Human Capital

I will exclude the literature review of human capital from the field of Human Resource Management (HRM) since my studies are not specified on that discipline. During research I have found hundreds of article references which links human capital under the umbrella of HRM but those are irrelevant on this research. I look more on linkage of human capital to entrepreneurship while covering a bit of background theories and findings from sociological perspectives of Coleman (1988) and Nahapiet & Ghoshal (1998).

Economic literature claims to have origins of defining human capital. Becker (1964) definition of human capital was “…knowledge, information, ideas, skills and health of individuals”. When compared to other capitals like financial or physical they seem to decrease over time compared to human capital which instead increases. Even though an individual can be separated from his or her financial or physical capital the human capital is always there since individual cannot be separated from their knowledge, skills, values or health (Becker 1964). The main argument of Coleman (1988) on social capital is that it has influence on generating human capital for the next generation. He as an educator sees importance of social capital of the family for developing and creating human capital of the child but also the importance of education by shaping the social capital into human capital. Coleman argue that human capital can be defined by the changes that individual experiences through learned skills and knowledge which makes him/her act in a different way compared earlier (Coleman 1988). Nahapiet & Ghoshal (1998) separate knowledge out of human capital by replacing the term with intellectual capital even the terms are interrelated according to authors. They argue that term intellectual capital brings out more the capability of an individual compared to findings of Coleman on human capital (Nahapiet &

Ghoshal 1998).

Intellectual capital can be divided to two dimensions which are type of knowledge and levels of analysis in knowledge and knowing (Nahapiet & Ghoshal 1998). The most critical theme around the nature of knowledge is to define the content of knowledge. Earlier research defines the content of knowledge in a different ways. Scholars debate between two major streams of knowledge. The first defines knowledge to three categories; practical knowledge, experience based knowledge and theoretical knowledge (Nahapiet & Ghoshal 1998). Other perspective is more cited in the academic research and has therefore more influence to be regarded as a leading theory. Polanyi (1967) identified knowledge to be both tacit and explicit which he argues to answer questions “knowing how” and “knowing what”.

One leading group of researchers adopted Polanyi’s theory and created their model to describe how tacit knowledge becomes explicit knowledge in case of Japanese companies post Second World War (see Nonaka & Takeuchi 1995 for more).

Other dimension is based on the question whether is it possible to make a difference between collective organizational knowledge and social knowledge of individual members of the organization (Nahapiet & Ghoshal 1998)? According to authors this is more philosophical and sociological dilemma for debate and since I’m not studying either I take no part of that. (See debate and arguments for and against in Nahapiet & Ghoshal 1998)

When coming to this millennium human capital has taken a significant step forward in academic research since competition has changed due technological development compared the academic literature in 1980’s to 1990’s. Liepe & Sakalas (2014) argue that human capital is significant since recent years the market environment has become hyper-competitive so fight over job opportunities is based on the competitive advantage of individuals compared each other as well as the competitive edge of the firms through skills of their employees against their competitors.

Human Capital and Entrepreneurship

According to Unger et al. (2009) entrepreneurship researchers over the past thirty years have been interested of findings linking human capital such as educational background, knowledge, experience and skills with entrepreneurial success. It is stated that human capital increase business owners capabilities to discover and exploit possible business opportunities (Unger et al. 2009). Human capital theory in general makes an assumption that individuals are trying to get better financial compensation depending on their investments on human capital (Becker 1964, Unger et al. 2009). Unger et al. (2009) created six hypotheses which they wanted to get answers on their research which combined thirty years of human capital research.

First hypothesis states there is a positive relationship between human capital and success. They argue that individuals with high educational background would not choose a career in entrepreneurship since it includes financial risks compared to being employed. But those with high gained human capital taking the steps of entrepreneurship are able to become more successful with better growth and profits compared to other entrepreneurs with lower gained human capital since according to the human capital theory individuals with high human capital want to get better financial compensation on their efforts (Unger et al. 2009).

