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Exploring the Connection Between Human Capital and Innovation in the Globalising World

Surender Munjal and Sumit Kundu

The volume of investment in the development of human capital by multinational enterprises (MNEs) as they innovate and compete for markets around the world has seen a sharp increase since the advent of the twenty-first century. At the same time, MNEs rummage around for novel means of governance that facilitate innovation and an efficient utilisation of human capital. MNEs are pursuing integrated business models, namely globally linked and locally leveraged (Bartlett & Beamish, 2015), reinventing the organisation in the form of a global factory (Buckley, 2011a, 2011b ; Buckley & Prashantham, 2016) and, as key strategies in this regard, orchestrating head office efforts with that of subsidiaries (Mudambi, 2011). Consequently, the business world witness architectural, radical as well as disruptive innovations (Pisano, 2015) in the

S. Munjal (h)

University of Leeds, Leeds, UK S. Kundu

Florida International University, Miami, FL, USA © The Author(s) 2017

S. Kundu, S. Munjal (eds.), Human Capital and Innovation, DOI 10.1057/978-1-137-56561-7_1

market place that profoundly affects many industries. Consider, for example, the cases of Apple in the communications (cell phone) industry, Uber in transportation, and Amazon in retail.

The business world is also witnessing competition from new players in emerging markets, like China and India, where enterprises focus on indigenous innovation (Chittoor, Aulakh, & Ray, 2015; Lema, Quadros, & Schmitz, 2015; Li, Strange, Ning, & Sutherland, 2016; Rui, Zhang, & Shipman, 2016). MNEs focus on developing innovative capabilities in developing countries in the way of reverse innovation (Govindarajan & Ramamurti, 2011; Govindarajan & Trimble, 2013; Ramamurti, 2016). It shows that intellectual human capital is prevalent around the world, not concentrated in developed countries. Thus, the onus of progressive companies is to foster a global mind set of brain circulation, which commonly refers to mobility in the workforce of highly talented individuals. Centres of excellence are sprawling from Silicon Valley and Boston Route 128 to Beijing in China, Bangalore in India and Sao Paulo in Brazil. The innovation landscape has been redefined and conventional wisdom challenged. This is the dawn of a new era where the connection between human capital and innovation is to be affected by forces of globalisation as well as localisation. Enterprises of all sizes, industries and countries of origin have to embrace these new realities as they face competition from others in developed and developing countries.

Clearly, to understand the complexities in the role of human capital in fostering innovation, one has to understand that the ecosystem of innovation has to encompass different levels of human capital analysis. The aim of this book is to explore the connection between human capital and innovation. Our conceptualisation in Fig. 1.1 shows the relationship between human capital and innovation at various stages of human capital aggregation. It suggests that even though human capital is fundamentally generated at the individual level, its importance as a critical resource comes from the collective accumulation of individual human capital at manager (Lepak & Snell, 2002; Zhu, Chew, & Spangler, 2005), entrepreneur (Davidsson & Honig, 2003; Marvel & Lumpkin, 2007), firm (Chen & Huang, 2009; Hitt, Biermant, Shimizu, & Kochhar, 2001), industry (Ranft & Lord, 2000; Shan, Walker, &

Stages in the aggregation of human capital and innovation. Source

Fig. 1.1 Stages in the aggregation of human capital and innovation. Source: Compiled by authors

Kogut, 1994) and country (Benhabib & Spiegel, 1994; Dakhli & De Clercq, 2004) levels.

The book comprises nine chapters, including this introduction as Chap. 1, identifying the relationship between human capital and innovation at manager, firm, industry and country levels. The second chapter by Enderwick sets the foundation for subsequent chapters by providing an overarching framework that unlocks the connections between human capital and innovation both within and outside of the firm. Taking cognisance of rising uncertainties in the global marketplace, he stresses the need for managers to create an ecosystem of innovation that allows the firm to be innovative and maintain flexibility for the effective elimination of market uncertainties.

Enderwick uses the global factory framework (Buckley, 2009, 2011a, 2011b, 2016) to illustrate how firms are reinventing themselves (e.g. by creating a balance between internalisation and externalisation of activities) in order to stay competitive in the wake of the competitive global environment. The global factory thinking suggests core functions that capture a higher proportion of the overall value added by the firm should be internalised, while non-core functions, such as production activities, should be outsourced to external parties that can best perform them taking advantage of their embedded locations.

