By  C. Lakshman

Tongji University, Shanghai, China

This paper examines the role of human capital and leader’s knowledge in performance management in three countries from different continents. We contribute to the relevant literatures by examining crucial, hitherto unexamined processes of leveraging human capital, focusing on the conversion of tacit knowledge to explicit knowledge. The paper also contributes by demonstrating the applicability of these processes and ageneral strategic human resource management framework to differing cultures. Using data from employee samples in these three countries, this study shows a strong positive impact of managerial human capital on key processes of leveraging such capital such as performance enhancement strategies and critical interactive behaviors, eventually leading to strong perceptions of leadership. These processes seem to be applicable across the three countries studied. These results are discussed in the context of cultural variations, pressures for globalization and associated HRM practices in these contexts. Future directions, limitations and managerial implications are discussed.

Keywords: behavioral process; human capital; leader’s knowledge; leveraging human capital; performance management

Research in strategic human resource management (SHRM) has consistently noted the importance of human resource management (HRM) practices for developing a firm’s human capital (i.e. knowledge, skills and experience of employees; e.g. Lepak and Snell 1999), social capital (i.e. knowledge residing in groups and networks; e.g. Kang, Morris and Snell 2007) and organizational capital (i.e. institutionalized knowledge residing in systems, databases, routines, etc.; e.g. Wright, Snell and Dunford 2001). These are constituents of the overall intellectual capital, which is the sum of all knowledge and knowing capabilities that contribute to competitive advantage (e.g. Youndt, Subramaniam and Snell 2004). Drawing from theoretical frameworks such as human capital theory (e.g. Becker 1964), transaction cost theory (e.g. Williamson 1975) and resource-based theory of the firm (e.g. Barney 1991), this literature has identified the critical role of human capital in contributing to a sustained competitive advantage, either in a non-contingent (universal) mode or in a manner contingent with the organization’s strategy (Youndt, Snell, Dean and Lepak 1996). This debate about the universal role of human capital (more broadly intellectual capital) in terms of its direct impact on firm performance and competitive advantage versus the role where it is contingent on the appropriate fit to the organization’s strategy is still alive. Some work in this literature has either predicted (Oldroyd and Morris 2012) or identified a curvilinear relationship between human capital (among other constituents of intellectual capital) and organizational performance, in addition to focusing on the evidence related to leveraging of human capital for its performance outcomes (Hitt, Bierman, Shimizu and Kochhar 2001). Although this SHRM literature has identified and investigated the importance of several human resource practices, either as separate elements or as bundles or configurations, for organizational performance through strategy execution (e.g. Lepak and Snell 1999; Hitt et al. 2001; Youndt et al. 2004; Datta, Guthrie and Wright 2005; Kang et al. 2007), it has not adequately focused on the processes through which either such HRM practices or individual components of intellectual capital contribute to organizational performance (Wright et al. 2001; McClean and Collins 2011). Thus, much of these processes remain in the black box (Wright, Gardner, Moynihan and Allen 2005; Bhatnagar 2013) and we still do not adequately understand how human capital, for instance, contributes to higher organizational performance. Hitt et al. (2001), for instance, identified the crucial variable of leveraging human capital and its impact on the performance and competitive advantage of professional service firms. Leveraging human capital is conceptualized as the process through which managers in organizations convert collective and individual tacit knowledge to explicit knowledge, thereby increasing the ability to offer wider and more customized solutions to customers (see Hitt et al. 2001). Although these researchers defined such leveraging in terms of key processes (including mentoring and transferring tacit knowledge), their evidence is based on a proxy measure of leveraging which is a ratio of associate partners to full partners at the auditing firms that constituted the sample. We address this issue by first suggesting that the process of leveraging human capital is the main content within this unexamined black box in the relationship between human capital and performance. This paper makes a contribution to the SHRM literature by examining the processes of leveraging human capital leading to positive outcomes for the organization.

Relatedly, although the SHRM literature has suggested the shift from touch labor (responsibility for physical execution of work) to knowledge work (responsibility for a richer array of activities) in industrial and in service settings (e.g. Youndt et al. 1996), this literature has not adequately utilized frameworks that focus on leading and managing such knowledge work. Therefore, we draw from a related stream of research, viz. knowledge leadership (Viitala 2004; Lakshman 2009, 2011), for insights into these processes of leveraging human capital, by focusing on processes surrounding developmental performance management, which is a key component of human-capital-enhancing HRM strategies (e.g. Youndt et al. 1996). We thus focus on a critical issue in SHRM, that of the under-addressed process of leveraging human capital, which has been identified to provide competitive advantage benefits, using insights from human-capital-enhancing HR systems and knowledge leadership literatures.

Additionally, much of this literature on SHRM, including high-performance work systems (HPWS) and human capital, is situated in the US context and researchers have wondered about their applicability to other country cultural contexts (e.g. Bae and Lawler 2000). Although there is some evidence that best practices in HRM in the form of HPWS work well in cultures (countries) such as South Korea (Bae and Lawler 2000), Britain (Conway et al. 2008), France (Dany, Guedri and Hatt 2008; Razouk 2011) and India (e.g. Sanyal and Sett 2011), this literature stream needs a good deal of more work before we can begin to understand the cultural processes facilitating the implementation of humancapital- enhancing strategies. We address this issue as well by theoretically discussing the cultural angle to human capital and HRM strategy choices and empirically examining these issues in three countries, viz. the USA, France and India.

We therefore contribute to the international SHRM literature by examining the applicability of human-capital-enhancing systems to non-US contexts. We also make more basic contributions to the SHRM literature by examining the processes of leveraging human capital, hitherto unexamined, by utilizing insights both from within this literature and drawing from the growing literature on knowledge leadership. The rest of the paper is organized as follows. We first provide a brief overview of the literature focusing on human capital, human-capital-enhancing HR systems and leveraging human capital, as these variables impact organizational performance and competitive advantage. In this process, we identify the importance of developmental and behavioral performance management and the critical role of knowledge leadership in such contexts. We then describe the insights drawn from these streams of work and develop the research hypotheses. We then examine the country (cultural) contexts chosen for this study to examine the applicability of these hypotheses in the respective countries. We then present the method and sample from which we collected data for the empirical test. We then present the results, discuss them in the context of the literature and provide directions for future research. We now turn to a brief review of the SHRM literature on human capital.

