Overcoming Human Capital Voids in Underdeveloped Countries

• DOI: http://doi.org/10.1002/gsj.1144
• Date: 01 February 2017
• Author: Alvaro Cuervo‐Cazurra,Stephanie L. Wang
• Published date: 01 February 2017

OVERCOMING HUMAN CAPITAL VOIDS

IN UNDERDEVELOPED COUNTRIES

STEPHANIE L. WANG

1

*and ALVARO CUERVO-CAZURRA

2

1

Department of Management and Entrepreneurship, Kelley School of

Business, Indiana University, Bloomington, Indiana, U.S.A.

2

International Business and Strategy Department, D’Amore–McKim School

of Business, Northeastern University, Boston, Massachusetts, U.S.A.

Research summary: In underdeveloped countries like those in Sub-Saharan Africa,

firms suffer from human capital voids (i.e., a prevalence of very low levels of skills

among individuals). These human capital voids have a negative effect on perfor-

mance improvement. However, managers can solve this negative effect by choosing

organizational upgrading mechanisms that are contextually appropriate. In particu-

lar, operating joint ventures with foreign partners compensate for this negative

effect, whereas internal research and development (R&D) amplifies this negative

effect. Managers should also monitor and push for the reduction of country-level

human capital voids because the influences of organizational upgrading mechan-

isms change. In countries with more developed human capital, joint ventures

have a weaker compensating effect, and R&D investments cease to amplify the neg-

ative effect.

Managerial summary: We analyze how firms in underdeveloped countries overcome

human capital voids—a prevalence of very low levels of skills among individuals—to

improve performance. Building on the knowledge-based view, we argue that managers

can strategically select organizationalupgrading mechanisms to compensate for the neg-

ative effect of the human capital deficiencies of employees on firm performance improve-

ment. We propose that external mechanisms (e.g., operating a joint venture with foreign

partners) are better than internal mechanisms (e.g., internal research and development)

because external mechanisms provide appropriate ready-made knowledgefor learning of

low-skilled labor, whereas internal mechanisms create additional learning inefficiencies.

However, these influences change incountries with more developed human capital: exter-

nal mechanisms have a lower compensating influence, whereas internal mechanisms

become less inefficient. Copyright © 2016 StrategicManagement Society.

‘The National Employment Office [of Gabon]

recently found that, of the jobs on offer, 54 percent

required technical skills. One of the biggest

shortages is qualified handlers of heavy machinery,

such as trucks and diggers, to carry out the govern-

ment’s ambitious infrastructure program. But

64 percent of those applying had no vocational

training’(Hollinger, 2012: 4).

‘[W]hile funding remains a key constraint to busi-

ness success, what most African start-ups want

from government is better education and training.

That is a key finding of research by mobile

Keywords: human capital voids; organizational upgrading

mechanisms; knowledge-based view; performance; Sub-

Saharan Africa

*Correspondence to: Stephanie L. Wang, Indiana University,

Kelley School of Business, Hodge Hall 3129, 1309 East 10th

St., Bloomington, IN 47405, U.S.A. E-mail: slwang@indiana.

edu.

Copyright © 2016 Strategic Management Society

Global Strategy Journal

Global Strategy Journal, 7:36–57 (2017)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1144

pollsters GeoPoll in a survey last month in the

Democratic Republic of Congo, Ghana, Kenya,

Nigeria, and South Africa. […]‘Few of Africa’s

entrepreneurs have been anywhere near a business

school,’says Mariéme Jamme, a Senegalese tech

entrepreneur and education activist. ‘Businesses are

not being profitable. They are feeling that they

need to learn more’’ (Klasa, 2015).

