The Resource-Based View of the Firm,Human Resources,and Human Capital: Progress and Prospects

Is Imitation (and Implementation) as Easy (or Fast) as Often Assumed?

Evidence of large positive performance effects of best practices, at least in the HR domain, might indicate that imitation is often not that easy or fast. Evidence indicates (Rynes, Colbert, & Brown, 2002) that firms are often unaware of or do not follow academic research on HR best practices. Posen and Martignoni (2018) emphasize “the inherent difficulty in the transfer of practices within and across organizations” and note challenges such as “not-invented-here syndrome” and those identified in work on absorptive capacity. Organizational change, organization learning, and institutional theories also focus on the difficulty of imitation. Further issues arise in a global context. For example, even limited success in imitating a competitor in one country product market could translate into competitive advantage in other product markets where best practices have diffused less (Rabl et al., 2014).

Given that Barney and Wright (1998) used Southwest Airlines as an example of meeting RBV tests, we cannot help but observe it was only after decades and with the aid of bankruptcy that other carriers were able to match Southwest’s labor costs, even though labor costs arguably do not meet RBV tests. The Southwest advantage in customer outcomes has yet to be imitated (see Gerhart & Newman, 2020: Exhibit 7.2). Similarly, only through bankruptcy did U.S. automakers narrow (but not close) the labor cost gap with Japanese producers. Again, however, other advantages (e.g., car reliability) have still not been imitated (Gerhart & Newman, 2020: Exhibit 7.1). These examples show that even after decades, (substantive) imitation is not always easy. Although in these examples we are looking at decades, the duration necessary to qualify as sustained (e.g., Bromiley & Rau, 2014) does not seem to be precisely defined in the RBV. Again, imitation is not all or nothing, and it matters also how easy it is/how long it takes.

Teece (2014) cites Bloom et al. (2013) to support his conclusion (see above) that “ordinary capabilities” (aka best practices) “can be bought through consultants for . . . a modest investment. . . .” Bloom et al. (2013) conducted an intervention to raise management quality in a single industry (textiles) in a single, low productivity country: India. They found implementing higher quality management practices in 20 experimental plants (relative to 18 control plants) in India led to sizeable productivity gains (16.65%). As noted, Teece described what this took as “a modest investment in training.” In fact, Bloom et al. (2013: 13) note that the consulting service, which was subsidized, would have cost each firm about $250,000. The median firm had annual revenues (not profits) of $6,000,000. Desrani (2013) reported that average net profit/revenue during the 2008–2012 period for five Indian textile companies studied was 2.6%. On $6,000,000, that would be $156,000. Thus, the cost of the consulting required to raise productivity by 16.65% would have cost the equivalent of about $250,000/$156,000, or 1.6 times the annual profit. That does not sound like an easy or likely path (given the uncertain return to such a large investment) to adopting best practices.

Is It “Imitation”? Uniqueness Introduced During Implementation

Best practices may be customized/hybridized during implementation to the new setting even where it appears to be simple imitation (Rabl et al., 2014). Pfeffer (1994: 64-65) argues there are best HR practices but offers an important qualification: “Obviously, how one would implement these practices will vary significantly, based on a given organization’s strategy and its particular technology and environment,” which he referred to as “the contingent nature of the implementation of these practices,” something “everyone would agree is necessary.” Ansari et al. (2010: 67) argue “management practices often cannot be adopted by user organizations as ‘off the shelf’ solutions’ but rather in the process of diffusion and implementation across firms, practices are likely to evolve . . . requiring custom adaptation, domestication, and reconfiguration to make them meaningful within specific organizational contexts.” Becker and Gerhart (1996) likewise noted that different firms adopting the same general principle could implement it in very different ways. Of course, best practice adoption varies in intensity and coverage and can be ceremonial rather than substantive (Oliver, 1991).

Barney (2001: 53-54) in an earlier retrospective on the RBV acknowledged that implementation had received too little attention in his 1991 article. This remains true 20 years later, especially if, as it appears, this is where significant firm-specificity is created. Perhaps this offers an opportunity for RBV research to better understand how competitive advantage is created. ⁴ Ketchen, Crook, Todd, Combs, and Woehr (2017: 284) observe examining “possession of strategic resources” is not sufficient. Examining “what a firm does with its resources” (Holcomb, Holmes Jr, & Connelly 2009: 461) is also critical. This helps explain growing attention to HR/HPWS/HC practices/systems, including microfoundations. Similarly, Bromiley and Rau (2014: 1249) state that “current strategy scholarship . . . rarely considers specific, actual techniques managers might use to develop strategies or generally applicable firm practices.”

