A Framework for Human Resource Management in the Knowledge Economy: Building Intellectual Capital and Innovative Capability
Intan-Soraya, Rosdi, Chew, Kok-Wai, International Journal of Business and Management Science
Over the years, the business environment has grown increasingly complex and characterized by rapid technological advancements. Innovation is the critical enabler for organizational value creation and sustainable competitive advantage, and it is driven by a firm's capacity to manage its knowledge stocks or intellectual capital (Chen and Huang, 2009). An organization's capability to innovate either in an incremental or radical manner depends on its knowledge management capacity (Subramaniam and Youndt, 2005). Since the knowledge based view of the firm runs on the basic premise that knowledge resides in individuals, firms need to facilitate communication and exchange among individuals in order to gain new insights and capabilities (de Pablos, 2004; Nonaka and Takeuchi, 1995). Reference to people management literature is therefore crucial to understanding organizational knowledge dynamics. Since literature in the field of human resource management (HRM) is specifically concerned with the management of people in organizations, it is comprehensively explored in the context of knowledge management and organizational innovation. Hence, the question is 'how can a firm's human resource management strategy and practices be geared towards building its intellectual capital and innovative capability?' Much of the existing literature have established the important role of HRM in innovation performance, but few have explained 'how' it manages to do so (Kang, Morris and Snell, 2007). By converging studies on strategic HRM, organizational learning and knowledge management, and innovation, this paper aims to develop an integrated framework that captures how a firm's HRM strategy and practices can be utilized to drive organizational knowledge building, and enhance a firm's innovative capability.
This section reviews literature on organizational innovation, organizational learning, knowledge management, and human resource management due to their relevance in constructing the research framework.
Innovation refers to a planned and drastic change in an organization or its existing products and processes with the intention of gaining competitive advantage over competitors (Leede and Looise, 2005). Innovation is essentially about detecting opportunities and using them to create new products, services, or work practices (Van_deVen, 1986), which makes it an important enabler in a complex and rapidly changing environment (Subramaniam and Youndt, 2005). Firms with higher innovativeness tend to more successfully respond to changing environments and develop new capabilities (Montes, Moreno and Fernandez, 2004). Innovation comes in different forms, and the most established categories are product innovation, process innovation, and organizational innovation. While product innovation refers to the development of new products and services, process innovation involves new technologies in production or service, and finally, organizational innovation refers to the development of new organizational structures and management practices (Boer and During, 2001).
There is an assortment of definitions of innovation types in the literature, but they share a common theme which focuses on how knowledge is used to meet customer needs and create competitive advantages (Gloet and Terziovski, 2004). As innovation is basically about being able to identify and seize opportunities to create new products, services, or work practices (Van_deVen, 1986), the process of innovation is commonly equated with a continuous pursuit of new and unique knowledge (Nonaka and Takeuchi, 1995). There is a well-established theme within the innovation literature which emphasizes on how knowledge is crucial for firms to come up with new products, services, and processes in order to meet customer needs and create competitive advantages (Gloet and Terziovski, 2004). The unique and tacit knowledge of individuals is a fundamental source of innovation, making people the main agent of change in the business environment. Hence, in studying the processes that facilitate innovation, much research has shown how innovation is inextricably linked to the management of knowledge, and also the management of people who are the elemental knowledge storehouses (Egbu, Botterill and Bates, 2001).
However, most of the existing research on how organizational knowledge contributes to innovation focuses on generic innovation outcomes such as product innovation, technology patents, and sales generated from new products (Subramaniam and Youndt, 2005). In other words, most studies focus on innovation types, be they product, process, or technological. Minimal research exists on investigating how organizational knowledge is connected to specific characteristics of innovation. Other than the types of innovation, namely product, process, or technological, the degree of novelty, or the extent of innovation in a firm is also an important measure (Romijn and Albaladejo, 2002). While there are researchers who describe innovation as involving a radical change in existing processes, products, or the organization which result in the creation of competitive advantage, there are also many authors who discuss innovation that is incremental, or continuous in nature (Leede and Looise, 2005). Hence, the concept of incremental and radical innovation warrants further attention.
A firm's innovative capability refers to its ability to utilize skills and knowledge to successfully digest, master, and improve existing technologies, and to create new ones (Lall, 1992). Incremental innovative capability refers to the capability to generate innovations that refine and improve existing products and services, namely incremental innovation. Radical innovative capability refers to the capability to create major transformations of existing products, services, or technologies, thus making the prevailing technologies obsolete, namely radical innovation (Chandy and Tellis, 2000). The most established classification of firm innovation is whether it is incremental or radical (Subramaniam and Youndt, 2005).
