Toward a Theory of Perceived Firm-Specific Human Capital

Strategy research suggests that firm-specific human capital is a source of sustained competitive advantage, at least in part because it may constrain employee mobility. However, it is also typically assumed that employees are reluctant to invest in firm-specific skills because such investments may come at the cost of developing general skills, thereby reducing their attractiveness in the labor market. This creates a theoretical paradox: Employee investment in firm-specific human capital is crucial for value creation and appropriation, yet there is believed to be global underinvestment in firm-specific skills. We argue that the logic behind this theory depends on the assumption that firm-specific human capital is accurately and objectively perceived among labor market participants and that relaxing this assumption significantly limits conclusions that can be drawn about competitive advantage. The key takeaway is that perceptions of firm specificity, even if inaccurate, can be more important than objective firm-specific human capital in determining the likelihood that firm-specific human capital can be a source of sustained advantage. By relaxing the assumption of strong-form labor market efficiency, we develop propositions regarding how firms can facilitate and manage perceptions of firm specificity, thereby increasing the likelihood that a competitive advantage can be sustained. In doing so, we help reconcile some of the differing assumptions in micro and macro work on human capital and employee retention.