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International Review of Business Research Papers Vol. 5 No. 5 September 2009 Pp.

25-36

Human Capital, Capabilities & Competitive Advantage

Emily Auw
The resource-based view of the firm (RBV) research has been criticized to give little elaboration of how firms build new capabilities. And although recent management concern has been that a value of a firm’s r e s o u r c e s s h o u l d b e a s s e s s e d , f e w e m p i r i c a l s tu d i e s d i r e c t l y m e a s u r e c a pa b i l i t i e s ’ r e l a t i o n s h i ps t o h u m a n capital and competitive advantage. In response to this gap, this study will empirically examine the relationships between human capital, capabilities and competitive advantage of professional service firms in the Hong Kong, China and Taiwan regions.

Fields of Research: Strategic Management, Human Capital, Skills Management, Internationalization

1. Introduction
Resource-based view research has been criticized to give little elaboration of how firms build new capabilities (Cavusgil et al., 2007). Also, the recent management concern has been that a value of a firm’s resources should be assessed (Barney & Hesterly, 2006), as competitive advantage of a firm has mostly been inferred from the presence of substantial resources and/or high performance rather than direct measurements (Peteraf & Barney, 2003). These previous studies are also descriptive/qualitative, and of abstract rather than practical nature (Thompson et al., 2001). Therefore, we will answer their call by employing a quantitative method to measure human capital for the professional firms by using Barney & Hesterly’s (2006) Value-Rare-Costly-to-imitate-Organizationally-supported (VRIO) Framework to _____________
Emily Auw, International Graduate School of Business (IGSB), University of South Australia, Email: e.auw@e-auw.com.hk

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second. It is because most human capital studies have focused on their impact on firm performance. capabilities (skills). experience and skills at a given point in time (Boxall & Steeneveld. (2006) and Ruzzier et al. we will conduct our literature review in the following four areas: first. human capital. We will test this finding in our research. for educated employees (Cameli & Schaubbroeck. Hitt. Uhlenbruck & Shimizu (2006) found that service firms that internationalize without strong human capital are likely to be at a competitive disadvantage. other than products (or services) and business processes (Porter. Hisrich & Konecnik’s (2007) international human capital model is still incomplete. According to Castanias & Helfat (1991). However. in order to internationally competitive. 2. Thus. this human capital is the professional firm’s ‘most important resource’ (Hitt et al. the two most recent works have been of Hitt et al. Lepak & Snell (2002) have already tried to measure the distinctiveness of human capital for the commercial and public organizations. (2007). In internationalization literature. Since lawyers have to undergo stringent proficiency training. Bieerman. Further. Literature Review Based on the above management concerns. 2005). Antoncic. in general service firms. Human Capital We would conceptualize human capital as consisting of the education. as it does not include the most essential elements of a professional service firm. It is because skills are one of firms’ internal investments needed to be continuously upgraded. as would be covered by our integrated framework. such as: Core Skills and Cross-Border Skills. Previously. research studies of the quantitative types that link resources to competitive advantage are scarce in the RBV literature that we need to borrow from the internationalization literature. 2001).26 - . third.. . internationalization. A view supported by Peteraf & Barney (2003) that although proficiency is important. the firm whose employees have more proficient industry-specific skills has the advantage. 1991). the prior work of Ruzzier. 1999). This study will support the further development of the empirically-relevant resource-based view (RBV) theory. Our framework will also examine how these local and international capabilities will be affected by the moderating factors of VRIOs as perceived by their firms’ CEOs.Auw evaluate the human capital and capabilities (skills) of professional service firms. the variation in employees’ proficiency per skill would determine the outcomes of competitive advantage. the research here offers a more realistic view of human capital and extends the competitive advantage theories to the international business research context. and lastly. competitive advantage. affecting competitive advantage. We will measure the perceived VRIO values of human capital and capabilities of professional service firms.