Research concepts on incremental and radical innovation are not new as early researchers discuss the difference between radical and incremental ideas (Cummings, 1997; Damanpour, 1991; Kanter, 1983). Ideas can vary along an incremental-radical continuum (Baer, 2007; Cummings, 1997; Kanter, 1983). Radical ideas lead to revolutionary changes to a firm's products, processes or procedures while incremental ideas involve relatively smaller changes in the firm and does not require much new knowledge if they were to be implemented (Green, Welsh and Dehler, 2003). This perspective of ideas being on the incremental-radical continuum has been applied to looking at innovative capability as being on the same continuum (Romijn and Albaladejo, 2002). An innovation index can be used to measure the innovative capability of firms based on the extent of their innovation output which can vary from new to the world, new to the firm's industry, or new to the firm. Higher scores on the innovative capability index would locate one's innovative capability on the end of the continuum that is nearest to radical innovation. Some firms have the capability for incremental innovation while others for radical innovation (Romijn and Albaladejo, 2002). While the innovative capability of firms can be categorized as incremental or radical, or somewhere along that continuum, radical innovation has been shown to more significantly impact organizational performance and provide firms with competitive edge as compared to incremental advancements (Damanpour, 1991; Kanter, 1983).
To proceed with linking innovation to organizational knowledge, it is important to note that how a firm utilizes its knowledge base will determine the type of innovative output, namely incremental or radical (Subramaniam and Youndt, 2005). It is found that incremental innovations stem from a firm's exploiting, building, and reinforcing its existing knowledge base and technological pathways. On the other hand, radical innovations result from a firm's disruption of its existing technological pathways and its existing knowledge base to transform it into something significantly new (Gatignon, Tushman, Smith and Anderson, 2004). Either reinforcing the existing knowledge base or transforming it, each type of innovative capability therefore has a different way of utilizing a firm's intellectual capital. Hence, it is important for firms to understand the role of their knowledge base, or intellectual capital, in the creation of innovative capability. The question is how does a firm's intellectual capital influence its innovative capability?
Knowledge and Innovative Capability
As knowledge is central to organizational innovation, the study of innovation is often interlinked with the study of knowledge creation and utilization in firms (Leede and Looise, 2005). To ensure organizational survival in a highly competitive environment, firms should increase their focus on knowledge building, and emphasize on creating value from intellectual capital (Daud and Yusoff, 2009). The term intellectual capital is widely used to refer to the summation of all types of knowledge that firms utilize for competitive advantage (Youndt, Subramaniam and Snell, 2004).
There are three types of knowledge stocks existing within the firm (de Pablos, 2004). First, there is human capital, which is comprised of the knowledge, skills, competencies, experience, and commitment of employees (Bontis, 1998; Roos, Roos, Dragonetti and Edvinson, 1997). Second, a firm's relational capital or social capital refers to knowledge that is embedded in firms' relations with its employees, current and potential customers, shareholders, suppliers, industry associations, and other agents in the external environment. As there are relations with both internal and external parties, it should be noted that there are internal and external social capital (Daud and Yusoff, 2009; de Pablos, 2004). Finally, there is structural capital, which is the infrastructure that enables the leveraging of human capital. It comprises hardware, software, databases, manuals, policies, strategies, routines, culture, and other storehouses of knowledge (Bontis, Keow and Richardson, 2000; Daud and Yusoff, 2009). Structural capital can be further divided into technological capital and organizational capital to capture the distinction between technology-based storehouses and the other organizational elements. However, it is common for researchers to refer to structural capital as organizational capital (de Pablos, 2004).
Each type of intellectual capital component possesses its own characteristics. One difference in attributes of the three components of intellectual capital lies in whether or not knowledge stocks can be preserved within organizations (Subramaniam and Youndt, 2005). For example, individual expertise in the form of human capital may or may not stay within organizations depending on employee mobility. However, institutionalized knowledge in the form of organizational capital tend to stay within organizations and does not change easily (Daft and Weick, 1984; Walsh and Ungson, 1991). As for social capital, it is made up of a network of individuals who can opt to leave the organization, but their exit rarely results in complete destruction of the viability of the overall knowledge network. Therefore, social capital tends to be largely preserved even with individuals leaving the organization. Even though social capital seems to be quite similar to organizational capital in the sense that it tends to largely remain in organizations even with the exit of individuals, it is different from organizational capital because of its flexibility in knowledge utilization. Knowledge associated with social capital evolves through individual or group interactions without predetermined rules and procedures to access or exchange information. On the contrary, organizational capital evolves through organizational structures and processes, or established procedures and rules for retrieving, sharing, and utilizing knowledge. It is also important to note that social capital facilitates and strengthens the leveraging of human and organizational capital in organizations (Kostova and Roth, 2003).
Different components of intellectual capital, which are human, social, and organizational in nature, both individually and jointly influence a firm's innovative capability (Baer, 2007; Romijn and Albaladejo, 2002; Subramaniam and Youndt, 2005). For instance, in terms of human capital, individuals whose personality makes them more open to new experiences and risks has been shown to contribute more to the development of radical ideas, and that other individual characteristics such as motivation influences idea generation and idea implementation that leads to both incremental and radical innovation (Baer, 2007). The education profile of a firm's workforce, professional background of founder-managers, and the skills of a firm's workforce is also found to contribute to building innovative capability (Romijn and Albaladejo, 2002).
