Title: The Classification of Human Capital According to the Strategic Goals of Firms: An Analysis
Abstract: Many companies nowadays derive their competitive advantages mainly from human capital. And it becomes critical for companies to select human capital that matches their strategic goals. Human capital must be identified, invested and maintained. This paper first defines and classifies company's human capital in line with a theoretical framework we provide; sort out company's human capital investments according to cost development stages in human resources. Finally, we argue that some human capital should be treated as investments instead of expenses in accounting records, and suggest ways for business to select human capital that meets their strategic target. Introduction Elements contributing to the value of companies are numerous, including organizational capital, customer (relations) capital and human capital (Dzinkowski, 2000). All these factors centered on humans as a foundation for all sorts of capital. However, current accounting research on the definition, forms and categories of human capital has been limited. It is hard to obtain statistical data of human capital from the current accounting system, let alone apply the data to managing human capital, which has become increasingly important to companies' value creation. Against this backdrop, this paper aims to present an in-depth discussion on human capital. Currently, financial statements compiled according to the GAAP do not properly disclose companies' investments in human capital and the knowledge assets created by it. Financial statements without a proper disclose of human capital are misleading for companies' management, who are used to making decisions based on the information provided by financial statements. Inappropriate decisions, such as layoffs, may thus be reached, thereby hampering companies' performance, far from its intended purpose of raising efficiency. The root of this mismanagement is the treatment of human capital as expenses instead of resources in traditional accounting (Hermanson et al., 1992). It is, therefore, necessary to further discuss the definition of human capital, the investment of human capital, and the disclose issue of human capital in financial statements under the current practice. The definition and characteristic of human capital Not all expenditure made by companies in human is counted as input of human capital. Expenditure about human, such as staff training programs, not in order to exchange it for the labor or services provided employees in the past or during the short-term period but in order to induce value-added in the future. The so-called costs or investments do not refer to an absolutely fixed set of accounting items but vary according to the business objectives, core skills and human attributes concerned. Existing literature approaches the definition of human capital mainly in three ways: the transaction cost economy theory, the human capital theory and resource-based view of the firm theory. The transaction cost economy theory presumes that companies choose to employ personnel in the most efficient way (Argyres and Liebeskind, 1999). When employ personnel, companies can either recruit new staff outside or train/promote existing staff. These two approaches to employment will incur various costs. For example, the former approach incurs hiring costs (transaction costs) and the latter one trigger training costs and management costs (bureaucratic costs). Between these two alternatives, companies choose the most efficient way or combination by comparing all relevant costs (Riordan Williamson, 1985). Human capital within the context of this theory must possess the dual properties of asset specificity and asset uncertainty. The human capital theory emphasizes that companies decide on the amount of human capital investment they will make by comparing it with the potential future benefits, for instance, improvements in production controls. Human capital in this context refers to technical training and knowledge buildup for employees. …
Publication Year: 2005
Publication Date: 2005-03-01
Language: en
Type: article
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Cited By Count: 14
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