The role of investment in human capital: the essence and importance

Table of contents: The Kazakh-American Free University Academic Journal №2 - 2011

Author: Voronin Vadim, Almetyevsk State Institute of Municipal Service, Tatarstan

In the judgment of most scientists (analysts) capital formation is the essential component of human capital. Capital formation is one of the forces of economic growth of the country and its socio-cultural development. For the individual it comes forth as a public good, a basis of formation and humanization.

Human capital has a defining role, being one of the greatest factors of economic growth and welfare of the community in a modern economy. In this regard many firms pay careful attention to human capital accumulation as a type of capital of high-value.

Human capital theory was studied from the XIX century. Such famous economists and theorists as Sir William Petty, Adam Smith, John Stuart Mill and Karl Heinrich Marx discussed useful human capabilities using the term “nominal capital”. Their discussion was about the necessity and expediency of the human treatment and its abilities as peculiar nominal capital. Such economists as Jean Baptiste Say, George McCulloch, Nassau William Senior, Walter Roscher, Henry Dunning Macleod, Marie Ésprit Léon Walras, Johann Heinrich von Thünen, Irwin Fisher considered human treatment as possible and useful as a form of nominal capital.

The term “human capital” gains considerable importance not only among academic economist, but also among individual firms.

The importance of human capital includes: skilled labor force; set of knowledge, qualifications, practical skills, abilities to innovations of each of employees of the enterprise; system of values, culture, and philosophy of business which can't be copied or reproduced in other organizations.

Interest has increased in economic science in human creative abilities, to ways of their formation and development. Many companies are beginning to make a point of accumulation of the human capital, as most valuable of all kinds of the capital.

One way of accumulating human capital is investment in health and education.

The quality and level of gained knowledge are determined by natural abilities and environmental factors: the level of the educational institution, where the knowledge was derived or obtained, diligence, financial possibilities of the family, education paid for by the student, the national policy in the field of education, state financial backing and patronage of the education system. Adequate attention still is not paid to the importance of personal motivation for the person gathering knowledge and to the important contribution of knowledge in the total value of human capital.

The motivation for lifelong learning depends on many factors: the level of education, norms and values, supported by the state and society, the demand for qualified specialists, professional skills and personal qualities of the teachers, employed educational technologies, the general organisational culture of the educational institution, and human consciousness of the link between professional career and existing knowledge.

Meanwhile, the future of the citizen is not satisfied only with the theoretical knowledge on account of obsolescence lead by rapidly developing science. Competitive power in the job market depends on the activity of the person, the flexibility of his thinking, the ability to improve already gained knowledge and experience. The ability to adapt successfully to the constantly changing world is the basis of social success.

In this regard it is quite understandable the interest, which shows modern pedagogy to pragmatic technologies of training. One of the examples of the activity approach in educational activity is the method of investment in the knowledge economy - projects.

Project-based learning newly becomes relevant in the modern information society.

The project is the work aimed at solving a particular problem, achieving the beforehand planned result by an optimal way.

There are several types of projects: practice-oriented, research, information, creativity, game or role-playing. Each of these projects has its own intentions, designed product, the type of the activity of the student and forms of competence (activity, reasoning, information, communication).

The development of the common educational skills is one of the most important tasks of training, as well as the problem of formation of competencies, can be addressed in the project activities. Under the term “competence” usually is understood the knowledge, coupled with the experience of their practical application. The attention to the formation of competencies is a characteristic feature of active learning technologies.

The competence approach in education that is in great request as of today advances at first the ability of the student to solve problems arising in practical activity rather than the student’s information awareness. The competence can be gained only with the help of self-setting of the problem, its research, the search of the necessary resources for its solution. Namely the project activity allows the students to learn to recognize the problem, to transform it into a goal of its activity, to develop a plan of the succeed; realize it, to achieve results and, looking back, to analyze their own successes and failures, in order to avoid them in the future.

The competent use of knowledge can serve as a significant competitive advantage of the Russian economy in the whole world, as far as in the previous historical period the qualitative institutional base for their reproduction was laid. At the present time the presence of the will on the macroeconomic level is required and the support from the government for the effective involvement of previous groundwork.

