Effect of Innovation Capability on Human Capital and Organizational Performance

Transcription

1. International Journal of Advanced Science and Technology Vol . 29, No. 14, (2020), pp. xx-xx Effect of Innovation Capability on Human Capital and Organizational Performance Bablu Kumar Dhar*1, Mahazan Mutalib2, Faird A. Sobhani3 1 Assistant Professor, Faculty of Business, Daffodil International University, Bangladesh 2 Associate Professor, Faculty of Leadership and Management, Universiti Sains Islam Malaysia, Malaysia 3 Professor, Faculty of Business, United International University, Bangladesh *1 drbablu.ba@diu.edu.bd; 2mahazan@usim.edu.my; 3drsobhani@uiu.ac.bd Abstract The concept of the production-based economy has moved to the knowledge-based economy where knowledge becomes the new engine of corporate expansion. From the human resource point of view, human capital, being a vital element of intellectual capital, plays a significant role in the case of emerging performance of an organization in this knowledge-based economy. The research intends to explore the relationship between human capital and organizational performance on the listed Islamic Banks under Dhaka Stock Exchange of Bangladesh through mediating effect (innovation capability) and by improvising motivation as moderator. Data were gathered randomly selected from 170 branch managers of six registered Islamic Banks under Dhaka Stock Exchange of Bangladesh. Based on accumulated data, SPSS 25 was applied to obtain a detailed assessment. Structure Equation Model (SEM) was utilized to analyze the reliability and validity measure for the model. SmartPLS 3.2 was employed to evaluate the measurement model and the structural model. Applying SEM, the study discovers that human capital has a substantial influence on organizational performance through innovation capability, whereas the moderating effect of motivation decreases the relationship. The finding of the study advocates that Islamic banks should highlight more on human capital to maintain the performance. The present research contributes to the current literature of human capital practices where there has been a shortage of research works in the perspective of Islamic Banks of Bangladesh. Keywords: Human capital, organization performance, innovation capability, motivation, Islamic banks of Bangladesh 1. Introduction Precisely, according to the Holy Qur'an 95:4, the Almighty has created human of the best stature as the perfect pattern of creation which indicates to the human being as the best and the noblest creation of the Almighty. Through human being’s physical construction or human potentiality or human soul and mind, we discover a profound glimpse of HIS wisdom (Dhar, 2019a). When a human uses his or her knowledge, potentiality and skill to make up the labor force of a firm, business or economy is known as human resource. Without this human resource, it is quite challenging to handle other physical resources. Sustainability and development of any organization depend on the efficacy of its human as human control all other resources (Dhar and Hoque, 2015). ISSN: 2005-4238 IJAST Copyright ⓒ 2020 SERSC 1
2. International Journal of Advanced Science and Technology Vol . 29, No. 14, (2020), pp. xx-xx In this competitive world and knowledge-based economy, without the perfect implementation of human capital, an integrated part of intellectual capital, it will be highly laborious for any organization to handle other physical resources (Akintoye et al., 2015). To extinct shortly, human civilization needs to move towards intellectual capital through innovation capacities from commodity-based capital. As technology changes day by day, as a result, human (homo sapience or Ashraful Makhluqat) needs to be motivated enough to adopt the innovation capability for better organizational performance (Dhar, 2019 a,b). Most recent researches on human capital and its relationship with performance have been performed based on various sectors of different countries (Asiaei et al., 2018; Felício et al., 2014; Lajili et al., 2017; Mastromarco and Simar, 2017; Rahim et al., 2017) except Bangladesh. Bangladesh uses disclosures of human resources in their annual reports only. However, the banking sector of Bangladesh controls the economy. Banking is one of the leading sectors among the listed industries where human resource is widely practised and disclosed in the annual reports (Amin and Aslam, 2017; Ullah and Karim, 2015). Moreover, banks of Bangladesh maintain most of the formalities regarding human resources (Sarkar et al., 2016), reliable data which are available in the form of published reports. The nature of the banking sector is “intellectually” concentrated; the entire staff (intellectually) is more standardized than in other economy segments. On the other hand, Dhaka Stock Exchange’s (DSE), the oldest and largest Stock Exchange, of Bangladesh, the website