OVERCOMING HUMAN CAPITAL VOIDS IN

OVERCOMING HUMAN CAPITAL VOIDS IN UNDERDEVELOPED COUNTRIES

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Stephanie Lu WANG Indiana University, Kelley School of Business Hodge Hall 3129, 1309 East 10th Street, Bloomington, IN 47405 Tel: 1 (812) 855-9638, [email protected] Alvaro CUERVO-CAZURRA Northeastern University, D'Amore-McKim School of Business 313 Hayden Hall, 360 Huntington Avenue, Boston, MA 02115 Tel: 1 (617) 373-6568, [email protected] November 3, 2016 For the published version, please see: Wang, S., and Cuervo-Cazurra, A. 2017. Overcoming human capital voids in underdeveloped countries. Global Strategy Journal, 7(1): 36-57. Plain language summary: In underdeveloped countries like those in Sub-Saharan Africa, firms suffer from human capital voids, i.e., a prevalence of very low levels of skills among individuals. These have a negative impact on performance improvement, but managers can solve this negative effect by choosing organizational upgrading mechanisms that are contextually appropriate: operating joint ventures with foreign partners compensates for this negative effect, but internal R&D amplifies it because of the learning limitations of low-skilled employees. Managers should also monitor and push for the reduction of countrylevel human capital voids, because in countries with more developed human capital, the influences of organizational upgrading mechanisms change: while joint ventures have a weaker compensating effect, R&D investments cease to amplify the negative impact. Technical summary: We analyze how firms in underdeveloped countries overcome human capital voids – a prevalence of very low levels of skills among individuals– to improve performance. Building on the knowledge-based view, we argue that managers can strategically select organizational upgrading mechanisms to compensate for the negative impact of employees’ human capital deficiencies on firm performance improvement. We propose that external mechanisms (e.g., operating a joint venture with foreign partners) are better than internal ones (e.g., internal research and development), because external mechanisms provide ready-made knowledge that is appropriate for low-skilled labor to learn, whereas internal mechanisms create additional learning inefficiencies. However, in countries with more developed human capital, these influences change: external mechanisms have a lower compensating influence, while internal ones become less inefficient. Keywords: Human capital voids; organizational upgrading mechanisms; knowledge-based view; performance; Sub-Saharan Africa

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We are grateful for the suggestions for improvement on previous versions of the paper from Editor Africa Ariño, anonymous reviewers, and the audiences at the Academy of International Business annual meeting in New Orleans and at the Strategic Management Society annual meeting in Berlin. We also thank Ms. Zhen Liang for sharing her insights on doing business in Ethiopia. For financial support, Cuervo-Cazurra thanks the Robert Morrison Research Fellowship and the Lloyd Mullen Research Fellowship at Northeastern University.

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“The National Employment Office [of Gabon] recently found that, of the jobs on offer, 54 per cent required technical skills. One of the biggest shortages is qualified handlers of heavy machinery, such as trucks and diggers to carry out the government’s ambitious infrastructure programme. But 64 per cent of those applying had no vocational training.” (Hollinger, 2012) “[W]hile funding remains a key constraint to business success, what most African start-ups want from government is better education and training. That is a key finding of research by mobile pollsters GeoPoll in a survey last month in the Democratic Republic of Congo, Ghana, Kenya, Nigeria and South Africa. […] ‘Few of Africa’s entrepreneurs have been anywhere near a business school,’ says Mariéme Jamme, a Senegalese tech entrepreneur and education activist. ‘Businesses are not being profitable. They are feeling that they need to learn more.’ ” (Klasa, 2015) INTRODUCTION As exemplified in these quotes, it is important to understand how human capital voids –a prevalence of very low levels of skills among individuals– impact firm performance improvement. Highly qualified labor is critical for all firms, and managers in all countries complain about their challenges in finding employees with the right skills (Manpower Group, 2015). However, firms in underdeveloped countries, such as the ones in Sub-Saharan Africa, face quantitatively and qualitatively more challenging human capital voids than those faced by firms in advanced economies or relatively developed emerging markets (Cooke, Wood, and Horwitz, 2015; Kamoche, 2002, 2011). The challenge in Sub-Saharan Africa is not only to find employees with the right skills, but also to find employees with any skills. Sub-Saharan Africa has extremely low educational levels, with only 22% of primary aged children in the region being in school, only 60% of adults being literate, and the average years of schooling being only 5.2 (United Nations Development Programme, 2015); it is home to more than 50% of the global total of out-of-school children, 50% of whom have never been enrolled (Africa-America Institute, 2015); and it is the only region where the rate of out-of-school children is growing due to the gap between education development and population increase (World Bank, 2015a). Human capital voids at the firm level are consequently manifested by lowskilled employable labor that not only lacks satisfactory technical or vocational education, but also in many cases lacks basic education and even literacy. Existing research has suggested that overcoming institutional voids –the absence or insufficiency of market-supporting institutions and providers of specialized inputs– is key to surviving and succeeding in underdeveloped countries (Khanna and Palepu, 1997; 2005). But current studies in global strategy analyzing the impact of these voids on the strategic decisions and performance of firms have mostly studied voids in political and legal systems (e.g., Garcia-Canal and Guillen, 2009; Holburn and Zelner, 2010; Mair and Marti, 2009), financial markets (e.g., Khanna and Palepu, 2000), product markets (e.g., Chacar, Newburry, and Vissa, 2010), and physical infrastructure (e.g., Loree & Guisinger, 1995; Woodward & Rolfe, 1993) with less attention being devoted to the impact of voids in the human capital market on firm performance, particularly in undeveloped countries. This is surprising, because human capital is extensively acknowledged by researchers as a critical source in building and sustaining organizational and national competitive advantage (Barney, 1991; Hatch and Dyer, 2004; Hitt, Bierman, Shimizu, and Kochhar, 2001; Pfeffer, 1994). Thus, in this paper, we fill this analytical gap by investigating how firms in underdeveloped countries overcome human capital voids to improve performance. We build on insights from the knowledge-based theory of the firm (e.g., Eisenhardt and Santos, 2002; Kogut and Zander 1992; Grant, 1996a, 1996b) to discuss and explain three ideas. We first explain how firm-level human capital voids, which we call employees’ human capital deficiencies, have a negative impact on firm performance improvement, because the lack of skills constrains firms’ learning capability and incentives to upgrade knowledge and subsequently improve performance. We then propose that managers can strategically choose appropriate organizational upgrading mechanisms to decrease this negative effect of employees’ human capital deficiencies on performance improvement. We analyze two types of organizational upgrading mechanisms: one external, namely operating a joint venture with foreign partners (Ariño and de la Torre, 1998; Sarkar, Aulakh, and Madhok, 2009), and one internal, namely investments in internal research and development (R&D) (Birkinshaw, 2

