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date: 22 August 2019

Introduction

Abstract and Keywords

This handbook aims to show the importance of human capital (HC) for contemporary organizations: how it contributes to theories of the firm, how it affects organizational performance, and its role in the future economy. It identifies HC as the linchpin of social and other forms of capital. The article also shows how applying the notion of HC to organizations requires consideration of how human and other intangible intellectual forms of capital differ from more traditional forms, implying the need for a theory of the firm that accommodates a concept of dynamic, heterogeneous HC. It focuses on five aspects of HC: its conceptual underpinnings; its relevance to theories of the firm; its implications for organizational effectiveness; its interdependencies with other resources; and its role in the future economy.

Keywords: human capital, firm, organizational performance, economy, organizational effectiveness

Concept and Rationale: Why a Handbook of Human Capital?

This Handbook aims to show the importance of human capital for contemporary organizations: how it contributes to theories of the firm, how it affects organizational performance, and its role in the future economy. We identify human capital as the linchpin of social and other forms of capital. Central to our thesis is the systemic nature of human capital in organizations: how human capital interacts with and complements other organizational resources. We also show how applying the notion of human capital to organizations requires us to consider how human and other intangible intellectual forms of capital differ from more traditional forms, implying the need for a theory of the firm that accommodates a concept of dynamic, heterogeneous human capital.

Given human capital's vintage and subsequent developments in management theorizing some might ask whether the notion has been subsumed or possibly superseded by more recent concepts, such as the resource-based or knowledge-based views of the firm. Some may question whether human capital is analytically separable from other forms of intellectual capital, such as social and structural capital. Others may question how the dynamic, heterogeneous nature of human capital in the contemporary firm fits with the traditional neoclassical view of capital as a static, homogeneous stock. We address these and related issues in this Introduction.

We start with a brief review of how the concept of human capital evolved. As many contributors to this volume remind us, human capital is not a new concept. Adam (p. 2) Smith in The Wealth of Nations (1776) wrote of an individual's acquisition of talents as ‘a capital fixed and realized, as it were, in his person’. Related notions surfaced occasionally in the nineteenth and early twentieth centuries, the first use of the term human capital, being credited to Arthur Pigou (1928). Human capital became prominent in the late 1950s and early 1960s as leading economists, notably Mincer (1958), Schultz (1961), and Becker (1964), proclaimed it as much a form of capital as physical and financial capital, and emphasized its importance to future economic growth. Since the 1960s an illustrious group of economists, all at one time or other associated with the Chicago School of Economics—such as Becker, Mincer, Rosen, Grossman, Friedman, Lucas, Romer, and Heckman—have continued to research human capital in relation to economic growth, the labor market, education, health, marriage, and related macroeconomic and social issues in both the market and non-market sectors.

Microeconomic perspectives based on human capital emerged more slowly. Even Becker's distinction between firm-specific and general human capital has yet to be brought deeply into theorizing at the firm level (see Sherer, Chapter 22 below). As Spender notes (Chapter 7), interest in human capital at the organizational level may have been spurred as much or more by Drucker's predictions of the rise of the knowledge worker, Daniel Bell's (1973) prediction of a shift to a post-industrial knowledge-intensive economy, and Reich's discussion of symbolic analysts in The Work of Nations (1992) in which he pays homage to Smith's The Wealth of Nations—the same work that inspired Schultz and Becker. Certainly there was a confluence of ideas and theories during the 1980s and early 1990s linking information, knowledge, and human talent. Zuboff (1988) spoke of the ‘automating’ and ‘informating’ potential of the new information technologies—implicitly substitutes for and enhancers of human capital. The resource-based (Wernerfelt, 1984; Barney, 1991) and dynamic capabilities perspectives (Teece and Pisano, 1998) highlighted the attributes of firms' human resources as drivers of value and competitive advantage. During the mid-1990s the idea that an organization's knowledge had become its most important economic and strategic resource became widely accepted (OECD, 1996), leading to a view of the firm as an integrator of disparate human knowledge and an explosion of interest in a knowledge-based approach (Blackler, 1995; Nonaka and Takeuchi, 1995; Grant, 1996; Spender, 1993, 1996; Conner and Prahalad, 1996; Zack, 1999).

Knowledge-based and human capital perspectives appear complementary—albeit the opportunities for synthesis are underexplored in the literature. Staffing and recruitment strategies can be viewed from both knowledge and human capital perspectives: firms recruit and invest in individuals largely based on their current and potential value as human/knowledge capital suppliers (Lepak and Snell, 1999; Burton-Jones, 1999). For individuals the firm provides an enabling context for developing their knowledge capital through training and socially enabled practice (Kogut and Zander, 1992). Combining human capital and knowledge-based perspectives can help identify complementarities and tensions between individuals as knowledge suppliers and firms as knowledge buyers, help us to better appreciate issues such as human capital formation and mobility, and throw fresh light on the (p. 3) principal–agent relationship. (For a variety of perspectives on these and related issues see Chapters 4, 7, 10, 13, 14, and Part V.)

During the 1980s and 1990s two additional forms of intellectual capital came to prominence alongside human capital: social capital, derived from investments in relationships between the organization's stakeholders, and structural capital, derived from investments in systems, processes, brands, and other non-human resources (Brooking, 1996; Edvinsson, 1997; Sveiby, 1997). Strong reciprocal interdependencies have been indentified between social capital and human capital (Coleman, 1988; Burt, 1992; Lin, 2001). People need social networks, and networks depend on people to develop and use them. Strong interdependencies are equally evident between human capital and other forms of structural capital such as information systems (ISs) (Wade and Hulland, 2004; Youndt et al., 2004). People are essential to information systems, and people depend on ISs to acquire and apply their human capital. While intellectual capital provides a simple typology of intangible forms of capital, all forms of intellectual capital including social and structural capital are arguably reducible to the human knower—human capital thus becoming the linchpin. (For a spectrum of views see Chapters 2, 7, 11, and Part IV.)

Human capital and other forms of intangible, intellectual capital in organizations are heterogeneous, dynamic, and notoriously difficult to measure and value, yet according to the prevailing neoclassical economic orthodoxy capital is homogeneous, quantifiable, and commensurable. For macroeconomists working at the aggregate level, the dynamic and heterogeneous aspects of human capital are not an issue. In organizations, however, such differences matter. Dean and Kretschmer (2007) argue that we need to accept that human, social, and structural capital are only metaphorically ‘capital’ and revert to resource-based or capabilities-based typologies, or alternatively develop a new theory of dynamic capital to account for them. Lewin, (Chapter 5) following the Austrian school of economics (Hayek, Kirzner, Lachmann), takes a radically different view, emphasizing that the concept of capital can apply to all productive resources including dynamic, heterogeneous human capital. According to this view all capital is knowledge-based, whether in the form of artifacts (knowledge representations) or people (embodied knowledge). Consequently capital itself is not a static stock of durable assets from past production but ‘the ability of combinations of things and ideas to produce value over time’ (Baetjer and Lewin, 2007: 28). A dynamic view suggests we may need both a new concept of capital and a new theory of the firm that more accurately reflects the nature and role of human capital in today's knowledge-based economy—ideas that are discussed in more detail later in this Introduction. Part II of this Handbook is devoted to an examination of human capital in relation to theories of the firm, and Part III addresses a range of issues associated with human capital management and organizational effectiveness.

It is apparent from this brief survey that human capital is alive and well—knowledge-based and intellectual-capital-based perspectives reinforce rather than diminish its organizational relevance. We also show that the interdependent and complementary nature of human capital in organizations increases rather than (p. 4) diminishes its strategic significance. Finally, to provide it with enduring foundations and maximize its value we show the need to move human capital in organizations from management heuristic to theory. To do that we need to rationalize our perspectives of human capital—from neoclassical to modern—and find a theory of the firm that will give it a proper home.

These are issues that to date have been the subject of a diffuse and fragmented set of literatures—from economics, sociology, and cultural studies to organization theory, psychology, HR, and accounting. There is an evident need to pull these literatures together to investigate the phenomenon of human capital in organizations. That is what we have aimed to do in designing this volume.

Scope and Design of the Handbook

Of recent years there have been a number of authoritative works on particular aspects of human capital in organizations, such as employment practices (Blair and Kochan, 2000) and interfirm mobility (Pennings and Wezel, 2007). Few, however, have attempted a comprehensive analysis of the subject. We determined to address this gap in the literature by exploring human capital in organizations from multiple perspectives, combining overviews of prior research with critical and original insights. We decided to focus on five aspects of human capital: its conceptual underpinnings; its relevance to theories of the firm; its implications for organizational effectiveness; its interdependencies with other resources; and its role in the future economy.

Given this broad canvas, we were conscious of the need to maintain a sense of thematic coherence—an overarching theme being the systemic nature of human capital and its centrality to other organizational resources. To achieve our goals required a multidisciplinary approach; contributing authors, over forty in total, comprise experts from a diverse range of disciplines including philosophy, law, economics, sociology, strategy, international business, corporate governance, cultural studies, entrepreneurship, organizational behavior, human resource management, industrial relations, environmental psychology, accounting, and information systems.

Structure of the Handbook

We divided the Handbook into five parts, each designed to offer a different perspective. Part I, ‘The Nature of Human Capital’ , opens the work with a series of chapters probing the concept of human capital, its conceptual underpinnings, and its links (p. 5) to other forms of capital. Individual chapters explore the economic role of human capital in the firm (a topic further developed in Part II), the links between human and social capital, human capital and cultural intelligence, cognitive human capital, and the nature of human capital and its relationship with capital more broadly.

Part II, ‘Human Capital and the Firm’, focuses on the role of human capital in theories of the firm. Individual chapters review the role of human capital from a transaction cost perspective, an agency perspective, the resource-based view of the firm, in relation to theories of entrepreneurship and the firm, and from a knowledge-based perspective.

Part III, ‘Human Capital and Organizational Effectiveness’, continues the theme of human capital in the firm but shifts the focus to human capital and organizational effectiveness. Topics addressed in the five chapters include the role of strategic HR management, trends in human capital procurement, strategic alignment of people with organizations' needs, appropriating value from human capital, and developments in approaches to human capital accounting and measurement.

Part IV, ‘Organizational Implications of Human Capital Interdependencies’, investigates the nature of interdependencies between human capital and other resources and their implications for organizational effectiveness. Chapters explore interdependencies between people, people and their physical work environments, people and information systems, human and structural capital, and the implications of human capital as a distributed and dynamic concept for human capital development and organizational performance.

Part V, ‘Human Capital in the Future Economy’, focuses on the dynamic interplay between human capital and its environment in the context of the future economy. Topics discussed include the different types of human capital expected to be in demand in the twenty-first-century business enterprise, how investigating human capital mobility helps us to bring human capital theory closer into the firm, how different regions and nations are developing human capital policies and capabilities, lessons learnt from the recent history of human capital development in Asian countries, and the future of human capital from an employment relations perspective.

Human Capital in the Knowledge Economy

Many of our authors point to the explosion of interest in human capital as an academic topic. A connection with the knowledge economy is suggested along with a way of defining it as an economy in which human capital is of qualitatively higher importance. But Becker's relating this to education raises questions, for instance, about educational policy; and we have touched on some already. His intuition that (p. 6) education is a determinant of economic growth, mediated by rising human capital, makes us wonder how education becomes economically useful at the national level. Is on-the-job training more important than general education? Is the hypothesis that education increases productivity actually valid (Berg, 2003)? Is education so intimately tied up with social and organizational capital that it simply reinforces prevailing social, institutional, and organizational structures? Does it exacerbate the theory–practice divide and distort productivity (Raelin, 2007)?