Microfoundations: Mediation and Level of Analysis

We very briefly comment on two key issues related to the causality issue (e.g., Jewell et al., 2020 above). “Without intervening variables, one is hard pressed both to explain how HR influences firm performance and to rule out an alternative explanation” (Becker & Gerhart, 1996: 793). Jiang, Lepak, Hu, and Baer (2012) conducted a meta-analysis of the ensuing work on mediation. Using their Figure 4, we compute the total effect as a 1 SD increase in HPWSs is associated with a .40 SD increase in firm financial outcomes. Using their Figure 4, we also estimate 1% of that total HPWS effect is mediated by HC. A limitation is a lack of distinction between FSHC and general HC. Most (see their appendix) look to be general. See also the meta-analysis of the relationship between HC and performance by Crook, Todd, Combs, Woehr, and Ketchen (2011), which provides the best effort to distinguish between FSHC and general HC and found that FSHC better predicted firm performance.

Understanding level of analysis is another key in causal inference. Ployhart and Moliterno (2011: 127) state that “there is no fully articulated multilevel theory describing how the HC resource is created and transformed across organizational levels. While the recent strategic HR management (SHRM) literature [on mediating mechanisms] in some ways fills the gaps . . . it focuses primarily on organizational practices . . . and does not focus as much theoretical attention on how HC resources are created” (see also Gerhart, 2005). Coff and Kryscynski (2011: 1432) agree that “an excessive focus on firm-level HR practices has obscured the inherently multilevel nature of HC (Ployhart & Moliterno, 2011).” Likewise, it is “more than an individual-level construct” (Coff, El-Zayaty, Ganco, & Mawdsley, 2020: 58) due to “the socially constructed nature” (Ployhart, 2015).

Complementarity: Crucial But What About Evidence?

Becker and Gerhart (1996) highlighted the RBV concept of “complementary resources” and its key argument (Barney, 1995: 56) that individual policies or practices “have limited ability to generate competitive advantage in isolation [but] in combination . . . they can enable a firm to realize its full competitive advantage.” According to Milgrom and Roberts (1992: 108), “several activities are mutually complementary if doing more of any activity increases (or at least does not decrease) the marginal profitability of any other activity in the group.” Further, “a group of activities is strongly complementary when raising the levels of a subset of activities in the group greatly increases the returns to raising the levels of the other activities” (p. 109).

This idea of complementary resources (and related concepts such as fit and synergy) is fundamental to what developed in strategic HR and later in strategic HC (e.g., FSHC) to meeting RBV tests. Complementarity is uniquely important because it can result in both value creation and value capture (Chadwick, 2017). To satisfy the “creating high value” part, it seems likely, as noted, that FSHC must be, as Coff et al. (2020: 58; see also Chadwick, 2017) put it, “more than an individual-level construct” and rather “a co-developed resource between employees, firm resources, and other stakeholder, and accrues with time and experience in a focal firm” and probably also “insights from customer interactions and relationships” (e.g., Greer, Lusch, & Hitt, 2017). This seems logical and others agree. For example, Ployhart and Chen (2019: 363) state, reminiscent of Pfeffer (1994), that “any collective HC resource will necessarily be specific to a firm because of emergence processes, the nature of the performance outcomes, and the firm’s strategy (Kryscynski & Ulrich, 2015; Ployhart, Nyberg, Reilly, & Maltarich, 2014). Similarly, as Ployhart (2015) argued, the socially constructed nature of most meso-level constructs (particularly group and team processes) ensures that those resources are specific to a firm.”

The problem is that although it garners much attention, there is arguably little evidence that complementarity in HPWS or strategic HC, whether due to emergence processes or otherwise, actually exists at the firm level (Chadwick, 2010; Gerhart, 2007; Gerhart, Trevor, & Graham, 1996). ⁵ The Nyberg and Moliterno (2019) volume contains many chapters that address the theoretical importance of complementarity, but none appear to examine empirical evidence or even call for research to document and quantify its actual importance. (Brymer and Hitt, 2019, come the closest and their Table 15.1 is a nice way to think about complementarity.) In his 2010 review, Chadwick observes “despite widespread acceptance” that complementarity exists “current research suggests [it] . . . is not a given and that evidence . . . can, in fact, be overstated.” He continues, “no one has yet described where” complementarities “in HRM systems really come from. . . . Instead, synergy is most often invoked metaphorically . . . as a loose rationale for working with aggregations of HRM practices.” Brymer and Hitt (2019) similarly observe that “we have much to learn about human capital complementarities, how they are formed, and why they work (or do not).” ⁶

