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Archives of Business Research – Vol. 9, No. 8
Publication Date: August 25, 2021
DOI:10.14738/abr.98.10753. Khouja, I., Belkhiria, S., & Tlili, O. (2021). Capital Structure Impact on the Human Capital Investment: Eastern European Countries
Case. Archives of Business Research, 9(8). 235-252.
Services for Science and Education – United Kingdom
Capital Structure Impact on the Human Capital Investment:
Eastern European Countries Case
Imen KHOUJA
Assistant, High Institute of Management, University of Tunis
Sina BELKHIRIA
Assistant Professor, High Institute of Management, University of Tunis
Ons Tlili
Doctoral Student, High Institute of Management, University of Tunis
ABSTRACT
Among growth factors of a company, its human capital, because of its hardly
imitable trait. However, investing in human capital is intangible and risky, which
makes its funding arduous. This article considered the impact of the company’s
capital structure on the human capital investment decision through training using
probit regressions. Among a sample of SMEs from 24 Eastern European countries,
the results confirmed that bank loans foster trainings. However, an increase in self- financing slows down such investments.
Key words: Capital structure, human capital investment, professional training, Eastern
Europe, SMEs, Profit models.
INTRODUCTION
The impact of human capital investment on the profitability of firms is no longer a controversial
topic. This investment offers the company a competitive advantage and enables it to improve
its productivity. Indeed, human capital constitutes a major and invaluable asset for the
company because it is hardly imitable. Moreover, according to Casimir (2016), staff training
increases the company’s added value of the company by more than 49%, while technological
investment only translates to a 25% increase. Thus, the economic growth sought by a country
is through the improvement of its firms’ performance.
In this article, we investigate Eastern European countries, which display a development delay,
compared to their homologues in the West. These transitioning economies are mainly
composed of small and medium-sized enterprises (SME). These enterprises represent the
growth engine of their countries. To grow, in an increasingly unstable and competing
environment, these companies have no other choice than to invest in their human capital.
Nevertheless, the last European investigation of professional trainings in companies reveals
that in 2015, 45% of the companies in Western Europe carried out trainings for their staff
against only 36% in Eastern Europe. In addition, according to Ciaran et al. (2016), 40% of SME
which need funding, in Eastern Europe, do not apply for a bank loan, against 17% in Western
Europe. The authors explain the reluctance of SME to apply for loans by the high interest rates,
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Archives of Business Research (ABR) Vol. 9, Issue 8, August-2021
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required guaranties, and rejection expectation. Whereas, the human capital investment
requires funds which can come, among other sources, from bank loans.
These outstanding facts lead us to question the impact of funding sources on human capital
investment. Particularly, we will examine the effect of the components of working capital of
Eastern European countries SME’s on the decision to invest in human capital through trainings.
Thereby, we retain a sample of SME belonging to 24 Eastern European countries which took
part in the BEEPS survey (Business Environment and Enterprise Performance Surveys).
Beforehand, we review various literature movements on funding options and the impact of
capital structure on the human capital investment decision.
We also review theoretical foundations of the relevance of human capital in the value creation
of the firm.
LITERATURE REVIEW
New literature movements converge to the idea that the accumulation of human capital is,
henceforward, more than physical capital, a competitive advantage for companies.
Investing in human capital refers to training, education and other professional initiatives that
improve employee’s knowledge and skills. This leads to employee satisfaction and efficiency,
and enhances the company’s performance. This investment requires funds that must be
provided by the company. The funding choice has continued, since the work of Modigliani &
Miller (1958), to stimulate the development of thought movements and their application to
different economic contexts.
Investment in human capital and its characteristics
Maximizing the value of the firm no longer occurs via maximizing its shareholders wealth.
On the contrary, the “Stockholder Theory” has gradually given place to the “Stakeholder
Theory” which states that managers have an ethical responsibility not only towards
shareholders, but also towards all stakeholders who contribute to the company’s profit- earning. Business stakeholders usually include customers, suppliers, shareholders and
employees constituting human capital.
Human capital is a resource that has gained more value for the company thanks to its main
characteristic of being inimitable, which can create a sustainable competitive advantage. This
argument emanates from the “Knowledge-based Theory”, initially founded by Penrose (1959)
and then extended by other authors, which states that the knowledge in the company is its
fundamental strategic resource. Indeed, knowledge-based resources are complex and difficult
to reproduce.
Garavan et al. (2001) consider that human capital has three key attributes (1) flexibility and
adaptability, (2) improvement of individual skills, (3) organizational skills development. They
showed that these attributes generate an added value to individual and organizational results.
These skills are of two types: general skills (literacy, basic calculations, learning abilities), and
specific skills related to technology or production processes.
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Khouja, I., Belkhiria, S., & Tlili, O. (2021). Capital Structure Impact on the Human Capital Investment: Eastern European Countries Case. Archives of
Business Research, 9(8). 235-252.
URL: http://dx.doi.org/10.14738/abr.98.10753
When the education system does not provide individuals with skills required by the labour
market, training becomes an alternative to fill the void (Ng, 2005). So, human capital investment
through training, is of great importance on both levels, the employees and the company.
According to Bapna et al. (2013), in today's knowledge-based economy, companies must
continuously nurture their human capital to achieve sustainable competitive advantage.
Indeed, accelerated technological development and market liberalization require companies
and their human capital to adapt to their evolving environment, hence the need for continuous
training to maintain this competitive advantage. Improving human capital leads to greater
competitiveness and better performance (Agarwala, 2003).
In this same framework, “Resource Based Theory” (RBT), argues that the heterogeneous
distribution of valuable resources among companies, such as the human capital, explains the
difference in performance. Firms that benefit from valuable resources that others cannot easily
replicate perform better (Barney, 1991). To this end, Barney et al. (2001), Acedo et al. (2006)
highlighted the role of human capital as a key factor explaining why some companies
outperform others.
Several authors agree that, knowledge integrated in human capital constitutes the most
universally valuable and imperfectly imitable resource (Grant, 1991, 1996; Kogut & Zander,
1992; Coff, 1997). In particular, human capital that holds firm-specific knowledge is unique
because it is not easy to transfer and apply to other firms (Kor & Mahoney, 2005).
On the other hand, according to Coff (1997), human capital with general knowledge can easily
move among competitors. So, all other elements being equal, the difference in performance
between firms is caused by the knowledge heterogeneity and human capital skills among them.
This creates a competitive advantage that the company should aspire to preserve.
Such purpose can only be achieved by a sustainable transfer of knowledge and a large
participation of human capital in continuous training imposed by technological progress,
increased competition and increasing deregulation.
However, investment in human capital through training is characterized by significant risks due
to its intangibility and the possibility of the employee resigning before recovering the costs of
his training through the company’s improved productivity. In this sense, according to Popov
(2014), investing in human capital is expensive and intangible, which makes it more difficult to
fund than physical assets. This brings us back to the issue of funding choice, which is still a
controversial topic delete the economic literature.
Theoretical foundations of the funding choice
The capital structure of the company, as well as its funding options, have historically attracted
researchers’ interest in financial theories, given their impact on the company's investment
decisions, its value and its future performance. The funding sources available to the company
are multiple and divided into equity and borrowed capital. Equity is represented by self- financing and capital increase. As for borrowed capital, it can be divided into bank loans and
bond loans.