Human capital matters: Market valuation of firm investments in training and the role of complementary assets

Research summary: This article empirically examines the economic value to firms of investing in the training of their employees and firm‐level factors that influence how much the firms benefit. Event study methodology is used to obtain a measure of the economic impact of information regarding a firm's human capital management investments and policies. Subsequent regression analyses are then used to test hypotheses regarding possible complementary relationships between firm‐level factors and human capital investments. Results provide robust support for the proposition that effective investments in human capital and training matter, and that these human capital investments are more impactful when combined with complementary assets of R&D, physical capital, and advertising investments . Managerial summary: Do firm investments in training and the development of employee human capital matter with regard to financial performance? We find that, yes, these investments do matter. Our results show that managers who view employee human capital as an asset to be invested in and developed can expect to outperform those who view it as a cost to be minimized. In addition, we find that these human capital investments will be of even greater economic value to firms when they have made complementary investments in R&D, physical capital, and advertising . Copyright © 2016 John Wiley & Sons, Ltd.     

The R&D performance in Taiwan's electronics industry: a longitudinal examination

R&D investment has been widely regarded as an important input for firms, particularly for high‐tech firms, to achieve competitive advantage within their industry. Hence, a number of high‐tech firms are now investing substantial amounts into R&D. Since R&D efforts enable firms to raise the competitive advantage, one noticeable and interesting issue expected to know is the degree to which R&D investment influences firm output performance. In Taiwan, much greater emphasis is also being placed into R&D investment in the high‐tech industries; however, R&D output performance has never been seriously examined within this sector. Since the island's electronics industry is widely regarded as the most promising industry in the ‘high‐tech sector’, and is expected to place greatest emphasis on its R&D efforts, we take the electronics firms as our analytical sample. This paper therefore sets out to estimate the impact of R&D on firm performance, in terms of productivity growth and the rate of return on investment, within the electronics industry in Taiwan, whilst also examining the Schumpeterian hypothesis, that R&D performance is an increasing function of firm size. Our examination of R&D performance is based on a panel sample of 83 large electronics firms, completely balanced over the period from 1994 to 2000, with series data of R&D capital also being constructed. Based upon the extended Cobb‐Douglas production function, a random effects model is developed with the estimations revealing that the output elasticity of R&D is around 0.19 and the average rate of return on R&D is around 22%. These findings clearly demonstrate that investment in R&D by these electronics firms has had an impact on their competitive advantage. Compared to the findings of previous studies, where the analytical unit of data was at firm level, here the rate of return on R&D is consistent with similar estimates for the US and UK, but lower than those for Japan. However, our estimations do not provide support for the hypothesis that the impact of R&D on productivity is an increasing function of firm size.     

Matching method to paradigm in strategy research: limitations of cross‐sectional analysis and some methodological alternatives

A central focus of empirical research in strategic management has been to understand the relationships associated with the structure–strategy–performance paradigm. To examine these relationships, investigators have relied extensively on cross‐sectional methods that embody the implicit assumption that model parameters are stable across firms and over time. Yet, many of the theoretical constructs used in strategic management have clear firm‐ and time‐specific components. Hence, it might be expected that the parameters of the relationships investigated empirically will vary across firms and over time. Whereas recent research has raised concerns about the use of cross‐sectional analysis when parameters vary over time, little attention has been given to the issue of parameter variability across firms. Given the focus of strategy researchers on firm‐level effects and the predominant reliance on cross‐sectional analysis, accounting for across‐firm variability is a significant methodological issue. Failure to account for such variability can lead to biased parameter estimates and incorrect inferences. This paper argues for the adoption of alternative methods that can overcome the limitations of a cross‐sectional analysis and it offers guidance on how researchers can proceed to use these alternative methods to explicitly incorporate or test for variation in model parameters across firms or over time. Copyright © 1999 John Wiley & Sons, Ltd.     