Our contributors probe these questions by contrasting static or ‘stock’ notions of capital against ‘flow’ or ‘process’ notions, and by considering the relationships between human capital and the other types of capital—financial, social, organizational, intellectual, and so on. In the background is an assumption that the explosion of interest is more than a fad and that it reflects qualitative changes in the global economy—typically seen as a sea change from tangible forms of capital to intangible forms. To clarify this, Reich's analysis and his distinction between high-value and high-volume economies are often cited; high-value production processes are information-intensive, hugely impacted by the Internet, and call for education in symbolic analysis (Reich, 1992). One can also point to the demands of an increasingly technologically penetrated workplace wherein all use increasingly complex tools. The interfaces between work and worker are increasingly data-intensive and symbolic, fly-by-wire rather than the hands-on feel of the materials or issues. There are attendant changes in the economic landscape as manufacturing moves from the US and Europe to India, China, and elsewhere (see Chapter 3), while we focus on design and innovation. How does a human capital approach provide additional insights?

We distinguish between the capital in general necessary for an economy to expand, and the need for human capital as a specific type of capital. The first is widely accepted; the second is central to this volume's contributions. An explanation obviously depends on how the distinction between human and other types of capital is made. The ‘human capital as an individual's knowledge and skills’ definition turns on the distinction between tangible and intangible assets. Thus some of our authors are interested in measuring intangible capital directly, the implication being that both can then be brought into the same analytic framework and managed according to the same principles of efficiency and maximization (for example, Blair and Kramar, Murthy and Guthrie). Others are interested in the implications for the theory of the firm or organization where the tangible and intangible interact to generate economic value. The managerial implication here is that their synthesis brings both into the same economic framework as a matter of practice—measurable in its outcomes—rather than as a matter of analysis—measurable as inputs.

At the same time, noting ‘the explosion’, there is some danger of falling into the conceit that economic activity prior to modern times did not require much human capital. Aside from natural modesty, the history of technology transfer, both industrial and military, shows this is untrue (Pacey, 1990). Likewise, an appreciation of (p. 7) the complexity of trade, production, and the financial instruments during the height of the Arab Empire shows how pre-European management was highly sophisticated (Chaudhuri, 1985). Knowledge has always been crucial to making good use of resources, and in this respect Penrose did not tell managers anything they did not already know.

But if we see qualitative rather than quantitative changes in the human capital being applied today we can also see the knowledge economy as qualitatively different. There is an undercurrent of this in many of our volume's chapters and, as noted earlier, we can address it directly by contrasting the concepts of capital in neoclassical theory with those proposed by some ‘Austrian’ economists, notably Lachmann. In the neoclassical framework, where everything has a price, the challenge is to bring what people know into the same market-based analysis as the other factors of production. This obviously hinges on use-value. Being measured by the same standard the human capital imagined is presumed homogeneous. Lachmann proposes something very different, focusing on the variety of resources that, when synthesized, produce economic value (Lachmann, 1977; Mathews, 2010). Here human capital is more about how to structure the synthesis than a stock or factor of production that is drawn into—and either consumed or regenerated—in the production process. In Lachmann's reading the knowledge economy is marked by an explosion in resource heterogeneity and in the corresponding managerial task of synthesis. Today's world is qualitatively more complex and less certain.

This argument's origin lies in Menger's intuition that progress should be framed in qualitative terms—better and more diverse products that more closely matched people's heterogeneous needs and so led to more appropriate pricing and resource allocations—rather than in the homogenizing neoclassical quantitative terms of GDP growth (Vaughn, 1994). His intuition was rephrased in Böhm-Bawerk's idea that progress and economic value were associated with increasing ‘roundaboutness’ in the production process. The knowledge age, then, is one in which complex production processes become paramount—and the human capital necessary to manage them becomes increasingly significant, both economically and theoretically. While Adam Smith stressed the division of labor and the crucial learning and task-oriented human capital to which it led, he paid little attention to the knowledge required for task integration and coordination. This knowledge is orthogonal to and qualitatively different from task-oriented knowledge. Managing is not producing. No question, qualitative changes in specialization, work measurement, and production communications since the 1950s have transformed the way we go about economic coordination. By way of illustration we might consider the cost and value differences between a low-tech approach to dealing with terrorists holed-up in Waziristan, massing a fully trained army and covering every inch of a territory versus a high-tech satellite intelligence-based remotely piloted Predator strike—the latter being hugely complex and management-intensive. It is brute force versus precision, the knowledge economy rewarding the second.

(p. 8) A knowledge economy distinguished by highly roundabout methods of production and highly customized goods and services exploits today's qualitatively different management tools—high-speed communications, data gathering and mining, supply chain management, customer relationship management, and so on. As Grant has often reminded us, competitive advantage is about integration, and there seems no question that there have been qualitative changes in our integrating practices and capacity over the last century, beginning with the telegraph (Grant, 1997). There is some irony here for Austrian economists, since the idea of a highly heterogeneous economy coordinated by increasingly powerful centralized management practices and technologies (and the human capital they imply) stands against the anti-centralizing impulses of Hayek and von Mises, whose approach to managing heterogeneity was to turn to the coordinating capacity of the market. A human capital-based approach to theorizing the knowledge economy could be powerful. It lets us probe the differences between the human capital that characterizes efficient markets and that which characterizes productive organizations, helping move us towards the human-capital-based theory of the firm sought explicitly by authors such as Coff, Foss, von Krogh and Wallin, Lewin, Kraaijenbrink and Loasby—but implicit in every chapter.

Conclusion

Our volume shows that human capital research and theory is in a fluid state. From one side it is supported by its economic roots; from the other by its practical nature. From economics we take human capital as a factor of production and the impulse to measure and value it. From practice we take the notion of human capital as the result of learning, whether in class, in training schemes, or by doing, whether individually or collectively. The economic approach seeks a general theory that defines human capital in abstract terms, and focuses on its interplay with less controversial factors of production. The practice-based approach emphasizes the situatedness and contingencies of bringing human capital into play. The economic angle looks to the managerially and theoretically significant differences between human capital as a factor of production and those factors or resources normally considered in microeconomic theory. It hews to maximization. The practical approach looks at human capital as an indicator of the dynamism of our socioeconomic situation, and the complexities of resolving the diversity of human goals and purposes.

Some will see human capital theory on the cusp between modernism and post-modernism. If so, it can serve as critical theory and engage many important projects. First, it is an attempt to move beyond the astringent rational maximizing individual on which much neoclassical analysis is based. The very notion of human capital (p. 9) presumes individuals who differ in what they know as well as in their utilities. It follows that non-market interactions with others come to the fore as individuals form relationships with others to compensate for the particularities of their knowledge endowment. All knowledge becomes firm- or situation-specific in Williamson's sense (Williamson, 1985). Management is extended from the modernist notion of rational goal-setting and performance measurement to include managing the inter-individual relationships—and the infrastructure, such as IT, culture, and trust, that mediates these.

Second, human capital theorizing presumes individuals who learn. As mentioned earlier, learning is one of the strongest themes in our volume. But it remains a challenge to theorize. In business studies we have generally trailed other disciplines, such as developmental psychology or educational theory, in this area. The challenge to identify and measure human capital can move us beyond naϯve learning models in which experience or communications lead to knowledge in an unproblematic way, onwards to the sounder empirically testable models on which these other disciplines are working.

Third, while our volume generally reinforces the Penrosian point that the value of resources is always dependent on knowledge, individual or managerial, human capital opens up new ways of thinking about technology and its social and economic impact. Referring to our time as the Information or Knowledge Age is often a trope to hide the more pressing evidence of how the ways we do things (our technologies) are changing our circumstances. The need for us to reshape our intellectual assumptions, from markets made as perfect as possible to tightly bounded finite systems, means we have to begin to inventory those systems and their processes of interaction. To address these challenges we need concepts and theories that more accurately reflect the systemic role of human capital in contemporary organizations.

Chapter Summaries

Chapter 1

Part I's agenda is the definition of human capital. Margaret Blair's chapter opens by identifying two principal reasons for looking into this. Defining human capital broadly as the ‘skills, knowledge and capabilities of the workforce’, she argues, first, that these are critical inputs to production. Second, that resources expended on increasing them are investments like more conventional investments in resources, facilities, and equipment. While a person's possessing ‘skills and knowledge’ is an (p. 10) old idea, she argues that the recent history of human capital is its rehabilitation as an additional variable to help explain economic growth not otherwise explained by conventional macroeconomic analysis. Yet this approach is controversial. Many have objected to its characterization of people and how and why they act, seeming to deny our humanity. It also glosses the mechanisms connecting education and training to productivity. She reports that despite forty years of objections human capital has become central to macroeconomics, labor economics, growth theory, trade theory, development economics, the economics of education, the theory of the firm, human resource management, and strategy theory—a very significant impact.

Blair takes up two other analyses: (a) whether human capital is analogous to capital as economists understand it, and (b) how to relate human capital to other forms of capital. From an economic point of view capital comes into existence when, first, previous production is saved rather than consumed and, second, it contributes to later production. One difficulty is that human capital, unlike other forms of capital, cannot be separated from the workers who acquire it. It is inalienable and untradable. Ownership is problematic—is it the property of the worker who develops it or the investor who paid for its production? These differences between human capital and other forms of capital suggest differences in its management as well as its place in our theories. Some relations between these forms of capital have been explored via intangibles—goodwill, customer loyalty, trademarks, and so on. Other forms of business capital have also been considered—reputational, intellectual, organizational, social, and so on. Blair points out that these are often trickier, and perishable, requiring maintenance that tangible assets may not.

She goes on to consider the associated questions of measuring intangibles, noting four accounting criteria typically used to justify a resource's economic asset status: (a) sufficiently well defined to be distinguishable from other assets and so tradable, (b) subject to the firm's control, (c) valuable, the basis for predictable returns, and (d) sufficiently defined to measure if its value has been impaired. But given human capital's inalienability it cannot be traded, suggesting a conflict between these criteria and the core notions of capital. Nonetheless, many think measuring human capital in terms of educational attainment or the costs of training useful, even while raising questions about future value. ‘Book to market’ makes it possible to use the market's valuations. But these methods often work better in aggregate than in the particular—even though that is where value is actually created. Blair returns to Becker's distinction between general and firm-specific human capital. She analyzes the tension between employees and investors that emerges from such asset-specificity, giving rise to the ‘hold up’ problem and the challenges of bringing human capital into a theory of the firm. She concludes on the public policy issues around the creation, distribution, and control of human capital when firm-controlled on-the-job training is so material to its production.

(p. 11) Chapter 2

Janine Nahapiet's chapter begins by suggesting one must define human capital from a social perspective. Its value inevitably depends on a wide range of social factors and relationships. The focus should be on the relationship between human (individual) capital and social capital, and their impact on each other's development. She examines the concept of capital, drawing initially on the economics literature. Along with many of our authors she concludes that even though human capital fails to meet the criteria for capital evident in that literature, the concept's heuristic value has made it popular nonetheless. She quotes Schultz's telling point—that there is nothing in the concept of human capital contrary to the idea that it exists for the advantage of people, and by investing in themselves people enhance their choices and welfare. She notes that human capital's failure to meet the conceptual conditions of capital theory can be interpreted as a critical insertion of human values into the discussion. Leveraging from the ‘Austrian’ economists she urges the analysis from static concepts and to a more dynamic interactive frame.

Like many of our authors Nahapiet revisits the evolution of human capital analysis but with her own points in mind. She notes the OECD's influential shift from defining human capital as an individual's economically relevant knowledge and skills to one in which the knowledge and skills are related to an individual's overall social and personal wellbeing, extending beyond their economic rewards. This need to pay attention to this broader context is supported by other research into on-the-job training and its impact. Then, leveraging from Swedberg and Granovetter's economic sociology, she argues that economic activity is a form of social action, embedded in a socially constructed institutionalized context. It follows that the nature and value of human capital is shaped by this context, positing a type of contingency or historicism at human capital's core.

