Strategic Human Capital Paradoxes…Posted: August 2, 2012
For a PDW, I was asked to develop a short list of paradoxes linked to the strategic human capital (spoiler alert for those of you planning to be at the session at 8am on Friday). I’m sure some of them would not surprise you in the least. Others might spur some discussion though. Here is the short list:
- Rent from human capital may not show up in profitability
- “Who” is a firm?
- Firm-specificity isn’t as important as we might think
- HR Departments may not matter much
- High performance work systems don’t tell us much about such advantages
Rent. The first point is what you would expect from me so let me dismiss it quickly. Obviously, if rent is linked to human capital, some portion of it is likely to be captured by people. Nuff said.
Who is a firm? A sharp distinction is made between hiring on the spot market and an internal labor market. Rightly so. However, one might think that once labor is “internal” such people are part of the firm. Nevertheless, they are still often treated as “external suppliers”in the context of rent appropriation. The average strategy person still feels that the only rent that counts in a competitive advantage is what flows to shareholders. More importantly, this gets at our definition of what is a firm? If we take micro-foundations seriously, we also have to nail down which stakeholders should be considered part of the firm. I think this extends to other supposedly external stakeholders as well. For example, even non-equity alliances may be enduring partnerships that function like part of a firm (e.g., going back to Barnard, “a system of consciously coordinated activities“). Ok, I know I’ve been harping on that for a number of years as well. Let’s move on…
How much does firm-specific human capital matter? Much of today’s theory here is based on Becker’s classic analysis, which assumes the value of those with firm-specific human capital is lower in other firms. Williamson borrows liberally from Becker as he describes the problem as a bi-lateral monopoly. However, this imposes very strong assumptions on the market’s ability to perceive and value firm-specificity. Assumptions that are not borne out if you look at the way labor markets work. More troubling is the fact that firms actively seek individuals who can and will make firm-specific investments. Typically, the best possible signal is the fact that they have already done so at another firm (this is one reason why recommendations are so important). Consider hiring at your institution. Do you really want to hire a person who has avoided all service commitments at their prior institution? Removing the disincentive for individuals to make firm-specific investments changes the dynamic dramatically. How does this alter our view of human capital-based competitive advantages? Ed Lazear’s recent work illustrates benefits of a renewed and more nuanced look at general human capital.
Do HR departments matter? Some might assume that strategic human capital implies that HR departments would be more important. However, where HR is most critical to a firm’s strategy, key decisions are most often made by line managers (e.g., professional services, R&D, sports…). Entrepreneurial firms often lack HR departments altogether. It is unfortunate that some view the field as closely tied to a functional area — we might miss the most important research problems.
Do high performance work systems matter? There are certainly HR best practices. However, HR professionals (and organizations like SHRM) actively help to transfer these across firms. There is no perceived conflict of interest — it’s part of being a professional HR manager. We should be asking how such practices are co-specialized to idiosyncratic aspects of firms. These might produce enduring performance differentials. Unfortunately, there is little research in this vein…
If you are addressing these types of questions in your research, please consider submitting a paper to the Journal of Management special issue that Pat Wright, Tom Moliterno and I are editing.