Family Ownership and R&D Intensity in Small‐ and Medium‐Sized Firms

Research was largely consistent in predicting a negative relationship between family ownership and research and development (R&D) intensity until Chrisman and Patel, using a behavioral agency model (BAM), called this general assumption into question. They argued that publicly owned family firms typically invest less in R&D than nonfamily‐owned firms. This behavior may however be reversed if economic performance levels are below family aspirations or if family long‐term goals, such as pursuing strong transgenerational family control, are highly valued. While most researchers, like Chrisman and Patel, primarily focused on large listed firms, more research on the relationship between family ownership and R&D intensity in privately held small‐ and medium‐sized enterprises (SMEs) is required. This is because firm size can play an important role in understanding the innovation management behavior of firms. Building on the BAM perspective, in the present paper it is argued that Chrisman and Patel's results can be extended to the context of SMEs, albeit with one important specification: the relationship between family ownership and R&D intensity is likely to be contingent on the way the family has invested its wealth. Specifically, it is contended that in the context of SMEs, where goals are more fluid and mixed, when there is a high overlap between family wealth and firm equity (i.e., most of the family's wealth is invested in the firm) the relationship between family ownership and R&D intensity is negative because of the family owners' greater desire to protect their socioemotional wealth (SEW). However, if the overlap between the family's total wealth and single firm equity is low (i.e., firm equity is just a small part of the total family wealth), the relationship between family ownership and R&D intensity is positive as the low overlap between family wealth and firm equity reduces the family's loss aversion propensity. In such a situation, family ownership is likely to foster R&D intensity because of the long‐term orientation of family owners that increases the family firm's propensity to bear the risk of investing in R&D activities. The hypothesis is tested and confirmed in a study of 240 small‐ and medium‐sized firms based in Italy. The paper contributes to the literature in several ways. First, adding to the literature on innovation management and R&D intensity, it increases the understanding of what drives or inhibits R&D investments in SMEs when a family is involved in the ownership of the firm. This is particularly important because research on innovation management, as well as research on R&D intensity in family firms, is primarily focused on large firms and much less on SMEs. Second, the study complements arguments from prior research on the correlates of R&D intensity in large listed firms, showing that the BAM and SEW perspective offer a theoretical framework that is also able to illustrate the complex nature of innovation management in the context of SMEs. Third, the study contributes to research on the effects of family ownership on the general functioning of a firm. In particular, it provides new insights into how family ownership may affect R&D intensity.     

R&D investment dynamics in agglomerations under weak appropriability regimes: Evidence from Indian R&D labs

What are the dynamics of R&D investment when firms agglomerate in environments with weak intellectual property rights protection? Specifically, do foreign and domestic firms present equal opportunities for free riding by domestic firms in such environments? We examine the impact on local firms' R&D investment from knowledge spillovers originating from co‐located foreign and domestic firms within and across industries. Building on fieldwork in India, we predict free riding by local firms on nearby foreign and local firms. Furthermore, we expect local firms to free ride more from other local firms within their industry and from foreign firms across industries. Analyzing a sample of 3,475 R&D lab investment decisions during 2003–2010 in India, we find that local firms free ride from other local firms both within and across industries. Copyright © 2014 John Wiley & Sons, Ltd.     

Learning to collaborate through collaboration: How allying with expert firms influences collaborative innovation within novice firms