Defining FSHC and Its Impact on Workers

Campbell, Coff, and Kryscynski (2012: 379) summarize a strand of thinking in the strategy literature, which appears to see firms capturing the value of FSHC investment returns at the expense of workers: “By investing in firm specific skills, workers increase their use value to their employers, without accompanying increases in their exchange value in the labor market . . . then workers face a dilemma . . . firms can retain workers with firm-specific HC for less than the full use value . . . [which has] led to the . . . assumption that [this] hinders workers mobility [and] it is assumed that workers may move [only] if they are willing to accept reduced wages.” One specific example of this argument is Morris, Alvarez, Barney, and Molloy (2017), who state “prior work suggests that firms will appropriate most of the value created by the firm-specific investments made by their employees (Becker, 1964).”

This view, however, appears to differ from Becker’s (1964/1973: 40) work on FSHC: “Completely general training increases the marginal productivity of trainees by exactly the same amount in the firms providing the training as in other firms. . . . Training that increases productivity more in firms providing it will be called specific training.” In Becker’s model, investment in FSHC is shared and benefits both firms and workers, as does less mobility. ⁸ “Employees with specific training have less incentive to quit, and firms have less incentive to fire them” (Becker, 1964/1973: 46), and “Both [employer and employee] will be made worse off by . . . separation,” and thus, “the parties attempt to minimize the loss from such separations by optimally sharing the investment” (Hashimoto, 1981: 475). To summarize, firms and workers share the investment costs and the return, and it is in the interest of both to avoid turnover. This remains standard in labor economics (e.g., Lazear & Gibbs, 2014: chapter 3).

Of course, there is almost always a possibility that a contract, whether explicit or implicit, will be violated, as agency and related theories (e.g., Milgrom & Roberts, 1992; Williamson, 1985) recognize the form of postcontractual opportunism (moral hazard), or the “holdup problem.” In the case of the shared investment in FSHC, Lazear and Gibbs (2014: 60) note that “the firm may be tempted to renege on its promise and renegotiate after the investment is made . . . to capture some of the profits from the investment that the worker made.” This is a major focus of the strategy literature in studying FSHC (Wang & Barney, 2006; Wang, He, & Mahoney, 2009). Lazear and Gibbs note sharing the benefits of the shared investment helps avoid the concern but does not eliminate it. They argue that “reputation and trust” become important (see also Wang et al., 2009) and essentially argue that in such cases “the employer will adopt policies that foster an internal labor force where employees are hired at the bottom and spend long careers working their way up the corporate ladder in the firm” (p. 67). In other words, firms will rely on internal labor markets (ILMs; Wachter & Williamson, 1978).

FSHC is a fundamental aspect of ILMs, which have traditionally been viewed as good for and sought out by workers. ILMs (Doeringer & Piore, 1971) are characterized by career jobs, promotion from within, and seniority as a major factor in promotion, layoff, and pay decisions. This all acts to reduce turnover/increase immobility. That this is desired by workers is evidenced by the fact that ILMs have traditionally been a bargaining goal for unions, not despite, but because they discourage worker mobility, especially competition from external candidates for higher level jobs obtained via promotion. Evidence does indeed document that ILMs are more likely to be found in unionized settings (Pfeffer & Cohen, 1984) and that declines in firm tenure in large organizations are strongly related to the decline in unionization (Bidwell, 2013).

Further Definitional Issues: Has Anyone Actually Seen FSHC in the Wild?

A definition is a first step, not the last step. Theory and definition guide measurement/observation, and those data are then used to improve theory and definition. If there is an actual in-depth example of FSHC that meets RBV tests, we have not seen it. In fact, the literature seems to be better at coming up with examples that do not meet RBV tests (e.g., “how to use the photocopier” and do “reimbursable expenses,” Chadwick, 2017: 505; “knowing where the bathrooms are or how to complete an expense report,” Raffiee & Coff, 2016: 782). Examples where FSHC is more likely to meet RBV tests sometimes have to do with customers (e.g., Greer et al., 2017). Here, more explanation is needed on whether this is individual- or firm-level FSHC (Chadwick, 2017) and how immobile the customer relationships are. Other examples use teams. Chadwick (2017: 507) described instances such as the following: “Teams of lawyers are needed to handle the volume and complexity of clients’ transactions . . . complementarities with coworkers that are particular to the firm create value for customers that goes beyond a simple aggregation of individual lawyers’ abilities.” (In such an example, firm-specificity is generated by combining/weighting general skills in a unique way, Lazear, 2009) That is promising. But how rare and nonsubstitutable is such a team of lawyers? Are there no similar lawyer teams elsewhere? Without better data, we do not know how rare/heterogeneous and meaningful FSHC is. Thus, it is not possible to know whether FSHC receives too much or too little attention. Frank and Obloj (2014) provide one of the most diligent attempts to actually measure and quantify FSHC (at the individual level), using ability to predict firm decisions.

