Intellectual capital, firm innovation and financial performance of insurance firms in Kenya

Abstract

Business environment has changed considerably in past few decades. As a result, competition is the main characteristic in every industry. Intellectual capital along with firm’s innovativeness has been considered as the main catalyst in firms’ financial performance. Intellectual capital has also been considered an ingredient in firm’s ability to engage in innovation. However there is need to understand if firms using intellectual capital view it as a critical asset in firm innovation resulting to financial performance. The purpose of this study is to examine the mediating effect of firm innovation on the relationship between intellectual capital and financial performance of insurance firms in Kenya. The objectives of the study is to establish the effect of human capital on financial performance, to determine the effect of social capital on financial performance, to find out the effect of organizational capital on financial performance, to determine the mediating effect of firm innovation on human capital and financial performance, to determine the mediating effect of firm innovation on social capital and financial performance and to determine the mediating effect of firm innovation on organization capital and financial performance.The study was anchored on balanced score card approach, which states that firms should not only focus on financial measures but also non-financial measures of the firm matters. Resource based view theory guided the study by looking at a firm as a bundle of resources which determines firms capability to innovate. Out of 47 registered insurance firms, 42 firms were sampled using Yamane (1978) formula. The respondents were 3 heads of sections and 6 operations managers from each of the 42 insurance firms selected using purposive sampling technique giving a sample size of 378 respondents. This was considered an appropriate technique because they are the right persons to give information on intellectual capital, firm innovation and financial performance of insurance firms. The study used structured questionnaires with a seven point Likert scale. Using Structural Equation Modeling, the study found that human capital (β = .308, ρ<.05), social capital (β = .858, ρ<.05) and organization capital (β = .035, ρ<.05), had a positive and significant effect on financial performance of insurance firms. Further firm innovativeness was found to mediate partially the relationship between human capital and financial performance (β = .215, ρ< .05), social capital and financial performance (β = .728, ρ< .05) and organization capital and financial performance, (β=.701, ρ< .05). The findings agreed with resource based view theory that intellectual capital resources that include, human capital, social capital and organisation capital are crucial for financial performance of insurance firms. Results indicate the important role of innovation as a mediating variable in that when firms innovate it results into human capital, social capital and organisation capital increasing the financial performance of insurance firms.