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THE FIRM’S ROLE IN ENHANCING HUMAN CAPITAL SKILLS

PART 3 SKILL ACQUISITION MODES: FORMAL AND NON-FORMAL EDUCATION EDUCATION

2.7 THE FIRM’S ROLE IN ENHANCING HUMAN CAPITAL SKILLS

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knowledge contained in manuals and procedures, while tacit knowledge can only be learned through experience and indirect communication through metaphor and analogy, and this knowledge is embedded in human experience. Nonaka and Takeuchi believe that the secret of Japanese firms’ success, is their focus on tacit knowledge (based on case studies of business organizations such as Honda, Canon, Matsushita, NEC, Sharp and Koa) (1995).

At the end of their book, these two writers outline the fundamental factors needed by firms in order to create and support knowledge development and dissemination. Among the factors are: firms should have knowledge vision, develop a workforce who possess high knowledge levels, build a high density interaction field at the front line, take responsibility for the new product development process, adopt a middle-up-down management, switch to a ‘hypertext organization’12 and lastly have a global knowledge network.

Rastogi gives a clear description of the key role of human capital in a firm in his work

12 A hypertext organization is a new organizational structure suggested by Nonaka and Takeuchi (1995) in order to successfully become a knowledge creating organization. According to Nonaka and Takeuchi (1995) a hypertext organization is “an organizational design that provides a structural base for organizational knowledge creation. The central requirement of this design is that it provides a knowledge-creating company with the strategic ability to acquire, create, exploit, and accumulate new knowledge continuously and repeatedly in a cyclical process. The goal is an organizational structure that views bureaucracy and the task force as complementary rather than mutually exclusive” (p166). The authors use computer science as metaphor for a hypertext organization, “Texts on a computer screen may be paragraphs, sentences, charts, or graphics. Under a hypertext, each text is usually stored separately in a different file. When a text is needed, an operator can key command that pulls out all the texts on the computer screen at one time in a connected and logical way. A hypertext provides an operator with access to multiple layers…Thus, in term of knowledge, each layer is really a different context. Like an actual hypertext document, hypertext organization is made up of interconnected layer or contexts: the business system, the project team, and the knowledge base…” (p167). Nonaka and Takeuchi added that “a hypertext organization has the organizational capability to convert knowledge from outside the organization. A hypertext organization is an open system that also features continuous and dynamic knowledge interaction with consumers and companies outside the organization” (p171). For further reading on this topic, please see Nonaka and Takeuchi (1995).

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entitled Sustaining Enterprise Competitiveness- Is Human Capital the Answer? (2000):13

Human capital of a firm may be viewed as consisting of highly skilled, creative, motivated, collaborative and knowledgeable people who understand the dynamic business environmental context, and the competitive logic of their enterprise and the critical requirements thereof. They understand and realize their own broad role and responsibility for the vision, values and competitive viability of their organization. For this purpose, they continually learn, develop, share, integrate and use their knowledge both individually and collaboratively to cultivate enterprise competencies/capabilities, innovation, expertise and speedy business processes in a proactive manner. They are focussed on the success of their enterprise in facing the challenges of both today and tomorrow (p196).

Based on Rastogi’s explanation, the success of a firm in sustaining and maintaining its productivity depends on the skills, abilities, commitment and cooperation offered by workers towards understanding the firm’s goal and mission. On the other hand, Lall (1998) has divided the importance of human capital to the firm into two categories:

skills development and technology capability formation. Skills development refers to the process of upgrading education and training that are relevant to the industrial needs.

These activities can take place at formal and non-formal educational institutions or even at the workplace. Meanwhile, technology capability formation is concerned with the development of skills in individual and institutional, as well as knowledge obtained from the technological effort. He added that in firms, skilled human capital is needed in every

13 For Rastogi (2000), the concept of human capital is beyond the conventional concept of human resources. By using rowing a boat analogy, he explains the different between those two concepts, “suppose a boat is being rowed by a team in a large river. The boat is going fast, the persons are rowing the boat skilfully with practiced economy effort, and their movements are well coordinated. But what happens if the boat is heading in a wrong direction? It would certainly fail to reach its destination which is the sole purpose of the boat’s journey. Skills, training, cooperation, and coordination of the rowers’ efforts would be of no avail if they can not identify their correct direction; change their course speedily towards the right direction; learn from past and present errors so as to avoid them; understand fully the nature, purpose, and circumstances of their journey; and are skilful in monitoring and interpreting the signals indicating their course and direction. The focus of the conventional concept of human resource in this context would be primarily limited to the development and coordination of the rowers’ rowing skills. The concept of human capital, on the other hand, would extend further to the cultivation of boatmen’s larger capabilities. The latter would be intended to ensure that they understand and reach the journey’s destination in the face of expected and even unforseen problems and difficulties (Ulrich, 1998)” (p195).