Nahapiet follows with an analysis of the social capital literature, arguing its core proposition is that ‘social ties constitute a valuable resource for the conduct of social affairs, enabling individuals and social groupings to achieve outcomes they could not otherwise achieve’. The research divides into a program investigating networks and another about ‘communities’. The first focuses on access and resource mobilization, the second on shared norms and cooperation. Social capital includes both, giving it a multidimensional nature. The argument is that social and human capitals are interrelated and interdependent. She discusses the literature that looks, first, at the determining effect of social capital on human capital, second at the determining effect of human capital on social capital. She argues that ‘what is needed now is a clearer articulation of the ways in which human and social capital may be linked’. Citing the Austrian approach and the work of Lewin (in this volume), as well as Bourdieu's argument that the various forms of social capital can be transformed into each other, Nahapiet suggests a program of research into the various mechanisms by which both human and social capitals grow, converge, synthesize, and (p. 12) change. Each exhibits characteristics of (a) fungibility and convertibility, (b) substitutability, (c) complementarity, (d) co-evolution, and (e) interaction. This dynamic typology points to a rich and novel theory of the firm as the human/social context in which these various capital transformations take place.

Chapter 3

Kok-Yee Ng, Mei Lang Tan, and Soon Ang's chapter likewise concentrates on the firm as the context of human capital development and application, though their focus is on global firms. Their analysis reaches back into the urban sociology of Gouldner and Merton and adopts their classic distinction between ‘locals’ and ‘cosmopolitans’, the latter having several languages and travel experience to add to their human capital. Cosmopolitan human capital, they argue, is essential for firms competing in the globalized economy. Their intent is to understand how such human capital is developed. In a neat move they appropriate much of the human capital literature's thinking about the impact of parent attitudes, learning habits, and education on their children's educational development. They reposition the corporation as a form of intellectual parent, defined as the custodian or context of the relevant ‘global cultural capital’ and able to foster cosmopolitan human capital.

Taking off from Kanter's argument that travel alone does not make cosmopolitans, their analysis looks beyond postings in multiple countries to consider each individual's ‘intercultural capabilities’. These imply a different kind of personal intelligence—the cultural intelligence (CQ) proposed by Bourdieu and Passeron—that parallels IQ and EQ (emotional intelligence). They draw on Sternberg and Detterman to argue that CQ's dimensions are: (a) metacognitive intelligence about the awareness and control of cognitions used to acquire and understand information, (b) cognitive intelligence about knowledge and knowledge structures, (c) motivational intelligence as the energy behind the engagement of intelligence, and (d) behavioral intelligence focused on individual capabilities at the action level. They report studies of the relationship between CQ and cultural adaptation and performance, expatriate effectiveness, interpersonal trust, team acceptance, and joint profits in intercultural negotiation dyads.

While the authors note that these effects are well known, they argue that little is known about how cosmopolitan human capital is developed. They turn to the international business literature to contrast different corporations' attitudes towards multicultural contexts. They note the firm's culture balances global integration and local responsiveness and the distinctions between ‘parochial’ and ‘diffused’ mindsets. They consider the literature on organizational routines to sketch out those that might increase CQ by (a) managing human capital flow globally, (b) developing intercultural talent, and (c) rewarding a global mindset. They conclude with a discussion of a program to test these notions empirically.

(p. 13) Chapter 4

Brett Rhymer, Michael Hitt, and Mario Schijven's chapter also focuses on managerial, operative, and corporate cognition. They argue that ‘the transformation of knowledge into practice is mediated by the cognition of the firm's human capital’. They posit a mutually constituting reciprocal relationship between knowledge and behavior, the exchange being governed by cognition. They argue that managers are able to influence the firm's cognitive states even when these are path-dependent and contextualized. Managers set the strategic balance between ‘learning’ and ‘using’, between ‘exploration’ and ‘exploitation’, creating effective alignment between the environment and internal activity systems through adjustments to cognition. The authors cite empirical research showing a strong relationship between human capital, as measured by education and experience, and firm performance. They also presume that human capital can arise at both individual and collective levels, enabling them to explore the relationship between individual and collective cognition and the value of the firm's human capital. They surface the various difficulties confronting those managing the firm's knowledge, for it is dispersed and subject to market failure and agency problems.

They go on to argue that the 1960s concern with managerial behavior and decision-making marked by behavioral analysis was displaced by a more abstract focus on transaction cost economics, resource dependency theory, and population ecology. The pendulum has now swung back to the individual and to the micro-foundations of organizational performance. The knowledge-based analyses of Kogut and Zander and Orlikowski are part of this trend, drawing cognition to the foreground. Likewise, the economy has shifted towards knowledge-intensive activity with the services sector now dominant.

The chapter continues with a model of the extraction of human capital value. The value of the firm's knowledge and cognitive capabilities is initially embedded and must be extracted by combining them with other resources. While these knowledge and cognitive resources can be regarded either as a stock or as embedded practices and routines, their value must be brought out through the cognitive activity of decision-making, communication, and action. This body of knowledge is dynamic, impelled by individual and collective learning. The result is path-dependent, for each period's knowledge builds on the previous period's knowledge. The strategic challenge is to find the ‘sweet spot’ that aligns the external demands on the organization with the activity systems its cognitions underpin. The means are either ‘use’ moderators that determine the extent to which knowledge is translated into cognition and behavior, or ‘learning’ moderators that determine the extent to which knowledge is reinforced or changed. The use moderators can be separated into ‘recall’ processes that bring stored knowledge into cognition, and ‘enactment’ processes that induce behavior from a cognitive state. The model integrates knowledge and practice, its core being the cognitions that broker, filter, and guide the ‘generative dance’ leading to performance outcomes.

(p. 14) Chapter 5

Peter Lewin's chapter reflects his interest in the ‘Austrian’ school of economics formulated by Menger, Böhm-Bawerk, Hayek, Lachmann, and others. Much of the contrast between the Austrian and neoclassical approaches revolves around their different notions of capital. Broadly speaking, Lewin claims that human capital cannot be treated adequately within the neoclassical tradition, while it fits naturally into the Austrian tradition. Lewin's argument proceeds first from the commitment (a) to define all resources as forms of capital based on the value-add of their application; that is, on knowledge of how to apply them. Capital is essentially embodied knowledge, whether in tools, symbols, or practices. Applying it entails combining it with other forms. Since the outcomes are subject to uncertainty, the values on which managers plan and act are expectations rather than determined facts. Resource-combining projects inevitably fail to meet their planned objectives, so open up previously unseen entrepreneurial opportunities. Thus (b) the theoretical task is to understand how resource combinations should be managed under conditions of uncertainty. Additionally Lewin argues that the defining difference between physical and human capital is that while the first can be traded, the second is inalienable. This distinction is merely one aspect of a more complex structuring of the socio-economy—one marked by heterogeneity of knowledge and thus of all forms of capital. An article of faith for ‘Austrians’ is that economic progress follows the increasing complexity of this structure, an increasing division of labor and knowledge, and a corresponding increasing heterogeneity of economically relevant capital. Lewin concludes that modularization is management's main tool to deal with this complexity.

Along with most of the economists who have adopted Austrian thinking, Lewin argues that absent Knightian uncertainty—the impossibility of making certain forecasts—there would be no economy as we understand it, no opportunity for entrepreneurship, rents, or profits. A Knightian world is explicitly heterogeneous, for there are no overarching insights into its fundamental nature such as scientific laws assert about the natural universe. There is no coherent or universal market that sets the price of everything. Resources must always be understood as specific to a particular use, tied to their application. Lewin quotes Lachmann's observation that something is a capital good not because of its physical form, but because of its economic function. Thus every capital good has an unknowable set of possible attributes and applications. It waits to be transformed into added value by some entrepreneur's judgment and expectations. Thus entrepreneurs lie at the center of the economic system, activating it, for there is no market that alone does that. ‘The market’ is no more than a term of art to describe the welter of heterogeneous processes arising as entrepreneurs pit their judgments against each other.

Lewin goes on to argue that capital goods embody our knowledge of their value, not simply about how to make them. The uncertainties here create the disjunction (p. 15) between cost and value that drives economic growth. A good hammer embodies subtle knowledge and skills, yet allows a vast range of applications that vary in their economic consequences. Some tools embody more knowledge than others—Lewin compares hammers and microscopes. This leads to realizing that capital is social, embodying the knowledge of many people. At the same time the analysis becomes dynamic, for situations change, and knowledge, such as embodied in tools, becomes obsolete. Who needs to know PC-DOS? Ultimately, capital is about structuring relationships between actors, knowledge, and entrepreneurial and social processes that are ever-changing across space and through time. In all, progress is marked by increasing complexity and heterogeneity.

As for many of our authors, the idea that the individual's human capital is inalienable leads Lewin to a discussion of hold-up and agency issues. He argues that the heart of the management dilemma lies in providing knowledgeable employees with decision rights optimal to the firm's performance—and we do not yet know how this might be done. Human capital management is thus differentiated from the management of other forms of capital by the agency problem, but the penetration of knowledge into all aspects of capital structure hugely increases its scope and significance. Lewin's answer is modularization. That knowledge and situations are heterogeneous opens up the possibility of finding some sympathy between the contextualized task, resources, and social boundaries—so modularizing economic activity. Modules, he suggests, are ideally self-defining and self-contained sub-structures whose inner workings are hidden from managers above. Lewin argues that this is what organizational design is about, bringing Hayek's ideas about the ‘division of knowledge’ together with Smith's ideas about the ‘division of labor’.

Chapter 6

Part II's agenda is the relationship between human capital and the theory of the firm. There are, of course, several theories current in the literature today. Nicolai Foss's chapter focuses on the transactions cost view spearheaded by Williamson, a recent Nobel winner for this work, but also takes note of the property-rights approach of Grossman and Hart. Foss begins by defining human capital as ‘the stock of valued skills, knowledge, insights, etc. controlled by an individual, the attributes of the individual that are valuable in an economic context’.

Theorists of the firm are not only concerned with defining firms by, for instance, contrasting them with markets or explaining their existence. They are also concerned with alternative forms of organizational governance—in the case of human capital, understanding whether it is most efficiently sourced through market transactions, employment relations, voluntary organizations, or households. Foss claims that transaction cost economics (TCE) has provided ‘the first and still most comprehensive treatment of the organizational ramifications of human capital in (p. 16) economics’. Yet it is ‘not at the same level of detail as the human capital literature’—'It does not tell Mrs Jones what to do on Monday morning'. Both the TCE and property-rights approaches ‘provide a rather abstract understanding of the efficient matching of transactions and governance structures or property rights allocations’.

Underpinning TCE is Coase's intuition that if transactions were costless their mode of governance would be irrelevant. Types of organization should be evaluated by their relative costs. Williamson argues that a special category of cost arises because the employment relationship is marked by bounded rationality and opportunism. These are multitransactional, marked by frequency and asset specificity. So he sees six reasons why assets may be difficult to deploy: (a) they are attached to a brand, (b) the need to act quickly (temporal specificity), (c) market size (dedicated assets), (d) localization (spatial specificity), (e) physical characteristics, and (f ) specialized knowledge (human capital specificity). Along the lines of our previous chapters, Williamson uses these terms to define the socioeconomic context of a transaction. Foss writes that asset specificity ‘opens the door to opportunism’—a restatement of the hold-up and agency issues noted earlier. The implications of the TCE approach are that transactions involving highly specific assets should be internalized within the firm and not conducted across a market. Given that human capital is inalienable, it is especially specific in this respect.

Coase saw the employment relation as the essence of the firm. In the presence of uncertainty contingencies are costly to anticipate, and rather than renegotiate each one, firms make employment contracts. Coase defined these as arrangements under which the employee, for a specific remuneration, agrees to obey the directions of an entrepreneur within certain limits. The contract limits the entrepreneur's powers. Foss likens this view to Simon's notion of the employee's ‘zone of acceptance’, redefining managerial authority as the decision rights purchased through the employment contract. He concludes that the arrangement has little to do with knowledge asymmetry or human capital differences.

