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Human Capital Theory

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Sociology B2

Human Capital Theory

What is human capital? According Schultz (1993), the term “human capital” has been defined as a key element in improving a firm assets and employees in order to increase productive as well as sustain competitive advantage. To sustain competitiveness in the organization human capital becomes an instrument used to increase productivity.

The theory of human capital is rooted from the field of macroeconomic development theory (Schultz, 1993). Becker’s (1993) classic book, Human Capital: A Theoretical and Empirical Analysis with special reference to education, illustrates this domain.
Becker argues that there are different kinds of capitals that include schooling, a computer training course, expenditures on medical care. And in fact, lectures on the virtues of punctuality and honesty are capital too. In the true sense, they improve health, raise earnings, or add to a person’s appreciation of literature over a lifetime.

Consequently, it is fully in keeping with the capital concept as traditionally defined to say that expenditures on education, training, and medical care, etc., are investment in capital. These are not simply costs but investment with valuable returns that can be calculated.
Uluslararası Sosyal Arastırmalar Dergisi The Journal of International Social Research Volume 2 / 8 Summer 2009

The Relationship between Human Capital and Firm Performance

Human capital is getting wider attention with increasing globalization and also the saturation of the job market due to the recent downturn in the various economies of the world. Developed and developing countries put emphases on a more human capital development towards accelerating the economic growth by devoting necessary time and efforts.
Thus human capital development is one of the fundamental solutions to enter the international arena. Specifically, firms must invest necessary resources in developing human capital which tend to have a great impact on performance. Firm performance is viewed in terms of financial and non-financial performance.

The human capital focuses two main components which is individuals and organizations. This concept have further been described by Garavan et al., (2001) that human capitals have four key attributes as follows: (1) flexibility and adaptability (2) enhancement of individual competencies (3) the development of organizational competencies and (4) individual employability.
It shows that these attributes in turn generate add values to individual and organizational outcomes. There are various findings that incorporate human capital with higher performance and sustainable competitive advantage (Noudhaug, 1998); higher organizational commitment (Iles et al., 1990); and enhanced organizational retention (Robertson et al., 1991).
Hence, all this debates fundamentally focuses on individual and organizational performance.


Gary S. Becker Investment in human capital: a theoretical analysis

Agarwala, T. (2003). Innovative human resource practices and organizational commitment: An empirical investigation. International Journal of Human Resource Management, 14(2), 175–197.

Bantel, K. (1993). Strategic clarity in banking: Role of top management-team demography. Psychology Reports, 73, 1187-1203.

Barney, J. B. (1995). Looking inside for competitive advantage. Academy of Management Executive, 9(4), 49–61.

Bates, T. (1990). Entrepreneur human capital inputs and small business longevity. The Review of Economics and Statistics, 72(4), 551-559.

Becker, B., & Barry, G. (1996). The impact of human resource management on organizational performance: Progress and prospects. Academy of Management Journal, 39(4), 779–801.

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