Progress in Business Innovation & Technology Management Volume 1 Page 23 – 32, May 2011
Human capital approach towards enhancing innovation performance in Omani industrial firms: The role of knowledge management Salim Abdullah Rashid Alshekaili* Faculty of Economics and Administration University of Malaya, Malaysia sshukili@hotmail.com Ali Boerhannoeddin Faculty of Economics and Administration University of Malaya, Malaysia alifeaum@yahoo.com Abstract In today’s competitive landscape, innovation is perceived as an essential target. Superior innovation provides organizations with opportunities to grow faster, better and smarter than their competitors. Because of the various environmental changes affecting industrial organizations around the world in the last years, most of them attempted to achieve innovation performance. Several researchers indicated that the Omani firms faced many challenges to achieve innovation performance. However, there are many approaches can stimulate organizations to achieve innovation performance; one of the most applicable approaches is human capital approach. On the other hand, innovation performance is most likely to occur when there are suitable knowledge management practices. Therefore, understanding the role of knowledge management is crucial to accelerate the impact of human capital on innovation performance. This paper aims to study the influence of human capital approach on innovation performance in Omani industrial firms. Additionally, it examines the mediating role of knowledge management in this relationship. The findings support the proposed hypotheses. The study contributes to the theoretical and practical development of the conceptual model.
Keywords: Innovation Performance, Human Capital Approach, Knowledge Management
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Progress in Business Innovation & Technology Management Volume 1 Page 23 – 32, May 2011
Human capital approach towards enhancing innovation performance in Omani industrial firms: The role of knowledge management 1. Introduction A continuous flow of industrial innovation is the key to sustained dynamic growth by any country. Innovation in industries has been of central interest in recent years because it is vital for organizational adaptation and renewal as well as for competitive advantage. All firms are interested in knowing what influences the results they achieve, how and why they succeed or fail. Although innovation is widely recognized as essential for the organizational survival and growth, understanding the factors influencing an organization’s ability to innovate successful new products, services, practices and ideas is a key strategic concern for firms competing in dynamic high-technology markets. The concept of organizational innovation has been defined as a new idea or behavior by individual to the organization, such as new product, service, technology, or practice (Damanpour, 1991; Rogers, 1995). In the last few years, the Gulf Cooperation Council (GCC) governments (Oman, Saudi Arabia, Qatar, Bahrain, UAE and Kuwait) have taken various proactive steps to support the innovation performance. The GCC countries are focusing on innovation for growth opportunities. They are taking a long-term sustainable approach to achieve innovation performance (Shafiqur Rahman, 2010). Many of the GCC countries have already started making progress toward that goal. In spite of these countries are oil and gas producer, the gross domestic product (GDP) is very high (rose by 4.4 percent in 2010 to $983 billion, compared in 2009) (Alireza, 2010) and the continues efforts exerted by the governments and industrial sectors to accomplish of innovation, many researchers in the field of innovation and economists believe that the GCC states failed to catch up with the developed countries (Barry and Kevin 2009; Shafiqur Rahman, 2010). This because of the nature of the challenges the GCC countries are facing. In fact, GCC countries face genuine obstacles to innovation and this is precisely why they remain undeveloped. These obstacles derive from a) inappropriate business and governance climates, b) weaknesses of educational level of human capital of those working in the industrial sector, c) insufficient efforts exerted for human capital learning and knowledge technology programs and d) low budget spent on research and development (R&D) (Al-Lamki, 2000). Thus, in order to achieve innovation performance, the GCC countries should cope with these difficult situations. Sultanate of Oman is a middle-income economy that is heavily dependent on oil resources. Oil declining reserves, global competition and the continuous changing nature of innovation are critical factors forcing Omani government and industries to search for the appropriate approach that can achieve high level of innovation performance (Ministry of National Economy – Oman, 2010). Several studies indicated that many approaches can stimulate organizations to achieve innovation performance such as: contingency approach, technological approach and evolutionary approach (Damanpour, 1991; Kesting and Parm Ulhøi, 2010). In economic terms, the impact of human capital in innovation performance is considerably more dramatic. They can transform existing products, services and ideas to create new ones and make enormous economic contributions (Al-Hamadi, Budhwar and Shipton, 2007). This suggests that human capital 24
