RBV & Financial Capability

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RBV & Financial Capability
Mohan Fonseka, Student (University), China, Member
The Chinese security regulation commission regulates the access to equity and bond. Only firms which meet the qualifications are eligible to obtain access to external finance.
Do you think a firms' ability to access equity or bond can be an intangible asset? Is it a capability? Do these capabilities give a competitive advantage? Anbd last but not least, can we apply RBV?
 

 
RBV & Financial Capability
Warren Miller, CPA, CFA, United States, Member
Mohan, I think that a firm's ability to access capital is a resource. It is not an intangible asset because access alone does not earn a rate of return; any asset must have a rate of return. In the case of access to capital, it's how that a firm can invest that capital to generate a rate of return that is higher than its own cost of capital. That is the challenge.
As for apply the RBV, the RBV can be applied to the capability of just about any enterprise. I say "just about any" because I have reservations about applying to very small firms and mom-and-pop types of businesses. Those aren't really businesses - they are just jobs. But for any substantive enterprise (full-time-equivalent employees >= 12), the RBV can be used with great benefits... If it's used properly.
 

 
Accessibility to Equity and Bonds for Chinese Firms - Intangible Assets?
Mohan Fonseka, Student (University), China, Member
@Warren Miller, CFA, CPA : thanks! I agree with your comments for mature and liberal economy.
A regulated economy such as China controls access to capital and bond market through administrative controls. A firm has to satisfy the requirements for qualifying to access equity or bonds. These requirements are firm level characteristics eg. 3 years average profitability prior to current year is 10% or more, total cash or stock dividend last 3 years should be more than 20% of net distributable earning of previous 3 years etc.
Zou & Xiao (2006, British Accounting Review) identify that equity financing are a kind of "luxury" only available for small portion of Chinese firms. They described a firm's ability to access equity financing as a valuable intangible assets. Resource based theorists admit that competitive advantage can be found in different places at different points of time in different industries. One firm differs from another due to differences of source of advantage (Peng, 2009) and strategic orientation (Zhou & Li, 2010).
 

 
Intangible Assets versus Capabilities
Piotr Wojcik, Student (Other), Poland, Member
Dear Mohan, the case you are describing is very interesting to discuss about.
You made a good point when referring to Zou & Xiao ("valuable intangible asset") but take a look on RBV and capabilities literature - authors define "capability" as a way of using resources (assets). It is the ability “to focus and coordinate human effort and ability to evaluate effectively the resource position of the firm in terms of strengths and weaknesses” (Mahoney and Pandian, 1992). (Day, 1994) states that “capabilities are complex bundles of skills and collective learning, exercised through organizational processes, that ensure superior coordination of functional activities”. According to Amit and Schoemaker (1993) capabilities “refer to a firm’s capacity to deploy resources, usually in combination, using organizational processes, to effect a desired end.
Therefore, I would identify access to capital in this case as a capability (although some authors use this term interchangeably with asset/competence).
 

 
Intangible Assets versus Capabilities
Warren Miller, CPA, CFA, United States, Member
@Piotr Wojcik: The origins of the RBV go back to Edith Penrose's classic book, The theory of the growth of the firm. It is one of the most fascinating books I've ever read. In it, Penrose points out a key attribute that I want to re-emphasize here: it is not a resource or configuration of resources that matters. What matters is the service(s) that can be derived from it or them. Different managements will use the same resource in different ways. They may configure resource combinations differently. Therefore, following her definition, I can see "access to capital" as a resource, but neither a capability nor an intangible asset.
When one thinks of a capability as an "intangible asset," one runs the risk of using accounting lingo that has specific meaning. For that reason, I would discourage anyone in this discussion from using the term "intangible asset" when talking about capabilities.
Moreover, it appears to me that the word "capability" is not itself defined well in our conversation here. Let me borrow from Dosi, Nelson & Winter (2000, p. 4) and add their definition to our colloquy:
"... think of 'capability' as a fairly large-scale unit of analysis, one that has a recognizable purpose expressed in terms of the significant outcomes it is supposed to enable, and that is significantly shaped by conscious decision, both in its development and deployment."
A capability might be an intangible asset, as accountants think of those, but such a connection is the exception, not the rule. Access to capital would qualify as a resource, not a capability.
 

 
Access to Capital: Resource or Capability?
Piotr Wojcik, Student (Other), Poland, Member
@Warren Miller, CFA, CPA: following Penrose (despite the fact that her work was issued in 1959, it is still valuable) I would also categorize access to capital as a resource, but only in developed economies.
Many authors underline a limited applicability of standard institutional frameworks (Hall and Soskice's VOC approach) in transition countries.
I guess that this is the case of China and the problem lies rather in a way of reaching this access to resources which often requires distinctive skills, other resources etc. And ability to use them in order to cooperate effectively with officials and institutional bodies.
To sum up, because of the context, the conclusions may differ in a transition economy like China...
 

     
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