As for social capital's contribution to innovative capability, it has been found that individuals are more likely to develop radical ideas when they maintain sustainable network ties to people who are outside their social domains or fields. Social networks allow individuals to gain access to diverse knowledge and perspectives. Social factors in terms of network ties are conducive to the generation and implementation of both radical and incremental ideas (Baer, 2007). These findings are confirmed in another study of innovation in high tech firms which reveal that innovative capability is driven by the intensity of a firm's networks with scientific institutions, its face to face contact with suppliers, its contacts with external institutions in receiving financial support and advice, and its relationship with and orientation towards international customers and markets (Romijn and Albaladejo, 2002).
The interaction between human and social capital has also been shown to result in radical innovative capability (Subramaniam and Youndt, 2005). This finding is in line with other research discussing the importance of interrelationships, partnerships, and collaborative networks to an organization's sustainability (Adler and Kwon, 2002). Organizational capital alone has also been found to contribute to incremental innovation (Subramaniam and Youndt, 2005). The move to capture knowledge in databases, standard operating procedures, manuals, rules, and routines positively influences a firm's innovation performance (Davenport and Prusak, 1998; Gloet and Terziovski, 2004). A firm's improvement of its technological processes has been shown to increase its innovative capability via enhancement of the efficiency and effectiveness of the firm's knowledge storehouse (Romijn and Albaladejo, 2002).
Hence, the following propositions are made:
P1: A firm's intellectual capital positively influences its innovative capability
* P1a: A firm's human capital positively influences its innovative capability
* P1b: A firm's social capital positively influences its innovative capability
* P1c: A firm's organizational capital positively influences its innovative capability
Although much research has focused on the three types of intellectual capital, namely human, social, and organizational capital, only few have attempted to study the dynamics or inter-relationships between them (Subramaniam and Youndt, 2005), leaving much room for research into intellectual capital dynamics. The next important question is how does a firm build its intellectual capital?
Knowledge Management Capacity and Intellectual Capital
The term intellectual capital is commonly used to refer to the summation of all types of knowledge in firms (Youndt et al., 2004). To have proper understanding of knowledge within firms, there is a need to analyze the process of organizational knowledge building. 'Knowledge' is different from 'information' in the sense that 'information' is actually data that has a certain degree of relevance and purpose to the user, while 'knowledge' refers to information that is blended with a person's experience, situation, interpretation, and judgment (Gloet and Terziovski, 2004). The term 'knowledge management' is an approach to actively leverage upon the expertise and knowledge in individuals in the effort towards value creation (Scarborough, 2003). Knowledge management is also an all-encompassing term for a wide variety of interdependent functions which involve knowledge creation, knowledge sharing, knowledge mapping and cataloging, and knowledge transport, storage, and distribution (Gloet and Terziovski, 2004).
Existing literature recognizes the positive influence of knowledge management on a firm's innovation performance (Chen and Huang, 2009; Gloet and Terziovski, 2004; Perez and de Pablos, 2003). It also recognizes the positive influence of a firm's intellectual capital on innovative capability and on various other financial and non-financial performance measures such as profitability, revenue growth, return on assets, return on equity, customer satisfaction, and product and service quality (Hsu, 2008; Subramaniam and Youndt, 2005; Youndt and Snell, 2004). However, only few researchers such as Hsu (2008) and Daud and Yusoff (2009) have explored the relationship between knowledge management processes and intellectual capital, and they neither provide a comprehensive coverage of all aspects of the knowledge management process nor establish a complete picture of intellectual capital components. Hence, there is a need to further study the link between knowledge management and intellectual capital.
Knowledge management literature seems to consistently feature knowledge acquisition, knowledge sharing, and knowledge application as the three factors of a firm's knowledge management capacity construct (Gold, Malhotra and Segars, 2001; Lin and Lee, 2005). 'Knowledge acquisition' by employees through contact with people inside the firm and also parties external to the firm has been shown to help a firm reduce uncertainties, and allows a firm's existing knowledge base to interact with newly acquired knowledge (Nonaka and Takeuchi, 1995; Yli-Renko, Autio and Sapienza, 2001). Thus, acquiring knowledge enables firms to increase their collection of knowledge, skills, experiences, and individual and group competencies (Bontis, 1998; Roos et al., 1997). In addition, 'knowledge sharing' refers to the behavioural routines relating to the spread of knowledge among different individuals or groups, thereby enabling collective learning and new combinations of knowledge that previously existed as separate entities (Chen and Huang, 2009; Nonaka and Takeuchi, 1995; Tsai and Goshal, 1998). Further, 'knowledge application' refers to the behavioural routines involved in applying, using, or implementing knowledge that previously resided within individuals and groups (Yli-Renko et al., 2001). Applying knowledge helps improve process technologies and administrative systems (Sarin and McDermott, 2003). Knowledge application is commonly viewed as central to the knowledge management process because it enables the transformation of previously tacit knowledge into explicit knowledge, and it leads to the capturing of knowledge in an organization's hardware, software, strategies, routines, or any organizational elements (Grant, 1996; Spender, 1996).