Core functions comprise high value adding activities such as product conceptualisation, design and implementation, technology development, product branding, marketing and customer service. Essentially, these core activities are reflected in the competitive advantages for the firm while human capital remains the backbone in their development. Enderwick suggests that innovation in each of these areas is critical. MNEs should invest in the development of human capital employed in the core functions. While the human resource practices of recruitment, selection, training and retention remain important in this process, Enderwick stresses the autonomy and flexibility at the workplace to boost creativity in the human capital.

The third chapter by Minai, Singh and Varma extends this argument by emphasising the role of leadership. The authors argue that challenges of ‘leading for innovation’ need to be understood at an individual and enterprise level to properly understand the process of building creativity in human capital employed by the firm. The authors suggest that to accomplish this, it is necessary for the firm to allow each leader to adjust his or her approach when the individual factors or the situational demands vary from location to location (an argument further examined in Chap. 4). The authors attempt to combine two streams of research in leadership: one that places emphasis on the motivational component of leadership and another that emphasises the role of leaders in influencing behaviour. They build different propositions for the leadership approach to foster innovation when core teams comprise diverse individuals in various situations.

Chapter 4 by Sanchez examines the balance between centripetal and centrifugal forces in managing human capital for innovation. The author argues that the literature on managing human capital is possibly skewed in favour of localisation, thereby ignoring that a global strategic imperative often houses the key drivers of innovation in global firms. The literature suggests that localisation of human capital management practices is vital given that individuals are psychologically tuned to local institutional environments and in order to exploit local talent the firm needs to adapt accordingly (Bjorkman & Budhwar, 2007). This eventually leads to a higher degree of interdependence among head offices and their subsidiaries, which may result in improved performance (Mudambi, 2011; Mudambi & Navarra, 2004; Pereira, Munjal, & Nandakumar, 2016).

In contrast, the author proposes several arguments for a global imperative arguing that too much focus on localisation efforts may endanger a firm’s innovative spirit. Sanchez proposes a bi-dimensional model of the global mindset, where localisation and globalisation represent two distinct sets of paradoxical forces that need to be managed by the firm in order to facilitate its innovative performance. This is a logical conclusion for the global factory set-up that acknowledges the twin informational aspects of innovation reinforcing the importance of explorative knowledge production, alongside the exploitation of existing stocks of skills and talent.

Human capital is considered a socially complex, intangible resource (Black & Boal, 1994). The management of global-local integration of diversity in workforces further contributes towards the complexity of human capital. On the one hand, diversity can be recognised as a valuable component of human capital that breeds new ideas and different perspectives for problem solving; on the other hand, it can contribute to the challenges of managing human capital.

Chapters 5 and 6 analyse the role of diversity in human capital for innovation. The authors argue that in a competitive global environment, the diversity and complexity associated with management of human capital are increasing. Firms increasingly recruit employees who are not only spatially away but also have different racial, sexual and cultural orientations, indicating that firms put more importance on international and non-traditional human capital. The management of diversity in human capital involving factors such as race, sex and culture, as studied in these chapters, is an under-researched topic and studies in this area with a focus on innovation have the potential to be quite rewarding.

Chapter 5 by Kim and Von Glinow examines the ways in which nontraditional human capital may supplement talent and innovation gaps. Chapter 6 authored by Zakaria, on the other hand, argues in favour of diversity on account of race and culture. Both studies present diversity as an innovative work structure with implications for how a firm’s agenda can improve innovation performance. The authors illustrate how this type of ecosystem promotes innovation and describe what challenges it presents for managing culturally and geographically distant employees.

Kim and Von Glinkow specifically analyse the role of lesbian, gay, bisexual and transgender (LGBT) expatriates in promoting innovation and the challenges associated therewith. The authors argue that even though talent pools across the globe are widening, firms are finding it difficult to find qualified traditional human capital locally. Firms thus often rely on teams of non-traditional expatriates. The authors raise two important issues that have implications for the firm. First, the MNE develops an internal labour market in the form of teams of expatriate managers where the human capital is trained (and retained) to take up challenges arising in foreign markets; second, the gap in creativity required for innovation in performing core functions of the MNE can be filled by the use of non-traditional human capital. The authors conclude that diversity and inclusive workplaces are more innovative and productive than those that are homogeneous.