HC is recognized to be a unique asset, which includes the need to address workforce motivation (Coff, 1997). Motivation, which, along with opportunity, determines how well skill translates into value creation, may be a good candidate to satisfy RBV tests (see, e.g., Southwest again or other companies with uniquely high workforce motivation or affect; Fulmer et al., 2003). Nevertheless, motivation/affect appears to receive little attention (Chadwick, 2017), even though “consummate cooperation” of employees is necessary (Williamson, Wachter, & Harris, 1975: 266).

Cautions Raised With FSHC Logic About Mobility

The relevance of FSHC has been called into question by the fact that managers seem not to think in terms of FSHC (Kryscynski & Ulrich, 2015) and that workers seem not to be able to accurately gauge the degree to which their HC is FSHC (Raffiee & Coff, 2016), which together have been interpreted to indicate that the firm specificity of their HC may not influence decisions by firms or workers regarding worker mobility. However, that managers do not self-report focusing on FSHC and that employees may not think in terms of FSHC in making turnover decisions does not rule out FSHC influencing actual turnover. Managers may be unaware of the historical origins of longstanding organization practices created over years. (See the concepts of path dependence and social complexity.)

In the case of an individual worker, there is no reason to expect his/her perception of labor market conditions to be predictive of his/her turnover (Gerhart, 1990). Most (80% in Lee, Gerhart, Weller, & Trevor, 2008) workers do not leave one job without having another actual job lined up. Second, one third of the 80% never searched for another job, instead receiving an unsolicited job opportunity via a “cold call” (Lee et al., 2008). This group had the highest job satisfaction and the highest relative pay level, compared to others who quit to take another job (and much higher than those who quit without another job lined up). In sum, worker perceptions of alternative job opportunities do not predict their turnover behavior at the individual level. The actual existence of an alternative more attractive job is what predicts their turnover. At the aggregate level, this becomes even clearer. Using U.S. Bureau of Labor Statistics data from the 2001-2019 time period, the correlation between national annual quit rate and national annual unemployment rate is quite high (r = .98). ⁹ Likewise, it is quite possible in the aggregate that in firms with higher levels of worker FSHC, there is less mobility, consistent with Becker’s model. ¹⁰

Assumption That Worker Immobility Is Good for Firms Generally

There are two issues with the centrally important requirement of the immobility of FSHC. One relates to the assumption about value creation and value capture, which we touched on above. We argued that Becker’s definition of FSHC did not appear to give firms a systematic advantage over workers in value capture. Thus, if value capture in the form of postcontractual opportunism by the firm (“holdup”) is a major rationale for striving for worker immobility, some rethinking may be necessary. There could also be value capture by the firm (but also by workers) if value is created through FSHC-related complementarity. Without value capture of some sort from FSHC, immobility is unimportant. This reinforces the need for more empirical attention (to go along with the large amount of discussion) to complementarity and FSHC.

Another concern is lack of attention to potential benefits of worker mobility for firms. Although potential benefits of low mobility under FSHC are understood, it is not clear (again, a shortfall of data) that shared investment in FSHC is so pervasive as to provide a rationale for a goal of low worker mobility in general. Absent perfect hiring decisions (unlikely), suboptimal matches will be discovered posthire and turnover best takes place before significant firm and worker investments in FSHC are made. Even if low worker mobility is an opportunity for value capture by a firm, it matters how this is achieved, at least from a social welfare perspective. Does the value capture come at the expense of value creation, which, in most models of the labor market, requires worker mobility to achieve efficient matching of workers to jobs/firms? If such models are valid, how is it possible for mobility to be seen as so (uniformly) negative for firms?