Reference to literature on organizational learning is also crucial in the effort to understand the role of knowledge in organizations. Learning in organizations seems to generally refer to the acquisition of knowledge by organizational members (Heraty, 2004). As knowledge becomes the primary competitive resource, organizations are forced to realize that continuous learning is imperative to keep up with new technology and rapidly changing business conditions (Boud and Garrick, 1999; Drucker, 1992). Learning is the crucial enabler for firms to gain different types of new knowledge in order to enrich customer value (Kang et al., 2007). There are two alternative forms of learning in organizations, which are 'exploratory learning' and 'exploitative learning'. Depending on which type of learning is adopted in firms, organizational learning lead to differing impacts on the firm's existing knowledge base, which subsequently determines its level of innovative capability which may slant towards incremental or radical innovation. 'Exploitative learning' is defined as the type of learning that involves refining and deepening the firm's existing knowledge in order to increase customer value. Learning outcomes tend to focus on improving 'efficiency' of knowledge search, acquisition, and merging. Since it is more routine and incremental learning, it results in incremental innovation (Danneels, 2002).
Despite the benefits of exploitative learning, researchers have long cautioned against using it as the sole approach to acquiring, sharing, and applying knowledge because it has been shown to lead to knowledge decay and the prevention of knowledge stocks renewal (Levinthal and March, 1993). Hence, in acquiring, distributing, and implementing knowledge, it is argued that 'exploitative learning' needs to be complemented with 'exploratory learning,' which involves searching for new knowledge that does not exist in the firm, and knowledge that sometimes even renders the current knowledge base irrelevant. The pursuit of radical new ideas and innovations is especially important in rapidly changing and complex environments (Luo and Peng, 1999). It enables firms to gain new mechanisms for radical recombination of new and existing knowledge, leading to organizational flexibility and adaptability (Danneels, 2002).
Further, researchers argue that individual learning is required for organizational learning to occur, but organizational learning is more than the sum of individual learning. This is because organizational processes can be developed and used to support the knowledge transfer from individual employees to the organization, and to ensure that knowledge is effectively stored and accessible by others in the firm (Heraty, 2004). Learning is central to knowledge creation, and successful organizations are those that are consistent in acquiring new knowledge, widely distributing it throughout the organization, and translating it into new products and technologies (Nonaka and Takeuchi, 1995). Hence, organizational learning literature seems to support the knowledge management view by emphasizing on the importance of knowledge acquisition, knowledge sharing, and knowledge application, and by recognizing that knowledge can reside in organizational members, as well as in socially-based and organizationalbased knowledge storehouses.
Effective knowledge management enhances innovation, and it does so through the development of new knowledge and capabilities (Nonaka and Takeuchi, 1995). Organizations adopt different approaches to knowledge management, and the impact is manifested in the form of different types and levels of intellectual capital created within organizations (Subramaniam and Youndt, 2005). Hence, the following propositions are made:
P2: A firm's knowledge management capacity (comprised of knowledge acquisition, knowledge sharing, and knowledge application processes) is positively related to its intellectual capital
* P2a: A firm's knowledge acquisition processes are positively related to its intellectual capital
* P2b: A firm's knowledge sharing processes are positively related to its intellectual capital
* P2c: A firm's knowledge application processes are positively related to its intellectual capital
As knowledge needs to be effectively acquired, shared, and applied in order for organizations to benefit from them, the next issue is how organizational members can be effectively managed so as to enhance an organization's knowledge management capacity. The following section will introduce the field of human resource management, which is specifically concerned with the management of people in organizations.
Human Resource Management (HRM)
Based on the basic premise that knowledge resides in individuals, firms need to facilitate communication and exchange among individuals in order to gain new insights and capabilities (de Pablos, 2004; Nonaka and Takeuchi, 1995). Specific strategies can be deployed to encourage individual employees to acquire, share, and apply knowledge towards organizational value-creation (Lengnick-Hall, Lengnick-Hall, Andrade and Drake, 2009). The field of human resource management (HRM) is specifically concerned with the management of people in organizations. HRM can be formally defined as activities performed by managers to attract, retain, and manage the performance of employees so that they contribute to achieving organizational goals (Jones, George and Hill, 2000). It can also be described as referring to the policies and practices involved in carrying out the people aspects of management, which include 'recruiting, screening, training, rewarding, and appraising (Dessler and Tan, 2006). With regards to developing strategies to motivate people towards innovation, one subfield of HRM research, which is referred to as strategic HRM, seems particularly pertinent. Strategic HRM (SHRM) focuses on the strategic choices in organizations and business units with regards to their use of the workforce, and its impact on operational and firm performance (Boxall and Purcell, 2000; Lengnick-Hall et al., 2009).
Even though much SHRM research has argued for the important role of HRM in firm performance, few have attempted and managed to explain 'how' exactly SHRM is linked to specific organizational performance measures and competitive advantages (de Pablos, 2004). Thus, the area between SHRM and organizational outcomes, which possibly consists of intervening variables, is termed as the 'black box' by SHRM researchers (Boselie, Dietz and Boon, 2005; Katou and Budhwar, 2006; Paul and Anantharaman, 2003). For the purpose of this paper, 'innovative capability' is identified as the 'organizational outcome' under scrutiny, and the 'black box' issue can be applied to the study of SHRMinnovation link.
