Human Resource Management in the Knowledge Economy Research Note A Framework for Human Resource Management in the Knowledge Economy: Building Intellectual Capital and Innovative Capability

Human Resource Management in the Knowledge Economy Research Note A Framework for Human Resource Management in the Knowledge Economy: Building Intellectual Capital and Innovative Capability
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  Human Resource Management in the Knowledge Economy ISSN 1985-692X International Journal of Business and Management Science, 3(2): 251-273, 2010 251   Research   Note   Received 27/04/2010 Accepted 23/06/2010 SAFA = 0.77   Chief Editor: Mohammad Safa Special Issue Editor: Keng-Boon Ooi & Alain Yee-Loong Chong  A Framework for Human Resource Management in the Knowledge Economy: Building Intellectual Capital and Innovative Capability a   Rosdi Intan-Soraya   and a Kok-Wai Chew a Over the years, the business environment has grown increasingly complex and characterized by rapid technological advancements. Innovation is the critical enabler for organizational value creation and sustainable competitive advantage, and it is driven by a firm’s capacity to manage its knowledge stocks or intellectual capital (Chen and Huang, 2009). An organization’s capability to innovate either in an incremental or radical manner depends on its knowledge management capacity (Subramaniam and Youndt, 2005). Since the knowledge- Faculty of Management, Multimedia University, Malaysia Abstract:  The business environment is experiencing rapid advancements in technology which are driven by firms’ capacity to innovate. Firms depend on their innovative capabilities to gain competitive advantage. Innovation is driven by knowledge in organizations, and knowledge resides in individuals. Knowledge needs to be effectively acquired, shared, and applied for the benefit of organizations. Hence, the issue is on how to facilitate knowledge exchange among organizational members in order to help build an organization’s innovative capability. The purpose of this paper is to propose a framework capturing how a firm’s people management strategies influence organizational learning and the firm’s capacity for knowledge management. The framework also captures how a firm’s knowledge management capacity positively relates to its intellectual capital, which in turn has a positive influence on its innovative capability. Keywords:  Innovative capability, intellectual capital, knowledge management, strategic HRM INTRODUCTION ♣    Human Resource Management in the Knowledge Economy ISSN 1985-692X 252 International Journal of Business and Management Science, 3(2): 251-273, 2010   based view of the firm runs on the basic premise that knowledge resides in individuals, firms need to facilitate communication and exchange among individuals in order to gain new insights and capabilities (de Pablos, 2004; Nonaka and Takeuchi, 1995). Reference to people management literature is therefore crucial to understanding organizational knowledge dynamics. Since literature in the field of human resource management (HRM) is specifically concerned with the management of people in organizations, it is comprehensively explored in the context of knowledge management and organizational innovation. Hence, the question is ‘how can a firm’s human resource management strategy and practices be geared towards building its intellectual capital and innovative capability?’ Much of the existing literature have established the important role of HRM in innovation performance, but few have explained ‘how’ it manages to do so (Kang, Morris and Snell, 2007). By converging studies on strategic HRM, organizational learning and knowledge management, and innovation, this paper aims to develop an integrated framework that captures how a firm’s HRM strategy and practices can be utilized to drive organizational knowledge building, and enhance a firm’s innovative capability. LITERATURE REVIEW This section reviews literature on organizational innovation, organizational learning, knowledge management, and human resource management due to their relevance in constructing the research framework. Innovation Innovation refers to a planned and drastic change in an organization or its existing products and processes with the intention of gaining competitive advantage over competitors (Leede and Looise, 2005). Innovation is essentially about detecting opportunities and using them to create new products, services, or work practices (Van_deVen, 1986), which makes it an important enabler in a complex and rapidly changing environment (Subramaniam and Youndt, 2005). Firms with higher innovativeness tend to more successfully respond to changing environments and develop new capabilities (Montes, Moreno and Fernandez, 2004). Innovation comes in different forms, and the most established categories are product innovation, process innovation, and organizational innovation. While product innovation refers to the development of new products and services, process innovation involves new technologies in production or service, and finally, organizational innovation refers to the development of new organizational structures and management practices (Boer and During, 2001). There is an assortment of definitions of innovation types in the literature, but they