Research summary : Strategic alliances have been recognized as a means for firms to learn their partners' proprietary knowledge; such alliances are also valuable opportunities for partner firms to learn tacit organizational routines from their counterparts. We consider how relatively novice technology firms can learn intraorganizational collaborative routines from more experienced alliance partners and then deploy them independently for their own innovative pursuits. We examine the alliance relationships between Eli Lilly & Co. (Lilly), a recognized expert in collaborative innovation, and 55 small biotech partner firms. Using three levels of analysis (firm, patent, and inventor dyad), we find that greater social interaction between the partner firm and Lilly subsequently increases internal collaboration among the partner firm's inventors. Managerial summary : Can collaborating externally advance internal collaboration? Yes. Our research found that collaboration among scientists at small, early‐stage biotechnology firms significantly increased after these firms formed highly interactive R&D alliances with a large pharmaceutical company known for its expertise in such collaboration. It is well known that alliances help new firms learn specific new technologies and commercialize innovations. Our study broadens the scope of potential benefits of alliances. New firms can also learn collaboration techniques, deploying them internally to enhance their own abilities in collaborative innovation. Managers should take this additional benefit into consideration in developing their alliance strategies. Pursuing alliance partners with expertise in collaboration and keeping a high level of mutual interactions with partner firm personnel should be important considerations to extract this value. Copyright © 2015 John Wiley & Sons, Ltd.     

Who matters more? The impact of functional background and top executive mobility on firm survival

Do some top executives matter more than others? Integrating insights from upper echelons and executive mobility research, we suggest that the functional roles performed by top executives shape their value to the firm. We examine the effects of interfirm executive mobility on firm survival for New York City advertising firms from 1924 to 1996. We find that, while losing any top executive is damaging, the loss of a top executive whose functional role focuses on internal firm processes is more detrimental to firm survival than losing a top executive whose functional role focuses on managing external exchange relationships. Additionally, in situations when multiple executives leave simultaneously, firms are more negatively affected when the group departing is functionally heterogeneous. Copyright © 2014 John Wiley & Sons, Ltd.     

Policy risk,strategic decisions and contagion effects: Firm‐specific considerations

Research summary : In this article, we investigate the firm‐specific environment and its impact on firm strategy focusing on adverse changes in the policy environment and their effect on divestitures. We argue that experiencing a negative change in the firm‐specific policy environment causes firms to reassess their exposure to policy risk and their ability to manage their policy environment, making them more likely to divest. Operationalizing negative shifts in the firm‐specific policy environment through formal policy disputes between firms and governments, we find that following a dispute, firms are more likely to divest both in the country where the dispute occurs and in other countries in the same region. However, the impact of disputes on divestitures is firm specific, applying only to firms directly involved in a dispute . Managerial summary : What is the impact of change in the firm‐specific environment on firm strategy? We argue that when firms directly experience a negative change in their policy environment that is specific to them, they negatively reassess their exposure to policy risk and their ability to manage their policy environment, which makes them more likely to undertake a divestiture. We analyze formal disputes between firms and governments that arise from adverse changes in policy and find that, following a dispute, firms are more likely to divest in the country where the dispute occurs and in other countries in the same region. However, the impact of disputes on divestitures is firm specific as it applies only to firms directly involved in a dispute . Copyright © 2016 John Wiley & Sons, Ltd.     

Lighting the way or stealing the shine? An examination of the duality in star scientists' effects on firm innovative performance

Do star employees enhance or constrain the innovative performance of an organization? Using data from 456 biotechnology firms between 1973 and 2003, we highlight the duality of the effects that stars have on firm performance. We show that while stars positively affect firms' productivity, their presence constrains the emergence of other innovative leaders in an organization. We find that firm productivity and innovative leadership among non‐stars in a firm are greatest when a star has broad expertise and collaborates frequently. We offer cross‐disciplinary insights into the role of human capital as a source of competitive advantage, suggesting that the value of human capital in a firm is contingent on the mutual dependence inherent in high‐status employees' relationships with other individuals in a firm. Copyright © 2014 John Wiley & Sons, Ltd.     

