Human Capital, Innovation and Performance: Evidence from Commercial Banks in Kenya
Purpose: With unprecedented growth in financial innovations firm are gradually focusing on knowledge resources as a source of competitive advantage. At the heart of knowledge resources is human capital. This paper evaluated the impact of human capital on financial performance of commercial banks in Kenya.
Design/Methodology/Approach: A survey research design approach was adopted. The population of the study consists of 42 commercial banks licensed by Central Bank of Kenya. Only 31 banks qualified for analysis due to availability of data. Some of the banks had not commenced operations during the study period while others were under statutory management. Secondary data was extracted from annual financial reports. The study used descriptive and inferential statistics. Regression analysis technique with the aid of STATA (version 13) was used to measure the strength of the relationship between the variables as the basis of testing the hypothesis. The study had two control variables comprising of firm size and firm age.
Findings: Evidence obtained from the analysis results indicated that human capital has a positive and significant effect on firm performance (R-squared, 0.3437; β = 0.291; ρ-value 0.000<0.05) ; firm age had a negative and significant impact on financial performance (β = -0.459, ρ < .05) while firm size had a negative though insignificant effect on performance (β = -0.459, ρ > .05). Thus, the null hypotheses were rejected and the alternate accepted.
Research limitations: This study had two known limitations. The study focused on the Kenyan banking sector. Therefore, future studies should focus on other sectors and in other economies. Second, the study used secondary data which limited measurement of variables. Future researchers can consider using primary data which might shed more light on the relationship between the variables.
Practical implications: The research hypothesis is of strategic importance to managers and the regulator considering the critical role banks play in economic growth. Accordingly, the findings will aid management in strategic management and the regulators in formulating policies that create a robust banking sector.
Originality/Value: To the best this researcher’s knowledge, no study was conducted to examine the relationship between human capital and financial performance in the Kenyan banking sector. Moreover, previous studies pooled human capital with other elements of intellectual capital ignoring the indirect causal relationship between these elements.
Abdin, J. (2016). Financial development and poverty reduction: Exploring the links between the issues using evidence from Bangladesh. International Journal of Financial Research, 7(4), 44-65.
Abhayawansa, S., Aleksanyan, M., & Cuganesan, S. (2018). Conceptualisation of intellectual capital in analysts’ narratives: a performative view. Accounting, Auditing & Accountability Journal, 31(3), 950-969.
Abualoush, S., Masa’deh, R. E., Bataineh, K., & Alrowwad, A. (2018). The role of knowledge management process and intellectual capital as intermediary variables between knowledge management infrastructure and organization performance. Interdisciplinary Journal of Information, Knowledge, and Management, 13, 279-309.
Aduda, J., & Kingoo, N. (2012). The relationship between electronic banking and financial performance among commercial banks in Kenya. Journal of Finance and investment Analysis, 1(3), 99-118.
Anetor, F., Ogbechie, C., Kelikume, I., & Ikpesu, F. (2016). Credit supply and agricultural production in Nigeria: a vector autoregressive (VAR) approach. Journal of Economics and Sustainable Development, 7(2).
Ashour, A. S. (2000, April). Knowledge capital management. Reinventing management paradigm in the 21st century. In Proceedings of the 12th International Conference on Training and Management Development Towards Arab Learning Organization (pp. 25-27).
Attar, M., Kang, K., & Sohaib, O. (2019). Knowledge Sharing Practices, Intellectual Capital and Organizational Performance. In Proceedings of the 52nd Hawaii International Conference on System Sciences.
Bae, J., & Lawler, J. J. (2000). Organizational and HRM strategies in Korea: Impact on firm performance in an emerging economy. Academy of management journal, 43(3), 502-517.
Balcilar, M., Gupta, R., Lee, C. C., & Olasehinde-Williams, G. (2018). The synergistic effect of insurance and banking sector activities on economic growth in Africa. Economic Systems, 42(4), 637-648.
Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of financial economics, 9(1), 3-18.
Bapna, R., Langer, N., Mehra, A., Gopal, R., & Gupta, A. (2013). Human capital investments and employee performance: an analysis of IT services industry. Management Science, 59(3), 641-658.
Barney, J. B. (1986). Organizational culture: can it be a source of sustained competitive advantage?. Academy of management review, 11(3), 656-665.
Beck, T., Demirgüç-Kunt, A. and Levine, R (2007) Finance, inequality and the poor, Journal of Economic Growth, 12(1), 27-49
Becker, G. (1964). Human Capital, NY. G
Becker, G. S. (1983). Human capital: A theoretical and empirical analysis with special reference to education. Chicago, IL: University of Chicago Press
Becker, G. S. (2002). The age of human capital (pp. 71-89). na.
