Intellectual capital disclosure by Chinese and Indian information technology companies: A comparative analysis Abstract: Purpose: The purpose of this paper is to examine the extent and quality of voluntary intellectual capital disclosures by information technology companies of China and India. Research Design/ Methodology: The research method adopted for this study is content analysis. The research is limited to the intellectual capital information disclosed in companies’ annual report. The sample for this research is based on 20 information technology (IT) companies listed by market captalisation listed on Shenzhen or Shanghai stock exchange market, and the largest 20 companies listed on Indian stock market. Findings: Indian IT companies tends to perform better than Chinese IT companies in extent and quality of disclosures. The extent of disclosure of both countries is at a relatively high level. The most frequently reported disclosure category in India is external capital, while the least one is human capital. In China, external capital is the most frequently disclosed category, while the internal capital is the least one. Limitations/ Implications: The sample size of the study is relatively small. Future research can expand on the sample size to get an overview of the intellectual capital disclosure, and conduct a longitudinal study to capture the trend of reporting practices. Originality: Previous studies of intellectual capital (IC) disclosure have covered little on the relationship between market capitalization and quality of disclosure and cross-country disclosure on IC. This research tends to extend the literature on intellectual capital disclosure. Key words: intellectual capital, China, India, information technology, disclosure. Intellectual capital disclosure by Chinese and Indian information technology companies: A comparative analysis 1.0 Introduction In the new information age (Schneider and Samkin, 2008), the economy is increasingly driven by knowledge (Bontis et al., 1999; Curado et al., 2011; Dzenopoljac et al., 2016; Schneider and Samkin, 2008; Liao et al., 2013; Low et al., 2015). Knowledge is one of the important factors for business to gain and maintain a competitive business advantage (Ghosh and Wu, 2007; Curado et al., 2011). Intellectual capital is becoming the key factor of underlying value creation (Liao et al., 2013; Williams, 2001 Catalfo & Wolf, 2016). However, the balance sheet of a company fails to disclose the value of intellectual capital and only shows the value of tangible assets. Some practitioners and regulators have criticized that the disclosure of intangibles is inadequate (Bismuth and Tojo, 2008; Ariff et al., 2014), partly due to the conservative reporting rules for intangibles. A gap persists between what shareholders want and what companies provide. Intellectual capital is a popular term used by some companies which depends on the skills, knowledge and experience of employees (Joshi et al., 2012; Curado et al., 2011). The information technology (IT) sector reflects IC as the productivity of IT companies which mainly relies on the knowledge and innovation of employees (Nimtrakoon, 2015).. Joshi et al. (2012) suggest that “highly skilled employees, robust training and innovation largely decide the success of such companies” (p.583). Moreover, the disclosure of IC in IT sector becomes an important signal to inform stakeholders’ affairs of companies, especially in an increasing competitive world (Abeysekera, 2008; Nimtrakoon, 2015). Since 1980, China and India have achieved economic growth and poverty reduction and taken together, these countries constitute over a third of the world’s population (Bosworth & Collins, 2008). As the Chinese IT services market size is higher than India, it is believed that the extent and quality of disclosures may vary between the two countries. Yet only three studies (Xiao, 2008; Yi and Davey, 2010; Liao et al, 2013) related to Chinese companies. All these studies are cross-sectional. Moreover, little research compares IC disclosure between two countries. The paper fills in a gap by examining cross country IC disclosure by IT companies in China and India. The purpose of this paper is to examine the extent and quality of voluntary IC disclosures by IT companies of China and India. The research question being asked is: what is the extent and quality of voluntary IC disclosure by IT companies of China and India? This paper examines 20 publicly listed IT companies in each country. Section 2 sets out the background of the two economies, IT industries and stock markets. Section 3 delineates the literature on IC and prior research. Section 4 describes methods. Section 5 outlines the results and discussion which is followed by section 6 on conclusion. 2.0 Economic comparisons: China and India This section sets the background information on economic comparison, IT and Stock Exchanges across the two countries to show how they are similar or different. The background information helps to glean later in the paper our research question: what is the extent and quality of voluntary IC disclosure by IT companies of China and India? China and India are developing countries in Asia-Pacific with rapid economic growth. The GDP growth rates in both countries are relatively higher than developed countries (Euromonitor International, 2015a, b). For example, the real GDP growth rates of China and India in 2014 are nearly three times of the real GDP growth rate of the USA in 2014 (Euromonitor International, 2015a, b). The gap between rich and poor exists in both China and India. For example, 76% of India’s 1.2 billion people live on less than US$2 per day (Euromonitor International, 2015b), and the income of urban households in China is, on average, several times higher than that of rural households (Euromonitor International, 2015a). Fujita and Hu (2001) note that globalization and economic liberalization play important roles in the increasing inequality in China, because of the highly