focuses on the report on matters such as an overview of the company, products and services, management and human resources, corporate governance, corporate social responsibility, investor relations, and financial features where a total number of 22 sectors of industries and 564 companies are listed (Mitra et al., 2017). Thus, the purpose of the current study is to investigate the moderating effect of motivation between human capital and organizational performance through innovation capability among the listed Islamic banks under Dhaka Stock Exchange (DSE). The remaining portion of this research is planned as follows: Section 2 defines the relevant literature on human capital and its dimension, organizational performance, and analysis of gap; Section 3 focuses on research model and hypotheses based on dependent, independent, mediating and moderating variables; Section 4 indicates on methodology (sampling and measurement); Section 5 specifies analysis of data, and Section 6 presents conclusion which includes future research directions. 2. Literature Review 2.1 Human Capital In 1964, Baker introduced the theory of Human Capital. Becker observed that the presence of high levels of human capital influences the superiority of business behaviour. The human capital theory remains a powerful influence in the knowledge-based economy (Fitzsimons, 2015). This theory reflects that knowledge brings more considerable cognitive skills to individuals, thus impelling their prospective efficiency and productivity to develop activities (Gillies, 2014). A substitutable outcome exists between human and financial capital (Bowman and Swart, 2007). For acquiring comprehensive benefit of human capital, top management needs to be conscious about the human resources of the organization to emphasize the useful application of collective knowledge. For dynamic development, the organization desires to establish a unique resource by embedding its human capital (Karimi, 2014). Additionally, human capital includes individual’s attributes as formal education, experience, knowledge and expertise (Felício et al., 2014; Lafuente and Rabetino, ISSN: 2005-4238 IJAST Copyright ⓒ 2020 SERSC 2
3. International Journal of Advanced Science and Technology Vol . 29, No. 14, (2020), pp. xx-xx 2011) which ensures business success (Pena, 2004) and more extensive range of opportunities (Davidsson and Honig, 2003). Previous researchers emphasized the importance of analytical thinking, systems integration and experiment. According to them, for strengthening knowledge and utilizing intellectual capital, an organization should focus on developing the skill of the employees. Throughout learn ing, experience, education, expertise, creation and innovation of employees, human capital vintages the best results of the performance of an organization (Sharabati et al., 2010). 2.2 Organizational Performance The goal of a business organization is the maximization of wealth for stakeholders (Becker and Fuseli, 1998). According to the research of Cabrita and Bontis (2008); Dhar (2019a,b); Dhar et al. (2017, 2018); Karimi (2014); Sharabati et al. (2010), and Shih et al. (2010) human efficiency, profitability and market assessment are three significant signs of business performance. Based on Karimi (2014), human productivity denotes the correlation between input (what is put into the business) and output (result) where through training and remuneration, the input can be evaluated and through profit per employee, the output can be assessed. Moreover, the output can be measured in two ways; based on actual goods and services generated and by considering people relative to crucial financial accomplishment. Profitability arises when revenue surpasses over the costs. Profitability can be assessed using sales growth and profit expansion. Sales growth is the increase in sales over a specific period, and profit growth is a combination of profitability and development (Dhar et al., 2017). Market valuation implies when market value outstrips its book value. The market valuation is the ratio of the total market capitalization, which is the average share price time’s number of outstanding common shares to book value of net assets (Karimi, 2014). 