate player through the player's social relationships, facilitating the attainment of goals" (Leenders & Gabbay, 1999, p3). However, constructs for CSC have only been loosely defined and its impacts on firm performance only minimally empirically tested. This research addresses this gap in the literature.
The key aim of this research is to explore the impact of CSC on firm performance. Through the use of CSC as a lens for viewing a firm's intangibles, several important sub-components of the CSC formulation are exposed. These include a firm's market centrality (CENT), absorptive capacity (AC), internal capital (INC), human capital (HC) and financial soundness. Therefore, an extended aim for this research is to identify the differential impacts of the CSC sub-components on firm performance. Firm performance was measured as ROI, market-to-book ratios (Tobin's Q) and total shareholder return (TSR). Overall, the research results indicate that CSC is a significant predictor of firm performance, but falls short of fully explaining the market-to-book value disparity. For this research an innovative computer-supported content analysis (CA) technique was devised to capture a majority of the data required for the empirical research. The use of a commercial news aggregation service, Factiva, and a standard taxonomy of terms for the search, allowed variables for intangible constructs to be derived from a relatively large sample of firms (n=155) from the global information technology services (ITS) sector from 2001 to 2004. Data indices for joint venture or alliance activity, research and development (R&D) activity, HC, INC and external capital (EC) were all developed using this CA approach.
The research findings indicated that all things aren't equal in terms of how the benefits of CSC accrue to different firms in the sector. The research indicated that for larger, more mature firms, financial soundness does not necessarily correlate with improved shareholder return. The inference is that these firms may have reached a plateau in terms of how the market is valuing them. In terms of market centrality, the research indicates that software firms could benefit from building a larger number of alliances and becoming more centrally connected in the marketplace. The reverse is true, however, for larger, more established firms in the non-software sectors. These companies can be penalised for being over-connected, potentially signalling that they are locked into a suite of alliances that will ultimately limit their capacity to innovate and grow.
For smaller, potentially loss-making firms, the research indicates that investments in HC are potentially the only investment strategy that could result in improvements in profitability and shareholder return. Investments by such firms in R&D or INC developments are likely to depress shareholder value and therefore should be minimised in favour of HC investments. For larger, more established firms, investment in HC is beneficial for both ROI and TSR. Investments in areas like R&D and INC were found to be only beneficial to those firms who have the financial capacity to afford it. Firms that don't appear to have the financial resources to support the level of investments they are making in R&D and/or INC were penalised by the market. Overall, the research provides specific insights into the links between firms and their performance, through appropriate investments in CSC. In terms of research practice, this research demonstrates the viability of computer-supported CA. Progress in the development of more intelligent search technologies will provide increasing utility to CA researchers, promising to unlock a vast range of textual source data for researchers that were previously beyond manual CA practices.
Professor James Guthrie