Intellectual Capital, Production Function of Firms and Return to Scale
Purpose – This paper investigates the production function of firms based on the use of intellectual capital. We come up with this problem since believe that the new economy conditions require an adjustment and a development of classical firm theory.
Design/methodology/approach – The research question addressed in this study is mainly related to the empirical validation of the function based on companies’ intangibles in the Cobb-Douglas framework. This model enables us to advocate the idea of the complementarity of intellectual resources as well as simplifies the analysis of intellectual capital features. To accomplish the purpose of our research we design a log-linear model and estimate it on a sample of more than 400 European and American companies.
Findings – Application of Cobb-Douglas framework allowed designing a production function based on intellectual capital. The complementarity of intellectual capital components is justified on the empirical results obtained in this research. The increasing return to scale for intellectual capital was established for the sample examined in this study.
Research limitations/implications – The main shortcoming of the approach implemented in this study is related to the proxy indicators of intellectual capital. Nevertheless, we statistically validate the chosen indicators applying hedonic approach.
Practical implications – Practical accomplishment of this research is mainly associated with the conclusion about an increasing return to scale of intellectual capital. This phenomenon appears to be of a particular importance for investment decisions.
Originality/value – The findings of this paper provide a new insight into intellectual resources interrelation that enhances companies’ value creation. We also hope to assist future research attempts in application of the theory of company’s growth driven by its intangible capital.