Human capital and innovation in Uruguayan manufacturing firms

Abstract

PurposeFirms are the primary producers of innovations, and understanding how these agents acquire, update and manage the knowledge of their employees is central to understanding economic growth. However, in developing economies, technology adaptation plays a critical role in innovation compared to knowledge creation. Thus, this research investigates the role of human capital in innovation at the firm level in the case of a small developing economy, which ranks highly on several human capital dimensions but shows declining levels of investment in advanced human capital development in its manufacturing sector.Design/methodology/approachThis research examines the relationship between innovation and human capital at the firm level in a small peripheral economy. The human capital theory is applied to a firm context to understand variations in innovative behavior depending on the size of manufacturing companies. The effect of several human capital dimensions on product innovation is estimated by applying binomial logistic regression models with firm and time-fixed effects.FindingsThis article contributes to innovation economics and public policy by highlighting that not all dimensions of human capital operate similarly for all companies in the context of developing economies. In such settings, technology adaptation plays a critical role in innovation. While employees' human capital endowments significantly impact small firms in that context, firm-level practices such as internal training are crucial for large companies. Consequently, policymakers should consider that firms' human capital endowments impact their innovative behavior differently to avoid one-size-fits-all policy design approaches in this regard.Originality/valuePrior research on the relationship between human capital and innovation in developing economies was based on a cross-sectional approach. This research's unique panel dataset covering 11-year triennial innovation surveys enabled a modeling strategy that controls for time-invariant unobservable firm characteristics. Three aspects of firms' human capital have been analyzed human capital endowments, internal training and human resource management (HRM) practices for the first time longitudinally in a developing economy, enabling to contrast of empirical findings with policy design.