Human capital and HR strategy

It is now widely accepted that people and the human capital they provide constitutes a strong base of competitive advantage to their organizations (e.g. Lepak and Snell 1999; Wright et al. 2001). Pointing to fundamental work on intellectual capital, Youndt et al. (2004) suggest that there is significant consensus among researchers in this area on what the construct represents and how it is to be operationalized, although this latter part is still evolving. As noted earlier, intellectual capital consists of three sub-dimensions, viz. human capital (i.e. knowledge, skills and experience of employees), social capital (knowledge residing in groups and networks) and organizational capital (i.e. institutionalized knowledge residing in systems, databases, routines, etc.) (Youndt et al. 2004). This increased acceptance of the importance of people has resulted in the increased focus on human capital management within the SHRM literature either by way of examining the direct impact of human capital (sometimes along with other dimensions of intellectual capital) on organizational outcomes (e.g. Hitt et al. 2001; Youndt et al. 2004) or by way of examining the impact of HRM systems on organizational performance (e.g. Youndt et al. 1996; Datta et al. 2005). This latter group of studies focuses on HRM systems such as HPWS (alternatively named as high-involvement work systems or highcommitment work practices) and their direct or interactive effects with organizational strategy on firm performance (Youndt et al. 1996; Datta et al. 2005). Although the debate between the universal and contingent approaches to the link between HRM and firm performance is still alive, there is some early consensus that these two approaches may both be important rather than being mutually exclusive (see Youndt et al. 1996; Datta et al. 2005). Following earlier studies showing support for either a direct effect of HRM on firm performance or a strategy contingent effect on firm performance, both Youndt et al. (1996) and Datta et al. (2005) provide evidence suggesting the viability of both the universal and the contingent approaches. More precisely, both these studies suggest that HPWS have both a direct effect on organizational outcomes and an effect on the outcomes when there is better fit with an appropriate firm strategy. In sum, however, these studies suggest that human capital in organizations is critical in contributing to competitive advantage through their impact on the HRM systems in their organizations, or alternatively as a result of the HRM practices in their organizations.

One set of studies mentioned above (e.g. Hitt et al. 2001; Youndt et al. 2004; Subramaniam and Youndt 2005) provides clearer evidence for the impact of human capital on firm performance by directly conceptualizing and operationalizing human capital (as opposed to HRM systems or HPWS) and then testing their impact either directly, configurationally or contingent on other characteristics on the ultimate organizational outcomes (performance or innovation). First, Hitt et al. (2001) demonstrated the strategic importance of human capital by showing a curvilinear effect of human capital on organizational performance in professional service firms, in addition to a positive effect of leveraging human capital on performance. These authors (Hitt et al. 2001) also showed the interactive effect of human capital and firm strategy on firm performance, supporting a resource-strategy contingency fit. In their study, the curvilinear relationship of human capital and firm performance in professional service firms was a result of declining marginal value of marginal increments to human capital beyond the inflexion point. Second, based on a survey of 208 firms, Youndt et al. (2004) identified different intellectual capital profiles, some with high levels of all three components (i.e. human, social and organizational) and others with low levels on all these three, with yet others uniquely specializing in each of these types of intellectual capital. This study (Youndt et al. 2004) also found that firms with superior performance made very high investments in HRM and therefore possessed high levels of human capital. Finally, Subramaniam and Youndt (2005) conducted a longitudinal study of 93 firms and found that human capital and social capital combined to make critical contributions to radical innovation.

There are two broad issues in this impressive literature, which we aim to address in this study. First, this literature has not sorted out the issue of whether investments in human capital lead to organizational performance or that superior performance in organizations leads to higher levels of investments in human capital and HRM systems (cf. Youndt et al. 1996, 2004; Datta et al. 2005; Razouk 2011; Bhatnagar 2013). All of these authors suggest that the reverse causality of superior performance leading to higher investments in HRM systems is possible (for an exception, see Ketkar and Sett 2009). Although Ketkar and Sett (2009) provide evidence for the direct effect of human resource flexibility (not human capital) on performance in the Indian context, their study’s cross-sectional design did not permit them to rule out reverse causality. Second, although this literature has found that it is critical for positive organizational outcomes, this literature has not examined the nature of the associated processes (Wright et al. 2005; Bhatnagar 2013). Both these issues point to the importance of the examination of the nature of the processes through which either (1) managerial human capital contributes to the leveraging of employee human capital in the organization or (2) human resource practices through which this human capital interacts with each other in building productive networks, in an effort to contribute to positive organizational outcomes. We aim to address these issues in this study by examining processes at micro levels of analysis, focusing on individuals’ human capital and their leadership/management processes through which the predominantly tacit knowledge laden human capital is converted into one with a clear basis in explicit knowledge. Drawing from knowledge leadership models (e.g. Viitala 2004; Lakshman 2009), as we do, helps in identifying the processes through which leaders manage tacit and explicit knowledge of their subordinates and facilitate the conversion of tacit knowledge residing in individuals and networks to exploitable explicit knowledge. The existence of these processes cannot be explained as an outcome of higher organizational performance but only as an antecedent of such performance. Evidence from such processes will therefore put to rest arguments of reverse causality with superior organizational performance resulting in higher levels of investments in human capital (Wright et al. 2005; Bhatnagar 2013). We make a contribution by providing evidence of the existence of these processes and their effectiveness in enhancing outcome variables such as subordinate performance and leadership perceptions. Subordinate performance and leader acceptance in the form of leadership perceptions are typical measures of leadership effectiveness, both conceptually and empirically (see Yukl 2006; Lakshman 2013).

