Human Resources, Managerial Ability, and Innovation: HR’s Moderated Effect on Firm Growth

Abstract

Drawing from Penrose and March, we conceptualize human resource (HR) slack as the margin for firm growth and managers as the firm’s coordinating mechanism. Therefore, we propose that the effect of HR slack on firm growth systematically depends on managerial ability. We elaborate our conceptual model to distinguish between managers who invest in HR slack primarily as additional units of time from those who invest in HR slack as unknown potential, by testing a three-way interaction among HR slack, managerial ability, and innovation intensity. Using publicly available firm-level data, we find that managerial ability negatively moderates HR slack’s effect on firm growth. The three-way interactions indicates that medium and high-ability managers of non-innovation intensive firms positively moderate HR slack’s effect on firm growth while high-ability managers of innovation intensive firms have the oppositive effect. In the Penrosian tradition, we interpret these results as different illustrations of HR slack envisioned as additional units of time compared to HR slack envisioned as unknown potential.