Understanding Human Capital: Creation and Components

What is human capital and is involved in its creation.

It is important start by mentioning that, Human Capital is a theory which ideally looks at the productive investment contained in human beings. It encompasses skills, abilities, ideals and health resulting from expenditures on education, on the job training programmes, as well as medical care. Therefore, in Human Capital education is perceived as a fundamental product to improve the quality of human life, and making social and economic development (Gidden. A., 2009:25). It further goes on that education is the key to creating, adapting, and spreading knowledge. On the other hand, human capital theory argues that the gains in access to education have been unevenly distributed; with the poor not very often getting their share. However, investing in education and health is fully covered in the Human Capital approach, or the analysis of investments in health and education are joined together in the Human Capital approach.

(Ansu Data, 1984) asserts that, Human Capital is the term economists often use to refer to education, health, and other human capacities that can rise productively when increased.

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In this sense, an analogy is made convectional investments in physical capital; after an initial investment is made a stream of future higher income can be made from both expansion of education and improvements in health. As a result, a rate of return can be deduced and compare with returns to other investments. Estimating the present discounted value of the increased in stream made possible by these investments and then comparing it with their direct and indirect costs, does what the above statement means.

In this sense it can be said that, health and education also contribute directly to well- being. On the other hand, the human capital approach focuses on their indirect ability to increase utility by increasing incomes.

The influence of human capital investments in developing countries can be quite remarkable. Note that, those with higher levels of education started full-time work at a later age, but as their incomes quickly out pace those who started working earlier, in the sense that, they begin to find financial trade -offs in the decisions to continue in school. On other hand, such income gain from education must be compared with the total costs incurred, so as to understand the value of human capital as an investment. Therefore, education costs comprise any direct tuition or other expenditures especially related to education, such as books and indirect costs, primarily income for gone because the student could not work while in school.

Human capital refers to the hypothetical or indefinite aspect of human assets. However, a firm's physical aspect of the human capital is only valuable at the hiring and selecting stage of development of the human resource practices. Thereafter, the firm is more concerned with the flexible components of human assets found in the skills, knowledge, and capabilities of the employees to achieve any given works in pursuit of the organizational goals. Therefore, the theory of human capital of the old economy meant that human involvement in production processes constituted a form of capital. Much of the theoretical and empirical foundations of studies were focused on the premise that firms derived economic benefits from their investment in people. Further, human abilities were put in various groups according to their abilities under the physical asset of the organization where the concern of the firm is on the productive output of its employees. On the other hand, one initial study of human resources had focused on the management of people broadly grouped under the class of selection, training, appraisal and rewards. In this sense, it can be said that, economic payments of employees brings about unwelcome attentions to a direct relationship with the level of education and the length of work experience.

However, with focus changing towards the indefinite aspects of human resources, strategic human capital practices have developed gradually by a long continuous variables to become more purposive and context specific and its creations are aligned to support the organization's strategic plans and needs. In this sense, the multi-dimensional aspects of human capital, this contains definite and indefinite aspects. Hence, indefinite aspects are aspects which cannot be physically touched but they can have value for example, goodwill and trademarks whereas, definite aspects these are real, clear, touched and can be shown for example, cars, food items and so on. It also involves fixed and exerting aspects and industry-specific and firm-specific aspects which become the focus of human resource management in an effort to intensify or heighten the performance. In addition, the indefinite aspects of human capital include the skills, knowledge, and abilities or capabilities that employees use to accomplish tasks at hand, and eventually achieve organizational goals. In this sense, it is vital to hire individuals that are equipped with ability, knowledge and skills from the start so as to carry the work effectively. However, it is this indefinite and flexible component of human capital that organizations seek to understand and control through the utilization of human resource practices. Hence, (Barney, 1991) recommends the utilization of firm resources to create sustained competitive advantages by conceptualizing human capital as a source of sustainable competitive advantage. The later work of (Barney, 1995) reaffirms this combination due to the fact that, the way these two resources are amalgamated is diverse in character across firms and the amalgamation is socially comprised of many different repressed emotionally important ideas which cause psychic conflict leading to abnormal mental behavior and more likely to be incomparable. Therefore, this view is supported by (Finkelstein and Hambrick, 1996) whose work showed the significance of human variables in strategic choice and firm performance. In order to attain competitive advantage, a firm now perceives to amalgamating specialized employees with the flexible components of human resource practices. Hence, the competitive advantage based on human capital that comprises many different form and interactions of individuals is kind of challenging to emulate than the competitive advantage taken from physical and financial capital.

According to (Becker, 1964), the human capital theory is entrenched in the resource-based view of the firm with specific focus on definite or real and indefinite features of human capital. However, the concern of firms regarding their definite human capital is on labor costs relative to future productivity and seeking return from investing in developing the skills and knowledge of their employees and how to prevent such skills from being transferred to another firm, in regard to this, it has been noted that, the indefinite aspects is on the other hand, concerned with the strategic relevance of competencies developed from acquisition and sharing of knowledge. The emphasis is on exploiting employees' knowledge to achieve internally developed core competencies that are valuable, rare, unique and non-transferable.

(Luthan, 2007) asserts that, given the job security, the rewards of wealth and with the promise for better benefits, employees allow themselves to be used to the fullest to the extent of losing their self-esteem. Of course, this existence is not to be blamed only on the workers which also constitute the middle management. More often than not the types of leadership which has targeted to attain, practice the so called "be strong" styles of management. For instance, the banking line, it is common practices for the management to set goals in order to enhance the profit for their chief executives or the shareholders. However, the constant pressures are put forth on the executives to make sure that these goals are achieved. Thus, some companies even deliberately set their goals very high. As one top management, quote (Sayles & Strauss, 1968) "My philosophy is always, give a man more than he can finish. That way you can be sure you are getting the most out of him". This simply means that the management will utilize whatever opportunity to squeeze their employees to the limit to achieve goals set by them; not unlike using 'cows' to work in the fields all days in order to produce enough harvests. In this competitive world, any firm will use any means and all the management expertise to achieve their goals. The utilization of technological innovations, adopting various model of management created by the famous management gurus, spending on training, cost conscientiousness, are various tools used by modern organizations to heighten the profits and this trends are widely practiced.

