Exploring the impact of various typologies of human capital on firms' productivity
| Published date | 03 May 2020 |
| DOI | https://doi.org/10.1108/WJEMSD-12-2019-0095 |
| Date | 03 May 2020 |
| Pages | 231-247 |
| Author | Mohammed Seid Hussen |
| Subject Matter | Strategy,Business ethics,Sustainability |
Exploring the impact of various
typologies of human capital on
firms’productivity
Mohammed Seid Hussen
Department of Economics, Marmara University,
Istanbul, Turkey
Abstract
Purpose –Although the impact of human capital on productivity has long been discussed in prior studies,
empirical evidence for African firms remains limited. The existing few studies have focussed on one type of
human capital in isolation and failed to explore the distinct role of different types of human capital on
productivity. The aim of this study is to examine the extent to which various typologies of human capital –
schooling, on-the-job training (OJT) and slack time –, both in isolation and as a combination, contribute to the
productivity of African firms.
Design/methodology/approach–To this end, a cross-sectional firm-level data set from 13 African countries
was used. To unravel the casual relationship, propensity score matching (PSM) and multinomial endogenous
switching treatment regression (MESTR) techniques were employed.
Findings –Results indicate that all typologies of human capital –schooling, slack time and OJT –have a
significant and positive impact on firms’productivity. The findings of the study further point out that the
highest payoff, in terms of increased productivity, is achieved when various typologies of human capital are
used in combination, rather than in isolation, in the production process.
Practical implications –The policy implications are that productivity of African firms can be improved by
increasing the general level of schooling; encouraging firm-sponsored OJT; and giving employees time to
develop new ideas.
Originality/value –The present study provides important insights into the distinct role of different types of
human capital on productivity. In addition, it provides empirical evidence for a region where empirical evidence
is scant.
Keywords Human capital, Enterprise survey, PSM, MESTR, Africa
Paper type Research paper
I. Introduction
Although one of the richest continents in the world in terms of natural resources, Africa
constitutes the largest percentage of poor in the world. It is the only region where the overall
number of people living in poverty has grown in the last two decades. In 1990, more than 30%
of the world population was poor, and nearly half of them lived in East Asia while 15% lived
in Africa. By 2015, not only that global poverty declined to one-tenth but also the
geographical composition was reversed: while Africa accounts for half of the global poor,
East Asia constitutes only 12%. Accordingly, people living in extreme poverty in Africa grew
from 278m in 1990 to 413m in 2015 (World Bank, 2016). The worst part is that poverty
reduction is showing few signs of improvement in most African countries, indicating most
countries are off track to achieving the first goal of UN sustainable development goals. The
question of how to lift these people out of poverty and change their life has been one of the
main conundrums of our time.
Both theoretical and empirical studies in development economics suggest that the ability
of a country/region to improve the living standard of its people is mainly determined by its
Various
typologies of
human capital
231
JEL Classification —J24, D22, D24
The author is grateful for the helpful comments and suggestions provided by anonymous referees
and editor of the journal.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/2042-5961.htm
Received 8 December 2019
Revised 28 March 2020
Accepted 4 April 2020
World Journal of
Entrepreneurship, Management
and Sustainable Development
Vol. 16 No. 3, 2020
pp. 231-247
© Emerald Publishing Limited
2042-5961
DOI10.1108/WJEMSD-12-2019-0095
ability to enhance the productive capacity of firms (Cosar, 2011;Hall, 2011;UNCTAD, 2006).
Higher firm-level productivity is expected to contribute to the poverty reduction effort of a
country in at least three ways. First, as firms expand their production activities, because of
higher productivity, new job opportunities will be created in the economy (Islam, 2004). [1]
Second, the price of goods and services, especially food prices, is also expected to fall, thereby,
increasing the real wage of workers. Third, as their business expands, firms pay more taxes
to the government which can be used to finance public services such as schools, health
facilities and infrastructure projects that directly affect the well-being of citizens (UNCTAD,
2006, pp. 77–80).
In light of these, there is a renewed emphasis on how African countries can improve the
productive capacity of their firms to raise the quality of their citizens. The literature identified
several mechanisms through which firms’productivity can be enhanced including, but not
limited to, innovation, institutional reform and human capital. From this list, human capital is
considered as a key element due to the fact that not only it increases productivity but it also
ensures the long-term competitiveness of firms and improves their capacity to adopt
technologies already existed elsewhere (Danquah and Ouattara, 2014;Nelson and Phelps,
1966;Papageorgiou, 2003;Romer, 1990). This is due to the fact that human capital helps
people to perceive, evaluate and implement new production techniques and inputs.
A considerable amount of empirical literature, both at the firm level and the economy as a
whole, has also indicated that the level of human capital explains a significant part of the
variation in productivity (Backman, 2014;Ballot et al., 2001;Black and Lynch, 1996;
Engelbrecht, 1997). However, the findings of these studies are generally based on only one
aspect of human capital, mostly formal schooling, without considering other aspects and a
sample data of a single country (Colombo and Stanca, 2014).
Human capital is defined as the stock of knowledge, skills and social and personal
qualities embodied in individuals that enable the creation of personal, social and economic
well-being (OECD, 2001, p. 18). From this definition, it becomes clear that human capital
encompasses a wider set of components and schooling (education in general) is only one of its
components. Since various typologies of human capital accomplish distinct tasks, as Cosar
(2011) argued, each typology of human capital could have different impacts on productivity
(Tan et al., 2016). Therefore, examining the effect of each typologies of human capital on
productivity provides a more comprehensive picture of the relationship. In addition, whether
various typologies of human capital are complementary or alternatives from which firms
should choose in their quest to increase productivity has not been examined empirically.
It is against this backdrop that the present study examines the extent to which various
typologies of human capital contribute to firms’productivity. Following van Uden et al.
(2017), three sets of human capital typologies are identified: schooling, on-the-job training
(OJT) and employee slack time [2]. While schooling reveals the firm’s endowment of stock of
human capital, OJT and slack time represent an investment by the firm to increase the stock
of human capital. In this study, the impact of these typologies of human capital –both in
isolation and as a combination –on firm-level productivity is examined using propensity
score matching (PSM) and multinomial endogenous switching treatment regression
(MESTR) techniques that control selection bias and potential endogeneity on a sample of
African firms. Our empirical investigation, based on PSM technique, indicates that all
typologies of human capital have a significant and positive impact on firms’productivity.
More importantly, our further empirical investigation based on MESTR indicates that these
typologies of human capital are not alternatives from which a firm should choose but rather
complementary to each other. Thus, firm productivity could be enhanced to a greater degree
by combining various typologies of human capital in the production process.
The present paper contributes to the existing literature in two ways. First, unlike most
previous studies, the present study provides important insights into the distinct role of
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