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Recent innovation studies have moved away from research and development (R&D) centric approaches by focusing more broadly on the diversity of internal activities that help shape the innovation process (Baldwin & Gellatly, 2003). Increasingly, it is recognized that R&D is but one of the many paths to innovation. In fact, activities other than formal R&D may be more appropriate for small newly established firms and service companies. After all, start-ups often cannot afford to establish separate research and development departments (Sundbo, 1999). And in the service sector, innovation consists almost entirely on non-R&D related practices (Baldwin & Gellatly, 2003). Innovation and development in both these types of companies must be done by creative employees coming up with ideas and participating in development work simultaneously. Obviously, in these circumstances human resources become a resource of crucial importance (Sundbo, 1999). However, in contrast to the ample attention this topic has received on a more macro-economic level (nationally, globally, and so forth) by for instance the development economics literature, little is known of the relationship between workforce characteristics (employees) and innovation on the firm level. Management researchers have tended to focus more on the effects of workforce management practices and work organization on various measures of company performance, including innovation (Michie & Sheehan, 1999; Shaw, 2004).9Without disregarding the importance of human resource management practices, this study also considers the nature or the quality of the firm workforce itself by means of employee human capital. A venture’s human resources act as a surrogate indicator of its competence and credibility, affecting the ability to attract other types of resources needed in the innovation, development and growth process (Florin et al., 2003; Pennings et al. 1998). Moreover, as innovation requires the creation, transfer and integration of knowledge (Shadur & Snell, 2002), a highly qualified or educated pool of employees is likely to facilitate innovation as education affects learning and knowledge capabilities (Bartel & Lichtenberg, 1987). Firms that are endowed with better human resources should be more able to effectively plan, troubleshoot and problem-solve, adapt to environmental contingencies, detect new ways to increase benefits and to decrease costs and – last but not least - innovate (Coleman, 1988; Lengnick-Hall, 1992; Snell & Dean, 1992; Youndt et al., 1996). After all, the acquisition and transformation of new knowledge remains a human process (Laursen & Foss, 2003). Recruiting highly qualified employees is an important innovation related practice for small start-ups (Baldwin & Gellatly, 2003). Hence the first research hypothesis:Hypothesis 1. Innovation is positively stimulated by the level of employee human capital.
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