CHAPTER TWO

LITERATURE REVIEW

2.0 Preamble

This chapter reviews the theoretical foundations and empirical studies related to human capital

development and organizational performance. The chapter is structured into three main sections:

theoretical frameworks that underpin the study, conceptual clarifications of key terms, and

empirical reviews of previous research in the area. These sections collectively provide the

intellectual foundation for investigating the relationship between human capital development and

organizational performance among fintech companies in Lagos State, Nigeria.

2.1 CONCEPTUAL REVIEW

2.1.1 Human Capital Development

Human capital according to Mustapha (2019) consists of knowledge, skills, dexterity and

personality attributes that enable individuals to perform particular tasks in an attempt to produce

goods and services that have economic value to the people. For effective and efficient human

capital development, organizations must place concerted efforts in training employees to take

abreast of its changing business environment for improved job performance in organizations

(Mustapha, 2019).

Schultz (1961), who largely described the concept as human qualities beneficial to a company, is

credited with coining the term "human capital." The value of human capital is based on how

much it helps an organization gain a competitive edge (Omada & Nweze, 2022). According to

Schultz (1993), the practice of professional training, imparting knowledge so that employees can

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acquire the skills, knowledge, and abilities necessary to be satisfied and motivated to perform, is

seen as a factor that improves employees and firms' assets to increase productivity and compete

in the market.

Human capital development, according to Harbison (1973), is the intentional and continuous

process of learning the necessary information, skills, and experiences that are utilized to produce

economic value to promote sustainable development. Additionally, Ejere (2011) proposed that

human capital simply refers to the components of the production process and is made up of the

workforce's collective knowledge, skills, or competences and talents (Omada & Nweze, 2022).

Human capital development is the process by which organizations help their employees to

acquire or sharpen abilities required to perform functions associated with their present or

expected job roles; develop their skills, and discover and utilize their potential (Lekan-

Akomolafe, 2023). The knowledge, skills, aptitudes, and other learned qualities that boost

production are a fair description of human capital (Omada & Nweze, 2022).

Schultz (1993) described "human capital" as a crucial component in enhancing a firm's assets

and workforce to boost productivity and maintain competitive advantage. As a result, "the

information, skills, abilities, and traits embodied in humans that facilitate the construction of

personal, societal, and economic well-being" is the definition of human capital (Organization for

Economic Co-Operation and Development or OECD, 2001: 18).

Human capital development, on the other hand, is a process used by organizations to enhance the

performance and capabilities of their workforce (Omada & Nweze, 2022). Human capital

development is focused on increasing employee productivity and is crucial to the success of a

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firm. Creating the right atmosphere for employees to learn and apply innovations, ideas, gain

new competences, improve skills, behavior, and attitude is a crucial step in developing human

capital.

Machines are no longer seen as the engines of progress; instead, people and businesses today see

human capital as the only means of achieving organizational success (Omada & Nweze, 2022). It

is impossible to overstate the value of human assets and capital. Many outstanding leaders who

have distinguished themselves in the corporate world through their deeds assert that while every

organization can purchase the same machinery, infrastructure, and materials, what distinguishes

one organization from another is its human capital, which cannot be replicated.

The primary area of concern in the business world has historically been finding the proper

individual for the job and then keeping him there, but now the emphasis is also on inspiring and

developing them (Omada & Nweze, 2022). Therefore, focus is placed on designing policies and

programs in a way that promotes the growth of the workforce, which in turn improves

organizational performance.

Human capital presents the image of the background knowledge of individuals grouped in the

organizations composite ability to disclose the optimum solution from its distinct employees

(Mgbemena et al., 2022). The sum of employee's skill, abilities, experience and knowledge is

known as human capital. Rastogi (2020) stated that human capital is an important input for

organizations especially for employees' continuous improvement mainly on knowledge, skills,

and abilities.

