Entrepreneurial human capital
Russell Coff
The term ‘‘human capital’’ originates from the economics literature, where it is explored pri marily as an investment that individuals make in knowledge and skills (Becker, 1964). It is an important distinction from the term ‘‘labor,’’ which is treated as an undifferentiated commod ity. It also marks recognition that knowledge and skills are a critical form of capital that affects firms’ and individuals’ productive capabilities. In this literature, much of the work has focused on the return on individuals’ investments in the form of wages. Most of this research has focused narrowly on education as a measure of human capital because individuals make a conscious de cision whether or not to seek a college education and advanced degrees.
However, education is clearly not the only form of knowledge or skills with economic value. Indeed, the knowledge literature focuses decidedly on more tacit knowledge that is un likely to be part of formal education (Nonaka, 1994; Polanyi, 1966). While there has been some study in the economics literature of training and experience, it represents a relatively small por tion of that literature and is subject to coarse grained measures (Glick and Feuer, 1984).
Entrepreneurial human capital, then, is linked to the broader concept of human capital. Specif ically, entrepreneurial human capital is the set of knowledge and skills that individuals can bring to bear to create and exploit market opportunities. Just as the central issue for the human capital litera ture is return on investment, a key question for entrepreneurial human capital is what is the value of the asset? Put another way, to what extent do increases in entrepreneurial human capital lead to successful new ventures in both corporate and entrepreneurial settings?
As a research construct, a critical question is how to differentiate this construct from related concepts (especially human capital and social capital). Since human capital is, by definition, valuable in enhancing productive capabilities for individuals and firms, it is not surprising to find that it also contributes to new venture success (Gimeno et al., 1997). This finding does not, in itself, demonstrate the existence of a new construct distinct from traditional conceptual izations of human capital. To do this, it is neces sary to identify how the human capital required in entrepreneurial settings might differ. The discussion below explores three issues critical to identifying entrepreneurial human capital as a distinct construct: (1) What knowledge and skills are uniquely relevant to successful new ventures? (2) How does one invest in entrepren eurial human capital? (3) How is entrepreneur ial human capital differentiated from social capital?
What Type of Knowledge and Skills?
We are immediately faced with the question of what knowledge and skills are uniquely relevant to creating new business ventures. This is critical to distinguish the term entrepreneurial human capital from the broader concept of human capital. That is, the traditional measures, education, training, and work experience, are important, but do these address the knowledge and skills that are most critical for entrepreneur ial success? What knowledge and skills are most important in identifying and exploiting new market opportunities? Furthermore, do corpor ate settings demand a different set of skills to promote entrepreneurial ventures?
Iyigun and Owen (1998) identify professional and entrepreneurial human capital and ex plore their role in economic development. Here, professional human capital refers to trad itional education based learning or managerial experience, while entrepreneurial human capital refers specifically to entrepreneurial experience. Their model suggested that both types of human capital are important for economic devel opment.
Gimeno et al. (1997) tested similar hypotheses empirically, using a survey of more than 1,500 entrepreneurs. They found that human capital did influence a venture’s economic performance. The most significant measures of human capital included education, managerial experience, supervisory experience, experience in a similar business, and prior number of jobs held – all are generally forms of professional human capital. That is, they are known to enhance productivity in most business settings and are not specific to an entrepreneurial context. This is consistent with Lerner and Haber’s (2001) finding that managerial skills had a very strong association with new venture performance.
However, Gimeno et al. (1997) found that prior entrepreneurial experience was important to a much lesser extent. Their results suggest that experience in a similar business, supervisory experience, and formal education are all more important than specific experience running a business – perhaps casting some doubt on the importance of entrepreneurial human capital as a distinct construct from professional human cap ital.
Another interpretation may be that some prior entrepreneurial experience is more valuable than others and that Gimeno et al. (1997) do not distinguish the type of prior entrepreneurial ex perience. This highlights an important avenue for further research on what entrepreneurial ex perience is most valuable. Ultimately, the ability to create and exploit market opportunities is a creative endeavor. It is unclear how or where potential entrepreneurs could enhance their skills in such creativity independently from trad itional sources of professional human capital (e.g., education and work experience).