only Newbert (2008) has linked resources and capabilities to Competitive Advantage. Internationalization ‘Internationalization’ is defined as an incremental process of increasing experiential knowledge (Eriksson et al. 1997). and Imperfectly imitable and for which there are no commonly available Substitutes’ (VRIS). transforming into McJobs. Some studies have also linked resources to competitive advantage.Auw and in the local context. 2008). And some skills are important if firms want to tap into an unexplored market. In research concerning capabilities. Ruzzier et al (2007). are rare. we shall examine the importance of human capital/capabilities (skills) which enable firms to outperform rival firms. Capabilities (Skills) A skill is a specific ability deriving from practice that allows organizations to perform certain tasks (Heugens. In the same way as technology removes workers’ manual skills. 1991).S. especially in their international services... Much of the previous studies on international business have been concerned with manufacturing. 2000). rather than on the acquisition of radically new skills (Teece et al. There are two kinds of competitive advantages: a) logistics-based competitive advantage (Porter. Competitive Advantages So far. 1991) and b) resource-based competitive advantage (Barney. We will dwell upon Barney’s RBV competitive advantage theory in this research. e. Jaw & Ling (2004). Next.g. e. These scholars have examined them in an unconnected approach. 2005).g. 1997).g. Rare. These latter skills are prevalent among law firms. and only a paucity concerned professional service firms.27 - . Newbert (2007. but there has been a gap in having a research linking up international capabilities (cross-border skills) to competitive advantage. work settings. setting up different models. like China. studies examining international human capital in non-U. such as Asia. which require little training and little skill to perform them. two theoretical approaches emerged: The first was Barney’s VRIO . e. when professional service firms still remain an under-researched organizational form (Malos & Campion. It is also through our study that we are linking internationalized resources to competitive advantage. So far. Much of a firm’s learning opportunities are determined by its present stock of available skills and focusing on the improvement of existing skills. so scripts usurp their verbal and interactive skills’. Cross-Border Skills. Ritzer & Stillman (2001) argue that ‘most customer service jobs have (now) been deskilled. ‘competitive advantage’ is defined as ‘a function of a set of firm-specific resources and capabilities that are Valuable. According to Barney (1991).

’s (2007) international human capital framework and a literature review. & Shuen’s (1997) dynamic capability. capabilities (skills). to overcome some of competitive advantage’s weaknesses of being inferred. 2001). . using a Five-Point Likert-scale. Pisano. 2005.Auw framework (Barney. we will measure the perceived VRIO values of human capital and capabilities (skills). studies on internationalization concerning professional service firm have been few. we have developed a Cross-Border Skills’ conceptual framework. our literature review has revealed that prior research has stopped short of direct measurement of competitive advantage. Barney & Hesterly. 1997. Conceptual framework Based on Ruzzier et al..28 - . particularly those that concerned Cross-Border Skills. 2006) and the second was Teece. and studies linking internationalization to competitive advantage have been sporadic. Thus. Barney & Mackey. Thus. abstract rather than practical knowledge (Thompson et al. as shown in Figure 1. thus. as moderated by the perceived VRIO values. contributing to filling the gap in the literature on the applicability of the RBV to Cross-Border human capital of the professional service firms. This framework incorporates the different factors that typically influence a cross-border human capital strategy. this study will fill these gaps in the literature by proposing a human capital (skills) framework. by examining capabilities (skills). This is where our study will supplement the RBV research. In summary.

based on the follow-up telephone interviews. and the pilot study firms would not be included in the sample of the main study (Jackson. We will conduct a pilot study with six-ten CEOs/senior partners of law firms to ascertain the validity and reliability of the survey instrument. 1993) Back-translation and pretesting will resolve any inconsistencies in the two versions. Methodology and Research Design Data will be collected by questionnaires and standardized quantitative measuring instruments. Questions for both the pilot and main studies would be based on five-point Likert scales. 2004). 1986): our English version will be translated into Chinese and then back-translated into English by a Language Service Company until there is agreement among the translators that both the English and Chinese versions are comparable (Ralston et al. Data used in the empirical analysis will be drawn primarily from the responses to the questionnaire and will be frequently updated. Any firm that does not provide all of the data necessary to construct the variables used in the study would be dropped (Hatch & Dyer..Auw Figure 1: A Cross-Border Skills’ Conceptual Framework Perceived VRIO Values Value Rareness Inimitability Organizationally-supported Resources Human Capital Competitive Advantage Capabilities Cross Border Skills Independent Variables Dependent Variables Main effect Moderating effect 3. The survey will be back-translated (Brislin..29 - . 2005). 2000). . and eliminating measurement errors due to language differences (Yiu et al. Alterations and clarifications would be made to the questionnaire items based on responses and input from the pilot study.