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Armstrong (2016) refers to human capital as human resources. He said that human capital is of

two dimensions: first is the financial, physical capital which he called the tangible assets. The

second is the intellectual capital which he called the intangible assets. He went ahead to say that

managing people is the same thing as managing other physical assets. He believes that

organizations create value through the intangible assets or the intellectuals in people (Mgbemena

et al., 2022).

Human capital development at the organizational level is usually human resource development.

Human resource development as described by Olusegun, Ajani, Adetunji, and Olomu Bayo

(2018) involves introducing, eliminating, modifying, directing and guiding processes in such a

way that all individuals and teams are equipped with the skills, knowledge and competences they

require to undertake current and future tasks required by the organization. The elements of the

human resource development process include learning, education, development skills,

knowledge and training (Armstrong, 2018).

2.1.2 Training

Training is defined as the process of acquiring specific skills, information, routines, and attitudes

in employees with the aim of enhancing effectiveness and efficiency for future organizational

positions (Omada & Nweze, 2022). According to Lekan-Akomolafe (2023), training is learning

and development undertaken with the intention of supporting the development and maintenance

of operational capability in employment.

Developing skills for work and in work, on the job or off the job, to enable effective performance

in a job or role is what is meant by training, which is defined as learning and development

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undertaken with the intention of supporting the development and maintenance of operational

capability in employment (Omada & Nweze, 2022). Personal competencies, adaptability, and

flexibility, as well as organizational development potential and employability, are all parts of

what Garavan et al. (2001) define as human capital. These factors enhance the value of both

employees and organizational outcomes.

Training gives employees a variety of attitudes, routines, and skills, preparing them to hold a

variety of positions in the future (Omada & Nweze, 2022). An organization must set up training

programs in order to have a well-developed staff. Training should be a continual program and a

lifelong activity. Giving an employee the necessary skills, knowledge, and competency to

maximize performance is what training and development is all about.

A thorough training and development program aids in considering the information, skills, and

attitudes required to meet company objectives and gain a competitive edge (Peteraf, 1993).

According to Apospori et al. (2008), training has a significant impact on performance. Because a

good training and development strategy can boost productivity and job quality, there is a

compelling need to develop staff (Abdus, 2011).

Therefore, training costs—also known as development costs—are any costs that an organization

incurs, directly or indirectly, to enhance its employees' talents, knowledge, and skills to perform

better (Omada & Nweze, 2022). Thus, the term "training cost" or "development cost" refers to

expenses for instructional materials and equipment, productivity losses from paying salaries

while in training, paying for lectures and training time, and the cost of training per employee.

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Training instills in employees a sense of the organization's commitment to them and ensuring

their future in the company, which inspires them to work harder and better (Omada & Nweze,

2022). Training also helps individuals enhance their expertise so that they may perform better

inside the company.

Effective employee training leads to an increase in quality goods and services as a result of

potentially fewer mistakes (Mgbemena et al., 2022). Consequently, accuracy, effectiveness, good

work, safety practices and good customer service can be expected. An intelligent and well-

trained workforce is central to both performance and the success of an organization.

Organizations can save money by retaining valuable employees: the costs of recruitment and

training of new entrants can be avoided.

Training provides employees with skills that improve their performance. As human performance

increases, business also improves. Rothwell and Kazanas (2006) are of the opinion that training

not only influences the bottom line, but is also critical in cost saving. As a consequence of

employee training, the level of turnover is reduced.

Investing in training and development is imperative for any organization, which will certainly

realize a return on investment in training and developing their workers (Mgbemena et al., 2022).

Those who neglect this important aspect of human resource management are bound to suffer the

consequences. When companies fall behind in the development of their human resources, they

are prone to fall behind in countless other ways as well.

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2.1.3 Innovation

Innovation refers to the process of creating, developing, and implementing new ideas, products,

services, or processes that add value to an organization. According to Chigozie et al. (2018),

innovation represents the ability of organizations to continuously learn, develop, share,

distribute, mobilize, cultivate, review and spread knowledge to compete effectively in the global

market.

