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The Warsaw Voice » Special Sections » August 2, 2010
Education: MBA Studies
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Investment Despite Crisis
August 2, 2010   
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Why it’s worth investing in the development of managerial staff during an economic downturn.

In times of an economic crisis, businesses focus on cutting costs and are reluctant to invest.

The reservations about investment largely reflect growing uncertainty about the profitability of investment projects carried out during a downturn. Drastic cost cutting is a response to lower demand, which leads to a drop in output and an increase in average costs, and poses a threat of heavy losses or even bankruptcy.

Under such circumstances, businesses cut employment, and in many cases halt spending on staff training and programs supporting the development of managerial staff.

It is not without reason that I have mentioned resistance to investing.

Spending by businesses on staff training and professional development is an investment in human capital, which is now regarded as the main factor behind differences in the competitiveness of businesses. These days, competition is very strong, be it in times of economic expansion or contraction.

If the overall economic situation is poor most businesses do not use their production potential to the full. As a result, the work time of staff regarded as “high potentials” is used somewhat less intensively. Training such employees—for example candidates for promotion to senior managerial posts—may be additionally justified in times of recession. The reason is that training programs, for example an MBA or postgraduate course, taken by managers in such conditions do not clash as much with their current professional duties and pose a smaller threat to the firm’s performance. It may be assumed that the so-called opportunity cost of training a staff member—measured by his or her lower productivity due to shorter work time, being tired because of studies and so on—is lower in times of downturn when the firm does not use its potential to the full. This cost is probably higher in times of boom. This may be an additional argument indicating that the rate of return on investment in human capital is relatively high in times of an economic downswing.

It is worth pointing out that an economic downturn creates excellent opportunities for trainees to test their newly-acquired business skills in a challenging environment and accelerate the adoption of best practices to mitigate the negative consequences of the cyclical nature of business.

Businesses should be aware of the important role their human capital may play in increasing their competitiveness and resistance to business-cycle fluctuations. Managers in firms facing cuts in operating costs and investment expenditure need to be aware of this role.

A downturn is bad for any business. Businesses that are innovative, not only in terms of technology but also organization—those with the right business model—have a chance of losing less during a downswing than weaker, backward and less efficient ones.

The qualitative differences between the two types of businesses are strongly linked to their human capital resources.

In my view, in times of crisis firms should exercise maximum restraint and caution in cutting spending on staff training and development.

Professor Marian Geldner, Director of the Warsaw Executive MBA Program (WEMBA) at the Warsaw School of Economics (SGH).
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