Hitt et al. (2001) allude to this mix of explicit and tacit knowledge components of human capital, with more emphasis on the tacit knowledge component in the context of professional service firms. They argue that processes of leveraging human capital are critical for firm performance by way of higher ability to service important clients with wider and more customized offerings, while also better optimizing the knowledge residing in individual associates (firm employees). Although they rightly identify the higher importance of tacit knowledge (gained mostly through experience and strengthened by interactions with others), their measure of human capital mainly captures the explicit knowledge obtained by university diplomas. Additionally, although they appropriately identify the variable of leveraging human capital and show its importance for firm performance, their proxy measure of it as the number of associates under each law firm partner does not capture the construct in all of its complexity. Leveraging human capital could also involve the transfer of tacit knowledge from partners to associates and the conversion of collective tacit knowledge into explicit knowledge, all indicating the importance of drawing from the knowledge leadership literature that has begun to address these issues (see Viitala 2004; Lakshman 2011). We therefore integrate ideas from this literature on knowledge leadership with that on developmental or behavioral (as opposed to results based) performance management from the SHRM literature, to develop the hypotheses that we examined in this study in the context of three countries. As noted earlier, we conceptualize leveraging human capital as the process through which managers in organizations convert collective and individual tacit knowledge to explicit knowledge. We empirically capture the construct of leveraging human capital by measuring (1) interactive behaviors and (2) performance enhancement strategies of managers, as we explain below in more detail. We first present our thoughts on the applicability of these ideas to these country contexts before we present our hypotheses.

International contexts

As seen above, although an impressive body of work has examined the links between organizational strategy, HRM strategy and firm performance, much of this research has been conducted in a US context and hence the applicability of such HR systems to emerging economies such as India or even developed economies in Europe (e.g. France) is relatively unknown. Bae and Lawler (2000) provided support for the use and effectiveness of high-involvement HRM strategies in a study of Korean firms. Drawing on the contrast between traditional HRM strategies (characterized by low participation, limited training and very specialized jobs) and high-involvement HRM strategies (high participation, extensive training and broad job designs) in the conventional SHRM literature (e.g. Youndt et al. 1996), Bae and Lawler (2000) point to the evolution in Korean HRM from the traditional HRM to the new HRM (NHRM) which corresponds highly to the US-style of high-involvement HR strategy. This evolution in Korean practices is traced by Bae and Lawler (2000) to the shift from the initial export-oriented development strategy to increased conformance to later pressures for globalization. Their analysis reveals that once the initial cost advantage was lost, Korean firms had to restructure and adopt NHRM techniques including greater reliance on teams, employee empowerment, performance based evaluation, pay and staffing, in addition to terminating workers for economic reasons (Bae and Lawler 2000). Their analysis also reveals that the US style of high- involvement practices was quite suitable for Korea, given the high levels of loyalty, cooperation and harmony as managerial values. Despite high levels of collectivism and power distance in traditional Korea (Hofstede 1991), cultural changes to a new and ‘dynamic collectivism’ consisting of a good blend of the ‘I’ feeling with the ‘we’ feeling facilitated the acceptance of such high-involvement work practices.

Both India and France (examined in this study) are relatively higher in power distance than the USA and hence may indicate the difficulty of implementing high-involvement HR systems. However, France is highly individualistic and there is some evidence to suggest that stock-market pressures (akin to pressures of globalization) are influencing firms in this economy to adopt HPWS on an increasing basis (see Conway et al. 2008). Conway et al. (2008) found that listing on the stock exchange was associated with team working, performance-related pay, worker autonomy and training, all characteristic of high involvement work practices. The presence of institutional investors (mostly foreign) and increase in size of the firms (beyond 500 employees) also increased the prevalence of these high-performance work practices. Independently, Razouk (2011) found that an increasing number of small- and medium-sized enterprises were instituting HPWS and that this practice was strongly related to their organizational performance. Other researchers (Dany et al. 2008) have found evidence to indicate that this strong association between HPWS and performance is conditioned by who in the organization has more influence in HR policies, notably between HR professionals and line managers. Thus, we get the sense that HPWS work well in France despite cultural differences that might indicate otherwise.

India is very much an emerging economy, much like the Korea of the 1990s in terms of export-oriented development approaches and being an Asian culture. Whereas loyalty, cooperation and harmony prevail as values to a lesser extent than Korea, they are nevertheless present. India is high on power distance, much like Korea or even France, relative to the USA. However, like in the 1980s in France, there have been serious waves of privatization and listing on the stock exchange by companies across the spectrum in the 1990s in India (Bhatnagar 2013). Thus, overall India has also been facing the pressures of globalization in more ways than one. Although the power distance and hierarchical nature of society is not consistent with HPWS, the collection of other forces, both cultural and politico-economic, has led to increased acceptance of SHRM practices in India (e.g. Budhwar and Sparrow 1997; Bhatnagar 2007; Sanyal and Sett 2011). More precisely, although several studies exist in the SHRM domain in the Indian context, such as a study on organizational commitment (Bhatnagar 2007), the level of HRM integration into strategy (Budhwar and Sparrow 1997), the impact of HRM practices on service quality (Chand 2010) and performance management in the Indian hospitality industry (Bhatnagar, Puri and Jha 2004), very little of this research focuses on the HPWS that could impact organizational performance, with the exception of Sanyal and Sett (2011). Thus, on the whole, very little research on HPWS exists in India to draw clear conclusions. However, a brief look at the best places to work ranking of HRM in India reveals a number of instances of HPWS-type practices used across industrial sectors, many from companies and whole sectors that are high performing. Thus, one cannot rule out the possibility of SHRM best practices such as HPWS being used and contributing to high performance in India.

