The impact of bank’s human capital on organizational performance: How innovation influences performance

home > archives > 14/3 > The impact of bank’s human capital on or

Yu-Fang Yen
Associate Professor, Department of Business Administration, National Quemoy University, Kinmen, Taiwan

Abstract

This study extends the literature by integrating the resource-based view (RBV) and innovation theory to examine how human capital in banks affects innovative capability, and in turn, organizational performance. The case study is structured on the qualitative research of eight commercial banks in Taiwan. The results revealed that the influence of firms' human capital on innovative capability is positive. This study also found the main elements of firms' human capital to include not only knowledge, skills, and abilities, but also leaders' vision, open-mindedness, execution, imitation ability, and functional diversity. The results also demonstrate that innovative capability is incremental among commercial banks and that innovative capability may mediate the relationship between firms' human capital and organizational performance.

Keywords

human capital, innovation, organizational performance

Article Text

In the resource-based view, a resource that is valuable, rare, and inimitable can boost the competitive advantage of those firms possessing it (Coff, 1997; Barney, 1991; Carpenter, Sanders, & Gregersen, 2001). Competitive advantage helps firms yield positive returns (Peteraf, 1993) and human capital forms the basis of competitive advantage in many of today's organizations. Smarter workers possess the ability to potentially improve organizational performance (Yountdt and Snell, 2004) and high quality human capital is one of the main factors influencing organizational performance (Carpenter et al. 2001; Pfeffer, 1994; Russell et al. 2011). Many previous researches have contributed to various research areas, such as the effect of human capital on individual job performance (Schmidt & Hunter, 1998, Hitt et al. 2001), entrepreneurial success (Florin et al. 2003; Unger et al. 2011), accumulation of new knowledge and skills (Ackerman and Humphreys, 1990; Hunter, 1986), strengthening employees' motivation (Huselid, 1995), and firm dissolution (Pennings et al. 1998). Awareness that human capital has a great effect on performance, productivity, and career advancement is critical for firms.

Previous studies on human capital and performance have primarily focused on the individual level. Researchers have noted, "The concept of human capital may be 40 years old, but its treatment in organizational research is in an infant stage" (Wright and McMahan, 2011, p. 100). Human capital at the organizational level is hence significant to the success of organizations. Carmeli and Schaubroeck (2005) stated that human capital is a perception of levels of education, training, work experience, and skills of the entire organization. Wright et al. (1999) defined human capital as skills and motivation. Ployhart et al. (2006) focused on personality traits such as emotional stability, conscientiousness, agreeableness, and extraversion. Concluding from the previous researches, we found that researchers have not reached a consensus on what critical elements should be included in human capital. Wright and McMahan (2011) indicated the need for improved measurement based on a common definition of human capital at the organizational level. We therefore suggest that examining the elements of firms' human capital at the organizational level might add to a theoretical and practical understanding.

Numerous authors have emphasized the importance of understanding the black box between firms' human capital and organizational performance (Combs et al. 2006). Unfortunately, a proper understanding of how the firms' human capital influences organizational performance is still lacking (Fisher and Govindarajan, 1992). We address calls to examine the explanations of mediating mechanisms through which human capital may derive performance (Sirmon, Hitt, and Ireland, 2007; Ployhart, Iddekinge, and Mackenzie, 2011).

Innovation is an important function of management because it is linked to business performance, as demonstrated in many studies (Damanpour and Evan, 1984; Damanpour, Szabat, & Evan, 1989; Khan and Manopichetwattana, 1989, Han et al. 1998; Smith, Collins, & Clark. 2005). Prior researches provide guidance on innovation antecedents to organizational performance, for example, networking (Glaister and Buckley, 1996; Todtling et al., 2009), organizational structure (Damanpour, 1991), technology intensity (Heidenreich, 2009; Pavitt, 1984), research and development, technology diversity (Nandini, 2010), knowledge exchange and combination (Argote et al. 2003), and social capital (Subramanism and Youndt, 2005; Zheng, 2010). The findings uniformly show a robust relationship, or a positive and direct relationship, between innovation and organizational performance. However, how human capital is accumulated and utilized remain disconnected to the specific types of innovative capabilities possessed by firms. Most studies only link knowledge to very generic, broadly defined innovation outcomes, such as new product launches, technology patents, and sales generated from new products (Subramaniam and Youndt, 2005). The current study examines comprehensive insights from prior studies investigating distinct characteristics of firms' human capital, and different types of innovative capabilities to better understand these relationships.