uneven distributions of trade and foreign direct investment (FDI). Information technology industry comparisons IT sector is a broad industry, which contains IT manufacturing and IT usage. IT manufacturing also includes manufacturing hardware, software telecommunication devices and IT services. Chinese IT companies are involved in manufacturing IT hardware and devices; while Indian IT companies are involved in IT services. It is a challenge to compare the whole IT industry of China and India, because of the blurry definition of information technology. According to MarketLine (2015a), the Chinese IT services industry’s compound annual growth rate (CAGR) for 2010-2014 was 12.4%. For the same period, the CAGR of Indian IT services market was 18.5% (MarketLine, 2015b). The value China’s IT services market was $109.7 billion in 2014, which was relatively higher than that of India’s $13 billion (MarketLine, 2015a, b). The research of MarketLine (2015a, b) showed that the annual growth rate of China’s IT services market was 14.7%, and that of India’s IT services markets was 10.2%. Table I shows the Chinese and Indian IT services industry market value for a five-year period from 2010 to 2014. Take in Table 1 about here Table II shows market segments of IT services industry in China and India of IT outsourcing and processing, IT consulting and support, and Cloud computing. The largest segment of China’s IT services market is IT outsourcing and processing, which accounts for 50.4% of total market value in 2014. The cloud computing has the least share in the total market value with 2%. On the other hand in the India’s IT services market, IT outsourcing and processing has the largest share of 73.2% followed by IT consulting and support with 25.8%. Take in Table II about here Stock Markets There are two stock exchange markets in Mainland China: Shanghai stock exchange (SHSE) and Shenzhen stock exchange (SZSE), of which Shanghai is the larger exchange. In India, there are two main stock exchange markets: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The main difference between Chinese and Indian stock exchanges is that Indian companies can publicly listed in both markets, but Chinese companies can only choose one of stock exchange market in Mainland China 3.0 Literature review Intellectual capital There is no generally accepted definition of intellectual capital (Sveiby, 1997; Schneider and Samkin, 2008; Yi and Davey, 2010; Dumay, 2014; Chiucchi & Dumay, 2015; An et al., 2015), even though IC is the important resource for creating economic wealth and corporate growth (Lev, 2001; Ariff, et al., 2014; Curado et al., 2011) and factor in the successful achievement of organizational objectives (Striukova et al., 2008). However, many researchers (Sveiby, 1997; Stewart, 1997) have contributed to the definition of IC on the basis of their own knowledge of intellectual capital. For example, Stewart (1997) proposed that intellectual capital entails the talent of staff, the value of proprietary knowledge and processes, and the value of relationships with customers and suppliers, is knowledge that transforms raw materials into something more valuable. Some previous studies (Sveiby, 1997; Edvinsson and Malone, 1997 Curado et al., 2011; Villasalero, 2014) were involved in developing intellectual capital frameworks for the purpose of understanding intellectual capital (Brennan and Connell, 2000). Sveiby (1997) proposed an intellectual asset monitor, which includes three broad classification categories – internal structure, external structure and employee competence. The Skandia value scheme built by Edvinsson and Malone (1997) classified IC into two categories, human capital and structure capital. Brooking (1997) also developed an IC framework, which includes four categories: infrastructure assets, human assets, market assets and intellectual property assets. In recent years, three categories: internal capital, external capital and human capital, developed by Sveiby (1997) have been widely adopted by many researchers in their empirical research (e.g. Yi and Davey, 2010; Liao et al., 2013; Curado et al., 2011; Goh and Lim, 2004; April et al., 2003; Guthrie and Petty, 2000; An et al., 2014); these researcher, however, modified the IC items in each category on the basis of their research purposes. Internal capital is created by employees and owned by the organisation (Sveiby, 1997), which may include patents, corporate culture, information system and firms’ information system (Sveiby, 1997; Yi and Davey, 2010; Vishnu & Gupta, 2014; Dzenopoljac et al., 2016)). Usually, internal capital has a higher value than the value of tangible assets (Yi and Davey, 2010; Sveiby, 1997). External capital is the asset whose value is influenced by the firms’ relationships with externals, such as customers, suppliers, brand and reputation building (Sveiby, 1997; Yi and Davey, 2010; Curado et al., 2011). Human capital refers to the capacity of employees, such as education, training and experience, to act in a variety of situations (Sveiby, 1997; Guthrie and Petty, 2000). The value of human capital is the accumulated value of investments in employee training, competence and the future (Pablos, 2002). Prior Research on IC Even though there is no unique definition of intellectual capital (Bukh, et al., 2001; Vishnu & Gupta, 2014), the growing importance of IC provided greater academic attention to various aspects of IC since the mid-1990s (Striukova et al., 2008). For instance, some early studies, such as Brooking (1997), Sveiby (1997), and Edvinsson and Malone (1997) focused on the IC framework and classification and Guthrie and Petty (2000) focused on the measurement and reporting of IC. Recently, many empirical studies paid attention to the intellectual capital disclosure practice around the world (e.g. Yi and Davey, 2010; Liao et al., 2013; Vishnu & Gupta, 2014; Low et al., 2015; Schneider and Samkin, 2008; Goh and Lim, 2004; Whiting and Woodcok, 2011). In addition, most previous