When Do Firms Invest in Developing Rookies?

Firms must often decide how to augment their human capital (HC) in a manner that can generate competitive advantages. Two predominant options are either (1) to build which entails hiring novice employees and developing them inside the firm or (2) to acquire which means to hire experienced employees from other firms and then integrating them. Recent trends suggest that firms are pursuing both options in order to have a mix of both HC strategies. In this paper, I analyze firms that pursue both building and acquiring strategies, and then investigate when their attributes can inform effective governance of one strategy vis-à-vis the other. This paper theorizes that a firm that has the managerial slack to provide mentorship to its employees and the financial slack to make a long-horizon investment is more likely to use building relative to acquiring strategies. Using a panel dataset from the legal industry, which has reported the augmentation practices of law firms from the last decade, I test and find support for my hypotheses. Law firms’ managerial and financial slack is positively associated with building strategies. Alternatively, when law firms have less of these slacks, which would the case if external leaders are hired or a large number of employees suddenly depart, these firms are more likely to acquire.