Foss argues that Williamson goes well beyond the Coase–Simon analysis. While they treat human capabilities as generic, Williamson pays attention to the heterogeneity of human capital and the problems this raises. His lever is that as the division of labor advances, so the worker's knowledge becomes increasingly specific and hold-up and agency issues intrude into the employment relation. Williamson sees four modes of labor contract: (a) sequential spot contracts—contract now for prescribed performance later, (b) contingent claims contracts—contract now for one of several prescribed performances, to be chosen later, (c) long-term contracting—determine performance later, and (d) establishing an authority relation alone—or ‘fiat’. His concern differs from that of Lewin and the Austrian economists who see increasing complexity and a ‘deepening’ of human capital; rather, it is the capital's increasing specificity and the governance problems generated, the ‘separability of work relations’ and the attendant difficulty of measuring employee performance. The framework leads to an in-depth analysis of governance under conditions of (p. 17) uncertainty and opportunism, and Foss reports and summarizes extensive empirical research that confirms its power and relevance to management.

Foss then turns to the property-rights approach. This too stands on the incompleteness of the firm's contracts and deals with the need to allocate rights to residual assets; that is, those not allocated ex ante to employees or other agents. He notes that such controls determine the boundaries of the firm as a bundle of jointly owned assets. Under uncertainty, control goes beyond the explicitly contractible to include subtleties of motivation, trust, and reputation. Foss notes Ghoshal and Moran's belief that employees perform in accordance with incentives and the opportunities offered, but also from their ‘feelings for the entity’. Thus motivations are both extrinsic and intrinsic, and the firm is seen as a ‘carrier of reputational capital’.

TCE is a novel theory of the firm that offers a place for human capital within it. Williamson's focus is on the connections between its specificity and its governance. As in Lewin's analysis, Foss shows that the human capital management insights the TCE offers turn on its inalienability and the particular governance challenges this raises. While the debates around the TCE are extensive and complex, its contributions are substantial. Foss urges theorists to pay it considerable attention.

Chapter 7

While Foss locates human capital within the transaction cost theory of the firm and shows how its heterogeneity gives rise to problems that drive the choice of governance mechanism, Spender's chapter locates human capital within principal–agent theory. He argues that the agency problem can be defined as a human capital difference between principal and agent. The value of doing this is that the principal–agent relationship then describes a key feature of firms—the same employment relationship that Coase regarded as defining for the firm. We can first explore how a human capital approach might illuminate this theory of the firm. But second, a critical analysis of agency problem theorizing might illuminate our notions of human capital. Spender's emphasis is less on human capital's heterogeneity, as either Foss or Lewin describe it, and more on the principal's decision-making when facing the agency problem. But unlike Foss's chapter, which presents TCE as a coherent body of work to which human capital's heterogeneity is essential, Spender's approach is more critical. He argues that principal–agent theory is actually far from coherent and that its shortcomings help us see that human capital must be conceived more widely, extended beyond the customary ‘knowledge and skills’ notion to include the agent's ability to respond creatively to the uncertainties of practice. He implies a previously underconsidered dimension of human capital: an ability to deal with the unanticipated that must be added to the accepted ability to deal with the anticipated.

Spender begins by questioning the relationship between Becker's macrolevel analysis of human capital as the output of the educational system and human capital (p. 18) as most of our authors see it, at the level of the firm. He moves on to surface some of the inconsistencies between the classic contributions of Jensen and Meckling, and Fama. He argues that Jensen and Meckling's analysis is essentially incoherent in that it offers no rigorous solution in the absence of the perfect markets in which the various benefits to managers and owners can be priced. The paradox is that such markets can exist only under conditions of certainty; that is, when Knightian uncertainty is absent. But under such conditions, principal and agent can negotiate a complete contract. Thus the conditions in which Jensen and Meckling's analysis ‘works’ are the conditions in which no agency problem can arise to demand their solution. Fama's analysis ‘works’ quite differently. While he too indicates that solutions are contingent on an institutional context—which, as we have seen, is the real mark of human capital theory—his context does not comprise perfect markets. On the contrary, Fama appeals to the available imperfect markets for financial capital and management talent, in ways that cannot be modeled rigorously.

Spender argues that this discussion illustrates the difference between (a) a theory—in the conventional philosophy of science sense of an apparatus for generating predictions (dependent variables) from discoverable facts (independent variables)—and (b) a social–economic ‘framework’ which indicates the actual context into which executive agency must be projected in order to achieve conceptual closure and reasoned action. This is the entrepreneurial act. Conversely, the distinction illustrates how, under conditions of Knightian uncertainty, the application of human capital to any action, social or economic, must call for the actor's agentic capability. This argument stands opposed, as in Knight's analysis, to an analysis based on risk, population statistics, and the actor's risk propensity. Spender continues reviewing Mitnick's parallel approach to the principal–agent relationship. This turns on the notion of ‘organizational slack’, presuming some of the firm's resources are in an agentic ‘potential’ category, yet to be applied, just as some aspects of human capital are not applied until people are fully ‘stretched’. Mitnick frames the interplay of tangible and intangible resources as a contextual aspect that must be addressed by calling up the actor's agentic capability.

As soon as agentic capability comes into the analysis, new theories of the firm open up. Spender discusses two—one advanced by Foss in 1996, and another by White in 1991. Both turn on the notion that markets are extremely flexible—prices adjusting to supply, demand, technological change, product redesign, consumer taste, and so on. In contrast, most theories of organization, presuming certainty, prioritize stability and rigidity. Foss proposes that ‘rather than conceptualizing firms as entities primarily kept together by transaction cost minimization, it might be better to view firms as entities whose primary role is to acquire, combine, utilize and upgrade knowledge’. This is the never-complete process that defines the firm's human capital as dynamic, focused on learning and responsiveness to the unanticipated. Spender argues that this shows the innovative power of differences of perception, interest, and thus human capital between principal and agent, allowing for flexibility and even the role reversals of real principal–agent relationships. The conclusion is (p. 19) that the inherent flexibility of the principal–agent relationship under Knightian uncertainty can be contained only by agentic appeals—like Fama's—to the institutional apparatus that defines its context.

Chapter 8

The previous chapters in Part II probed the nature of human capital by locating it within a specific theory of the firm–transaction cost (Chapter 6) and principal–agent (Chapter 7). Jeroen Kraaijenbrink's chapter examines how human capital relates to the resource-based view of the firm (RBV). The RBV claims to explain sustained competitive advantage. Kraaijenbrink takes a critical stance and poses three questions that this kind of theory of the firm should be able to address. (a) What are the assets that claim to explain the firm's sustained competitive advantage? (b) What is their value? (c) How might rents be generated and sustained?

But first he deals critically with the RBV's evident weaknesses—especially its vague notions of resource and value. Most RBV authors include the employees' human capital, and sometimes that of suppliers, customers, and others, as among the resources to be managed with a view to extracting sustainable rents. Wernerfelt argued that ‘anything which could be thought of as a strength or weakness of a given firm’ would be an RBV-relevant resource. Likewise, Barney argued that the relevant resources would comprise ‘all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm’.

This seems fine, as far as it goes. But is anything excluded? Kraaijenbrink notes there is no analysis of how human capital might be differentiated from other types of resource, for the RBV treats all resources as conceptually equivalent. This contrasts with the view advanced by many of our authors, such as Lewin or Foss, who argue that it is precisely human capital's inalienability that leads to the special problems around managing it that our theorizing must address. Using human capital as a hammer, Kraaijenbrink chips away at the RBV's tautological notion of resource. He points out that an individual's human capital must often be shared with other entities, such as the family, and be applied under specific legal and institutional arrangements that limit the firm's usage—a reminder of Coase's theory of social cost. The RBV presumes full unproblematic title to the relevant resources.

Kraaijenbrink then turns to the RBV's notion of value—a theme running throughout the human capital discussion. While most of our authors see the value of distinguishing between input costs and output returns, the RBV is in special difficulties because of the tautology around identifying rent-earning resources by their ability to produce rents. In contrast, many of our authors argue that resources of all types only reveal their value when combined with other resources—which lifts the analysis from the component level to a project or a firm level. The RBV is dismissive of collective capabilities, and of the distinction between human and group or social (p. 20) capital, considering them conceptually identical to individual capabilities—just at another level of analysis.

Kraaijenbrink then focuses on his three questions and the way human capital might help address them. First, regarding identifying the assets, he cites literature that shifts attention from definitions of resources, such as those of Wernerfelt and Barney above, that are hopelessly tautological, and onto the specification of property rights, defining their economic nature and significance. He notes the importance of the knowledge and skills which individuals are able to draw in from outside the firm, problematizing the boundary around the firm as a bundle of resources. This would include intra-individual resources, such as the individual's own work relations, and the inter-individual resources drawn from their social network—their personally controlled social capital. He notes Bowman and Swart's typology of separable, embodied, and embedded capital.

Second, regarding valuing the assets, Kraaijenbrink deals with the literature that contrasts internal and external valuation. But he also argues that a resource's value ultimately depends on the context and infrastructure around its application. He observes how Barney's 1991 RBV formulation—VRIN, where N denoted non-substitutable—was replaced in 2002 by his VRIO formulation, where O denoted the organizational context into which the resource must be brought before value could be extracted. He reads this as an admission of failure to theorize value successfully as deriving from the resources alone. He also reminds us that some of the firm's resources lie beyond its zone of control. Finally, on the generation and appropriation of rents, Kraaijenbrink points out that it fails to recognize the human capital that enables people to generate rents with their creativity. Clearly his attempt to surface additional dimensions or features of human capital by locating it within the RBV discourse does not produce very much. But his chapter shows that the problem is less with his analysis than with the RBV itself, for it evidently lacks the power and integrity to illuminate human capital as a resource beyond the tautology on which all its resource definitions stand. Compared with the transactions cost and principal–agent approaches—which yield important insights into the nature of human capital—the RBV's weaknesses are such that this cannot happen.

Chapter 9

Brian's Loasby's chapter adopts the methodology of the previous chapters—seeing how human capital might be theorized in the context of a specific theory of the firm. But his focus is on the entrepreneurship literature—which implies rather than offers an articulate theory of the firm. As a respected contributor to our field he lays down several radical points. First, neoclassical theories have neither a place nor a need for an entrepreneurial theory of the firm—or a theory of the entrepreneurial (p. 21) firm. Neoclassical theory defines the firm as determined by external (market) forces—so is often labeled a theory of markets rather than of firms. A firm's modes of governance are irrelevant. Economic theory is not overly interested in firms, their internal arrangements, or even why they exist. Insofar as individuals are present in the analysis, standard explanations ‘all rely on a reallocation of decision rights to resolve some conflict of incentives, and when this has been achieved everyone acts independently’. He observes that ‘only Williamson's analysis, which postulates a complementary relationship between parties dependent on each other, envisages the solution as a hierarchy in which one person is partially controlled by another to the benefit of both’. But Williamson has yet to explain how this works. Inter alia it implies firms are little more than ‘devices for validating the dominance of markets while ignoring the methods and costs of organizing such markets’.

Having thrown down the gauntlet Loasby reviews the entrepreneurial literature, suggesting entrepreneurship, human capital, and the theory of the firm form ‘a natural grouping’. His point of departure is Knight's distinction between certainty, risk, and uncertainty. Under conditions of certainty decision-making is a purely logical matter, the conclusion fully determined by the data, and one decision-maker cannot be distinguished from another. The relevant human capital is shared and non-distinctive and is no more than the ability to think logically. Education might enhance this ability but cannot produce it. When there is a range of possible future values, each with a known probability of occurrence, the decision cannot be determined without knowing the decision-maker's attitude towards risk. The decision-maker's risk profile is her/his distinctive human capital. But under Knightian uncertainty neither the range of values nor their probability are known. The decision-making turns on conjectured possibilities, subjective expectations. It requires knowledge of both the risk preferences and the process by which expectations are arrived at. Loasby observes that the standard economic analysis bypasses this to presume the decision-maker is using the ‘correct’ probabilistic model of the economy—that known to the analyst. It follows that three major economic phenomena cannot be explained without the concept of uncertainty: profit, entrepreneurship as its pursuit, and the incomplete contracts which characterize firms. Thus the standard microeconomic analysis is incapable of explaining these.