In the context of human capital development, innovation encompasses the capacity of employees

to generate creative solutions, adopt new technologies, and improve existing systems and

procedures to enhance organizational performance. Organizational performance was viewed as a

multidimensional concept that included financial performance metrics, customer-related results,

innovation, and internal organizational processes by Kaplan and Norton (1992) and Richard et al.

(2009).

According to Rolstadas (1998), an organizational system's performance involves a complicated

interaction comprising seven performance criteria that must be adhered to: effectiveness,

efficiency, quality, productivity, quality of work, innovation, and profitability (Omada & Nweze,

2022). Innovation is therefore recognized as one of the critical dimensions of organizational

performance.

Managerial skills generate innovation and improve business processes (Lekan-Akomolafe,

2023). Human capital development in the form of knowledge and skills development have

positive significant relationship on innovation. Organizations that do not learn continuously and

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continuously list, develop, share, distribute, mobilize, cultivate, review and spread knowledge

will not be able to compete effectively in the global market (Chigozie et al., 2018).

The push for competitive advantage in the corporate climate of the twenty-first century has left

enterprises with the challenge of maximizing profits while delivering services with the utmost

efficiency and effectiveness with the available staff at their disposal (Omada & Nweze, 2022).

Innovation through human capital development provides organizations with the means to address

these challenges.

2.1.4 Efficiency

Efficiency refers to the ability of an organization to maximize outputs while minimizing inputs,

thereby achieving optimal productivity with available resources (Omada & Nweze, 2022).

Efficiency involves the rational utilization of human, financial, and material resources to

accomplish organizational goals with minimal waste, cost, and time.

Human capital development is an essential tool that helps people advance their knowledge and

abilities, which affects organizational performance and the effectiveness and efficiency with

which goals are achieved (Omada & Nweze, 2022). Human resource development strives to

develop people for potential problems and to have them ready to operate as effectively as they

can in the existing environment.

According to Rolstadas (1998), efficiency is one of the seven performance criteria that must be

adhered to in an organizational system's performance. The preservation and enhancement of any

organization's performance depends on the growth of its human capital (Ostroff & Bowen,

2000).

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Efficiency in organizational context reflects how well employees perform their tasks and how

effectively organizations convert their investments in human capital development into tangible

performance outcomes. Working groups' adoption of the best workplace innovations would raise

competences and boost business efficiency, but only if the HR-development activities are carried

out successfully (Marko, 2012).

Organizations are under intense pressure to increase their performance through cost reduction

and quality improvement because of the intensifying global competition (Omada & Nweze,

2022). Human capital development focused on increasing employee productivity is crucial to

achieving this efficiency and the success of a firm.

2.1.5 Organizational Performance

Performance of an organization is measured in terms of its financial, market, and shareholder

value (Omada & Nweze, 2022). It consists of an organization's actual production or results

compared to its projected output. Organizational performance is influenced by a variety of

elements, including but not limited to human and cultural characteristics, technological

advancements, and the availability of natural resources, economic factors, management

philosophies, and motivated behavior.

Since it serves as a useful benchmark for assessing both individual and organizational

performance as well as the performance of the entity from the perspective of stakeholders,

organizational performance has become the key focus for corporate managers over time (Omada

& Nweze, 2022). The interaction of an organization's resources, structure, culture, and

environment results in its organizational performance (Combs et al., 2005).

9
Financial and non-financial metrics can both be used to evaluate an organization's performance.

The profitability, return on assets, good sales figures, and other conventional financial

performance measures (Hsu et al., 2007; Selvarajan et al., 2007). Earnings per share (EPS),

return on investment (ROI), and net income after tax (NIAT) are further metrics (Grossman,

2000).

Organizational performance was viewed as a multidimensional concept that included financial

performance metrics, customer-related results, innovation, and internal organizational processes

by Kaplan and Norton (1992) and Richard et al. (2009). The subjective and objective measures

of business performance evaluated in terms of return on investment and sales growth have also

been shown to be significantly correlated (Harris, 2001).

