Principal Topic

Environmental and competitive pressures may lead to the natural decay of human capital, that is, the depreciation of the knowledge, skills, abilities, and experience of individuals in an organization over time. When changes such as these come along, old competencies are replaced with new competencies as the organization adapts. To prevent or circumvent human capital obsolescence, an organization is obliged to make new human capital investments in its top management team. Human capital investments are important as they keep the organization moving forward with growth. Thus, growth-oriented firms may be particularly susceptible to human capital obsolescence.

Building on human capital theory and resource-based theory, employment modes that obtain, retain, and develop the necessary skills and competencies are proposed to be important for preventing human capital obsolescence in growth-oriented firms by providing value and uniqueness to the competencies that create competitive advantage for these firms. Therefore, it is predicted that the mode of employment (“make” versus “buy”) for obtaining top management team human capital will influence the type of human capital decay (value decay or uniqueness decay) in initial public offering (IPO) firms.

Method

To test these hypotheses, the research design follows over a three-year period a cohort of 70 high technology firms (based on a 4-digit SIC code) that went public in 1997. These IPOs present an excellent opportunity for studying young, growth-oriented firms that are likely to be dealing with the human capital issues discussed. Data on human capital investment modes (e.g., development, market acquisition, contracts, and alliances) are collected through content analysis from the IPO prospectuses filed in 1997. Human capital decay (e.g., change in firm-specific, industry, and management experience) data are collected from the IPO prospectuses filed in 1997 and collected from proxy statements for 2000.

Results and Implications

On average, these firms are yielding to human capital decay. Firms using employment modes that represent a “buy” strategy of human capital investment were positively related to the rate of investment in firm-specific experience. However, when a firm used a “make” mode of human capital investment, firm experience decreased over time. These results suggest the need to get a closer look at how the value and uniqueness of individuals’ knowledge, skills, and abilities contribute to the growth process.

CONTACT: Jason C. Senjem, University of Colorado, College of Business, Boulder, CO 80309; (T) 303-499-2780; (F) 303-492-5962; Jason.Senjem@colorado.edu