2.3 Human Capital and Organizational Performance Organizations retain several numbers of resources that affect their performance (Yaseen et al., 2016). In this sense, human capital not only contributes to the organizational performance from entrepreneurial competence, creativity perspectives and motivation (Chen and Chang, 2013) but also to the national economic growth (Neeliah and Seetanah, 2016). The researchers of social science consider human capital as the collection of skillful and knowledgeable persons (Demartini and Paoloni, 2011) and Chen and Chang (2013) and Felicio et al., (2014) observed that knowledge and skills persons have a positive influence on firms’ performance. In Islamic banks of Bangladesh, around 30,000 people work in different sectors among 960 branches (Akhtaruzzaman, 2016) and the performance of Islamic banks of Bangladesh depends on the utilization of its human capital (Kamal, 2019). Performance and motivation of the employees are indispensable tools for the success of any organization in the long run (Kontoghiorghes, 2016; Shin and Konrad, 2017). Turner (2011) used motivation as a moderating variable between social capital and organizational performance, whether Belenzon and Schankerman (2015) worked on motivation and human capital. Moreover, innovation, dissemination, acquisition, and use of new knowledge is intimately related to organizational performance (Zhou et al., 2017). Though previously several factors have been measured as applicable antecedents of innovation, scholars have emphasised on individual’s knowledge employed in an organization recognized as human capital as one of the prime resources for innovation and becomes a potent mediator between intellectual capital and organizational performance ( Osman, 2014). However, previous research rarely scrutinized the moderating effect of motivation between human capital and organizational performance through ISSN: 2005-4238 IJAST Copyright ⓒ 2020 SERSC 3
4. International Journal of Advanced Science and Technology Vol . 29, No. 14, (2020), pp. xx-xx innovation capability among the Islamic banks of Bangladesh though most of the recent researches have focused on the potential impact of the human capital on organizational performance (Chatterjee, 2017; Currie and MacLeod, 2017). Thus, existing research is based on the premise that organizational performance of Islamic banks of Bangladesh may depend on the components of human capital (experience and expertise, learning and education, and innovation and creation) through mediating effect of innovation capabilities and moderating effect of motivation. 3. Research Model and Hypotheses Empirical evidence recommends that human capital has a positive influence on organization performance (Karimi, 2014) though a few evidences recommend inverse relationship (Yaseen et al., 2016). However, until now, there is an option to explore the influence of human resource on performance among Islamic banks of Bangladesh. The following hypotheses try to find out the fact regarding this issue: 3.1 Learning and Education Advanced level of education is positively correlated with performance (Felício et al., 2014). Though according to Davidsson and Honig (2003), conventional education does not seem to be a controlling aspect of accomplishment throughout the business process or in terms of the development of activities. Consequently, it is necessary to justify the following hypothesis: H1a: Learning and education influence organizational performance in the Islamic Banks of Bangladesh 3.2 Experience and Expertise Experience of work, management and entrepreneurial are related to the activities of the organization (Felício et al., 2014). Based on the research of Davidsson and Honig (2003), harmonization of knowledge become isolated among people through work experience. On the contrary, Cohen and Levinthal (2000) mentioned that the accumulation of new knowledge depends on explicit knowledge (developed in educational institutions) and implicit knowledge (developed through experience). Thus, the study needs to test the following hypothesis: H1b: Experience and expertise influence organizational performance in the Islamic Banks of Bangladesh 3.3 Innovation and Creativity According to Karimi (2014) and Sharabati et al. (2010), innovation is a type of process by which a unique idea is put into practice. Innovation ties the world of ideas to the world of human activities. The most usually used measures of innovative activities contain: RandD expenditures, innovation counts and patent counts. On the other hand, creativity indicates the capability to think a new idea, or it is the aptitude to re-think an existing idea. Innovation and creativity can also be mentioned in an organization for better performance (Yates-Mercer and Bawden, 2002). Therefore, the following hypothesis is raised: H1c: Innovation and creation influence organizational performance in the Islamic Banks of Bangladesh 3.4 Innovation Capability Innovation capability is becoming an integral part of the business (Rajapathirana and Hui, 2017). It is extensively approved that an organization’s innovation capability is precisely associated with intellectual capital as the resource of knowledge of an ISSN: 2005-4238 IJAST Copyright ⓒ 2020 SERSC 4