Researchers have attempted to identify the antecedents of innovation; however, most research has focused on the manufacturing and high technology industry (Miles, 2000). Goffin and Mitchell (2005) argued that the service sector increasingly dominates current research on innovation relative to manufacturing activities. Service-focused businesses have dominated the global economy (Frie, 2008). Although more than three-quarters of employment includes service, empirical evidence of a human resource (HR)-performance link is largely based on the manufacturing sector (Appelbaum et al. 2000; Ichnoiowski et al. 1996). In relation to industrial sectors, innovation development within manufacturing enterprises has been studied with an emphasis on technology (Heidenreich, 2009), whiles the focus within service enterprises has been on knowledge intensity (Miles, 2000; Amara et al. 2009). The results from manufacturing studies may not suffice to generalize to service settings (Batt, 2002; Mac Duffie, 1995; Von Tunzelmann, and Acha, 2005). Tether (2005) indicated a comparative difference between innovation in the service industry and that of the manufacturing industry from the aspect of intangibility, high dependence on people, and high level of interaction. We therefore believe that an examination of the mediating role of innovation, particularly in the service industry, could contribute to the theoretical and practical understanding of this issue. This study attempts to fill this research gap.

Based on resource-based theory (Barney, 1991) and innovation theory, current studies have examined the effect of human capital on innovation, and in turn, the influence on organizational performance. The major contributions of this study are threefold; firstly, human capital is critical to organizational success; however, there is a lack of reliable and valid measures of the construct on the organizational level (Gerhart et al. 2000b). To solve the problem, we explored a more detailed description of firms' human capital at the organizational level. Secondly, we addressed the processes that intervene between human capital and organizational performance (Wright and McMahan, 2011) to explain how human capital contributes to performance. This study sheds light on how innovative capabilities directly influence organizational performance and examines the mediating role of innovation. Specifically, we examine innovative capabilities, including radical and incremental capabilities. Finally, scholars generally agree that innovation plays an important role in organizational performance and success. However, this research focuses on service industries instead of manufacturing industries in Taiwan. We select the banking industry because Taiwanese banking has undergone significant change resulting from deregulation, rapidly changing technology, major industry consolidation, and important macroeconomic changes.

View references

References

Abernathy, W. J., & Clark, K. 1985. Innovation: Mapping the winds of creative destruction. Research Policy, 14:3-22.

Ackerman, P. L., & Humprheys, L. G. 1990. Individual differences theory in industrial and organizational psychology, In: Hough, L. M. (Ed.), 2^nd ed. Handbook of Industrial and Organizational Psychology, Vol. 1, Consulting Psychologists Press, Palo Alto, 223-282.

Amara, N., Landry, R., & Doloreux, D. 2009. Patterns of innovation in knowledge-intensive business services. The Service Industries Journal, 29(4):407-430.

Appelbaum, E., Bailey, T, Berg., & Kalleberg, A. 2000. Manufacturing Advantage. Ithaca, NY: ILR Press.

Argote, L., & McEvily, B., & Reaguans, R. 2003. Introduction to creating, retaining, and transferring knowledge [Special issue]. Management Science, 49(4), v-viii.

Barney, J. B. 1991. Firm resource and sustained competitive advantage. Journal of Management, 17:99-120.

Barras, R. 1986. Towards a theory of innovation in services. Research Policy, 15:161-173.

Barras, R. 1990. Interactive innovation in financial and business services: The vanguard of the service revolution. Research Policy, 19:215-237.

Batt, R. 2002. Managing customer services: human resource practices, quit rates, and sales growth. Academy of Management Journal, 45:587-597.

Becker, G. S. 1964. Human Capital. New York: Columbia University Press.

Berg, I. 1969. Education and Jobs: The Great Training Robbery. New York: Praeger Publishers.

Boeker W. 1997. Strategic change: the influence of managerial characteristics and organizational growth. Academy of Management Journal, 40(1):152-170.

Boland, R. J., & Tenkasi, R.V. 1995. Perspectives making and perspective taking in communities of knowing. Organization Science, 6:350-372.

Brooking, A.1996. Intellectual Capital. London: International Thomson Business Press.

Brown, S., & Esienhardt, K. 1995. Product development: Pat research, present findings, and future directions. Academy of Management Review, 20:343-378.

Burgess, G. H. 1989. Industrial Organization. Englewood Cliffs, NJ: Prentice-Hall.

