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Effective Human Resources Management in Small and Medium Enterprises: Global Perspectives Carolina Machado University of Minho, Portugal

Pedro Melo University of Minho, Portugal

A volume in the Advances in Human Resources Management and Organizational Development (AHRMOD) Book Series

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Published in the United States of America by Business Science Reference (an imprint of IGI Global) 701 E. Chocolate Avenue Hershey PA 17033 Tel: 717-533-8845 Fax: 717-533-8661 E-mail: [email protected] Web site: http://www.igi-global.com

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All work contributed to this book is new, previously-unpublished material. The views expressed in this book are those of the authors, but not necessarily of the publisher.

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Effective human resources management in small and medium enterprises : global perspectives / Carolina Machado and Pedro Melo, editors. pages cm Includes bibliographical references and index. Summary: “This book addresses the issues of HRM in SMEs by providing a channel of communication to disseminate knowledge; including management philosophies, culture, and management practices”-- Provided by publisher. ISBN 978-1-4666-4731-2 (hardcover) -- ISBN 978-1-4666-4732-9 (ebook) -- ISBN 978-1-4666-4733-6 (print & perpetual access) 1. Personnel management. 2. Small business--Management. I. Machado, Carolina, 1965- editor of compilation. HF5549.E4234 2014 658.3--dc23 2013028004 This book is published in the IGI Global book series Advances in Human Resources Management and Organizational Development (AHRMOD) (ISSN: 2327-3372; eISSN: 2327-3380)

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Advances in Human Resources Management and Organizational Development

(AHRMOD) Book Series

• Change Management • E-Human Resources Management • Employee Benefits • Employee Communications • Employee Relations • Outsourcing HR • Performance Improvement • Strategic HRM • Succession Planning • Worker Behavior and Engagement

Patricia Ordóñez de Pablos Universidad de Oviedo, Spain

ISSN: 2327-3372 EISSN: 2327-3380

Mission A solid foundation is essential to the development and success of any organization and can be accom- plished through the effective and careful management of an organization’s human capital. Research in human resources management and organizational development is necessary in providing business leaders with the tools and methodologies which will assist in the development and maintenance of their organizational structure.

The Advances in Human Resources Management and Organizational Development (AHRMOD) Book Series aims to publish the latest research on all aspects of human resources as well as the latest methodologies, tools, and theories regarding organizational development and sustainability. The AHR- MOD Book Series intends to provide business professionals, managers, researchers, and students with the necessary resources to effectively develop and implement organizational strategies.

Coverage IGI Global is currently accepting manuscripts

for publication within this series. To submit a pro- posal for a volume in this series, please contact our Acquisition Editors at [email protected] or visit: http://www.igi-global.com/publish/.

The Advances in Human Resources Management and Organizational Development (AHRMOD) Book Series (ISSN 2327-3372) is published by IGI Global, 701 E. Chocolate Avenue, Hershey, PA 17033-1240, USA, www.igi-global.com. This series is composed of titles available for purchase individually; each title is edited to be contextually exclusive from any other title within the series. For pricing and ordering informa- tion please visit http://www.igi-global.com/book-series/advances-human-resources-management-organizational/73670. Postmaster: Send all address changes to above address. Copyright © 2014 IGI Global. All rights, including translation in other languages reserved by the publisher. No part of this series may be reproduced or used in any form or by any means – graphics, electronic, or mechanical, including photocopying, recording, taping, or information and retrieval systems – without written permission from the publisher, except for non commercial, educational use, including classroom teaching purposes. The views expressed in this series are those of the authors, but not necessarily of IGI Global.

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Titles in this Series For a list of additional titles in this series, please visit: www.igi-global.com

Effective Human Resources Management in Small and Medium Enterprises Global Perspectives Carolina Machado (University of Minho, Portugal) and Pedro Melo (University of Minho, Portugal) Business Science Reference • copyright 2014 • 374pp • H/C (ISBN: 9781466647312) • US $185.00 (our price)

Strategic Approaches for Human Capital Management and Development in a Turbulent Economy Patricia Ordóñez de Pablos (Universidad de Oviedo, Spain) and Robert D. Tennyson (University of Minnesota, USA) Business Science Reference • copyright 2014 • 346pp • H/C (ISBN: 9781466645301) • US $185.00 (our price)

Building a Competitive Public Sector with Knowledge Management Strategy Yousif Al-Bastaki (University of Bahrain, Bahrain) and Amani Shajera (University of Bahrain, Baharain) Business Science Reference • copyright 2014 • 514pp • H/C (ISBN: 9781466644342) • US $185.00 (our price)

Collaborative Communication Processes and Decision Making in Organizations Ephraim Nikoi (University of Wisconsin-Superior, USA) and Kwasi Boateng (University of Arkansas-Little Rock, USA) Business Science Reference • copyright 2014 • 353pp • H/C (ISBN: 9781466644786) • US $185.00 (our price)

Valuing People and Technology in the Workplace A Competitive Advantage Framework Claretha Hughes (RHRC/COEHP, USA) Information Science Reference • copyright 2012 • 421pp • H/C (ISBN: 9781466602403) • US $175.00 (our price)

Human Resource Management in the Digital Economy Creating Synergy between Competency Models and Information Susana de Juana-Espinosa (Universidad de Alicante, Spain) Jose Antonio Fernandez-Sanchez (Universidad de Alicante, Spain) Encarnacion Manresa-Marhuenda (Universidad de Alicante, Spain) and Jorge Valdes-Conca (Universidad de Alicante, Spain) Information Science Reference • copyright 2012 • 445pp • H/C (ISBN: 9781613502075) • US $175.00 (our price)

Distributed Team Collaboration in Organizations Emerging Tools and Practices Kathy L. Milhauser (George Fox University, USA) Business Science Reference • copyright 2011 • 336pp • H/C (ISBN: 9781609605339) • US $180.00 (our price)

Managing IT Human Resources Considerations for Organizations and Personnel Jerry Luftman (Stevens Institute of Technology, USA) Business Science Reference • copyright 2011 • 424pp • H/C (ISBN: 9781609605353) • US $180.00 (our price)

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Editorial Advisory Board Chris Brewster, University of Reading, UK Maria Emília Fernandes, University of Minho, Portugal Ana Paula Ferreira, University of Minho, Portugal Stephanie Jameson, Leeds Metropolitan University, UK Oliver Mallett, Durham University, UK Wayne O’Donohue, Griffith Business School, Australia Teresa Carla Oliveira, University of Coimbra, Portugal Cem Tanova, Eastern Mediterranean University, Turkey Robert Wapshott, University of Sheffield, UK Connie Zheng, Deakin University, Australia

List of Reviewers Neeta Baporikar, Ministry of Higher Education, CAS – Salalah, Sultanate of Oman Josh Bendickson, Louisiana State University, USA Kenneth Cafferkey, Universiti Tun Abdul Razak, Malaysia Burcu Özge Özaslan Çalışkan, Istanbul University, Turkey Dababrata Chowdhury, University of Suffolk, UK Nil Selenay Erden, Turkey Maria Emília Fernandes, University of Minho, Portugal Ana Paula Ferreira, University of Minho, Portugal Maria Carmen Galang, University of Victoria, Canada Brian Harney, Dublin City University, Ireland Stephanie Jameson, Leeds Metropolitan University, UK Eric W. Liguori, California State University – Fresno, USA Oliver Mallett, Durham University, UK Olimpia Meglio, Department of Law, Economics, Management, and Quantitative Methods (D.E.M.M.), Italy Wayne O’Donohue, Griffith Business School, Australia Gizem Öksüzoğlu-Güven, University of Mediterranean Karpasia, Northern Cyprus Teresa Carla Oliveira, University of Coimbra, Portugal Pramila Rao, Marymount University, USA Mercedes Rubio-Andrés, San Pablo CEU University, Spain David Starr-Glass, State University of New York - Empire State College, USA A. Suryanarayana, Osmania University, India Cem Tanova, Eastern Mediterranean University, Turkey Robert Wapshott, University of Sheffield, UK Connie Zheng, Deakin University, Australia

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Table of Contents

Preface................................................................................................................................................xvii

Introduction ........................................................................................................................................ xix

Chapter 1 The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs ................. 1

Maria Carmen Galang, University of Victoria, Canada Intan Osman, Universiti Sains Malaysia, Malaysia

Chapter 2 Human Capital in Malaysian SMEs: HR Practices, Uniqueness, and Value ........................................ 28

Kenneth Cafferkey, Universiti Tun Abdul Razak, Malaysia Brian Harney, Dublin City University, Ireland Pua Eng Teck, Universiti Tun Abdul Razak, Malaysia

Chapter 3 Effective Human Resources Management Practices in Small and Medium Enterprises: Global Perspectives of the MIST (Mexico, Indonesia, South Korea, Turkey) Economies .............................. 44

Anil Chandrakumara, University of Wollongong, Australia Pramila Rao, Marymount University, USA

Chapter 4 The Synergistic Potential of Human Resource Management in Small and Medium Enterprises ........ 74

David Starr-Glass, State University of New York - Empire State College, USA

Chapter 5 Managing Human Resources in Family Businesses: A Review on the Current State of Research and New Proposals for the Future ......................................................................................................... 96

Santiago Gutiérrez-Broncano, University of Castilla-La Mancha, Spain Mercedes Rubio-Andrés, San Pablo CEU University, Spain Pedro Jiménez Estévez, University of Castilla-La Mancha, Spain

Chapter 6 HRM Practices and Problems in Family-Owned SMEs ..................................................................... 113

Burcu Özge Özaslan Çalişkan, Istanbul University, Turkey

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Chapter 7 Intergenerational Transition in a Small Family Business: Evidence from a Process Study ............... 131

Carlo Mari, University of Molise, Italy Olimpia Meglio, University of Sannio, Italy

Chapter 8 The Role of Human Resources Practices in Conflict Management: Implications for Small-Medium Enterprises ........................................................................................................................................... 148

