Building the capacity to innovate: the role of human capital

By Andrew Smith, Jerry Courvisanos, Jacqueline Tuck, Steven McEachern Research report 29 February 2012 ISBN 978 1 921955 97 6

Description

In this paper, the authors examine the links between human resource management, including learning and development practices, and building innovation capacity. The survey component of the research found only limited evidence for the links between human resource management and innovation capacity, although some management practices such as the bundling of high performance work practices were found to have some association with innovation capacity. Subsequent case studies found a lack of understanding by large enterprises of the role of human resource management in fostering innovation capacity. This was seen to have implications for the tertiary education system in stimulating demand for innovation courses.

Summary

About the research

This report examines the link between human resource management practices and innovation. It is based on a conceptual framework in which ‘human resource stimuli measures’ — work organisation, working time, areas of training and creativity — feed into innovative capacity or innovation. Of course, having innovative capacity does not necessarily mean that a firm will be innovative.

One of the issues of this approach is that, while innovation can be directly observed, innovative capacity is a more abstract concept. The study comprises a survey of firms as well as some case studies, and the survey captures data on innovative capacity through a series of questions relating to a firm’s perception of its capacity to innovate. Based on the survey data, the authors find that certain human resource practices do improve innovative capacity (or at least firms’ prediction of their capacity) but they have a very weak link with innovation directly. Therefore appropriate human resources practices and the capacity to innovate can be thought of more as necessary conditions for innovation rather than as sufficient. This leads to thinking about the mediating factors that transform the capacity to innovate into innovation. The purpose of the case studies was to throw some light on these mediating factors.

Key messages

  • Human resource practices, creativity management and knowledge management impact on innovation indirectly through their effect on innovative capacity rather than impacting directly.

  • Three sets of management practices assist the development of innovative capacity:

    • people management; for example, practices such as team-based work organisation, support for training and flexible work practices
    • the development of a learning culture
    • external linkages, especially with educational institutions.
  • In the case studies the one factor that appears to assist innovative capacity translating to innovation is links with the tertiary education sector. Assistance from universities or the VET system can facilitate training and recruitment and the development of applied research to assist product innovation.

Tom Karmel
Managing Director, NCVER

Executive summary

The Australian economy is highly dependent on a small number of major industries, but to survive in the international marketplace Australia will need to diversify its economic base. A crucial element in the process of industrial and economic diversification is innovation. Although much has been written on the importance of human capital factors in innovation, until now there has been no study that has attempted to draw human factors together into one coherent model or framework.

The aim of the research project is to elaborate a theory of human capital that builds innovative capacity in enterprises, in the process identifying the human resource management practices that build this capacity. In particular, this study investigates how enterprises can develop their human capital internally through better human resource management and learning and development practices, and externally through engagement with the tertiary education system.

The model for this research was derived from the literature that proposes that the innovation process begins as a result of the stimulus provided by two parallel factors — technological capital and human capital. These two factors encourage the development of innovation capacity in national, regional and sectoral innovation systems. By innovation capacity we mean the ability of enterprises to acquire, develop and exploit new knowledge. In turn, the extent of the capacity held by organisations determines its innovation performance. The model that combines these three elements that lead to innovation — stimulus; (innovation) capacity; (innovation) performance — is termed the Stimulus-Capacity-Performance model of innovation. The three key factors (stimuli) identified as instrumental in developing human capital for enterprise innovation are people management, knowledge management and creativity management.

Method

The study comprised three phases. Phase 1 involved a series of expert interviews with relevant federal and state government departments, industry bodies, the Australian Council of Trade Unions and an academic expert in the field. The responses and subsequent discussion from these interviews relating to innovation in enterprises informed the development of the survey.

The second phase of the project was a national survey of enterprises, held in 2010. The survey asked about innovation performance, practices and strategies; human resource practices; and the learning and development practices of enterprises. From the results we were able to identify the practices that develop innovative capacity within enterprises. The final phase of the project involved seven case studies of enterprises, where some of the issues arising from the survey were pursued in depth. More detailed information on human resource practices, learning and development practices and interaction with stakeholders was gathered through the case studies. This third phase enabled the researchers to take the descriptive statistical data from phase two and use it to identify how management practices in enterprises impacted on innovation capacity. The enterprises that participated in this phase ranged in size from fewer than 200 to almost 400 000 employees and were drawn from the manufacturing, information and communications technology and financial services sectors.

Results of the research

From the survey, three sets of management practices were identified that relate to the development of innovative capacity.

  • people management, in particular, the bundling of high performance work practices, including team-based work organisation, support for training and learning and the use of flexible work practices
  • learning and development, more specifically the development of learning cultures within enterprises — not simply the provision of training
  • external linkages, in particular, linkages with educational institutions, which were significant stimuli for building innovation capacity.

The Australian case studies presented a very limited source for innovation, with, in general, a low level of product and process innovation performance. In terms of management practices, most of the companies had established human resource management and learning and development policies and practices; however, these tended not to be aligned with strategic organisational goals and there was little evidence that they were designed to develop innovative capacity within the organisation. There were, however, two exceptions, the companies Technology and Metals 1, both of which had introduced significant product and process innovation in recent years. In the case of Technology, a multinational organisation, innovation is one of the three core organisational values and management practices, with human resource management and learning and development structured to foster innovation and creativity. In the case of Metals, a much smaller company with a domestic focus, the human resource management systems were still quite rudimentary, although the company had created a learning culture with an emphasis on training and development and the extensive use of nationally recognised training for new and existing workers. In both companies, external links were important in the innovation process. For Technology, links to universities were critical for the training and recruitment of new staff and for the development of applied research, which supported the company’s product innovation. At Metals, the links to the tertiary system were increasing, with well-developed connections to the vocational education and training (VET) system and the beginnings of relations with universities.

Metals and Technology tended to conform to the principles of the Stimulus-Capacity-Performance model of innovation as suggested in the survey. The companies low on innovation tended not to have the human resource management stimuli, learning and development system alignment and the external linkages that were identified by the model as critical to the development of innovation capacity and innovation performance. The case studies provided a deeper appreciation of the practices and systems that initially emerged from the findings of the survey and which are needed to build innovative capacity. From the case studies, conclusions can be drawn about the development of innovation capacity. Enterprises need to:

  • align their human resource management practices into complementary bundles that focus on innovation
  • create a climate of learning that is supported by learning and development programs so that employees feel that they can share their creativity within the organisation
  • forge linkages outside the company, particularly with education institutions.
     

1 Pseudonyms are given to the case study organisations; their names align with their particular industry.

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