The effect of corporate investment in human capital on employee's performance: major Korean financial corporation examined.

Author:Bae, Seong-O.
Position:Report - Abstract
 
FREE EXCERPT

INTRODUCTION

The importance of investment in human capital by nations, businesses, and individuals for economic growth has been emphasized since Schultz (1961) and Becker (1975) invented the concept of human capital. Thus far, a number of studies were conducted on examining the impact of human resource development and education level on wage difference. In the meantime, Korean businesses have focused on education level and language ability when they hire new employees. After recruitment, they have made strenuous efforts to develop human capital by building employees' capacity through the use of education and training, OJT, degree programs, and support for certification acquisition.

Despite the above, the level of investment in education and training in Korean companies is still found to be significantly lower than that of foreign companies. In the case of large companies from the U.S, they invest on average 2-3% of their revenues in employees' training (American Society for Training and Development 2010). However, in the case of large corporations in Korea, the cost of employees' training accounts for only 1.34% of the entire labour cost (Korean Ministry of Labour 2009). In addition, according to the Korea Chamber of Commerce and Industry (2008), the participation rate of Korean adult workers in work-related training was the lowest among OECD members. Consequently, the productivity level of the Korean workforce is 40% of that of advanced countries such as, the U.S. and the U.K.

This clearly demonstrates that Korean companies, from a strategic perspective, have not fully comprehended the concept of human capital, and that there is insufficient research as to the effect of corporate investment in human capital of their employees. In other words, there is a substantial importance for research on the question as to whether or not companies' investment in human capital of their employees has actually had a positive effect on employees' performance, and on the issue as to whether or not work-related investment by companies in their employees is made strategically by considering job performance. The reason why there is lack of research on the strategic enhancement of human capital investment is, first, it is difficult for the academia that come up with academic theories to gain access to corporate data, especially in Korea. It is challenging for corporations to produce and record the results of fair evaluation on employees' performance. There are limits that have acted as stumbling blocks for practical research.

To overcome the problems and limitations of previous studies, this study focuses on the evaluation of the effectiveness of Korean companies' human capital investment from the perspective of employees' performance, and, for improvements in employees' performance, on how to invest strategically in human capital to make it an efficient investment in a more practical way. Through this, this study tries to identify the effect of important components of human capital by focusing on the level of school education, job training, job experience, language ability, and certification on employees' performance. Furthermore, this study tries to build on academic knowledge by providing suggestive points for strategic employee HRD (human resource development) that Korean companies will consider in the future.

LITERATURE REVIEW

The previous body of research defined the concept of human capital as different depending upon times and academic background, but essentially there are common grounds as to the definition of human capital; it is essentially internalized within humans, it enhances productivity, it can be acquired through investment in education and training. To sum up concepts discussed so far, human capital within a business is a productive component that is internalized in humans and is formed by investment in diverse factors including school education, job training, job experience, etc.

Thus, such common grounds mentioned above show that human capital would be defined as knowledge, skills, capacity, etc. owned by an employee, and that human capital could be measured by school education, job training, job experience, language ability and the possession of certification, etc. The relationship between the elements of human capital, and performance of individuals and an organisation is shown in the below diagram (see Figure 1).

Effect of human capital

Earlier studies on the impacts of human capital components on the performance of individuals and an organisation as follows. So far, the human capital theory of Becker and Schultz argues that school education contributes to the enhancement of employees' performance. This theory proved that there is a structural process where employees' performance enhancement leads to an increase in corporate productivity, which in turn results in an increase in compensation for individual employees. Hence, the higher the employees' education level, the greater wage they could earn (Martin & Torres 2000, Card 2000; Blundell et al. 2003; Chevalier et al. 2004). However, this theory is over-generalized, and is an approach that does not take into account, from the perspective of companies, employees' work or duties. In other words, the mismatch between employees' level of education and their current official duties can be regarded as a problem (Kim 2005). This phenomenon is called over-education, where this problem occurs when the education level of a worker exceeds that which is required for a job (Alba-Ramirez & Blazques 2003). Employees with "over-education," when compared with those without a similar level of education, have low job satisfaction and poor productivity (Verhaest & Omey 2004). They cause a higher turnover rate due to the discrepancy between their level of education and their duties (Alba-Ramirez & Blazques 2003).

Previous studies mainly focused on the effect of school education on human capital. Recently, however, there has been increasing efforts to accounting for the influence of training, experience, language ability, and certification on human capital. First, among earlier studies on the effect of job training on human capital, a number of studies generated considerable evidence linking job training and an increase in the productivity of employees and their company, and the company's profitability (Black & Lynch 1995, Bishop 1996, Battel 2000, Barrett & O'Connell 2001, Sels et al. 2006).

On the contrary, there are some empirical studies in Korea demonstrating the effect of job training did not produce the supporting results as mentioned above (Ryu 1995, Ryu 1997, Cheon 1998, Ryu 2003), while other researchers (Jung 2009, Lee 2006, Kim 2001) reported that education and training have a positive effect on productivity and profitability. Lee (2000) reported that even though the Korean Government adopted several policies including financial incentives to motivate private enterprises, specifically SMEs, to conduct training of their employees voluntarily, the results did not have a significant impact on SMEs; only the large corporations acquired any benefit from these polices. These findings suggest that in the case of Korean businesses, the results of empirical studies on the effect of job training on productivity and profitability are still inconsistent.

Many existing studies indicate that job experience has a positive effect on individual employees' performance (DuBois & McKee 1994, Van Scotter & Motowildlo 1996, Tesluk & Jacobs 1998). Additionally, job experience being regarded as the length of service is used as a criterion for personnel affairs such as, selection (Ash & Levine 1985), promotion (Olsen & Berger 1983), career management (Campion et al. 1994, McCauley et al. 1994), compensation (Medoff & Abraham 1981), and training (Ford et al. 1992).

Language ability is found to have a positive effect on the performance of a company (Kim, 2001). In the case of duties, where English skills are important, language ability is closely linked to the performance enhancement of employees and their company (Hagen 1990, Reeves 1990).

Research examining the influence of certification on wages provided some evidence that certifications do have a positive effect on wages (Lee & Kim 2001, Chang & Kim 2000). Conversely, more recent studies found that certifications do not have a positive effect on wage (Kim & Kim 2004). And, it is noted that certifications are acquired in order to make up for one's shortcomings, apart from education. Some previous studies showed that if employees have a high level of education, then they do not seek for a certification. Furthermore, acquiring a certificate, unlike the level of school education, could lead to a problem of adverse selection (Leland 1979, Wimmer & Chezum 2003). Given that previous findings are inconsistent in this issue, there is still a need to explore more how certifications affect employees' performance.

Contribution to knowledge

The current study intends to examine the impact of human capital elements on performance, since considerably little is known about this relationship in the existing body of literature. This attempt could contribute to close a gap existing in previous studies and moreover provide practical suggestions and recommendations from the perspective of companies' human capital and performance management.

THEORY

The concept of human capital was coined by Theodore Schultz, a Nobel Prize laureate in economics, as "skills, knowledge, and attributes similar to these that affect the enhancement of certain human capacity for productive activities" (Schultz 1961). However, the concept of human capital was expanded by a variety of methods and criteria and by a number of scholars for the past fifty years.

According to the traditional concept of human capital by Schultz, Thurow, and Becker, it can be utilized to its fullest due to intellectual and cognitive factors. Recently, however, the scope has been extended to...

To continue reading

FREE SIGN UP