The Organizational Context and Performance Implications of Human Capital Investment Variability

• Author: D. Harold Doty,Mousumi Bhattacharya,Thomas Garavan
• Date: 01 March 2014
• DOI: http://doi.org/10.1002/hrdq.21182
• Published date: 01 March 2014

The Organizational Context

and Performance Implications

of Human Capital Investment

Variability

Mousumi Bhattacharya, D. Harold Doty, Thomas Garavan

In contrast to the traditional focus of HRD on human capital accumulations

we examine the issue of variability in human capital investment. Drawing

on Real Options Theory, we theorize that larger fi rms and fi rms that are

faced with greater organizational risk will create a greater number of

options in terms of human capital investment decisions resulting over time in

greater variability in labor costs. Based on a large sample of U.S. fi rms and

longitudinal data, we found that labor cost variability was positively related

to organizational risk and fi rm size, but negatively related to capital

intensity. These relationships were signifi cant even after controlling for

employment variability. Overall, we found that in the long term, fi rms with

greater variability in labor costs achieved better performance. Implications

for strategic HRD theory and practice are discussed.

Key Words: human capital investment, variability, organizational risk, fi rm

size, capital intensity

The notion that the sustained competitive advantage of organizations can be

achieved through the accumulation of high-quality human resources is a cen-

tral foundation of HRD (Crook, Todd, Combs, Woehr, & Ketchen, 2011;

Holton & Yamkovenko, 2008; Kuchinke, 2003). The emergence of strategic

HRD (Garavan, 2007) has led to a tighter integration of the fi elds of stra-

tegic management and HRD primarily through the theoretical perspective of

the resource-based view (RBV). An important consequence of the emergence

of the resource-based view within the strategy literature concerns the shift in

focus toward viewing human resources as potentially valuable, rare, and non-

substitutable (Shaw, Park, & Kim, 2013).

HUMAN RESOURCE DEVELOPMENT QUARTERLY, vol. 25, no. 1, Spring 2014 © Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com) • DOI: 10.1002/hrdq.21182 87

88 Bhattacharya, Doty, Garavan

HUMAN RESOURCE DEVELOPMENT QUARTERLY • DOI: 10.1002/hrdq

A central premise of strategic HRD is that investment in HRD practices

such as training, development, leadership development, talent development,

and organizational learning processes will increase the value, rareness, non-

substitutability, and inimitability of an organization’s human resources

(Chami-Malaeb & Garavan, 2013). While the literature on human capital

investments is highly persuasive in that it shows a substantial and positive

impact on organizational performance (Crook et al., 2011; Delery & Shaw,

2001; Hitt, Bierman, Shimizu, & Kochhar, 2001), it is signifi cantly defi cient

in demonstrating the effects of variability in human capital investments. The

HRD literature offers limited theoretical and empirical insights showing how

variability in investment in human capital impacts organisational performance

and the contextual antecedent factors that explain which fi rms will demon-

strate greater variability in human capital investment. Human capital invest-

ments are expenses that a firm incurs to attract, develop, and motivate

employees with expectations of future returns (Bhattacharya & Wright, 2005;

Blundell, Dearden, Meghir, & Sianesi, 1999). Wages and benefi ts paid to

employees attract, retain, and motivate employees, while training and other

development activities enhance human capital and facilitate its retention.

Given the strategic importance of human capital, decisions about invest-

ments in human capital need to be conceptualized in terms similar to other

strategic decisions that organizations are required to make to achieve perfor-

mance goals. Human capital investment decisions that impact the future per-

formance of the fi rm typically involve signifi cant resource commitments, and

therefore must incorporate mechanisms to evaluate and manage returns

and business risk. For example, training and development programs typically

entail signifi cant start-up and operational costs; however, they can create

workforce fl exibility so that fi rms are better able to navigate business cycles

and economic downturns (Bhattacharya & Wright, 2005; Garavan, 2012).

We argue that it is important to rectify the current imbalance in the HRD

literature and focus on variability in human capital investment. We suggest

that a focus on variability of investment in human capital is important for two

reasons: First, reductions in labor both deplete an organization’s human capi-

tal but also provide competitors with an opportunity to acquire highly skilled

labor and tacit knowledge without having to incur the training costs associ-

ated with such investments. Second, variability in human capital investment

provides signifi cant decision-making dilemmas for organizations in that when

employees have to be recruited in the future, it results in signifi cant costs as

well as costs associated with the time it takes for new employees to adjust to

the new environment (Lepak & Shaw, 2008). Therefore, it is important to bet-

ter understand the contextual factors that explain human capital investment

variability as well as how this variability relates to organizational

performance.

We utilize Real Options Theory (Bowman & Hurry, 1993; Sanchez, 2003)

to understand the contextual factors that explain variability of investment in