5. International Journal of Advanced Science and Technology Vol . 29, No. 14, (2020), pp. xx-xx organization utilizes this capital for achieving sustainable accomplishment (Osman, 2014). Moreover, other researchers claim that innovation capability relies on knowledge that permits firms to enrich or develop new technologies (Wonglimpiyarat, 2010). Hogan et al. (2011) used a ‘three-dimensional innovation capability scale’ for service firms containing Technology-focused innovation capability (TFIC), Client-focused innovation capability (CFIC), and Marketing-focused innovation capability (MFIC). Moreover, there is a positive relationship between innovation capability and firm’s performance (Zhou et al., 2017). As banking is a service-based industry, there is an option to explore on the influence of innovation capabilities on performance among Islamic banks of Bangladesh. The following hypotheses intend to find out the fact regarding this issue: H2a: Human capital influences innovation capability in the Islamic Banks of Bangladesh H2b: Innovation capability influences organizational performance in the Islamic Banks of Bangladesh H2c: Human capital influences organizational performance through innovation capability in the Islamic Banks of Bangladesh 3.5 Motivation Performance is a function of the interaction between cognitive ability and motivation (Van Iddekinge et al., 2018). Through motivation, performance increases (Hackney, 2017; Menges et al., 2017). Nearly all organizations, the management employees’ motivation as a fruitful technique to boost employee productivity. As there are options to develop human of the organization according to the concept of human resource management, motivation plays an essential part. According to Zhu et al. (2016), motivation and performance of employees are essential tools for the achievement of an organization in the long run. Thus, the study intends to use motivation as moderator and to justify the use of motivation between human capital and organizational performance using the underlying hypothesis: H3: Motivation has moderator effect between human capital and organizational performance in the Islamic Banks of Bangladesh Based on the literature, there is a possibility of research to evaluate the moderating influence of motivation between human capital and organizational performance through innovation capability. Fig. 1 implies the research model based on the gap of literature: Fig. 1. Conceptual research model 4. Methodology 4.1 Sampling The study applied simple random sampling. Through this sampling technique, the population, managers of different branches of different Islamic banks of Bangladesh, has equal chances to be selected for the study. The entire population were 829 managers of ISSN: 2005-4238 IJAST Copyright ⓒ 2020 SERSC 5
6. International Journal of Advanced Science and Technology Vol . 29, No. 14, (2020), pp. xx-xx the branches among 6 Islamic banks of Bangladesh under Dhaka Stock of Exchange (DSE). The table of determining sample size from a finite population, 265 managers were selected as a sample to reflect the view of the total population as well as the to satisfy the purpose of this research whereas 170 completed questionnaires were returned. 4.2 Measurement For increasing more reliability and convenience to answering, a seven-point Likert scale questionnaire has been adopted based on the previous studies. The study adopted three dimensions of human capital, ‘learning and education, experience and expertise, and innovation and creation’, based on Karimi (2014) and Sharabati et al. (2010); innovation capacity as mediating based on Turner (2011), motivational effect as moderator based on Osman (2014); three dimensions of organizational performance, ‘human productivity, profitability and market valuation’, based on Karimi (2014) and Sharabati et al. (2010). Based on these dimensions, a questionnaire has been divided into six sections: respondents’ information, practices of human capital (learning and education), practices of human capital (experience and expertise), practices of human capital (innovation and creation), innovation capability, motivational effect, and organizational performance. 5. Data Analysis and Results Based on collected data, Statistical Package for the Social Sciences (SPSS) program version 25 was used to find the descriptive analysis. Structural Equation Model (SEM) was utilized to analyze the reliability and validity for the model and to establish the significant influence between the independent variables, dependent variable, mediating variable and moderating variable from accumulated data. The statistical program, SmartPLS Version 3.2, was used to evaluate both measurement model (inner) which is related to reliability and validity of the scales and structural model (outer) which shows the relationships (paths) between the research constructs, and SEM is implemented to scrutinize the research hypotheses (Alavifar et al., 2012; Hair et al., 2017; Masruki et al., 2020; Yaseen et al., 2016). In Islamic Banks of Bangladesh, there is no female manager. Out of respondents, 70.0% were between 40 to 49 years old, and about 94.1% of them had a master’s degree. Out of them, 90.6% have 16 years above working experience. Table 1: Describes the demographic profile of the respondents Experience level (in years) Age Education Gender ISSN: 2005-4238 IJAST Copyright ⓒ 2020 SERSC 1-5 6- 10 11- 15 Above 15 Total less30 30 – 39 40 – 49 Above 50 Total Diploma Bachelor degree Master degree Doctorate degree Total Male Female Total Frequency 2 3 11 154 170 0 29 119 22 170 2 2 160 6 170 168 0 170 Per cent 1.2 1.8 6.5 90.6 100.0 0.0 17.1 70.0 12.9 100.0 1.2 1.2 94.1 3.5 100.0 100.0 0.0 100.0 6