For example. & Schuler. Child & Rodrigues.30 - . We therefore hypothesize that: . 2003. in China. 1995. 1995. These top managers may even lack the knowledge and skills necessary to use correctly those resource and capabilities even if they are developed (Zahra et al. 2005). Morley. Thus the scarce strategic resource that allows one company to surpass its competitors is the quality of its employees (Bartlett & Ghoshal. 2000. Chen & Lin.. Jackson. 1997). Garavan. 2004). 2002. 1993. Those local authorities carrying out strategic human resource management practices that result in organization-specific educated and trained employees outperforming those that do not implement such practices (Huselid. This leads us to our first hypothesis that: Hypothesis 1A: Firms’ Human capital will be positively-related to its competitive advantage Firms with higher level of human capital tend to be more efficient in utilizing the knowledge they acquire (Variyam & Kraybill. if they have the required skills. the pool of managers who have previously worked in the government setting lacks the corporate mindsets and incentives to trade in market-oriented activities or create the resources and capabilities for their changing environment. 1994). Huselid. O’Reilly & Pfeffer. which Saffo (2009) says are moving home-grown Americans abroad. Firer & Mitchell. which strengthens the premise that people are a valuable organizational resource (Collis & Montgomery. 1998. an asset-augmenting or asset-seeking perspective has been used to explain how firms are using international expansion as a way to seek resources and overcome their competitive disadvantages (Makino et al. Gunnigle. 2003). which can affect a firm’s competitive advantage. in what could become a huge shift in the world economic order.. 2000. 1993). 2002. Other researchers also advocate that. This management void can be filled in by the professionals from Hong Kong. Yiu et al. 2001. 2005). Discussion of Hypotheses We would discuss about the following hypotheses: Human capital and Competitive Advantage Human capital is found to be a source of higher performance in local authorities (Carmeli & Tishli. especially those employees that possess international human capital (cross-border skills). Pfeffer.. Hendry & Pettigrew. with the rise of Asian multinationals.Auw 4. & Collins. Mathews.

Jaw & Ling (2004) called these skills the ‘cross-border international capital’. 2004). and to launch Initial Public Offerings (IPOs) in both China and the neighbouring markets (TDC Survey.Auw Hypothesis 1B: Firms with better international human capital are more likely to generate competitive advantage at a higher rate than their counterparts Capabilities and Competitive Advantage Past theorists have only discussed about ‘skills in the light of ‘complementary skills’ (Storey. Trade Development Council’s (2005) survey has also supported their call for ‘the required skills’. 2005). 2002). & Van Witteloostuijn. and 2004. of which we would redefine as ‘the cross-border skills’. to make mergers & acquisitions (M&A) deals. or just ‘skills’ (presumably normal working skills) (Edvinsson & Malone. Cross-Border Skills are important in international trading. management & coordination for cross-border projects. 2008). Ian Mitroff (2002). 2003). to offset opponents’ sudden attacks. as experienced by the Chinese managers. in order for certain professions to excel in a foreign market. McCann (2004). or to build rapid momentum for new strategic shifts (Quinn. on acquisition of a foreign company. who still have a talent-development problem. ordinary skills that normal staff would possess in themselves. 1999. Skill set required would be dependent upon the service range in a particular firm and the scale and scope of their marketing plan into China. Therefore. to contact and liaise with decision-makers for business. 2005). to manage Intellectual Property (IP) work. 2003. ‘personal skills’ (Piazza-Georgi. advising Mainland clientele on international capital markets. Pennings Lee. In absence of the Cross-Border Skills it would take three years for a Chinese team to get oriented to and acquainted with a foreign territory. Youndt. not the mundane. The Cross-Border Skills for Hong Kong lawyers would be: expertise in handling cross-border mergers and acquisitions (M&A). Subramaniam. commercial litigation.31 - . international arbitration/mediation. ‘talents’ (Chen & Lin. because they find it hard to deal with the increasingly sophisticated global context by just emphasizing the improvement of technical/core skills (Joerss & Zhang. 1998. 1980). Especially in the case of CEPA. & Snell. calling it ‘the required new skills’. corporate law and intellectual property issues (TDC Survey. because they saw the fresh need for something that could suit the occasion. Cross-Border Skills are necessary in order to . Recently. The Cross-Border Skills for lawyers in China are: to engage foreign lawyers. 1995). and Rosabeth Kanter (2003) have specifically brought up the word ‘skills’ again in 2002. These capabilities would enable firms to have quick access to resources to cushion the sudden impact of forceful random events. in preparation for successful cross-border transactions.

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