The role of human capital in firms – Entrepreneurship

Introduction

Martin, McNally and Kay (2013) descirbed human capital is an important source of productivity and identified as influencing factor for the firm competitiveness. The modern literature on human capital is based on work of Gary Becker and Theodore Schultz (general and specific human capital) and highlight benefits of accumulation of capabilities. Human capital theory elaborates that individual knowledge develops cognitive abilities and result in efficient and productive potential activity.

According to Lazear’s theory of entrepreneurship, human capital is an important intangible asset for business divisions and individual with experiences and expertise are likely to successful entrepreneurs. In literature human capital appears as interchangeable concept with skills (Baptista, Karaoz and Mendonca, 2014).

The goal of this essay is to present empirical and theoretical literature on the role of human capital in firms. The specific focus is given on how human capital increases the performance of firm under economic and technological factors in context of entrepreneurship.

To reach the point, a deeper understanding of entrepreneurship, human capital and firm performance is given based on following questions (Burton, Sorensen and Dobrev, 2016). The questions are

  • How to define the entrepreneurship and human capital?
  • What is relationship between human capital and firm performance?
  • How human capital affects the performance of firms?

Systematic literature review

Systematic literature review (SLR) method is applied to human capital, entrepreneurship and performance of firms. The articles reviewed is based on publishing in ABS journals from 2011 to 2016 and included in Entrepreneurship journals ranking. The specific journals searched through Entrepreneurship, theory and practices, Journal of business venturing, Journal of small business management and Small business economics. Moreover, descriptive method is largely used along with SLR (Conway Dato-on et al., 2016).

The table below enclosed the stages involves in SLR

Stages

Description

Sources

1The researcher identified the key journals in the fieldEntrepreneurship Journals Ranking
2The collection of journals as outlined in ABS quality journal guide·       Entrepreneurship, theory and practices

·       Journal of business venturing

·       Journal of small business management

·       Social Entrepreneurship

·       Small business Economics

3The time range of publicationsTimeframe of publication 2011-2016
4The criteria for accepting or rejecting and i.e. key words are defined·      Human capital

·      Entrepreneurship and firm performance

·      Human capital and firm performance

 

5The selection criteria was appearing on keywords in·      Abstracts

·      In the keywords

·      Titles of articles

6Database listing·      Emerald-insight

·      Wiley online library

·      Elsevier

·      Science direct

*** There were total of 24 articles were selected to develop literature on role of human capital in firms.

 

Human capital and education

Volery et al (2013) highlighted that Adam Smith considers human capital as important capital because skills and abilities are acquired at cost and tend to increase the productivity of labour. The human capital theory presented by Becker (1962) and Schultz (1961) analysed the investment and formation of human capital. Becker concept of human capital includes the activities of general human capital such as education and formal training and specific human capital which is on job training. In literature, formal education is important source of creating skills (Schultz) and skill improvement through on job training and learning by doing.

Human capital in economic and technological context

Marvel (2013) explained that the two important perspectives relevant to this literature is human capital in economic and technological context. From economic perspective, human capital is stock skills for firms (managers); define the structure of labour force (education and quality); accumulation of skills (training investment) and loss of human capital (exit of employee). From technological perspective, it involves development of institutional and individual knowledge to manage the technologies (Rauch and Rijsdijk, 2013).

Human Capital and resource-based view

According to resource-based view, firm growth depends upon the availability of knowledge and resources. Firm can accumulate knowledge by learning existing knowledge of firm as well as new knowledge from external sources. However, internal capabilities of firm define the ability to absorb the external knowledge. Managerial capabilities resolve problems and exploit opportunities to achieve persistent growth. The understanding of entrepreneurship varies and it involves a process of linking change, vision and creation (Lonial and Carter, 2015).

Busenitz et al (2014) analysed that entrepreneurship involves applying passion and energy towards the creation as well as the implementation of ideas and creative solution and i.e. entrepreneurial activities are recognised as an important source of innovation. Therefore, and i.e. entrepreneurship involves the ability to select, discover and interpret information for decisions in an uncertain world to exploit the market opportunities. Entrepreneurs identify and exploit the opportunities, bear risk associated with new ventures and arrange necessary resources for the success of business. This raises the question how human capital affects the start-up and effect of endowments on the success of business (Chrisman et al., 2013).