The average annual U.S. quit rate was 26% during 2000-2019. This level of mobility might come as a surprise. It may indicate (a) firms are not as focused on immobility as expected, (b) firms’ decisions are less than optimal and they need better advice, (c) firms see positives to some mobility, and/or (d) firms decided, correctly or not, the cost of reducing mobility exceeded the return. One situation where mobility will be less of a problem for firms is where they have developed a dynamic capability (Teece, Pisano, & Shuen, 1997) whereby their routines, processes, and systems are able to produce a workforce that maintains or evolves to have the required attributes (e.g., FSHC defined at the supra-individual level) with or without strong immobility, independent of specific employees. Thus, for example, instead of raising wage rates to reduce turnover (Gerhart & Newman, 2020: Exhibit 7.14 reviews elasticities), a firm may build a capability to efficiently find, train, and integrate workers.

Value Creation and Value Capture

In strategy broadly, some have wondered whether there is too much emphasis on value capture, not enough on value creation. For example, Priem, Butler, and Li (2013: 472) cite Adner and Kapoor (2010: 309) that strategy research “has tended to assume away the question of how value is created in the first place,” and similarly, Nickerson, Silverman, and Zenger (2007: 211) note that “the vast majority of strategy research has focused on value capture and underemphasized the challenge of crafting organizations and strategies that continuously create value.” Certainly, a major part of the literature on RBV deals with value capture (e.g., Coff, 1997), as do other fields related to management, such as agency theory and industrial relations. Barbash (1984), in the Elements of Industrial Relations, noted that firms and workers “have a common interest in maximizing the total revenue which finances their respective returns, but they take on adversarial postures in debating how the revenue shall be divided as between wages and profits.” (Note that Barbash begins with value creation.)

The question is whether high growth in productivity and standard of living can be obtained if firms (and the ecosystem in which they operate) move too much toward value capture and if that comes at the expense of value creation by alienating other stakeholders. At the level of the firm, as is well-studied in strategy, market imperfections, frictions, barriers to entry, and so forth, whether created by firms, regulation, labor unions, or trade barriers, can reduce competition, which may benefit certain firms, though not generally aggregate economic output. As Mahoney and Pandian (1992: 364) observe, “the generation of above-normal rates of return (i.e., rents) is the focus of analysis for competitive advantage,” and “the existence and maintenance of rents depend upon a lack of competition in either acquiring or developing complementary resources.”

The “depend on lack of competition” is the concerning part. As Kaufman (2015: 530) points out, “in microeconomic [economic] theory, imperfect competition is undesirable because it results in inefficient use of resources and lower output.” As Kaufman (2015: 529) also points out, the RBV (Barney et al., 2012: 137) argues its focus on creating efficiency at the firm level by emphasizing how firms can create greater value from their internal resources. Further, RBV argues that if all firms do this, the result will be more economy-wide output. Of course, the net result depends on the degree to which RBV ultimately influences firms to focus on value creation and value capture in ways that achieve efficiency rather than in ways paved by erecting barriers to competition, in the product market, or in the labor market. Kaufman (2015: 532) further observes that “in effect, the Porter strategy hunts out and creates monopoly power in product markets to promote firm performance, and the Barney strategy hunts out and creates . . . monopsony power in the factor market. . . . Perhaps RBV has particular traction at this point since it may be easier for firms to create imperfect competition in labour markets (e.g. by investing in ILMs) than product markets, partly because the former are more local-based.”

As noted, ILMs are not necessarily anticompetitive and can be an efficient solution where FSHC is valuable, and transaction costs (including opportunism) must be controlled to encourage shared investment by firms and workers. However, also as noted, the emphasis in the strategic HC literature sometimes seems to be disproportionally focused on the value capture opportunity it sees (whether correct or not) arising from worker immobility and less on how FSHC might give rise to value creation. Other approaches to reducing mobility can be anticompetitive, with a focus on value capture at the expense of the worker, and thus may also reduce value creation. Some, such as noncompete contracts, have received some research attention (e.g., Starr, Ganco, & Campbell, 2018). ¹²

We know from the study of industrial relations that firms can collaborate with workers to reduce competition to their mutual benefit but perhaps to the detriment of the consumer and aggregate efficiency/output. At least that is one narrative for what happened to companies in legacy industries when deregulation, international competition, and other barriers to competition were removed and bankruptcies followed in industries like airlines and automobiles in the United States along with major declines in some. Capturing rents arising from constructing such barriers to competition can continue for many years. However, it is not sustainable in the face of stronger market forces and competition and ultimately fails on the (social) value creation criterion.