Overall, therefore, the general set of issues we identified for our research study (viz. systems enhancing human capital) should not differ from one country to the next in our set of three countries. In addition to the above cultural and institutional issues, one could also use a strategy lens and identify differences in strategies normally employed across countries, if any, and then link it in a contingency fashion to HRM strategies. Aulakh, Kotabe and Teegen (2000) argue and show some evidence that emerging economy firms in an export mode use more cost-advantage strategies, whereas developed economy firms use more differentiation strategies. Contingency arguments within the SHRM literature would argue that traditional (administrative) HR systems are more suited for cost-advantage strategies and HPWS are more suited for high quality and differentiation strategies, although the existence of such an effect is not convincing (see Youndt et al. 1996). However, as suggested by the evolution in Korea from cost-based competition to more global competitive pressures, for companies around the world it is no longer a choice between cost and quality differentiation strategies but rather both (Bae and Lawler 2000). As noted above, the SHRM literature is consistent with the strategy literature in that some researchers argue that direct effects of HRM practices on organizational performance are not mutually exclusive to the contingent effect of a fit between organizational strategy and HRM strategy (Becker and Gerhart 1996), with some finding the existence of both effects (e.g. Datta et al. 2005).Moreover, Aulakh et al. (2000) found the use of cost-based strategies only for exporting firms in emerging markets, whereas there could be a significantly larger proportion of firms catering to domestic markets in huge emerging economies of Asia such as China and India. Firms catering to domestic markets in these economies are more likely to employ a mixture of both cost and quality differentiation approaches as suggested by strategy researchers in other contexts. Such combined usage of strategies could lead to a weakening of the contingency effect and a corresponding strengthening of the direct effect of SHRM practices such as HPWS. Thus, we conclude with the belief that our examination of human capital leveraging processes across these three country samples will show more convergence rather than divergence as a result of the confluence of cultural, economic, strategy and political forces operating in these contexts.

Hypotheses

We wish to briefly recall here that the two broad issues we are examining in this study are the issues surrounding processes of leveraging human capital and more closely examining the tacit versus explicit knowledge distinction, as components of human capital, which in turn could yield to different processes of leveraging human capital (see Lakshman 2011). To this end, we draw from the knowledge leadership literature (e.g. Viitala 2004; Lakshman 2009) that focuses on how leaders utilize knowledge management processes to enhance unit and organizational performance. We graphically present the hypotheses to be tested in Figure 1.

The SHRM literature has traditionally defined human capital as the knowledge, skills and abilities residing with and utilized by individuals (e.g. Subramaniam and Youndt 2005). Knowledge in this definition of human capital does and should refer to both the tacit and explicit components (Polanyi 1967) and is normallymeasured by qualifications and experience (e.g. Hitt et al. 2001) or through perceptual measures (e.g. Youndt et al. 2004; Subramaniam and Youndt 2005). The knowledge leadership literature (e.g. Lakshman 2009) has focused on both the technological and socio-cognitive approaches (Hansen, Nohria and Tierney 1999) through which leaders manage explicit and tacit knowledge, respectively, in contributing to organizational performance. This literature first identified (Lakshman 2007) the importance of knowledge in the formof cause–effect beliefs (e.g. Saffady 2000) on the part ofmanagers and then empirically examined the effect of such knowledge on organizational performance (Lakshman 2009). Consistent with this literature (e.g. Lord andMaher 1991;Lakshman 2007), we define leaders’ knowledge of cause–effect beliefs as the knowledge that aids managers in their decision-making and reflects their implicit theories on the relationships between important cause and effect relationships. Conceptualizing knowledge in the form of cause– effect beliefs, the knowledge leadership literature has hypothesized a positive relationship between such knowledge and subsequent managerial actions and interactive behaviors (Lakshman 2007) that are critical for leveraging human capital for competitive advantage. According to this literature, such interactive behaviors are important not only for converting tacit knowledge of participants into explicit knowledge, but also for converting data and information inputs of these participants into knowledge (Lakshman 2007). Stimuli, data, information and knowledge occupy, respectively, higher positions in a semiotic framework utilized in the knowledge management literature, with knowledge occupying the highest semiotic level (e.g. Ramaprasad and Ambrose 1999). Consistent with Subramaniam and Youndt’s (2005) finding of an interaction between social capital and human capital in terms of the impact on innovation, the knowledge leadership literature provides a theoretical account of the role of interactive processes between managers and subordinates that helps in surfacing tacit knowledge of the participants and then converting them into explicit knowledge (Lakshman 2007). Thus, consistent with the definition of leveraging human capital, we first focus on interactive behaviors of managers with their subordinates. Based on the knowledge leadership literature, we further argue that managerial knowledge in the form of cause–effect beliefs is positively related to interactive processes that serve to leverage human capital. We extend this argument by suggesting that managerial human capital (consisting of both experience and knowledge) is positively related to interactive behaviors between managers and subordinates. Therefore, we suggest the following hypothesis:

Hypothesis 1: Managerial human capital is positively related to interactive behaviors (one component of leveraging human capital) that help in converting tacit knowledge to explicit knowledge.

Performance enhancement strategies

We now turn our attention to the second component of leveraging human capital in our definition, viz. performance enhancement strategies of managers. In addition to the above focus on leveraging human capital by focusing on the conversion of tacit knowledge to explicit knowledge, we now draw from the developmental or behavioral performance management of HPWS from the SHRM literature (e.g. Youndt et al. 1996) to suggest that managerial knowledge of cause–effect beliefs within the task domain is likely to lead to performance enhancement strategies. In other words, managers with higher levels of clarity and firmness in their cause–effect beliefs are better able to develop performance enhancement strategies that they then communicate to subordinates (Lakshman 2009). Interestingly, Hitt et al. (2001) refer to the capability of such leveraging processes in renewing, augmenting and adapting firm capabilities in addressing changing client needs, in addition to being able to offer customized services in a more efficient manner to clients, although they do not measure these in their study. Using a behavioral perspective, the SHRM literature has suggested that implementing organizational strategy requires specific attitudes and behaviors, which are best elicited and reinforced by HR activities such as developmental and behavioral appraisals (e.g. Schuler and Jackson 1987; Youndt et al. 1996). Contrasting administrative HR systems and high-involvement HR systems, Youndt et al. (1996) suggest that developmental performance appraisals are most appropriate for strengthening employee skills and capabilities, especially in contexts where variations in human skills, knowledge and attitudes are critical for organizational performance. Discussing global performance management, Engle, Dowling and Festing (2008) suggest that developmental performance management is not likely to be very different in domestic and international operations, although implementation could be more difficult in international contexts as a result of communication styles and contexts. These authors also suggest that developmental performance management is associated with leadership and its development, while also suggesting that it is instrumental in developing and reinforcing networks (Engle et al. 2008), which are critical for leveraging human capital. Managers with higher levels of both tacit and explicit knowledge on the firm-specific capabilities have better capabilities to leverage human capital by developing performance-enhancing strategies. Hence, the following hypothesis:

Hypothesis 2: Managerial human capital is positively related to the development of performance enhancement strategies (component of leveraging human capital).