Survey measures of first‐ and second‐order competences

Research summary : This study tests and validates survey measures of first‐ and second‐order competences in order to foster cumulative empirical research and theoretical refinement in the area of dynamic capabilities. Data from two informants and two time periods for a sample of publicly traded U.S. manufacturing firms are used to examine the convergent, discriminant, and nomological validity, and the reliability of scales to measure various levels and types of competences. Findings suggest that customer competence, technological competence, marketing competence, and R&D competence are related but distinct dimensions, evidencing strong validity and reliability. Qualifying this empirical support, it was found that items regarding manufacturing operations and facilities seemed to measure aspects unrelated to the focal competences, and that marketing competence had no relation to future market‐resource accumulation. Managerial summary : This study enhances understanding and measurement of dynamic capabilities, in particular, marketing and R&D second‐order competences. Marketing and R&D second‐order competences are a firm's ability to build new competences to serve new markets or use new technologies, respectively. The ability of a firm to add new market‐related resources (such as brands and distribution channels) and technological resources (such as patents and engineering skills) helps it cope with environmental change and grow in new directions. For firms in stable environments, being able to serve new markets and use new technologies provide opportunities for growth. For firms in turbulent environments, these skills are a matter of survival. Using data collected from publicly traded U.S. manufacturing firms, this study tests and validates questions that can be asked in questionnaires presented to management. It finds that even if a firm has strong skills in serving current customers and great technology, it may not be able to go after new markets or technologies. The survey questions tested here could be used not only by other researchers, but also by practitioners. Managers, management consultants, and industry association advisors could use the scales as diagnostic instruments or to perform benchmarking. Copyright © 2015 John Wiley & Sons, Ltd.     

The performance implications of intra‐ and inter‐regional geographic diversification

Engaging the debate regarding the appropriate level of geographic diversification for multinational enterprises (MNEs), we examine a critical, yet unresolved, question: How is performance impacted by the MNE's level of intra‐ and inter‐regional diversification versus the total level of geographic diversification? Using data from 123 U.S.‐based MNEs over a seven‐year period and leveraging both sales‐based and subsidiary‐based measures for diversification, we find that performance increases at an increasingly higher rate as firms concentrate more heavily on intra‐regional diversification. Regarding inter‐regional diversification and total geographic diversification, we find inverted‐U relationships to exist between firm performance and the level of geographic diversification. Different from recent research on multinationality, our robustness checks indicate no evidence of a sigmoidal relationship between the degree of regional diversification and performance. Copyright © 2010 John Wiley & Sons, Ltd.     

Is performance driven by industry‐ or firm‐specific factors? A response to Hawawini,Subramanian, and Verdin

Hawawini, Subramanian, and Verdin (2003) examined the relative impact of industry‐ vs. firm‐level factors shaping firm performance. They demonstrated that variance in firm performance attributable to industry‐level factors increases, while variance attributable t to firm‐level factors decreases when ‘exceptionally’ higher‐ and lower‐performing ‘outlier’ firms in each industry are excluded. They concluded that previous research underestimated the relative impact of industry‐level factors for ‘average’ firms that make up the bulk of an industry. We take issue with their methods used to identify and exclude outliers as well as their conclusions drawn from such analyses. Rather than excluding true ‘outlier’ firms, we argue that they incorporated an artificial restriction of within‐industry sample variance that almost deterministically led to lower firm and higher industry variance component estimates. We demonstrate this point with a comparable sample of data to which we apply progressively greater restrictions on within‐industry sample variance leading to similar results. Finally, we show that exclusion of firms from a data sample based on commonly understood standards of outlier identification leads to little change in industry and firm variance component estimates compared to full‐sample estimates. Copyright © 2005 John Wiley & Sons, Ltd.     

Windfalls of emperors' sojourns: Stock market reactions to Chinese firms hosting high‐ranking government officials