Hamel, and Mo, 2008). We argue that the former reduces the negative effect of employees’ human capital deficiencies on firm performance improvement, because it can provide ready-made knowledge that is appropriate for unskilled employees to use in the operations of the firm and improve its performance. In contrast, we propose that the latter amplifies the negative effect, because investments in internal R&D are not appropriately developed for and implemented by unskilled employees, creating additional inefficiencies and limiting performance improvements. We finally argue that the impact of these two organizational upgrading mechanisms on firm performance improvement is contextually contingent on national human capital voids. Specifically, in countries with relatively lower country-level human capital voids, which we call citizens’ human capital underdevelopment, operating a joint venture has a smaller countervailing effect on the impact of employees’ human capital deficiencies on performance improvement, because employees are able to apply and develop their own knowledge. Additionally, internal R&D ceases to amplify the negative effect of employees’ human capital deficiencies because employees are able to use some of the advanced knowledge created in the R&D process. We test these arguments on a sample of 1,811 firms from ten countries in Sub-Saharan Africa. We focus on this region as a research laboratory that provides us with an ideal setting to examine human capital voids. It also provides an opportunity to gain novel insights from an under-researched region (George et al., 2016); studying firms in extreme conditions helps challenge implicit theoretical assumptions (CuervoCazurra, 2012). We seek to provide new insights to three strands of existing literature. The first strand is the effect of institutional voids on firm behavior (Khanna and Palepu, 1997, 2000), in which we analyze one of the voids that has received less attention in the literature —human capital voids—and provide strategic solutions to address them. The second strand is the knowledge-based view in which we identify boundary conditions of existing theoretical arguments on the analysis of organizational upgrading mechanisms in emerging countries (Kumaraswamy et al., 2012; Luo and Tung, 2007; Madhok and Keyhani, 2012). Our paper highlights how the use of organizational upgrading mechanisms is contingent on the condition of human capital at the country level. The usual proposal that internal R&D is the best way to upgrade competitiveness seems to be appropriate only in countries with lower human capital voids. The third strand is the analysis of firms in underdeveloped economies and, in particular, in Sub-Saharan Africa. By analyzing these firms as a research laboratory we are able to provide a better understanding of the influence of institutions on firm behavior. OVERCOMING HUMAN CAPITAL VOIDS IN UNDERDEVELOPED COUNTRIES Human Capital Voids in Underdeveloped Countries Institutional voids refer to the situation in which market-supporting institutional ecosystems are either missing or do not function well (Khanna and Palepu, 1997, 2000). Khanna and Palepu (2005) propose that firms identify and respond to institutional voids individually, because the severity of different institutional voids (e.g., voids in political and social systems, openness, labor markets, capital markets, and product markets) and related circumventing strategies may vary among countries. For example, some institutional voids prevent the market from functioning efficiently, some weaken governance structures, and others may serve as opportunity space for entrepreneurship (Mair and Marti, 2009). Existing investigations on the impact of institutional voids on global strategy are predominately based on voids in political and legal institutions (e.g., Miller et al., 2009; Stephan, Uhlaner, and Stride, 2014) and voids in capital markets (e.g., Shinkle and Mccann, 2014; Nguyen and Rugman, 2015), thus providing limited insights on how to overcome human capital voids. Human capital voids are reflected in employees’ skill deficiencies at the firm level and in underdeveloped human capital ecosystems at the country level. Human capital captures the aggregation of multifaceted investments in people, including general skills (e.g., language, literacy, the ability to process information and solve problems), specific skills, and technical and scientific knowledge (de la Fuente and Ciccone, 2002). It is built throughout one’s lifetime via schooling, training, work experience, personal contacts, and socialization. Sub-Saharan Africa as a Research Laboratory 3

Sub-Saharan Africa is an appropriate research laboratory for our study because of its well-recognized human capital voids. Sub-Saharan Africa is composed of countries in the African continent south of the Sahara desert 1. Table 1 provides relevant statistics on human capital development in the region; the table also includes selected advanced and emerging countries as a point of comparison. *** Insert Table 1 about here *** Despite economic growth in the region, human capital development has lagged behind. The adult literacy rate across the region increased by only 2%, from 57% to 59%, during 2000-2012 (United Nations Development Programme, 2015). Existing school and education systems are outdated, further limiting the ability of firms to improve. For example, in 2012, technical and vocational programs only accounted for 6% of total secondary enrollment in the region (Africa-America Institute, 2015). As a result, human capital voids have become extremely severe obstacles confronting firms, as illustrated in the following quote: “It is one of the biggest handicaps to doing business in Gabon, says Sanjay Dey, director of Abhijeet, an Indian manganese processing group planning a $1bn investment. Mr Dey says he will have to import 40 to 50 per cent of his workers for most of the next decade because of a lack of technical competence in the labour market. ‘Children here don’t have access to the right education,’ he says. ‘They don’t have technical colleges.” (Hollinger, 2012: 4). Because of insufficient and outdated education and training systems in the market, firms are burdened with the under-supply of labor with needed skills. For example, Debrah and Ofori (2006) find that an industry-wide systematic training program in the construction industry is completely missing in Tanzania. As a result, employees’ human capital deficiencies seem to be a long-lasting bottleneck to growth, as illustrated in the following quote: “Prof. Salami [of Lagos Business School in Nigeria] says ‘There’s a fundamental contradiction. You’ve got high unemployment coexisting with significant labour force shortages. […]And those who are not [high skilled], you wouldn’t hire because they are not fit for purpose.’ Seni Adetu, chief executive of Guinness Nigeria, complains that, in spite of the size of the labour force, it is a challenge to recruit sufficiently skilled workers.” (Fielding-Smith, 2014). In addition, poor talent management and development have pushed the international migration of the few highly educated individuals to advanced countries, resulting in a so-called “brain drain” (Beine, Docquier, and Rapoport, 2008). This has had pernicious effects on the region, as illustrated in the following quote: “ ‘It’s not just the skills gap, but also accentuated by the skills mismatch – you see it in South Africa you see it in all parts of Africa,’ says Mthuli Ncube, chief economist at the African Development Bank, ‘companies having to hire foreign employees at a managerial and strategic level, but also at a technical level because of the shortage of manpower,’ he says. ‘This is being accentuated by the brain drain.’ Africa has the lowest rate of tertiary education of any developing region. And one out of every eight Africans with a university education lived in an OECD country in 2000, according to a report by the AfDB and the World Bank.” (England, 2011). Despite rich anecdotal evidence and the growing economic importance of Africa, there is limited scholarly research on this region in the field of management (see a recent overview of the management literature on Africa in George et al., 2016). Additionally, the analysis of human resources in Africa has received relatively little attention, with some notable exceptions: a special section on human resources in Africa in International Journal of Human Resource Management (Kamoche, 2002), and another in Journal of World Business (Kamoche, 2011). Yet, many studies have focused on cross-cultural or crossgeographical variations in human resource management policies by multinational firms, and the reasons behind them (Kamoche, 2002). Few focus on how local firms can overcome challenges due to the human 1

Although geographically located in Africa, North Africa, in many cases, is considered a region that is historically and culturally more connected to the Middle East than to the rest of Africa; some institutions consider the Middle-East and North Africa (MENA) as a distinct region (World Bank, 2016). These two regions appear to face distinct challenges. For example, according to the Survey on the Global Agenda 2015, while in Sub-Saharan Africa the top three challenges are inadequate education and skills development, unsustainable governance systems, and poor infrastructures, in MENA the top three critical challenges are persistent employment, political transitions, and societal tensions (World Economic Forum, 2015).

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capital voids in the region, with the exception of Ibeh and Debrah (2011) who investigate how the institutionalization of female talent development practices in African business schools impacts the development of talent at the country level. The Knowledge-Based View Because of the focus on knowledge, we draw on insights from the knowledge-based view of the firm (KBV) to explain the impact of human capital voids on firm performance improvement and the mechanisms to overcome this. The KBV argues that knowledge is the “overwhelmingly important” basis of a firm’s competitive advantage (Grant, 1996a, 1996b). It is the key asset that enables managers and employees to acquire and use other tangible and intangible assets. One important distinction of the KBV from other theories is its emphasis on the importance of people as the main carriers of knowledge, or the “recognition that the major source of knowledge is the expertise and know-how of employees” (Grant, 1997:51). This is particularly the case for tacit knowledge, which is embedded in the mind of employees (Nonaka, 1994). Knowledge, embodied in human beings as human capital, is accumulated through education, training, and experience, and is imperfectly distributed among individuals, firms, and countries (Hayek, 1945; Tsoukas, 1996). Firms diverge in performance because of their differences in the stock of knowledge and in their use and development of new knowledge (Kogut and Zander 1992). Firms are considered mechanisms superior to markets in the creation and use of knowledge, because they are able to provide employees with the appropriate incentives and support to facilitate the integration of external and internal knowledge (Kogut and Zander, 1992) and its transfer across countries (Kogut and Zander, 1993). Figure 1 presents the theoretical framework we discuss in more detail in the explanation of the hypotheses. *** Insert Figure 1 about here *** Firm-Level Human Capital Voids and Firm Performance Improvement in Underdeveloped Countries Some firms may improve their performance by hiring low-skill employees, because these employees can be paid less and the firm can enjoy lower labor costs. For example, Porter (1990) proposes that cheap unskilled labor is one of the comparative advantages of countries such as South Korea before 1980, while Draca, Machina, and Van Reenen (2011) find that the introduction of a minimum wage in the UK reduced firm profitability as a result of the increase in labor costs. However, we argue that this perceived advantage of reducing labor costs by employing low-skilled labor is undermined by two severe disadvantages of unskilled employees that limit performance improvements: their lack of a learning ability, and their lack of an incentive to focus on performance improvements. First, employees’ low skill levels constrain firms’ learning capacity, hence obstructing the feasibility of improving firm performance. Human capital is a primary repository of both codifiable and tacit knowledge (Kogut and Zander, 1992; Nonaka, 1994). Unskilled employees are constrained in absorbing new ideas, which limits the absorptive capacity of the firm (Minbaeva et al., 2003). Saggi (2002) suggests that inadequate human capital in developing countries leads to their failure to benefit from foreign direct investment spillovers. Similarly, Kor and Leblebici (2005) indicate that the level of human capital sophistication of a firm determines the extent to which the firm can leverage external knowledge and bolster financial performance. Second, employees’ human capital deficiencies reduce the incentives to improve firm performance because unskilled employees deviate their attention from upgrading toward opportunistic and short-term gains. For individuals with higher skills and education, the organizational upgrading goals (i.e., being more competitive) are better aligned with their own (i.e., being more critical to the organization). Black et al. (2015) show that individuals with higher education tend to be more achievement-focused and entrepreneurial. In contrast, unskilled employees care more about security and stability (Herzberg, 1986, 2003), thus becoming an obstacle for risk-related and future-oriented activities to improve performance. For example, in 2012 only 28% of Africa’s labor forces had stable wage-paying jobs, and people work to survive for immediate economic gains (McKinsey, 2012). Thus, summarizing these ideas, we propose the following baseline hypothesis: Hypothesis 1 (H1). In underdeveloped countries, employees’ human capital deficiencies are negatively related to firm performance improvement. 5