share a common theme which focuses on how knowledge is used to meet customer needs and create competitive advantages (Gloet and Terziovski, 2004). As innovation is basically about being able to identify and seize opportunities to create new products, services, or work practices (Van_deVen, 1986), the process  Human Resource Management in the Knowledge Economy ISSN 1985-692X International Journal of Business and Management Science, 3(2): 251-273, 2010 253   of innovation is commonly equated with a continuous pursuit of new and unique knowledge (Nonaka and Takeuchi, 1995). There is a well-established theme within the innovation literature which emphasizes on how knowledge is crucial for firms to come up with new products, services, and processes in order to meet customer needs and create competitive advantages (Gloet and Terziovski, 2004). The unique and tacit knowledge of individuals is a fundamental source of innovation, making people the main agent of change in the business environment. Hence, in studying the processes that facilitate innovation, much research has shown how innovation is inextricably linked to the management of knowledge, and also the management of people who are the elemental knowledge storehouses (Egbu, Botterill and Bates, 2001). However, most of the existing research on how organizational knowledge contributes to innovation focuses on generic innovation outcomes such as product innovation, technology patents, and sales generated from new products (Subramaniam and Youndt, 2005). In other words, most studies focus on innovation types, be they product, process, or technological. Minimal research exists on investigating how  organizational knowledge is connected to specific characteristics  of innovation. Other than the types of innovation, namely product, process, or technological, the degree of novelty, or the extent of innovation in a firm is also an important measure (Romijn and Albaladejo, 2002). While there are researchers who describe innovation as involving a radical change in existing processes, products, or the organization which result in the creation of competitive advantage, there are also many authors who discuss innovation that is incremental, or continuous in nature (Leede and Looise, 2005). Hence, the concept of incremental and radical innovation warrants further attention. Innovative Capability A firm’s innovative capability refers to its ability to utilize skills and knowledge to successfully digest, master, and improve existing technologies, and to create new ones (Lall, 1992). Incremental innovative capability refers to the capability to generate innovations that refine and improve existing products and services, namely incremental innovation. Radical innovative capability refers to the capability to create major transformations of existing products, services, or technologies, thus making the prevailing technologies obsolete, namely radical innovation (Chandy and Tellis, 2000). The most established classification of firm innovation is whether it is incremental or radical (Subramaniam and Youndt, 2005). Research concepts on incremental and radical innovation are not new as early researchers discuss the difference between radical and incremental ideas (Cummings, 1997; Damanpour, 1991; Kanter, 1983). Ideas can vary along an incremental-radical continuum (Baer, 2007; Cummings, 1997; Kanter, 1983). Radical ideas lead to revolutionary changes to a firm’s products, processes or procedures while incremental ideas involve relatively smaller changes in the firm and does not require much new knowledge if they were to be implemented  Human Resource Management in the Knowledge Economy ISSN 1985-692X 254 International Journal of Business and Management Science, 3(2): 251-273, 2010   (Green, Welsh and Dehler, 2003). This perspective of ideas being on the incremental-radical continuum has been applied to looking at innovative capability as being on the same continuum (Romijn and Albaladejo, 2002). An innovation index can be used to measure the innovative capability of firms based on the extent of their innovation output which can vary from new to the world, new to the firm’s industry, or new to the firm. Higher scores on the innovative capability index would locate one’s innovative capability on the end of the continuum that is nearest to radical innovation. Some firms have the capability for incremental innovation while others for radical innovation (Romijn and Albaladejo, 2002). While the innovative capability of firms can be categorized as incremental or radical, or somewhere along that continuum, radical innovation has been shown to more significantly impact organizational performance and provide firms with competitive edge as compared to incremental advancements (Damanpour, 1991; Kanter, 1983). To proceed with linking innovation to organizational knowledge, it is important to note that how  a firm utilizes its knowledge base will determine the type of innovative output, namely incremental or radical (Subramaniam and Youndt, 2005). It is found that incremental innovations stem from a firm’s exploiting, building, and reinforcing its existing knowledge base and technological pathways. On the other hand, radical innovations result from a firm’s disruption of its existing technological pathways and its existing knowledge base to transform it into something significantly new (Gatignon, Tushman, Smith and Anderson, 2004). Either reinforcing the existing knowledge base or transforming it, each type of innovative capability therefore has a different way of utilizing a firm’s intellectual capital. Hence, it is important for firms to understand the role of their knowledge base, or intellectual capital, in the creation of innovative capability. The question is how does a firm’s intellectual capital influence its innovative capability?  