Many followers of the theory of human capital have developed quantitative methods of the knowledge economy and the analysis of the investments efficiency in education, health care, training on production operation, migration, birth and care for children, and their monetary returns for society and the family. The main focus of this analysis is made on the individual's producible capacity and income differentiation induced by different levels of investment in their production.

Let us analyze the main causes, mechanisms of changes in "human capital" that affect the educational process and corporate level for better understanding of the process of investing in "human capital". More often the corporate human capital increases due to the accession of the individual "human capital" of newly adopted workers (primary, extensive way).

The "human capital" changes the size and structure due to the investments, as from the part of the worker, as well as from the company, notably the change of the individual "human capital" is primary. As consequence, the corporate "human capital" (the intensive factor) increases (by changing its structure).

For Example: an overrating of the "human capital" reflects the impact on corporate "human capital" of external factors, whereas the «human capital" can not be regarded independently from external conditions. The overrating can be both positive and negative. In the latter case the term "depreciation" fits better. Except for depreciation, the of recession factors of the corporate "human capital" become firing of the workers, death or other reasons, that lead to retirement.

How the impact of investment can influence on the change of the elements of the "human capital"? It appears that this change occurs in the consumption of the earlier created value and labor force, which are supported by investments. Any investment in "human capital" is connected with participation of labor, whether it is the labor of the teacher, the sports coach or the confectioner. But, what is more important, the indispensable condition of the achievement of an objective of investment is the work of the medium of the "human capital". Thus, the process of “human capital” elements transformation is the consumption process of earlier made value and labor power, therefore it has clear analogies with the production process, and may be considered quite the same with some assumptions. The essential difference is that for such a “production” we may have enough labor power, while we need the other factors for usual production process.

The main problem, the modern enterprises have to clash, is the valuation of human capital investment efficiency. Difficulties, we meet here, are mostly explained by some peculiarities the human capital investment has, what distinguishes it from the other types of investment.

Firstly, the efficiency from human capital investment immediately depends on its bearer life term (on the duration of work capacity period).

The earlier the human investment is made, the quicker it begins its efficiency. But we should know that more qualitative and permanent investment gives higher and more prolonged effect.

Secondly, intellectual and human capital is exposed not only to the physical and moral wear, but is also able to accumulate and increase. The human capital wear forms, firstly, by natural wear degree (aging) of the human system and its psycho-physiological functions, and, secondly, by moral (economic) wear degree caused by knowledge aging or the received education value changing. The human capital accumulation forms during the process of worker’s periodical re-learning and his accumulation of production experience. If this process is uninterrupted, then, using the human capital, we may improve and increase its qualitative and quantitative characteristics (quality, volume, value).

Thirdly, during the human capital accumulation its profitableness increases to the definite limit, restricted by the upper bound of work activities (active able to work age), and then comes down abruptly.

Fourthly, in the human capital forming “the mutual multiplying effect” takes place. Its essence is that during the learning process the characteristics and capacities of not only the trained improve and increase, but also of the trainer, that causes, as a result, the wage growth of both.

Fifthly, not all the human investment may be considered as human capital investment, but only that which is expedient for the society and necessary for the economy. For example, the expenses for the criminal activity are not the human capital investment, because they are not expedient and noxious for the society.

Sixthly, the whole character and the human investment types are conditioned by historical, national, cultural peculiarities, and traditions. So, the education level, and choice of the future profession by children greatly depends on their family traditions and their parents’ educational level.

Seventhly, in comparison with the other different forms of capital investment, the human capital investment is the most profitable one, as in the definite person’s opinion, so from the point of view of the whole society.

In the opinion of many scientists’ theoretical and practical methodology, the investment just makes the base for the human capital production in the Education System, the Health Service, the qualification rise system, economic motivation, geographic mobility, etc. Its essence is not only putting money, but also real, deliberate, and purposeful activity of the investor. Here expenses of labor and efforts in self-development, and self-perfection play an important role in the human capital creation. Proceeding from the topical suppositions, we can make the following formulation of this study theme:


High technologies need knowledge renovation among specialists one 5-7 years. Thus, the uninterrupted education takes the paramount importance. The aim to form in a person the motivation to study during the whole his life becomes especially important. The rates of scientific and technical progress, the development of the new type economy (knowledge economy), and also the realization of the firm society development conception depend on the success of its achieving.

