Estimating Returns to Training in the Knowledge Economy: A Firm Level Analysis of Small and Medium Enterprises

MIS Quarterly, Volume 38, Number 3, September 2014

38 Pages Posted: 22 Aug 2014

See all articles by Amit Mehra

Amit Mehra

University of Texas at Dallas

Nishtha Langer

Rensselaer Polytechnic Institute

Ravi Bapna

University of Minnesota - Minneapolis

Ram D. Gopal

University of Connecticut - Department of Operations & Information Management

Date Written: August 21, 2014

Abstract

The ongoing digitization of multiple industries has drastically reduced the half-life of skills and capabilities acquired by knowledge workers through formal education. Thus, firms are forced to make significant ongoing investments in training their employees to remain competitive. Existing research has not examined the role of training in improving firm level productivity of knowledge firms. This paper provides an innovative econometric framework to estimate returns to such employee training investments made by firms. We use a panel dataset of small-to-medium sized Indian IT services firms and assess how training enhances human capital, a critical input for such firms, thereby improving firm revenues. We use econometric approaches based on optimization of the firm’s profit function to eliminate the endogenous choice of inputs common in production function estimations. We find that increase in training investments is significantly linked to increase in revenue per employee. Further, marginal returns to training are increasing in firm size. Therefore, relatively speaking, large firms benefit more from training. For the median company in our data, we find that a dollar invested in training yields a return of $4.67, and this effect approximately grows 2.5 times for the 75th percentile sized firm. A variety of robustness checks, including the use of Data Envelopment Analysis, are used to establish the veracity of our results.

Keywords: IT services, non-linear growth, ROI of training, productivity, human capital

Suggested Citation

Mehra, Amit and Langer, Nishtha and Bapna, Ravi and Gopal, Ram D., Estimating Returns to Training in the Knowledge Economy: A Firm Level Analysis of Small and Medium Enterprises (August 21, 2014). MIS Quarterly, Volume 38, Number 3, September 2014 . Available at SSRN: https://ssrn.com/abstract=2484499

Amit Mehra

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835083 (Phone)

Nishtha Langer (Contact Author)

Rensselaer Polytechnic Institute ( email )

110 8th St
Lally School of Management
Troy, NY 12180
United States
+15182764414 (Phone)

Ravi Bapna

University of Minnesota - Minneapolis ( email )

321 19th Ave S
Information and Decision Sciences
Minneapolis, MN 55455
United States

Ram D. Gopal

University of Connecticut - Department of Operations & Information Management ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

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