Towards A Theory of Perceived Firm-Specific Human Capital

Abstract

Strategy research has drawn attention to firm-specific human capital as a source of sustained competitive advantage, at least in part because it may encumber employee mobility. However, it is also typically assumed that employees are reluctant to invest in firm-specific skills because such investments may come at the cost of developing general skills, thereby reducing individuals’ attractiveness in the labor market. We argue that the logic behind this theory depends on the oft-violated assumption that firm-specific human capital is accurately and objectively perceived among labor market participants and that relaxing this assumption limits conclusions that can be drawn regarding competitive advantage. The key takeaway is that perceptions of firm-specificity, even if inaccurate, can be more important than objective firm-specific human capital in determining the likelihood that firm-specific human capital can be a source of sustained advantage. By relaxing the assumption of strong form labor market efficiency, we develop propositions regarding how firms can facilitate and manage perceptions of firm-specificity, thereby increasing the likelihood that a competitive advantage can be sustained.