In the face of Knightian uncertainty the analyst must appeal to the decision-maker's imagination, especially evident in Shackle's theory. But since it cannot be determined in the same way as reasoning, the challenge is to know how it might be shaped or directed. There must be both a source of intentionality and a mechanism for its action. Loasby turns to evolution and self-organization, citing Simon's speculations on ‘decomposability’ that parallel Lewin's notions of ‘modularization’. Loasby concludes self-organization influenced by human ideas and intentionality grounds human capital. Crucial is the distinction between homogeneity and heterogeneity. Drawing on Marshall, Knight, and Barnard, Loasby argues intelligence and knowledge hinge on differences and their perception. Uncertainty-based economics is (p. 22) related because organization is then the context in which heterogeneities are synthesized into the novelties that drive economic growth.

The human capital needed to engage these processes implies cognitive capabilities that go well beyond those needed for rational choice. Loasby refers to Hayek's speculations about the neurological capabilities that make classification our deepest mode of consciousness. It follows that ‘the qualities we attribute to experienced objects are strictly speaking not properties of that object at all, but a set of relations by which our brain classifies them’. Humanly constructed ‘sensory order’ is epistemologically distinct from the ‘physical order’ that characterizes the natural world—such as the arrangement of the planets. The tension between the two orders often leads to the interpretive breakdowns that, by presenting us with uncertainty and calling forth our imagination, become progress's drivers. While the resulting paradigm shifts are familiar from Kuhn's work, Loasby reminds us that Adam Smith thought this way too. Smith was also interested in the quality or aesthetics of the constructed order, and education can prepare us to be aware of these characteristics—giving us a form of ‘absorptive capacity’ as a dimension of our human capital.

On this basis Loasby analyzes various approaches to entrepreneurship—Cantillon, Kirzner, Richardson, Lachmann, Casson, Harper, Schumpeter, and so on. He concludes that these authors have yet to pin down the interplay of the imaginative process and the experience of failure. He turns back to the firm as an apparatus through which one individual may shape the cognitive processes of another, in their extent and their timing. Thus Shackle observed that the firm is ‘a means by which choice can be deferred until a later and better informed time’. Being able to carry knowledge through time and apply it later defines it as a form of capital—especially evident in Penrose's theory of the growth of the firm. New combinations are discovered by trial and error but then recomprehended as opening up new economic opportunities. Loasby notes Marshall's and Penrose's attention to the relevant knowledge that lies outside the firm, available through networking and other modes of communication. It follows these systems must be bounded—for the cognitive resources comprising the various people's human capital are limited. But these boundaries are of our own construction and so artificial. They are sensory and in tension with our experience. Loasby concludes that uncertainty is the founding notion that makes it possible to articulate a theory of economic activity that embraces a natural grouping of entrepreneurship, human capital, and an evolutionary theory of the firm.

Chapter 10

In the final chapter in Part II Georg von Krogh and Martin Wallin look at human capital in the context of the knowledge-based view of the firm. While personal notions of knowledge as human capital are axiomatic, they also recognize collective (p. 23) or community processes. But their interplay is a problem, and von Krogh and Wallin argue there has been little attention to the microfoundational aspects of aligning the interests of the various individuals involved. Their chapter proposes a relationship between the individual and the firm that takes divergent interests into account. Taking Nonaka's thinking as their starting point they argue that ‘organizations create knowledge through individuals and groups who make available and amplify their knowledge and crystallize and connect this knowledge to the organization's knowledge assets’. The processes are voluntary, so interests and motivations are key. They note Gottschalg and Zollo's call for a theory of interest alignment. Employees are also members of groups beyond the organization, so relating their human capital to the organization requires consideration of external knowledge resources.

Von Krogh and Wallin review the history of human capital theory, paying special attention to Becker's distinction between general and specific capital. They note Mincer's attention to on-the-job training. They go on to consider the relation between the individual knowledge-based human capital and that of the firm. They leverage from Florin and Schultze's analysis to distinguish three types of human capital: firm-specific, industry-specific, and individual-specific. Their interplay depends on the individual's voluntary decisions about how to allocate their time. Clearly the tension where individuals invest in themselves rather than contributing to the firm can be seen as a zero-sum game. But von Krogh and Wallin also see it can be mutually beneficial. This sets up a two-by-two matrix: win–win, lose–lose, win–lose, and lose–win. The bulk of their chapter is taken up with a detailed discussion of how each of these possibilities arises and might be influenced by management. They point to the tension between the knowledge-based firm literature, which presumes that the role of the individual is to increase the firm's knowledge, and the human capital literature which presumes the firm, as a context of activity-based learning, focuses on increasing the individual's knowledge. They also criticize principal–agent theorizing for its implicitly zero-sum assumption and neglect of the synergistic win–win possibilities. Theorizing these requires moving from a rivalrous currency, such as money, to a non-rivalrous currency—with which human capital must be described and measured.

They conclude that three important results emerge from a democratic and cooperative approach to management: firm-level knowledge results only when individuals contribute beyond the terms specifiable in their employment contract, non-pecuniary rewards are essential, and the motivational aspects become those that define the firm. The complexity and multiplicity of the individuals' relations means the firm can be regarded as a repository or ‘safe haven’ for the knowledge gathered through these processes. It gains competitive advantage as (a) a context for learning-by-doing, (b) because it can use training to create knowledge more economically than markets can, and (c) it can be entrepreneurial in capturing opportunities for learning. The subtlety of the balance between the firm and the individual raises questions about their separability and the (p. 24) management of their interaction. This cannot be comprehended if performance is defined only in terms of a single stakeholder.

Chapter 11

Part III continues the theme of human capital in organizations, shifting focus to the links between human capital and organizational effectiveness. Peter Boxall's chapter opens this part of the Handbook with the premise that human capital in organizations is dependent on social capital and exists within clusters or configurations of human, social, technological, and other resources—a view reflected by several authors here.

Boxall's second premise is that a firm's particular configuration of human and social capital may help it build and sustain superior performance. Noting that such concepts verge on truisms and that (acknowledging Penrose) merely possessing resources is not enough, he emphasizes the importance of resource management. He proceeds to highlight three strategic human resource management problems: (1) why the management of human capital is inherently problematic; (2) why firms' investments in human capital vary across critical contexts within and outside their boundaries; and (3) how firms can obtain a sustained advantage through their management of human capital.

In relation to the first problem Boxall identifies the main issues as deriving from firms' dependence on the employment relationship, the attendant problems of gaining access to required levels of skilled labor, and motivating workers, once hired, to contribute fully—the last problem accentuated by the discretionary nature of human knowledge. These challenges are compounded by the need to continue to motivate workers over time. Motivation in turn requires trust, and in this context Boxall refers to Hyman's (1987) ironic comment that capitalism requires workers to be ‘both dependable and disposable’. Boxall notes that while levels of trust will vary according to the nature of the exchange, breaches of trust are the issue. In extreme cases loss of trust may demand radical solutions such as relocation or outsourcing.

In relation to the second problem Boxall identifies three moderating variables. First, firms' investments in human capital vary according to the different value to them of employee groups, from managers to contract staff. A second factor is the technological context: low knowledge-intensive industries such as textiles and footwear demand less investment than high knowledge-intensive sectors such as professional services. A third factor relates to the cost-based or skill-based nature of service industries—the former demanding less human capital investment than the latter.

The ‘cutting edge’ of current strategic HRM research, however, according to Boxall, is concerned with the third question: how firms can obtain a sustained competitive advantage through their management of human capital. Here he notes the importance of distinguishing between labor-cost advantages and labor-differentiation (p. 25) advantages. The key to sustained advantage according to Boxall is via the ‘human resource advantage’, which he claims is derived from more rather than less investment in people (see also Sean O'Riain's comments on ‘lean versus learning’ approaches to staffing and human capital development in Chapter 23). While indicating potential solutions, Boxall's approach is essentially analytic, his main concern being to highlight some major problems contemporary organizations face in managing human capital. His chapter sets the scene for succeeding chapters in this part, which continue our exploration of the human capital—performance equation.

Chapter 12

Monika Hamori, Rocio Bonet, and Peter Cappelli address the question of how modern firms obtain the human capital they need. They focus on how workforce recruitment and hiring practices have changed since approximately the late 1980s, as firms, driven by external forces to improve efficiency and increase flexibility, have responded by flattening hierarchies, downsizing, and making greater use of external labor markets.

Hamori and her co-authors identify four key features of these strategic shifts: (1) a decrease in the importance of internal talent development; (2) an increase in external hiring practices; (3) increased use of alternative work arrangements such as part-time, temporary, and contract work; and (4) decreasing loyalty of employees to employers.

In a wide-ranging and insightful survey of current trends the authors describe these strategic shifts and their human capital implications. For individuals the most important implication appears to be the shift in responsibility for their human capital development from the firm to themselves: careers have become dissociated from specific employers or particular jobs. From the firm's perspective we can see an increasing need to achieve a balance between workforce flexibility and workforce continuity, the former required to survive and the latter to compete long term. Clearly not all human capital is of equal value—reinforcing the importance for HR practitioners of adopting contingent rather than universalistic approaches to human capital management—as noted by Lepak and his co-authors in Chapter 13.

In their analyses of current recruitment practices Hamori and her co-authors identify two key trends: the increased use of executive search agencies, and the growing use of the Internet as a recruitment medium. They show how executive search agencies typically recruit from a small number of top-tier firms in any industry, one result being to restrict firms' access to a restricted human capital pool. On the other hand, as they point out, lower-tier firms are likely to be the beneficiaries of such human capital transfer. One might also speculate on the implications for transfer of firm-specific human capital from larger to smaller firms (see for example, Peter Sherer's comments in Chapter 22).

(p. 26) The results of increased use of the Internet appear clearer cut; both firms and workers have more options but as a result have to invest more effort in filtering and evaluating the relevant data. Once hired, employees are still open to the lure of new jobs online while employers are left with the problems of staff retention. All parties clearly benefit from internet recruitment but, as the authors note, availability and use of the technology appears to have shifted the balance of bargaining power from human capital buyers to human capital suppliers, and recruitment power from the firm to the market.

Hamori and her co-authors highlight three conclusions from their research: (1) a need for firms to improve their personnel selection skills and methods, (2) a need to acknowledge the shift in responsibility for career management from firms to individuals, and (3) a need for firms to recognize that employee attitudes and turnover are increasingly driven by forces outside their boundaries.

This chapter raises some interesting questions. Will firms accept the recruitment challenge or outsource it to the market? Will individuals shoulder their career management or will new intermediaries emerge to assist them—enhanced roles perhaps for staffing agencies and business schools? Will firms combat the growing dissociation between jobs and careers by offering ever stronger incentives to retain their key suppliers of human capital?

Chapter 13

David Lepak, Juani Swart, and Riki Takeuchi focus on the question of how alignment between human capital and organizational strategy influences individual and organizational performance. The starting point for their chapter is the HR architecture proposed by Lepak and Snell (1999), which suggests that firms' decisions to build or buy in human capital are influenced by its strategic value and uniqueness. Lepak and Snell identify four types of employment relationship, each aligned with a different value/uniqueness configuration and a correspondingly different human resource management system. The model suggests that optimizing fit between employees' differential human capital, their work contracts, and organizational HR practices should positively influence firm performance.

Lepak and his co-authors note that while subsequent research has broadly validated Lepak and Snell's HR architecture, its performance implications have not been fully explored. It is also static in nature—that is, aimed at achieving alignment at a point in time, whereas organizations need to maintain fit over time and in changing contexts. The authors proceed to address both these issues.

In relation to performance implications the authors review possible relationships between employment type and organizational performance, identifying a range of potential effects. For example, a differentiated approach to employee management may positively influence a flexibility outcome while negatively (p. 27) influencing a cost outcome. Their analyses illuminate the complex web of relationships between fit and performance, including the effects of differentially targeted HR systems.

