Human Capital Investments and Employee Performance: An Analysis of IT Services Industry

Abstract

The rapid pace of technological innovation necessitates Information Technology (IT) services firms to continually invest in replenishing the skills of their key asset base, the human capital. We examine whether human capital investments directed towards employee training are effective in improving employee performance. Our rich employee level panel data set affords us the opportunity to link formal training with performance at the individual employee level. Using a dynamic panel model, we identify a significant positive impact of training on employee performance. A unit increase in training is linked to a 2.14% increase in an employee’s performance. Interestingly, we find that in the IT sector skills atrophy and consequently high experience employees reap higher returns from training, highlighting the uniquely dynamic nature of IT knowledge and skills. We also find that general training that an employee can utilize outside the focal firm improves employee performance. However, specific training pertinent to the focal firm is not positively linked to performance. On the other hand, while domain and technical training both enhance employee performance individually, the interaction between the two suggests a substitutive relationship. Thus our findings suggest that the value of training is conditional upon a focused curricular approach that emphasizes a structured competency development program. Our findings have both theoretical and practical significance, most important of which is that they justify increased human capital investments to fuel future growth of this important component of the global economy.

Keywords: Training and productivity, IT services, dynamic panel model, employee performance, Indian IT industry, human capital theory