Becker, G. S. (2009). Human capital: A theoretical and empirical analysis, with special reference to education. University of Chicago press.
Benevene, P., Kong, E., Lucchesi, M., & Cortini, M. (2019). Intellectual capital management among Italian non-profit socio-cooperatives. Journal of Workplace Learning, 31(1), 17-3
Benhabib, J., & Spiegel, M. M. (2005). Human capital and technology diffusion. Handbook of economic growth, 1, 935-966.
Bontis, N. (1998). Intellectual capital: an exploratory study that develops measures and models. Management decision, 36(2), 63-76.
Bontis, N., & Fitz-Enz, J. (2002). Intellectual capital ROI: a causal map of human capital antecedents and consequents. Journal of Intellectual capital, 3(3), 223-247.
Bontis, N., Chua Chong Keow, W., & Richardson, S. (2000). Intellectual capital and business performance in Malaysian industries. Journal of intellectual capital, 1(1), 85-100.
Bontis, N., Ciambotti, M., Palazzi, F., & Sgro, F. (2018). Intellectual capital and financial performance in social cooperative enterprises. Journal of Intellectual Capital, 19(4), 712-731.
Bratianu, C. (2018). Intellectual capital research and practice: 7 myths and one golden rule. Management & Marketing, 13(2), 859-879.
Bustos, P., Garber, G., & Ponticelli, J. (2016). Capital allocation across sectors: Evidence from a boom in agriculture. Banco Central do Brasil (414).
Cai, D., Song, Q., Ma, S., Dong, Y., & Xu, Q. (2018). The relationship between credit constraints and household entrepreneurship in China. International Review of Economics & Finance, 58, 246-258.
Carletti, E., Senbet, L. W., Cull, R., Allen, F., Qian, J., & Valenzuela, P. (2018). Improving Access to Banking: Evidence from Kenya. BAFFI CAREFIN Centre Research Paper, (2018-104).
Chen, C. J., & Huang, J. W. (2009). Strategic human resource practices and innovation performance—The mediating role of knowledge management capacity. Journal of business research, 62(1), 104-114.
Chen, J., Zhu, Z., & Yuan Xie, H. (2004). Measuring intellectual capital: a new model and empirical study. Journal of Intellectual capital, 5(1), 195-212
Chen, M. C., Cheng, S. J., & Hwang, Y. (2005). An empirical investigation of the relationship between intellectual capital and firms’ market value and financial performance. Journal of intellectual capital, 6(2), 159-176.
Cheng, M. Y., Lin, J. Y., Hsiao, T. Y., & Lin, T. W. (2008). Censoring model for evaluating intellectual capital value drivers. Journal of Intellectual Capital, 9(4), 639-654
Chicu, D., del Mar Pàmies, M., Ryan, G., & Cross, C. (2019). Exploring the influence of the human factor on customer satisfaction in call centres. BRQ Business Research Quarterly, 22(2), 83-95.
Chiorazzo, V., Milani, C. and Salvini, F., 2008. Income diversification and bank performance: Evidence from Italian banks. Journal of Financial Services Research, 33(3), pp.181-203.
Chiu, C. L., & Chen, Y. S. (2017). A web-scale experience to identify the component impacts of intellectual capital on corporate performance from perspective of multimedia data applications. International Journal of Applied Systemic Studies, 7(1-3), 138-153
Clarke, T., & Gholamshahi, S. (2018). Developing human capital for knowledge based economies. In Innovation in the Asia Pacific (pp. 247-270). Springer, Singapore.
Colombo, M. G., & Grilli, L. (2005). Founders’ human capital and the growth of new technology-based firms: A competence-based view. Research policy, 34(6), 795-816.
Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J., & Ketchen Jr, D. J. (2011). Does human capital matter? A meta-analysis of the relationship between human capital and firm performance. Journal of applied psychology, 96(3), 443.
Dakhli, M., & De Clercq, D. (2004). Human capital, social capital, and innovation: a multi-country study. Entrepreneurship & regional development, 16(2), 107-128.
Davenport, T.H. and Prusak, L. (1998), Working Knowledge: How Organizations Manage What They Know, Harvard Business School Press, Boston, MA.
Dietrich, A., & Wanzenried, G. (2014). The determinants of commercial banking profitability in low-, middle-, and high-income countries. The Quarterly Review of Economics and Finance, 54(3), 337-354.
Drucker, P. (1993) Post-Capitalist Society, New York: Harper Business.
Dwyer, R. E. (2018). Credit, debt, and inequality. Annual Review of Sociology, 44, 237-261.