Nil Selenay Erden, Istanbul University,Turkey

Chapter 9 Occupational Health and Safety in SMEs: Overview as a Part of Management System ................... 167

Burcu Özge Özaslan Çalişkan, Istanbul University, Turkey

Chapter 10 The Impact of the Entrepreneur’s Educational Level on the Employment Creation by New Small and Medium Enterprises ..................................................................................................................... 183

João Zambujal-Oliveira, Instituto Superior Técnico, Universidade de Lisboa, Portugal Luis Contente, Instituto Superior Técnico, Universidade de Lisboa, Portugal

Chapter 11 Placing SMEs at the Forefront of SHRM Literature .......................................................................... 201

Josh Bendickson, Louisiana State University, USA Eric W. Liguori, California State University – Fresno, USA Jeffrey Muldoon, Louisiana State University, USA Lindsay N. Newport, The Martin Agency, USA K. Mark Weaver, University of South Alabama, USA

Chapter 12 How SMEs in the Car Maintenance Services Industry Recruit Employees from the Dense Forest of Hopeless Unemployed Youths: Case Study of Two Selected Cities in Tanzania ........................... 222

Felix Adamu Nandonde, Aalborg University, Denmark Pamela John Liana, Open University of Tanzania, Tanzania

Chapter 13 The Rise, Decline, and Regeneration of Industrial Districts: Enhanced HRM, SMEs, and Location .............................................................................................................................................. 238

Stuart Holland, University of Coimbra, Portugal Teresa Carla Oliveira, University of Coimbra, Portugal

Chapter 14 Self-Managing Teams in Small and Medium Enterprises (SME) ....................................................... 280

Mercedes Rubio-Andrés, San Pablo CEU University, Spain Santiago Gutiérrez-Broncano, Castilla-La Mancha University, Spain Luis Varona-Castillo, San Pablo CEU University, Spain

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Chapter 15 Decision Making in SMEs: Insights from Business Ethics and Entrepreneurship ............................. 301

Gizem Öksüzoğlu-Güven, University of Mediterranean Karpasia, Northern Cyprus

Chapter 16 Innovation Strategies in SME: Global Perspective ............................................................................. 315

Neeta Baporikar, Ministry of Higher Education, CAS – Salalah, Oman

Chapter 17 Hierarchies and Holdings: Implications of SME Entrepreneurship for Enhanced HRM in Hospital Management ......................................................................................................................... 342

Teresa Carla Oliveira, University of Coimbra, Portugal Stuart Holland, University of Coimbra, Portugal João Fontes da Costa, Instituto Politécnico de Coimbra, Portugal Francisco Edinaldo Lira de Carvalho, University of Coimbra, Portugal

Chapter 18 HRM Evolution in SMEs: Recruitment and Selection Case .............................................................. 377

Pedro Ribeiro Novo Melo, University of Minho, Portugal Carolina Feliciana Machado, University of Minho, Portugal

Chapter 19 Internationalization Services for Small and Medium Enterprises: A Case Study ............................... 393

Enrico Buggea, Politecnico di Milano, Italy Roberto Castiglione, Politecnico di Torino, Italy Tania Cerquitelli, Politecnico di Torino, Italy Lorenzo Grosso, Politecnico di Torino, Italy Giacomo Rontini, Politecnico di Milano, Italy Arianna Scolari, Politecnico di Milano, Italy Lei Xiang, Politecnico di Torino, Italy

Chapter 20 Entrepreneurship Readiness in Turkey: Profiles from Istanbul-Kayseri-Van Provinces .................... 415

Leyla Tulunay, Hacettepe University, Turkey Semra Güney, Hacettepe University, Turkey M. Kemal Öktem, Hacettepe University, Turkey

Compilation of References ............................................................................................................... 427

About the Contributors .................................................................................................................... 493

Index ................................................................................................................................................... 502

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Detailed Table of Contents

Preface................................................................................................................................................xvii

Introduction ........................................................................................................................................ xix

Chapter 1 The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs ................. 1

Maria Carmen Galang, University of Victoria, Canada Intan Osman, Universiti Sains Malaysia, Malaysia

From a survey of Small and Medium-Sized Enterprises (SMEs) in Malaysia and the Philippines, the authors find that the adoption of strategic Human Resource Management (HRM) is at best at a moderate level. The adoption of strategic HRM by SMEs in both Malaysia and the Philippines is predicted from the positive effect of legal and regulatory requirements, the importance of business environment chal- lenges, and the strategic role of the HR professional. Furthermore, regression analysis shows that in both countries, SMEs with strategic human resource management have better organizational performance in terms of human resource outcomes, operational outcomes, and financial outcomes, but the impact is larger in the Philippine SMEs. This study adds empirical evidence currently available from a small set of countries, mostly in North America and Europe. The authors end this chapter with implications for policy makers and HR practitioners and provide recommendations for future research.

Chapter 2 Human Capital in Malaysian SMEs: HR Practices, Uniqueness, and Value ........................................ 28

Kenneth Cafferkey, Universiti Tun Abdul Razak, Malaysia Brian Harney, Dublin City University, Ireland Pua Eng Teck, Universiti Tun Abdul Razak, Malaysia

This chapter explores Human Capital in Malaysian SMEs. Malaysia has placed significant policy emphasis on indigenous SMEs as a basis for achieving economic growth and competitiveness. This renders the human capital infrastructure of SMEs of critical importance. However, the reality is that there is little information as to the nature of HR practices and their impact in Malaysian SMEs. This chapter aims to fill this void by exploring descriptive findings from a unique sample of over 200 Malaysian SMEs. Drawing on the work of Lepak and Snell in particular, the chapter offers insights into human capital uniqueness and human capital value in the firms investigated. The performance and policy implications of the research are discussed and future research avenues outlined.

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Anil Chandrakumara, University of Wollongong, Australia Pramila Rao, Marymount University, USA

This chapter explores HRM (Human Resource Management) practices in SMEs (Small and Medium Enterprises) in the MIST (Mexico, Indonesia, South Korea, and Turkey) economies. Researchers and consultancy firms such as Goldman Sachs have suggested that these nations will be potentially very strong trading economies for the next decade based on economic analyses. SMEs play pivotal roles in these nations as they contribute to a majority of their domestic employment and GDP (Gross Domestic Product). The focus of the chapter is based on a thorough investigation of secondary sources on HRM practices (recruitment and selection, training and development, performance management, and compen- sation) of SMEs in the MIST nations. Institutional theory and Strategic Human Resource Management (SHRM) perspectives are showcased in understanding these practices better. The findings of the study suggest that HRM practices adopted in the MIST countries, both individually as well as a cluster, reflect the aspects of universalistic, contingency, resources bases, and institutional perspectives of the Strategic HRM (SHRM) model. The evidence also indicates the simultaneous adoption of both convergence and divergence theories of international HRM. The chapter also presents a model of HRM practices adopted by the SMEs in the MIST nations. Theoretical and practical implications of findings are discussed and directions for future research are provided.

Chapter 4 The Synergistic Potential of Human Resource Management in Small and Medium Enterprises......... 74

David Starr-Glass, State University of New York - Empire State College, USA

In large-scale operations, strategically orientated Human Resource Management generally has a structural function. In small- and medium-sized enterprises, however, strategic intent has to be more intimately matched to entrepreneurial behavior of core management. In these firms, HR is not an added layer but rather a key synergistic element in their strategic configuration. Considering the economic challenges faced by the small firm, it would seem that some form of strategically orientated HR is beneficial; however, it is often unconsidered. Taking a resource-based view of the firm and a configurational approach to strategy, this chapter considers the challenges to strategically orientated HR adoption in small entrepreneurial enterprises. It examines the characteristics of entrepreneur-founders, strategic orientation, and strategic configuration in an increasingly globalized context. Challenges to HRM adoption are identified, and a number of possible solutions are considered.

Santiago Gutiérrez-Broncano, University of Castilla-La Mancha, Spain Mercedes Rubio-Andrés, San Pablo CEU University, Spain Pedro Jiménez Estévez, University of Castilla-La Mancha, Spain

Although a lot of research has been carried out in the field of family businesses in recent years, not much of it has focused on human resource management. After compiling the major studies, both negative aspects (e.g. nepotism) and positive ones (e.g. employee commitment) have been identified. Therefore, the authors propose high-performance human resources practices to reduce the negative impact of fam- ily in business and boost the positive effects, increase their human capital, and achieve a competitive advantage in this field. Finally, the authors provide key insights for practitioners, family business owners, and managers, and they propose future research directions.

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Chapter 6 HRM Practices and Problems in Family-Owned SMEs ..................................................................... 113

Burcu Özge Özaslan Çalişkan, Istanbul University, Turkey

In exchange for the need for more highly trained employees, there is not enough qualified labor in the market. Small- and Medium-Sized Enterprises (SMEs) play an important role in the economies of countries because of their characteristics about generating employment. Effective Human Resource Management (HRM) is becoming increasingly important in the modern knowledge-based economy and vital for the success of small- and medium-sized enterprises. However, there are few studies concerning HRM prac- tices of SMEs. The purpose of this study is to analyze the current HRM practices of SMEs, especially which are family businesses, and to identify HRM practices and the problems within these SMEs. With the help of the literature review, helpful suggestions about HRM practices are developed for SMEs.

Chapter 7 Intergenerational Transition in a Small Family Business: Evidence from a Process Study ............... 131

Carlo Mari, University of Molise, Italy Olimpia Meglio, University of Sannio, Italy

Family businesses constitute the key infrastructure of wealth creation across the globe. One of the most important human-resource challenges they face is intergenerational transition, an issue that has received considerable attention from scholars in various countries. Despite this great interest, academics are still attempting to understand the phenomenon and provide effective managerial guidance on how family businesses can make it to the second generation. This chapter seeks to contribute to family business research by offering a more nuanced understanding of intergenerational transition that builds on a con- ceptualization of the phenomenon as a process rather than the prevailing view of it as an instantaneous event. In order to capture the processual nature of intergenerational transition, evidence is presented from a field study carried out in a small Italian family business that was the arena of three different intergenerational transitions taking place at different time periods. The evidence gathered suggests that the process is shaped by interaction of the different parties involved, who renegotiate their roles as it unfolds, with various factors playing a part.