Burgelman, R. 1991. Intraorganizational ecology of strategy making and organizational adaptation: Theory and field research. Organization Science, 2:239-262.

Carmeli, A. and Schaubroeck, J. 2005. How leveraging human resource capital with its competitive distinctiveness enhances the performance of commercial and public organizations'. Human Resource Management, 44:4,391-412.

Capon, N., Farley, J., & Lehmann, D. 1992. Profiles of product innovators among large U.S. manufacturer. Management Science, 38.157-169.

Carpenter, M. A., Sanders, W.A., & Gregersen, H. B. 2001. Bundling human capital with organizational context: The impact of international assignment experience on multinational firm performance and CEO pay. Academy of Management Journal, 44(3):493-512.

Chandy, R. K., & Tellis, G. J. 1998. Organizing for radical product innovation: The overlooked role of willingness to cannibalize. Journal of marketing Research, 35:474-487.

Coff, 1997, Getting to "yes" when acquiring firms in human capital intense industries: Medium of exchange, diversification strategy, and impasse. Working paper, St. Louis: Washington University.

Cohen, W. M., & Levinthal, D.A. 1990. Absorptive capacity: A new perspective in learning and innovation. Administrative Science Quarterly, 17: 178-184.

Combs, J. G., Liu, Y., Hall, A. T., & Ketchen, D. J. 2006. Do high performance work practices matter? A meta-analysis of their effects on organizational performance. Personnel Psychology, 59(3):501-528.

Daft, R. D.1978. A dual-core model of organizational innovation. Academy of Management Journal, 21(2):193-210.

Damanpour, F., & Evan. 1984. Organizational Innovation and performance: The problem of organizational lag, Administrative Science Quarterly, 29:329-409.

Damanpour, F., Kathryn, A., Szabat, & Evan, M. D. 1989. The relationship between types of innovation and organizational performance. Journal of Management Studies, 26:587-601.

Damanpour, F. 1991. Organizational innovation: A meta-analysis of effects of determinants and moderators. Academy of Management Journal, 34:555-590.

Dewar, R.D., & Dutton, J. E. 1986. The adoption of radical and incremental innovations: An empirical analysis. Management Science, 32:1422-1433.

Dougherty, D., & Bowman, E. H. 1995. Effects of estimation methods, number of indicators per factor and improper solutions on structural equation modeling fit indices. Structural Equation Modeling, 2:119-143.

Druker, P. 1954. The Practice of Management, New York: Harper & Row Publisher, Inc.

Eisenhardt, K. M. 1989. Building theories from case study research. Academy of management Review, 14(4):532:550.

Ellonen, H. K., Widstrom, P., & Jantunen, A. 2009. Linking dynamic-capability portfolios and innovation outcomes. Technovation. 29(11):753-762.

Ettlie, J. E. 1983. Organizational policy and innovation among suppliers to the food processing sector. Academy of Management Journal, 26:27-44.

Fisher, J., & Govindarajan, V. 1992. Profit center manager compensation: An examination of market, political and human capital factors. Strategic Management Journal, 13:205-217.

Fiske, S., Kinder, D., & Larter, W. 1983. The novice and the expert: Knowledge based strategies in political cognition. Journal of Experimental Social Psychology, 19: 381-400.

Florin, J., Lubatkin, M., Schulze, W. 2003. A social capital model of high growth ventures. Academy of Management Journal, 46(3):374-384.

Frie, F. X. 2008. The four things a service business must get right. Harvard Business Review. April. 70-80.

Garcia, R., & Calantone, R. 2002. A critical look at technological innovation typology and innovativeness terminology: A literature review. Journal of Product Innovation Management, 19(2):110-132.

Gatignon, H., & Xuereb, J. M.1997. Strategic Orientation of the firm New Product Performance. Journal of Marketing Research, 34:77-90.

Gatignon, H., Tushman, M. L., Smith, W., & Anderson, P.2002. A structural approach to assessing innovation: Construct development of innovation locus, type and characteristics. Management Science, 48:1103-1123.

Gerhart, B., Wright, P. M., & McMahan, G. C. 2000b. Measurement error in research on human resource decisions and firm performance: further evidence and analysis. Personnel Psychology, 53:4,855-872.

Glaser, R. 1984. Education and thinking. American Psychologist, 39:93-104.

Glaser, B. & Strauss, A. L. 1967. The Discovery of Grounded Theory. NY. Aldine.

Glaister, K. W., & Buckley, P. J. 1996. Strategic motives for international alliance formation. Journal of Management Studies, 33(3):301-332.

