In this final step, we will interpret scope of intangible asset in related to firm’s value. According to Yamaguchi (2014), he finds out a relationship between firm’s revenue and intangible asset. His research method began at a regression between firm’s revenue and book value of equity. After that, he added more variables in his regression include growth rate of industry and intangible asset. Result shows in this paper that intangible asset more impact on firm’s value than book value of equity.
Beside that, industrial growth rate express a valuable effect on firm’s value, but this effect lower than effect of the assets. Performance of Japan firms more depends on their asset structure than trend of industry. The firms have famous brand name, efficient control structure, diversify distribution network (or spend more money on intangible asset) could reach higher development than peer companies in the same industry.
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Figure 4: Change of total factor of production (TFP)
Source: Own calculation
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Figure 5: Ratio of Intangible asset on Total asset
Source: Own calculation
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We will examine effect of intangible asset on firm’s added value for Vietnam listed companies. However, in this research, we will present more clearly about different effect of tangible and intangible asset on firm’s added value, so that, we will use value of tangible asset instead of book value of equity. In theoretical, non-linear model will be used to make estimation because firms will make simultaneously decision about inputs to reach maximum revenue and minimum expense. However, according to Samuelson (1947), in practical, it is really complicated to do this non-linear estimation. By this reason, he proposed to make this estimation with linear form and to apply logarithm transformation to the variables. Estimation will conduct at first with full variables, after that, we reduce number of variable to explore effect of each factor to firm’s added value.
Data using in this estimation include 214 companies in different industries. We examine change of variables affecting on firm’s earning before tax and interest (EBIT) in 2012. Limitation of this database is that datas were just observed in 2012 and it includes effect of business cycle or not identify season factor. However, this problem could be solved when data range larger.
Table 8: Estimation with all variables
REVENUE Coefficient Std. Error t-Statistic Prob.
ITCHANGE 0.05 0 13.8 0
TCHANGE 0.12 0.14 0.89 0.38
LAMDA 5.37 1.04 5.15 0
C 1.7 0.24 7.06 0
R-squared 0.69 Mean dependent var 2.61
Adjusted R-squared 0.68 S.D. dependent var 3.97
Table 9: Effect of intangible asset and industry development on firm’s added value REVENUE Coefficient Std. Error t-Statistic Prob.
ITCHANGE 0.05 0 13.81 0
LAMDA 5.33 1.04 5.13 0
C 1.8 0.21 8.42 0
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R-squared 0.69 Mean dependent var 2.61
Adjusted R-squared 0.68 S.D. dependent var 3.97
Table 10: Effect of intangible asset on firm’s added value
REVENUE Coefficient Std. Error t-Statistic Prob.
ITCHANGE 0.05 0 13.74 0
C 2.06 0.23 8.96 0
R-squared 0.62 Mean dependent var 2.61
Adjusted R-squared 0.61 S.D. dependent var 3.97
Basing on results, we could see that intangible asset has efficient effect, while tangible asset make unclear effect on firm’s added value. Relationship between intangible asset and firm’s added value is positive sign. The more intangible asset companies focus on, the more profit they will get. Firms will earn 0.04% more in their profit when they devote 1% more in their intangible asset account. This impact of increasing intangible asset should be more than this number because the effect will maintain in more than just one year. However, because of limitation of database, we just see this effect in one year. For example, consumption firm expands its distribution network to new market (geography expansion). In short-term, they will attract more young man than elder. It is because younger with well education and higher risk acception will be easier to adapt new product, while elder will wait for more information before decide to buy a new one. In this term, proportion of customer approach new product is about 2.5% (Rogers, 1983), and this customer is called as innovators. After that, some experiences about using this product will be record and the brand name appear again and again. More youths try to use the product and more elders wonder about it. Effect of expanding distribution network will give more and more money for the firm in the future. The story is similar when the firm wants to invest in other kinds of intangible asset.
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On the other hand, growth rate of industry the most efficiently impact on firm’s EBIT. This result is different from result in Yamaguchi’s paper. Resource for development of Vietnam listed companies come from unstable factor, profitability of industry. We know that attractiveness of each industry depend on position of economic on business cycle. When economic is in recovery phase, some industries will meet advantage to develop such as financials and transportation at early stage, technology and capital goods at middle stage or basic industries and energy at the peak. In contrast, there are some industries have better performance when economic is in recession phase such as utilities at middle stage of recession phase or financials at the trough. By this reason, growth rate of Vietnam listed companies is unstable and spontaneous.
