The virtuous circle of human resource investments: A precrisis and postcrisis analysis

• Author: Beatriz García‐Juan,Juan‐Carlos Bou‐Llusar,Vicente Roca‐Puig,Inmaculada Beltrán‐Martín
• Published date: 01 April 2019
• Date: 01 April 2019
• DOI: http://doi.org/10.1111/1748-8583.12213

ORIGINAL ARTICLE

The virtuous circle of human resource

investments: A precrisis and postcrisis analysis

Vicente Roca‐Puig |Juan‐Carlos Bou‐Llusar |

Inmaculada Beltrán‐Martín |Beatriz García‐Juan

Department of Business Administration and

Marketing, Universitat Jaume I, Castellón,

Spain

Correspondence

Vicente Roca‐Puig, Associate professor,

Department of Business Administration and

Marketing, Universitat Jaume I. Avd. Sos

Baynat s/n, Castellón 12071, Spain.

Email: roca@emp.uji.es

Funding information

Spanish Ministry of Science and Innovation,

Grant/Award Number: ECO2015‐66671‐P

Abstract

We propose a dynamic model of positive feedback between

human resource (HR) investments and companies' economic

performance. The model assumes that HR investment

increases profitability through labor productivity and, in

turn, profitability improves HR investment through organi-

zational slack. Based on data from a sample of 2,497

industrial companies over a 7‐year period (2005–2011), lon-

gitudinal analysis corroborates the existence of a two‐way

relationship between HR investment and profitability over

time. However, the emergence of an economic crisis

weakens this feedback, identifying the effect of organiza-

tional slack on HR investment as the weakest causal chain

link. In a postcrisis period, HR investment is not such a high

priority for managers.

KEYWORDS

economic crisis, longitudinal models, profitability, strategic human

resource management

1|INTRODUCTION

According to Huselid and Becker (2011), one of the most challenging tasks in the field of strategic human resource

management (SHRM) nowadays is the development and assessment of an overarching causal model that relates

HR investment to economic performance (i.e., profitability). In this literature, some researchers (e.g., Becker &

Huselid, 2006; Boselie, Dietz, & Boon, 2005; Combs, Liu, Hall, & Ketchen, 2006; Huselid & Becker, 2011) have called

for simultaneous exploration of both the “direct causality hypothesis”(firms invest in their human resources with the

aim of improving their future economic performance) and the “reverse causality hypothesis”(companies invest in

people once they have achieved high economic performance). A circular or two‐way relationship is suggested in

which HR investment and profitability are, in turn, cause and effect at different times. Therefore, a virtuous circle

Received: 6 June 2017 Revised: 31 July 2018 Accepted: 13 August 2018

DOI: 10.1111/1748-8583.12213

Hum Resour Manag J. 2019;29:181–198. © 2018 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/hrmj 181

exists between these two concepts, because improved levels of HR investment enhance economic performance, and

greater economic performance increases companies' HR investment.

Unfortunately, with the exception of the recent longitudinal study by Shin and Konrad (2017), the empirical evi-

dence for the extent of this virtuous circle is still scant. Using the “Workplace and Employee Survey”data, these

researchers examine 2,228 Canadian companies in three moments of time and show that organizational performance

improvements lead to ongoing HR investment, which in turn generates performance gains, thus configuring a positive

feedback loop between these two variables. Shin and Konrad (2017) suggest several key areas that could be

addressed in future studies to further explore this virtuous circle, namely, taking into account mediator variables

and examining whether the proposed causal hypotheses are altered by unusual social or economic events. This paper

is a response to their call.

The first objective of our research is to examine whether there is a virtuous circle between firm profitability and

HR investment by considering two mediating variables (labor productivity and organizational slack) in this two‐way

relationship. Figure 1 shows how HR investment leads to an increase in labor productivity, which in turn encourages

growth in profitability; for its part, this higher profitability generates an increase in organizational slack, which will

result in increased HR investment. This economic process recurs cyclically over time. Considering mediating variables

allows more thorough theoretical arguments to be articulated to explain in detail the nature of the process by which

profitability and HR investment are related (Huselid, 1995; Jiang, Lepak, Hu, & Baer, 2012). To this end, we develop

two “mediating”causation hypotheses, by integrating labor productivity and organizational slack as intervening var-

iables in this two‐way relationship. In particular, by introducing organizational slack, we are able to discern whether

the indirect effect of economic performance on HR investments depends on the higher financial autonomy that this

performance provides or, rather, whether it is explained by the managers' willingness to invest that financial

autonomy in the workforce as a future strategic option.

The second objective we address is whether an economic crisis might alter this virtuous circle. To this end, we

conduct a comparative analysis of a period of economic growth and a period of decline. A favorable or adverse

economic context may moderate the relationship between HR investment and economic performance (d'Arcimoles,

1997; Kim & Ployhart, 2014; Lado & Wilson, 1994). The beginning of the economic crisis in 2008 triggered a pro-

nounced deterioration in economic activity in Europe, with the resulting notable increase in the unemployment rate

and a reduction in the levels of firm profitability (Kim & Ployhart, 2014). This state of affairs was particularly serious in

Spain. According to the Spanish Statistical Office, the average rate of unemployment for the period 2005–2007 was

8.51%, whereas during the period 2008–2011, it rose to 18.78%. Similarly, firm profitability across Spanish industries

stood at about 7.5% in the period 2005–2007 but fell dramatically in 2008 to values around 4% in the 2008–2011

period (Menéndez, Gorris, & Dejuán, 2017). Therefore, Spain is a suitable context to analyze the economic crisis as a

contingent factor of the two‐way relationship between HR investment and profitability.

FIGURE 1 Theoretical model

182 ROCA‐PUIG ET AL.