Nil Selenay Erden, Istanbul University,Turkey

The aim of this chapter is to provide a conceptual basis on the role of HR (Human Resources) practices in conflict management in the context of small business. However, conflict management is not accounted as a formal function of HRM (Human Resources Management) such as selection, performance appraisal, or administrative services. Besides, HR functions in Small-Medium Entreprises (SMEs) are usually carried by owners or line managers while some practices might be outsourced, as well. Consequently, managing human resources is different in SMEs due to firm size, priorities of the owner, and informal- ity. Therefore, the challenge is to build the link between HR functions and conflict management in the context of small business. In this respect, the chapter emphasizes the importance of managing human capital effectively in terms of managing conflicts.

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Chapter 9 Occupational Health and Safety in SMEs: Overview as a Part of Management System ................... 167

Burcu Özge Özaslan Çalişkan, Istanbul University, Turkey

Employees of Small- and Medium-Sized Enterprises (SMEs) are exposed to higher risks than the em- ployees of larger ones, and SMEs have difficulties in controlling risk. Many countries have noticed the potential of the SMEs, and they judge employment and economic growth to a great extent based on these enterprises. The studies regarding this subject have increased during the last decade, parallel to the political and economic interests in occupational health and safety in SMEs. The objective of this chapter is to reveal general conclusions on effective approaches to prevent occupational diseases and injuries in SMEs and to gain information related to employment, welfare and health facilities, health education, legislation, occupational health, and safety management as a part of integrated management systems and other safety activities. The chapter also aims to facilitate developing an informative perspective about Occupational Health and Safety Management Systems (OHSMS) in SMEs by emphasizing the drivers, benefits, and barriers of SMEs trying to adopt these systems.

João Zambujal-Oliveira, Instituto Superior Técnico, Universidade de Lisboa, Portugal Luis Contente, Instituto Superior Técnico, Universidade de Lisboa, Portugal

This chapter examines the effects of different types of start-up rates on subsequent employment change. Longitudinal data on start-ups and employment in Portuguese regions in the period 1996–2007 is used for the analysis. The study addresses whether diverse types of new small- and medium-sized enterprise formation have heterogeneous effects on regional employment generation. It is found that, for the range considered, the seven types of start-ups led to significant and negative effects on the average variation of regional employment. It is also observed that these effects were more negative for start-ups with at least one business owner with higher education in engineering and for start-ups with at least one busi- ness owner with higher education in management. The last conclusion is that the share of highly skilled employees has a statistically significant and positive impact on the average employment change and, therefore, on regional development.

Chapter 11 Placing SMEs at the Forefront of SHRM Literature .......................................................................... 201

High Performance Work Practices (HPWPs) provide firms with resources to improve employee- and firm-level outcomes. While recent literature in this field begins to explore the role and benefits of HPWPs in Small- to Medium-Sized Enterprises (SMEs), much remains unknown. To address this deficiency, the authors explore the dominant HPWPs used by SMEs, demonstrating that in some U.S. firms SMEs are just as human resource savvy as their larger counterparts. Ultimately, they both advance the SHRM literature and provide a better understanding of the common HPWPs (e.g., compensation, training, development, etc.) used by U.S. SMEs.

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Felix Adamu Nandonde, Aalborg University, Denmark Pamela John Liana, Open University of Tanzania, Tanzania

There is a general consensus among scholars that the HR practices by corporate companies cannot be imitated by Small and Medium Enterprises (SMEs). Even though it is a neglected sector, SMEs in Tanzania are considered to be a major contributor to the national economy in terms of tax payment and job creation. Using a case study, this chapter investigates human resource practices in the recruitment process among the SMEs in a car maintenance sub sector. The nature of doing business is more informal, whereby a customer can bring a car to the garage and the technicians work on the car without bargain- ing for the cot of the work. Accordingly, there have usually been complaints from customers regarding over charging for the services offered and lack of trust among technicians, especially on matters relating to falsification on spare parts. In addressing this problem, garage owners have to make sure that they employ people with good character; those who cannot temper with customers’ property tarnish the im- age and reputation of the company.

Stuart Holland, University of Coimbra, Portugal Teresa Carla Oliveira, University of Coimbra, Portugal

Who does what, and how, is central to Human Resource Management (HRM). Where people do has been central to theories of location and the clustering of firms in industrial districts. Yet there has been little boundary spanning between HRM and location theories. This chapter seeks to redress this in relation to the rise and decline of industrial districts of small and medium firms and to draw implications for their potential regeneration. It relates this to cost-based models of locational and competitive advantage, theo- ries of flexible specialisation, the “triple helix” concept of enterprise-university-government relations, and the challenges both for entrepreneurs and for policy makers in an era in which industrial districts are no longer only local but already have “gone global.” In forwarding the concept of “enhanced HRM,” the chapter advocates that public policies for SMEs should encourage surfacing tacit knowledge in new product innovation, achieving kaizen style continuous improvement, stretching core competences, profiling and extending latent abilities and implicit skills, and boundary spanning to synergise research with new high-tech start ups. While critical both of Michael Porter’s dismissal of tacit knowledge and kaizen, and of European research and regional policies, the chapter gives examples of success in such policies and how “enhanced HRM” can draw from them to regenerate industrial districts.

Chapter 14 Self-Managing Teams in Small and Medium Enterprises (SME) ....................................................... 280

Mercedes Rubio-Andrés, San Pablo CEU University, Spain Santiago Gutiérrez-Broncano, Castilla-La Mancha University, Spain Luis Varona-Castillo, San Pablo CEU University, Spain

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are relatively autonomous work groups whose members share responsibility and leadership to accomplish their independent tasks. Their objective is to develop a type of collective knowledge that requires the pooling of individual knowledge. Their characteristics include independent, autonomous decision making, shared responsibility, and shared leadership. Sometimes, self-managing teams are also responsible for personnel decisions within the team, such as working hours, the selection and contracting of members, dismissal, and even determining salaries. In sum, the authors propose self-managing teams (such as High Performance Practices) as a good human resource management in small and medium enterprises and show how they can help to create organizational effectiveness and competitive advantage in SMEs.

Chapter 15 Decision Making in SMEs: Insights from Business Ethics and Entrepreneurship ............................. 301

Gizem Öksüzoğlu-Güven, University of Mediterranean Karpasia, Northern Cyprus

This chapter explores theories and concepts of ethical decision making in SMEs and how individuality of entrepreneurs affects their organisations. In order to investigate the entrepreneurial ethical decision- making process, the chapter crossbreeds the concepts of greed and power, cognitive moral development, ethical ideologies, and individual psychological characteristics as determinant of ethical decision making. Through discussion of relevant models, the chapter presents arguments on determinants of individual ethical decision making as well as external factors that influence the decision-making process. In doing so, it aims to provide a distinctive perspective on understanding decision making in SMEs through forming a bridge between individual moral psychology and entrepreneurial decision making. This understanding enables us to have an alternative reasoning when examining employment-related issues.

Chapter 16 Innovation Strategies in SME: Global Perspective ............................................................................. 315

Neeta Baporikar, Ministry of Higher Education, CAS – Salalah, Oman

Small and Medium Enterprises (SMEs) play a vital role in a country’s economic development. The current trend of economic growth and rapid industrial development has made many countries open up their economies to the world. In conjunction, governments the world over are devoting and designing SME development plans to assist the SMEs in meeting new business challenges in the competitive global business environment. The focus of this chapter is identifying and analyzing innovation strate- gies in SMEs, drivers of innovation in SMEs from global perspective, and understanding the need of effective HRM to drive innovation. This will help in getting an idea about the competitiveness facing SMEs in the global business environment since challenges of SMEs in a globalized market together with economic turmoil is the reality. Further, two mini-cases reflecting SME innovation strategies are provided for better understanding.

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market or quasi-market criteria have been dysfunctional in the UK in near trebling administrative costs, demotivating health professionals, and in the view of their professional associations, risk destroying the principles of a national health service. It proposes that those concerned to counter this could draw on more plural modes of management in public sector institutions such as holding companies as a model for reforms in hospital organisation, which could enable a degree of relative autonomy for individual services and units similar to that typical of small- to medium-sized firms. It distinguishes organisational logic as the basis for economic efficiency from operational logic as the basis for social efficiency in terms of psychological wellbeing of both health professionals and patients. It submits that doctors as managers of staff in different services and units need relative autonomy for effective implementation of Human Resource Management (HRM) practices at operational levels to be able to enhance purpose- ful engagement and vocational commitment to health as public service as well to enable psychological contracting into change. Informed by a case study within a socio-cognitive approach in a major Euro- pean teaching hospital, it then draws implications concerning the merits of a holding company model for hospital organisation.

Chapter 18 HRM Evolution in SMEs: Recruitment and Selection Case .............................................................. 377

Pedro Ribeiro Novo Melo, University of Minho, Portugal Carolina Feliciana Machado, University of Minho, Portugal

The enormous business competitiveness at a global scale and the constant search for sources of competi- tive advantage have led several scholars and practitioners to implement their studies to pay attention to the potential of HRM in the success of companies. Portugal, like others European countries, is not set apart from the question of HRM. However, it is rare and recent to find empirical literature on practice of HRM in Portugal, and even more scarce to find literature that focuses on SMEs. This study clarifies the situation of SMEs in the Portuguese context, serving as a basis for discussion on HRM in SMEs in an international context. This chapter looks to understand the role of recruitment and selection on Hu- man Resource Management (HRM) at Small and Medium Enterprises (SMEs) in Portugal, as well as contribute to a better knowledge of this area, still little studied. More particularly, it aims to understand the level of implementation of recruitment and selection. Data was collected by questionnaire from 512 small and medium enterprises in Portugal, and from these, 3 hypotheses were formulated and tested using the SPSS program. From this study, the authors conclude that HRM is not yet a reality in SMEs. Recruitment and selection are the HRM practices more commonly used in SMEs, but in an informal way.