Qian and Acs (2013) evaluated the relationship of human capital and entrepreneurship is characterised as knowledge and skills embodied in person which affect exchange and production and reflect the intellectual capital which contribute towards the transfer of knowledge and innovation.

Empirical context

Unger et al (2011) integrate research on human capital for three decades. The study examines the relationship human capital and success through theoretical conceptualisation of two variables. The research question of the study is to explore the relationship between human capital and success based range of dependent variables specific to the concept of success (growth, size and profitability). The finding of the study highlighted that relationship between human capital and success is higher for skills and knowledge capital investment compared to education and experience (Unger et al., 2011).

Estrin, Mickiewicz and Stephan (2016) study added that different skills and abilities are important to achieve goals of each type of entrepreneurship. The study explores how particular human capital characteristic enhances the individual capabilities to realise the externalities. In addition, the study specifies examines the effect of institution structures affect the human capital across different occupational choices. The finding of study highlight general human capital is more applicable and valuable in commercial enterprises (Estrin, Mickiewicz and Stephan, 2016).

General human capital and specific human capital

The two important implication of human capital for entrepreneurship are general human capital and specific human capital. Investment in general human capital has a positive effect on performance because it enables the individual to develop new knowledge and adapt to the situation quickly.

General human capital increases the ability of an individual to exploit and discover opportunities. In empirical literature there is the positive association between education and some studies even focus on types of education (Seghers, Manigart and Vanacker, 2012). The psychological aspect emphasis on the importance of education and benefits are two folded. First, it increases the flexibility and independent thinking but it also focuses on the economic benefits.

In respect to specific human capital, the skills and knowledge related to running of business and crafting business models to find solutions and overcome obstacles for the success of business. These skills are specific to business and not found in wages employment (Rauch and Rijsdijk, 2013).

The firm performance is measured based on a range of variables such as ability to generate profits, survival and profitability. The performance measurement is important to understand the success and failure of business. In the context of entrepreneurial ventures, there is difficulty to separate management and ownership and goal of owner become the goal of the firm. The measure of performance involves sales growth, market share, market scope, profits and increase in a number of employees (Lechner and Gudmundsson, 2014).

Human capital in entrepreneurial firms fosters the learning and development and maximise the effect on company performance. Human capital involves former view on knowledge acquisition and latter view of value acquisition. Entrepreneurship intensity is positively related to growth and profitability of organisation.

The study of Wiklund found a positive relationship between performance and entrepreneurial orientation. Empirical data shows positive relationship between entrepreneurship activities and long-term performance of organisation (Alegre and Chiva, 2013).

The relationship between human capital and firm performance is a consequence of concern that education system should be responsive towards the economic system. There is close link between education and economic success and thus, education is treated as an important asset. The assumption is that improved education and training result in increased productivity and economic performance.

Human capital includes all those activities such as training which increase the performance and increase education enhance the ability to decode the information (ability to deal with disequilibrium) (Stam, Arzlanian and Elfring, 2014). The ability to adapt to technological changes is important indicator of further education suitability and improves the efficiency because as source of information it enables the individual to translate education into skills to find solution to the problem and develop innovative solutions.

Human capital and performance

In the context of human capital and performance, economic performance studies emphasis on growth and return whereas technological performance literature on adaptation to technological changes (Frese, Rousseau and Wiklund, 2014).

Lechner and Gudmundsson (2014) elaborated that skill is rather a vague term which involves an ability to perform task and include behavioural attributes like an ability to perform task independently. Skills can be acquired through education, training and course of people activities. The four categories of entrepreneurial skills in relation to human capital are technical skills, person skills and managerial skills.

Technical skills highlight necessary to be successful in line of business such as operations (production of product and service), input (raw material) and technology. Moreover, the managerial skills involve ability to organise the work such as planning and organising, networking, customer management, supply chain, management of financial resources and problem –solving skills. Entrepreneurial personal skills include conceptualisation of business, environment scanning, accountability, self-awareness and creativity (Chrisman et al., 2013).

Baptista, Karaoz and Mendonca (2014) stated that the relationship between human capital, entrepreneurship and performance has important implication for ventures. Human capital has the vital role for profitability, growth and success of entrepreneurial ventures. The attributes of human capital such as age, education and experience is particularly important for the success of entrepreneurship and affect the performance of business.

