Sunday, January 31, 2016

The Significance of Human Capital Theory

The added value that people can contribute to an organization is emphasized by human capital theory. It regards people as assets and stresses that investment by organizations in people will generate worthwhile returns. The theory therefore underpins the philosophies of human resource management and human capital management.



Human capital theory is associated with the resource-based view of the firm as developed by Barney (1991). This proposes that sustainable competitive advantage is attained when the firm has a human resource pool that cannot be imitated or substituted by its rivals. Box (1996) refers to this situation as one that confers ‘human capital advantage’. But he also notes (1996 and 1999), that a distinction should be made between ‘human capital advantage’ and ‘human process advantage’. The former results from employing people with competitively valuable knowledge and skills, much of it tacit. The latter, however, follows from the establishment of.





For the employer, investments in training and developing people is a means of attracting and retaining human capital as well as getting better returns from those investments. These returns are expected to be improvements in performance, productivity, flexibility and the capacity to innovate that should result from enlarging the skill base and increasing levels of knowledge and competence. Sculler (2000) suggests that: ‘The general message is persuasive: skills, knowledge and competences are key factors in determining whether organizations and nations will prosper.’ This point is also made powerfully by Reich (1991).



But Davenport (1999) has some cautionary words about the asset-based content of human capital theory. He argues that workers should not be treated as passive assets to be bought, sold and replaced at the whim of their owners – increasingly, they actively control their own working lives. Workers, especially knowledge workers, may regard themselves as free agents who can choose how and where they invest their talents, time and energy. He suggests that the notion that companies own human assets as they own machines is unacceptable in principle and inapplicable in
practice; it short-changes people by placing them in the same category as plant and equipment.




Important though human capital theory may be, interest in it should not divert attention from the other aspects of intellectual capital – social and organizational capital – which are concerned with developing and embedding the knowledge possessed by the human capital of an organization. Sculler (2000) contends that.

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