Investments in Entrepreneurial Human Capital
Thus, acquiring entrepreneurial human capital, apart from professional human capital, is com plicated by the fact that not all entrepreneurial experience is necessarily valuable. It would appear that there is some causal ambiguity con cerning exactly in which knowledge or skills would be entrepreneurs should invest. Accord ingly, noted labor economist Walter Oi (1999) concludes that entrepreneurship is sufficiently risky as to be effectively gambling. That is, one can win with the first hand, or not win after playing many hands, or have a winning streak. While there are certainly instances of serial entrepreneurship (Wright, Robbie, and Ennew, 1997a), it is less clear how much of their success is due to experience (e.g., previous successful and/or failed ventures) as opposed to other sources of knowledge and skills – an intuitive sense of what ideas will be effective. Indeed, Wright, Robbie, and Ennew (1997b) found that experienced entrepreneurs did not outperform novice entrepreneurs who also got venture cap ital financing. If an entrepreneur envisions a value creating formula, there is no guarantee that he or she will be able to reproduce those results. In this context, Oi (1999) argues that entrepreneurial human capital is not a useful construct separate and distinct from professional human capital because individuals cannot make rational decisions about how much to invest.
In order to counter this gambling argument, further exploration is warranted concerning what knowledge is critical for entrepreneurial success and how this knowledge is obtained. Nevertheless, to the extent that past entrepren eurial experience of some type is valuable, it is reasonable to view it as a form of capital. This would be true even if the type of experience needed were sufficiently causally ambiguous as to make systematic investing impossible for in dividuals. This is the case for many resources underlying the resource based view and they are still clearly viewed as assets (Reed and DeFil lippi, 1990).
However, even causally ambiguous assets might be acquired using approaches suited to investment under uncertainty, such as real options (Dixit, 1989). Generally, this heuristic involves making multiple initial investments and fully funding only those that are revealed as having merit based on subsequent information. This may recast the high rate of entrepreneurial failure in a more favorable light as ‘‘options that were not exercised’’ (McGrath, 1999). Of course, this is a very different model for human capital investment than that normally explored in the literature – initiating new ventures specif ically for the purpose of developing scarce skills. Additional research on this topic is certainly warranted.
A final problem in analyzing investments in entrepreneurial human capital is that entrepren eurs are known to have a mixture of economic and non economic objectives. Thus, while an investment approach might explore the impact of human capital on outcomes such as venture capital, market penetration, or financial per formance, a given entrepreneur may have other objectives that are not captured by these meas ures (Bird, 1988).
Entrepreneurial Social Capital
Finally, entrepreneurial human capital is strong ly linked to social capital. The human capital literature has spawned a related area in socio logy and management that focuses on indi viduals’ use of social ties as a form of capital. Whereas human capital is ‘‘what you know,’’ social capital addresses the question of ‘‘who you know.’’ This distinction has increased in importance as the economics literature focused heavily on empirical measures of education and experience to the detriment of social ties. How ever, as Coleman (1988) identifies, the two are often closely linked in practice. Such is the case in an entrepreneurial context. Certainly, social capital has an important impact on new venture success (Shane and Stuart, 2002). Social ties are an important source of essential resources, in cluding information, employees, customers, and venture capital (Sacks, 2002). Indeed, social cap ital may be relatively more important than human capital in this context (Davidsson and Honig, 2003).
However, the distinction may be especially blurred for entrepreneurial human capital to the extent that it refers specifically to experience in previous entrepreneurial ventures. Whereas education may ultimately be loosely linked to one’s professional networks, experience may be more closely related. Indeed, the most important and valuable social ties may have been forged as a result of prior entrepreneurial experience. In practice, it may be hard to empirically differen tiate the two constructs.
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