Overcoming Firm-Level Human Capital Voids via Organizational Upgrading Mechanisms Managers can use organizational upgrading mechanisms to mitigate the negative impact of employees’ human capital deficiencies on performance improvement. We focus on two critical organizational upgrading mechanisms: an external one (operating a joint venture with foreign partners) and an internal one (investments in internal R&D). We argue that external mechanisms are more effective than internal ones in mitigating the negative impact of firm-level human capital voids because the former fit better with lowskilled labor’s learning patterns (i.e., capacity and incentive) and hence maximize learning. Operating a joint venture with foreign firms. Firms in underdeveloped countries can cooperate with and obtain knowledge from foreign partners. Operating joint ventures or forming other collaborative relationships is one of the most pervasive vehicles for knowledge acquisition and learning (Hamel, 1991; Kumaraswamy et al., 2012). This mechanism provides local firms with opportunities to team up with the carriers of advanced knowledge and enjoy knowledge spillovers. The following quote vividly elucidates this: “South Africans would start off with little ability but build up their [nuclear industry manufacturing] expertise over time, Mr. Adam says, citing South Korea as an example. ‘The first plant built in Korea had almost no Korean input. But after 35 years, they can build their own plants. They’re even selling them abroad. That’s a copybook of how to do it.’ …Whichever foreign supplier or suppliers are contracted to build the planned power stations – following a tender process that will have to be under way by the end of next year if the resource plan’s deadlines are to be met – will be under pressure to pass on skills to locals…“When you train somebody to do welding on a nuclear power station, they could do that in the petroleum or aircraft industry,” says Eskom, which will oversee the nuclear construction programme.” (Bleby, 2010). We argue that operating a joint venture with foreign firms can alleviate the hindering effect of lowskilled employees on firm performance improvement for two reasons. First, a joint venture facilitates learning by example, with ready-made solutions and close observation, and hence suits the learning needs of low-skilled employees who have a relatively low learning capacity. Low-skill employees are less capable of recognizing, absorbing, and utilizing new knowledge. Operating a joint venture with foreign firms allows employees to be more involved with knowledge sources, and thus to better understand how their existing knowledge base could be improved. Increasing knowledge flows can thus compensate for their low learning capacity. Second, a joint venture with foreign partners provides relatively quicker and easier access to new knowledge, and hence fits the learning incentives of low-skilled employees who seek immediate and lowrisk learning outcomes (Herzberg, 1986, 2003). A joint venture provides an appropriate environment where learning processes may take place simultaneously with collaboration. The foreign firm may have gained valuable experience from its operations in multiple countries and distilled best practices that are not only appropriate but also superior to the practices of local firms (Bartlett and Ghoshal, 1989). Through a joint venture with foreign firms, local employees, though unskilled, have stronger incentives to understand and learn new knowledge because of the proven success of this knowledge. In short, a joint venture can help less skilled individuals achieve their full learning potential, and hence ultimately bolster firm performance improvement. These ideas support the following hypothesis: Hypothesis 2a (H2a). In underdeveloped countries, the negative effect of employees’ human capital deficiencies on firm performance improvement is weaker for firms that operate a joint venture with foreign partners. Internal R&D. Alternatively, firms can upgrade capabilities by building new knowledge and best practices internally via formal investments in R&D. A strong knowledge base, a high learning capacity, and the willingness to take risks are critical to the success of internal R&D efforts (Leiponen, 2005). We propose that internal R&D is therefore mismatched with the learning capacity and learning incentives of low-skilled employees, and hence amplifies the hindering effect of employees’ human capital deficiencies on firm performance improvement. Internal R&D involves knowledge-complex activities and requires high learning capacity (Dakhli and De Clercq, 2004; Marvel and Lumpkin, 2007), and hence it may not even be feasible for firms with a 6

large proportion of unskilled workers. Cuervo-Cazurra and Un (2010) find that firms with inadequate internal knowledge resources tend to never invest in R&D. For example, R&D in the agricultural sector in Africa is hampered by the weak human capital base, with researchers that have limited high-level training and are aged and close to retirement, and by challenges in recruitment and retention (Beintema and Stads, 2011). Firms with inadequate human capital may have a limited capability to perform sophisticated knowledge creation such as internal R&D activities, as illustrated by the following quote: “ ‘We don’t have enough manpower in engineering. That’s the basic problem’. One interviewee from Zambia explained that, ‘The universities are able to churn out the engineers in numbers… but many of them do not have the skills to be able to operate in a global economy’.” (Africa-UK Engineering for Development Partnership, 2012) Without adequate stocks of knowledge in employees, firms might not even exploit the right opportunities for R&D. Internal R&D is expensive and time-consuming (Hitt, Bierman, Uhlenbruck, and Shimizu, 2006) and thus is incompatible with low-skilled employees’ preference for easier and quicker learning. We hence propose the following hypothesis: Hypothesis 2b (H2b). In underdeveloped countries, the negative effect of employees’ human capital deficiencies on firm performance improvement is stronger for firms that invest in internal R&D. The State of Country-Level Human Capital Voids as a Boundary Condition of the Influence of Organizational Upgrading Mechanisms Underdeveloped countries vary in the level of their citizens’ skills, the overall stock of knowledge embedded in human capital, as well as in their ecosystems to develop human capital (Puryear and Goodspeed, 2011). Some countries are building more advanced vocational and tertiary training programs, whereas others are merely at the point of creating very basic schooling systems or increasing adult literacy. For example, the percentage of trained pre-primary teachers increased from 63% to nearly 86% in Ethiopia during 1999-2010, whereas the percentage has dropped in countries such as Eritrea, Mali, and Sierra Leone (World Bank, 2015a). In Tanzania, only 5.6 percent of women and 9.54 percent of men have received at least some secondary education, whereas in Ghana the numbers are 45.20 and 64.66, respectively (United Nations Development Programme, 2015). Building on this reality of a diversity in the level of human capital voids among underdeveloped countries, we now push the previous arguments further. We propose that and explain how the importance of the strategic alignment of organizational upgrading mechanisms in overcoming the negative impact of firm-level human capital voids on performance varies with the degree of country-level human capital voids. Country-level human capital voids and operating a joint venture with foreign firms. Operating a joint venture with foreign partners is more critical for firms to reduce the impact of their employees’ human capital deficiencies on performance improvement in countries with higher levels of human capital underdevelopment. The joint venture can serve as a stepping stone for these firms to build and leverage the complementary knowledge they lack (e.g., training, technology, and managerial expertise) (Luo and Tung, 2007). It also permits firms to focus on harnessing the productive and learning potential of their limited talent. With a reduced burden to acquire the extremely limited high-skill talent in countries with underdeveloped human capital markets, firms can reduce costs and boost efficiency. This strategy can additionally align the needs of employees, with substantial living pressures and low wages, with the needs of managers, who are under pressure to reduce costs, including labor costs (Kamoche, 2011). In contrast, in countries with lower levels of human capital underdevelopment, firms are less dependent on establishing a joint venture with foreign partners to overcome employees’ human capital deficiencies negative impact on performance improvement. These countries are projected to have bundles of policies and practices in schooling, education, and training systems that support firm’s upgrading efforts. Enhancing citizens’ development prepares many unskilled workers to be future skilled workers. This makes firms less dependent on learning from foreign partners because of the expanded options in knowledge development brought by improved human capital ecosystems. For example, growing business schools with international training, coaching, community, and collaboration partners will allow employees in SubSaharan Africa to obtain knowledge beyond their national and regional contexts (Ibeh and Debrah, 2011). We hence propose: 7