research has investigated the level and extent of IC disclosure in a specific country; for example, Australia (Guthrie and Petty, 2000), UK ( Shareef and Davey, 2006), Canada (Bontis, 2003), Italy (Bozzolan et al., 2003), New Zealand ( Whiting and Miller, 2008), Spain (Oliveras et al., 2008), China (Yi and Davey, 2010; Liao et al., 2013), Malaysia (Goh and Lim, 2004), India (Kamath, 2007, 2008; Vishnu & Gupta, 2014) and Sri Lanka (Abeysekera and Guthrie, 2005). However, only last four, among these studies, investigated IC disclosure relating to developing countries. Guthrie and Petty (2000) analysed annual reports of 20 publicly listed companies in Australia in 1998. They found that only a few companies were interested in measuring and reporting IC, and there was a lack of a mutually agreed framework for measuring and reporting IC by large Australian companies. Some other studies (Brennan, 2001; Bontis, 2003; Xiao, 2008; Yi and Davey, 2010; Singh and Kansal, 2011) also made similar conclusions that IC is rarely reported. Most studies on the extent of IC disclosure in a particular country were across different industries (Yi and Davey, 2010), but their findings on the determinant of the decision to disclose IC were different. Bozzolan et al.’s (2003) study on 30 Italian non-financial listed companies found that industry and size are relevant factors in explaining the differences in IC reporting behaviors. This finding was similar to Bruggen et al.’s (2009) research in Australia that industry type and firm size play key roles as the determinants for the disclosure of IC in annual reports. The knowledge on IC disclosure in a specific industry is scarce, due to limited research (Yi and Davey, 2010; Villasalero, 2014). Few studies researched the IC disclosure based on a specific industry; for example, Kamath (2007) analysed the Value Added Intellectual Coefficient for measuring the value-based performance of the Indian banking sector for a period from 2000 to 2004; Schneider and Samkin (2008) studied IC disclosure by 82 local government authorities in New Zealand in their annual reports; Joshi et al. (2011) investigated the top 20 information technology companies listed on the BSE; and Shareef and Davey (2006) examined the extent of IC disclosure by 19 football clubs in UK. Some scholars compared the voluntary reporting of IC of two different countries, but such research is limited. Joshi et al. (2012) compared intellectual capital disclosures by Indian and Australian information technology companies. Abeysekera (2008) compared IC disclosure trend in Sri Lanka and Singapore, and found that IC disclosure differs between these two countries’ companies. Guthrie et al. (2006) investigated the voluntary reporting of intellectual capital by comparing evidence from Hong Kong and Australia. Overall, there is no study, which is focusing on comparing Chinese intellectual capital disclosure to other countries. 4.0 Research Method This research compares the annual reports for the 2014 financial year of top 20 Chinese IT companies to those of Indian companies. The research method adopted for this research study is content analysis. Various mechanisms, such as Official Website, newspaper and Journals, are used by companies to disseminate intellectual capital information. This study is limited to the intellectual capital information disclosed in companies’ annual reports. Guthrie & Petty (2000) stated that annual report of the company is generally the most widely distributed of all publicly documents; moreover, the management of the company can control the discretionary disclosure of information in this document. The initial sample constituted the largest 20 IT companies by market capitalization listed on Shenzhen or Shanghai stock exchange market, and the largest 20 companies listed on Indian exchange market for the year 2014. The main reason to limit data collection to publicly listed companies is that it is easier to collect annual reports of listed companies from websites. According to Garcia-Meca et al. (2005), more information is needed by stakeholders in larger companies; for example, larger companies are in the pressure to exercise social responsibility such as price control or higher corporate taxes (Branco, et al., 2010). However, the cost of gathering and preparing detailed information is lower for larger companies because of more resources and superior expertise (Branco, et al., 2010). The top 20 Chinese listed IT companies by market capitalization was selected as Chinese sample. For Indian sample, the authors analysed the top 20 listed IT companies as well. However, at the time of collecting data, the authors could not find four companies’ annual reports among the top 20 companies. Then the next four companies ranked by market capitalization was selected, while two companies did not disclose their annual reports on their official websites. As a result, the next two companies, which were ranked as 25 and 26, were selected in the sample. Content analysis Content analysis is adopted as the main framework for examining corporate annual reports with the aim of providing an overview of intellectual capital reporting practices (Guthrie and Petty, 2000; Dumay & Cai, 2015). Content analysis is defined as a technique for gathering data (Abeysekera, 2007), which involves codifying qualitative and quantitative information into pre-defined categories in order to derive quantitative scales of varying levels of complexity (Guthrie et al., 2004; Guthrie and Petty, 2000; Abeysekera, 2007; Dumay & Cai, 2015). Content analysis of annual reports is regarded as one of the important and widely used research methodology (Krippendorf, 1980; Milne and Adler, 1999; Ahmed Haji and Mohd Ghazali, 2012; Dumay & Cai, 2015), as it has been held to be empirically valid in the corporate social, intellectual capital disclosure, ethical and environmental reporting fields of accounting research (Schneider and Samkin, 2008; Guthrie and Petty, 2000; Yi and Davey, 2010; Guthrie