Goffin, K., & Mitchell, R. 2005. Innovation Management: Strategy and Implementation Using the Pentathlon Framework. Macmillan: Palgrave.

Grant, R. M. 1996. Toward a knowledge-based theory of the firm. Strategic Management Journal, 17:109-122.

Hage, J.1980. Theories of Organizations. New York: Willey.

Hage, J., & M. Aiken.1970. Social Change in Complex Organizations. Englewood Cliffs, N. J. Prentice-Hall.

Han, J. K., Namwoon, K., Rajendra, K., & Srivastava.1998. Market orientation and organizational performance: Is innovation a missing link? Journal of Marketing, 62:30-45.

Heidenreich, M. 2009. Innovation patterns and location of European low- and medium technology industries. Research Policy, 38(3):483-494.

Hill, C. W. L., & Rothaermel, F. T. 2003. The performance of incumbent firms in the face of radical technology innovation. Academy of Management Review, 28:257-274.

Hitt, M. A., Bierman, K., Shimizu, K., & Kochhar, R. 2001. Direct and moderating effects of human capital on strategy and performance in professional service firms: A resource-based perspective. Academy of Management Journal, 44(1):13-28.

Hunter, J. E. 1986. Cognitive ability, cognitive aptitudes, job knowledge, and job performance. Journal of Vocational Behavior, 29:340-362.

Hunter, L., Bernhardt, A., Hughes, K. L., & Skuratowicze. 2001. It's not just the

ATMs: Technology, firm strategies, jobs, and earnings in the retail banking.

Industrial and Labor Relations Review, 54: 402-424.

Huselid, M. A., 1995. The impact of human resource management practices on turnover, productivity and corporate financial performance. Academy of Management Journal, 38:365-672.

Ichniowski, C., Kochan, T., Levine, D., Olson, C., & Strauss, G. 1996. What works at work: overview and assessment. Industrial Relations. 35: 299-334.

Johannessen, J.A., & Dolva, J.O. 1994. Competence and Innovation: identifying critical innovation factors. Entrepreneurship, Innovation and Change, 3(3):209-222.

Khan, Arshad M., & Manopichetwattana, V. 1989. Innovative and Non-innovative Small Firms: Types and Characteristics. Management Science, 35: 597-606.

Kogut, B., & Zander, U. 1996. What firms do? Coordination, identify and learning. Organization Science, 7:502-518.

Lord, R. G., & Maher, K. J. 1990. Alternative information-processing models and their implications for theory, research, and practice. Academy of Management

Review, 15: 9-28.

Mac Duffie, J. P. 1995. Human resource bundles and manufacturing performance: Organizational logic and flexible production systems in the world auto industry. Industrial and Labor Relations Review. 48: 197-221.

McKeithan, K., Reitman, J., Rueter, H., & Hirtle, S. 1981. Knowledge organization and skill differences in computer programmers. Cognitive Psychology, 13: 307-325.

Miles, I., 2000. Services innovation: Coming of age in the knowledge-based economy. International Journal of Innovation Management, 4(4):371-389.

Nahapiet, J., & Ghoshal, S. 1998. Social capital, intellectual capital, and the organizational advantage. Academy of Management Review, 23:242-266.

Nandini, L. 2010. Georgraphic distribution of R&D activity: How does it affect innovation quality? Academy of Management Journal, 53(5):1194-1209.

Pavitt, K. 1984. Sectoral patterns of technical change: Toward a taxonomy and a theory. Research Policy, 13(6):343-373.

Patton, M. Q. 1987. How to use qualitative methods in evaluation. Newbury Park, CA: Sage.

Pennings, J. M., Lee, K. & Witteloostuijn, A. 1998. Human capital, social capital, and firm dissolution. Academy of Management Journal, 41(4):424-440.

Peteraf, M. A. 1993. The cornerstones of competitive advantage: A resource-based view. Strategic Management Journal, 14:179-191.

Pfeffer, J. 1994. Competitive advantage through people. California Management Review, 36(2): 9-28.

Polyhart, R. E. and Moliterno, T. P. 2011. Emergence of the human capital resource: a multilevel model. Academy of Management Review, 36:1, 127-150.

Ployhart, R. E., Weekley, J. A., & Baughman, K. 2006. The structure and function of human capital emergence: A multilevel examination of the attraction-selection-attrition model. Academy of Management Journal, 49(4):661-667.