Knowledge and Innovative Capability As knowledge is central to organizational innovation, the study of innovation is often interlinked with the study of knowledge creation and utilization in firms (Leede and Looise, 2005). To ensure organizational survival in a highly competitive environment, firms should increase their focus on knowledge building, and emphasize on creating value from intellectual capital (Daud and Yusoff, 2009). The term intellectual capital is widely used to refer to the summation of all types of knowledge that firms utilize for competitive advantage (Youndt, Subramaniam and Snell, 2004). There are three types of knowledge stocks existing within the firm (de Pablos, 2004). First, there is human capital, which is comprised of the knowledge, skills, competencies, experience, and commitment of employees (Bontis, 1998; Roos, Roos, Dragonetti and Edvinson, 1997). Second, a firm’s relational capital or social capital refers to knowledge that is embedded in firms’ relations with its employees, current and potential customers, shareholders, suppliers, industry associations, and other agents in the external environment. As  Human Resource Management in the Knowledge Economy ISSN 1985-692X International Journal of Business and Management Science, 3(2): 251-273, 2010 255   there are relations with both internal and external parties, it should be noted that there are internal and external social capital (Daud and Yusoff, 2009; de Pablos, 2004). Finally, there is structural capital, which is the infrastructure that enables the leveraging of human capital. It comprises hardware, software, databases, manuals, policies, strategies, routines, culture, and other storehouses of knowledge (Bontis, Keow and Richardson, 2000; Daud and Yusoff, 2009). Structural capital can be further divided into technological capital and organizational capital to capture the distinction between technology-based storehouses and the other organizational elements. However, it is common for researchers to refer to structural capital as organizational capital (de Pablos, 2004).   Each type of intellectual capital component possesses its own characteristics. One difference in attributes of the three components of intellectual capital lies in whether or not knowledge stocks can be preserved within organizations (Subramaniam and Youndt, 2005). For example, individual expertise in the form of human capital may or may not stay within organizations depending on employee mobility. However, institutionalized knowledge in the form of organizational capital tend to stay within organizations and does not change easily (Daft and Weick, 1984; Walsh and Ungson, 1991). As for social capital, it is made up of a network of individuals who can opt to leave the organization, but their exit rarely results in complete destruction of the viability of the overall knowledge network. Therefore, social capital tends to be largely preserved even with individuals leaving the organization. Even though social capital seems to be quite similar to organizational capital in the sense that it tends to largely remain in organizations even with the exit of individuals, it is different from organizational capital because of its flexibility in knowledge utilization. Knowledge associated with social capital evolves through individual or group interactions without predetermined rules and procedures to access or exchange information. On the contrary, organizational capital evolves through organizational structures and processes, or established procedures and rules for retrieving, sharing, and utilizing knowledge. It is also important to note that social capital facilitates and strengthens the leveraging of human and organizational capital in organizations (Kostova and Roth, 2003). Different components of intellectual capital, which are human, social, and organizational in nature, both individually and jointly influence a firm’s innovative capability (Baer, 2007; Romijn and Albaladejo, 2002; Subramaniam and Youndt, 2005). For instance, in terms of human capital, individuals whose personality makes them more open to new experiences and risks has been shown to contribute more to the development of radical ideas, and that other individual characteristics such as motivation influences idea generation and idea implementation that leads to both incremental and radical innovation (Baer, 2007). The education profile of a firm’s workforce, professional background of founder-managers, and the skills of a firm’s workforce is also found to contribute to building innovative capability (Romijn and Albaladejo, 2002). As for social capital’s contribution to innovative capability, it has been found that individuals are more likely to develop radical ideas when they maintain
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