Hypothesis 3a (H3a). The degree to which operating a joint venture with foreign partners reduces the negative effect of employees’ human capital deficiencies on firm performance improvement is weaker in countries with lower citizens’ human capital underdevelopment. Country-level human capital voids and internal R&D. Internal R&D is highly sensitive to the overall country-level stock of high-skill workers and the provision of training in labor markets. When the national human capital market is extremely underdeveloped, the mismatch between the learning patterns that firms need and the ones provided by low-skilled employees makes internal R&D even more challenging. The education is generic and basic, with no foreseen improvements in the near future. The skill sets of existing and potential employees are, therefore, not readily applicable to complex learning such as R&D. As a result, internal R&D tends to make firms suffer even more from their employees’ human capital deficiencies and, hence, performance may worsen. In contrast, in nations with lower levels of human capital underdevelopment, internal R&D becomes not only a more feasible but also a more desirable mechanism for learning and upgrading. In these countries, the labor market can produce more potential employees with greater abilities for learning and problem-solving. Improved education in the national labor market enables citizens to regularly upgrade their knowledge base and engage in continuing professional training and perform better. For example, Mano, Iddrisu, Yoshino, and Sonobe (2012) find that even basic-level management training can help improve standard business practices and performance based on a randomized experiment in Ghana. In countries with higher skill levels among citizens, companies can progressively engage in internal R&D and eventually build an innovative capacity and associated intellectual property and patenting capabilities (Bromfield and Barnard, 2010). In addition, reductions in citizens’ human capital underdevelopment might attract expatriate workers who bring new knowledge and creativity and enrich the labor market. Thus, firms can select employees that are more capable, more educated, and have higher learning capacity, helping to build an internal R&D capacity that compensates for the limited skills elsewhere in the firm. We thereby propose the hypothesis: Hypothesis 3b (H3b). The degree to which internal R&D amplifies the negative effect of employees’ human capital deficiencies on firm performance improvement is weaker in countries with lower citizens’ human capital underdevelopment. RESEARCH DESIGN Sample and Data Sources We utilized the World Bank’s Business Environment and Enterprise Performance survey database for firmlevel data. The purpose of this survey is to “better understand conditions in the local investment climate and how they affect firm-level productivity”, as indicated in the opening sentence of the questionnaire, thus matching well with the purpose of this study. Private contractors in each country conducted the surveys on behalf of the World Bank (World Bank, 2015b) via face-to-face interviews with one to three respondents such as general managers, accounting managers, human resource managers, etc.; this reduces the potential threats of common method variance (Podsakoff, MacKenzie, Lee, and Podsakoff, 2003). The World Bank uses a stratified random sampling method by including firm size, business sector, and geographic region within the country to maintain high representativeness. We employed the World Bank’s pre-made panel datasets with consistent coding rubrics for various countries across years. The panel dataset consists of surveys conducted between 2006 and 2014. Panel data is better for causal analyses and enables us to model both inter-firm differences and intra-firm dynamics, so it is more suitable for our investigation on how human capital voids impact firm performance improvement. After excluding cases with missing information on key variables, we have a sample of 1,811 firms from ten Sub-Saharan African countries with varying degrees of human capital voids. The distribution of firms by country is as follows: Democratic Republic of the Congo (164), Ethiopia (338), Ghana (238), Kenya (78), Malawi (89), Nigeria (162), Senegal (128), Tanzania (183), Uganda (160), and Zambia (271). Although the World Bank also has panel data for Angola, Botswana, Cameroon, Cape Verde, Mali, Rwanda, and South Africa, these countries’ surveys do not include information about R&D activities or/and skilled employment and therefore we had to exclude them from the analysis.

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For country-level data, we relied on the United Nationals Development Programme’s (UNDP) human development index (HDI) and cross-checked this information with data from other sources to ensure validity. For example, we obtained the World Bank’s data on government expenditures on education, and mean years of schooling from the United Nations Education, Scientific, and Cultural Organization (UNESCO) Institute for Statistics (UIS). Variables and Measures Firm performance improvement. We operationalized firm performance improvement as firm sales compared with sales three years ago, following prior research (e.g., Brush, Bromiley, and Hendrickx, 2000). We calculated the compound growth rate in sales as Ln (Sales t/ Sales t-3). A three-year time period is long enough to capture the changes in performance, indicating a direction, but short enough to avoid critical shifts in firm strategies and operations. Employees’ human capital deficiencies. We measured employees’ human capital deficiencies as the percentage of unskilled labor in the focal company 2 . The skillset of employees is considered an important proxy for firm-level human capital (Boxall and Steeneveld, 1999; Hambrick and Mason, 1984; Leiponen, 2005). We subtract the score from the industry mean to take into account industry variation (Hitt, Hoskinsson, Ireland, and Harrison, 1991) 3. Organizational upgrading mechanisms. Operating a joint venture with foreign partners is operationalized as a dummy variable, which specifies if the focal firm is partially “owned by private foreign individuals, companies, or organizations” 4. Internal R&D is measured by whether “the focal firm spent on formal R&D-related activities during the last three years” 5. Citizens’ human capital underdevelopment. We utilized a country’s Human Development Index (HDI) with a one-year lag to measure citizens’ human capital underdevelopment. Created by the UNDP (United Nations Development Programme, 2015), the HDI is a composite index that measures the human capital development of a country in three dimensions: a long and healthy life, knowledge, and a decent standard of living. We reverse coded the HDI score to reflect country-level human capital voids. Control variables. We controlled for organizational and national characteristics that may affect performance improvement. First, we controlled for firm-level generic characteristics, including firm age and top manager industrial experience (years of work experience in the industry). Second, we controlled for corporate governance factors that may influence organizational risk-taking preferences and performance improvement, such as ownership concentration (the percentage of shares held by the largest owner) and sole proprietorship (a dummy variable that indicates if the firm is an unincorporated business with one owner who pays personal income tax on profits from the business). Third, we controlled for firm capabilities that may influence performance improvement, including (1) whether the focal firm has adopted an international technology license, (2) the firm’s exporting intensity as a percentage of total sales, and (3) whether the firm has expanded assets in the previous year. Fourth, we controlled for firms’ financial debt, measured by the percentage of operating income from banks. Fifth, we controlled for other perceived institutional voids by the firms, using respondents’ answers on a 6-point Likert scale of “how much of an obstacle” were political instability, governmental corruption, and labor regulation. Sixth, we controlled for country-level characteristics such as human development index and GDP per capita, with one-year lags. Seventh, we included bivariate indicators for the industry to control for industry influences. Eight, by using a multilevel model, we controlled for unobserved firm, country, and year influences. 2

One alternative measure is employee education (Barro, 2001), which is operationalized as the percentage of employees with at least a high-school degree. This measure is positively related to the percentage of unskilled employees but produces many missing values. Other alternative measures, such as the highest degree of the top management team, are only available in certain countries and years. 3 We thank one anonymous reviewer for this suggestion. 4 Other potential measures of upgrading by collaboration, such as whether the focal firm co-operated on any of its innovation activities with other enterprises or science and technology institutions, or received any public support (financial or other types of assistance) for innovation-related activities, are only available for a few countries. When this information is available, these measures are positively and significantly related to the measure we used. 5 An alternative measure is the actual expenditures of R&D as a percentage of total sales. This measure produces similar but insignificant results because of a large number of missing values.

