The Impact of Human Resource Configurations on Intellectual Capital in the Australian Biotechnology Industry Chao-Ying Lee, Assistant Professor, Chia Nan University of Pharmacy & Science, Taiwan

ABSTRACT The objective of this study is to examine the impact of human resource (HR) configurations (combinations) on intellectual capital (IC) in the Australian biotechnology industry. Various stages of data analysis were undertaken to test the hypotheses including the preliminary analyses, confirmatory factor analysis (CFA), and regression analyses. The results have provided support for the view that the six HR configurations (recruitment & selection, training & development, documentation, information systems, egalitarian, and collaborative) were all significantly related to an organisation’s level of IC, human, organisational, and social capital respectively. It contributes to IC theory development, as the creation, formation, measurement, valuation, and reporting of IC are still at an early stage (e.g., Andriessen, 2004; Marr, Gray, & Neely, 2003; Wu, 2005), and some related important concepts lack a consensus (Canibano, Garcia-Ayuso, & Sanchez, 2000). In a practical sense, this study offers useful and specific managerial guidelines for effective IC management to practitioners in the Australian biotechnology industry. Keywords: Human Resource Configurations, Intellectual Capital, Biotechnology Industry INTRODUCTION The resource-based view (RBV) of the firm has been given considerable attention (e.g., Barney, 1991; Diericks & Cool, 1989; Ray, Barney, & Muhanna, 2004; Rumelt, 1984; Wernerfelt, 1984; Wright, Dunford, & Snell, 2001), becoming one of the most frequently used theories within strategic human resource management (SHRM), accentuating the links between a firm’s internal resources, its strategy and its performance (Wright, McMahon, & McWilliams, 1994). SHRM scholars argue that human resources can assist to build sustained competitive advantages (Wright, et al., 2001; Wright & MacCallum, 1992). The RBV of the firm (Barney, 1991) serves as the grounding for the study as it brings legitimacy to the human resource assertion that people are strategically crucial for a firm’s success. The rise of the knowledge economy is attributable to the increased prominence of intellectual capital (IC) as a business and research topic (Petty & Guthrie, 2000), and the IC literature has grown tremendously in the past decade. The assertion that knowledge and brainpower supersede physical assets as the foremost source of competitive advantage is now commonly accepted in the management literature (Quinn, Anderson, & Frinkelstein, 1996; Stewart, 1997). In particular, the realisation that an organisation’s stock of intellectual assets is a critical contributor to its capacity to secure a sustainable competitive advantage is growing (Bismuth & Tojo, 2008). The ‘multi-faceted phenomenon’ of IC is of particular interest to organisations that derive their profits from innovation and knowledge-intensive services (Edvinsson & Sullivan, 1996). Biotechnology is one emerging industry with such characteristics which urgently requires more empirical studies since it is one of the fastest growing industries in Australia. In recent years, Australia has attracted much of the overall share of venture capital invested in the Asia Pacific region; it is the biotechnology hub of the Asia-Pacific region, increasingly being regarded internationally as a bio-innovation powerhouse. The significance of undertaking this study is threefold. Firstly, although it has been acknowledged by both academic and business strategists that human resource management (HRM) plays a key role in developing and managing strategic resources and core competencies, theoretical development and empirical studies have been slow to follow (Youndt & Snell, 2004). Secondly, the RBV of the firm (Barney, 1991) focuses on the internal resources of the firm as the foremost determinant of competitive advantages. Nevertheless, it can be argued that not all the resources that a firm owns or controls have the same strategic value. Some of a firm’s resources, such as intangible assets (IC), can be more valuable than others (e.g., Barney, 1991; Grant, 1996; Hall, 1992, 1993; Itami, 1987). IC is the source of a firm’s competitive advantage (Edvinsson & Malone, 1997) being of particular interest to firms deriving their profits from innovation and knowledge-