et al., 2004). In the area of intellectual capital disclosure, content analysis is undertaken as follows. Qualitative data was coded in the coding sheet in accordance with a selected framework of intellectual capital indicators (e.g. Internal capital, External capital and Human capital), after reading the annual report (Guthrie and Petty, 2000). The coding sheet recorded the quality score of IC items for each company. The frequency of disclosure can be calculated by counting the number of companies disclosing the specific items. Some limitations persist in adopting content analysis (Milne and Adler, 1999; Unerman, 2000; Guthrie et al., 2004). For example, subjectivity would be involved in the process of coding (Frost and Wilmshurst, 2000; Guthrie et al., 2004), which would affect the data reliability. However, content analysis has been widely adopted in various accounting research, such as ethical and environmental reporting, to evaluate the extent of disclosure of various items (Ahmed Haji and Mohd Ghazali, 2012; Guthrie et al., 2004; Schneider and Samkin, 2008; Yi and Davey, 2010). Construction of IC disclosure index A disclosure index is a qualitative-based tool (Coy, 1995; Yi and Davey, 2010), used to quantify the amount of information relating to intellectual capital included in the prospectus (Nikolaj Bukh et al., 2005). The function of disclosure index would be realized through giving “a surrogate score indicative of the level of disclosure in the specific context for which the index was devised” (Coy, 1995, p. 121). Three steps are involved in constructing disclosure index. The first step is to identify a list of items. Disclosure index contains an extensive list of selected items, which may be disclosed in annual reports (Marston and Shrievs, 1991). Nikolaj Bukh et al. (2005) point out that the items included in the index vary among different studies. Researchers could select items on the basis of Sveiby’s (1997) three IC categories and some prior literature (Guthrie et al., 2006; Guthrie and Petty, 2000; Yi and Davey, 2010; Liao et al., 2013), and the researchers own knowledge of mainland China and India’s IT industry. According to Sveiby (1997), intellectual capital can be divided into three categories: internal capital, external capital and human capital. The list of IC items will be allocated into these three categories, and different researchers will have different allocations. Yi and Davey (2010) claimed that twenty-one IC items (eight for internal capital; eight for external capital; five for human capital) were more likely to be disclosed by Chinese companies, and they simplified the framework into sixteen items (five relating to internal capital; seven relating to external capital; four relating to human capital); However, Liao et al. (2013) listed twelve items in disclosure index (five internal capital; five external capital; two human capital). In this research, the author selected fifteen items, which were allocated into three categories (seven internal capital; four external capital; and four human capital) based on authors’ knowledge of Chinese and Indian IT industry. Based on the preliminary twenty-one items (Appendix V), the authors amalgamated some similar items into one item based on prior IC disclosure studies (Shareef & Davey, 2006; Yi and Davey, 2010). For example, patents, copyrights and trademarks were combined under the intellectual property heading; management philosophy and corporate culture were combined as corporate culture; brands and company names were combined under the heading of goodwill. Research and development, and subsidiaries were added into internal capital (see Yi & Davey, 2010; Liao et al., 2013). The research and development plays an important role in IT companies. Many companies, especially the companies with large market capitalization, have subsidiaries. The final fifteen items are listed in Table III, and the description of these items is provided in Table IV. The second step in the construction of a disclosure index is the decision on scale scheme, which can be applied to measure the quality of disclosure. The selection of scale scheme used to score IC items varies between specific studies. For instance, Shareef and Davey (2006), Schneider and Samkin (2008) and Yi and Davey (2010) adopted a six-point scale (from 0 to five); Bozzolan et al. (2003) and Whiting and Miller (2008) established the quality criteria on a three-point scale (from 0 to 2, 0 for non-disclosure, 1 for qualitative disclosure and 2 for quantitative disclosure); Brennan (2001), and Abeysekera and Guthrie (2005) used a two-point scale (0-1, 0 represents non-disclosure and 1 represents disclosure). In this research, a five-point (0-4) scale will be adopted to assess the quality of IC disclosure. The details of the five-point scale adopted by Liao et al. (2013) are described as follows: No-disclosure (0): the disclosure information does not appear in annual reports; Narrative (1): the disclosure information is presented in a narrative form; Numerical (2): the disclosure items are presented in a numerical form; Monetary (3): the disclosure items are presented in a monetary form; Qualitative and quantitative (4): the disclosure is clear with combination of qualitative and quantitative information. Take in Table III about here Take in Table IV here. Four intellectual capital items (Corporate Culture, Management Process, Work Related Knowledge and Employee Satisfaction) are difficult to be measured in numerical form, as they are narrative in nature. These items are assigned a maximum score of one. The quality score of each item will be normalised to a scale of 0 to 1, because of comparability (Yi and Davey, 2010). 