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approach is one of the accessible approaches which can achieve innovation performance in the industrial firms. Numerous studies have confirmed that firms can achieve innovation performance through the human capital approach. For instance, Onyx and Bullen (2000) in their empirical study indicated the significance of the quality of human capital in promoting innovation. Putnam (1993) also concluded that managers should enhance the effectiveness of human capital factors to stimulate innovation performance in the organization. The researchers suggested factors such as; leadership behavior and employee commitment as the most essential factors related to human capital approach in affecting innovation performance (Lin, and Kuo, 2007). On the other hand, high level of human capital is a necessary but insufficient factor for achieving innovation performance (Kesting, and Parm Ulhøi, 2010). Today, when the world living the transition to the knowledge society, the economy of developed countries is solidly based on science, technology, innovation and advanced education. The studies suggested that innovation is most likely to occur when there are appropriate knowledge management practices (Ministry of National Economy – Oman, 2010; Shu-hsien., Wu-Chen, and Chih-Tang, 2008). However, limited attention has been paid to elucidation of issues pertaining to human capital factors and knowledge management and its contributions to innovation performance in Omani industrial firms. Therefore, innovation in these key areas will help ensure a prosperous long-term future for Oman’s industrial sector. Thus, this research bridges the gaps in the current literature by linking human capital approach (education, experience, leadership and commitment) with innovation performance in the Omani industrial firms. In addition, the research studies the role of knowledge management in this relationship.
2. Background and hypotheses The effects of human capital approach on innovation performance in industrial firms depend on the presence of previous capabilities by which firms synthesize and acquire knowledge resources and generate human capital as well as new applications from those resources (Zerenler, Hasiloglu, and Sezgin, 2008). In this section, the researcher examines two hypotheses about how human capital approach affects innovation performance depending on knowledge management. 2.1 Innovation Performance Today, firms are facing a competitive and continuously changing situation. In this context the performance, and even the survival, of firms depend more than ever on their ability to achieve a solid and competitive position and on their flexibility, adaptability and responsiveness. Therefore, it is hardly surprising that there is growing interest in innovation as a strategy that allows the firm to improve its flexibility, competitive position and performance (Van de Ven, 1986). Organizational innovation performance is defined as the propensity of a firm to actively support new ideas, novelty, experimentation, and creative solutions (Wang, and Ahmed, 2004). Scores of studies have highlighted how innovation enables organizations to renew themselves, adapt to changing environments and ensure their long term growth and survival (Chen, and Guan, 2010; Damanpour, 1991; Van de Ven, 1986). Innovation provides an important foundation for an organization’s dynamic capabilities, and is indeed a cornerstone for its competitiveness (Zerenler, Hasiloglu, and Sezgin, 2008). Thus, innovation performance is often an important aspect of worker performance. 25