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intensive services (Edvinsson & Sullivan, 1996). Thirdly, it focuses on one single industry, the Australian biotechnology industry, rather than cross-industries or cross-sectors. Very limited empirical studies have been undertaken in the context of the Australian biotechnology industry; it is an emerging industry which urgently requires more empirical studies as Australia is largely accepted as an active biotech nation, claiming the sixth position globally in the industry (Herpin, Karuso, & Foley, 2005). LITERATURE REVIEW Human resource management has shifted away from being a cost factor to a success factor in an internal market (Afiouni, 2007). Coinciding with this shift was the rise of the resource-based view of the firm (RBV) (Barney, 1991), and the more strategic view of the firm championed by the intellectual capital (IC) movement. The resource-based view of the firm emphasises firm’s internal resources as the foremost determinant of competitive success. It brings legitimacy to the human resource assertion that people are strategically crucial for a firm’s success. Cappelli and Singh (1992) within the industrial relations literature, propose that the resource-based view might offer a theoretical rationale for why human resources could have implications for strategy formulation and implementation. The term ‘intellectual capital’ was first published by the American economist, John Kenneth Galbraith, in 1969 who believes that IC meant more than merely ‘intellect as pure intellectual’; it incorporated a degree of ‘intellectual action’ (Feiwal, 1975). The implication of this view is that IC is an ideological process rather than a static intangible asset in itself. Agreement on the categorization of IC elements has not yet been accomplished in the existing literature. Studies examining the development, use and performance effects of IC spent considerable time defining its subcategories of IC; nevertheless, great confusion still exists as to what the term IC actually represents (Edvinsson & Malone, 1997; Stewart, 1997). In general, three knowledge-categories are distinguished: knowledge related to employees (human capital), customers (customer or relational capital), and company only (structural or organisational capital). Youndt and Snell (2004) synthesised and conceptualised intellectual capital as having three distinct categories: human, organisational, and social capital. The present research stemmed from the Youndt and Snell’s (2004) classification of intellectual capital given that their work is considered to be the most comprehensive of the existing literature. Human capital can be considered as the most fundamental component of intellectual capital (N Bontis & Fitz-Enz, 2002; Edvinsson & Malone, 1997; Stewart, 1997; Sveiby, 1997) due to the fact that employees are the most valuable corporate asset. Human capital contains the knowledge, know-how, talent, expertise, and experience of an individual employee (Edvinsson & Malone, 1997) required to provide solutions to customers (Saint-Onge, 1996). Youndt and Snell’s (2004) define organisational capital as representing institutionalised knowledge and codified experience stored in databases, routines, manuals, structures, patents, trademarks and so forth. Social capital resides neither at the individual nor the organisational level. Adler and Kwon (2002) and Nahapiet and Ghoshal (1998) view social capital as an intermediary form of intellectual capital consisting of knowledge resources embedded within, available through, and derived from networks of relationships possessed by an individual or social unit, meaning the networks and relationships an organisation builds up both internally and externally. THEORETICAL FRAMEWORK AND HYPOTHESES DEVELOPMENT Youndt, Subramaniam, and Snell (2004) aver that a natural outcome of the various differences between the three IC elements (human, organisational, and social capital) is that each element requires distinctive HR investments. More specifically, this study hypothesises that the six HR configurations (recruitment & selection, training & development, information technology, egalitarian, and collaborative) facilitate the development of the three elements of IC (human, organisational, and social capital).. IC is of particular interest to firms that derive their profits from innovation and knowledge-intensive services (Edvinsson & Sullivan, 1996). This study proposes that each of the three IC elements require distinctive HR investments (Youndt, et al., 2004). Human capital requires the employing, training, and retaining of staff; organisational capital requires the establishment of knowledge storage devices and structured recurrent practices; and social capital requires the