Second hypothesis states relationship between human capital and success is higher for outcomes of human capital investments than for human capital investments. At the beginning this statement was a bit blurred to me but after understanding from example it was easier to put it in context. Becker (1964) argued that knowledge and skills in theory are result of investment to human capital like education and earlier work experience and since many researchers have based their arguments on measurement of human capital to either education level or past work experience which according to Unger et al. is a valid approach if relationship between human capital investments and outcomes of human capital investments exits. They argue that universally that is not the case since success of relationship on human capital investments differs from person to person and environment where individuals live. If two individuals have studied the same amount of years in a university but in a different university compared to other how learnings can be measured? Authors refer the environment in this case the university and quality of teaching. How can it be stated that each individual learns same skills in the course and are able to be compared among each other for example in the job interview after graduation if the content of the course is same but quality of teaching differs? Unger et al. argument is that human capital differs and may reveal only little about the knowledge and skills individual actually has obtained. Those two students could start same business in a different environments and results could be completely different even if their learned knowledge and skills could be seen as the same. So focus on measurement should be on the outcomes of the human capital investments than human capital investments (Unger et al. 2009).

Third hypothesis states that relationship between human capital and success is higher on entrepreneurial related tasks compared to non-entrepreneurial related tasks (Unger et al. 2009).

Authors argue to separate task related and non-task related human capital from each other. They refer task related human capital as something required in the field of expertise an entrepreneur currently needs for example industry know-how. Non-task related human capital can be for example general education or previous work history of an entrepreneur (Unger et al 2009).

As fourth hypothesis researchers define the possibility of human capital being in higher role on high technology companies compared to low technology companies since using high technology more knowledge and skills are required (Unger et al. 2009). I do not see any difference on human capital between companies since same human capital can be used in many sectors and companies. Authors also do not give an example of what they mean about High Technology Company but let the reader to interpret in a way they like. Giving a broad statement without any practical example or defining the high and low technology more specifically is very

dangerous if adapted wider in the academic field. As the researchers claim the relationship between human capital and success to be higher in high tech compared to low tech companies (Unger et al. 2009). The problem of this general statement is that human capital is needed in every company. Statement about the relation of human capital and success cannot be measured without giving a proper examples of the academics definition of high and low tech company.

There can be a company operating without high technology such as manufacturing shoes but the requirement of human capital in making those specific shoes in order to be successful proofs the statement of Unger et al. (2009) as single minded.

I can agree with the fifth hypothesis of the researchers as they claim human capital to give a competitive edge in business if it differs from their competitors’ human capital (Unger at al 2009). Especially researchers claim this hypothesis to be true in developing countries where education level is not as high compared to western societies. This makes the human capital to be more heterogeneous and therefore it has more influence on success as individuals are more likely employing themselves as an entrepreneur by necessity instead of by choice since job opportunities are not as wide as in the western, more developed countries. There is a good example in Zambia where local entrepreneur has started to create the frames of bicycle out of bamboo wood. (http://edition.cnn.com/2012/05/31/business/bamboo-bicycles-zambia-zambikes/) Since they lack the resources of creating bicycle frames from other materials the owners of the bamboo bicycle productions in Zambia use their natural resource of bamboo with human capital to create a sustainable impact that supports the nature compared to their competitors in the western societies in bicycle manufacture. So through this example I can agree the argument of relationship between human capital and success being higher in less developed countries compared to more developed countries (Unger et al. 2009).

Sixth and final hypothesis of the research group states relations between human capital and success to be higher in start-up companies compared to older companies. (Unger et al. 2009) I think this is accurate which is proofed by the example of Zambian bamboo bicycle manufacturers in the previous chapter. Since a new company has not created a solid customer base yet compared to those companies operating for years they could avoid the huge gap between them by investing on human capital as older companies have already established the structure of the company or as researchers state it, the “track record” (Unger et al. 2009).

How effects of the human capital relation to success can be measured in this context? The authors refer there should be a specific criterion that can be measured such as financial and operational performance of the entrepreneurial organization (Unger et al. 2009). Since one thing is common no matter which country the company is located or what field of business they are into the numbers do not lie. Financial statement always tells the truth about the performance of any company if done correctly according to accounting law of the country of origin so it can be used as a universal measurement criteria even though accounting laws and systems differ between some countries. Theory of human capital states that individuals want to be compensated according to their collected human capital when working in a company. Authors argue that within entrepreneurship it means to receive return on investment of human capital in networking and following opportunities of such action. For the measurement of success argument of the researchers is based on economics of the company such as profitability, growth and possible stock market performance (Unger et al. 2009). They state that it is not possible within the literature to allow theoretical predictions on the importance of relation between human capital and indicators of financial performance so they prefer to focus on the set research question on relationship of human capital to three success indicators (Unger et al. 2009).