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process of production. Having human capital with appropriate skills is essential from the operational level, to procurement, and even marketing. For Lall (1998), skilled human capital is not only the foundation of productivity; in fact, it is the element that matures the industry. Indeed, in his study, Lall (1998) has grouped the level of education and skills into several phases depending on the type of task (see Table 2.6). In the division, as tasks becomes increasingly complex, higher quality of human capital is demanded.

Table 2.6

Human Capital and Industrial Development Level Level of Industrial Development Skills Low levels, mainly simple assembly and

processing activities for domestic market

Literacy, simple technical and managerial training. Practically no in-firm training except non-formal on-job learning

Intermediate level, with export-oriented activities in light industry, some local linkages in low-tech products

Good secondary and technical schooling and management financial training. Low base of engineering and scientific skills. In-house training mainly by export-oriented enterprises. Small Medium Enterprises (SMEs) have low skill levels

Deep industrial structure but mainly inward-oriented; technological lags in many activities

Broad but often low quality schooling, vocational and industrial training. Broad engineering base. In-house training lagging.

Training institutes de-linked from industry.

Management and marketing skills weak.

SMEs have some modern skills Advanced and deep industrial structure,

with many world-class activities, own design and technology base

Excellent quality schooling and industrial training. High levels of university trained managers, engineers and scientists. Training institutes responsive to industrial needs.

Large investments in formal and non-formal in-firm training. SMEs have high skill levels and competence

Source: Lall (1998)

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According to Hatch and Dyer (2004), in the firms’ context, human capital is the resource that exists in the form of knowledge and skills that are embedded in humans. It is the competitive advantage that determines the firms’ success in the global market.

Principally, the educational level is the influence factor to human capital performance and productivity (Asefa & Huang, 1994 and Blundell, Dearden, Meghir & Sianesi 1999). Research done by Blundell, Dearden, Meghir and Sianesi (1999) has shown that the level of education and skills possessed by the human capital are the two factors that influence product quality and the production processes speed. This is because it is easy for workers with high knowledge to adapt new technology and they could do a task efficiently. Blundell et al. (1999) also found that the level of formal education received is one of the determinant factors in human capital future capability and their interest in knowledge.

According to Hatch and Dyer (2004), in the firms’ context, human capital is the resource that exists in the form of knowledge and skills that are embedded in humans. It is the competitive advantage that determines the firms’ success in the global market.

Principally, the educational level is the influence factor to human capital performance and productivity (Asefa & Huang, 1994 and Blundell, Dearden, Meghir & Sianesi 1999). Research done by Blundell, Dearden, Meghir and Sianesi (1999) has shown that the level of education and skills possessed by the human capital are the two factors that influence product quality and the production processes speed. This is because it is easy for workers with high knowledge to adapt new technology and they could do a task efficiently. Blundell et al. (1999) also found that the level of formal education received is

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one of the determinant factors in human capital future capability and their interest in knowledge.

Carmeli (2004) has stated that there are two theories used in explaining the significance of human capital in a firm’s performance: (1) resource based theory and (2) strategic human resources management. The resource based theory emphasizes the strategy adopted by firms in managing their resources and capabilities. Resources in this theory include a firm’s tangible and intangible assets. In contrast, strategic human resource management theory focuses solely on human capital management and policies as a competitive source for firms (Carmeli, 2004). Generally, both theories emphasize the practices used in developing the human capital as the important factor in determining the effectiveness of the firms’ competitive advantage.

The significance of skilled human capital in firms’ development has long been discussed. Penrose in her work entitled The Theory of the Growth of the Firm (1959, cited in Kor & Mahoney, 2004, p184-185) has emphasized three factors shaping the relationship between a firm’s performance and resources. Firstly, a firm’s success does not depend on the amount of resources it possesses, instead it depends on the efficient management of them. Secondly, Penrose also highlighted the relationship between firms’

resources and innovative activity. Knowledge and experiences are the two main contributors to productivity and innovation in a firm. And finally, she focused on the availability of diverse composition of skilled workers as the key driver of a firm’s growth. As Penrose states, “it is the heterogeneity of the productive services available or

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potentially available from its resources that gives each firm its unique character” (p75).