It is asserted that while organizational effectiveness refers to a broader concept that encompasses

wider indicators in addition to financial performance, such as operations effectiveness, customer

satisfaction, corporate social responsibility, and other outcomes that go beyond financial

quantification, organizational performance refers to financial performance, product market

performance, and shareholder return (Richard et al., 2009).

The results obtained from the data analyses revealed that human capital investment has positive

and statistically significant effect on organizational effectiveness of manufacturing firms, career

development has positive and statistically significant effect on organizational effectiveness, and

competency-based assessment has positive statistically significant effect on organizational

effectiveness (Lekan-Akomolafe, 2023).

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2.2 THEORETICAL FRAMEWORK

2.2.1 Human Capital Theory

This research is anchored on Human Capital Theory by Adam Smith (1776). The origin of

human capital goes back to emergence of classical economics in 1776 and thereafter developed a

scientific theory. The idea of investing in human capital was first developed by Adam Smith

(1776), who argued in the Wealth of Nations that differences between the ways of working of

individuals with different levels of education and training reflected differences in the returns

necessary to defray the costs of acquiring those skills.

The Human Capital theory was formulated by Becker and Schultz in 1961 (Omada & Nweze,

2022). According to Becker's (1964) introduction of the human capital theory, investing in

formal or informal education is necessary to boost employee productivity. Theoretically,

education or training enhances employee lifetime wages by increasing worker productivity by

teaching practical knowledge and skills.

The human capital hypothesis focuses on how employee skill variation affects performance

(Omada & Nweze, 2022). Human Resources is the organization's ownership of the human

capital, and the connection is one of direct employment. Application of the human capital theory

places a strong emphasis on how competent individuals are in firms.

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The human capital theory (Schultz, 1961) underpins studies on human capital development and

organizational performance (Lekan-Akomolafe, 2023). Human capital theory is rooted from the

field of macroeconomic. Becker's (1993) classic book, Human capital: A theoretical and

empirical analysis with special reference to education, illustrated this domain. The theory

believes that manpower development is a prerequisite for improved employee job performance.

Operational skills, knowledge and training acquired by workers influence their work perception;

thus, investment in human capital adds to their value, dexterity, and abilities that enhance their

job performance (Lekan-Akomolafe, 2023). The emphasis on human capital synchronizes with

the emphasis in strategy research on core competencies, where economic rents are attributed to

workers with knowledge, skills, and abilities. Human capital theory emphasizes how education

and training has increasingly contributed to improved creativity and productivity of workers by

increasing their productive capability.

The fundamental concept of this idea is that human capital refers to the additional value that

people provide to a business (Armstrong, 2006). Any organization can now benefit from having

human capital. Since Barney first proposed the Resource-Based View (RBV) model of a

corporation, this is where the human capital theory is mostly based (1991).

Depending on how important, unusual, distinctive, and non-substitutable human capital is, the

idea goes, an organization's competitive advantage must directly relate to it (Omada & Nweze,

2022). As a result, the more often human capital passes the litmus test established by this

paradigm, the more crucially vital it is thought to be.

12
According to the human capital principle, businesses may determine the rate of return on

investment just like they can for physical capital like machinery by investing time and money in

education (Omada & Nweze, 2022). An organization's investment in its personnel comes at a

cost and opportunity cost in terms of time spent on employee development initiatives, but it also

makes each employee more productive and accrues rewards for the employee's future, including

improved work performance and greater pay.

The theory argues that a person's formal education determines his or her earning power

(Mgbemena et al., 2022). Human capital theory holds that it is the key competences, skills,

knowledge and abilities of the workforce that contributes to organizations competitive

advantage. It focuses attention on resourcing, human resource development, and reward

strategies and practices.

According to Human Capital Theory, education is an investment because it is believed that it

could potentially bestow private and social benefits. Human capital theorists believe that

education and earning power are correlated, which means, theoretically, that the more education

one has, the more one can earn, and that the skills, knowledge and abilities that education

provides can be transferred into work in terms of performance.

