Strategy, human capital investments, business‐domain capabilities, and performance: a study in the global software services industry
| Published date | 01 March 2017 |
| Date | 01 March 2017 |
| Author | Joydeep Chatterjee |
| DOI | http://doi.org/10.1002/smj.2505 |
Strategic Management Journal
Strat. Mgmt. J.,38: 588–608 (2017)
Published online EarlyView 12 April 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2505
Received 28 March 2013;Final revisionreceived 25 September 2015
STRATEGY, HUMAN CAPITAL INVESTMENTS,
BUSINESS-DOMAIN CAPABILITIES, AND
PERFORMANCE: A STUDY IN THE GLOBAL
SOFTWARE SERVICES INDUSTRY
JOYDEEP CHATTERJEE1,2*
1School of Business, University of Washington Bothell, Bothell, Washington, U.S.A.
2William and Phyllis Mack Institute for Innovation Management, The Wharton
School, University of Pennsylvania, Philadelphia, Pennsylvania, U.S.A.
Research summary: In knowledge-based industries, continuous human capital investments are
essential for rms to enhance capabilities and sustain competitive advantage. However, such
investments present a dilemma for rms, because human resources are mobile. Using detailed
project-level operational, nancial, and human capital data from a leading multinationalrm in
the global IT services industry, this study nds that deliberate investments in improving general
human capital can help rms develop superior capabilities and maintain high prots. This
paper identies two types of capabilities essential for success in this industry— technological
and business-domain capabilities— and provides empirical evidence justifying such investments.
Theoretical and practical implications of capability-seeking general human capital investments
are discussed.
Managerial summary: The primary managerial implication of this research is that
capability-seeking investments in developing general human capital through strategic learning
(training and internal certications) can enhance rm performance. Although investing in
general human capital is risky, the rm considered this a strategic necessity in order to thrive
in the fast paced IT services industry. By leveraging general technological skills in combination
with business-domain knowledge to address customer’s business problems rms can earn and
sustain higher prots. Our study also demonstrates how a developing-country rm responded to
strong competitive challenge from global rivals possessing superior capabilities by upgrading
the capabilities of its employees through internal development. In doing so the rm was able to
narrow the capability gap vis-à-vis its foreign peers and expand its businessglobally. Copyright
© 2016 John Wiley & Sons, Ltd.
INTRODUCTION
In today’s knowledge economy, rms need to nur-
ture their human capital continuously to gain and
Keywords: capability evolution; human capital; corporate
development; technology strategy; service outsourcing;
competition
*Correspondence to: Joydeep Chatterjee. UW1-117, Box 358533,
School of Business, University of Washington Bothell, 18115
Campus Way NE, Bothell, WA 98011-8246, U.S.A. E-mail:
Joydeepchatterjee@gmail.com
Copyright © 2016 John Wiley & Sons, Ltd.
sustain competitive advantage (Hatch and Dyer,
2004; Mayer, Somaya, and Williamson, 2012).
This is especially relevant for knowledge-based
industries such as information technology (IT),
in which productivity improvements related to
employee skills are major determinants of perfor-
mance (Bapna et al., 2013; Ethiraj et al., 2005;
Huckman, Staats, and Upton, 2009; Mayer et al.,
2012). In such industries, employees’ skills and
competence require continuous improvements
due to the fast pace of technological change (Lee,
Strategy, Human Capital Investments, and Performance 589
Trauth, and Farwell, 1995). The knowledge-based
view (Grant, 1996; Kogut and Zander, 1993) con-
ceptualizes a rm as a vehicle for the integration
and application of knowledge, which resides within
individuals. Becker (1962, 2003) and Mincer
(1962) suggest that investment in human capital
through employee training improves its quality and
has major productivity implications. Consequently,
understanding the performance implications of
capability development through deliberate human
capital investments has signicant implications for
both theory and practice (Lepak and Snell, 1999).
Human capital is not owned or fully controlled
by the rm, because employees are free to carry
their knowledge to other employers (rival rms).
Therefore, this deliberate investment in human cap-
ital to enhance employees’ capabilities poses a
classic problem for rms’ managers: their invest-
ments might turn into losses as rival rms attract
top talent away by providing a better total com-
pensation (Coff, 1997, 1999; Coff and Kryscynski,
2011). Becker’s (1964) seminal work emphasizes
the strategic importance of rm-specic human cap-
ital over general human capital. Building on that,
Campbell, Coff, and Kryscynski (2012) forward a
theory explaining that rm-specic human capital
can also be valuable to other rms, since it reects
an employee’s willingness and ability to invest in
learning new skills. Similarly,they suggest that gen-
eral human capital may be valuable to the focal
rm if the labor market underestimates the true
worth of employees’ skills and if the focal rm is
able to exploit those skills better than rivals and
design inimitable compensation packages catering
to employees’ idiosyncratic preferences in order to
retain them.
Motivated by this body of work, we undertake
an empirical study of the software services industry
in which we examine the performance implications
of a rm’s strategic learning activities (Kuwada,
1998) through investments in two types of general
human capital: technological and industry domain.1
Specically, we seek to show how technological
and industry- or business-domain knowledge can
enable the development of superior capabilities with
attendant benets for performance. In doing so, we
1While technological knowledge and skills can be used in a
variety of rms in multiple industries, industry-domain knowl-
edge and skills can be used by rival rms in the same industry.
Thus, both types of knowledge and skills are general and not rm
specic— technological knowledge being more general in rela-
tion to industry-domain knowledge
provide empirical evidence supporting Campbell
et al.’s (2012) theory that investments in general
human capital can be benecial for rms.
First, we investigate how general human capi-
tal investments in developing two types of capa-
bilities (technological and business domain) can
enable a rm to realize its strategic objectives in
the context of software services outsourcing and
expand our understanding of the performance impli-
cations of investing in different types of capabili-
ties. A recent paper by Bapna et al. (2013) tested
the impact of general training on employee perfor-
mance. However, their study did not include the
effect of mandatory certication examinations on
project team performance, nor did they link those
investments with capability development and cor-
porate performance.
Second, there is dearth of prior research that
establishes the link between employer-provided
training and internal certications and corporate
performance, which this study attempts to accom-
plish. This is an interesting avenue of research,
because it promises to unravel the conditions under
which investments in general human capital can
benet rms. Human capital theory, developed by
Becker (1964) and colleagues, recommends that
rms invest in rm-specic human capital and sug-
gests that investments in general human capital are
inherently risky. Our ndings highlight the contri-
bution of general knowledge to rm performance,
which is an emerging research program in strategy.
Third, by employing detailed large-sample
project-level data from a leading software services
rm and using human capital variables to measure
capabilities, this paper renes Ethiraj et al.’s (2005)
attempts to measure project management capabil-
ities using operational metrics.2Human capital
measures are closer (than rm-level measures such
as R&D and marketing spending) to the actual
phenomenon of individual capability development,
which aggregates up to project- and rm-level
capabilities.
Finally, our study also provides a nonambiguous
measure of organizational capabilities and empiri-
cally tests the effect of different types of human cap-
ital on disaggregated performance outcomes at the
operational level within the rm, thereby address-
ing some of the concerns raised by Ray, Barney,
2Ethiraj et al. (2005) measured project management capabilities
using effort overrun, schedule slippage, and in-process defects
Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 588–608 (2017)
DOI: 10.1002/smj
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