At the individual level of analysis the authors investigate the potential influence of job security/career prospects and the target of an individual's commitment on performance. In a wide-ranging analysis they question whether conventional goals of maximizing workforce commitment are necessarily desirable, given that, while core workers and firm's targets of commitment are likely to be in alignment, the targets of commitment for those in job/productivity relationships are more likely to align with their future careers outside the firm. Other topics explored in relation to each of the four generic employment groups include the performance effects of ‘overinvestment’ and ‘underinvestment’ strategies (for example, low- or high-commitment HR practices), perceived organizational support, and employee perceptions of fairness and equity.

Turning to the question of dynamic fit, Lepak and his co-authors explore temporal, social, and contextual factors. They canvass issues such as how to anticipate and dynamically adjust management practices to cope with human capital growth and decay over time, how to use social capital to leverage human capital, and how to maximize individuals' different value-adding capacities, noting that some may contribute value directly whereas others may be ‘value enablers’ or ‘connectors’.

In their conclusion the authors speculate as to whether a firm's core knowledge workers (those with highly valuable and unique knowledge) might reside outside its boundaries; that is, not be in an employment relationship and thus not directly manageable, and if so how this would affect the firm's strategic freedom. They further ask whether an employee's attachment to clients or to their professions may surpass their commitment to the firm, and if so, how such preferences may affect their interest alignment with the firm (see also Chapter 10). These are clearly significant questions for future research. Coff picks up the topic of commitment in the next chapter.

Chapter 14

Russell Coff's chapter describes two dilemmas for organizations seeking to derive a competitive advantage from human capital (defined as knowledge derived from education, training, and experience). First, the very qualities such as knowledge tacitness and causal ambiguity that make employees' human capital valuable, inimitable, and a source of competitive advantage to firms, make it difficult for firms to acquire, organize, retain, and motivate those employees. Secondly, employees will inevitably seek to maximize their share of the rents accruing from organizational use of their capital through wages, expenses, and benefits, thus only a portion of the rents may flow to shareholders. Strategies to reduce dependency on employees' idiosyncratic (p. 28) human capital through knowledge codification and routinization risk increasing imitability. Firms must therefore address these human capital dilemmas directly.

Coff proceeds to analyze issues associated with gaining a competitive advantage from human capital. Employee turnover is one issue. Individuals with general human capital are considered attractive to other firms, but individuals with the ability to acquire firm-specific knowledge may also prove attractive in the external labor market (see also Peter Sherer's comments on this topic in Chapter 22). Competitors tend to seek individuals with socially complex human capital derived from relationships with suppliers and customers, such as members of high-performing work teams. General, firm-specific, and socially complex forms of human capital are thus all prone to turnover, implying a need for firm strategies to retain and motivate staff at all levels.

Other factors constraining firms' ability to realize a competitive advantage through their human capital include information issues related to social complexity and causal ambiguity. Effects on team performance of individual suppliers of human capital in complex social structures may prove causally ambiguous, not only to external observers but to firms' managers. Other information dilemmas reviewed by Coff include effects of adverse selection, issues of moral hazard relating to shirking and motivation, and issues of bounded rationality. In relation to bounded rationality issues, Coff notes that today's managers may have less knowledge than those they oversee, resulting in serious organization and motivation dilemmas (see also Chapter 7).

Coff proposes several ‘coping’ strategies to address turnover and information dilemmas. Retention strategies may reduce turnover by improving job satisfaction and creating firm-specific knowledge and routines. Organizational design strategies may be used to address motivational and informational issues; shared governance mechanisms may be used to overcome problems of asymmetric information and uncertainty; organic organization structures may be used to encourage lateral and face-to-face communication, and ‘strong’ cultures used to help firms cope with both turnover threats and information problems. Informational strategies suggested by Coff include use of labor market data to address adverse selection, and multi-rater feedback to evaluate employee performance.

Coff comments that even if coping strategies are applied successfully and the firm thereby gains a competitive advantage, the full value derived from the advantage may not necessarily flow to shareholders, because managers and other employees of the firm will seek to maximize their share of the rents. This brings us to the second of the two human capital–firm performance dilemmas. Coff identifies employees' ability to maximize the benefits of their human capital contributions for themselves as a function of their bargaining power. Such power is reflected in individuals' ability to act collectively, their access to key information, their replacement cost to the firm, and their ability to move to another firm. On all these dimensions (p. 29) he argues that employees may be in a strong bargaining position relative to external shareholders.

To address this bargaining imbalance Coff suggests that firms need effective value appropriation strategies. Mechanisms identified by him include the use of strong incentives, such as participation in decision-making, plus investments in firm-specific skills, the provision of firm-specific compensation, and routinizing tasks. He notes, however, that governance mechanisms that grant external shareholders bargaining power in terms of strong information and direct influence are probably the most effective means of ensuring optimal distribution of rents.

The chapter provides much food for thought. Coff's argument is that the more idiosyncratic the firm's human capital the greater its potential for generating competitive advantage, but equally the greater the challenges to firm-level appropriation and equitable distribution of its value. These considerations highlight the need to explore further the relationships between human capital, competitive advantage, and firm performance. We continue the exploration of the elusive human capital-performance relationship in Chapter 15.

Chapter 15

In Chapter 15 Robin Kramar, Vijaya Murthy, and James Guthrie discuss how the shift to a knowledge-based economy has propelled firms' human capital and associated intellectual resources to center stage. They note that while organizational researchers have highlighted the increasingly strategic role of human capital, and despite a growing realization among firms that their human knowledge resources are becoming more important, managerial awareness of the value of human capital remains low. The authors suggest that human capital management, measurement, and reporting are increasingly vital capabilities that all organizations will need to acquire. They proceed to analyze the nature of human capital, trace the evolution of human capital accounting, identify current accounting challenges, and describe contemporary frameworks that are seeking to address these challenges.

Kramar and her co-authors define human capital within organizations as ‘employee capability, knowledge, innovation, adaptability and experience’, noting that it is typically represented as one element in a tripartite framework of intellectual capital or ‘knowledge flows’, the other two being relational capital (relationships involving customers, suppliers, and others) and organizational capital (intellectual property and infrastructure assets). They describe six stages in the evolution of human capital accounting. In the 1960s human asset accounting sought to improve accounting for human capital in firms' balance sheets. During the 1970s and 1980s human resource accounting aimed at accounting for human resources as assets rather than expenses. During the 1990s an interdisciplinary management accounting perspective, human (p. 30) resource costing, and accounting was developed in Sweden, and separately Roslender and Dyer promoted the concept of human worth accounting.

Throughout the 1990s and early 2000s various attempts were made at accounting for human competences as a part of intellectual capital accounting frameworks, such as Sveiby's Intellectual Assets Monitor. The authors comment that the consensus among theorists and informed practitioners is that these and prior attempts at human capital accounting, mostly based on monetary valuation, have largely failed. They note a current trend away from reliance on monetary valuation to broader accounting frameworks, incorporating qualitative measures and financial and non-financial indicators.

Accounting-related challenges facing contemporary organizations include how to optimize human capital alignment with organizational needs, how to predict human capital requirements, how to measure the effects of human capital on organizational performance, and how to increase managerial awareness of people as assets rather than costs. The authors note that the tools that organizations are currently using to address these challenges, such as competency frameworks, benchmarking studies, human capital management systems, and engagement surveys, have so far been able to provide only partial solutions.

In light of the relative lack of success of human capital accounting and reporting to date, the authors suggest a need for fresh approaches. They cite recent moves to link human capital accounting to social accounting and new forms of accounts, including ‘extended performance accounts’ and ‘global reporting initiatives’. In general they signal a shift to using a richer mix of financial and non-financial indicators and the use of narratives to help identify the value of human capital to organizations.

Chapter 16

Rob Grant and James Hayton's chapter helps to set the scene for Part IV with an examination of interdependencies among people in organizations. Defining human capital as the ‘totality of human potential’ available to an organization, they note that to realize this potential individuals must integrate their knowledge and activities, and that integration involves human interactions requiring both cooperation and coordination. Grant and Hayton review the relevant literature from three perspectives: the characteristics of the work people do (structures and processes), the characteristics of the organizations within which they interact (social capital, culture, and climate), and the characteristics of the individuals themselves (competencies).

The authors trace the evolution of structural and process perspectives on interdependencies, from sociotechnical systems thinking in the 1950s, through the work of Thompson in the late 1960s, to the work of Mintzberg in the 1970s, and Malone and others associated with the MIT Centre for Coordination Science in the 1990s. They highlight the work of Tjosvold during the 1980s, relating it to prior research, notably by Deutsch, in embracing not only the nature of work processes but culture, (p. 31) cognition, and social psychological factors. Grant and Hayton proceed to examine the literatures on organizational culture and climate. They argue that the organizational climate literature, given its focus on the impact of the organization's social system on individuals and groups, offers a particularly useful lens through which to study the effects of informal coordination and interdependencies. As an example they note how organizational climate may influence choice of autonomous versus team-based working, with consequent implications for social interaction. Social interactions bring into question the role of social capital. The authors argue that although social capital can be used to help explain human capital investments and how human capital creates value, from the viewpoint of managing interdependencies between people in organizations it is the structure and character of social interactions that matters; that is, networking rather than capital per se.

The authors turn next to the literature on individuals' characteristics and the role they play in human interactivity in organizations. They note that competency modeling has confirmed the role of four attributes: achievement motivation, self-awareness, social awareness, and self-regulation—factors associated with ‘emotional intelligence’—as consistently characterizing high performers, and that these attributes have been claimed to be better predictors of job performance than traditional human capital determinants such as education, training, and experience. They suggest that while debates may continue over the value of emotional intelligence as a construct, effective human interaction is critical to job performance, and human competencies in this area are clearly related to individuals' control of their own emotions and their ability to sense and react appropriately to the emotions of others.

Grant and Hayton's review shows how task and process perspectives reveal differing types of interdependencies between people in organizations and their effects on knowledge integration. They also show that collective norms and values (culture) and individual competencies for interaction (particularly emotional intelligence) significantly influence the success of human interactions, thus the extent of integration achieved. Their findings remind us that for organizations to maximize returns on their human capital investments they will need to take into account all these elements.

Chapter 17

David O'Donnell explores interdependencies between human and structural capital in organizations, drawing on Kantian pragmatism and in particular the work of Jürgen Habermas. In common with many authors in this volume he identifies prevailing notions of human capital, along with other intangible, intellectual forms of capital in organizations, as an heuristic rather than a theoretical construct. He argues that currently accepted intellectual capital taxonomies are based largely on neo-positivist concepts borrowed from the natural sciences, which he claims have resulted in linear, static models with limited practical relevance. He highlights the need for more dynamic and theoretically grounded approaches to defining intangible (p. 32) capital and to exploring intra-organizational relationships between human and structural capital.

As a basis for developing a dynamic view of the human—structural capital relationship O'Donnell moves to the agency—structure question, drawing on Reed's (2003) reductionist, determinist, conflationist, and relationist/realist typology of competing perspectives. He discusses how the relationist/realist perspective fits the Kantian pragmatist worldview and aligns with the concepts of organizational lifeworld and Habermas's theory of communicative action. The firm in this context is conceived as a social community specializing in creating, developing, maintaining, and leveraging its processes of knowing through relations between people involved in communicative action. O'Donnell uses Habermas's 1987 typology to depict communicative relations between people in the firm (human capital in interaction) as dynamically interdependent with its cultural, social/community, and psychological social structures and their associated reproduction processes of cultural reproduction, social integration, and socialization (social structural capital). Dimensions of evaluation are defined as rationality of knowledge, solidarity of members, and personal responsibility.

O'Donnell emphasizes the importance to modern organizations of collaboration and thus linguistic competence. He prefaces a discussion of the linguistic validity claims, central to the theory of communicative action, by distinguishing between instrumental and communicative agency orientations. Whereas the former is oriented towards success or efficacy, communicative action is essentially concerned with reaching inter-subjective understanding. Following a discussion of the communicative relationship O'Donnell uses the organizational lifeworld typology to model the interplay between communicative action (‘human capital in interaction with the validity claims within speech acts’) and lifeworld structures and processes (‘social structural capital’) in organizations, citing real world examples. A key message for management is that anything that impedes critiques of validity claims within a set of communicative relations will negatively influence the firm as a knowing community. Another implication is that given agents and their lifeworlds are ‘situated’, communicative actors cannot transcend their own organizational lifeworlds, albeit the organizational lifeworld itself is inherently transcendental in character in that it provides the background of mutual intelligibility that makes communicative relations possible.