5.0 Result and Discussion Overview Indian IT companies’ annual reports disclose not only more intellectual capital but also in better quality than Chinese IT companies. Both countries’ IT companies disclosed human capital in the highest quality and internal capital in the lowest quality. In China, the quality of disclosure does not have significant relationship with companies’ market capitalisation; while in India, the quality of disclosure has significant relationship with market capitalisation. The extent and quality of IC disclosure by attributes Quality Mean score [1] is a quality measure for the disclosure of IC items, which has been transferred to a scale of zero to one for comparison. This is because it is challenging to compare each other with different maximum scores. The maximum score of some items (e.g. Management process/Strategy, Corporate culture, Work related knowledge and Employee Satisfaction) is one, while the others’ are four. The results of two countries’ mean scores for all items are disclosed in Table V. From Table V, Chinese listed companies disclosed “Management process/Strategy” and “Employee” in a high quality with a mean score of one. It means that all the sample companies have disclosed the item of “Employee” with qualitative and quantitative information, and disclosed “Management process/Strategy”, which cannot be measured, in a narrative method. Compared to Chinese IT companies, Indian IT companies have disclosed “Work related knowledge” in a higher quality. The mean score of Indian companies was 1, while the mean score of Chinese companies was 0.9. Six items’ mean scores were higher than or equal to 0.9 in Chinese sample, while only four items’ mean scores were higher than 0.9 in Indian sample. “Financial relations”, “Information technology”, and “Employee satisfaction” are the last three IC items in the rank list of disclosure quality in China and India. Comparing the lower quality level, Indian companies performed better than Chinese companies. There was no item where mean score was lower than 0.1 in Indian IT companies. In Chinese sample, however, there are three items (e.g. Financial relations, Information technology, Employee satisfaction) where mean scores were lower than 0.1. In addition, the mean score of “Employee satisfaction” for Chinese companies was zero, which means that none of Chinese sample companies disclosed this item. Overall, the disclosure quality for Chinese and Indian IT companies’ annual reports is in a similar level, but Indian IT companies reported better than Chinese IT companies. The comparable table is presented in Appendix III. Both countries’ IT companies prefer to disclose IC items in a descriptive form with some numerical description. However, Indian companies performed better than Chinese companies. For example, Chinese companies scored 62 zero marks, while Indian companies scored 32 zero marks (zero means no disclosure in annual reports). Take in table V about here Extent The extent of disclosure is measured by the frequency, which is equal to number of companies disclosing each IC items. The results of frequency were shown in Table VI. From this Table, it can be concluded that ten IC items have been disclosed by all sampled IT companies in China and India. The only difference was in the content of these ten items. All Chinese sample companies disclosed item of “Subsidiaries”, while one Indian sample companies did not disclose this item. For “Work related knowledge” item, all Indian companies mentioned this item in their annual reports, whereas two Chinese sample companies missed this item. Although the least frequently disclosed item in both countries was “Employee satisfaction”, the disclosure extent of this item in two countries was different. There were five Indian companies that disclosed “Employee satisfaction”, but none of Chinese companies disclosed “Employee satisfaction”. Chinese sample companies also reported “Financial relations” and “information technology” in a relatively low frequency. In summary, the Indian IT companies reported more IC items in their annual reports than Chinese IT companies, and the comparable table is presented in Appendix IV. Take in Table VI about here. Internal capital attribute China (Table VII) “Intellectual property”, “Management process/Strategy”, “Research and Development”, and “Subsidiaries” were the most frequently reported internal capital items, being reported by all sample companies. In the meanwhile, “Management process/Strategy” had the highest disclosure level among internal capital items with a maximum mean score of 1. “Subsidiaries” and “Research and development” had a relatively higher disclosure quality, because both acquired a mean score higher than 0.95. More than half companies had disclosed “Corporate culture” in their annual reports with a mean score of 0.6. “Financial relation” was only reported by 6 companies out of 20, with a low quality (0.08). The least frequently reported item among internal capital attribute was “Information technology”, being reported by 2 companies with the lowest disclosure quality (0.03). Only two sample companies reported what information technology have been adopted in their companies. India (Table VII) “Intellectual property”, “Management Process/Strategy”, and “Research and Development” were the most frequently disclosed internal capital items. All Indian sample companies reported these items. In the meanwhile, “Management process/Strategy” had the highest disclosure quality among internal capital items, with a mean score of 1. All companies had reported this information in their annual report. “Intellectual property”, “Corporate culture” and “Research and development” had a relatively high disclosure quality (0.73-0.76). “Subsidiaries” had a relatively high extent of disclosure among internal capital items, since only one company did not report subsidiaries information, and it was well reported with a mean score of 0.8. Although “Financial relation” had been reported by 16 companies out of 20, it was disclosed in a quite low quality (0.29). Many companies disclosed this item in a narrative method. “Information technology” was the least disclosed item with the lowest quality not only in the category but also among the total IC items, whose mean score was 0.16. Both countries’ annual reports in IT industry disclosed “Intellectual capital”, “Management process/Strategy”, “Research and development” and “Subsidiaries” in a relatively high extent, but Chinese companies disclosed these four items in a relatively higher quality. For the items of “Information technology” and “Financial relation”, however, Indian companies reported better than Chinese companies. This is shaped by more than half Indian companies disclosing these two items in a descriptive form, while most of Chinese companies did not report these two items in their annual reports. As a result, Indian IT companies disclosed more internal capital than Chinese IT companies, but the disclosure quality of internal capital category for two countries’ companies was at the same level. Indian IT companies could pay more attention on the quality of disclosing internal capital items. They should try to disclose information with more monetary description. However, Chinese companies should try to disclose more internal capital information, especially “information technology” and “financial relations” in their annual reports. External capital attribute China (Table VIII) All external capital items had been disclosed by all Chinese sample companies, but being reported in different qualities. The mean score of “Business partnership” was 0.96, which was the highest in external capital category. 18 companies out of 20 disclosed this item with full scores (4). “Goodwill” was also well reported with a high mean score (0.85). However, the mean score of “Stakeholder relationship” was only 0.26, which indicates that the item of “Stakeholder relationship” was reported in the lowest quality. This is because almost all Chinese sample companies only mentioned what they did to the society or how they act in a sustainable method. “Market share” was disclosed in a low quality by Chinese sample companies with a mean score of 0.33. This is because only six companies had mentioned their market share ranking or percentage in their annual reports. India (Table VIII) All external capital items had also been reported by all Indian sample companies in their annual reports. However, the quality of disclosure among four items was different. “Stakeholder relationship” owned the highest disclosure quality among external capital attribute, with a mean score of 0.95. Nearly all companies had disclosed this item with qualitative and quantitative information. “Goodwill” and “Business partnership” were reported at the mid-level quality (0.53 and 0.64). The mean score of “Market share” was 0.35, which is the lowest among external capital items. Almost 70% companies prefer to disclose market share in a narrative way. For example, nearly all companies had mentioned that they are devoted to the increase of market share. Only one company had reported the value of its market share. From Table VIII, it can be found that all Chinese and Indian companies disclosed all external capital items but with different disclosure quality. Indian companies disclosed “Stakeholder relationship” in a high quality, as they attached Corporate Social Responsibility report in annual reports. However, Chinese companies only mentioned what they did to the society in a descriptive way which was low quality. Both Chinese and Indian companies reported “market share” in a low quality. An overriding principle for low quality disclosure could be that such disclosures are voluntary (Joshi et al., 2012). Human capital attribute China (Table IX) “Employee” and “Education/Training” were the most frequently reported items among human capital category. However, there was a huge difference between these two IC items’ disclosure quality. “Employee” was the highest rated item among human capital. All Chinese sample companies clearly reported the number of employees, the salaries to employees and the remuneration to directors. However, only one company mentioned how much money they spent on training programs. The other companies reported the hours of training each employee can get from the company, or the percentage of employees’ education level. The disclosure quality of “Work related knowledge” was at a high level (0.9). The maximum score for “Work related knowledge” is one. Companies can acquire the maximum score if they have mentioned what kind of knowledge employees can learn from working (Bontis et al., 1999; Schneider & Samkin, 2008). The lowest frequency and quality of disclosure is “Employee satisfaction”, as no sample company reported this item in their annual reports. India (Table IX) All Indian sample companies reported “Employee”, “Education/Training” and “Work related knowledge” in their annual reports. Two of these three items (“Employee” and “Work related knowledge”) were the highest rated item with the highest mean score 1. “Education/Training” was rated in the mid-level (0.53), which means its quality of disclosure is neither high nor low. “Employee Satisfaction” was the least frequently reported item with the lowest mean score 0.25. Table IX indicated that Indian IT companies disclosed human capital more frequently with a higher quality than Chinese IT companies. Indian IT companies reported “Employee satisfaction” in a low extent and quality, while no Chinese IT companies disclosed this item. Although all companies disclosed the item of “Education/Training”, the disclosure quality was not at a high level as fewer companies reported this item in a monetary form. The low score is attributed to the voluntary nature of disclosure (Joshi et al., 2012). Take in Table VII about here Take in Table VIII about here Take in Table IX about here Quality of IC Disclosure China Table X represents the Chinese companies’ mean disclosure quality by reporting categories compared with the frequency of disclosure. The category with highest disclosure quality was human capital attribute, while the category with lowest disclosure quality was internal capital attribute. The gap in disclosure quality between these two categories was 0.11. However, the