7. International Journal of Advanced Science and Technology Vol . 29, No. 14, (2020), pp. xx-xx 5.1 Measurement model Construct reliability, individual item-wise reliability, discriminant, and convergent validity of all measurement items need to be examined. Reliability measures were examined using individual item-wise reliability and internal consistency of the scale. Specific item reliability needs to be measured in terms of standards loading of individual item into its original variable. Cronbach's alpha loading values of each item needs to be at least equal to or higher than 0.7. Average variance extracted value of 0.50 or higher signifies that the construct explains more than half of the variance of its indicators. Convergent validity was assessed by analyzing the composite reliability and the average variance extracted. Composite reliability values between 0.70 and 0.90 can be regarded as acceptable (Hair et al., 2017; Yaseen et al., 2016). Table 2: Reliability and convergent validity Construct Cronbach's Alpha CR Learning and Education 0.949 0.958 Experience and Expertise 0.964 0.969 Innovation and Creation 0.977 0.980 Innovation Capability 0.914 0.924 Motivation 0.947 0.966 Organizational Performance 0.985 0.987 AVE 0.697 0.757 0.829 0.676 0.904 0.884 R2 0.925 Note: CR= Composite Reliability; AVE= Average Variance Extracted Table 2 demonstrations that reliability and convergent validity. The data indicates that measures are vigorous in terms of their internal consistency reliability. Cronbach's alpha, for all factor loadings, is higher than 0.7 and more significant. Composite reliability (CR) of all constructs was above 0.8, the average variance extracted (AVE) for every measurement exceeded 0.50 and R2 is more than 0.5. Table 3: Discriminant validity Constructs IC EandE IandC Innovation Capability (IC) 0.759 Experience and Expertise (EandE) 0.744 0.870 Innovation and Creation (IandC) 0.696 0.722 0.910 Learning and Education (LandE) 0.687 0.638 0.775 Motivation (M) 0.682 0.634 0.760 Organizational Performance (OP) 0.636 0.661 0.711 LandE M OP 0.835 0.798 0.769 0.951 0.805 0.940 Table 3 demonstrates the correlation matrix of the model constructs. Moreover, it demonstrates the square roots of the average variance extracted. For stipulating that, square roots of average variance extracted are more than the correlation between construct and other constructs, discriminant validity was measured. (Yaseen et al., 2016). 5.2 The structural model Research model was analyzed using Partial Least Square structural equation modeling (SmartPLS 3.2) tool which assesses psychometric properties of measurement model. Moreover, it evaluates parameters of structural model. SmartPLS develops componentbased approach to structural equation model by using bootstrapping method. Moreover, SmartPLS path model entails of two essentials: Inner model (measurement model) and outer model (structural model) (Yaseen et. al, 2016). ISSN: 2005-4238 IJAST Copyright ⓒ 2020 SERSC 7
8. International Journal of Advanced Science and Technology Vol . 29, No. 14, (2020), pp. xx-xx Fig. 2: Results of PLS analysis (Total effect) Fig. 3: Results of PLS analysis (mediating effect) Fig. 4: Results of PLS analysis (effect of dimensions of IV on DV) ISSN: 2005-4238 IJAST Copyright ⓒ 2020 SERSC 8
9. International Journal of Advanced Science and Technology Vol . 29, No. 14, (2020), pp. xx-xx Fig. 5: Moderating Effect Fig. 2 and 3 indicate on total effect, mediating effect, path coefficients and p-values of the research model similar to Hayes (2009). Fig. 4 focus on the effect of dimensions of human capital on organizational performance where it shows there are significant effects between learning and education and experience and expertise on organizational performance. However, innovation and creation show the opposite effect. Fig. 5 emphasis on moderating effect, based on Dawson (2014) where it illustrates that motivation decreases the positive relationship between human capital and performance. Path Table 4: Results of Hypotheses β T-stat. Learning and Education → Org Per Experience and Expertise. → Org Per Innovation and Creation → Org Per Human Capital → Innovation capability Innovation capability → Org Per Human Capital → Inn. Cap. → Org Per Human Capital →Motivation → Org Per 0.486 0.356 0.066 0.868 0.386 0.620 -0.072 3.960 2.580 0.562 44.022 4.374 9.370 1.977 Level of Sig. 0.000 0.010 0.574 0.000 0.000 