ABSTRACT

The study empirically test the effect of intellectual capital (IC) on the performance in the non- financial sector of Pakistan,  considering both linear and non-linear specification. The analysis is based on an unbalanced panel data of 361 non-financial listed firms on Pakistan Stock Exchange with a 3,441 firm-years observations during the time-period of 2014-2023. Static panel and dynamic System GMM both techniques are utilized to enhance methodological rigor and control for  endogeneity and  persistence of the performance.  The  firm  financial performance  is the dependent variable and is proxied by Returm on Assets (ROA). IC is the independent variable, measured using the Value Added Intellectual Coefficient (VAIC) framework and the core components of the IC are the Human Capital efficiency, Structural Capital efficiency and Capital Employed efficiency. The empirical evidence of linear model shows that the overall IC has a positive but insignificant contribution to the performance of the firm. Further on, the results of the non-linear estimation indicate that there is an inverted U-shaped IC-performance relationship, indicating the existence of an optimal level beyound which its marginal effects declines. Findings of the component level analysis illustrate that Human Capital Efficiency is the most prominent in explaining firm performance and demonstrate a U-shaped relationship. In contrast Structural capital and capital employed effficiency do not show significant non-linear effects. The dynamic panel analysis strengthens the findings and evidence a non-linear IC-performance association. Firm size, leaverage and liquidity positively affects performance and no strong persistence is observed.  Cumulatively,  the research provides a robust  empirical evidence  that  support the Resource-Based View, Locus Human Capital, Endogenous Growth and Production Theory, as it focuses on the importance of intangible resources in the achievement of the firm performance. The results have important implications for managers and policymakers to enable development of knowledge-based growth and long term competitiveness in non-financial sector of Pakistan.