It come to market value of company, we will examine relationship between independent variables and stock price. Table 11 shows result of this relationship. We could see an inverted result in which tangible asset represents a valuable coefficient, while intangible asset and growth rate of industry are not take a significant part.
Table 11: Association among intangible asset, tangible asset, industrial growth rate and stock price.
Stock Price Coefficient Std. Error t-Statistic Prob.
ITCHANGE 0 0 0.73 0.47
TCHANGE 0.07 0.03 2.06 0.04
LAMDA -0.06 0.26 -0.22 0.82
C 0.28 0.06 4.59 0
R-squared 0.04 Mean dependent var 0.35
Adjusted R-squared 0.02 S.D. dependent var 0.57
Table 12: Association between tangible asset and stock price
Stock Price Coefficient Std. Error t-Statistic Prob.
TCHANGE 0.07 0.03 2.08 0.04
C 0.29 0.06 4.85 0
R-squared 0.04 Mean dependent var 0.35
Adjusted R-squared 0.03 S.D. dependent var 0.57
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Stock price is affected by a lot of factors such as company’s performance, company’s financial position, vast cast flow, policies .etc. Stock market of each country has different features. Vietnam stock market is too small, so that, stock price trend is usually controlled easily by big financial entities. A huge proportion of investor in Vietnam stock market focuses on short-term profit. Vietnam stock market could be affected by financial behavior too. These trading methods make investment decision not depend on company’s foreseen or future profit from company’s core value. By this reason, some kinds of firm’s information are very important but are not in investment analysis such as administration expense, value of brand name etc.
Through table 8 and table 11, there are some different effects of intangible asset between practical firm’s performance and firm stock price. As above analysis, intangible asset actual stand for incremental firm’s future profit. In short, beside expanding manufacture, firms also need to focus on accumulate their intangible asset to lead to long-term development.
4.8. Firm’s Intangible Asset and Policy Implications
After specific calculations, clearly, intangible assets play an extremely important value in the company's operations. Intangible assets have an intimate relationship with real prospects for future growth of the business. The next question we should ask is why intangible assets have such a strong effect on business. Really hard to explain this question because it needs long-term study for each case specific intangible assets.
However, we will contact to a concept that is “market power”. This concept has been discussed in many basic concepts of economics. Market power often comes with the monopoly market. For a perfectly competitive market, businesses account for a very small market share and did not seem to affect the market when making economic decisions, so it does not appear significant market power in the market competition full competition. When the market started to appear firms or groups of firms capable of governing the price, in other words they are the price maker, this time the concept of market power appears. So what is the market power?
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According to Lawrence (May 2012), market power is the ability to generate excess profits of the company from the difference between the price and marginal cost.
Sources of market power are the difference of the product. He concluded, based on research by Bain (1956) suggests that market power is observed as barriers to entry, and barriers to differentiate your product from. Without differentiation, products are sold on the market as other products and buyers only interested in choosing the lowest selling price. This will lead to the market to equilibrium and eliminate excess profits, not market power exists. The difference of products from three main elements and the process is similar to the creation of intangible assets. Lawrence indicated some origins formed the difference of products includes:
- Resources owned monopoly: This resource can be a source of inputs exclusive, proprietary trade from the government (for example right to provide taxi service in the city) or a patent exclusive. Exclusive inputs could be exclusive raw materials or mineral ingredients. For example, to obtain inputs such monopoly companies must possess sufficient social capital and financial position, brand’s strength enough to ensure that providers only make business with them. Similarly exclusive input, proprietary trade from the government is as well as a component of social capital.
These intangible assets come from a good relationship between business and government. Patent invention is an extremely important asset. This property may come from R&D activities, or from the acquisition. But overall, a firm holds many patents prove that its leadership focuses on developing long-term orientation. These are intangible assets from structural capital (Table 1).
- Economic of scale: This is the origin of "natural monopoly". To participate in the industry, enterprises have accumulated an amount of capital needed and thereby create barriers to entry.