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development of norms that facilitate interactions, relationships, and collaboration. Typically, human capital theorists have argued that firms can increase their human capital by either externally attracting individuals with high knowledge and skill levels from the labour market, or by internally developing their employees’ knowledge and skills (Hatch & Dyer, 2004; Youndt, et al., 2004). Firms can either ‘buy’ human capital externally, or ‘make’ human capital internally. A recruitment and selection HR configuration including comprehensive selections, complemented by higher wages and employee ownership can facilitate the development of human capital. Training and development have been the main focus of human capital theory for a long time. Firms can develop superior human resources through investments in training (Hatch & Dyer, 2004). Comprehensive training activities tend to be cornerstones of a ‘make’ strategy (Huselid, 1995; Snell, Lepak, Dean, & Youndt, 2000). In short, a training and development HR configuration including comprehensive training, complemented by promotion-from-within, development performance appraisal, and skill/knowledge-based pay can facilitate the development of human capital. Hypothesis 1: A recruitment & selection HR configuration positively affects an organisation’s level of human capital. Hypothesis 2: A training & development HR configuration positively affects an organisation’s level of human capital. While human capital can only be borrowed or rented, organisational capital is the only sort of intellectual capital an organisation actually owns. The core responsibilities of the HRM function in developing organisational capital are to create and/or to fill knowledge storage bins and repositories. A firm can either institutionalise knowledge into organisational capital or interface with it by providing an infrastructure that supports this knowledge codification. A documentation HR configuration including knowledge codification, employee work redesign, and employee suggestion systems can facilitate the development of organisational capital. Information systems form the backbone or infrastructure of many knowledge management efforts in firms (Davenport & Prusak, 1998; Huber, 1990; Stewart, 1997). An information systems HR configuration focuses on accessibility, user-friendliness, and integration to facilitate the development of organisational capital. Hypothesis 3: A documentation HR configuration positively impacts an organisation’s level of organisational capital. Hypothesis 4: An information systems HR configuration positively affects an organisation’s level of organisational capital. Building social capital requires a collaborative organisational environment where knowledge and information can flow freely. Pfeffer (1994) points out that an egalitarian HR configuration consists of five categories: eliminating status symbols, creating flatter firms, minimising job classifications, utilising flat pay structures and empowering employees. An egalitarian HR configuration which includes elimination of status symbols, and hierarchical levels, minimisation of job classification, utilisation of flat pay structure, and empowerment can facilitate the development of social capital. A collaborative HR configuration focuses on permeability and network intimacy of work structure, teamwork, and group incentives to facilitate the development of social capital. Hypothesis 5: An egalitarian HR configuration positively affects an organisation’s level of social capital. Hypothesis 6: A collaborative HR configuration positively affects an organisation’s level of social capital. METHODOLOGY A census sample size was used as the sampling frame of the Australian biotechnology companies is not very large (777 companies). In total, 158 out of 777 questionnaires were returned, indicating the response was 20.33 percent. The multi-item scales of the six HR configurations (1)recruitment & selection, 2) training & development, 3) documentation, 4) information systems, 5) egalitarian, and 6) collaborative) were mainly derived from Youndt and Snell’s (2004) empirical study. Intellectual capital, was conceptualised into three constructs (human, organisational, and social capital), and then each construct was operationalised and measured by five-, four-, and five- item scales respectively. Quantitative data analyses include preliminary analyses, confirmatory factor analysis (CFA), and regression analyses. CFA was performed through LISREL 8.72 for construct validity verification (convergent validity, discriminant validity, nomological validity and face validity) and the overall goodness of fit of the proposed model.

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FINDINGS AND DISCUSSIONS Convergent validity (factor loadings, variance extracted, and construct reliability) resulted in all factor loadings being significant (at least at 95 % confident interval), variance extracted by each construct was adequate convergence (all above the accepted level of 0.5), and construct reliability was good (all above the accepted level of 0.7). Discriminant validity resulted in the difference of χ² all being greater than 3.84; therefore, discriminant validity was established at 95 percent confidence with a degree of freedom being one. CFA was used to test whether the measurement theory of intellectual capital (human, organisational, and social capital) confirms or rejects the results of Youndt and Snell’s (2004) study. Overall, the results of CFA (Table 1) were satisfactory; therefore, the present study confirms Youndt and Snell’s (2004) measurement theory of intellectual capital as no item has being deleted. Table 1: Overall Goodness of Fit Index of the Measurement Models Goodness of fit χ² with 74 degrees of freedom (d.f.) =148.97 Incremental Fit Index (IFI) =0.98 Goodness of Fit Index (GFI) =0.88 Adjusted Goodness of Fit Index (AGFI) =0.83 Root Mean Square Residual (RMSR) =0.050

(p=0.000)

The results of regression analyses are presented in Table 2. Firstly, support was found for Hypotheses 1 and 2 as the recruitment & selection (standardised beta=.237, p