0.000 0.049 Results Accepted Accepted Rejected Accepted Accepted Accepted Accepted Results of the purposed hypotheses summarized in Research model accounts for 0.925 (Table 2). Table 4 indicates that all path coefficients (β) are statistically significant and positive (p<0.05) expect the relationship between innovation and creation and organizational performance. In case of the dimension of human capital, ‘learning and education’, and ‘experience and expertise’ have a significant positive relationship (β=0.486; p<0.05 and β=0.356; p<0.05) with organizational performance among the Islamic banks of Bangladesh. On the contrary, ‘innovation and creation’ does not have a significant relationship with organizational performance as (β=0.066; p>0.05). Moreover, Table 4 shows human capital with innovation capability, and innovation capability with organizational performance have found a statistically significant effect with path coefficients β=0.868; p<0.05 and β=0.386; p<0.05, respectively. From the analysis, it is clear that there is a positive indirect relationship (β = 0.620) among human capital, innovation capability and organizational performance though the direct relationship between human capital and innovation capability is high (β =0.868), and innovation capability and organization performance is poor (β = 0.386). From the above analysis, it is clear that learning and education and experience and expertise have a positive impact on the performance of the Islamic banks of Bangladesh, whether ‘innovation and creation’ does not have. On the other hand, innovation capability ISSN: 2005-4238 IJAST Copyright ⓒ 2020 SERSC 9
10. International Journal of Advanced Science and Technology Vol . 29, No. 14, (2020), pp. xx-xx plays a positive mediating impact between human capital and performance of Islamic banks of Bangladesh. Moreover, the motivational effect reduces the positive relationship between human capital and performance of Islamic banks of Bangladesh. 6. Conclusions This study explored the moderating effect of motivation between human capital and organizational performance through innovation capability among DSE’s listed Islamic banks of Bangladesh. The study findings specified that human capital has positive effects on organizational performance through innovation capability and among the dimensions of human capital, learning and education has the most significant effect on organizational performance. Moreover, motivation, being a moderator, diminishes the positive relationship between human capital and performance. The study contributes to the remaining literature of human capital practices where research works have been deficient in the context of Islamic Banks of Bangladesh. Despite the significance of this research, it grips some confines. First, this research is based on the Islamic banking sector of Bangladesh, which does not reflect the overall scenario of the banking sector of Bangladesh. Moreover, this result may not generalize to developed countries as it is based on a developing country. Second, this study uses motivation as moderator, whereas few other researchers use environmental turbulence as moderator. Third, inadequate response rate. These limitations lead to further research. More research can be done on other banks as well as other industries, and more moderating effect can be used, and comparative studies can be done among industries and countries. Acknowledgement The study was supported by Graduate Assistance Scheme, Pusat Pengurusan Penyelidikan and Inovasi (PPPI) of University Sains Islam Malaysia (USIM). References [1] Akhtaruzzaman (2016) Developments of Islamic Banking in Bangladesh. Internal and Islamic Economics Division, Research Department, Bangladesh Bank (Central Bank of Bangladesh). [2] Akintoye, I.R, Segun, O, P and Oyetola. O. (2015). Accounting for Human Asset in the Statement of Financial Position: How Realistic is the Lev and Schwartz Model? British Journal of Arts and Social Sciences, 20 (2), 67-87. [3] Alavifar, A., Karimimalayer, M., and Anuar, M. K. (2012). Structural equation modeling vs multiple regression. Engineering Science and Technology: An International Journal, 2(2), 326-329. [4] Amin, S., and Aslam, S. (2017). Intellectual Capital, Innovation and Firm Performance of Pharmaceuticals: A Study of the London Stock Exchange. Journal of Information and Knowledge Management, 16(02), 1750017. [5] Antoni, C. H., Baeten, X., Perkins, S., Shaw, J. D., and Vartiainen, M. (2015). Reward management-linking employee motivation and organizational performance: a special issue of the Journal of personnel psychology. Journal of personnel psychology. [6] Asiaei, K., Jusoh, R., and Bontis, N. (2018). Intellectual capital and performance measurement systems in Iran. Journal of Intellectual Capital, 19(2), 294-320. ISSN: 2005-4238 IJAST Copyright ⓒ 2020 SERSC 10
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