Chapter 19 Internationalization Services for Small and Medium Enterprises: A Case Study ............................... 393

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the creation of new job opportunities both in the home country and abroad. This process could be seen as a solution, or better as mitigation, for the current problem of unemployment that our society has to face in this period of crisis. SMEs need to be supported in their expansion abroad. In Italy, public and private agencies provide services to achieve this. The aim of this chapter is to analyze how they operate, what services they provide, and how much they support enterprises. As a case study, the authors examine services provided by Chinese agencies because China is one of the most active countries in international markets. Italian and Chinese agencies are compared focusing on the existing standard services provided and their customization according to specific domain needs. Finally, the authors present a global view of today’s scenario to define future directions of current internationalized services.

Chapter 20 Entrepreneurship Readiness in Turkey: Profiles from Istanbul-Kayseri-Van Provinces .................... 415

Leyla Tulunay, Hacettepe University, Turkey Semra Güney, Hacettepe University, Turkey M. Kemal Öktem, Hacettepe University, Turkey

The target group of the study is composed of the entrepreneurs having business in manufacturing and services in Istanbul (Marmara Region), Kayseri (Central Anatolia Region), and Van (Eastern Anatolia Region), Turkey. Istanbul is a first degree developed city, Kayseri is a second degree developed city, and Van is a fifth degree developed city. A questionnaire having three parts was developed to collect data for the study. The first part of the questionnaire was about the factors influencing the decisions of establishment of a new business, the second part was about the personality characteristics, and the third part was about the demographic features of the entrepreneurs. One-hundred-seventy-eight questionnaires were collected from the companies in the targeted regions, and their results are analyzed statistically.

Compilation of References.................................................................................................................427

About the Contributors......................................................................................................................493

Index ................................................................................................................................................... 502

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Preface

This book is dedicated to SMEs management with a special emphasis in Human Resource Management (HRM). It provides discussion and the exchange of information on principles, strategies, models, tech- niques, methodologies, and applications of HRM in SMEs in the field of public and private organizations. It aims to communicate the latest developments and thinking on the management subject worldwide.

More and more, big organizations are giving place to SMEs. However, we still see that, in what concerns SMEs, HRM strategies, policies, and practices, remain the same as those established and implemented in big organizations. Indeed, although very different in dimension/size and philosophy, the management developed is still the same. Drawing on the latest developments, ideas, research, and best practice, this book intends to examine the implications of the changes taking place and how they affect the management and motivation of human resources belonging to these organizations. It is important to know what is happening on both national and international fronts to be able to understand and develop effective responses to meet these new demands.

The book has a special focus in research on important issues that transcend the boundaries of single academic subjects and managerial functions. Among others, it assists readers to develop a coherent understanding about human resources management in SMEs and how lessons learned by the different perspectives presented might be transferred to new contexts.

The book has 20 chapters, which present different perspectives of the importance of human resources in these organizations and have a special focus on current and relevant issues in the field of HRM in SMEs. Topics covered in the book include:

• Human Resources Management (HRM) in family businesses. • Strategic HRM in SMEs. • Intergenerational transition in SMEs. • Conflict management. • Occupational health and safety in SMEs. • Entrepreneur education/employment creation. • Politics and practices of HRM in SMEs. • Self-managing teams in SMEs. • Business ethics and entrepreneurship. • Innovation strategies in SMEs. • International perspectives of HRM in SMEs.

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xviii

The chapters do not need to be read in their given order, although it is recommended to do so. Indeed, each of them can be read independently as they offer a complete point of view about the particular topic on which they focus.

Today, the interest in this subject is evident not only for many important institutes and universities but also for different professionals around the world. Identifying the theoretical as well as practical im- plications of the work in SMEs, the book can be used by academics, researchers, managers, and other professionals in related matters with human resources management in SMEs.

Carolina Feliciana Machado University of Minho, Portugal

Pedro Manuel Ribeiro Novo de Melo University of Minho, Portugal

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xix

Introduction

OBJECTIVE OF THE BOOK

The main aim of this book is to provide a channel of communication to disseminate HRM in SMEs knowledge between academics/researchers and managers. It serves as a useful reference for academics, researchers, managers, engineers, and other professionals in related matters with HRM in SME. Taking into account these concerns, this book looks to:

• Find out how SMEs around the world are tackling today’s employment challenges and changes. • Critically evaluate alternative strategies for improving working conditions and develop effective

relationships between employers and their employees in SMEs. • Identify the effective organizational and HRM strategies in SMEs. • Keep at the forefront of innovative theories and the latest research activity relating to HRM in

SME. • Participate in an international, interdisciplinary exchange of information, ideas, and opinions

about SME. • Examine best practice on HRM in SME. • Share knowledge through debate and information exchange about the best HRM practices and

politics in SME. • Keep up to date with current developments and emerging trends about HRM in SMEs.

Considered an important tool, both to academics and practitioners, as it contributes to a more effective advance and tools of communication in what concerns the understanding of key issues related to HRM in SME, this book looks to identify HRM strategies, politics, and practices necessary to develop and imple- ment SMEs, allowing these organizations to obtain more efficient and competitive management models.

The book is written and organized in order to help readers develop a coherent understanding about HRM in SMEs, as well as to provide readers with original and cutting-edge contributions in the HRM and SMEs subject, allowing them to learn and transfer this new acquired knowledge to new and differ- ent situations.

CONTRIBUTIONS

Following these main aims, the contributors look to explore the different processes, politics, practices, and strategies of how to manage human resources in small and medium enterprises in a global perspec- tive in order to contribute to a better understanding, as well as to improve an effective HRM in this type of organization.

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After this introductory chapter, the concerns about the antecedents and consequences of strategic HRM in SMEs are explored in chapter 1. Here, the authors, from a survey of SMEs in Malaysia and the Philippines, find that the adoption of a strategic HRM is at a moderate level.

Chapter 2 explores human capital in Malaysian SMEs. Given the critical importance that the human capital infrastructure SMEs assume, this chapter, based in a sample of Malaysian SMEs, offers insights into human capital uniqueness and human capital value in these firms.

Effective human resources management practices in SMEs is the subject that follows. Focusing on the MIST countries (Mexico, Indonesia, South Korea, and Turkey), the findings of this study suggest that HRM practices adopted both individually and as a cluster reflect the components of universalistic, contingency, resources bases, and institutional perspectives of the strategic HRM model. A model of HRM practices adopted by SMEs in the MIST economies is also presented.

In Chapter 4, the synergistic potential of HRM in SMEs is explored. Considering HR as a key syner- gistic element in SMEs strategic configuration, this chapter examines the characteristics of entrepreneur- founders, strategic orientation, and strategic configuration in a globalized world.

Considered a specified type of SMEs, family business is also a relevant topic of study in what concerns the HRM subject. This is what happens in chapters 5, 6, and 7. Focusing on HRM in family business, chapter 5 makes a review on the current state of research, at the same time it presents new proposals for the future.

Chapter 6 studies the HRM practices and problems in family-owned SMEs. It looks to analyze the cur- rent HRM practices in this kind of organization, as well as to identify the existent practices and problems.

The intergenerational transition in a small family business is addressed in chapter 7. In order to analyze the processual nature of intergenerational transition, the authors have implemented a study in a small Italian family business seen as an interesting example of three different intergenerational transi- tions taking place at different time periods.

The next chapter attempts to develop an analysis about the implications for SMEs resulting from the role of HR in conflict management. Looking to provide a conceptual basis on the role of HR practices in conflict management in SMEs, this chapter emphasizes the importance of managing human capital effectively in terms of managing conflits.

Chapter 9 focuses on the role of occupational health and safety in SMEs. It aims to facilitate the development of an informative perspective about occupational health and safety management systems in these organizations by emphasizing the drivers, benefits, and barriers of SMEs that are trying to adopt that system.

The entrepreneur’s educational level and its impact on the employment creation by new SMEs is the subject of chapter 10. In order to study the effects of different types of start-up rates on subsequent employment change, the authors have used longitudinal data on start-ups and employment in different Portuguese regions in a period of 11 years.

Chapter 11 looks to place SMEs at the forefront of strategic HRM literature. Advancing the strate- gic HRM literature, the authors provide a better understanding of the common high performance work practices used by U.S. SMEs.

Questions related to HR recruitment are explored in chapter 12. Based in a case study of two selected cities in Tanzania, this chapter studies HRM practices in the recruitment process among the SMEs in a car maintenance sub sector.

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Considering that there has been little boundary-spanning between HRM and location theories, in chapter 13, the authors seek to redress this in relation to the rise and decline of industrial districts of SMEs, as well as to draw implications for their potential regeneration.

Self-managing teams in SMEs is the focus of the next chapter. The authors propose self-managing teams as a good way to manage HR in SMEs, looking to explore how they can help to create organiza- tional effectiveness and, consequently, competitive advantages in SMEs.

Chapter 15 deals with the decision-making process, taking some insights from business ethics and entrepreneurship. The author looks to provide a different perspective about the understanding of the decision-making process in SMEs through the development of a bridge between individual moral psy- chology and the entrepreneurial decision-making process.

In a world characterized by changes and high complexity and diversity, the questions related with innovation are a challenge to organizations, namely SMEs. Taking into account this reality, chapter 16 looks to give us a global perspective of the innovation strategies in SMEs. In other words, it looks to identify and analyze the innovation strategies and drivers of innovation in SMEs from a global perspec- tive, and to nderstand the need for effective HRM to drive innovation.

Taking back the subject of entrepreneurship, chapter 17 evaluates the implications of SME entrepre- neurship for enhanced HRM in hospital management.

Chapter 18 addresses its attention to the study of recruitment and selection in SMEs. It looks to un- derstand the role of recruitment and selection on HRM at SMEs in Portugal, as well as be a contribution to a better knowledge of this area, still briefly studied in this country.