Subordinate performance and leadership perceptions

Having focused on the influence of managerial human capital on the processes of leveraging human capital in the form of interactive behaviors and performance enhancement strategies, we now turn our attention to the outcomes of the process of leveraging human capital. Following the knowledge leadership literature (Lakshman 2009), we suggest that managerial human capital will have a twofold impact on the processes of leveraging human capital leading to performance outcomes. First, managerial human capital (combination of managerial knowledge in the form of cause-effect beliefs, and managerial experience) directly impacts subordinate performance and leadership perceptions. Second, the impact of managerial capital on subordinate performance and leadership perceptions is mediated through its initial impact on the process of leveraging human capital captured by interactive behaviors and performance enhancement strategies. The leadership literature has focused on a concept related to cause–effect beliefs called implicit theories of leaders (Lord and Maher 1991). Lord and Maher (1991) argue that such cognitive knowledge structures of managers provide the basis of strategic decisionmaking leading to actions and outcomes. Other leadership researchers (e.g. Burns 1978) provide extensive discussions of cause–effect belief structures of executives with the suggestion that such possession of knowledge on the part of leaders is critical for them to be effectively understood and for their decisions to be accepted and implemented (managerial ‘buy-in’), all of which is crucial for organizational performance. The direct effect of managerial human capital on outcomes of the process of leveraging human capital is based on such reasoning. The mediated effect of managerial human capital can be reasoned in two steps. In the first step, as outlined in the reasoning for the first hypothesis, managerial human capital has an influencing effect on interactive behaviors and performance enhancement strategies. The second step in such reasoning focuses on the relationship between the process variables of interactive behaviors and performance enhancement strategies, and the outcome variable of subordinate performance. Interactive behaviors aid in converting data and information inputs of the participants into knowledge, as suggested earlier. Additionally, these interactive behaviors also bring the tacit knowledge residing within individuals in the collective to surface and aid in its conversion to explicit knowledge. This is consistent with the notion that learning complex knowledge requires face-to-face interactions and socialization practices (Nonaka and Takeuchi 1995). Both the learning from such interactions and the explicit performance enhancement strategies enable subordinates to better understand critical aspects of performance such as client needs, thereby leading to higher performance. Hence, the following hypotheses:

Hypothesis 3a: Managerial human capital is positively related to subordinate performance.

Hypothesis 3b: The relationship of managerial human capital and subordinate performance is mediated by interactive behaviors and performance-enhancing strategies, i.e. leveraging human capital.

Leadership perceptions

We use a line of reasoning similar to the implicit leadership theory approach used by Global Leadership and Organizational Behavior Effectiveness (GLOBE) researchers (House, Hanges, Javidan, Dorfman and Gupta 2004) to suggest that managers with higher levels of clarity and firmness in their cause–effect beliefs will be seen as outstanding leaders. Of the 22 universally desirable leadership traits identified by GLOBE (House et al. 2004), several are related to managerial knowledge as conceptualized here (decisive, intelligent, informed, communicative and confidence-builder). Implicit leadership theory (Lord and Maher 1991) suggests that subordinates use traits and behaviors as data that are used as the basis for forming leadership perceptions. Thus, knowledge in the form of cause–effect beliefs, or more generally managerial human capital, is likely to be related to the perception of being an outstanding leader across all three countries in this study. The universally desirable traits such as communicative and confidence-builder in the above list are representative of the interactive behaviors and performance-enhancing strategies that capture the process of leveraging human capital and hence are equally expected to be related to leadership perceptions. In addition to this direct effect of human capital on leadership perceptions, we also need to focus on the instrumental connection between subordinate performance and leadership perceptions which suggests that managers who are capable of producing better performance from their subordinates are more effective as leaders (Yukl 2006). Thus, subordinate performance is expected to mediate the effect of human capital and the process variables on leadership perceptions. Hence, the following hypotheses:

Hypothesis 4a: Managerial human capital is positively related to leadership perceptions.

Hypothesis 4b: Interactive behaviors and performance-enhancing strategies (i.e. leveraging human capital) are positively related to leadership perceptions.

Hypothesis 4c: Subordinate performance is positively related to leadership perceptions.

Hypothesis 4d: Subordinate performance mediates the relationship between managerial human capital and the process variables (interactive behaviors and performance-enhancing strategies) on leadership perceptions.

Method

The model was tested using questionnaire responses of subordinates in a variety of business organizations, from the USA, France and India, including manufacturing, telecommunication, financial and other services. The respondents in this study (many of them managers themselves) were reporting on their managers’ cause–effect beliefs and behaviors from a subordinate perspective.

Respondents

The hypotheses were tested using a total of 337 employees in US, French and Indian business organizations, who reported on the relationships with their managers at their respective places of work. In the USA, 92 non-traditional students1 enrolled in a management course at a State University in the East Coast (USA) provided valid responses on a questionnaire designed to measure the study variables. These responses pertained to the relationship they had with the supervisors they had worked with, with the average relationship tenure being 1.35 years. These US respondents possessed an average experience of 5.13 years. A majority of these respondents worked in service organizations (83.7%), with a few coming from non-profit organizations (12%). A majority of the respondents were female (58%) and African-American (66.3%), with about 22% of the sample being Caucasian. These respondents, on average, had supervisory experience of 1.65 years. A majority of the supervisors they reported on were female (52%) and were either Caucasian (52.2%) or African-American (28.3%) by ethnicity.