Ployhart, R. E., Iddekinge, C.H.V., Mackenzie, W. I. Acquiring and developing human capital in service contexts: the interconnectedness of human capital resource, Academy of Management Journal, 54(2):353-368.

Russell, C. T., Combs, J. G., Todd, S. Y., Woehr, D. J., Ketchen, D. J. 2011. Does human capital matter? A meta-analysis of the relationship between human capital and firm performance. Journal of Applied Psychology, 96(3):443-456.

Schultz, T. W. 1961. Investment in human capital. American Economic Review, 51:1-17.

Schmidt, F. L., & Hunter, J. E. 1998. The validity and utility of selection methods in personnel psychology: Practical and theoretical implications of 85 years of research findings. Psychological Bulletin, 124: 262-274.

Sirmon, D. G., Hitt, M. A., & Ireland, R. D. 2007. Managing firm resources in dynamic environments to create value: Looking inside the black box. Academy of Management Review, 321: 273-191.

Smith, K. G.., Collins, C. J., & Clark, K. D. 2005. Existing knowledge, knowledge creation capability, and the rate of new product introduction in high-technology firms. Academy of Management Journal, 48: 346-357.

Stewart, T. A. 1997. Intellectual Capital: The New Wealth of Organizations, New York: Bantam Doubleday Dell publishing group, Inc,.

Subramaniam, M., & Youndt, M. A. 2005. The influence of intellectual capital on the types of innovative capabilities. Academy of Management Journal, 48:450-464.

Snell, S. A., & Dean, J. W.1992. Integrated manufacturing and human resources management: A human capital perspective. Academy of Management Journal, 35:467-504.

Smith, K. G.., Collins, C. J., & Clark, K. D. 2005. Existing knowledge, knowledge creation capability and the rate of new product introduction in high-technology firms. Academy of Management Journal, 48(2):346:357.

Tether, B. 2005. Do services innovate (differently)? Insights from the European innobarometer survey, Industry and Innovation, 12(2):153-184.

Todtling, F., Lehner, P., & Kaufmann, A. 2009. Do different types of innovation rely on specific kinds of knowledge interactions? Technovation, 29(1):59-71.

Tushman, M., & O'Reilly, C. 1997. Winning ThroughIinnovation. Boston: Harvard Business School Press.

Tushman, M.L. & Anderson, P. 1986. Technological Discontinuities and Organizational Environments. Administrative Science Quarterly, 31: 439-465.

Unger, J. M., Rauch, A., Frese, M., & Rosenbusch, N. 2011. Human capital and entrepreneurial success: A meta analytical review. Journal of Business Venturing, 26:341-358.

Von Tunzelmann N., & Acha, V. 2005. Innovation in "low tech" industries, in Fagerberg J. Mowery, D. C. and Nelson, R. R. (Eds.) The Oxford Handbook of Innovation, Oxford University Press, Oxford, 407-432.

Winne, S. D. & Sels, L. 2010. Interrelationships between human capital, HRM and innovation in Belgian start-ups aiming at an innovation strategy. The International Journal of Human Resource Management, 21(11):1863-1883.

Wang, H. K., Yen, Y. F., Tsai, C. F., & Lin, Y. C. 2008. An empirical research on the relationship between human capital and innovative capability: A study on Taiwan's commercial banks. Total Quality Management & Business Excellence, 19:1189-1205.

Wright, P. M., & McMahan, G. C. 2011. Exploring human capital: putting human back into strategic human resource management. Human Resource Management Journal, 21:93-104.

Wright, P. M., McCormick, B., Sherman, W. S., & McMahan, G.. C. 1999. The role of human resource practices in petro-chemical refinery performance. International Journal of Human Resource Management, 10(4):551-571.

Yin, R. K. 1994. Case Study Research: Design and Methods. 2^nd edition, London: Sage.

Youndt, M. A., & Snell, S. A. 2004. Human resource configurations, intellectual capital, and organizational performance. Journal of Managerial Issues, .XVI(3):337-360.

Zaltman, G.. R., Duncan, J., & Holberk. 1973. Innovations and Organizations, New York: John Wiley & Sons.

Zammuto, R., & O'connor E. 1992. Gaining advanced manufacturing technologies benefits: The role of organizational design and culture. Academy of Management Review, 17:701-728.

Zheng, W. 2010. A social capital perspective of innovation from individuals to nations: Where is empirical literature directing us? International Journal of Management Review, 12(2):151-183.

Navigate: Archives | Contents | Top of page