How does Human Capital Drive Performance? Evidence on a Missing Link in SMEs

Abstract

Ever since Becker’s work on human capital, management scholars have aimed to determine whether and how human capital affects firm performance. In line with Becker’s arguments, research on both large, well-established organizations and entrepreneurial firms (new and small) supports a positive link, but the mechanisms of how the human capital of individuals at the top of organizations affects firm performance is not well understood. In this paper, we examine the role of business planning as a possible link between an individual’s human capital and firm performance. We analyze whether executives with greater human capital engage in more business planning activities and how the consequent business planning impacts firm performance. We test hypotheses, applying an evidence- based research approach that synthesizes 148 empirical studies linking human capital, business planning, and entrepreneurial firm performance. We confirm the positive relationship between human capital and firm performance, and find support for business planning as a partial mediator of the human capital–firm performance relationship. Further analyses tease out the differences between education-based human capital and work experience-based human capital. While education is more strongly connected with business planning than experience, we find that business planning only mediates the relationship between experience and firm performance, not the relationship between education and performance. Implications for human capital theory and research on planning are discussed.