This theory emphasizes the value added that people contribute to an organization. It regards

people as assets and stresses that investments by organizations in people will generate

worthwhile returns. The theory is related to this study in the sense that investment in people

results in economic benefits for individuals and society as a whole. The investment in individuals

can be made in terms of education, health, nutrition, and any other development that results in

long-term benefits.

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2.3 EMPIRICAL REVIEW

2.3.1 Training and Organizational Performance

The impact of human capital development on organizational performance has been examined by

several researchers. Daniel (2019) examined the impact of human capital development on trust

fund pension limited's organizational performance using Pearson's product moment correlation

coefficient and a descriptive research design. The results demonstrated a significant link between

organizational success and human capital management.

Akinyele, Adegbuyi, Ogbari, and Ahamdu (2013) investigated the impact of HRD initiatives on

employees' job security in industrial organizations using Mobil Oil Nigeria as empirical data.

The study employed regression and correlation analysis. The results showed that the recruiting

process is more open and effective in terms of competences when it is available and includes

additional elements like experience, academic qualifications, and aptitude testing. The study

revealed how HRD programs may strengthen core, management, and functional competencies,

which unquestionably enhances both individual and organizational performance.

Young, Jin, and Sun (2011) investigated how human resource development affected the

operational and financial success of manufacturing firms. Using factors including training costs,

asset returns, and cost reduction, the study employed interclass correlation to assess the

14
relationship between human resource development and organizational success. The study found

that HRD practices improve employee competence and dedication, which in turn improve an

organization's operational performance, which in turn influences its financial performance.

Gunu, Oni, Tsado, and Ajayi (2018) examined whether employees' training and development

enhances work efficiency in the banking industry in Nigeria using primary data generated

through questionnaires. Major findings indicated that there is a positive correlation among all the

variables. Result of model summary shows that the independent variables account for 39.1% of

the variation in organizational performance.

Sampson, Ibeh and Emerole (2016) focused on the effect of human capital development

programmes in optimising employee performance in Abia State House of Assembly in Nigeria.

The findings revealed that human capital development programmes employed, which include

training, seminar, workshop, and skill acquisition, are significantly related to employee

performance.

Adele and Ibietan (2017) in their study on manpower training and productivity in Nigerian public

sector found that human capital development improves employees' skills and knowledge towards

achieving organizational goals. This finding aligns with Anike, Okafor, and Udejinta (2017) who

established in their study on the role of public enterprises in economic development in Nigeria

that employees are valuable organizational resources that contribute to quality output.

2.3.2 Innovation and Organizational Performance

Chigozie, Aga, and Onyia (2018) in their study on human capital development and performance

of manufacturing firms in South-East Nigeria found that human capital development in the form

15
of knowledge and skills development has a positive significant relationship with innovation. The

study concluded that organizations that do not learn continuously and continuously list, develop,

share, distribute, mobilize, cultivate, review and spread knowledge will not be able to compete

effectively in the global market.

Olubayo and Olajide (2020) investigated how business process reengineering (BRP) affected the

performance of organizations in Nigeria's food and beverage sector. The study employed a

multistage sampling strategy and survey research design, with data analyzed using multiple

regression analysis. Results demonstrated that while innovative thinking has a positive and

significant impact on competitive advantage, organizational resources and process function have

a negative and insignificant impact. The study also demonstrated the favorable and considerable

impact business process reengineering (organizational resources, creative thinking, and process

function) has on operational performance.

In earlier studies, Bontis (2000) established that managerial skills generate innovation and

improve business processes. Webster (2000) corroborated this view, while Lyles (2004)

submitted that managerial competences and experience improve firms' performance. These

studies collectively suggest that human capital, in a real sense, is a soft asset that enhances firms'

ability to survive the vagaries of the business-scape.

2.3.3 Efficiency and Organizational Performance

Kareem (2019) conducted a study on the impact of human resource development on

organizational effectiveness in Iraqi public universities. The study reported that HRD practices

16
such as development, training and development, organizational development and career

development have positive and significant impact on organizational effectiveness.

