Effects of Human Capital and Long-Term Human Resources Development and Utilization on Employment Growth of Small-Scale Businesses: A Causal Analysis (1)

By Rauch, Andreas; Frese, Michael et al. | Entrepreneurship: Theory and Practice, November 2005 | Go to article overview

Effects of Human Capital and Long-Term Human Resources Development and Utilization on Employment Growth of Small-Scale Businesses: A Causal Analysis (1)


Rauch, Andreas, Frese, Michael, Utsch, Andreas, Entrepreneurship: Theory and Practice


The purpose of this study was to explore how three different human resource variables affect employment growth of small-scale enterprises: human capital of business owners, human capital of employees, and human resource development and utilization. The literature suggests different models of how these human resource variables affect business outcomes. Longitudinal data from 119 German business owners provided support for a main effect model indicating that owners' human capital as well as employee human resource development and utilization affect employment growth. Moreover, human resources development and utilization was most effective when the human capital of employees was high. We conclude that human resources are important factors predicting growth of small-scale enterprises.

Introduction

The resource-based view of organizations explains variations in firm performance by variations in firms' human resources and capabilities (Hitt, Bierman, Shimizu, & Kochhar, 2001). In entrepreneurship research, the human element has received attention recently and there is increasing research effort and theorizing on this topic. Human capital attributes (education, experience, skills), in particular those of the business owner, have been argued to be a critical resource in small firms (Pfeffer, 1994) that affects small business performance (Ranch & Frese, 2000). To achieve a competitive advantage, firms need to generate specific knowledge because specific resources are unique and difficult to imitate (Barney, 1991). One way to generate firm-specific resources is human capital development (Lepak & Snell, 1999). The research presented here contributes to the resource-based view because we try to specify relationships between human capital, human resource (HR) development and utilization, and business performance. By looking at the fit between persons and processes, this study tries to specify the intermediate and boundary conditions of human resources and small business Success.

Thus, HR development and utilization helps small-scale enterprises to succeed. Our study analyzed the effects of human resources on entrepreneurial success, specifically on employment growth in small firms. Although some reviews concluded that sales growth is the best measure of growth in most situations (Davidsson & Wiklund, 2000; Weinzimmer, Nystrom, & Freeman, 1998), we think that employment growth is an important measure in our study. First, there is a theoretical link between the independent and dependent variable because both human capital and HR development and utilization refer to the people in the firm. Thus, we hypothesize that businesses interested in employment growth invest in human resources in the firm. Sales growth, on the other hand, can theoretically be achieved by strategies other than employment and human resources. Second, employment growth has a link to business success and is, therefore, an important criterion variable. Finally, employment growth is a criterion that reflects lagged performance. Sales change more rapidly with demands than do the number of employees and employment is likely to take place when sales levels become more stable (Delmar, 1997, p. 202). Since human resource strategies do not pay off immediately (Black & Lynch, 1996; Boxall & Steeneveld, 1999; Welbourne & Andrews, 1996), employment growth is an important variable for studying the long-term effects of human resources. These arguments imply that a cross-sectional study may not be able to detect the long-term effects of human resources. Therefore, this paper reports a longitudinal investigation of small-scale enterprises, which goes one step further in the causal analysis (Cook & Campbell, 1979).

Human resource issues have been mainly studied in larger firms. To our knowledge, there are no studies about the relationship between the human capital of business owners and employees, HR development and utilization, and growth of small-scale enterprises (up to 50 employees). …

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