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Estimation Methods Our data has a multi-level structure that requires modeling to separate the year (level 1), firm (level 2), and country (level 3) sources of variation. The statistical evidence shows that the intraclass correlation coefficient (ICC) at level 2 is 0.06, and the ICC at level 3 is 0.05, thus statistically confirming the multilevel structure of our data. Multilevel regressions were performed to account for clustering, or the nonindependence of firm-level observations within the same country. A set of random-intercept models was estimated where the intercepts were allowed to vary. We also computed a set of models with random intercepts and random slopes when the model fit worsened. Thus, we report and interpret the results based on a set of mixed-effect models with random intercepts. RESULTS Descriptive Statistics and Correlation Matrix Table 2 presents the means, standard deviations, and Pearson correlation coefficients for the variables in this study. The sample firms exhibit a wide range in their age, location, governance modes, and industry distribution. The highest variance inflation factor (VIF) in the analysis is 3.5, hence ruling out the potential threat of multicollinearity. ***Insert Table 2 about here*** Hypotheses Testing Table 3 presents the results of the three-level mixed-effect analyses. Model 1 is the baseline model with all control variables and moderators, Model 2 presents the effect of employees’ human capital deficiencies, Models 3 and 4 examine the moderating effects of organizational upgrading mechanisms, and Model 5 is the full model with all relevant variables and interactions included. In each regression model, a Chi square test for whether the multi-level model performs better than the standard, single‐level regression, is statistically significant at the 0.001 level. ***Insert Table 3 about here*** The baseline Hypothesis 1 posits that employees’ human capital deficiencies have a negative effect on firm performance improvement. The results indicate that Hypothesis 1 is weakly supported. In Model 2, the variable employees’ human capital deficiencies is negatively related to firm performance improvement (p=0.018). However, in Model 5, the full model, the variable becomes marginally significant (p=0.091). Hypothesis 2a argues that operating a joint venture with foreign firms alleviates the negative effect of firm-level human capital deficiencies on firm performance improvement. We find statistical support for Hypothesis 2a. Both Model 3 and Model 5 show that the effect of the interaction between operating a joint venture with foreign partners and employees’ human capital deficiencies is positive and significant (p= 0.042 and 0.026 respectively). Hypothesis 2b indicates that internal R&D amplifies the negative effect of employees’ human capital deficiencies on firm performance improvement. We find statistical support for Hypothesis 2b. In both Model 3 and Model 5, the effect of the interaction term between internal R&D and employees’ human capital deficiencies is negative and significant (p= 0.014 and 0.009 respectively). To better understand these interaction effects, we plot the interaction graphs (Figure 2a and 2b) using Model 5. The plots are based on the dummy moderators at 0 and 1 (Hox, 2010). The vertical axis represents the predicted margins of firm performance improvement with 95% confidence intervals, whereas the horizontal axis represents a continuous measure of the independent variable employees’ human capital deficiencies. The results show that, when a firm suffers from a higher degree of employees’ human capital deficiencies, upgrading by joint venture is more beneficial than upgrading by internal R&D. Figure 2a illustrates how upgrading by joint venture reduces the negative effect of employees’ human capital deficiencies on firm performance improvement. Figure 2b indicates that the decreasing predicted margins of firm performance improvement with employees’ human capital deficiencies become more severe when firms engage in upgrading by internal R&D. ***Insert Figure 2a and 2b about here*** To test Hypotheses 3a and 3b, which explain how the influence of organizational upgrading mechanisms change with the level of country-level human capital voids, we conducted a subgroup analysis, presented in Table 4. Models 6 and 8 show the main effect of employees’ human capital deficiencies, and 10

Models 7 and 9 show the interaction between employees’ human capital deficiencies and organizational upgrading mechanisms. Hypothesis 3a is not supported, and Hypothesis 3b is supported. The results show that the interaction between employees’ human capital deficiencies and operating a joint venture with foreign partners is positive and marginally significant in both groups (p=0.091 and 0.064 respectively). In contrast, the interaction between employees’ human capital deficiencies and internal R&D is negative and statistically significant in countries with higher country-level human capital voids (p=0.009), but positive and statistically not significant in countries with lower country-level human capital voids (p=0.906). We also imposed an equality constraint over the coefficients for the interaction terms in Models 7 and 9. ***Insert Table 4 about here*** Robustness Tests We conducted several tests to ensure the findings are robust to alternative explanations and influences. First, we checked the sensitivity of our results. The sample has an unbalanced mix of countries. Thus, we reestimated the models with a weighted variance estimation, which can reduce potential bias resulting from unequal probability samples (DuMouchel and Duncan, 1983). We also used the inverse of country probabilities as weights, and obtained consistent results. If we drop Ethiopia, which has the largest number of firms in our sample (18.66%), the results remain the same. To ensure that there was no systematic missing data bias, we computed a group of t-tests and found no significant mean differences in firm attributes, such as firm age and employment size, between the final sample and the firms excluded because of missing data. Second, we recognize that the categories of upgrading are not mutually exclusive. We run an additional robustness analysis in which we create a new categorical variable: 1=no joint venture with foreign partners and no internal R&D, 2=only joint venture with foreign partners, 3=only internal R&D, and 4=both joint venture with foreign partners and internal R&D. We use the new variable to moderate the relationship between human capital voids and firm performance improvement. The results show that, with group 1 as the reference, the moderating effect of group 2 is positive and significant, of group 3 is negative and significant, and of group 4 is negative but not significant. These results are consistent with our original results, showing that a joint venture with a foreign partner is effective in reducing the negative effect of employees’ human capital deficiencies on firm performance improvement, while internal R&D reinforces the negative effect. Third, we also included several country-level variables, such as GDP growth and the World Bank’s corporate governance indicators, as controls for selected robustness checks. Their results support the pattern of findings reported in the results section. Fourth, we ran the models using an alternative measure of country-level human capital voids, and instead of using the Human Development Index we use the measurement of education index and government expenditure on education (% of GDP). Although the different proxies produce slightly different scores for each country, the subgroup analysis results are consistent. That is, internal R&D no longer amplifies the negative effect of employees’ human capital deficiencies in countries with lower levels of national human capital voids. DISCUSSIONS AND CONCLUSION In this study, we analyzed the impact of human capital voids on firm performance improvement in underdeveloped countries, and proposed and explained how firms use organizational upgrading mechanisms to overcome the voids and perform better. We built on the knowledge-based view to argue that operating a joint venture with foreign partners lessens the hindering effect of employees’ human capital deficiencies on firm performance improvement, whereas internal R&D amplifies the hindering effect. We also argued that as country-level human capital voids diminish, this strategic alignment becomes less critical, and firms are less dependent on external learning and less constrained by internal learning to address employees’ human capital deficiencies and perform well. Contributions to the Literature These ideas contribute to three streams of literature: human capital voids, the knowledge-based view, and the literature on underdeveloped countries. First, the paper provides a fuller understating of the negative impact of human capital voids and the upgrading mechanism that firms can use to overcome the voids. 11