Research summary: We contribute to the corporate political activity (CPA ) literature by showing that investors value companies that host visits of high‐ranking government officials (P resident and P remier). We argue that investors may value host official visits for two reasons: (1) the signal received about possibility of firm accessing government‐controlled resources via promotion or protection; and (2) the certification effect from such high‐powered visitors elevating the firm's reputation and legitimacy. Results from an event study analysis of 84 high‐ranking government official visits in C hina from 2003 to 2011 indicate that investors responded positively to host firms as reflected by stock market performance. Furthermore, the greatest positive reactions accrued to firms experiencing weaker prior period financial performance and to firms that are privately compared to state‐controlled . Managerial summary: Do visits by high‐ranking government officials influence firm stock market performance? Studying a sample of C hinese public firms that hosted 84 visits by the C hinese P resident and the P remier from 2003 to 2011, we find that investors reacted positively to such visits compared with a group of non‐host firms from the same industry and with similar financial performance and size. In addition, firms with weaker prior financial performance and private firms benefit the most from hosting such visits. Our findings imply that hosting visits of high‐ranking government officials can signal future government‐controlled resource inflows and boost host firms' reputation and legitimacy . Copyright © 2016 John Wiley & Sons, Ltd.     

Organizational knowledge networks and local search: The role of intra‐organizational inventor networks

Research summary : While firms tend to build on their own knowledge, we distinguish between depth and breadth of local search to investigate the drivers of these behaviors. Given that inventors in a firm carry out the knowledge creation activities, we strive to identify inventors responsible for these behaviors by employing the notion of an intra‐firm inventor network. A longitudinal examination of 14,575 inventors from four large semiconductor firms using patent data supports our hypotheses that the reach of inventors in the intra‐firm network and their span of structural holes have independent and interactive effects on these two types of local search behaviors. These findings have implications for research on exploitation and exploration, organizational knowledge, knowledge networks, and micro‐foundations. Managerial summary : Large amounts of knowledge may reside within firm boundaries, and managers are interested in understanding who may leverage this knowledge to generate novel ideas. We focus on collaborations among knowledge workers to address this question. Using the collaborations among all knowledge workers in a firm, we show that those who have higher reach to all others and those who form bridges to connect unconnected groups of workers tend to leverage not only more organizational knowledge, but also knowledge that is more dispersed in the organization. Managers could use these insights to shape the use of organizational knowledge by firm inventors, and also to make decisions about granting or withholding access to internal knowledge platforms for knowledge workers. Copyright © 2016 John Wiley & Sons, Ltd.     

Context matters: Diversity's short‐ and long‐term effects in fortune's “best companies to work for”

Research summary: Previous research has examined the racial diversity‐productivity relationship in corporations with an evident high commitment to minority programs, Fortune's “Best Companies for Minorities.” To assess generalizability, we replicate this research using a different context of high organizational‐employee value congruence, Fortune's “Best Companies to Work For.” We are not able to find evidence for the curvilinear relationships previously found, but do uncover a linear negative relationship between racial diversity and short‐run performance. Managerial summary: Using Fortune's “Best Companies for Minorities,” previous research found that racial diversity affected both firm productivity and Tobin's q. To see if we could find these results in a different group of firms, we replicate this research using a sample drawn from Fortune's “Best Companies to Work For.” The former sample is distinguished by high commitment to minority programs, while the one used here stresses high congruence of values between the organization and all its employees. We are unable to replicate the relationships previously found, however, but do find that increasing racial diversity had a negative effect on firm productivity. Copyright © 2016 John Wiley & Sons, Ltd.     

Virtuous or vicious cycles? The role of divestitures as a complementary Penrose effect within resource‐based theory

Research summary: Studies of how divestitures affect firm performance offer mixed results. This paper unpacks relationships between divestitures and subsequent performance, focusing first on the moderating role of prior performance and then on mechanisms through which divestitures by higher‐ and lower‐performing firms affect performance. The study suggests that divestitures can exacerbate weakness and reinforce strength: divestitures by lower performers improve profits but inhibit sales growth and tend to speed the firms’ exits as independent actors; by contrast, higher‐performing divesters invest in support of existing assets and gain new growth, while avoiding becoming acquisition targets. Most generally, divestitures help reduce constraints to changing a firm's resource base, which we refer to as a complementary Penrose effect. Managerial summary: Divestitures help both struggling firms and high performers free financial and managerial resources that they can reinvest in more productive uses. In doing so, divestitures reinforce the strength of high performers but may exacerbate weaknesses of struggling firms. Divestitures by lower performers improve their profits but inhibit their sales growth and increase the chances that the firms will be acquired. By contrast, higher‐performing divesters gain new growth by investing in support of existing and recently acquired assets and, by doing so, are less likely to become targets of acquirers who seek their productive assets. Thus, divestiture is part of a downward cycle for struggling firms but supports a virtuous cycle for superior firms.     

