Which Came First? Human Capital and Human Process Advantage and the Circulation of Market Ties

Abstract

We use a resource-based view of the firm to test competing theoretical predictions on whether human capital or human processes drive the circulation of client ties – i.e., the dissolution of a market relationship between a client and a professional service firm market relationship and the subsequent establishment of a relationship with the same client and a new professional service firm. The human capital perspective predicts that managerial mobility precedes the circulation of client ties because inter-firm relationships are embedded in the relationship-specific investments and the social capital of individual managers, and thus, competitive advantage rests in the possession of these intangible resources. An alternative prediction, based on dynamic capabilities and human process advantage, predicts the opposite: that managerial mobility is likely to follow the circulation of client ties because clients select professional service firms based on their ability to acquire and leverage the necessary human resources. We test these competing predictions on a unique longitudinal data set of the New York City advertising agencies. Our preliminary results suggest stronger support for a human capital resource advantage than a human process advantage, but these effects depend in part on the types of employees and characteristics of the organizations.