Human capital has long been argued as a critical resource underpinning organizational competitiveness (Pfeffer, 1994). Although scholars have verified the far-reaching effects of human capital on firm performance (e.g. Chacar, Newburry, and Vissa, 2010; Shrader and Siegel, 2007), existing studies are short on discussions of how to cope with human capital voids. In filling this research gap, our paper also separates the mechanisms and effects of human capital voids at the firm level and at the country level. Specifically, we explain how different organizational upgrading mechanisms address firm-level human capital voids differently, and how their differences are contingent on the country-level human capital voids. Second, the study contributes to the KBV by adding new insights on the use of organizational upgrading mechanisms to gain knowledge and address some of the unique obstacles of human capital voids. Current studies on organizational upgrading provide rich findings on the antecedents, conditions, and consequences of upgrading, but largely ignore the process; for review summaries, see Bapuji and Crossan (2004) and Dodgson (1993). We analyze two important organizational upgrading mechanisms: an external one (i.e., operating a joint venture with foreign partners), and an internal one (i.e., internal R&D). We suggest that firms confronting high employees’ human capital deficiencies are not incentivized or even able to carry out and leverage costly and time-consuming internal R&D, but may instead benefit from collaborating with sophisticated foreign partners for faster and more profitable competitive responses. This order of preference of organizational upgrading mechanisms to overcome employees’ human capital deficiencies reverses the usual order promoted in the KBV. For instance, the usual recommendation that firms should focus on investing in R&D to enhance their competitiveness (see chapters in Fagerberg, Mowery, and Nelson, 2005) seems to have a theoretical boundary in terms of the conditions of human capital. We explain and find that internal R&D does not seem to be an appropriate upgrading mechanism when countries have large human capital voids. However, this ceases to be the case in underdeveloped countries with citizens with more developed human capital, in which firms eventually manage to invest in R&D and innovate (Bromfield and Barnard, 2010) Finally, this study broadens existing research on how underdeveloped country firms catch up by investigating the understudied context of Sub-Saharan Africa (e.g., Bromfield and Barnard, 2010; Mellahi and Mol, 2015; Uzo and Mair, 2014). Firms in Sub-Saharan Africa experience many challenges common to other emerging country firms. However, certain “African factors” such as severe human capital voids stand out, making Sub-Saharan Africa an ideal laboratory to test the arguments in this study. Nevertheless, our study is able to provide broadly applicable managerial implications to the emerging market literature, such as the finding that the difference between organizational upgrading mechanisms in overcoming employees’ human capital deficiencies is smaller in markets with relatively lower country-level human capital voids. These findings allow us to bridge studies based on advanced economy firms, emerging economies, and underdeveloped economies. Implications for Practice The arguments and findings provide important implications for managers in underdeveloped countries. These managers are likely to find that their firms suffer from smaller performance improvements as a result of the skill deficiencies in their employees. Hence, managers need to find ways to overcome these human capital voids. When the firm is handicapped by employees’ human capital deficiencies, managers should adopt the collaboration mechanism to upgrade, and limit their internal R&D efforts. Managers should also keep in mind that the success of these organizational upgrading mechanisms depends on the national human capital market development. Managers should understand and monitor the stages of country-level human capital voids, which affect the effectiveness of different organizational upgrading mechanisms. Upgrading is not a static process, but one that evolves with the development stage of the countries where the firm operates. Reductions in the country-level human capital voids make internal R&D mechanisms more feasible. The findings also provide timely implications for policy makers. This study echoes previous findings that human capital is regarded as the most valuable asset (Pfeffer, 1994), and that reducing national human capital voids to facilitate firm upgrading is crucial. The findings indicate that human capital voids result in relatively low value for high-risk high-return upgrading mechanisms such as internal R&D. To alleviate such challenges, government officials should improve their highly skilled labor pool, which 12

becomes even more important as the economy becomes more knowledge-intensive. For example, governments may reduce country-level human capital voids by improving the quantity and quality of schooling, as well as by developing supporting regulations and institutions. By operating in a better human capital market, firms can utilize opportunities and overcome obstacles to various organizational upgrading mechanisms, thus spurring organizational catch-up in competitiveness and fostering national economic development. Future Research The study opens new avenues for future research, which can also address some of the limitations of our study resulting from data constraints. First, we were not able to study all the countries in the entire SubSaharan Africa region because of the limited data, restricting our ability to analyze the impact of political, cultural, demographic, social, and economic diversity within the region. The comparison of countries with lower and higher country-level human capital voids revealed new insights that can be refined further with a broader variety of countries. Future studies may find that in underdeveloped countries with more skilled citizens, internal R&D may have a compensating effect for employees’ human capital deficiencies, as some case-based research seems to point (Bromfield and Barnard, 2010). Second, we faced some measurement limitations that could be solved in the future. We were unable to include other firm performance indicators, such as profitability or return on assets, because of data constraints. In a similar vein, we were limited in our measure of the joint venture with foreign firms to what was available in the dataset and could not analyze in detail the level of ownership or the type of joint venture. Future research could investigate other performance improvement measures and other alternative measures of the independent variables. Third, we focused on two organizational upgrading mechanisms because of the restrictions of the dataset, so we were not able to analyze other organizational upgrading mechanisms. Upgrading by imitation, for example, might be very feasible in a market where intellectual property rights protection is weak and low-cost advantages are valued (Luo, Sun, and Wang, 2011). Upgrading by acquisitions might also be rewarding, particularly when firms are unable to obtain technology from the foreign partners with whom they are collaborating because advanced country firms establish barriers to the unintended transfer of technology (Zhao, 2006). A simpler form of acquisition, for example, is to bring expatriates into the underdeveloped country to compensate for the lack of employees with the skills needed to run the firms (Cooke, Wood, and Horwitz, 2015). This is illustrated by the following quote: “At times Angola’s new cityscapes look more like China than Africa. The frequent use of Chinese on signs and hoardings reinforces the illusion. With skills and locally sourced materials in short supply, Chinese contractors bring them in. During a visit to Beijing in April, the head of Angola’s migration department told the national news agency, Angop, there were nearly 260,000 Chinese in the country.” (White, 2012). Finally, it would be fruitful to examine whether the solutions to overcome human capital voids can be applied to other institutional voids. This is important because firms ultimately need to overcome all the different and intertwined voids, as indicated by the following quote: “In a heavily forested country [Gabon] with few roads, dominated by its capital city, incumbent investors say they are already struggling to attract unskilled workers for resource projects. ‘If you spend $10m on a project, one-third of it or $3m will be for social infrastructure – housing, roads, electricity,” says Gert Vandersmissen, director general of Siat Gabon [which was founded in Nigeria and also has operations in Ghana and Ivory Coast, and with 4,400 people on its payroll and describes itself as the country’s biggest private employer], which produces palm oil, rubber, and cattle in farflung parts of the country.” (Reed and Hollinger, 2012). Final Thoughts In the new era of global competition, latecomer firms from underdeveloped countries, such as the ones in Sub-Saharan Africa, need to improve their competitiveness and close the gap with global industry leaders. This study provides new insights on how firms improve performance while coping with obstacles from human capital voids. In particular, the findings help to determine the extent to which human capital voids can be mitigated through external learning, particularly operating a joint venture with foreign partners, 13

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Figure 1. Theoretical framework

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Table 1. Sub-Saharan Africa and selected countries, selected indicators Population

Millions

GDP

GNI per capita

Human Development Index Value

Life expectancy

Literacy rate

Mean years of schooling years

Primary school enrolment %

Secondary school enrolment %

Tertiary school enrolment %

Millions of 2011 PPP $ years % current US$ 2016 2014 2014 2014 2014 2015 2014 2012-14 a 2012-14 a 2012-14 a Angola 25.9 138,400 a 6,822 0.53 52 71 4.7 9.9 n.a. n.a. Benin 10.7 9,575 1,767 0.48 60 38 3.3 95.9 42.0 15.4 Botswana 2.1 15,813 16,646 0.7 65 89 8.9 91.0 62.8 27.5 Burkina Faso 19 12,542 1,591 0.4 59 36 1.4 67.5 21.7 4.8 Burundi 10.1 3,094 758 0.4 57 86 2.7 95.4 24.9 4.4 Cameroon 23.9 32,051 2,803 0.51 56 75 6 91.6 43.1 n.a. Cabo Verde 0.5 1,871 6,094 0.65 73 88 4.7 98.2 69.1 23.0 Central African Republic 5 1,723 581 0.35 51 37 4.2 70.6 13.6 2.8 Chad 14.5 13,922 2,085 0.39 52 40 1.9 84.4 n.a. 3.4 Comoros 0.8 624 1,456 0.5 63 78 4.6 83.2 43.9 8.7 Congo, Rep. 4.7 14,177 6,012 0.59 62 79 6.1 91.4 n.a. 10.4 Congo, Dem. Republic* 85 33,121 680 0.43 59 77 6 n.a. n.a. 6.6 Cote d'Ivoire 23.2 34,254 3,171 0.46 52 43 4.3 74.7 n.a. 8.7 Equatorial Guinea 1.2 15,530 21,056 0.59 58 95 5.5 56.8 n.a. n.a. a Eritrea 5.4 2,608 1,130 0.39 64 74 3.9 40.6 28.6 2.6 Ethiopia* 92.2 55,612 1,428 0.44 64 49 2.4 85.8 n.a. 6.3 Gabon 1.8 18,180 16,367 0.68 64 83 7.8 n.a. n.a. n.a. Gambia 2 851 1,507 0.44 60 56 2.8 69.9 n.a. n.a. Ghana* 27.7 38,617 3,852 0.58 61 77 7 88.6 54.6 15.6 Guinea 12.9 6,624 1,096 0.41 59 30 2.4 74.0 31.8 10.8 Guinea-Bissau 1.5 1,022 1,362 0.42 55 60 2.8 n.a. n.a. n.a. Kenya* 47.3 60,937 2,762 0.55 62 78 6.3 84.9 56.5 n.a. Lesotho 1.9 2,181 3,306 0.5 50 79 5.9 80.2 34.7 9.8 Liberia 4.6 2,013 805 0.43 61 48 4.1 37.7 16.7 11.6 Madagascar 22.4 10,593 1,328 0.51 65 65 6 n.a. 31.1 4.1 Malawi* 16.8 4,258 747 0.45 63 66 4.3 n.a. 32.9 n.a. Mali 18.1 12,037 1,583 0.42 58 39 2 59.4 34.6 6.9 Mauritania 3.7 5,061 3,560 0.51 63 52 3.8 74.4 21.5 5.5 Mauritius 1.3 12,630 17,470 0.78 74 91 8.5 96.2 n.a. 38.7 Mozambique 26.4 15,938 1,123 0.42 55 59 3.2 87.6 17.9 6.0 Namibia 2.3 12,995 9,418 0.63 65 82 6.2 89.7 53.9 n.a. Niger 20.7 8,169 908 0.35 61 19 1.5 61.0 15.7 n.a. Nigeria* 187 568,508 5,341 0.51 53 60 5.9 n.a. n.a. n.a. Source: Information on literacy rate comes from United Nations Education, Scientific, and Cultural Organization (UNESCO); Population data from official population clock and UN projection; Human development index and years of schooling from United Nations Development Programme (UNDP); The rest are from the World Bank http://databank.worldbank.org/data/. Note: Sudan is not included as part of Sub-Saharan Africa in the list used by the UN (2016). However, Library of Congress (2016) and World Bank (2016) include Sudan in their lists of Sub-Saharan countries and therefore we include it in this table. We include information on the United States, Russian Federation, Brazil, China and India for comparison purposes. a: Data refer to the most recent year available during the period specified. *: Countries included in our sample. n.a. not available