HRM and Innovation
Despite many researchers pointing to innovation as a crucial source of competitive advantage (Youndt and Snell, 2004), the interest in translating HRM policy and practices into innovation-related outcomes is perceived to be growing only in the last decade (de Pablos, 2004; Looise and Riemsdijk, 2004). In their focus on establishing firms' financial performance as an important outcome of HRM systems, SHRM researchers have been slow to follow-up on empirical findings showing that firm innovation actually plays a central role in realizing important financial outcomes such as firm market share and other financial returns (Jimenez-Jimenez and Sanz-Valle, 2008; Wang and Shyu, 2009). Even though literature on innovation management seems to give considerable attention to HRM issues, few HRM studies have attempted to develop a comprehensive framework bridging SHRM and innovation (de Leede and Looise, 2005).
The link between SHRM and innovation can be traced back to the resource-based theory of the firm, which is a theory conceived in the strategic management literature (Lengnick-Hall et al., 2009). According to the theory, the way organizational resources are utilised and combined will determine a firm's ability to gain sustainable competitive advantage (Barney, 1991). The firm is regarded as an accumulation of diverse resources, with resources being defined as the different types of organizational assets that enable firms to devise and implement strategies to improve their competitiveness (Grant, 1996). Further, the resource-based theory argues that for a firm to obtain sustainable competitive advantage over competitors, it needs to have resources which are valuable, rare, inimitable, and non-substitutable (Boselie et al., 2005). Applications of the resource-based theory to strategic HRM have shown how HRM policies and practices can be used to effectively acquire and retain human resources with rare, and difficult to imitate characteristics, and to develop individual competencies into organizational competencies capable of becoming sources of sustainable competitive advantage to firms (Barney and Wright, 1998; Boselie et al., 2005; Lado and Wilson, 1994). To date, the resource-based theory is the most widely used theory by SHRM researchers (Lengnick-Hall et al., 2009).
The SHRM-innovation link can also be explained by the knowledge-based theory of the firm, which considers knowledge as the most strategically significant resource of the firm, and that firms are knowledge distribution systems made up of employees as knowledge-holders (Daud and Yusoff, 2009; Spender, 1996). Knowledge is viewed as residing within the human capital, and HRM systems can encourage individual employees to acquire, share, and implement knowledge towards organizational value-creation (Lengnick-Hall et al., 2009). Linking this premise back to the resource-based theory of the firm, knowledge is viewed as a strategic resource crucial to the achievement of organizational competitive advantage as it fulfils the requirement of being rare, valuable, inimitable, and unsubstitutable (de Pablos, 2004). It seems that an intersection of both the resource-based theory and the knowledge-based theory of the firm is needed for research on the role of SHRM in innovation. But before proceeding to further analyze the HRM-innovation link, the following section will provide the necessary details on HRM systems in organizations.
HRM System and HR Architecture
When describing an organization's HRM system, researchers seem to discuss different aspects of the system, namely HRM strategy (McClendon, 2004; Palthe and Kossek, 2003), HRM policies (Budhwar, 2000; Martin-Alcazar, Romero-Fernandez and Sanchez-Gardey, 2005), and HRM practices (Katou and Budhwar, 2006; Palthe and Kossek, 2003; Paul and Anantharaman, 2003). There are a number of researchers who addressed the discrepancy and explained how the terms interconnect (Martin-Alcazar et al., 2005). They describe how the HRM system contains three interrelated components, namely HRM strategy, HRM policies, and HRM practices.
An 'HRM strategy' refers to the firm's orientation in managing its human factor, and it ensures the cohesiveness of the set of HRM practices implemented by the company. 'HRM practices' refer to the respective functional areas such as training and development, compensation, and work design. 'HRM policies' serve as the intermediary between HRM strategy and HRM practices by describing the coordination of two or more practices to achieve particular objectives, such as employee involvement, or improvement of internal communication channels (Martin-Alcazar et al., 2005). 'HRM policies' are defined as the organisation's statements of intentions regarding its people management activities (Wright and Boswell, 2002). The inter-related components of an HRM system illustrated by Martin-Alcazar et al. (2005) is consistent with findings made by other researchers who conducted extensive reviews of major studies on strategic HRM (Boselie et al., 2005; Lengnick-Hall et al., 2009). There are also studies showing that a firm's HRM system which duly aligns its HRM strategy, HRM policies, and HRM practice components has a positive impact on the firm's financial performance (McClendon, 2004).
However, there were criticisms made on how SHRM researchers tend to adopt the assumption that there is a single HRM system existing within an organization. An important conceptual model developed by Lepak and Snell (1999) which was subsequently supported by empirical evidence (Colbert, 2004; Lepak and Snell, 2002; Palthe and Kossek, 2003) shows how different types of human capital can exist within a single firm, and that different HRM systems are needed to manage them. There are four types of human capital, and they are differentiated based the types of knowledge they contribute to the firm (Bryant and Allen, 2009; Lepak and Snell, 1999; Palthe and Kossek, 2003; Perez and de Pablos, 2003).