Knowledge and skills possessed by the heterogeneity of workers are significant to determine the firms’ development path. Competent use of these assets would increase the firms’ competitive advantage (Kor & Mahoney, 2004).

More recently several other scholars have extended the discussion on human factors as valuable asset to a firm. This includes Hall (1992), Huselid (1995), Teixiera (2002), Nielsen (2007), Hanel (2008), Lee and Nathan (2010) and Parrotta, Pozzoli and Pytlikova (2010). Huselid (1995), for example, focussed on knowledge, experience and skills as the factors that have great influence on the performance of human capital and also on a firm’s outcomes. For Teixeira (2002), human capital performance can be explained in three different perspectives; economic performance, technological growth and long term survival. Nielsen (2007), meanwhile, has cited workers with high qualifications as the factor that stimulates innovation in firms. Nielsen found that highly educated workers with other skills qualifications contributed towards the firms’

creativity and innovation.

Recently the subject on culture and ethnic composition at workplace or in a country in relation to human capital formation is becoming more significant. For Lee and Nathan (2010) and Parrotta, Pozzoli and Pytlikova (2010), employing workers from diverse skills and ethnicity is beneficial to firms. They found that workers from different educational and cultural backgrounds promote technological process and productivity in firms as it gives rise to openness, creativity, learning, problem solving and knowledge

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development. The work of these scholars is very relevant to Lundvall’s interactive learning. Lundvall (1992) emphasizes innovation as an interactive process between different elements in the system that involves learning activity. Learning by interacting is important to understand different characters in the innovation system. Learning meanwhile is a “socially embedded process which cannot be understood without taking into consideration its institutional and culture context” (Lundvall, 1992, p1).

In addition, the pressure from the environment such as changes in technology use, market demands, different work specifications, management restructuring and the country’s political and economic situation requires workers to have a high level of knowledge which is continuously updated. As argued by Xiao and Tsang (2001):

…rapid changes that have occurred in workplace, including massive inputs of new production technology, production technology, production of new products to suit market needs, vocational displacement, increased job requirements, and management reforms, have resulted in gaps in work competence. Such changes have relegated knowledge, skills and attitude/value gained in previous learning and work experiences to obsolescence. As the competence gap increases, the firms and their workers look for ways to remedy the situation (cited in Xiao &

Lo, 2003, p413).

Because of these factors, firms have to constantly upgrade their human capital skills and knowledge. Besides hiring educated workers, various strategies have been adopted by firms to develop and improve their human skills quality.14

14 Baldwin and Johnson (1995) note that “while there are many factors that influence training, the preceding analysis highlights the finding that training tends to occur as part of a cohesive company strategy….Consequently, human capital that is developed at the firm level strongly complements technological capability. Second, training also occurs where firms recognize that labour skills are important and where they focus on devising innovative compensation packages. Third, firms that stress quality and total quality management are more likely to implement a training program” (32).

Firms usually will invest in training and other sources of knowledge enhancement activities to add value to their

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workers’ proficiency (Xiao & Tsang, 2001, Xiao & Lo, 2003 and Bauernschuster, Falck

& Heblich 2008). In fact, Xiao and Tsang (1999) find that as a way to increase workers competency, firms are not only willing to provide in-house training but also to allocate substantial amount of funds for their workers to attend external training programs.

This has been proven through the research by Xiao and Lo (2003) on firms in Shenzhen and Shanghai where various training and educational programs were taken in order to improve their workers’ skills and to deal with the changing situation. At the end of their work, Xiao and Lo (2003) suggested that for a country which is developing rapidly, it is preferable to place less focus on formal education. Maintaining and improving human capital in the work place should be given greater emphasis. Bauernschuster, Falck and Heblich (2008) reiterated that skilled workers will contribute to the invention of a new technology and at the same time make the firms be a technological frontier. Indeed, this has been the success factor for Japanese firms. According to Nonaka and Takeuchi (1995), the strength of Japanese firms is they emphasize on learning through hands on experience, and trial and error to enhance their human capital skills. For that reason, Nonaka and Takeuchi consider a Japanese firm as not just a workplace but also a learning organization where workers can gain knowledge and experience.