Giving a special focus to the future directions of the current internationalized services, the following chapter addresses its attention to the analysis of the SMEs internationalization process, with a special attention to the services that are provided, as well as the support given by private and public agencies to international SMEs.

Finally, the concluding chapter explores the relationship between the entrepreneurship and entrepre- neur’s characteristics, as well as the factors that influence the entrepreneurial decision in a particular country, namely Turkey.

Giving a global perspective of effective HRM in SMEs, the chapters presented in this book are a very important tool and can be very useful for academics, researchers, managers, engineers, and other professionals that are involved in different matters related with HRM, with a special emphasis in SMEs, both in private and public sectors.

The professional and scientific interest in this book and subject is evident for many universities/schools in the world with courses (graduate and undergraduate) in HRM, Management, Business Management, International Business, Production Engineering, among others.

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Chapter 1

DOI: 10.4018/978-1-4666-4731-2.ch001

The Antecedents and Consequences of Strategic

HRM in Malaysian and Philippine SMEs

ABSTRACT

INTRODUCTION

In the past decade, empirical research of Human Resources Management (HRM) in small and medium-sized enterprises (SMEs) has stepped up; 75% of the 120 studies we found in an on-line search of databases were published since 2002. As well, the countries covered have expanded.

Prior to 2002, 87% of studies were in developed countries in North America and Europe, mainly of the United States and the United Kingdom. Since 2002, only 56% were from this same group of countries, studies in Asia and Africa increased from just two in the previous period to 24, and the Asian continent accounted for 21%, with most studies done on China.

Maria Carmen Galang University of Victoria, Canada

Intan Osman Universiti Sains Malaysia, Malaysia

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

While these numbers are encouraging, there is still much research that needs to be done (Cas- sell, Nadin, Gray & Clegg, 2002; Katz, Aldrich, Welbourne & Williams, 2000). Mayson and Bar- rett (2006) for instance note that not only is there very little research on HRM in small and entre- preneurial firms, but that theory is also lacking that could explain how important HRM is for such organizations. Marlow (2006) echoes the lack of theorizing as an impediment in our understanding. Cardon and Stevens (2004) found 37 articles on small and emerging firms but noted that close to half (n=16) do not distinguish between emerging and small ventures, “failing to clarify the differ- ent HR challenges resulting from newness and smallness and how they are overcome. Twenty- three of the articles confound small and medium enterprises, and less than half of them are based on empirical data” (p. 299). They note that more empirical research and theorizing is still needed specifically in training, performance manage- ment, organizational change and labor relations in small firms, as well as understanding retention of employees, integration and interactions of HR practices and the evolution of HR practices within the context of small firms.

As well, we find that some countries have not been studied, especially those from developing countries with a different cultural, institutional, or economic context from the U.S. and the U.K. By having studies of SMEs in a wider range of countries, we could begin to determine the in- fluences that underlie any observed differences and similarities of HRM. We can also begin to understand whether the impact of HRM is the same or different, depending on the country con- text (e.g., Cunningham, 2010; Innes & Wiesner, 2012). Thus, we can become more confident of our recommendations to a sector that is recognized to be of economic importance to many countries.

In this chapter we offer empirical evidence from two Asian countries that have not been studied extensively, namely Malaysia and the Philippines. We found only three HRM studies of SMEs in Malaysia and none on the Philippines.

Yet, in these countries SMEs comprised around 99% of the total establishments, employed 56% and 70% of the total workforce in Malaysia and the Philippines respectively, and contributed 32% to the country’s GDP (Osman, Ho & Galang, 2011). The governments of both countries have also recognized the importance of this sector by implementing laws, policies and regulations that specifically are aimed at ensuring SMEs are com- petitive in a more global environment (Habaradas, 1009). Based on data from a survey that was conducted among HR managers, our study has three purposes. The first addresses the question of whether or not SMEs in these countries have adopted a more formal and strategic approach to managing employees. As a comparison, we will utilize survey data that we also collected from HR managers of SMEs in the U.S., a country that has a different economic, institutional and cultural context than Malaysia and the Philippines. The concept of HRM is argued to have originated from the U.S. Nonetheless, Mayson and Barrett (2006) observed that HRM in small firms in the U.S., as well as Europe and Australia, is largely ad hoc and informal.

The second purpose is to determine whether the adoption of a more formal and strategic approach to managing employees provides these SMEs with a competitive advantage. There have been many studies in the past decade linking strategic HRM with organizational performance of SMEs, again mostly in developed countries in North America and Europe. Those in developing Asian coun- tries are limited: two in China (Zheng, Morrison & O’Neill, 2006; Zheng, O’Neill & Morrison, 2009), two in Vietnam (King-Kauanui, Ngoc & Ashley-Cotleur, 2006; Nguyen & Bryant, 2004) and one in Korea (Seong, 2011).

Our third purpose is examine some antecedents to the adoption by SMEs of a more formal and strategic approach to managing employees. It has been argued that because SMEs are resource poor, they are limited in their ability to adopt strategic HRM practices, most of which would require money, time and expertise which are not

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

present in the organization (Cassell et al., 2002; Çetinel, Yolal & Emeksiz, 2009; Harney & Dun- don, 2006; Hooi, 2006). As well, because of their size, SMEs do not have the economies of scale that larger organizations have that would justify the investment in these practices. Some have also noted that informality is further argued to be more appropriate to small firms; for instance, that informality is their advantage since it allows them the flexibility to change (e.g., Beaver & Harris, 1995; de Kok & Uhlaner, 2001; Mayson & Barrett, 2006). In addition, because of the size of the organization, the owner/manager is very much directly involved in running the organiza- tion, oftentimes preferring a more ad hoc approach (e.g., Jack, Hyman & Osborne, 2006; Tocher & Rutherford, 2009). Nonetheless, there are studies showing that there are SMEs that have adopted a more formal and strategic approach, perhaps not in terms of all but certainly some HRM practices (Bacon & Hoque, 2005; Cassell et al., 2002; de Kok & Uhlaner, 2001; Harney & Dundon, 2006; Henry & Temtime, 2010).

In line with the extant literature, we argue that the adoption of a more formal and strategic approach to managing employees is a conscious response to environmental pressures (Beaver & Hutchings, 2005; Debrah & Mmieh, 2009; Lacoursière, Fabi & Raymond, 2008; Miles, Co- vin & Heeley, 2000), such as legal and regulatory requirements (Rantaša, 2004; Sheehan, 2013), and increasing competition from other organizations (Altinay, Altinay & Gannon, 2008; Debrah & Mmieh, 2009; Hayton, 2003). The effect of these environmental pressures on HRM is further aided by the importance of its human resources relative to other resources of the organization (Bacon & Hoque, 2005; Brand & Bax, 2002), and the presence of an HR person or unit with a strategic inclination (Innes & Wiesner, 2012; Kerr, Way & Thacker, 2007; Osman et al., 2011). Finally, we argue that SMEs faced with such environmental pressures benefit more from a formal and stra- tegic approach to managing employees, which

otherwise might be detrimental to resource-poor smaller organizations (Chadwick, Way, Kerr & Thacker, 2010).

Our chapter is organized as follows: We will start with reviewing the literature on strategic HRM in SMEs, specifically in so far as its adoption is concerned, the empirical evidence that has been gathered linking strategic HRM to organizational performance, and the various theoretical and empirical studies on the contextual influences to the adoption of formal and strategic approaches to managing human resources in SMEs. We also present information on contextual factors that are particularly salient for Malaysia and the Philip- pines. We end our literature review by stating the hypotheses we are testing in addressing our three main purposes. Following the literature review, we will describe our research methodology, in- cluding the operationalization of the variables we have chosen and the statistical analyses we utilized to test our hypotheses. We then present our results, including our interpretation of these results. Finally, we present some recommendations for policy, practice, and research.

BACKGROUND: REVIEW OF THE LITERATURE

Defining Strategic Human Resource Management (SHRM)

In a review of empirical studies of HRM-per- formance link, Boselie, Dietz and Boon (2005) observed that there is no consensus on the con- ceptualization and operationalization of Strategic Human Resource Management (SHRM). There are three definitions that convey our own con- ceptualization:

• The pattern of planned human resource deployments and activities intended to en- able the firm to achieve its goals (Wright & McMahan, 1992, p. 298).

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

• An integrated and coherent “bundle” of mutually reinforcing practices (Boselie et al., 2005, p. 73).

• A set of distinct but interrelated HRM practices that together select, develop, re- tain, and motivate a workforce: (1) that possesses superior abilities (i.e., superior [a broad repertoire of] skills and behav- ior scripts); (2) that applies their abilities in their work-related activities; (3) whose work-related activities (i.e., actual employ- ee behaviors/output) result in these firms achieving superior intermediate indicators of firm performance (i.e., those indicators over which the workforce has direct con- trol) and sustainable competitive advan- tage (Way, 2002, p. 765-766).

These definitions indicate that ensuring the coherence among several HRM practices targeted at developing the performance of the firm’s work- force towards desired organizational outcomes entails planning and execution with purpose and careful deliberation. Thus in our view, “strategic” necessarily embodies a formal rather than an ad hoc approach. However, formalization does not necessarily mean strategic, as the formalized prac- tice may not explicitly consider the organizational goals and the requisite workforce performance. For instance, de Kok and Uhlander (2001) stated that:

formalization has been variously referred to as: 1) the extent to which a rule or procedure is written down (e.g., as in written job descriptions); 2) the degree to which a procedure is regularly applied within the organization (e.g., as in the regularity of performance appraisals); and/or 3) the degree to which the employer (vs. the employee) has as- sured that an activity should take place (e.g., as in employer sponsored training programs). (de Kok & Uhlander, 2001, p.274)

There is also no consensus on the compo- nents or specific practices to include in the set or bundle of practices. However, consistent with

Way’s (2002) definition above and the dominant AMO (Ability-Motivation-Opportunity) theory (Boselie et al., 2005), the set or bundle should include a broad enough range of HRM practices. It should cover at least the traditional HRM func- tions or domains of recruitment, selection, job/ work design, training, performance evaluation and compensation, as together they would result in the requisite ability, motivation and opportunity for employees to work towards organizational goals. Nonetheless, there is agreement that SHRM is considered as a set or bundle of practices, as bundling has the advantage of synergy that is not provided in considering practices separately (Becker, Huselid, Pickus & Spratt, 1997). Thus, SHRM needs to be measured or represented as a unitary index. How that unitary index is derived however is still debated.