20

Table 1. Sub-Saharan Africa and selected countries, selected indicators (continued) Population

Millions

GDP

GNI per capita

Human Development Index Value

Life expectancy

Literacy rate

Mean years of schooling years

Primary school enrolment %

Secondary school enrolment %

Tertiary school enrolment %

Millions of 2011 PPP $ years % current US$ 2016 2014 2014 2014 2014 2015 2014 2012-14 a 2012-14 a 2012-14 a Rwanda 11.6 7,890 1,458 0.48 64 71 3.7 96.1 n.a. 7.5 São Tomé and Príncipe 0.2 337 2,918 0.56 67 75 4.7 n.a. n.a. 8.3 Senegal* 14.8 15,658 2,188 0.47 67 56 2.5 71.1 n.a. n.a. Seychelles 0.1 1,423 23,300 0.77 73 95 9.4 94.7 74.6 6.5 Sierra Leone 6.6 4,838 1,780 0.41 51 48 3.1 97.9 37.3 n.a. Somalia 11.1 5,707 550 a n.a. 55 n.a. n.a. n.a. n.a. n.a. South Africa 55 350,141 12,122 0.67 57 94 9.9 n.a. n.a. 19.0 South Sudan 12.1 13,282 2,332 0.47 56 32 5.4 n.a. n.a. n.a. Sudan 39.6 73,815 3,809 0.48 64 76 3.1 53.8 n.a. 14.9 Swaziland 1.1 4,413 5,542 0.53 49 88 7.1 78.5 34.4 5.3 Tanzania* 55.2 48,057 2,411 0.52 65 80 5.1 80.9 n.a. 3.6 Togo 7.1 4,518 1,228 0.48 60 67 4.5 91.2 10.0 10.1 Uganda* 34.9 26,998 1,613 0.48 59 74 5.4 93.7 n.a. n.a. Zambia* 15.9 27,066 3,734 0.59 60 63 6.6 87.4 n.a. n.a. Zimbabwe 14.2 14,197 1,615 0.51 58 87 7.3 88.7 43.3 5.9 United States 323.4 17,419,000 52,947 0.91 79 n.a. n.a. 92.8 n.a. 88.8 Russian Federation 146.5 1,860,598 22,352 0.8 70 100 12 96.1 n.a. 78.0 Brazil 206 2,416,636 15,175 0.76 75 93 7.7 n.a. n.a. n.a. China 1376.4 10,354,832 12,547 0.73 76 96 7.5 n.a. n.a. 30.2 India 1288.6 2,048,517 5,497 0.61 68 72 5.4 89.5 61.8 23.9 Source: Information on literacy rate comes from United Nations Education, Scientific, and Cultural Organization (UNESCO); Population data from official population clock and UN projection; Human development index and years of schooling from United Nations Development Programme (UNDP); The rest are from the World Bank http://databank.worldbank.org/data/. Note: Sudan is not included as part of Sub-Saharan Africa in the list used by the UN (2016). However, Library of Congress (2016) and World Bank (2016) include Sudan in their lists of Sub-Saharan countries and therefore we include it in this table. We include information on the United States, Russian Federation, Brazil, China and India for comparison purposes. a: Data refer to the most recent year available during the period specified. *: Countries included in our sample. n.a. not available

21

Table 2. Descriptive statistics and correlation matrix Variable 1. Firm performance improvement 2. Employees’ human capital deficiencies 3. Operating a joint venture with foreign partners 4. Internal R&D 5. Country human development index 6. GDP per capita 7. Labor regulation 8. Technology licensing 9. Exporting 10. Top manager industrial experience 11. Firm age 12. Sole proprietorship 13. Ownership concentration 14. Access to debt finance 15. Perceived political instability 16. Perceived corruption 17. Asset procurement

Mean 0.26 0.25 0.15 0.23 0.46 1257.95 1.00 0.16 0.09 16.66 20.46 0.57 0.86 0.10 1.19 1.66 0.67

Std. dev. 2.01 0.28 0.36 0.42 0.05 555.07 1.05 0.37 0.24 10.39 14.36 0.50 0.23 0.21 1.29 1.34 0.65

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

-0.04 0.05 0.05 -0.02 0.04 -0.03 0.03 0.10 -0.04 -0.05 -0.10 -0.04 0.02 -0.01 0.00 -0.02

0.09 0.04 0.02 -0.02 0.06 0.06 0.06 0.03 0.05 -0.12 -0.07 0.05 0.03 -0.03 -0.05

0.06 -0.11 -0.06 0.02 0.18 0.09 0.06 0.10 -0.33 -0.25 0.02 -0.06 -0.04 0.04

0.03 -0.02 0.07 0.18 0.12 -0.01 0.10 -0.18 -0.10 0.12 0.07 0.04 0.00

0.82 0.03 -0.01 0.09 0.06 0.07 0.27 0.25 -0.06 0.08 0.08 -0.37

-0.15 -0.05 0.01 0.09 0.01 0.18 0.18 -0.03 -0.10 -0.05 -0.14

0.05 0.05 -0.02 0.04 0.01 0.02 -0.01 0.28 0.25 -0.12

0.14 -0.04 0.08 -0.16 -0.09 0.05 -0.08 -0.02 0.04

0.01 0.11 -0.10 -0.05 0.10 0.01 -0.02 -0.03

0.40 -0.01 0.02 0.03 -0.01 -0.01 0.01

-0.14 -0.05 0.09 0.01 -0.03 -0.02

0.72 -0.10 0.10 0.04 -0.18

-0.09 0.09 0.05 -0.22

-0.07 -0.04 0.14

0.48 -0.14

-0.17

Note: n=1811. Pearson correlation coefficients are reported. The absolute value of correlation coefficients greater than 0.113 are significant at the 0.05 level, greater than 0.149 at the 0.01 level, and greater than 0.189 at the 0.001 level, two-tailed test.