The quality and the rate of professional skills are defined by the developed natural capacities of the concrete person, by his level of the received education, his experience, the complexity level of the job, and by the labor motivation.

As education has a great influence on all the components of the human capital, so the education investment is one of the most important investment types. The knowledge, secured in the human capital and technologies, is the engine of productivity and economic growth. We may call human capital investment any measure, taken to increase the labor production. Thus, we refer to the human capital investment the expenses for the health maintenance, for receiving the general and higher education; expenses, connected with the job seeking, with professional training on the production, with migration, birth and growth up of children, with seeking the information about prices and wages, which is very important for the economy.

Economists distinguish three types of the human capital investment:

- expenses for education, including the general and special, formal and informal ones, for the training in the work place;

- expenses for care of the health, that form from diseases prophylaxis, medical services, dietary food, the improvement of living conditions;

- expenses for mobility, due to which the workers migrate from the places with comparatively low production force.

Also there is a subdivision of the human capital investment into material and immaterial ones. To the first group we refer all the expenses that are necessary for physical forming and development of the person (cost from the birth and growth of children); to the second one – accumulated expenses for the general education and special training, a part of accumulated expenses for the care of health, and labor power transference.

From all the types of human capital investment the most important is the health and education investment. The general and special education improves the knowledge quality of the person, raises its level and accumulation, and increases the volume and quality of the human capital. The higher education investment helps the forming of highly qualified specialists, whose highly skilled labor causes the greatest influence on economic growth rates.

Today one of the most important components of the human capital investment in all the countries is the expenses for training on the production. In any training project up to 80% of knowledge are taken independently by the worker. Especially it is related to the professions of specialists, such as investigators, teachers, engineers, computer experts, etc, who must refresh their qualification uninterruptedly by individual studying of literature, using independent training programs, learning-by-doing, other people’s experience, and marks (opinions).

Education investments on the basis of its essence are usually distinguished into formal and informal ones. Formal investment is getting the general, special and higher education, professional production training, different courses, study in the magistracy, in postgraduate course, degree study, etc. Informal investment is a person’s self-education, here we may see reading the developing literature, perfecting in different arts, professional sport training. Together with education, the investment in health is also considered one of the most important. It causes the reduction of diseases and mortality, the prolongation of work capacity in the human life, and, therefore, of human capital functional time.

The human capital investment has some peculiarities, what makes it different from the other types of investment:

Firstly, the return of the human capital investment depends directly on its bearer life term (on the duration of the work capacity period). The earlier the human investment is made, the quicker it begins its efficiency.

Secondly, intellectual and human capital is exposed not only to the physical and moral wear, but is also able to accumulate and increase.

Thirdly, during the human capital accumulation its profitableness increases to the definite limit, restricted by the upper bound of work activities (active able to work age), and then comes down abruptly. Not all the human investment may be considered as the human capital investment.

So, if we examine the other countries of the world, according to the valuations, the largest volume of the human capital is in the USA and comes to about three fourth of the whole national welfare in the USA. The human factor investment has become the main purpose of the confident economic development of the United States in the late of the XX century.

Investments in the human factor became the main cause of the steady economic development of the United States at the end of the XX century.

Financing of staff education, creation of training centers become one of the main objects of attention among the companies in many countries of the world. However, unfortunately many firms still economize on training. While the IBM company, "Xerox", "Motorola" and other channel their funds for education at the rate from 5% to 10% of the labour compensation fund, the expenditures of the majority of firms on education average out at less than 2% of the labour compensation fund (salary fund).

The application of innovative technologies and methods of projects in education contribute to the formation of highly qualified specialists, who will become human and intellectual capital in the future, which is the engine of productivity and economic growth, not only of the institutions, but also of the country as a whole.


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Table of contents: The Kazakh-American Free University Academic Journal №2 - 2011

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