The first group of employees, the 'core knowledge employees,' possess knowledge that is firm-specific and relates to the firm's core competencies. The HR strategy used in managing this type of human capital is referred to as the 'make' strategy because firms engage in the strategy of investing in the training and development of their internal employees. The second group of employees are the 'external or alliance partners'. A 'collaborating' HR strategy is used to manage them because firms engage in the strategy of partnering and collaborating with external parties to gain access to special expertise or knowledge. These workers are deemed to possess 'idiosyncratic knowledge' needed by the firm. The third group of employees are the 'internal partners or traditional employees' who possess valuable, but not firm-specific talents. A 'buy' HR strategy is used because firms engage in the strategy of acquiring human capital to gain immediate access to these employees' knowledge. The fourth group of employees are the 'contract workers'. They possess 'ancillary knowledge' which is not useful in creating customer value, and is not specific to the firm. This group tends to be unskilled or semi-skilled employees. To lessen administrative costs and focus their investment on other types of human capital, firms often substitute them by automating job tasks, or by external contracting arrangements. A 'contracting' HR strategy is used whereby HR policies focus on outsourcing of jobs, and task-centered hiring, appraisal, and rewards (Bryant and Allen, 2009; Lepak and Snell, 1999; Palthe and Kossek, 2003; Perez and de Pablos, 2003).
In sum, there exist multiple employee types within a single organization, necessitating different HR strategies, policies, and practices. A 'HRM system', which is also commonly referred to as 'HR configuration', refers to the combination of HRM strategy and HRM practices used to manage particular forms of human capital. Subsequently, the cluster of multiple 'HRM systems' or 'HR configurations' within a single firm is termed 'HR architecture' (Colbert, 2004; Lengnick-Hall et al., 2009).
HR Architecture and Knowledge Flow
As discussed earlier, different types of human capital can exist within a single firm, and SHRM needs to manage all types of human capital to fully realize their contribution to firm performance (Lepak and Snell, 2002). However, much SHRM literature limits their focus to only one or two types of human capital. Most often, they focus on the core knowledge workers and the alliance partners, which may be due to their high uniqueness or firm-specific knowledge (Perez and de Pablos, 2003). Much of the literature on innovation also tend to focus on issues regarding the management of core knowledge workers because research shows that innovation is often driven by this group of employees, who are in possession of a firm's core knowledge (Jimenez-Jimenez and Sanz-Valle, 2005).
Some researchers caution that without continuous discovery of new knowledge and enhancement of existing knowledge stocks, the core knowledge within firms can turn into decayed, obsolete knowledge, which hinders organizational renewal and the creation of a firm's dynamic capabilities (Levinthal and March, 1993). To create innovation-driven organizations, the required organizational environment must be one in which knowledge flows freely (Chen and Huang, 2009; Hsu, 2008; Wan, Ong and Lee, 2005). Firms need to ensure the continuous renewal of their core knowledge by implementing HRM practices that increase the core employees' opportunities to access others' knowledge through increased interaction with internal and external parties (Kang et al., 2007; Matusik and Hill, 1998; Perez and de Pablos, 2003). Even early SHRM researchers noted that innovation and flexibility are the outcomes of firms effectively dealing with the issue of organization-environment boundaries, and that firms benefit from accessing and utilizing knowledge from both its external and internal environments (Evans, 1986). For instance, contingent or contractual workers contribute to the firm's knowledge base and to their competitive advantage by providing the firm access to knowledge located outside the firm (Matusik and Hill, 1998). Innovative firms have also increased the value of their external alliance partners by ensuring that their knowledge is transferred to the firms' core knowledge workers (Perez and de Pablos, 2003).
Since knowledge is the key enabler of firm innovation, a specific HR architecture, comprised of multiple HR configurations, is needed to ensure that knowledge is shared and continually renewed in order to create an innovative organization (Kang et al., 2007; Leede and Looise, 2005; Youndt and Snell, 2004). The HR architecture for managing 'knowledge flow' should be separate from the already established HR architecture for managing 'knowledge stocks' (Kang et al., 2007). So the question is what type of HR architecture can ensure continuous knowledge updates and enhancement of organizational knowledge stocks?
The term 'knowledge flow' refers to the movement of knowledge as a result of it being acquired, transferred, and assimilated to modify and enhance a firm's knowledge stocks, and it also involves the exchange of new knowledge across firm boundaries as well as the sharing of knowledge within firm boundaries (Argote and Ingram, 2000; Kang et al., 2007). At the moment, studies that specifically focus on developing an HR architecture for managing organizational knowledge flows are found to be severely limited (Kang et al., 2007; Youndt and Snell, 2004). Rather, quite a number of researchers seem to focus on studying the impact of particular bundles of HRM practices on knowledge management activities, innovation, and firm performance but stopped short of going deeper into understanding the dynamics underlying the HRM-innovation link (Chen and Huang, 2009; Jimenez-Jimenez and Sanz-Valle, 2008).