22

Table 3. Results of the three-level mixed-effect analyses of the impact upgrading mechanisms on the relationship between firm-level human capital voids and performance

Employees’ human capital deficiencies

Model 1 ---

Employees’ human capital deficiencies * Operating a joint venture with foreign partners

---

Employees’ human capital deficiencies * Internal R&D

---

Operating a joint venture with foreign partners

Internal R&D

Country-level human development index

GDP per capita

Labor regulation

Technology licensing

Exporting

Top manager industrial experience

Firm age

Sole proprietorship

Ownership concentration

Access to debt finance

Perceived political instability

Perceived corruption

Asset procurement

Constant

N Chi2

0.02 (0.14) [0.890] 0.18 (0.11) [0.121] -9.03 (5.53) [0.103] 1.00 (0.65) [0.121] -0.01 (0.05) [0.771] 0.11 (0.13) [0.400] 0.69 (0.20) [0.001] -0.07 (0.08) [0.358] -0.22 (0.09) [0.014] -0.29 (0.15) [0.046] 0.30 (0.30) [0.325] 0.15 (0.22) [0.504] 0.03 (0.04) [0.552] 0.01 (0.04) [0.790] -0.14 (0.09) [0.130] -1.96 (2.99) [0.512] 1811 31.56

Dependent variable: Firm Performance Improvement Model 2 Model 3 Model 4 -0.4 -0.56 -0.19 (0.17) (0.19) (0.19) [0.018] [0.003] [0.323] --0.92 --(0.45) [0.042] -----1.00 (0.41) [0.014] 0.02 -0.01 0.02 (0.14) (0.14) (0.14) [0.873] [0.939] [0.910] 0.17 0.17 0.17 (0.11) (0.11) (0.11) [0.143] [0.142] [0.137] -8.98 -9.08 -8.78 (5.55) (5.48) (5.51) [0.106] [0.097] [0.111] 0.99 0.99 0.98 (0.65) (0.64) (0.64) [0.128] [0.120] [0.129] -0.01 -0.01 -0.02 (0.05) (0.05) (0.05) [0.787] [0.849] [0.741] 0.11 0.12 0.11 (0.13) (0.13) (0.13) [0.399] [0.353] [0.384] 0.70 0.72 0.69 (0.20) (0.20) (0.20) [0.000] [0.000] [0.001] -0.07 -0.07 -0.07 (0.08) (0.08) (0.08) [0.362] [0.347] [0.369] -0.21 -0.21 -0.22 (0.09) (0.09) (0.09) [0.015] [0.015] [0.014] -0.31 -0.32 -0.32 (0.15) (0.15) (0.15) [0.033] [0.029] [0.031] 0.30 0.31 0.27 (0.30) (0.30) (0.30) [0.323] [0.297] [0.361] 0.17 0.17 0.16 (0.22) (0.22) (0.22) [0.436] [0.449] [0.478] 0.03 0.03 0.03 (0.04) (0.04) (0.04) [0.527] [0.510] [0.571] 0.01 0.01 0.01 (0.04) (0.04) (0.04) [0.910] [0.879] [0.790] -0.13 -0.12 -0.12 (0.09) (0.09) (0.09) [0.172] [0.189] [0.198] -1.86 -1.89 -1.88 (2.99) (2.96) (2.98) [0.534] [0.522] [0.528] 1811 1811 1811 45.75 50.12 51.91

Model 5 -0.34 (0.20) [0.091] 1.01 (0.45) [0.026] -1.07 (0.41) [0.009] -0.02 (0.14) [0.881] 0.17 (0.11) [0.135] -8.88 (5.43) [0.102] 0.99 (0.63) [0.120] -0.01 (0.05) [0.805] 0.13 (0.13) [0.334] 0.71 (0.20) [0.000] -0.07 (0.08) [0.354] -0.22 (0.09) [0.014] -0.32 (0.15) [0.027] 0.29 (0.30) [0.333] 0.15 (0.22) [0.496] 0.03 (0.04) [0.555] 0.01 (0.04) [0.749] -0.11 (0.09) [0.221] -1.91 (2.93) [0.515] 1811 57.14

Note: The entries are unstandardized βs with standard errors in parenthesis, and p values in brackets. Firm age, top manager industry experience, and GDP per capita are log transformed in the regression. Industry controls are included in the analyses but not reported because of space constraints. The hierarchical model controls for firm, year and country influences.

23

Figure 2. Predictive margins of firm performance improvement

-.5

Firm performance improvement 0 .5

1

2a

-.3

-.24

-.06 0 .06 .12 .18 -.18 -.12 Firm-level Employees' Human Capital Deficiencies

.24

.3

.24

.3

No Joint Venture with Foreign Partners Joint Venture with Foreign Partners

-.5

Firm performance improvement 0 .5 1 1.5

2b

-.3

-.24

-.18 -.12 -.06 0 .06 .12 .18 Firm-level Employees' Human Capital Deficiencies No Internal R&D Internal R&D

Note: Plots are based on results of Model 5 in Table 3. Predicted margins of dependent variable with 95% CIs are plotted. Employees’ human capital deficiencies are subtracted by industry means.

24

Table 4. Results of the three-level mixed-effect analyses of the differences by country-level human capital voids of the impact upgrading mechanisms on the relationship between firm-level human capital voids and performance

Employees’ human capital deficiencies

Employees’ human capital deficiencies * Operating a joint venture with foreign partners Employees’ human capital deficiencies * Internal R&D Operating a joint venture with foreign partners

Internal R&D

GDP per capita

Labor regulation

Technology licensing

Exporting

Top manager industrial experience

Firm age

Sole proprietorship

Ownership concentration

Access to debt finance

Perceived political instability

Perceived corruption

Asset procurement

Constant

N Chi2

Dependent Variable: Firm Performance Improvement Model 6 Model 7 Model 8 Model 9 Lower Country-Level Human Capital Higher Country-Level Human Capital Voids Voids (DRC, Ethiopia, Malawi, Nigeria, Senegal, (Ghana, Kenya, Tanzania, Zambia) Uganda) 0.09 -0.00 -0.71 -0.61 (0.14) (0.17) (0.27) (0.32) [0.530] [0.983] [0.009] [0.059] --0.62 --1.35 (0.36) (0.73) [0.091] [0.064] ---0.04 ---1.85 (0.31) (0.71) [0.906] [0.009] 0.00 -0.02 -0.01 -0.06 (0.11) (0.11) (0.23) (0.23) [0.998] [0.832] [0.948] [0.783] 0.03 0.03 0.28 0.26 (0.09) (0.09) (0.19) (0.19) [0.721] [0.704] [0.150] [0.169] 0.76 0.75 -0.28 -0.27 (0.40) (0.40) (0.54) (0.53) [0.058] [0.058] [0.605] [0.604] 0.08 0.08 -0.10 -0.09 (0.04) (0.04) (0.08) (0.08) [0.027] [0.023] [0.221] [0.266] 0.09 0.11 0.16 0.13 (0.10) (0.10) (0.23) (0.23) [0.332] [0.251] [0.483] [0.572] 0.22 0.21 1.04 1.04 (0.16) (0.16) (0.32) (0.32) [0.176] [0.193] [0.001] [0.001] 0.11 0.10 -0.15 -0.14 (0.07) (0.07) (0.12) (0.12) [0.121] [0.134] [0.223] [0.237] -0.13 -0.13 -0.26 -0.27 (0.08) (0.08) (0.13) (0.13) [0.078] [0.085] [0.054] [0.047] 0.14 0.14 -0.55 -0.54 (0.13) (0.13) (0.22) (0.22) [0.274] [0.295] [0.014] [0.015] -0.22 -0.21 0.36 0.33 (0.28) (0.27) (0.45) (0.45) [0.420] [0.437] [0.421] [0.462] 0.22 0.2 0.11 0.12 (0.18) (0.18) (0.35) (0.35) [0.233] [0.270] [0.766] [0.740] 0.02 0.02 0.01 0.01 (0.03) (0.03) (0.07) (0.07) [0.536] [0.561] [0.903] [0.876] -0.05 -0.05 0.02 0.03 (0.03) (0.03) (0.07) (0.07) [0.104] [0.109] [0.734] [0.658] 0.16 0.16 -0.27 -0.24 (0.08) (0.08) (0.14) (0.14) [0.037] [0.037] [0.061] [0.086] -5.43 -5.42 3.5 3.45 (2.86) (2.84) (3.78) (3.70) [0.057] [0.056] [0.355] [0.351] 770 770 1041 1041 26.63 29.62 48.07 57.98

Note: The entries are unstandardized βs with standard errors in parenthesis, and p values in brackets. Firm age, top manager industry experience, and GDP per capita are log transformed in the regression. Industry controls are included in the analyses but not reported because of space constraints. The hierarchical model controls for firm, year and country influences. 25