Zakarias Chap. 6 examines global virtual teams as an innovative work structure. The author argues that global virtual teams allow the firm to stay competitive and agile. Focusing on innovation in the process of teamwork, the author proposes what she calls the CAB (cognitive, affective and behaviour) framework for understanding cross-cultural competency in global virtual teams that can aid in understanding aspects of cultural competency such as awareness, sensitivity and adroitness. The author presents certain propositions for successful teamwork in a virtual multicultural workplace. Her work also has important implications for the management of human capital in the global factory, that is, managers should inculcate open mindset and appropriate attitudes towards the cultural diversity of global virtual teams as an innovative work structure.

A similar approach is required for managing human capital outside a firm’s boundaries as firms are increasingly outsourcing knowledgeintensive activities to leverage skills and talent possessed by third parties. The move to access specialised knowledge externally is catching scholarly attention (Mudambi & Venzin, 2010 ; Yang, Mudambi, & Meyer,

2008). Chapter 7 by Pingali, Rovenpor and Shah explore this phenomenon by examining the trend and drivers of the shift in outsourcing and offshoring from traditional economic consideration to knowledgeseeking motives. The authors give a historical review of outsourcing with some useful contemporary statistics. They suggest that with advances in communication technology the outsourcing phenomenon is not only growing but also changing its nature. Online platforms act as marketplaces allowing efficient matching of skills and talent between buyers and sellers. The authors thus refer to the global search for talent and innovation in the current electronic age of a knowledge-driven economy as ‘Best Sourcing’. The authors argue that the growing trend in the outsourcing of high-end, value-creating knowledge-based activities has significant benefits in innovation.

The evolving stream of research (e.g. Govindarajan & Ramamurti, 2011; Govindarajan & Trimble, 2013; Ramamurti, 2016) in this area further suggests that skills and talent in emerging economies are increasing. The availability of promising human capital raises the innovation profile in emerging economies and attracts multinational enterprises from advanced economies looking for specific skills and talent.

Chapter 8 by Mckkonen examines the role of local talent in different phases of China’s innovation performance. The author’s thesis revolves around the mobility of people across geographic and cultural boundaries and argues that mobility has fundamental implications for innovation because talent flows with the movement of people and helps in the transfer of technologies and knowledge across borders. Mckkonen associates the mobility of professionals in the global labour market with the development of countries’ innovation performance. Taking the case of China, Makkonen identifies three innovation performance phases, the eras of copy and imitation, evolution and revolution. The author argues that China’s ability to move from evolution to revolution is influenced by global talent flow, cultural factors and regulative institutions at home. The study thus highlights the role of macroinstitutional environment on a country’s innovative capabilities.

The final chapter by Malik and Pereira extends the analysis to the case of India. The authors argue that globalisation imposes an increased need for investment in human capital. However, there is little theoretical basis for understanding how skill formation affects innovation. The authors propose a theoretical model for understanding the interactions and relationships between various units in the formation of human capital with innovation. With respect to the formation of human capital, they specifically place importance on the need for and nature of training and development, customised according to the existing state of affairs of the workforce.

Overall, this book integrates different levels in the study of human capital and its connection with innovation. It tackles this timely topic within the context of globalisation. Given the complexity of relationships, organisations must take an integrative perspective to leverage the usage of human capital in fostering innovation in a globalised world. The success of firms is determined by the optimal allocation of resources, the most precious of these being human capital. It begins with recruitment and retention of talented individuals who are available globally and discusses how firms sustain innovation capabilities within as well as outside their organisational boundaries. We are familiar with the role of offshoring and outsourcing of different activities in the value chain as firms have come to realise that not everything can be done within the internal boundaries of the organisation. The continued success of an enterprise in a fast-changing world witnessed by disruptive, radical and architectural innovation has to be understood and examined from the creation of knowledge and the transfer of best practices across the organisation.

We hope readers will find this compilation of articles useful. Given the nature of the subject, it remains a comprehensive, yet focused, exploration of the connections between human capital and innovation in the globalised world. We trust the book will not only serve as reference material for academia but also provide useful guidance to managers and policy makers. The chapters present many examples in support of our assertion, highlighting managerial action to achieve an ecosystem for innovation and human capital development, for instance, managing diversity, customising training and improving leadership to enhance creativity among the workforce employed in the core functions of the MNE. The important managerial action of balancing tensions between centripetal and centrifugal forces is identified. In addition, the book draws attention towards the development of human capital in emerging economies, which reflects policy implications. While, the global mobility of talent has vastly contributed to the economy of the United States and, in recent years, to the Indian and Chinese economies, the European Union is still debating the pros and cons of it. This suggests that global mobility may have positive effects on the innovativeness and competitiveness of the host economy; however, a well-thought-out policy is needed to harvest its economic benefits.

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