(Demings, 1986) elaborates that, in order to understand organizational behavior, the elements of power and politic also contribute to human being 'squeezed' of their energy to maximize production. In this case it can be emphasized that with the use of power, there is the ability of one individual in an organization or institution to cause other individuals to bring about preferred outcomes. However, in order to meet certain time limit, institutional managers, at times, do not pause in indecision before exercising their power to attain their set goals. In a worst case background or development of event, such set of circumstances in which individuals find themselves in creates what is often known as management by fear, for instance, a fear of disobeying the boss may motivate the staff to play office politics or keep side with the boss. However, such political motives which are not approved by the organization are very perilous or likely to bring about problems, due to the fact that it leads to the abuse of power and manipulation of a resource to obtain one's preferred outcomes.

In a business or marketing environment where productivity and maximizing profit is the bottom line, effective utilization of resources is very much emphasized. Hence, individuals become one of the resources that had to be used to the fullest, in short individuals play an important role in marketing environment by utilizing their capabilities to build and maintain successful customer relationship. However, in many literatures on human resource management, individuals have been proven to be the determining factor in the success of any organization or institution. Individuals include their physical, intellectual, emotional, social, political, spiritual and all other forms of development. Therefore, it is an accepted culture in some organization to implant the merit or importance of working hard to achieve organizational goals. More often than not, posters and slogans showing writings of 'working hard for your organization' are used generously to remind and repeat to the staff the need to regularly work hard. Therefore, in order to support the work hard policy, rewards are often used as the motivating factor to make sure that the staff stays loyal and never complain.

According to (Collier, 1968) in managing people in organizations the use of authority is no more acceptable; hence, both management and workers ought to understand of each other's purpose in accomplishing organizational goals. On the other hand, managers and leaders have their objectives to attain what has been defined in their organization plan or any organizational policies, the employees have commitments to act in accordance with the rules and follow the needs and instructions of their superiors. In this case, employees' anticipation is a chance to maximize their functionality, creativity and a chance to evolve their full capability as individual within the extent of their environment and experience. Human resources, or employees, are maybe the most important resources a firm or companies have due to the fact that, human capital underlie any organizational capability thus organizations do not make decisions or allocate resources; individuals do. Organizations actually depend on the employees' ideas to influence the financial and physical resources so as to produce financial returns. Hence, this can be done by amalgamating or consolidating specialized employees with various ideas which can influence human resources practices. In this case, a firm or company can achieve competitive advantage as these consolidated resources become diversified across the firm making them socially concerned or comprised of different connected parts of ideas and difficult to emulate. By increasing the extent of human capital through the use of strategic human resource practices, employees' skills and capabilities can be developed to meet the demands of unpredictable environmental changes. The result of this adaptation process creates unique routines and procedures that have limited value outside the firm (Pennings, Lee & Witteloostuijn, 1998). After accomplishing this, the firm's human capital becomes firm-specific and can eventually bring positive influence on performance.

(Edvinsson & Malone, 1997) espoused that, the contribution of human capital to firm performance is basically from the flexible components of human assets found in the know-how, capabilities, skills and expertise manifested within the firm's employees. It is largely tacit in nature and does not belong to the firm. Therefore, when an organization hires, develops and retains the best individuals, some degree of firm specificity of human capital created influences transaction costs and can strongly influence the decision to internalize employment resulting in an increase in human capital value. By attributing to the resource-based view of the firm, (Lepak and Snell, 1999) also hold the view that the uniqueness of human capital brings value to the firm when they enable a firm to implement strategies that improve efficiency and effectiveness, exploit market opportunities, and/or neutralize potential threats. It is this value that enables a firm to achieve the competitive advantage or core competence. Hence, human capital can be said to be the most critical resource in most firms as it is the attributes of human capital like education, experience and skills that form the basis of firm strategies and their implementation. These attributes, when interacted with tangible resources, bring positive impact to performance as a result of the firm's unique resource endowments (Cook, M, 1994).

In conclusion, this paper explained what human capital is and what it involves in its creation. Therefore, human capital is a theory which preferably looks at the productive investment contained in human beings. It however, encompasses skills, abilities, ideals and health resulting from expenditures on education, on the job training programmes, as well as medical care. Therefore, in Human Capital education is perceived as a fundamental product to improve the quality of human life, and making social and economic development. It further goes on that education is the key to creating, adapting, and spreading knowledge. On the other hand, human capital theory argues that the gains in access to education have been unevenly distributed; with the poor not very often getting their share. However, investing in education and health is fully covered in the Human Capital approach, or the analysis of investments in health and education are joined together in the Human Capital approach. In addition, human capital is the term economists often use to refer to education, health, and other human capacities that can rise productively when increased. In this sense, an analogy is made convectional investments in physical capital; after an initial investment is made a stream of future higher income can be made from both expansion and growth of education and improvements in health. As a result, a rate of return can be deduced and compare with returns to other investments. Estimating the present discounted value of the increased in stream made possible by these investments and then comparing it with their direct and indirect costs, does what the above statement means. In this sense it can be said that, health and education also contribute directly to well- being. On the other hand, the human capital approach focuses on their indirect ability to increase utility by increasing incomes.

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