How CEO hubris affects corporate social (ir)responsibility

Grounded in the upper echelons perspective and stakeholder theory, this study establishes a link between CEO hubris and corporate social responsibility (CSR). We first develop the theoretical argument that CEO hubris is negatively related to a firm's socially responsible activities but positively related to its socially irresponsible activities. We then explore the boundary conditions of hubris effects and how these relationships are moderated by resource dependence mechanisms. With a longitudinal dataset of S&P 1500 index firms for the period 2001–2010, we find that the relationship between CEO hubris and CSR is weakened when the firm depends more on stakeholders for resources, such as when its internal resource endowments are diminished as indicated by firm size and slack, and when the external market becomes more uncertain and competitive. The implications of our findings for upper echelons theory and the CSR research are discussed. Copyright © 2014 John Wiley & Sons, Ltd.     

Firm Heterogeneity,New Investment and Acquisitions

This paper presents a model of investment in which heterogeneous firms choose between new investment and acquisitions. New investment involves purchasing a new plant for an existing variety. Acquisitions involve purchasing a plant and a variety from a selling firm. Using a variable‐elasticity demand system, I show that if varieties within a differentiated industry are imperfect substitutes, mid‐productivity firms invest. As varieties approach perfect substitutability, high‐productivity firms invest. For both cases, within the region of investing firms, the most productive choose acquisitions over new investment. In analyzing firm‐level data from Compustat, I find evidence that supports these predictions.     

Strategy,human capital investments,business‐domain capabilities,and performance: a study in the global software services industry

Research summary : In knowledge‐based industries, continuous human capital investments are essential for firms to enhance capabilities and sustain competitive advantage. However, such investments present a dilemma for firms, because human resources are mobile. Using detailed project‐level operational, financial, and human capital data from a leading multinational firm in the global IT services industry, this study finds that deliberate investments in improving general human capital can help firms develop superior capabilities and maintain high profits. This paper identifies two types of capabilities essential for success in this industry—technological and business‐domain capabilities—and provides empirical evidence justifying such investments. Theoretical and practical implications of capability‐seeking general human capital investments are discussed. Managerial summary : The primary managerial implication of this research is that capability‐seeking investments in developing general human capital through strategic learning (training and internal certifications) can enhance firm performance. Although investing in general human capital is risky, the firm considered this a strategic necessity in order to thrive in the fast paced IT services industry. By leveraging general technological skills in combination with business‐domain knowledge to address customer's business problems firms can earn and sustain higher profits. Our study also demonstrates how a developing‐country firm responded to strong competitive challenge from global rivals possessing superior capabilities by upgrading the capabilities of its employees through internal development. In doing so the firm was able to narrow the capability gap vis‐à‐vis its foreign peers and expand its business globally. Copyright © 2016 John Wiley & Sons, Ltd.     

How national systems differ in their constraints on corporate executives: a study of CEO effects in three countries

Do CEOs matter more in some countries than in others? Based on a theoretical consideration of three fundamental national‐level institutions—national values, prevailing firm ownership structures, and board governance arrangements—we argue that CEOs in different countries face systematically different degrees of constraint on their latitudes of action, and hence they differ in how much effect they have on firm performance. To test these ideas, we apply a variance components analysis methodology to 15‐year matched samples of 100 U.S. firms, 100 German firms, and 100 Japanese firms. Results provide strong, robust evidence that the effect of CEOs on firm performance—for good and for ill—is substantially greater in U.S. firms than in German and Japanese firms. Copyright © 2007 John Wiley & Sons, Ltd.