UNIT 1
INTRODUCTION TO HUMAN CAPITAL
DEVELOPMENT
Assoc. Prof. Dr. Nik Hasnaa Nik Mahmood
Universiti Teknologi Malaysia
Mobile no :0122276050
Email : nikhasnaa@[Link]
Website : [Link]
Definition : Human Capital
• Human Capital is a measure of the skills, education, capacity
and attributes of labour which influence their productive
capacity and earning potential. (Tejvan Pettinger. 2019)
• According to the Organization for Economic Co-operation and
Development (OECD), human capital is defined as:
“the knowledge, skills, competencies and other attributes
embodied in individuals or groups of individuals acquired
during their life and used to produce goods, services or ideas
in market circumstances”.
cont
• Individual human capital – the skills and
abilities of individual workers
• Human capital of the economy – The
aggregate human capital of an economy,
which will be determined by national
educational standards.
Factors that determine human capital
• Skills and qualifications
• Education levels
• Work experience
• Social skills – communication
• Intelligence
• Emotional intelligence
• Judgement
• Personality – hard working, harmonious in an office
• Habits and personality traits
• Creativity. Ability to innovate new working practices/products.
• Fame and brand image of an individual. e.g. celebrities paid to endorse a
product.
• Geography – Social peer pressure of local environment can affect
expectations and attitudes.
Human capital in primary and secondary
sector
• In agriculture and manufacturing, human capital was
easier to measure.
• The human capital of an assembly line worker could be
measured in simple terms of productivity – e.g. the
number of widgets produced per hour.
• In mining, human capital may be strongly related to
physical strength and quantity of coal produced per
day.
Human capital in tertiary
sector/knowledge economy
• The tertiary/service sector has a greater variety of jobs, which require different
skills. These skills and qualities are often more difficult to measure regarding
output. For example, the human capital of a teacher, cannot be measured by
university degree and A-Levels. The best academics may lack some teaching skills
– like empathy, the ability to inspire and command a class.
• In a job, such as management, important characteristics will be factors such as
interpersonal skills, ability to work in a team and the creativity to problem solve.
• In other words, as the economy has developed the concept of human capital has
also broadened to include a greater variety of skills and traits of capital.
• Since the 1960s/70s, human capital has become a more popular economic
concept as the emerging ‘knowledge economy‘ makes greater use of a wider
range of human capital.
How to increase human capital
• Specialization and division of labour
• Education
• Vocational training
• A climate of creativity
• Infrastructure.
• Competitiveness.
Different views on Human Capital
• Theodore Schultz “Investment in human capital” (1961) was an early proponent of theory. He stated:
• “Although it is obvious that people acquire useful skills and knowledge, it is not obvious that these skills
and knowledge are a form of capital, that this capital is in substantial part a product of deliberate
investment”
• Gary Becker “Human Capital” (1964) In his view, human capital, is determined by education, training,
medical treatment, and is effectively a means of production. Increased human capital explains the
differential of income for graduates. Human capital is also important for influencing rates of economic
growth.
• Howard Gardener – different types of human capital. Gardener emphasised the different types of
human capital. One could increase education, but be a poor manager. A successful entrepreneur may
have no education. Human capital is not unidimensional.
• Schultz/Nelson-Phelps – ability to adapt. Human capital should be looked at from the ability to adapt.
Can workers adapt to a changing labour market? A labour market which is shifting from full-time manual
work in manufacturing to flexible work in the service sector.
Competitive Strategy
• Competitive strategy is a long-term action plan of a company which is directed to gain
competitive advantage over its rivals after evaluating their strengths, weaknesses,
opportunities and threats in the industry and compare it with your own.
Porter's Generic Competitive Strategies (ways of competing)
• A firm's relative position within its industry determines whether a firm's profitability is above
or below the industry average.
• The fundamental basis of above average profitability in the long run is sustainable
competitive advantage.
• There are two basic types of competitive advantage a firm can possess: low cost or
differentiation. The two basic types of competitive advantage combined with the scope of
activities for which a firm seeks to achieve them, lead to three generic strategies for achieving
above average performance in an industry: cost leadership, differentiation, and focus.
• The focus strategy has two variants, cost focus and differentiation focus.
Cost Leadership
• In cost leadership, a firm sets out to become the low
cost producer in its industry
• The sources of cost advantage are varied and depend
on the structure of the industry. They may include the
pursuit of economies of scale, proprietary technology,
preferential access to raw materials and other factors.
• A low cost producer must find and exploit all sources of
cost advantage. if a firm can achieve and sustain
overall cost leadership, then it will be an above average
performer in its industry, provided it can command
prices at or near the industry average.
Differentiation
• In a differentiation strategy a firm seeks to be
unique in its industry along some dimensions
that are widely valued by buyers.
• It selects one or more attributes that many
buyers in an industry perceive as important,
and uniquely positions itself to meet those
needs. It is rewarded for its uniqueness with a
premium price.
Focus
• The generic strategy of focus rests on the choice of a narrow
competitive scope within an industry. The focuser selects a
segment or group of segments in the industry and tailors its
strategy to serving them to the exclusion of others.
• The focus strategy has two variants.
• (a) cost focus a firm seeks a cost advantage in its target
segment, while in
• (b) differentiation focus a firm seeks differentiation in its
target segment
Theory Related to Human Capital
1. The Harvard model of HRM
2. Resource based theory
3. AMO model
The Harvard model of HRM
• The analytical framework of the ‘Harvard model’ offered
by Beer et al .consists six basic components:
• Situation factors
• Stakeholder interests
• HRM policy choices
• HR outcomes
• Long-term consequences
• Feedback loop through which the output flow directly
into the organisation and to the stakeholders
Resource Based theory
Resource based model of HR Strategy –
Barney argues that four characteristics of resources and
capabilities – value, rarity, inimitability and non-
substitutability- are important in sustaining competitive
advantage.
From this perspective, collective learning in the
workplace on the part of managers and non managers,
basically on how to coordinate workers diverse
knowledge and skills and integrate diverse information
technology , is strategic asset that rivals find to difficult
to replicate.
AMO Model
• The AMO model is an illustration of how
employees can be motivated by the line
managers using the HR policies and practices
involved so as to enhance performance and
well-being. The term AMO means A=Ability,
M=Motivation, O= opportunity.
(Appelbaum et. al, 2000)