The work of Kang et al. (2007) provides important insights on knowledge flows and the dynamics of learning, social relations, and knowledge management within organizations. It is argued that HR configurations can be used to manage social relations within and across firm boundaries in order to ensure effective knowledge acquisition, sharing, and application, leading to the enhancement of firms' innovative capability. From the social relations perspective, a firm's access to new knowledge located beyond the firm boundaries results in 'exploratory learning' that leads to radical innovation. Exploratory learning involves pursuing knowledge "that does not exist in the firm to create new customer value, or that replaces a firm's existing knowledge to enrich current customer value". Access to new knowledge can be realized through higher interaction and knowledge flow between core knowledge employees and the firm's external alliance partners. The external ties do not have to be strong, but they must be high in number. This would guarantee the firm's access to a variety of the latest knowledge available in the public domain.
In this situation, the HR configuration must be geared towards increasing the number of relationships with a variety of external partners, developing resilient trust between the parties, and enhancing cooperation and understanding between parties due to possession of firm-specific technical knowledge. HRM practices under this HR configuration include having flexible work structures such as broadly defined job tasks, results-based incentives that reward joint contributions, and training aimed at providing skills in multiple specialized technical areas (Kang et al., 2007). Previous scholars have referred to this type of HR configuration as 'entrepreneurial' in nature as it encourages the firm to be involved in exploring diverse new ideas in unfamiliar territories (Shane and Venkataraman, 2000). Thus, this type of HR configuration can be labelled 'entrepreneurial HR'. Based on existing literature on knowledge management and innovation, an entrepreneurial approach to social relations helps firms to continuously develop new competency areas via the development, sharing, and application of radical new ideas that enhance organizational knowledge stocks (Baer, 2007; Kang et al., 2007; Romijn and Albaladejo, 2002).
Another HR configuration discussed by Kang et al. (2007) is the 'cooperative HR' configuration, which can be used to encourage cooperation and collaboration between a firm's traditional human capital and its core human capital. From the social relations perspective, both types of human capital reside within firm boundaries, so the social relationships between the two groups of employees are of a different nature compared to relations between core employees and external partners. In this case, core knowledge employees and traditional employees can be encouraged to cooperate with each other, and engage in 'exploitative learning'. This cooperative approach to social relations and learning enables firms to grow through leveraging their prior competency bases, and thus supporting incremental organizational change.
Besides the work of Kang et al. (2007), another important empirical research work that focuses on HR architecture and its impact on knowledge management dynamics and intellectual capital is that of Youndt and Snell (2004). However, unlike Kang et al. (2007) who look into both internal and external relations, Youndt and Snell (2004) focus only on internal knowledge flows in developing their HR architecture. The elimination of horizontal barriers results in better knowledge flow between departments, between the company and its vendors and clients, and between employees themselves (McGill and Slocum, 1994; Youndt and Snell, 2004). According to Youndt and Snell (2004), this can be achieved when the HR configuration is geared towards higher levels of teamwork and collaboration between parties. HR practices ensure that hiring criteria is based on applicants' leadership, teamwork, and interpersonal skills, performance appraisals are based on feedback from peers and customers, training is focused on leadership and team training, and employee rewards are based on team performance, group bonuses, and profit-sharing. This 'collaborative HR' approach results in better interpersonal and cross-functional interaction and collaboration, and bears close resemblance to the 'cooperative HR' configuration proposed by Kang et al. (2007).
Further, Youndt and Snell (2004) stress that since knowledge is an important source of power in organizations, barriers to smooth knowledge flow may come in the form of power relationships between individuals within firms. Organizational hierarchy is a clear mechanism for power delineation within firms. Eliminating or reducing hierarchical barriers increases cross-level interaction and higher degrees of knowledge flow within firms. The HR configuration is referred to as 'egalitarian HR' as it de-emphasizes differences in class or hierarchy. It flattens organizational structures, minimizes job levels and flattens pay structures, eliminates status symbols such as reserved parking spaces and other exclusive benefits, and empowers people through more autonomous work functions and decision-making authority.
Valuable knowledge can also remain and continue to flow in the organization if there exists an HR configuration that focuses on creating and filling up knowledge storage devices such as libraries and information systems, standard operating procedures, manuals, rules and routines (Davenport and Prusak, 1998). A 'documentation HR' configuration aims for knowledge to be applied and institutionalized via databases, processes, and manuals, by ensuring that HRM practices require employees to participate in employee feedback initiatives, to update databases and other knowledge-mapping tools, to document client feedback and preferences, and to write reports on learned skills and experiences (Youndt and Snell, 2004). This is to prevent knowledge from leaving the organization in the occurrences of employees leaving the firm, or alliance partners ending the collaborative ventures (Subramaniam and Youndt, 2005). Finally, a 'technological HR' configuration is needed whereby an information technology infrastructure is used to assist in the codification, capturing, and management of knowledge within firms (Youndt and Snell, 2004). It is found that a knowledge management approach that focuses on utilising a combination of both information technology resources and human resources has a significant and positive relationship with innovation performance (Gloet and Terziovski, 2004).