O'Donnell's chapter shows how Habermas's theory of communicative action and the lifeworld can be used to illuminate the dynamic interdependencies between the human capital inhering in communicative relations between people and the social structures and regenerative processes representing structural capital. He also reveals how a Kantian pragmatist approach, by regarding objectivity, intersubjectivity, and subjectivity as ‘mutually irreducible’ and ‘equiprimordial,’ overcomes the apparent limitations of intersubjective communication and that, as a result, validity claims within the communicative relation may be empirically verified both by internal participants and external observers.

(p. 33) Chapter 18

Ikujiro Nonaka, Ryoko Toyama, and Vesa Peltokorpi commence Chapter 18 with a review of perspectives on human capital from labor market economics, intellectual capital, and the transactions-cost and resource-based literatures. They conclude that although these perspectives shed light on what human capital is and how it contributes to firms' competitive advantage, they largely fail to explain how human capital is developed and utilized in organizations. The authors attribute this failure to perceptions of human capital as an aggregate notion and positivist philosophical concepts of organizations, which they criticize for allowing standardization and uniformity to take precedence over human variances. The authors argue the need for a concept of organizations as organic entities investing in dynamic and distributed human capital, and proceed to use the Aristotelian notion of phronesis to describe how human capital is developed and used within organizations and the implicit interdependencies involved.

Building on the notion of the firm as a knowledge-creating entity, Nonaka and his co-authors characterize knowledge creation as a social process that validates truth. Knowledge in organizations emerges through a collective validation of individuals' value judgments based on their values, ideals, aesthetic perceptions, and truth perceptions. These ideals, values, and aesthetic sensibilities create an organization's ontology or way of categorizing the world, helping to define its vision, its present existence, the knowledge it creates, and its perception of its environment. Phronesis is the practical capability to make the value judgments necessary for continuous knowledge creation. Citing Aristotle, the authors note there are three types of knowledge: episteme, universal truth that exists objectively, is context independent and can be described explicitly; techne, technique, technology, and art, is context dependent and represented in practical and tacit human skills; and phronesis is the ability to grasp the truth about what is good or bad in a particular situation and take appropriate action. The element of moral discernment reveals phronesis as an intellectual virtue, possessing an ethical component lacking in the other two types of knowledge. Key components of phronesis are practical wisdom and prudent and ethical decision-making ability.

Nonaka and co-authors posit phronesis as a capacity of organizations that exists at multiple levels and is an essential complement to other types of knowledge; for example, techne is knowledge of how to make a car properly, whereas phronesis is knowledge of what a good car is (value judgment) and how to build it (value realization). The authors propose that phronesis in a knowledge-creating company consists of six abilities: making a judgment on ‘goodness’; sharing knowledge contexts; grasping the essence of situations and things; using language, concepts, and narratives to reconstruct particulars into universals, and vice versa; using the necessary political means well to realize concepts for the common good; and fostering phronesis in others. They describe these six abilities and the conditions necessary for (p. 34) fostering collective phronesis in organizations, using examples from leading organizations including Honda, Mitsui, Eisai, Seven Eleven, and Toyota.

The authors conclude that phronesis has fundamental implications for how organizations view their human capital and the strategies they adopt to develop and use it. Rather than simple investments in education and training, they note the importance of developing contextual and value-laden knowledge from individual, subjective interpretations produced and validated in a social context. The management of organizations and the development and use of human capital they describe as an emergent, distributed, phronetic process operating at multiple levels, rather than the domain of single entrepreneurs.

This chapter provides a further set of perspectives on human capital and its interdependencies. We see a different type of interdependency at work, involving the interplay of idiosyncratic human values and intentions and the reconciliation between them required for effective organizational functioning. Moving beyond scientific and technical concepts of knowledge, phronesis incorporates virtues of human character—intent on discerning what is ‘good’. In an organizational context this implies good not just for the individual but for the collective. Such discernment requires human capital with the ability to identify the ‘virtuous mean’ among competing options, highlighting in turn the importance of experience, leadership, and political skills. Investments in and returns from human capital need to be geared to developing these aspects of human ‘character’, not merely epistemic knowledge or technical skills.

The chapter indicates that a phronesis-supporting environment (ba) aids distributed phronesis, thus inducing individuals to maximize contribution of their human capital. The use of phronetic narratives suggests how organizational appropriation of the value of individual's contributions may be enhanced (see Chapters 10 and 14). Phronesis also offers another lens through which to view Becker's firm-specific versus general human capital distinction (see in particular Chapter 22). Phronesis or practical wisdom suggests dimensions of firm-specificity extending beyond knowledge of firm-specific rules and routines to suggest how experienced and expert organizational actors may embody firm-specific history and values in decisions, policy-making, and development of procedural artifacts. The authors reveal how understanding phronesis can aid our understanding of human agency in the knowledge-creating firm.

Chapter 19

Jacqueline Vischer's chapter focuses on interdependencies between people and their physical work environment—the buildings they occupy and the spaces in which they work. She shows how these interdependencies affect employees' work attitudes and behaviors, thus organizational returns on human capital investments. She argues that an organization's physical environment affects its overall performance, through constraining or supporting achievement of its business objectives, the task (p. 35) environment, and intra-organizational relationships. She proceeds to review how work space influences each of these dimensions.

Vischer suggests that organizations and their members develop organization–accommodation (O–A) relationships with the land, buildings, workspaces, and information technology that they use that reflect their objectives and cultures. As with relationships between organizations and their employees, O–A relationships need to be aligned but also flexible so as to permit change over time. At different times O–A relationships may for example reflect a focus on ‘exploration’ or ‘exploitation’ strategies, structural coordination or interpersonal cooperation, and the differing needs of a mobile or static workforce. Vischer suggests that organizations need a workspace architecture, analogous to an HR architecture (see Chapter 13) that is designed to maintain fit over time between people and their physical environments.

On the subject of relationships between organizations and individuals, Vischer argues that along with the various HR elements in work contracts there is a ‘socio-spatial’ element involving promises regarding physical work conditions. Key elements of this (usually implicit) sociospatial contract are territoriality, environmental control, and job performance. Promises, however, may be breached. Vischer claims, for example, that ‘homogenized’ open-plan working conditions tend to send a message to workers that ‘you are all the same to us’. Drawing on the theoretical and empirical literatures Vischer suggests that making workspace arrangements more explicit within the hiring process, and involving workers in accommodation decisions affecting them, can speed up employee acceptance and productive use of workspace, thus organizational returns on human capital investments.

Understanding how workspace features affect human behavior and how people interact with their workspaces, Vischer argues, is essential to negotiating the socio-spatial contract and to understanding and improving the O–A relationship. Synthesizing environmental psychology and human capital perspectives, she uses the notion of ‘functional comfort’ to suggest that workers struggling with arduous physical work environments are wasting human capital that might be better applied for the benefit of the organization. Expanding the concept of physical functional comfort to incorporate the virtual and mental concept of ‘ba’ and drawing on Nonaka, Nenonen, Heerwagen, and others, Vischer outlines a high-level workspace typology that identifies the various space requirements associated with differing levels of social collaboration (awareness, brief interaction, collaboration) at each stage in Nonaka's SECI model (socialization, externalization, combination, and internalization).

Vischer reveals the importance of the physical work environment in supporting or constraining workplace productivity and organizational performance. Her chapter illuminates linkages between the physical and virtual worlds of organizations and suggests how a better understanding of their interdependencies can assist organizations in obtaining more value from their human capital.

(p. 36) Chapter 20

In Chapter 20 Alan and Andrew Burton-Jones argue that while people and information systems (ISs) represent the two single largest areas of investment for many organizations and are increasingly interconnected resources, there has been very little research on the nature of their interdependencies and how these interdependencies affect their functioning and complementarity—thus organizational returns on investments in them and their effects on organizational performance.

Defining an IS as ‘an artifact that provides representations of some domains in the world’, and noting that ‘the development and use of an IS depends on both technologies (infrastructure and applications) and people (developers, managers, users)’, the authors examine the extent to which people and ISs can be regarded as forms of ‘capital’. They find that both share many features traditionally associated with capital, and in addition both derive their value principally from individuals' knowledge. The authors conclude that human and IS capital are strongly interdependent forms of capital, requiring an holistic approach to their measurement and management.

From a review of the literature on interdependency in organizations the authors identify critical interdependencies involving people, systems, and tasks. They next introduce a model describing interdependencies between two types of resources—people and systems—and two types of activity and associated tasks: functional support activities and primary activities. Noting a paucity of research on such interdependencies in the organization science and IS literatures, the authors describe the results of two empirical studies of people–IS interdependencies that the first author conducted. These two studies differed in nature—one was inductive and the other was deductive—but both found strong interdependencies between people and ISs, providing further fuel to the authors' thesis that these interdependencies cannot be ignored or assumed away. Moreover, the studies identified several different ways in which these interdependencies can occur in practice.

The first study, involving a large inner-city hotel, measured the influence of the hotel workforce (people), hotel information systems and processes (IS), and the hotel brand standard on hotel performance. The authors report evidence of strong resource–resource dependencies, leading them to conclude that models positing an independent effect of people, brands, or systems on organizational effectiveness may be incomplete and possibly misleading. The second example, a deductive study, used a three-stage causal model to explain how functional support tasks affected the provision of resources used to perform work tasks that in turn influenced organizational effectiveness. The authors describe various interdependent relationship patterns involving HR and IS resources and support functions at each stage of the model.

The authors identify three main implications from their research. The first is that given the strong interdependencies observed between people and IS in their (p. 37) performance effects, models that seek to show how to use human capital to improve organizational performance should incorporate both people and IS, and model both resource fit and resource interdependency. The second implication is that people and IS are dependent on other forms of intellectual capital and that all forms of capital are ultimately knowledge-based (see also Chapter 5). The authors conclude from these multiple dependencies that researchers and practitioners should benefit from viewing all forms of capital in a more systemic and dynamic fashion. The third implication is a recommendation for more coordinated approaches to managing IS and people resources, which the authors note may involve reconceptualizing the relationships between people, IS, and knowledge as an active process in organizations.

Chapter 21

Part V looks to the future and the place of human capital in twenty-first-century economies, firms, and institutions. Various angles open up: the interaction of developed and developing economies, environmental and ethical concerns, globalization, and new forms of work. David Teece's chapter deals with organizational transformation, noting that twenty-first-century organizations are structured to extend delegation by the senior management team to those whose task-specific expertise (organizationally relevant human capital) is greater than their own. Citing McGirt, Teece describes Cisco as ‘a distributed idea engine whose leadership emerges organically, unfettered by a central command’.

As ideas become more important, so does education. Teece reviews Marshall's comments on this, and some, we presume, helped shape Becker's views. The trend makes the people who absorb and generate these ideas more significant too. Teece labels these individuals ‘literati and numerati’—the latter being skilled in numerate and symbolic analysis. These categories contrast with entrepreneurs, whose activity draws ideas into the economy. Teece shares the ‘Austrian’ theme echoed by many of our authors—Lewin and Loasby in particular. Like Loasby, Teece argues that neoclassical economics neglects ideas and entrepreneurial creativity. The twenty-first-century managerial challenge, he suggests, is to manage contributions by the literati and numerati who create and convey innovative ideas into the non-equilibrium-seeking and dynamic economies in which they generate value.