- The size and "sunkeness" of needed Investment: To join the industry, businesses have to spend a huge cost and if not used in this industry, the cost will not be reused for other sectors. In other words, the decision to join the industry, businesses
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must be ready to face a request "sunk cost" very large. Entering this market makes the potential business risks and inhibits companies to entry. The expenses they facing include the cost of R&D, market research costs, the cost of advertising and promotion, brand building costs. In other words, these are cost-intensive industries to invest in relational capital (Table 1). Coke and Pepsi are the best examples. Obviously creating a product like Coca-Cola or Pepsi brittle is not too big challenge. However, it could not say that their products easily are replaced completely by the other substitute products. This is the result of building a strong brand and costly advertising strategy of Coca-Cola and Pepsi. Obviously, according to game theory, to be able to survive in the market of Coca-Cola and Pepsi, the potential must now prepare for their financial resources to run its advertising and building up its brand against CocaCola and Pepsi.
This financial requirement is an actually barrier to entry, barrie of brand name.
Through the analysis of market power and the source of its formation, the study of Lawrence (1956) has pointed out the close relationship between the intangible assets of a firm's business and possession of market power. If businesses want to make a beyond profit from holding market power, the need to do next is the development orientation based on the construction of intangible assets.
Market power is really strong impact on the business of company. However, there are many different opinions about its effect on the economy. The economists make both good and bad perspective on the impact of market power to the market.
First, we will look at the negative side of market power. Perfect competition market is the most ideal market with the highest level of competition. The effect of this is derived from the studies about market structure. In this market, the price reaches the optimal value and economic benefit equal to the market rate of return. In other words, when fully competitive market, no one can enjoy an outstanding return ratio. The story is different for the monopoly market, where competition is eliminated completely. In monopoly markets, monopoly corporate has pricing power and output decisions.
Therefore, a dominant market occurs and they may maintain superior economic
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benefits in the long term. For example, it is the case of Microsoft on the web browser market. This firm had repeatedly been accused of monopoly power on this market.
Directly installing Microsoft Internet Explorer browser (IE) in Windows operating system leaded users to forget the existence of other browsers software. In 2004, almost anyone using the Internet must also due to IE web browser software. IE market share at this time accounted for 95%. Two years later, although other companies had made a lot of effort to improve its products and many new entrants entered this market; IE's market share still remained at 85%. This fact shows the power of monopoly power enormous and it is a real barrier to the development of other companies in the same industry. Microsoft had created this monopoly by straightly integrating IE in the installation of the Windows operating system. The policy makers try to reduce the market power of the monopolies to increase competition from other firms by the antitrust laws. This is necessary because the impact of monopolies cause a DWL is very clear. The problem of IE has faced strong reactions from countries around the world, because it actually inhibits creativity and new products on the web browser market. One example is the punishment from the European market. So far, Microsoft suffered multiple litigation involving antitrust laws which applied to both the Windows and Internet Explorer, with total fines of up to nearly 2.2 billion dollars.
Antitrust efforts bring visible results and make IE lost market share. From a big account for most of the market share, in 2013, IE only holded 24% market share and other products constantly increased market share, including Firefox Chrome 35% and 29%.
However, beside the negative side, market power in its essence brings a very important positive impact. To see this effect, we must first distinguish the difference between market power and monopoly power. Based on Lawrence (2012), market power is the ability to generate excess profits generated based on differences in products, management and distribution system. Meanwhile, monopoly power is a sum sufficient amount of market power. In other words, a firm may have market power could only achieve monopoly power when it can maintain market power in a period of
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time long enough to accumulate sufficient market power needed. Clearly, to achieve monopoly power is not simple. Speaking to the formation of market power, it refers to the intangible value that is owned by firms. The creation of intangible value is not simple. To make a difference, or the remarkable improvement in the product, the management or the business methods, the founders have worked very hard to try and go through the great waterfall. For example, the case of Bill Gates, to create Microsoft, he had to spend five years working with the duration of 15 consecutive hours per day.
It is the same in case of Travic Kalanick, founder of Uber. He had experienced a lot of previous failures after created a product that are distinctive and have market power.