The contribution of HRM systems to firm performance is mediated by the ability of HRM systems to encourage and enable employees to acquire new knowledge, to interact among themselves and share knowledge, and to apply knowledge and store it in systems, routines, and processes (Kang et al., 2007; Youndt and Snell, 2004). These findings are also supported by empirical research showing that a firm's innovation-cantered HR practices positively influence its innovation performance, but the effects are mediated by the firm's knowledge management capacity in terms of knowledge acquisition, sharing, and application (Chen and Huang, 2009).
In sum, to ensure that knowledge is shared and continually renewed, organizations need a specific HR architecture for managing knowledge flow, which is comprised of multiple HR configurations. These HR configurations can exist simultaneously in a single organization, and each configuration functions to smoothen organizational knowledge flow. The 'entrepreneurial HR configuration' encourages the internal workforce to explore new knowledge in unfamiliar territories outside the firm, the 'egalitarian HR' eliminates vertical and hierarchical barriers to enhance cross-level interaction, the 'collaborative HR' reduces horizontal barriers to improve cross-functional interaction and cooperation, the 'documentation HR' focuses on creating and filling up knowledge storage devices, and the 'technological HR' supports the use of information technology tools for knowledge management. The proposed integrated SHRM-KM capacity-intellectual capital-innovative capability framework is presented below. Hence, the propositions are as follows:
P3: A firm's HR architecture for managing knowledge flow relates positively to its knowledge management (KM) capacity.
* P3a: A firm's 'entrepreneurial HR configuration' relates positively to its KM capacity
* P3b: A firm's 'egalitarian HR configuration' relates positively to its KM capacity
* P3c: A firm's 'collaborative HR configuration' relates positively to its KM capacity
* P3d: A firm's 'documentation HR configuration' relates positively to its KM capacity
* P3e: A firm's 'technological HR configuration' relates positively to its KM capacity
[FIGURE 1 OMITTED]
IMPLICATIONS FOR RESEARCH AND PRACTICE
There are important implications from the proposed integrated SHRM-KM capacity-intellectual capital-innovative capability framework on both research and industry practice.
Implications for Theory
There is a research gap for the link between SHRM and innovation (de Pablos, 2004). This paper focuses on 'innovative capability' as an important organizational outcome, and it contributes to the body of knowledge on innovation by crystallizing the nature of the link between SHRM and innovative capability. Another contribution of this paper to theory building is the use of a multidisciplinary approach to research whereby reference is made to literature from different areas such as HRM, knowledge management, organizational learning, social relations, and innovation.
This paper also significantly contributes to strategic HRM research as it extends the widely established concept of HR architecture by interpreting its use in managing knowledge flow in an organization's internal and external networks. As for its contribution to innovation research, this paper has addressed an important research gap in the innovation literature by shedding more light onto the difference between incremental and radical innovation, their different impacts on firm performance, and different demands on organizational resources. It opens up avenues for further research on the role of strategic HRM as an important tool in managing innovation.
Implications for Practice
Although it can be argued that the proposed framework has significant implications on all organizations in general, it may be especially significant for those that place high priorities on the role of strategic HRM and knowledge management in driving firm innovation, as well as current organizations that employ different types of human capital. It is acknowledged that most contemporary organizations rely on multiple types of human capital in their operations (Palthe and Kossek, 2003). This paper highlights the importance of managing the different forms of human capital to maximize performance. Different employee cohorts within firms bring different value to the organization based on the different types of knowledge that they possess (Lepak and Snell, 1999; Perez and de Pablos, 2003). More importantly, the proposed framework can be used by firms to ensure the effective management of knowledge flow between different employee groups towards building the firms' intellectual capital and innovative capability.
In the knowledge age, firms depend on their innovative capabilities to gain competitive advantage. Innovation is driven by knowledge in organizations, and knowledge resides in individuals. Hence, knowledge needs to be effectively acquired, shared, and applied in order for organizations to benefit from them. The issue addressed in this paper is on how to facilitate communication and knowledge exchange among organizational members in order to help build an organization's innovative capability. The study of human resource management (HRM) becomes critically relevant as it is specifically concerned with the management of people in organizations. It is proposed that a firm's HR architecture can be designed to encourage and manage the processes of knowledge acquisition, knowledge sharing, and knowledge application in order to enhance a firm's intellectual capital. The proposed framework also captures how a firm's intellectual capital positively influences its innovative capability. This paper contributes to the body of research on developing a comprehensive strategic HRM framework for the creation of innovative organizations that are able to face challenges of the knowledge economy.
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(a) Rosdi Intan-Soraya * and (a) Kok-Wai Chew
(a) Faculty of Management, Multimedia University, Malaysia
* email@example.com [mail]…
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Publication information: Article title: A Framework for Human Resource Management in the Knowledge Economy: Building Intellectual Capital and Innovative Capability. Contributors: Intan-Soraya, Rosdi - Author, Chew, Kok-Wai - Author. Journal title: International Journal of Business and Management Science. Volume: 3. Issue: 2 Publication date: December 2010. Page number: 251+. © Assoc. Prof. Dr. Mohhammad Samaun Safa Jul 2009. COPYRIGHT 2010 Gale Group.
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