Adoption of Strategic Human Resource Management (SHRM) in SMEs

Given our conceptualization, there are not many empirical studies of SHRM in SMEs, even with SHRM operationalized in different ways and cov- ering different HRM practices. We found two on Australian SMEs (Innes & Wiesner, 2012; Teo, LeClerc & Galang, 2011); one Belgium (Sels et al., 2006); four Canada (Chadwick et al., 2010; Fabi, Raymond & Lacoursière, 2007; Kerr et al., 2007; Lacoursière et al., 2008); one China (Zheng et al., 2009); two France (Aїt Razouk, 2011; Aїt Razouk & Bayad, 2009); one Korea (Seong, 2011); one Netherlands (Brand & Croonen, 2010); one Spain (Elorza, Aritzeta & Ayestarán, 2011); three U.S. (Hayton, 2003; Kaman, McCarthy, Gulbro & Tucker, 2001; Way, 2002); and three U.K. (Drummond & Stone, 2007; Sheehan, 2013; Storey et al., 2010).

It should be noted that these studies have also used different terms for SHRM, such as high per- formance work systems, HRM intensity, human capital enhancing HRM systems, high investment HR systems, HR formality, but what they have

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

in common is that their analysis is based on a set of HRM practices, and not on separate HRM practices. The measure of a set of HRM practices also varies, from simple additive indices to one of clustering. Nonetheless, of these studies, five empirical studies have specifically commented on the level or extent of adoption of the HRM system, even when this was not the primary purpose of the study. Kaman et al. (2001) did focus on the extent of use among U.S. SMEs, distinguishing two types of HRM systems: bureaucratic and high commitment. Their observation is that the high commitment practices were used more, with a mean of 4.36 vs. 3.80 out of a scale of 6 points. Sels et al. (2006) found Belgian SMEs averaged 7.21 practices out of a maximum 18 practices. Sheehan (2013) indicated that the use of formal human resource practices (measured as an index averaging across 17 practices) is quite common in SMEs in the U.K. Teo et al. (2011) noted that Australian SMEs adopted human capital enhanc- ing HRM systems only to a moderate extent, with a mean of 4.30 out of a scale of 7 points. Way (2002) found the mean for high performance work systems among U.S. SMEs was at 2.61 practices out of a possible maximum of 7. He also found that this level of adoption is not significantly different compared to larger firms (100 or more employees).

There are other studies that, while not making any explicit statement regarding level of adoption, provided some data to enable some conclusions about the level of adoption. For instance, Brand and Coonen (2010) reported the mean of HR in- tensity in their Dutch sample to be at 3.02. The HR intensity was a five-point scale; thus, one could say that with this sample, the level of HR intensity is at a moderate extent. Aїt Razouk and Bayad 2009 reported that 42% of their French SMEs had implemented strategic HRM, while 45.4% were in a hybrid state, between administrative HRM and strategic HRM. Lacoursière et al. (2008) found only 17% of their Canadian sample were classified as having strategic high involvement HR prac-

tices. Storey et al. (2010) however found higher percentages in their U.K. sample: the percentage of firms with HR formality ranged from 51% for single-site workplaces of 5-49 employees to 89% for workplace size between 250-499 employees in multi-site firms. Nonetheless, they also provided information to compare the small workplace sites with large firms, with the latter having a higher HR formality.

Overall, except for Sheehan (2013) in the U.K., these empirical studies on SHRM in SMEs show at most a moderate level of adoption in various countries.

Linkage of SHRM and Organizational Performance in SMEs

In trying to systematize our understanding of the field, Wright and Boswell (2002) suggested a typology of HRM research and reviewed the major developments in each of the four types or areas. These areas are defined by whether a single HRM practice or multiple practices are studied simultaneously, and whether the analysis of the outcome is at the individual or organization level. Studies examining the effects of a single HRM practice on individuals (i.e., employees) is the traditional area of HRM research and numerous studies have been conducted especially in the area of selection, training, recruitment, compensation, performance management and participation or work design (Wright & Boswell, 2002). The seminal study by Huselid (1995) spurred many empirical studies linking multiple HRM practices to organizational performance. This area continues to grow, especially outside of the U.S. (Wright & Boswell, 2002). The study reported in this chapter is classified within this area. While debates con- tinue on what HRM practices to include, how to measure these practices, and how to conceptualize a system of practices, Wright and Boswell (2002) noted that the studies in this area are supportive of the HRM-firm performance link. Fewer studies were noted in the other two areas. While Wright

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

and Boswell (2002) suggest that examining the impact of a system of multiple HRM practices on individuals presents “a ripe opportunity for future research,” they were discouraging of studies that focus on the organizational impact of a single HRM practice, as these studies ignore the possible synergy (or contradictions) from a combination of practices that organizations in reality implement (Becker et al., 1997).

Boselie et al. (2005) reviewed 104 articles linking HRM practices and organizational per- formance that were published in major journals between 1994 and 2003. The top four practices included in these studies, in this order, were training, contingent pay and reward, performance management, and recruitment and selection. Most of these studies (n=58) also approached HRM practices as separate practices rather than as a system. Neither of these reviews however reported results specifically for SMEs. Boselie et al. (2005) did note however that organization size was often considered as a control variable (64 studies).

In our search for studies linking HRM practices and performance of SMEs, we found 13 empirical studies (Altinay et al., 2008; Carlson, Upton & Sea- man, 2006; Cassell et al., 2002; Castrogiovanni, Urbano & Loras, 2011; Chi, Wu & Lin, 2008; De Grip & Sieben, 2005; Faems, Sels, De Winn & Maes, 2005; King-Kauanui et al., 2006; Newman & Sheikh, 2012; Saá-Pérez, Díaz-Díaz & Balles- teros-Rodríguez, 2012; Schmelter, Mauer, Börsch & Brettel, 2010; Storey et al., 2010; Zheng et al., 2006). A wide range of performance variables were considered, such as sales growth, productivity, voluntary turnover, innovative capacity, entre- preneurial behavior, corporate entrepreneurship, employee commitment and employee job quality. The HRM practices examined were training (9 studies), compensation and rewards (9), recruit- ment and selection (7), performance appraisal (6), and employee participation/empowerment, which includes communication, grievance and dispute resolution (4), HR planning (1). Most of

these studies found a positive relationship between the HRM practice and the performance variable.

In this section, we focus only on empirical studies on SHRM as a set or bundle of practices, in accordance with the definition above, and not on studies linking separate HRM practices or domains to organizational performance. Furthermore, as organizational performance has been defined and measured in various ways, we considered all pos- sible measures of organizational performance that Dyer and Reeves (1995) outlined as four possible types of measurement: (1) human resource out- comes (e.g., absenteeism, turnover, individual or group performance), (2) organizational outcomes (e.g., productivity, quality, service), (3) financial or accounting outcomes (e.g., return on assets, return on invested capital), and (4) market out- comes (e.g., stock value or shareholder return).

We highlight eleven studies, of which seven found a positive SHRM-performance relationship for all the performance measures used. Kaman et al. (2001) found that high commitment practices had the most positive impact than bureaucratic prac- tices on U.S. small service firm’s ability to attract and motivate employees, turnover, absenteeism, and number of employment litigations experienced by the firm. Kerr et al. (2007) found a positive relationship between a high-performance work system of Canadian small entrepreneurial firms and a perceptual composite measure of over-all organizational performance, which included sales level, sales growth rate, cash flow, gross profit margin, net profit from operations, profit-to-sales ratio, ability to fund business growth from cash flow, return on investment, and change in the value of the firm for private firms or share price for publicly-traded firms. Sheehan (2013) found positive associations between an HRM index and profitability, innovation and lower labour turnover in SMEs in the U.K. Teo et al. (2011) found a posi- tive relationship between human capital enhancing HRM system and manufacturing performance and employee performance in Australian manufactur- ing SMEs. Aït Razouk (2011) also found a posi-

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

tive relationship between high performance work systems and French SMEs’ profitability, quality of social climate and innovation. Among Asian studies, Seong (2011) found a positive relation- ship between high performance work systems and financial outcomes of profitability and return on assets in Korean SMEs. Zheng et al. (2009) found that Chinese SMEs with innovative HR practices had better HR outcomes (staff turnover, congru- ency, competency and commitment), sales, market share and growth potential.

However, there are studies that found a nega- tive impact on SMEs. For instance, while greater use of high performance work practices (HPWP) by Belgian SMEs was correlated with increased productivity, Sels et al. (2006) noted that the impact was offset by increased labour costs. Nonetheless, they did find an overall positive effect on firm profitability. Way (2002) likewise found a posi- tive association between high performance work systems and employee turnover, but not labour productivity, concluding that “the outcomes pro- duced by HPWS do not exceed (nor do they fail to meet) the labor costs associated with the use of these systems” (p. 778). Brand and Croonen (2010) found that franchised units, as opposed to company-owned ones, of a large Dutch retail organization had relatively low HRM intensity but better HR performance in terms of absenteeism and share of wages in the unit’s sales turnover. Chadwick et al. (2010) also found a negative re- lationship between high investment HR systems (HIHRS) and labour productivity in Canadian small firms. They did point out however that this relationship is moderated by the firm’s business strategy, capital intensity, age and the industry in which they operate.

In summary, so far the empirical studies link- ing SHRM with organizational performance of SMEs do not all show a positive effect, and that the positive impact may be dependent on contex- tual factors, and which aspect of organizational performance is being measured.