Edvinsson, L., & Malone, M. S. (1997). Intellectual capital: The proven way to establish your company's real value by finding its hidden brainpower. Piatkus.
Eggoh, J., Houeninvo, H., & Sossou, G. A. (2015). Education, health and economic growth in African countries. Journal of Economic Development, 40(1), 93.
Eisfeldt, A. L., & Papanikolaou, D. (2013). Organization capital and the cross‐section of expected returns. The Journal of Finance, 68(4), 1365-1406.
Fama, E.F. and French, K.R., 1992. The cross‐section of expected stock returns. the Journal of Finance, 47(2), pp.427-465
Felício, J. A., Couto, E., & Caiado, J. (2014). Human capital, social capital and organizational performance. Management Decision, 52(2), 350-364.
Firer, S., & Mitchell Williams, S. (2003). Intellectual capital and traditional measures of corporate performance. Journal of intellectual capital, 4(3), 348-360.
Fleisher, B., Li, H., & Zhao, M. Q. (2010). Human capital, economic growth, and regional inequality in China. Journal of development economics, 92(2), 215-231.
Gabriel, A. S., Cheshin, A., Moran, C. M., & van Kleef, G. A. (2016). Enhancing emotional performance and customer service through human resources practices: A systems perspective. Human Resource Management Review, 26(1), 14-24.
Gennaioli, N., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2012). Human capital and regional development. The Quarterly journal of economics, 128(1), 105-164.
Ghemawat, P. (1986). Sustainable advantage. Harvard business review, 64(5), 53-58.
Goksu, A., & Goksu, G. G. (2015). A comparative analysis of higher education financing in different countries. Procedia Economics and Finance, 26, 1152-1158.
Gololo, I. A. (2018). Challenges of the Nigerian Banking Sector and the Way Forward. American Finance & Banking Review, 3(1), 26-34.
Grant, R. M. (1996). Toward a knowledge‐based theory of the firm. Strategic management journal, 17(S2), 109-122.
Halim, S. (2010). Statistical analysis on the intellectual capital statement. Journal of Intellectual Capital, 11(1), 61-73.
Han, J., Han, J. and Brass, D.J. (2014) Human capital diversity in the creation of social capital for team creativity. Journal of Organizational Behaviour. Vol 35, No 1. pp54 71.
Hannan, M. T., & Freeman, J. (1984). Structural inertia and organizational change. American sociological review, 149-164.
Harris, D., & Helfat, C. (1997). Specificity of CEO human capital and compensation. Strategic Management Journal, 18(11), 895-920.
Hatch, N. W., & Dyer, J. H. (2004). Human capital and learning as a source of sustainable competitive advantage. Strategic management journal, 25(12), 1155-1178.
Hitt, M. A., Bierman, L., Shimizu, K., & Kochhar, R. (2001). Direct and moderating effects of human capital on strategy and performance in professional service firms: A resource-based perspective. Academy of Management journal, 44(1), 13-28.
Ilaboya, O.J. and Ohiokha, I.F., 2016. Firm age, size and profitability dynamics: a test of learning by doing and structural inertia hypotheses. Business and Management Research, 5(1), pp.29-39.
Itami, H., 1987. Mobilizing Invisible Assets' Harvard Uni. Press, Cambridge Mass.
Kabir, M. N. (2019). Knowledge Society. In Knowledge-Based Social Entrepreneurship (pp. 59-89). Palgrave Macmillan, New York.
Kasekende, E., & Nikolaidou, E. (2018). Mobile Money and Money Demand in Kenya (No. 2018-11). School of Economics, University of Cape Town.
Kato, M., Okamuro, H., & Honjo, Y. (2015). Does Founders' Human Capital Matter for Innovation? Evidence from J apanese Start‐ups. Journal of Small Business Management, 53(1), 114-128.
Khalique, M., Bontis, N., Abdul Nassir bin Shaari, J., & Hassan Md. Isa, A. (2015). Intellectual capital in small and medium enterprises in Pakistan. Journal of Intellectual Capital, 16(1), 224-238.
Khan, S. J. M., & Anuar, A. R. (2018). Access to Finance: Exploring Barriers to Entrepreneurship Development in SMEs. In Global Entrepreneurship and New Venture Creation in the Sharing Economy (pp. 92-111). IGI Global.
Kombe, S. K., & Wafula, M. K. (2015). Effects of Internet Banking on the Financial Performance of Commercial Banks in Kenya a Case of Kenya Commercial Bank. International Journal of Scientific and Research Publications, 5(5), 1-10.
Kor, Y. Y., & Mahoney, J. T. (2005). How dynamics, management, and governance of resource deployments influence firm‐level performance. Strategic Management Journal, 26(5), 489-496.
