Human capital and the innovation economy

Human capital and the innovation economy

Part one of a two-part series examines the management of people to produce maximum business benefits and return on investment made in their development

A team of talented employees and managers address challenging problems for a company. 
A team of talented employees and managers address challenging problems for a company. 

In an article published in the Bangkok Post in February, I explored how people management has changed in lockstep with humanity's economic evolution from a hunter-gatherer society through the agricultural and industrial ages into the knowledge and information age. Today, let's discuss how successful people management in the innovation economy requires a new perspective on how to best manage people: human capital.

The OECD defines human capital as the stock of knowledge, skills and other personal characteristics embodied in people that help them to be productive. Investopedia sees human capital as the economic value of an employee's knowledge, skills and experience repertoire, including assets like intelligence, education, training, skills, health and other things employers value such as resilience, loyalty and punctuality.

As such, the human capital concept regards talented employees and managers as assets for a company. But these human assets are not listed in a company's balance sheet. As a creative person, my auto-response is: Why not?

A fundamental assumption of the human capital concept is that all human capital investments increase the productivity, profitability and growth potential of an individual, a company and an economy. So, HC management aims to bring the right talents on board to build a capable, well-aligned human asset base and then invest in further development (such as ongoing training programmes and individualised upskilling and reskilling) to preserve and possibly increase its value.

Human capital is also essential for helping a company come up with meaningful innovations. After all, innovation begins with creativity, with great ideas that flow out of the brains of talented individuals who collaboratively take action on a worthy idea to transform it.

CONNECTING THE DOTS

The deeper the expertise and the broader the general knowledge, skills and experience repertoires of each talent, the easier it is for them to connect the dots to come up with genuinely exceptional ideas that form the basis of meaningful evolutionary innovations or groundbreaking, revolutionary innovations.

The more innovations companies produce, the more innovative and prosperous are the economies in which these firms operate.

In recent years, the human capital movement has gained momentum, and rightly so. But to elevate human capital from a buzzword to a workable new people management paradigm, we need to understand and address several interesting challenges and unresolved problems related to the concept.

Human capital migration captures the challenge that many top talents tend to move from rural areas to work in cities, and from developing countries to developed countries. While this may be a logical step for a high-flyer, it is unfair to those rural communities and emerging-market countries that provided the talent with foundational education. They suffer from a brain drain that further limits their economic development potential and to be able to offer attractive conditions that could convince their brightest minds to stay.

Low employee loyalty and high turnover pose a comparable challenge for companies that invest in human capital development, only to see their employees leave for a competitor who offers them a higher salary to benefit from their newly gained skills without paying for the training itself.

Our education systems were originally designed to meet industrial companies' needs. Nowadays, they continue teaching some outdated knowledge and skills, which constitutes another big challenge for the full advent of human capital management.

In particular, many experts lament that many graduates entering the job market lack digital know-how, entrepreneurial and comprehensive cognitive skills that are needed to succeed in the fast-changing and complex modern innovation economy.

RETURN ON INVESTMENT

Here is another interesting dilemma: Those who invest in early-stage and university education of a "human asset" (often the family or, in some developed countries, the state) don't get a direct financial return on this investment.

Put differently, companies go on a free ride by enjoying the benefits of acquiring educated human assets to work for them without having to pay for their primary and secondary education.

Now, managers may rightfully argue that companies pay salaries to their employees and taxes to the government. However, these payments are still not compensation for upfront education investments, but rather an equivalent for the actual work performed or for the government providing the infrastructure and stability needed to do business.

Another challenge is that experience often isn't properly accounted for adequately in human capital. For example, as a junior corporate banker handling a loan default for the first time, you can count yourself lucky if an older colleague can guide you through the legal steps to take and traps to avoid, while going through a client's bankruptcy proceeding.

Unfortunately, many companies have begun "outplacing" their experienced managers and employees to save cost, which will lead to a dangerous "experience drain" further down the road. Effective human capital needs a healthy mix of generations, and a long work life full of experiences can make as valuable contributions to the bottom line as the latest know-how.

In part two, I will share with you a creative solution that promises to resolve most of the challenges related to the human capital concept and fairly reflect the investments made.


Dr Detlef Reis is the founding director and chief ideator of Thinkergy, the "Know how to Wow" Innovation Company in Asia and beyond. He is also an assistant professor at the Institute for Knowledge & Innovation - Southeast Asia at Bangkok University, and an adjunct associate professor at the Hong Kong Baptist University.


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