Odette, Namusonge, Mwirigi, and Warren (2017) examined the influence of strategic human

capital investment on performance of coffee exporting firms in Rwanda. The study revealed that

strategic human capital investment had a positive significant influence on the performance of

coffee exporting firms in Rwanda.

In Kenya, Odhon'g and Omolo (2015) investigated the effect of human capital investment on

organizational performance of pharmaceutical companies. The study found a positive significant

relationship between human capital investment and organizational performance.

Peprah, Anowuo, and Ameyaw (2019) conducted a conceptual review on the relationship

between human capital development and organizational performance. The study established that

developing an organization's human capital is essential for its success and can be linked to both

its non-financial and financial performance.

2.3.4 Human Capital Development and Organizational Performance

Lekan-Akomolafe (2023) investigated the effect of human capital development on organizational

effectiveness of manufacturing firms in South-east Nigeria. The study used human capital

investment, career development and competency-based assessment as proxies of human capital

development. The study adopted a descriptive research design and used questionnaire to collect

primary data from 248 respondents. Multiple regression statistics were utilized to test the effect

of human capital development on organizational effectiveness. The results revealed that human

capital investment has positive and statistically significant effect on organizational effectiveness

17
of manufacturing firms at 5% level of significance (coefficient value 0.826>0.000 p-value),

career development has positive and statistically significant effect on organizational

effectiveness at 5% level of significance (coefficient value 0.669>0.020 p-value), and

competency-based assessment has positive statistically significant effect on organizational

effectiveness at 5% level of significance (coefficient value 0.922>0.000 p-value).

Keji (2021) examined the relationship between economic growth and human capital

development in Nigeria between 1981 and 2017. The study employed vector autoregressive and

Johansen approaches to address the research questions. The findings showed that the calculated

human capital coefficients have a long-term, considerable impact on Nigeria's economic growth.

Tamunomiebi and Anyanwu (2020) examined the effects of empowerment practices on

organizational performance through a review of literature. The descriptive study used

organizational performance as the criterion variable and empowerment practices as the predictor

variable to theoretically review the literature. The study concluded that empowerment practices

predict organizational performance as long as the cost of implementing them does not outweigh

the revenue they bring into the company. Based on their findings, the researchers concluded that

there is a link between organizational effectiveness and the growth of human capital.

Ojokuku and Sajuyigbe (2015) investigated the impact of human capital development on the

performance of small and medium scale enterprises in Nigeria. The study employed survey

research design and collected data from SME operators. The findings demonstrated that human

capital development factors such as career advancement, formal instruction, cooperation in

classes, gatherings and workshops, influence human capital development and subsequently affect

organizational performance.

18
Channar, Talreja, and Bai (2017) in Pakistan assessed the impact of human capital variables

using acquisition of knowledge, skills and expertise of employees on employee satisfaction and

organizational effectiveness. The study used simple random probability method for sampling

selection and primary data was collected through questionnaires. Independent Samples T-Test

showed that both genders are provided equal chances of human capital development. Correlation

technique showed that human capital development has a strong significant positive relationship

with satisfaction level of employees and customers, which will eventually lead to improved

organizational performance.

Sarminah (2018) in Malaysia investigated the relationship between human capital and business

performance. Data were collected from a sample of 390 managerial staff in Malaysian logistics

companies based on stratified random sampling and analyzed using SPSS Version 23. The study

found that human capital aspects are related to business performance. The study revealed that all

aspects of human capital contributed significantly to business performance. The findings

indicated that human capital aspects of employees' competency and creativity emerged as the

main factors that influenced business performance.

Jelena et al. (2018) conducted a study on the impact of knowledge management on

organizational performance. The study aimed to show that through creating, accumulating,

organizing and utilizing knowledge, organizations can enhance organizational performance. The

sample included 329 companies in Slovenia and Croatia with more than 50 employees. The

impact of knowledge management practices on performance was empirically tested through

structural equation modeling. The results showed that knowledge management practices

19
measured through information technology, organizational systems and knowledge positively

affect organizational performance.

20
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