rank of frequency of disclosure by three categories was different. External capital attribute, for Chinese sample companies, was the most frequently disclosed category (0.41), while internal capital attribute was the least frequently disclosed category (0.29). The gap in frequency of disclosure was 0.12, which is quite similar with the gap in quality of disclosure. The findings suggest that the relationship between quality and extent of disclosure in Chinese companies is not clear. Although internal capital had the lowest disclosure quality and frequency, the category with highest disclosure quality and frequency was different. India Table X shows that the gap among three categories in quality of IC disclosure for Indian sample companies was 0.16, which was larger than the gap in frequency of disclosure (0.07). In the results of disclosure quality, human capital attribute had the highest mean score (0.74), while internal capital attribute had the lowest mean score (0.58). This result suggests that both Chinese and Indian sample companies had the same rank in quality of disclosure by categories. However, in the result of disclosure extent, human capital attribute, which had the highest quality of disclosure, was the least frequently disclosed category (0.3), while external capital attribute was the most frequently disclosed category (0.37) by Indian sample companies. These findings indicated that there is no relationship between the quality and frequency of disclosure. Take in Table X about here In summary, IT companies in China and India disclosed human capital category in the highest quality and internal capital in the lowest quality. The gap between these two categories in India is larger than the gap in China. One important finding is that there is no clear relationship between quality and frequency of disclosure among Chinese and Indian IT companies. The overall disclosure scores show that companies have at least some commitment in communicating their IC information to external audience (Guthrie & Petty, 2000). The extent and quality of IC disclosure by companies (refer Appendix 1 &2) Extent China For all intellectual capital disclosure items, the average number of items disclosed by each company was 11.9 out of the maximum 15 (see Appendix 1). The maximum number of items reported was 14, which was reported by ZTE Corporation. Two companies (TCL Corporation, & Shenzhen O-Film Tech. Co., Ltd.) disclosed 13 intellectual capital disclosure items in their annual reports. The minimum number of items disclosed by sample companies was 11, and six companies reported IC disclosure items in this extent. The other 11 sample companies reported 12 IC items in their annual reports. Under Internal capital category, the mean disclosure was 5. Only one company (ZTE Corporation) disclosed all seven internal capital items. TCL Corporation and Shenzhen O-Film Tech. Co., Ltd., which are ranked the second at the same time, disclosed six internal capital items in their annual reports. Four companies (Hangzhou New Century Information Technology Co., Ltd., Beijing Gehua Catv Network Co., Ltd., Shanghai Hyron Software Co., Ltd., & Beijing Teamsun Technology Co., Ltd.) disclosed four items of internal capital, which were ranked at the end of the sample company list. With regards to external capital disclosure, the average frequency was 4 out of a possible maximum 4, which indicated all sample companies reported external capital items in their annual reports. As to human capital category, the average disclosure was 2.9 out of 4. Nearly all sample companies (18) had disclosed three items of human capital. Only two companies (Wonders Information Co., Ltd., & DHC Software Co., Ltd.) disclosed two human capital items, which was the minimum number of items reported. India With regard to all intellectual capital disclosure items, the most frequently reported number was 13.4 out of the maximum 15. Five companies (Tata Consultancy Services Ltd., Infosys Ltd., Cyient Ltd., Persistent System Ltd., & Rolta Ltd.) reported all IC disclosure items. Four companies (Wipro Ltd., Tech Mahindra Ltd., NIIT Technologies Ltd., & Polaris Consulting and Services Ltd.) reported 14 items out of 15; six companies reported 13 items; and four companies (Mphasis Ltd., Tata Elxis Ltd., Intellect Design Arena Ltd., & SQS India BFSI Ltd.) reported 12 items out of 15. The minimum number of items reported was 11, which is disclosed by Mindtree Ltd. The average number of internal capital items disclosed by Indian companies was 6.15 out of a maximum of 7. Nine companies reported all seven internal capital disclosure items, and six companies reported six items. Only one company, Mindtree Ltd., disclosed four internal capital disclosure items. For external capital disclosure items, all Indian sample companies had disclosed all four items in their annual reports. For human capital disclosure items, the average number of items reported by Indian companies was 3.25 out of 4. Five companies (Tata Consultancy Services Ltd., Infosys Ltd., Cyient Ltd., Persistent System Ltd., & Rolta Ltd.) reported all four human capital items in their annual reports. The other companies reported three human capital items. Overall, India had higher mean score disclosure in relation to internal capital and human capital while China had a higher mean score in relation to external capital. Quality China (Appendix I) As to internal capital disclosure items, the average score of all Chinese sample companies was 0.58. Nine companies acquired higher score than mean score. ZTE Corporation had the highest mean score 0.73, followed by TCL corporation and Shenzhen O-Film Tech. Co., Ltd. (0.68). The lowest disclosure score (0.45) in internal capital category was by Beihai Yinhe Industry Investment Co., Ltd. As to external capital disclosure items, the mean score for all companies was 0.6. Eleven companies’ score of external capital was higher than mean score. The highest disclosure score in external capital was achieved by GRG Banking Equipment Co., Ltd. Shenzhen O-Film Tech. Co., Ltd., which acquired second highest disclosure score in internal capital, achieved the lowest score in external capital disclosure. Regarding human capital disclosure items, the mean disclosure score of sample companies was 0.69. 