In France, 68 employees in a variety of business organizations, including retail (15.4%), manufacturing (23.1%), telecommunication (3.1%), financial and insurance services (12.3%), and other services (43.1%) provided complete responses to a French version of the questionnaire. This questionnaire was translated from the original in English and then back-translated to ensure equivalence. We assumed that the constructs and variables used in this study were not alien to any of the three cultures, and nor were there any indications to the contrary during the pretesting of the questionnaire. Additionally, the results of testing the measurement model (presented below) indicated that the measures do not vary across the three countries in this study. Thus, we were certain that the measurement of these constructs did not pose significant cultural problems in terms of their conception. Participants in an executive education program were contacted and presented the opportunity to participate in the study. The length of the relationship they had with their managers was on average 4.61 years. The French respondents possessed an average experience of 13.48 years.

In India, a total of 177 employees attending a management development program at a premier business school provided valid responses on the questionnaire pertaining to the variables constituting the model presented above. The average length of relationship with manager for the Indian respondents was 3.86 years. These respondents possessed an average experience of 17.57 years. These respondents also had managerial experience with an average of 14.8 years. These respondents worked in retail (2.9%), telecommunications (6.9%), financial and insurance services (5.8%), other services (60.7%) and manufacturing sector (16.2%), with a few coming from non-profit organizations (6.9%).

Questionnaire

The questionnaire sought responses from the subjects with regard to their most recent managers. They were requested to think about this most recent manager’s handling of subordinate performance and subordinate relationships while answering the questions. In the following, we present results of testing the measurement model, including validity and reliability of the scales used. In Table 1, we present the means, standard deviation and correlations among the variables, with the square root of the average variance extracted (AVE) along the diagonal of the table. We present the exact wording of the questions, the factor loadings, AVE and construct reliability information in Table 2.

Managerial human capital

We measured managerial human capital with two measures, one capturing the level of managerial experience and the other capturing knowledge in the form of cause–effect beliefs using Lakshman’s (2009) scale. This nine-item measure (α=0.91 in this study) is similar to the measure of human capital used in the SHRM literature (e.g. Youndt et al. 1996) in that it is perceptual. However, this measure is targeted more toward tacit knowledge in task contexts and thus is more amenable to the examination of processes of leveraging human capital, as in this study. Lakshman (2009) presented evidence of reliability and validity for this scale, and hence we deemed it worthy of use in this context, given its high validity and reliability in this study as well. Unless otherwise noted, all questions were on five-point Likert response scales ranging from strongly disagree to strongly agree.

Leveraging human capital

Interactive behaviors of managers were measured using a three-item scale (α=0.79) assessing the degree to which supervisors interacted positively with their subordinates in the context of developmental performance appraisals. Managers’ Performance Enhancement Strategies (PES) were measured using a two-item scale (a ¼ 0.89) to assess the degree to which managers developed performance enhancement strategies and communicated these to subordinates.

Outcome variables

Subordinate Performance (α=0.75) was measured with two self-reported items capturing ‘good performance evaluation’ and ‘good performer’ in the most recent performance appraisal. Leadership perceptions of subordinates were also measured using slightly modified items from existing scales (e.g. Phillips and Lord 1981). Phillips and Lord’s (1981) scale focused on interpersonal contexts, which we modified to reflect the organizational context in this study. The six-item scale (α=.96) assessed the degree to which subordinates thought the supervisors were providing leadership to their unit.

Moderator

Power distance (α=0.76) was measured with a four-item scale by combining items from Brockner et al. (2001) and Baird, Lyles and Wharton (1990). These items contained questions such as ‘managers should make decisions without consulting subordinates’ and ‘people are better off not questioning the decision of those in authority’. All of these items pertained to organizational power distance and thus relevant to the context. All questions were about the values of the individual respondents and hence pertained to power distance orientation.

In addition to these scale items, the questionnaire collected background information on the manager and the subordinate in terms of gender, ethnic and/or regional affiliations, the length of their relationships with their supervisors, their assessment of how experienced their supervisor was on a five-point scale ranging from very inexperienced to very experienced and the type of organization (manufacturing vs. service etc.) that served as the context.

Validity and reliability of measures

Since we used multiple perceptual, questionnaire-based measures of the dependent variables, we wanted to ensure measurement invariance as well as rule out any common method variance in the data set. Results of confirmatory factor analyses in AMOS 18 and Harman’s single factor test (Podsakoff and Organ 1986) revealed that the constructs were invariant across the three samples (results are available from the authors) and that common-method variance did not pose as a problem. Moreover, in addition to separating and placing the performance variable after the independent variables in the questionnaire (to reduce consistency artifacts), we also present detailed tests of the measurement model in Table 2. The measures of model fit, factor loadings, construct reliabilities and AVE presented in Table 2 provide sufficient indications of measurement validity of the constructs in the study. First, on examining the correspondence between constructs and their items, we conclude that all of the constructs in the study show high levels of construct reliability, above the threshold of 0.7 (see column 3 of Table 2) (Gerbing and Anderson 1988). Second, all but one of the constructs show high degrees of convergent validity, with the corresponding AVE measures (a measure of the error-free variance of the set of items related to the construct) (see Fornell and Larcker 1981) above the threshold of 0.5. Finally, as suggested by Fornell and Larcker (1981), the square root of the AVE (in Table 2) is, in general, larger than the correlations with other constructs (19 out of 21 instances in Table 2), suggesting that constructs in this study have more internal variance than that shared with other constructs, indicating their discriminant validity. The few exceptions to this general trend suggest that more precise model specifications may be appropriate in future studies. The model fit indices provided in Table 2 (CFI = 0.9; NFI = 0.86; IFI = 0.9; RMSEA = 0.08) do suggest that the constructs and their measures show acceptable levels of measurement validity, and indicate lack of common-method variance. We therefore now turn to a presentation of the results of the hypotheses tests.

Results

The hypotheses comprising the model were each tested using hierarchical regression analyses, with the appropriate control variables entered first in each case, followed by one independent variable or a set of independent variables at a time (where applicable), while monitoring change in proportion of variance explained in the dependent variable (∆R 2) and the significance of such change for each step. We present these results in Tables 3–6 and discuss them here in the text.