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2.2 Human Capital Approach and Innovation Performance Human capital is just one of an organization’s intangible assets. It is basically all of the competencies and abilities of the people within an organization, i.e. their skills, experience, experience, behaviors, commitments and capacities (Al-Hamadi, Budhwar, and Shipton, 2007). A recent study (Chen, and Guan, 2010) concluded that human capital, with knowledge, expertise and skills, is a valuable resource of firms. Therefore, organizations that effectively manage and leverage the knowledge and expertise embedded in the individuals’ minds will be able to create more value and achieve superior competitive advantages (Ruggles, 1998; Scarbrough, 2003). Furthermore, human capital theory emphasizes emotions, values, and the importance of investment in people for economic benefits for individuals as a whole to encouraging innovation and performance in organizations (Wright, Dunford, and Snell, 2001). Human capital factors reflect a large part of the stock of knowledge within an organization. Robinson and Sexton (1994) report a strong positive relationship between levels of education and experience and innovation of individuals. Additionally, the transformational leadership theory demonstrates the role of leadership behavior in achieving organizational innovation (Parker, 1982). Moreover, an organization can exhibit commitment to its employees to achieve innovation performance (Mowday, Porter, and Steer, 1982). Consequently, the higher the level of education, experience, leadership behavior and commitment, the more receptive an individual has been found to be to innovation. Thus, this study offers the following hypothesis; H1. There is a positive relationship between Human capital approach and innovation performance. 2.3 The Mediating Role of Knowledge Management Knowledge management is “a systematic and integrative process of coordinating organization-wide in pursuit of major organizational goals” (Ruggles, 1998). Knowledge management serves not only as an antecedent to organizational innovation, but also a medium between individual factors and organizational innovation. Knowledge management could serve as one of the intervening mechanisms through which human factors influence innovation performance. Identifying how individuals interact with knowledge management to increase organizational innovation performance is the first rationale of this research. Knowledge management researchers have emphasized the pivotal role of knowledge management, particularly in creating an internal working environment that supports creativity and fosters innovation (Darroch, 2005). The knowledge-based Theory concerns knowledge as a valuable resource of firms (Al-Hajri, and Tatnall, 2007). Knowledge embedded in human capital enables firms to enhance distinctive competencies and discover innovation opportunities (Robinson, Sexton, 1994). Moreover, Politis (2005) provided an important empirical evidence to support the role of knowledge management within firms to operational and overall organizational performance through leadership behaviors. In addition, Meyer et al. (2002 ) contended that organizations that create mechanisms and environments favorable to learning and development will increase employees’ knowledge engagement and subsequently, this knowledge experience will increase their commitment to achieve innovation performance. Thus, knowledge management could serve as one of the intervening mechanisms through which human capital factors influence innovation performance. Hence, this study proposed the following hypothesis: 26
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H2: Knowledge management mediates positively the relationship between human capital approach and innovation performance.
3. Research methodology This section presents the methods used to carry out the study and test the research hypotheses. It discusses the sample selection, followed by the process of developing the questionnaire and collecting data. 3.1 Data Collection and Sample This study uses a questionnaire to collect data from a sample of general managers, functional managers and HRM managers working in the Omani industrial organizations. In this study the research sample was chosen from various Omani industry sectors and they included manufacturing, financial services and banking, healthcare services, higher education and hospitality. Variables in the questionnaire include firms’ background information, human capital factors (educational level, experience, leadership and commitment), knowledge management, and innovation performance. The questionnaire was sent by fax and e-mail as well as delivered by hand. A total of 201 usable questionnaires were returned. 3.2 Variable Definition and Measurement a) Human Capital Approach: Becker (1964) defined human capital as the knowledge, skills, behaviors and commitment of employees in a firm’s workforce. Formal education was measured by asking respondents to specify their degree levels of post-high school education attained. Work experience was measured by asking participants how many years work experience they had in their previous industry and company. The scale used in this study measured the leadership impacts in innovation performance adapted from two validated scales; (1) the Multifactor Leadership Questionnaire (MLQ) (Hartog, Van Muijen and Koopman, 1997), which measured the organizational leadership. Organizational commitment was measured using the standard measure Organizational Commitment Questionnaire (OCQ) Mowday, Steers and Porter, 1979). b) Knowledge Management: Knowledge management represents the mediator variable in the study. The scale for knowledge management was developed based on the key elements of knowledge management dimensions. These dimensions are: knowledge acquisition, conversion and application (Cui, Griffith, and Cavusgil, 2005). In particular, the fifteen elements of the knowledge management scale were derived from selected items in the Inventory of Organizational Innovativeness (IOI) model (Tang, 1999). c) Innovation Performance: Innovation performance represented the dependent variable in this study. Since organizational innovation in this study refers to a type of atmosphere at the organizational level rather than frequencies, rates, or numbers of innovations adoption by the focal organizations, questions of this type contained in the original scales were excluded from the newly-composed scale. A fourteen-item scale based on previous research (Damanpour, 1991; Wang, and Ahmed, 27
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2004) reflects the extent of firm’s support and encouragement of development and implementation of innovation performance. d) Control Variables: Firm size and age may influence innovation performance because firms of different size and age may exhibit different organizational characteristics and resource deployment. Firm size is measured by the number of employees and firm age is taken as the number of years from the founding date. 3.3 Reliability Composite reliability assesses the inter-item consistency, which was operationalzed using the internal consistency method estimated with Cronbach’s alpha. Typically, reliability coefficients of .70 or higher are considered adequate (Cronbach, and Warrington, 1951). Although the constructs developed in this study were measured primarily with previously validated measurement items and strongly grounded in the literature, they are adapted to the Omani context. As can be seen from Table 1, Cronbach’s alpha values of all factors were well above .70. Table 1: Descriptive statistics and correlation matrix
1 2 3 4 5 6 7 8 9 10
Factor name and variable items Control variables Org. age Org. size Human capital Educational level Experience Leadership Commitment Know. Manag. KM Acq. KM Conv. KM App. Inn. performance
Mean
S.D.
1
2
3.70 2.45
1.68 1.11
-0.03
3.06 2.63 4.57 3.76
0.90 0.78 1.43 0.86
-0.18* 0.40** 0.22** 0.24**
3
4
5
6
7
8
9
Cronb. α
.80 .83 0.28** 0.18* 0.16* 0.29**
0.24* 0.27** 0.38**
0.42** 0.30**
.85 .81 .84 .79
0.63**
0.55** 4.72 0.62 0.19* 0.17* 0.31** 0.47** 0.32** 0.60** 4.90 0.55 0.18* 0.15 0.23** 0.44** 0.84** 0.27** 0.58** 0.57** 4.90 0.58 0.16 0.19* 0.19* 0.52** 0.72** 0.62** 0.48** 4.78 0.55 0.20* 0.18* 0.29** 0.61** 0.64** N=201 * Correlation is significant at the .05 level (2-tailed) ** Correlation is significant at the .01 level (2-tailed)
0.73** 0.63**
0.81**
4. Analysis and results This study employed Structural Equation Model (SEM). In SEM, all independent variables were entered simultaneously into the model and their influence on the dependent variables, were calculated. Since this was an exploratory study, this method was appropriate as one was trying to "simply assess relationships among variables and answer the basic question of multiple correlations" (Tabachnick, and Fidell, 2007). 4.1 Main Effects of Human Capital Approach on Innovation Hypothesis 1 proposed a relationship between human capital approach and innovation performance. A hierarchical regression model was developed to test the relationship between human capital factors and innovation performance. Table 2 shows that the control variable (size of organization) was a significant predictor of innovation performance as shown in Step I. Step 2 28
.80 .77 .82 .86
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in Table 2 revealed that educational level (β= .18, p < .001), experience (β= .21, p < .001), leadership (β= .36, p < .01) and commitment (β= .13, p < .01) were found to be significant predictors of innovation performance. Hierarchical regression analysis indicated that 63% of the variance associated with organizational innovation performance is explained by the human capital factors (R2adj= 0.52, p < .001). As predicted, Table 2 shows a direct, positive and significant relationship between human capital approach and innovation performance. Thus, the results support hypothesis 1. Table 2: Regression results (standardized coefficient) for innovation performance Innovation Performance Step 1 Step2
Variables Control Variables Org. Age Org. Size Response Variables Educational Level Experience Leadership Commitment R2 Adjusted R2 F ∆ R2 F ∆ R2 Note: *p < .05. **p < .01. ***p < .001
.06 .14*
0.9 .16*
.08 0.07 10.62** .05 10.62**
.18* .21** .36*** .13* .63 .52 77.49*** .47 105.76***