Santarelli and Tran (2013) examined that the higher level of human capital benefits through a higher level of performance. The study of Gimeno found a positive relationship between the level of human capital (education, experience and economic performance) at both firm and entrepreneur level. The entrepreneurial human capital enhances productivity of business leading to higher profitability and higher productivity represent that operations are efficient.

Cassar (2014) investigated that education and experience are two important components of human capital. Education is general capital increases the level of productivity and results in accumulation of explicit knowledge for the entrepreneurs. Education has a significant effect on the growth and survival of firm and helps to achieve desired performance level. The formal education of entrepreneur is related to eventual performance and entrepreneurs with formal degree are less likely to fail than those who did not.

Empirical results show positive result between venture performance and education. On the other hand, the experience is an important factor to influence entrepreneurial success and shaped by experience which is gained during the course of prior employment (Jayawarna, Jones and Macpherson, 2014).

The prior experience includes full-time experience, prior start-up experience, managerial experience and current self-employment. Experience is important to attribute related to entrepreneur entry and experience in same industry positively influence on business performance. The important determinant of success is specific human capital such as industry-specific experience. Bosma et al studied 1000 firm in the Netherlands and find out that industry related prior experience is important in term of profitability and growth of firm (Vanevenhoven, 2013).

Lechner and Gudmundsson (2014) explained that training and firm performance is important human capital for the firm in both general and specific context. There are two types of training are specific and general training. General training involves skills which are useful in many industries and specific training enclosed skills which affect productivity in a firm providing the training. Workforce lack of training has the low competitiveness and stock of human capital is linked with higher productivity. Training is positively associated with longevity and tendency of business growth.

Khedhaouria, Gurau and Torres (2015) added that entrepreneur with better training positivity influence through enhances professionalism, better technology and legitimacy of entrepreneurial initiatives. Entrepreneurs with relevant training are less likely to spend time on gathering and analysing information and increase efficiency and entrepreneurial efforts likely translate into higher performance.

Conclusion

The essay provides insight on relationship human capital, firm performance and entrepreneurship and reinforces the need of skills and abilities to enter in the entrepreneurship. It develops theoretical context and explores empirical studies to analyse the relationship between performance and human capital as elaborated by human capital theory (increasing quantity of firms’ human capital). The exercise of reviewing literature highlighted that studies focus on human capital theory in terms of demand determinants and factors influence the entrepreneurial performance.

The selected papers are useful to develop a perspective on the important of human capital and environment related to the success of entrepreneurship. This essay contributes towards body of knowledge for human capital and entrepreneurship through assessment and evaluation. Articles provide good information on the topic and provide motivation on to research on the value of human capital in success of entrepreneurship.

Implication of essay

The implication of essay is that it is useful as a snapshot of the role of human capital influence the entrepreneurial ventures performance. The implication of study highlighted that personal characteristic, environment and institutions affect the human capital need of entrepreneurship. The human capital is important in terms of knowledge rather experience and different types of human capital are important for start-up as well as success phase. The essay useful to contextualised entrepreneurship in light of human capital theory and need of skills vary in the context of underlying opportunities. Human resource is an important asset of business and effective utilisation increases the business performance. The factors revealed which are important to enhance the performance are specific human capital.

The potential limitations attached to this essay are a number of studies involved to examine the literature on human capital, firm performance and entrepreneurship. The studies limit the scope of study and influence of confounding variables is difficult to examine. The studies do not explain the differences based on continuous and dichotomous variables or size of start-up. The problem associated with studies is a generalisation of data and both studies use the secondary data which restrict the measure of human capital. Articles include secondary studies and particularly meta-analysis present validity issues. The mix of good and bad studies during meta-analyses reduces the reality of study.

Future research direction

The future research includes studying the human capital through exploring motivation, skills, confidence. The future research direction could involve analysing the effect of economic conditions and its effect on the human capital to recognise the opportunity. Another research involves analysing the background of the entrepreneur in terms of employment, managerial experience and network effect on the development of human capital.

The future research can include measures education level, quality of academic institutions, nationality and ethnicity, previous employment along with career goals of an entrepreneur. In this study, the emphasis is given on human capital and entrepreneurship but in future research, the role of entrepreneurial ventures can be elaborated. The human capital in context of cross-culture management and implication entrepreneurial can be studied.

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