To test the relationship between managerial human capital and interactive behaviors in the process of leveraging human capital, we first entered a control variable for country (coded 1 for India, 2 for USA and 3 for France), followed by a control for relationship capital, which is a subset of social capital (Bontis 1996) and includes the value of all relationships. We measured relational capital with the dyadic tenure between managers and subordinates in this study. As shown in step I of Table 3, relationship capital is significantly positively related to interactive behaviors. Additionally, as can be seen in step II, there is strong support for the relationship between managerial human capital and their interactive behaviors with subordinates (hypothesis 1) in that managers’ human capital is significantly positively (β= 0.61, p < 0.001) related to interactive behaviors. Moreover, as can be seen from the table, this relationship holds good across all three countries and the interaction of power distance and managerial human capital is not a good predictor of interactive behaviors. Thus, following our discussion of country contexts, despite being hierarchical societies, France and India, relative to the USA, are subject to a confluence of other forces that result in convergence in the use of HPWS-type approaches, including the impact of human capital on processes of leveraging.

We present the result of hypothesis 2 in Table 4. Again we entered the control variables before any of the predictor variables were entered. As can be seen in step I of this table, power distance is positively related to the use of performance enhancement strategies (β=0.23, p < 0.01). Thus, the use of performance enhancement strategies is more prevalent in higher power distance cultures than those lower in power distance. As shown in step II of this table, there is strong support for the relationship between managerial human capital and performance enhancement strategies (β= 0.66, p < 0.001), even after controlling for the effect of power distance. Again, this relationship holds across the three countries examined, as can be seen from the nonsignificant interaction effect of power distance and managerial human capital on the dependent variable of performance enhancement strategies.

We present the results of hypotheses 3a and 3b in Table 5. Table 5 is organized into two panels, one labeled ‘Direct effect’ and the second labeled ‘Mediation test’. In step I of the regression in the panel labeled ‘Mediation test’ in Table 5, we see that human capital is significantly positively related to subordinate performance (β=0.36, p < 0.001), thus supporting hypothesis 3a indicating a direct effect of the relationship between managerial human capital and subordinate performance. We tested the mediation effect in hypothesis 3b following Baron and Kenny (1986) by performing regressions testing the effect of both the independent variable and the mediating variable directly on the dependent variable of subordinate performance.

We then test the effect of the mediating variable(s) controlling for the independent variable. First, as just noted above, the independent variable of human capital is directly related to subordinate performance. Second, as can be seen from the panel labeled ‘Direct effect&rsquo; in Table 5, one of the sets of two mediating variables, viz. interactive behaviors, is significantly positively related to subordinate performance (β= 0.32, p < 0.001). Although the other variable (PES) approaches marginal significance, it does not have a strong direct effect. However, the combined direct effect of this set of mediating variables on the dependent variable of subordinate performance (R 2 = 0.19, p < 0.001) suggests that this regression model is a good one. Third, with the introduction of the mediating variables in step II of the regression (see panel ‘Mediation test’), the effect of the independent variable of human capital on subordinate performance reduces in magnitude and significance level (β= 0.24, p < 0.01). The mediating variables add significantly more explanatory power (∆R 2= 0.03, p < 0.01) to that already explained by the independent variable of human capital. All this indicates partial support for the mediation hypothesis in 3b. This partial mediation effect holds across the three countries studied as can be seen by the non-significant interaction effect in step III of the regression.

We present the results of hypotheses 4a, 4b, 4c and 4d in Table 6. First, in support of hypothesis 4a, human capital is significantly positively related to leadership perceptions (β= 0.76, p < 0.001) in step II of the regression. Thus, managerial human capital is directly related to leadership perceptions. Second, in support of hypothesis 4b, interactive behaviors (β= 0.10, p < 0.10) and PES (β= 0.36, p <  0.001) significantly predict leadership perceptions (R 2 = 0.66, p < 0.001; ∆R 2 = 0.10, p < 0.001). Third, in support of hypothesis 4c, subordinate performance is significantly positively related (β= 0.15, p < 0.001) to leadership perceptions. Finally, the results in Table 5 suggest that the introduction of variables appearing later in the process reduces the magnitude and/or the significance of the variables appearing earlier in the process leading up to leadership perceptions. The introduction of interactive behaviors and PES in step III of the regression reduces the magnitude of the effect of human capital on leadership perceptions (from β= 0.76 to 0.46), while adding significant explanatory power to the model (R 2 = 0.66, p< 0.001; ∆R 2 = 0.10, p < 0.001). The introduction of subordinate performance reduces the significance of interactive behaviors and reduces the magnitude of the regression coefficient for human capital. All of this again indicates support for a partial mediation effect rather than a complete mediation effect. The support for partial mediation in hypotheses 3b and 4d provides some support for the presence of process effects in the domain of leveraging human capital. We discuss these results in the context of the broader literature in the next section.

Discussion

These results provide empirical evidence on the process of leveraging human capital, a variable that has been shown to have an impact (in a proxy form) on firm performance (Hitt et al. 2001). Although Hitt et al. 2001 conceptualize leveraging human capital as a set of processes, they use the ratio of associates to partners at law firms as its measure, in showing empirical evidence of its impact on firm performance. Suggesting that these processes need more micro-investigations at the individual level of analysis (see also Wright et al. 2005; Bhatnagar 2013), we contribute by showing systematic support for the positive effect of managerial experience and managerial knowledge, i.e. managerial human capital on the process of leveraging human capital (measured by interactive behaviors and performance enhancement strategies). As discussed in the literature (e.g. Hitt et al. 2001) and elaborated here by drawing from the knowledge leadership literature, these processes and interactions are critical for the transfer of explicit knowledge from managers to subordinates and more importantly for the successful conversion of tacit knowledge of the participants into explicit knowledge before its eventual interpersonal transfer. We show evidence of the presence of interaction behaviors and the articulation of explicit performance enhancement strategies of managers with high human capital as indications of this process of converting tacit knowledge to explicit knowledge. Thus, these findings represent a critical contribution to the SHRM literature on human capital and its role in influencing competitive advantage.