Contextual Factors Influencing Adoption of SHRM in SMEs

Dyer and Reeves noted back in 1995 that the emer- gence of Strategic Human Resource Management (SHRM) among both scholars and practitioners around the world was mainly attributed to “in- creasingly intense global competition and the corresponding search for sources of sustainable competitive advantage” (p. 656). Many other factors influencing the adoption of HRM have also been pointed out, and these can be broadly classified into external and internal context (Duberley & Walley, 1995; Harney & Dundon, 2006; Lacoursière et al., 2008; Tsai, 2010). Har- ney and Dundon (2006) proposed a conceptual framework, based on institutional theory and resource dependency and supported by the extant literature, which identify the salient external and internal influences on HRM of SMEs. Among the external influences are the product/market structure, HR supply, industry sector, value chain, technology and employment legislation. For the internal influences, Harney and Dundon (2006) listed ownership, management style/ideology, trade union presence, size and employees.

Lacoursière et al. (2008) noted that of the 45 empirical studies they found examining the con- textual factors influencing the adoption of HRM systems or practices in both SMEs and large en- terprises, the most common factors were organiza- tional size (23 studies), business strategy (16) and presence of a labour union (12). Less frequently studied were characteristics of the owner-manager, customer power, the firm’s stage of development and technology, labour force characteristics and the presence of an HR professional.

We focus on empirical studies of SHRM in SMEs. Of the seven we found, the factors that have been supported are type of industry, especially those exposed to world competition (Aït Razouk & Bayad, 2009); national cultural values of indi- vidualism vs. equity and justice (Aït Razouk & Bayad, 2009); organizational culture (Drummond

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

& Stone, 2007); presence of an HR professional or department (Kerr et al., 2007; Teo et al., 2011); customer requirements (Kinnie et al., 1999); own- ership characteristic, such as whether collectively owned, state owned, domestic privately owned, or joint venture (Zheng et al., 2009); the organiza- tion’s strategic orientation (Teo et al., 2011) and firm age (Zheng et al., 2009). Lacoursière et al. (2008) also tested a modified Harney and Dundon framework on 176 Canadian SMEs, and found sig- nificant differences in seven contextual variables out of fourteen between SMEs with the traditional low-involvement HR system and those with a stra- tegic high-involvement HR system: development of networks (a product/market structure character- istic); technological intensity (an industry sector characteristic); presence of quality standards, planning and logistics applications of advanced manufacturing process technology; and internal factors such as the chief executive’s educational level, the presence of a board of directors, and the presence of an HR manager. Among the external variables that were not significantly different were commercial dependency, product development, market development (characteristics of firm’s product/market structure); product design as part of their manufacturing technology; and among the internal variables, the level of experience of the CEO and the presence of a labour union.

While much of the existing literature has not focused on the legal and regulatory context, in both Malaysia and the Philippines, this factor is especially salient. There are numerous govern- ment policies and programs aimed specifically towards developing the SME sector, as the sector is primarily seen as a means to alleviate poverty (Harabadas, 2009). However, in the Philippines, the SME-related policies and programs are more extensive than in Malaysia, with the country even having special laws for SMEs: the Magna Carta for Micro, Small, and Medium Enterprises, and the Barangay Micro Business Enterprises Act of 2002 (Habaradas, 2009). Nonetheless, other laws and regulations exist that are not necessarily targeted at, but may have an effect on, SMEs. For

instance, Beaver and Harris (1995), Harvey and Dundon (2008), and Rantaša (2004) identified employment legislation as one such law that have a detrimental effect on SMEs. So it is the overall legal and regulatory context within which the SME operates that needs to be considered.

As well, like many developing nations that were once colonies of Western nations, both countries have embraced trade liberalization (Athukorala & Menon, 1999; Tongzon, 2005). While trade liberal- ization opens up opportunities for the economy, it could also present challenges, making the business environment more complex and competitive. As Dyer and Reeves (1995) pointed out, one of the basic arguments for the focus on HRM is that of “increasingly intense global competition”.

HYPOTHESES

Given the above literature review and in view of the three purposes of our study, we test the fol- lowing hypotheses.

Our first hypothesis is to establish the level of adoption of SHRM in SMEs. We suggest that given the origins of SHRM, U.S. SMEs would have higher levels of SHRM than either Malaysia or the Philippines. However, we do not hypoth- esize the level of SHRM adoption in Malaysian SMEs would be higher or lower than that of the Philippine SMEs. Thus,

H1: There will be differences in the adoption of SHRM in SMEs across the three countries, with the level of adoption in the U.S. higher than in Malaysian or Philippine SMEs.

We test the next set of hypotheses separately for Malaysia and the Philippines, which allows us to compare whether the influences and outcomes of strategic HRM are different for each country. In a broad sense, we consider both external and internal influences. External influences would capture country differences. Thus, from the perspective of a comparative study such as ours, among the

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

external influences, we chose legal and regula- tory environment, and business environment, as these two factors are especially salient for the two countries. Thus,

H2: The adoption of SHRM is predicted from external influences of (a) legal and regulatory requirements, and (b) business environment challenges.

Internal influences enable the comparison of SMEs from within the same country. We ar- gue that one of the most salient internal factors related to a firm’s adoption of HRM practice is the relative importance of human resources as compared to other organizational resources such as financial, material or technological resources. This is akin to perceived acute HRM problems that Tocher and Rutherford (2009) referred to; they found that higher-performing firms in the U.S. were less likely to perceive such problems. Barrett and Meyer (2010) also tested this notion in small Australian firms with the purpose of identifying the types of firms that would benefit from more assistance in implementing HRM. As well, while the presence of a HR professional in the firm has been supported by previous studies, the HR professional can take on various roles in the organization, such as that of a strategic busi- ness partner, change agent, employee champion or administrative expert (Conner & Ulrich, 1996). Hence, we are suggesting that it is not merely the presence of a HR professional that is important, but what role does he/she play in the organization. As a strategic business partner, the HR professional is more likely to influence the adoption of strategic human resource management. Thus,

H3: The adoption of SHRM is predicted from in- ternal influences of (a) strategic partner role of the HR professional in the organization, and (b) the importance of human resources relative to other resources utilized by the organization.

Boselie et al., (2005) noted the possible causal distance of various organizational outcomes that Dyer and Reeves (1995) listed. SHRM would have more impact on the proximal human resource outcomes, than the more distal one of financial or economic outcomes. It is prudent therefore to examine different organizational performance variables. Thus,

H4: SHRM is positively correlated to different as- pects of organizational performance, namely (a) people performance, (b) operational performance, and (c) economic performance.

Finally, in as much as organizations experience different external and internal influences, and various studies have indicated that the impact of SHRM on organizational outcomes is affected by situational factors, we test:

H5: The external influences of the (a) legal and regulatory requirements and (b) business environment challenges, and internal influ- ences of the (a) strategic partner role of the HR professional and (b) relative importance of human resources moderate the link of SHRM to (a) people performance, (b) eco- nomic performance, and (c) operational performance.

RESEARCH METHODOLOGY

Variables

The list of items that make up the different scales measuring our variables of interest can be found in the Appendix.

Strategic Human Resource Management (SHRM): A composite index of seven sub-scales covering practices in six functional domains of HR planning, staffing, job design, training, per- formance appraisal and compensation, mostly adopted from Geringer, Frayne and Milliman

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

(2002). Each of these sub-scales covered from 3-5 different HRM practices. On a scale of five, the respondent was asked the extent that the statement describes their current practice, with 1=Not at all and 5=Very large extent. Each of these sub-scales was determined to have good internal reliabilities ranging from Cronbach α of 0.71 to 0.94, and loading on only one factor. Following Aït Razouk (2011), we averaged across all seven sub-scales to compute for the SHRM index.

Legal and Regulatory Requirements: A scale consisting of six items taken from Khandwalla (1977). The respondent was asked to rate the effect of the listed government legislation or regulation on their organization, with 1=very negative effect and 5=very positive effect. Likewise, Business environment challenges is a scale of 10 items taken from Khandwalla (1977), with 1=of little importance, and 5=of extreme importance. Cron- bach α for these scales range from 0.88 to 0.94, and also loaded on only one factor.

Strategic Partner Role of the HR Professional: A measure of the extent that the HR professional in their organization performs activities identified by Conner and Ulrich (1996) as that of a strategic business partner. The HR professional referred to in the survey is any person who is responsible, whether full-time or part-time, for the human resources management function. Our sample in Malaysia had 32.1% SMEs without an HR de- partment, while that in the Philippines only had 3.9% without an HR department. Nonetheless, all respondents indicated that there was someone in the organization who was tasked with the HRM function. The respondent was asked the extent that the statement describes their current prac- tice with respect to the role of the person or unit responsible for the HRM function, with 1=Not at all and 5=Very large extent. Cronbach α for this scale range from 0.87 to 0.91, and also loaded on only one factor.

Relative Importance of Human Resources: A scale taken from Martell and Carroll (1995). The respondent was asked the extent that obtaining and

preserving the listed resource was more important than obtaining and preserving human resources, with 1=Strongly disagree and 5=Strongly agree. Likewise, internal reliability of this scale is good with Cronbach α ranging from 0.86 and 0.95. Fac- tor analyses also showed only one factor.

Organizational performance is measured by three scales: People Performance, Operational Performance and Economic Performance. The respondent was asked to compare their organi- zation’s performance with their industry average or other comparable organizations in the past three years. Measured on a five-point scale, with 1=Much lower and 5=Much higher, the items were taken from Geringer et al. (2002) and Khandwalla (1977). Cronbach α for these scales range from 0.86 to 0.97, and also loaded on only one factor.

Sample

The sample used for this chapter is a subset of a larger study. Collection of survey data varied according to location. In Malaysia, the organiza- tions were selected from the 2007 Directory of the Federation of Malaysia Manufacturers, and a list of HR workshop participants conducted by two consulting and training firms. Question- naires were either administered face-to-face, or collected on-line or by mail. In the Philippines, the data were collected through an on-line panel of a commercial survey organization. The U.S. data we used for comparing the levels of adoption of SHRM were also collected through an on-line panel of another commercial survey organization.