INTRODUCTION

As exemplified in the preceding quotes, under-

standing the effect of human capital voids—a prev-

alence of very low levels of skills among

individuals on firm performance improvement is

important. Highly qualified labor is critical for all

firms, and managers in all countries complain about

the challenge of finding employees with the right

skills (Manpower Group, 2015). However, firms in

underdeveloped countries, such as those in Sub-

Saharan Africa, quantitatively and qualitatively

encounter more challenging human capital voids

than those encountered by firms in advanced

economies or relatively developed emerging mar-

kets (Cooke, Wood, and Horwitz, 2015; Kamoche,

2002, 2011). The challenge in Sub-Saharan Africa

is not only to find employees with the right skills,

but also to find employees with any skills. Sub-

Saharan Africa has significantly low educational

levels, with only 22 percent of primary aged chil-

dren in the region in school, only 60 percent of

adults literate, and only a 5.2 average year of

schooling (United Nations Development Pro-

gramme, 2016). Sub-Saharan Africa is also home

to more than 50 percent of the global total of out-

of-school children, in which 50 percent of children

have never been enrolled (Africa-America Institute,

2015). In addition, Sub-Saharan Africa is the only

region wherein the growing rate of out-of-school

children is attributed to the gap between educa-

tional development and population increases

(World Bank, 2015a). Human capital voids at the

firm level are consequently manifested by low-

skilled employable labor, which not only has insuf-

ficiently satisfactory technical or vocational educa-

tion, but also insufficient basic education and even

literacy in many cases.

Existing research has indicated that overcoming

institutional voids, such as the absence or insuffi-

ciency of market-supporting institutions and provi-

ders of specialized inputs, is key to the survival

and success of underdeveloped countries (Khanna

and Palepu, 1997, 2005). However, current studies

in global strategy that analyze the effect of these

voids on the strategic decisions and performance of

firms have mostly investigated voids in political

and legal systems (e.g., Guillén and García-Canal,

2009; Holburn and Zelner, 2010; Mair and Marti,

2009), financial markets (e.g., Khanna and Palepu,

2000), and physical infrastructures (e.g., Loree and

Guisinger, 1995; Woodward and Rolfe, 1993),

devoting less attention to the effect of voids in the

human capital market on firm performance. This

lack of attention is surprising because human capi-

tal is extensively acknowledged by researchers as a

critical source in building and sustaining organiza-

tional and national competitive advantage (Barney,

1991; Hatch and Dyer, 2004; Hitt et al., 2001;

Pfeffer, 1994).

Thus, we fill this analytical gap by investigating

how firms in underdeveloped countries overcome

human capital voids to improve performance. We

obtain insights from the knowledge-based theory of

the firm (e.g., Eisenhardt and Santos, 2002; Grant,

1996a, b; Kogut and Zander, 1992) to discuss and

explain three ideas. First, we explain how firm-

level human capital voids, which we call employ-

ees’human capital deficiencies, negatively affect

firm performance improvement because insufficient

skills constrain the learning capabilities and incen-

tives of firms to upgrade knowledge and subse-

quently improve performance. This serves as the

baseline argument of the article.

Thereafter, we propose that managers can strate-

gically choose appropriate organizational upgrading

mechanisms to decrease the negative effect of the

human capital deficiencies of employees on perfor-

mance improvement. We analyze two types of

organizational upgrading mechanisms: one is exter-

nal, operating a joint venture with foreign partners

(Ariño and de la Torre, 1998; Sarkar, Aulakh, and

Madhok, 2009), and the other is internal, invest-

ments in internal research and development (R&D)

(Birkinshaw, Hamel, and Mol, 2008). We argue

that the external type reduces the negative effect of

the human capital deficiencies of employees on

firm performance improvement because it can pro-

vide appropriate ready-made knowledge for

unskilled employees to use in the operations of the

firm and improve its performance. By contrast, the

internal type amplifies the negative effect because

investments in internal R&D are not appropriately

developed and are implemented by unskilled

Overcoming Human Capital Voids 37

Copyright © 2016 Strategic Management Society Global Strategy Journal, 7:36–57 (2017)

DOI: 10.1002/gsj