Each distinct product will be created and formed a new market and reduce competition from substitute products exist before. Superior economic returns, low competitiveness are rewards promoting creativity and innovation in the economy. This is the motivation to create resource in the long term growth of the economy, it is technology improvements. The idea of technological improvements will bring long-term growth and value-added social welfare has been studied for a long time. According to classical economics, D.Ricardo and K.Marx said that technological progress is the main resource for growth, against the diminishing marginal productivity of capital.
Another question posed, if market power is a source of inspiration for technological improvements and makes a difference in the product, so which elements of market power will be the key?
In a study of Schumpeter (1942), he searched the empirical evidence on the relationship between market structure and technological innovation activities. Factor structure of the market becomes the main representation of market power. The more an industry accumulates market power, the closer it is with monopoly. Schumpeter research on the relationship between the concentration in an industry with R&D costs of the firms in the industry. He came to the conclusion that, in a competitive market, small businesses are the main means of generating new ideas and innovations to market. In contrast, the market concentration, the large business is the key factor for
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the increase in total output in the long term. In the other study, the tests also mainly revolves around two hypotheses: (1) the rate of expansion of firm’s scale often slower improvements generated by it and (2) the relationship covariates speed of technological innovation and market concentration.
Schumpeter's argument (1942) has faced opposition from the Harvard school of economics, as represented by the study of Mason (1951). He said that the study of the relationship between business size, concentration of market and technological improvements have no clear relationship to each other. Conclusion of Schumpeter (1942) offers a challenge to the view of the antitrust laws. In a study of Wesley (1989), he gave evidence to prove the fact that all studies of Schumpeter (1942) cannot draw conclusions as had been. The reason for this argument is that a business cannot be continuous access to basic resources for technology improvements. Wesley gives three factors necessary for technological improvements include: the demand structure, the abundance of potential technological improvements and policy conditions for the interest generated from technology improvements. He said that the study of Schumpeter (1942) is not enough data and does not include all the variables needed, thus leading to bias.
In a study of R.W. Vossen (1996), he said that the study of Schumpeter unfinished, but not refute the arguments of Schumpeter. Numerous other studies also agree with covariates relationship between industry concentration and costs for R&D activities.
There are two main reasons given. First, firms have market power is concentrated enough internal resources to carry out research and development. For the industry focused mainly small businesses, incentive for product innovation and technological development are not so high, so the R&D cost can become a risky investment to dominate business expenses of your business. The second reason comes from the impact of the time company could take benefit from innovation, called protect period.
Almost arguments support the idea that the industry with the high concentration will has the small number of company and has a larger scale. Meanwhile, firms perform
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R&D will face less competition and help to protect more prolonged period.
Nevertheless, some argue disagree with the views on the covariates between the concentration of industry and R&D activities. Economists support this argument that firms in industries with a high concentration will have less incentive to compete, thus less pressure to implement innovative and differentiating products. However, this argument is faced with a problem given by Vossen (1996). He said that the economic arguments did not mention the magnitude of barriers to entry. If the industry has low barriers to enter, current market forces are facing the potential competitor. When the firms in the industry create a profitable enough to attract other businesses involved in the sector, it will create a new competitive force, too. Thus, the sector has a higher concentration of industry will tend to spend more improvement activities. R.W.
Vossen (1996) also posed the question about no motivation to improve technology merely from industrial concentration factor? Vossen said that if the motivation to improve technology only for large companies, so why small companies are still born with breakthrough ideas? He also made one more question for the study of Schumpeter (1942) when the variable cost of R&D was used in research. According to Vossen, an important issue is not how much the company gives money to the cost of R&D that is how many different products are created. When looking at the overall picture of research on industrial concentration and effectiveness of improvement, the actual data is often not the obvious meaning (Weiss, 1963; Allen, 1969;; Scherer, 1965) or even negative results (Williamson, 1965; 1990; Schwalbach and Zimmermann, 1991;
Koeller, 1995) about the relationship between industry concentration and effective technological innovations. Researchers have used many different variables to represent effective technological improvements, such as growth rate of company, the number of patents, the number of new products announced in the journal. The final results showed that the degree of industrial concentration only has the effect on increasing R&D expenses and not related to the effective technology improvements.
Nooteboom and Vossen (1995) had pointed out in his study of empirical evidence shows that the cost of R&D spent more than the value recorded. Additionally, in a