Teece reviews the literature on entrepreneurship, noting difference between the Schumpeterian entrepreneur's desire to innovate and disturb the economy, and the Kirznerian entrepreneur who spots the opportunities opened up and seizes the market's impulse to equilibrium in his/her favor. Teece fleshes out the management practices that lead to profit. One problem, as most recognize when discussing the measurement of human capital, is that it is difficult to know talent and to value it ex ante. Teece notes Lotka's ‘power law’—that most of the important contributions to a field (p. 38) are made by a small percentage of those engaged in it—implying that ex ante measures miss the point. Talent must be both present and engaged for success. Teece sees organizations as the important means to achieve this, thus ‘engines of economic progress with human capital as their pistons’.

To engage the literati and numerati Teece proposes that organizations need ‘dynamic capabilities’, about which he has written much. ‘Dynamic capabilities have become the shorthand by which many understand the processes whereby, in fast-paced global environments, firms organize to develop sought-after new products and processes’. Or ‘dynamic capabilities are those attributes of the business enterprise that enable it to orchestrate assets and organizational units, while remaining relevant to the market and other aspects of the business environment’. Teece argues that dynamic capabilities enable the firm to deal with (a) multi-trial contexts, (b) co-specialization of knowledge, and (c) the structures that engage the necessary human capital. He distinguishes the processes of creating and capturing value from those of sensing, seizing, and transforming the opportunities available, capturing the two dimensions in a two-by-three matrix.

Teece goes on to review some history of technological innovation and surface the conundrum managers face as they see that innovative activity does not necessarily lead to success—technological push cannot produce without demand pull—as success often depends on complementary products, services, and attitudes not under management's direct control. While such issues are external, the internal challenge of managing the literati and numerati into the push remains. Teece discusses the strategic balance between direction and delegation, and how this changes when managing experts. He offers a table distinguishing traditional teams from virtuoso teams—the second being more appropriate to literati and numerati. He concludes with critical comments about the failure of contemporary theories of the firm to engage these issues.

Chapter 22

Remarking on the lack of linkage between Becker's notion of general and firm-specific human capital and the organizational literature on inter-firm movement of talent, Peter Sherer discusses how these literatures may be reconciled and how synthesizing human capital and organizational perspectives can bring human capital deeper into organizational theory. He highlights the fact that Becker's proposition that firm-specific human capital should be of higher value in the firm, providing it and general human capital of equal value across firms takes no account of the role of the firm receiving the human capital. At Becker's (aggregate, national) level of theorizing this role was not important, but for organizational theorists it clearly is. Using examples from law firms and the semiconductor industry, and drawing on population economics, labor market theories, the resource-based view of the firm, and HR management theories, Sherer explores the dynamics of inter-firm talent (p. 39) transfer—in particular the role of the receiving firm and the implications of particular types of human capital for firm-level competitive advantage. He shows that in practice both firm-specific and general human capital may be critical to a firm's competitive advantage, and describes how and why the relative value and scarcity of each type may vary over time and across organizations.

From an organizational process perspective Sherer suggests that two alternative processes may occur when human capital is transferred from one firm to another: Relocation when general human capital is transferred, and Replication when firm-specific human capital is transferred. He presents a range of studies of Relocation and Replication effects, providing insights into the various factors constraining and supporting human capital transfer. While acknowledging that more research is required on population level transfers he suggests that the activities of individual organizations over time and involving transfers of differing forms of human capital must generate population level effects, which he categorizes as Diffusion, in which firm-specific human capital becomes more general as it spreads across a population; Specification, when general human capital becomes fragmented and its use becomes firm-specific; and Drift, when firm-specific human capital fragments into multiple versions.

Sherer's research on the inter-firm movement of talent suggests that, dependent on a range of factors, relocation and replication of general and firm-specific human capital may generate positive, negative, and no firm performance effects at the individual firm level. Human capital characteristics also appear to change as they diffuse over time across a population. While focusing on inter-firm transfer of human talent, Sherer's research clearly carries implications for knowledge transfer within firms, for organizational learning, innovation, and competitive advantage, and for industry evolution. His call for a research agenda, aimed at identifying how firms gain a competitive advantage through general and firm-specific human capital and for a better understanding of population processes, seems warranted and timely. Sherer's chapter helps us to appreciate both the value and the limitations of Becker's distinction between general and firm-specific human capital, and reinforces a central contention of this Handbook that organizations matter to human capital theory.

Chapter 23

Seán Ó Riain's chapter relocates managing human capital into the larger world of which firms are merely part. He goes beyond the relationship between human capital and education to embrace the knowledge-based workings of the state. A firm's production strategies work in an institutional framework that shapes how the benefits of education are distributed and the nature of skills, work, its control, and rewards.

(p. 40) Ó Riain builds a complex model of five elements: inputs from firms' production strategies, national welfare production regimes, pertinent labor norms and interests, the firms' goals and interests, and the political system—collectively determining a sixth, the politics of firm-level human capital formation. He contrasts notions of work, education, and welfare in Germany, Japan, Sweden, and the US and UK. The analysis stands on Esping-Andersen's distinction between modes of welfare capitalism: Liberal, Social Democratic, and Christian Democrat. The processes are dynamic and interactive—calls for change by one interest group, such as labor or the employers, often neglect the way situations institutionalize in self-reinforcing ways so that even the disadvantaged are loath to change.

Yet change occurs; there is convergence as much professional work—scientific research, computers, and so on—becomes standardized. Likewise, the EU's Bologna accord leads to a convergence on the approach to the European approach to human capital. There are also contrary tendencies as regional identities flourish. Many have suggested that national innovation systems are dissolving under the press of globalization—that it is not useful to compare, say, state-supported industrial training in Germany, traditionally strong, against the weaker US system. Riain reminds us that attempts to extract human capital management from its broader political context and thereby ignore the tussle between that society's interests groups misconstrues the kinds of human capital that matter economically and with which managers must actually deal.

Ó Riain contrasts production strategies, welfare strategies, political conditions, and human capital formation regimes in the three systems, and shows how the interplay of elements varies. He distinguishes the service and knowledge economy, and indicates how changes in the nature of work affect their interplay. He pays attention to the feminization of the labor force and to the impact of transnational production. He concludes by observing that the situation is ongoing—though it is clear that the distinctions and interactions that underpinned the ‘Golden Age of Western Capitalism’ are disappearing. This is of particular interest to human capital theorists given Ashton's argument that ‘human capital theory is a product of the Fordist techniques that dominated that period. The use of narrow, tightly circumscribed job descriptions, a highly specialized division of labor, and command and control hierarchies, led to the treatment of skill as an attribute of the individual almost as if it were a possession of asset which could then be used at work for a specific return.’ In this light, many chapters in our book can be understood as attempts to overcome this historical legacy and find a concept of human capital more fitting to our time.

Chapter 24

In Chapter 24 Thomas Clarke surveys the development of human capital in developing countries, focusing on the significance of the Asian experience. A central theme is how the countries of Asia have coped and will need to continue to cope in (p. 41) future with the shift to a globalized, knowledge-based economy. In this process of development Clarke identifies a central role for human capital while stressing the complementary nature of other forms of capital including social capital, financial capital, manufacturing capital, and natural capital.

Commenting on institutional and national cultural influences across the Asian region Clarke observes that on the surface India, with its technical skill-oriented educational system, and inheritance of the English language, might appear better prepared for the knowledge economy than China with its more classical tradition of education and emphasis on rote learning. Drawing on economic, sociological, and organizational research literature he suggests that the future knowledge economy is likely to require more broadly based and creative forms of human capital than the past. Citing Evans and Sen, he notes the importance of appropriate political, social, and educational institutions plus advanced information infrastructures and innovation systems.

Turning to economic growth trajectories and tracing the progression of several Asian countries from light to heavy industries through assembly industries such as electronics to innovation, information, and knowledge-intensive industries, Clarke questions whether Asian countries can leapfrog one or more of these stages of economic growth. Here he observes that Asian nations are already playing catch-up with their European and US counterparts via information technology and telecommunications. Not only advanced economies such as Japan but emerging economies in the region are investing in broadband networks and applying internet technologies across their industry sectors. India already has the largest concentration of IT skills in the world. Clarke also notes the efforts of countries across the region to ramp up manufacturing, hi-tech, and knowledge-based industries via clusters that fuse FDI with local research and producer services. A potential source of expert and well connected human capital that may aid this process is the large Asian entrepreneurial diaspora currently participating in North America who may be attracted home for cluster development in East Asia—providing, as Clarke notes, there is a welcoming institutional environment to which they can return.

Clarke observes that the spectacular growth enjoyed by several East Asian economies, previously led by Japan and now China and India, has demonstrated the region's huge potential for developing human capital. This growth has undoubtedly been fueled by significant public expenditure on education, with nine years of education compulsory across the region and increasing investment in vocational and tertiary education. As to whether the Asian model of rapid growth can be extended to the rest of the developing world Clarke is less sanguine, noting that poorer nations' struggle to climb out of poverty and progress towards a knowledge economy is unlikely to make progress until issues of international trade, foreign investment, and aid are resolved in a more balanced way. For the relatively few economies in East Asia and elsewhere that have developed the necessary human and other capital necessary to succeed in the knowledge economy, a future challenge will be to (p. 42) continue to develop the institutions and the business and educational relationships that will help them continue to compete with the West.

Chapter 25

Thomas Kochan and Adam Seth Litwin assess the future of human capital in organizations from an industrial relations perspective. They note that, paradoxically, while human capital has grown in importance in the shift to a knowledge-based economy, the externalization of work that has accompanied this shift and the consequent weakening of labor market institutions has reduced incentives and pressures on firms to invest in people. They suggest that this is a case of market failure. Resolving the paradox will require firms as well as unions, professional associations, staffing agencies, and the state to work together. The employment relationship thus becomes their unit of analysis, and they explore the variety of institutional support that will be necessary to rebuild and sustain that relationship in the future economy.

Kochan and Litwin start by discussing how traditional assumptions underpinning firm worker relations, such as protected national wage systems, a male dominated workforce, full-time employment, and its associated social contract, no longer apply. Similarly the institutions constructed to address three key labor market issues: human capital formation and development, work–life integration, and the role of women in the labor market, and the relationships between technology, technological change, and employment practices are now outmoded. The authors proceed to chart the changes that have occurred in each these three key areas. They describe how, when internal labor markets were strong and stable, firms could afford to invest in general human capital, whereas in today's markets such investments would make workers mobile and open to poaching— possibly a belated confirmation of Becker's thesis (see also Chapter 22). Similarly, whereas unions used to help keep workers' skill levels up to date, the shift to individualized and externalized work contracts has fragmented collective bargaining and union power.

Charting the evolution of work–life perspectives, the authors note that Henry Ford paid his male workers enough to allow their wives to look after home and family. As women became more educated the male breadwinner model of employment became progressively less viable, leading to pressures to utilize both male and female human capital in the workforce. While in the industrial era the state could safely devolve work–life integration problems to business this has become decreasingly viable. Kochan and Litwin discuss the differing approaches taken by nations to support work–life integration through paid maternity leave and other schemes, noting the USA's relatively poor showing compared to some EU nations. In relation to technological change the authors argue that whereas pacts between business and organized labor traditionally helped spread the positive and negative effects of tech (p. 43) nological progress across all the stakeholders, the balance now favors business, and state intervention is therefore required, in the form of worker retraining and similar schemes, to reduce human capital loss due to technological substitution.

Turning to the question of how to encourage the right type of work arrangements for the future economy, Kochan and Litwin emphasize the importance of trust-based relationships between business and both external and internal suppliers of human capital. Citing the literature on productivity from IT usage they note the importance of understanding the complementary roles played by people and IT in economic growth in order to maximize ROI in human and IT investments (see also Chapter 20). Given the continuing trend to externalized work arrangements the authors discuss the potential for professional associations and craft unions to help externalized workers acquire and maintain their skills and advocate a stronger role for government to avoid loss of human capital through market failures.

In making industrial relations the centerpiece of their chapter Kochan and Litwin bridge micro-, meso-, and macrolevel perspectives of human capital. They show that while the old industrial relations model is outmoded, a viable successor is not yet in place, and that new links and stronger connections between individual workers, firms, and networks of private and public institutions will be increasingly vital for human capital to flourish in the future economy.

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