17 companies owned disclosure score in human capital higher than average score. The highest disclosure score (0.9) was achieved by Hangzhou Hikvision Digital Technology Co., Ltd. The second highest score in human capital disclosure was 0.7, and there were 16 companies with this score. Westone Information Industry Inc. acquired the lowest disclosure score (0.4) in human capital items. India (Appendix II) The mean disclosure score of Indian sample companies in internal capital category was 0.58. Four companies (Tata Consultancy Services Ltd., Cyient Ltd., Ramco System Ltd., and Rolta Ltd.) scored the highest disclosure score 0.73. The lowest disclosure score in internal capital was 0.36, from Mindtree Ltd. and Mphasis Ltd. For external capital disclosure, the average score was 0.62. Twelve Indian sample companies scored higher than the mean score. The highest disclosure score in external capital was 0.88, which was achieved by Tata Consultancy Services Ltd. and Mindtree Ltd. Ramco System Ltd. got the lowest disclosure score 0.38. Regarding human capital disclosure items, the mean score of Indian sample companies was 0.74. Three companies (Tata Consultancy Services Ltd., Infosys Ltd., and Cyient Ltd.) acquired the maximum disclosure score (1) in human capital disclosure. The lowest disclosure score was 0.6, and six sample companies got the lowest score. Indian companies had better quality scores in relation to external capital and human capital disclosures. 6.0 Conclusion This paper examines the extent and quality of voluntary IC disclosures by IT companies of China and India. The research question being asked is: what is the extent and quality of voluntary disclosure made by IT companies of China and India? The top 20 publicly listed Chinese and Indian IT companies in the rank of market capitalisation were selected as the sample. The IT sector reflects IC as the productivity of IT companies which mainly relies on the knowledge and innovation of employees (Nimtrakoon, 2015). The three categories of internal capital, external capital and human capital were utilised in the study (Sveiby, 1997; Curado et al., 2011; Vishnu & Gupta 2014). Some scholars compared voluntary reporting of IC of two different countries but such research is limited (Joshi et al., 2012; Catalfo & Wolf, 2016). The Chinese IT services market size is higher than that of India. India still needs to expand its IT sector through increasing in-home usage and exports. The main findings of this exploratory study are as follows. Firstly, Indian IT companies perform better than Chinese IT companies in extent and quality of disclosures. However, the extent of disclosure of both countries is at a relatively high level, and the disclosure quality of both countries is not low. This finding contradicts the Joshi’s et al. (2012), which noted that IC disclosures by Indian IT companies remain relatively low. However, the finding of Chinese IT companies is consistent with the finding of Yi and Davey (2010), which found that Chinese companies disclosed intellectual capital frequently without high quality. However, the quality of disclosure by Chinese IT companies in this research is higher than the disclosure quality of Chinese companies in Yi and Davey’s (2010) research. Overall, the findings of this research indicated that companies have recognised the importance of IC disclosure, and there is an area for improving disclosure quality (Curado et al., 2011; Dumay, 2014).. The most frequently reported disclosure category, in India, is external capital; while the least one is human capital. In China, external capital is the most frequently disclosed category, while internal capital is the least one, which is consistent with Yi and Davey (2010). However, this finding is different from Liao’s et al. (2013) research on Chinese version annual reports which indicated that internal capital is disclosed the most frequently while external capital is disclosed least frequently. The human capital is reported in the highest disclosure quality in both countries, while internal capital is reported in lowest quality. There is no relationship between the quality and frequency of disclosure among Chinese and Indian IT companies. The findings of this study have implications for policy makers and standard setters for rethinking of inclusion of IC disclosure in annual reports as compulsory items. This will not only add to the quality of information but various stakeholders will be able to make an assessment of the values of a firm. The comparative study of two countries is not free from research limitations. The work cultures, corporate philosophies and regulatory framework are different in both countries. The study is limited to a selected few firms in IT companies only. In addition, the sample companies are at the top of market capitalization of IT industry; thus, there is a risk that the results of sample companies cannot represent the Chinese and Indian IT industries’ practices in intellectual capital disclosure. Future research can expand on the sample size to get an overview of intellectual capital disclosure, and conduct a longitudinal study to capture the trend of reporting practices. Future researchers can engage to interview market participants in order to understand the reasons of conducting intellectual capital disclosures. The study can be extended to study the comparative picture across other industries in the two countries such as banking, insurance, pharmaceutical and other knowledge intensive industries. Also an effort can be made to compare IC disclosures made by different industrial sectors. Finally, there is no common accepted IC reporting framework. 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