Lakonishok, J., & Shapiro, A. C. (1984). Stock returns, beta, variance and size: an empirical analysis. Financial analysts journal, 40(4), 36-41.
Lepak, D. P., & Snell, S. A. (1999). The human resource architecture: Toward a theory of human capital allocation and development. Academy of management review, 24(1), 31-48.
Lev, B., Radhakrishnan, S., & Zhang, W. (2009). Organization capital. Abacus, 45(3), 275-298.
Link, A.N. & Siegel, D.S. (2007). Innovation, entrepreneurship, and technological change. Oxford: Oxford University Press.
Lu, C. C., & Hsu, H. J. (2018). Exploring the Relationship between Organizational Capital and Service Innovation Behavior. International Journal for Innovation Education and Research, 6(12), 01-10.
Maditinos, D., Chatzoudes, D., Tsairidis, C., & Theriou, G. (2011). The impact of intellectual capital on firms' market value and financial performance. Journal of intellectual capital, 12(1), 132-151.
Mahdi, O. R., Nassar, I. A., & Almsafir, M. K. (2019). Knowledge management processes and sustainable competitive advantage: An empirical examination in private universities. Journal of Business Research, 94, 320-334.
Martin, B. C., McNally, J. J., & Kay, M. J. (2013). Examining the formation of human capital in entrepreneurship: A meta-analysis of entrepreneurship education outcomes. Journal of Business Venturing, 28(2), 211-224.
McDowell, W. C., Peake, W. O., Coder, L., & Harris, M. L. (2018). Building small firm performance through intellectual capital development: Exploring innovation as the “black box”. Journal of Business Research, 88, 321-327.
Megna, P., & Mueller, D. C. (1991). Profit rates and intangible capital. The review of economics and statistics, 632-642.
Muthinja, M. M., & Chipeta, C. (2018). What drives financial innovations in Kenya’s commercial banks? An empirical study on firm and macro-level drivers of branchless banking. Journal of African Business, 19(3), 385-408.
Noe, R. A., Hollenbeck, J. R., Gerhart, B., & Wright, P. M. (2017). Human resource management: Gaining a competitive advantage. New York, NY: McGraw-Hill Education.
Noorbakhsh, F., Paloni, A., & Youssef, A. (2001). Human capital and FDI inflows to developing countries: New empirical evidence. World development, 29(9), 1593-1610.
Pelinescu, E. (2015). The impact of human capital on economic growth. Procedia Economics and Finance, 22, 184-190.
Penrose, E. (1959). The Theory of the Growth of the Firm. Basil Blackwell, London.
Peteraf, M. A. (1993). The cornerstones of competitive advantage: A resource‐based view. Strategic management journal, 14(3), 179-191.
Psillaki, M., & Mamatzakis, E. (2017). What drives bank performance in transitions economies? The impact of reforms and regulations. Research in International Business and Finance, 39, 578-594.
Reichenberg, M., & Andreassen, R. (2018). Comparing Swedish and Norwegian teachers' professional development: How human capital and social capital factor into teachers' reading habits. Reading Psychology, 39(5), 442-467.
Reinartz, W., Krafft, M., & Hoyer, W. D. (2004). The customer relationship management process: Its measurement and impact on performance. Journal of marketing research, 41(3), 293 305
Sahari, S., Nichol, E. O., & Yusof, S. M. (2019). Stakeholders’ Expectations on Human Capital Disclosure vs. Corporate Reporting Practice in Malaysia. International Business Research, 12(1), 148-155.
Sardo, F., Serrasqueiro, Z., & Alves, H. (2018). On the relationship between intellectual capital and financial performance: A panel data analysis on SME hotels. International Journal of Hospitality Management, 75, 67-74..
Schultz, T.W. (1961) Investment in human capital. American Economic Review. Vol 51. pp1–17.
Seleim, A., Ashour, A., & Bontis, N. (2007). Human capital and organizational performance: a study of Egyptian software companies. Management Decision, 45(4), 789-801.
Shivdas, A., & Ray, S. (2017). Resource utilization by pharmaceutical companies in India: Emphasis on R&D, labor and capital. In 2017 International Conference on Data Management, Analytics and Innovation (ICDMAI) (pp. 19-23). IEEE.
Shrader, R., & Siegel, D. S. (2007). Assessing the relationship between human capital and firm performance: Evidence from technology–based new ventures. Entrepreneurship theory and Practice, 31(6), 893-908.
Sikod, F., & Baye, M. (2015). Microfinance Access and Poverty Reduction in Cameroon. La microfinance en Afrique centrale: Le défi des exclus, 253.