We also contribute to the SHRM literature by providing evidence of these effects from three countries, two of which are each distinct from the USA, which has been the country context of much of this research (Bae and Lawler 2000). As pointed out earlier, although there is increasing evidence of the use of best HRM practices such as HPWS in countries such as Korea (Bae and Lawler 2000), Britain (Conway et al. 2008), France (e.g. Dany et al. 2008) and India (Sanyal and Sett 2011), evidence for the presence of the process of leveraging human capital is not available in any of these countries, including the USA. By presenting the case for the applicability of SHRM frameworks in France and India despite cultural differences, and then presenting empirical evidence on the leadership process of leveraging human capital in these countries, we contribute to the SHRM literature. We also confirm the expectation of Engle, Dowling, and Festing (2008) that developmental performance management is not likely to be different in international contexts, although they argue that when the manager and subordinates are from different countries, there may be implementation difficulties. Both the managers and the subordinates in our study were from the same country and hence our study does not report on these implementation difficulties. However, our study does confirm the similarity of these developmental appraisal processes in three countries. We do find, however, that there is a positive relationship between power distance and the use of performance enhancement strategies, despite the role of managerial human capital in this process. Thus, there are differences in the magnitude to which developmental performance appraisal is prevalent in countries varying on the dimension of power distance. Overall, these findings confirm our expectations based on theoretical analysis favoring the confluence of pressures for globalization and related politico-economic forces dominating over the effect of different cultural dimensions on these practices.

By examining the process of leveraging human capital as outlined above, we contribute to and throw some light on the issue of direction of causality between human capital investments and firm performance. Consistent with the theoretical base of resource-based views of the firm (e.g. Barney 1991) used in earlier SHRM studies, we show some indication of the support for the relationship between managerial human capital and some of the intervening process variables such as performance-enhancing strategies and interactive behaviors in the leveraging process. Although our study is also cross-sectional, it would make no theoretical sense to argue that higher levels of interactive behaviors and performance-enhancing strategies would lead to higher levels of managerial human capital. It is much more likely that higher levels of human capital lead to these process variables. However, because our study is at the individual level of analysis, we were not able to examine the subsequent relationships between the processes and firm performance. We do, however, focus on subordinate performance as an outcome of the leadership process of leveraging human capital. Therefore, in all, we contribute to the discussion surrounding the direction of causality issues in the context of human capital investments and firm performance by providing fairly clear evidence in the hypothesized theoretical direction, rather than the opposite. Although Razouk’s (2011) longitudinal analysis provided early evidence consistent with our findings here, that study was only in the context of France. We add to Razouk’s (2011) findings by showing evidence in the USA and India in addition to France, even at a more micro level of analysis.

Despite the strong contributions of this study, there are a few limitations. Our study is cross-sectional and all of our data were obtained from single respondents in organizations. Although our confirmatory factor analysis shows that there are multiple factors with sufficient discriminant validity, we cannot rule out common-method variance in the tests of our relationships. Next, although our measure of subordinate performance is limited by the fact that it is a two-item self-report measure, it is reliable and shows good measurement properties within the overall measurement model. Additionally, although the measure of performance enhancement strategies is limited to two items in this study, we have been able to demonstrate its validity through confirmatory factor analysis. Thus, despite these limitations, we have demonstrated the quality of the relationships with sufficient levels of rigor.

Our partial evidence of mediation suggests that managerial human capital has a slightly stronger and more direct effect on performance outcomes in comparison to the processes emanating from it. This is consistent with the SHRM literature that has often examined the direct impact of human capital on performance (e.g. Hitt et al. 2001) or innovation (e.g. Subramaniam and Youndt 2005). However, there is sufficient evidence in this study that suggests that managerial human capital is related to interactive behaviors and performance enhancement strategies and that these in turn are related to some of the outcome variables. Perhaps, it would be more fruitful to measure more directly the conversion of tacit knowledge into explicit knowledge as an indication and evidence of these processes. This calls for more qualitative and in-depth investigations into these processes using different research methods and designs. Although our study is limited on this front, it provides promising evidence in this regard which could serve as the basis of future qualitative investigations.

We also contribute to the literature on knowledge leadership (e.g. Lakshman 2009) by demonstrating the role of leader’s knowledge in the process of leveraging human capital. Although the broader leadership literature has extensively examined the importance of leaders and their styles on subordinate outcomes (e.g. Avolio, Walumbwa and Weber 2009), it is only the nascent knowledge leadership literature that has examined the importance of leaders’ knowledge to individual and organizational outcomes (e.g. Lakshman 2009). More specifically, this literature has examined the role of leaders in organizational learning (or knowledge management) (e.g. Berson, Nemanich, Waldman, Galvin and Keller 2006). Our findings in this study contribute to this literature by demonstrating the impact of leaders’ knowledge on the processes of leveraging human capital among subordinates, especially in surfacing their tacit knowledge for conversion to explicit knowledge. Such processes can have important implications for the innovation orientation of firms.

Theoretical and practical implications

Our study identifies the importance of leaders’ knowledge and managerial human capital for enhancing organizational capabilities. The selection of managers with appropriate knowledge and experience therefore becomes important for leveraging organizational capabilities. Our study also suggests that it is important for managers in organizations to actively leverage subordinates’ human capital and to specifically focus their attention on the processes of converting their tacit knowledge to explicit knowledge. This becomes a critical activity in the performance management domain. Managers could benefit from training focused on the processes of leveraging human capital to create organizational readiness for innovation.

Conclusion

Our study has attempted to open up the black box of the process through which human capital impacts on positive organizational outcomes. More specifically, this study has investigated the nature of the process of leveraging human capital, which has been shown in recent studies to have a positive impact on firm performance. We have drawn from literature in knowledge leadership to identify insights on the process of conversion of tacit knowledge into explicit knowledge, in addition to conceiving managerial knowledge in the form of cause–effect beliefs, which has laid the foundation for more detailed investigations of this complex process of leveraging human capital. We also identified and reconfirmed the direct effect of human capital on performance outcomes at a more micro and individual level of analysis in organizations. Perhaps, most importantly, we provide a glimpse into the applicability of such SHRM models in international contexts by examining these processes in the USA, India and France. Identifying and distinguishing between processes of leveraging human capital that facilitate incremental innovation from those facilitating radical innovation would be a logical next step that could make crucial contributions to the advance in this field.

Note

1.        Many of them working full-time while attending school.

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