Learning: What and How? An Empirical Study of Adjustments in Human Resource Systems

Abstract

What information do firms use when they design their organizational structure? How do they learn what direction they should take? Generally, firms may learn from their own experiences and outcomes, as well as those of other firms. In the economics literature, learning from these sources has been investigated in conjunction with three theoretical strands: learning-by-doing, matching theory, and social learning. We construct a conceptual framework that incorporates these three strands and develop hypotheses about the effects of various factors on learning about adjusting one important element of organizational structure, the human resources system. We concentrate on four human resource systems: traditional (the simplest system), decision-making oriented, financial-incentives oriented, and high-performance (the most complex system). The hypotheses regard (1) the effects of learning-by-doing on adoption of more or less complex systems, (2) the shape of the performance-experience learning curves associated with different systems, (3) the match between perceived organizational capabilities and the degree of complexity of human resource systems, (4) the influence of other firms’ systems and the performance associated with them on a firm’s adjustment of its system, (5) the effect of a firm’s location on its adjustment decisions, and (6) the effects of various factors on the speed with which firms adjust their systems. We use a unique panel dataset of firms in Minnesota concerning decisions about adjustments in human resource systems, as well as about firm characteristics, geographic location and financial results. We obtain a rich set of findings: organizational learning is multifaceted, learning by doing one system does help with other systems, we replicate the famous learning curve only for the complex human resources system but not others, firms use changes in their performance as signals of their capabilities, and firms learn from other firms’ experiences. Larger and higher-wage firms learn faster to cope with complex systems, older firms learn slower, and firms located near a major metropolitan center adjust faster to more complex systems.