We Are Who We HireWITHIN THE SAME SECTOR THERE ARE FIRMS WITH A PRODUCTIVITY DOUBLE THAT OF OTHERS AND RESEARCH FINDS MORE AND MORE CLUES OF THE FACT THAT IT IS HUMAN CAPITAL PLAYING AN ESSENTIAL ROLE IN THESE DIFFERENCES, AFFIRMS NICOLAI FOSS
Many of the European economies suffer from sluggish productivity growth. Firm performance (i.e., productivity advances, financial performance, innovation …) matters strongly to economic growth, and hence social and economic well-being. Studying firm performance, in particular, productivity and innovation, is thus of very high scientific and societal interest. However, the understanding of firm performance has many gaps--particularly concerning the role that human resources (or “human capital”), organizational design, and their interaction play in a firm performance. This is in spite of firm performance having been studied for decades in economics and management research.
PERSISTENT HETEROGENEITY IS STILL A PUZZLE
The field of strategic management—one of the key areas of macro management research—is taken up with explaining performance differences across firms. In particular, it focuses on the reasons why some firms may obtain a sustained competitive advantage.
Research in management and economics shows that virtually all industries are characterized by heterogeneity of firm performance (e.g., financial, innovation, productivity). For example, in many industries there is a 100% between the top and the bottom deciles of the distribution of productivities. Moreover, such performance differences tend to be persistent. Such persistent heterogeneity is something of a puzzle in economics, because one would expect heterogeneity to be eliminated by market forces. In management research, intra-industry heterogeneity is a starting point for much of strategic management research. However, heterogeneity has a tendency to be something we assume (rather than something we explain) in economics, and often even in management.
INTERNAL RESOURCES ARE NOT WELL UNDERSTOOD
Over the last three decades, strategy research has refined the understanding of what makes firms different. Thus, generic frameworks that focus on the “resources”, “capabilities” and other assets of firms have been developed. There is a well-established, basic understanding of the characteristics of those resources that can give rise to sustained competitive advantage. And yet, our understanding of how factors inside firms drive performance is highly incomplete. Key factors like human capital (i.e., employees, managers), organization design, and the interactions of these two remain ill-understood. Partly, this is a matter of under-developed theory, partly it is a matter of the difficulty of getting access to good micro-data that speak to the characteristics of human capital (education, age, job experience and so on), and partly it is a matter of measurement difficulties.
From a managerial perspective, this is problematic. The reason is that the hiring, training, and rewarding of human capital and the structuring of work tasks and activities and the allocation of authority are key levers that managers can pull to improve the performance of the firms they manage. It is also problematic from a policy perspective, because there are links between education and other forms of training and innovation and productivity. In other words, the quality of the human resources that firms can deploy to production matters not just to company outcomes but to aggregate outcomes as well.
STRATEGIC HUMAN CAPITAL RESEARCH
However, scholars in strategy and related areas are increasingly refining their understanding of the role of human capital in explaining performance. Much of this parallels current efforts in economics. Indeed, current management research on human capital draws heavily on economics research on contracts, bargaining, human capital and productivity. Of course, this emerging field also draws on established management fields like Human Resource Management, Organizational Behavior, and research on Top Management Teams, where the demographic characteristics of managers have long been central.
A key issue addressed by human capital scholars in the field of strategy is the extent to which firms gain competitive advantage through “people.” A basic problem here is that unlike physical capital, people can leave—or, threaten to leave! This translates directly into bargaining power, which may be leveraged by human capital, reducing the value that the firm can appropriate. A related issue is the value appropriation challenges presented by “star” employees who are likely to be “poaching targets” for rival firms. Research suggests various solutions, such as contractual clauses that limit the mobility of key employees, making them dependent on other employees, giving them access to key resources to properly incentivize and much else.
Another key issue concerns the factors that explain differences in human capital productivity within industries, or, why an employee may be highly productive in one firm, but much less productive in another one. Here answers focus on how an employee’s human capital may fit with the human capital of other employees, or, alternatively, how different management practices in different firms enhance the value of human capital differently.
A third set of issues concern how human capital emerges, e.g., how employee skills are improved, and how this partly stems from interaction with other forms of intellectual capital (e.g., social capital, organizational capital). Research looks at how firms can purposefully create valuable human capital heterogeneity, either by being good at “picking” good employees from the labor markets or by “treating” the employees the firm already has, e.g., through training.
A different set of issues relate to the mechanisms that link human capital to firm-level outcomes. It is clear that there are “direct” effects, because the quality of human capital has direct implications for the quality of the efforts that employees supply. In other words, productivity, creativity, innovativeness, and so on are directly affected by human capital. But, there are also indirect mechanisms through which human capital contributes to performance. For example, with peer effect employees may be concerned with the efforts and productivity of other employees, and this is directly affected by the level of human capital.
STRATEGIC HUMAN CAPITAL RESEARCH AT BOCCONI
As described above, human capital research is an interdisciplinary undertaking, involving, in particular, economists, management scholars and psychologists. For example, a key issue is the motivation of human capital. Psychology research amply demonstrates that pecuniary incentives is at best a part of the story here. Not surprisingly, instances of human capital research can be found at most Bocconi departments, as the interviews in this issue confirms.
Read the other stories on the topic of Human Capital:
Gig Economy: What Rights for Workers?
The Chosen People who Invested on Themselves
Not only CEOs, the Importance of the Manager
Investing Time in Children Pays
Uncertain Victor, Better Candidates
The Importance of Incentives
The Consequences of Uncertainty on Families
Autonomy in Decision Making: the Right Balance is Required
The Geography of Human Capital
Not all Directors have the Same Value
by Nicolai Foss