4.2 Testing for Mediating Effects In this study, Hypothesis 2 proposed a mediating effect of knowledge management on the relationships between human capital factors and innovation performance. A stepwise multiple regression process was used to examine the hypothesis mediation effects. Step 1in Table 3 shows that the control variable (size of organization) was a significant predictor of innovation performance. Table 3: Regression results (standardized coefficient) for innovation performance as a dependent variable Variables Control Variables Org. Age Org. Size Response Variables Human Capital Edu. Level Experience Leadership Commitment Know. Manage. Know. Acquisition Know. Conversion Know. Application R2 Adjusted R2 F ∆ R2 F ∆ R2 Note: *p< .05. **p< .01. ***p< .001
Step1
Innovation Performance Step2
Step3
.06 .14*
0.9 .16*
.14* .18
.17* .15*
.12 .09
.27** .26**
.16 .24*
.39 .38 44.11*** 0.30 51.50***
.28*** .34*** .30*** .51 .48 62.00*** 0.12 104.87***
.09 .08 19.90*** 0.09 19.90**
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Whereas, Step 2 revealed that human capital variables including educational level (β=.17, p < .05), experience (β=.15, p < .05), leadership (β=.27, p < .01) and commitment (β=.26, p < .01) were found to be significant predictors of innovation performance. This relationship accounted for 38% of the variance in the dependent variable when human capital variables were inc1uded in the sample. The inclusion of knowledge management factors in Step 3 of the process reveals that knowledge management factors including: acquisition (β= .28, p< .001), conversion (β= .34, p< .001) and application (β= .30, p< .001) are mediating variables for the human capital approach and innovation performance relationship. Thus, the results support H2.
5. Discussion and conclusion This study examines the role of knowledge management in the relationship between human capital approach and innovation performance. The findings support: a) the influence of human capital factors in innovation performance, and b) the mediating effect of knowledge management on the relationship between human capital and innovation performance. Human capital works their beneficial effects on innovation performance through the capacity in knowledge acquisition, conversion, and application. These findings highlight the critical roles of human capital and knowledge management in enhancing innovation performance, a research result consistent with previous findings (Meyer, Stanley, Herscovitch, and Topolnytsky, 2002; Parker, 1982; Shu-hsien., Wu-Chen, and Chih-Tang, 2008). This study contributes to the literature by examining the relationships among human capital, knowledge management, and innovation performance. The findings of this study fill the gap in the literature that is lack of examining the mediating role of knowledge management in the relationships between human capital and innovation performance. Policy makers and organizational leaders can use the results of this study to create evidence-based plans and decisions in the human capital development and innovation achievement. To facilitate the link of human capital factors and favorable innovation performance, managers first need to recognize the importance of knowledge management. Then they should utilize human capital factors to cultivate a better level of knowledge management which in turn will result in favorable innovation outcomes. However, this study has some limitations. Firstly, limitation is the fact that a single respondent was used to report information from each firm. It may be, especially for such indicators as internal sharing, that multiple respondents would give a different, more accurate picture of the situation in each firm. Secondly, as with all studies, there are other possible variables that were not examined that may have exogenous effects on the relationships studied. In particular, both organizational culture and social capital have been cited as key factors for building new knowledge within organizations. Finally, this study uses self-report data which may have the possibility of common method variance. Future studies should be based on a larger sample and might well explicitly integrate the influences of external factors. Although the results are consistent with theoretical reasoning, the cross-sectional design may not rule out causality concerning the hypothesized relationships. Future research might address this issue by using longitudinal design in drawing causal inferences. To conclude, human capital approach is a valuable asset for firms desiring to achieve superior innovation and sustainable competitive advantages. The viewpoints of this study 30
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highlight the crucial importance of the mediating role of knowledge management when examining the relationship between human capital and innovation performance.
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