In each country, for-profit organizations with employment size of 5 to 500 were selected for this study. Responses were obtained from 134 SMEs in Malaysia, and 153 in the Philippines. The average size is 109 employees for Malaysia, and 182 for the Philippines. The US data set has responses from 103 SMEs, with an average size of 142. Most of the organizations in Malaysia were either in manufacturing (23.1%) or information and communications (16.4%), while in the Phil-

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

ippines, most were in administrative and support services (28.1%) or manufacturing (19.6%). The U.S. sample had 18.4% in manufacturing, 13.6% in human health and social work, 10.7% in education and 9.7% in information and communications.

As indicated earlier, not all the organizations have an HR department or a full-time HR per- son, but there was an individual who was mainly responsible for the HRM function. Most of the respondents were the most senior person respon- sible for the HRM function, 60.4% and 66.7% for Malaysia and the Philippines, respectively, and they had been in their current jobs for an average of 6.8 years and 4.7 years respectively for Malay- sia and the Philippines. Most are female, 59% for Malaysia and 68.6% for the Philippines, and most had at least a four-year educational degree, 58.2% for Malaysia and 77.8% for the Philippines. For the U.S. sample, most of the respondents were also the most senior person responsible for the HRM function (61.2%) having been on the job for an average of 7.0 years, are female (68%), had at least a four-year educational degree (82.4%).

Statistical Analyses

Analysis of variance was utilized for Hypothesis 1. Regression analysis was done separately for each country to test the rest of the hypotheses.

RESULTS AND DISCUSSION

The means and standard deviations of all variables are shown in Table 4 (see Appendix).

Adoption of SHRM

One advantage we have in this study is the use of the same instrument which allows us to directly compare across samples. The mean levels of SHRM in Malaysia and the Philippines respec- tively are 3.20 and 3.85. In comparison the mean level of SHRM in the U.S. is 3.51. One-way

ANOVA shows that the difference among the three countries is highly significant (F=30.14, p<.0001). However, the Philippine SMEs had a significantly higher level of adoption than U.S. SMEs. Hypothesis 1 is thus partly supported. It is possible that given the colonial experience under the U.S., the managers and owners in the Philippines still emulate the model provided by U.S. management practices that may be seen to account for the business and economic success of the U.S. On the other hand, Malaysia tends to be influenced by the systems and regulations left over by the British colonization during the nineteenth century as legacies of western influ- ences in indigenous HR practices (Chew, 2005). Malaysian HR practices can be characterized into two mainstreams, namely British oriented value and ethnic oriented values (Hirano, 1991 as cited by Chew, 2005). The difference could also be attributed to the difference in the profile of the sample. The Philippine SMEs mostly had an HR department (96%) with the U.S. coming second at 85% and Malaysia at 67%. The Philippine sample also had more respondents who had a four-year educational degree. Educational systems are often the means for diffusing knowledge about business and management practices from the developed to the developing nations.

Despite the moderate level of adoption of SHRM in Malaysia and the Philippines in general, it does indicate that SHRM is also applicable in these Asian countries, such as Zheng et al. (2009) had found for China, and Seong (2011) for Korea.

Predictors of SHRM

Regression analyses show that Business envi- ronment challenges and Strategic partner role of the HR professional as significant predictors of SHRM for SMEs in both Malaysia and the Philippines. In addition, Relative importance of human resources was also a significant predic- tor for Malaysian SMEs, albeit in the opposite direction hypothesized. Nevertheless, collinearity

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

diagnostics indicated a slight multicollinearity problem with respect to the four predictors. Thus, regression analyses using instead the factor scores representing the standard scores for the four pre- dictors were conducted. All factor scores were significant predictors of SHRM in both Malaysia and the Philippines, and accounted for 50% and 74% of the variance in SHRM for Malaysia and the Philippines respectively. Table 5 in the Ap- pendix shows the β coefficients of each factor and the factor component and loading. With each of the four factors composed of the standard scores for the four predictors, hypotheses 2 and 3 are supported. Interestingly however, for Malaysia, the less important human resources are compared to other resources, the higher SHRM is. The dif- ference could be the industry sector profile of the country samples: while both have manufac- turing SMEs, Malaysia has more of information and communications, and the Philippines has more administrative and services. As well, the manufacturing sector is a broad category, and sub-sectors may also play a role in the findings. Another possibility is that, in Malaysia overall, other resources are indeed much more difficult to obtain than human resources, while in the Philip- pines, human resources may be more difficult to obtain than other resources, a reflection of the countries’ respective labor markets.

SHRM-Performance Link

Moderated hierarchical regression analyses of SHRM on the three organizational performance variables were conducted. In both countries, re- sults show that SHRM is a significant predictor of organizational performance of SMEs (see Table 1, Table 2, and Table 3). Hypothesis 4 is thus supported. However, the variance accounted for is larger for the Philippine SMEs, ranging from 46 to 54%, while in Malaysian SMEs, the range is from 16 to 29%. The causal distance suggested by Boselie et al. (2005) was not supported by the data from Malaysia, as the largest impact of SHRM seems to be in terms of economic performance.

The data from the Philippines is in accordance with such a causal distance, where the largest impact is with respect to people performance, followed by operational performance, and then economic performance.

Interaction terms were added in step 2 of the regression analysis. Not many of these interaction terms are significant. For the Malaysian case, only two of the interaction terms were significant, and only for economic performance. For the Philippine case, only one interaction term was significant with respect to economic performance; for people performance, two interaction terms were found to be significant. Hypothesis 5 is thus not fully supported.

In terms of the ultimate test of business success, the impact of SHRM on economic performance is influenced by different situational factors in the two countries. In the Philippines, the economic gain from SHRM depends on the legal and regula- tory requirements: SHRM would have a greater impact if the legal and regulatory requirements have a positive effect on the organization. Thus, in this case, the legal and regulatory environment not only does not seem to pose a constraint on SMEs, but is facilitative of getting the most out of utilizing strategic human resource management. For Malaysian SMEs, the impact of SHRM on economic performance is greater under two types of situations: the first, is also when the legal and regulatory requirements are deemed to have a posi- tive effect on the organization, but combined with a situation when other organizational resources are more important than human resources; the second is when the situation is such that the busi- ness environment challenges faced by the SME are important and human resources are more important than other organizational resources.

Alternatively, the difference in the results of the influence of the context might be a reflection of the difference between the two country samples, particularly in terms of the industry sector. The Malaysia sample has more manufacturing and information and communications SMEs while the Philippines has more SMEs in the administrative

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

and support services, followed by manufacturing. Industries, as well as sub-sectors in those indus- tries, might be affected differently by the same country context in terms of legal and regulatory requirements, business environment competitive- ness, availability of human resources with the relevant abilities and skills for the industry.

CONCLUSION: SUMMARY OF FINDINGS AND IMPLICATIONS

The study presented provides more evidence that strategic human resource management (SHRM) is applicable in small and medium-sized enterprises (SMEs) in two more Asian countries, Malaysia and the Philippines, particularly when the legal and

regulatory environment and business environment are conducive, that is, if the legal and regulatory requirements are seen to have a positive effect on the organization, and when the business environ- ment is seen to be challenging. This is further aided by the presence of an HR professional taking on the role of a strategic business partner. It should be noted that empirical evidence currently avail- able comes from a small set of countries, mostly in North America and Europe. As well, only a few factors influencing the adoption of a more strategic approach to managing employees have so far been examined. As far as we have gathered from our literature review, our study is one of few that have incorporated in the analysis the legal and regulatory environment as well as business environment.

Table 1. Moderated regression analysis of SHRM on people performance

Variables MALAYSIA PHILIPPINES

β Coefficient t β Coefficient t

Step 1.

SHRM .460 3.786*** .545 5.438***

Adj R2 change .220 F = 31.111***

.540 F = 173.314***

Step 2.

SHRM x Legal Requirements -.064 -.304 .103 .967

SHRM x Business Environment Challenges .089 .541 .096 .841

SHRM x Role of HR -.036 -.204 -.459 -3.282**

SHRM x HR Importance -.042 -.280 .000 .003

SHRM x Legal Requirements x Role of HR .036 .179 .019 .152

SHRM x Legal Requirements x HR Importance .096 .407 -.141 -.967

SHRM x Business Environment Challenges x Role of HR .026 .113 .388 1.893

SHRM x Business Environment Challenges x HR Importance .077 .385 .180 1.179

SHRM x Legal Requirements x Business Environment Challenges x Role of HR

.179 .728 .222 1.164

SHRM x Legal Requirements x Business Environment Challenges x HR Importance

.216 .876 .312 1.699

SHRM x Legal Requirements x Role of HR x HR Importance .147 .444 -.031 -.237

SHRM x Business Environment Challenges x Role of HR x HR Importance

.024 .092 -.499 -3.230**

Adj R2 .213 F = 3.223***

.577 F = 16.445***

*p < .05, **p < .01, ***p < .001

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

The study also provides additional evidence that SMEs can benefit from SHRM, in terms of human resource outcomes, operational perfor- mance and financial performance. As we have included three different types of organizational outcomes, we were also able to test the notion of causal distance of impact of human resource management suggested by Boselie et al. (2005), which has not been done explicitly by the few studies on linking SHRM and organizational per- formance in SMEs. The evidence in the literature thus far has shown that the impact of SHRM is not always positive, and some studies indicate that the impact may be dependent not only on which aspect of organizational performance is being studied, but also on contextual factors. Our study

has incorporated some interaction terms, and has found that only a few contextual factors have a significant moderating influence, and not for all types of organizational outcomes.

It is of course not easy to adopt SHRM; if it were easy to imitate, then it would not be a source of competitive advantage (Barney, 1991). Regardless, for policy makers, our study suggests making the legal and regulatory environment more conducive to the uptake of SHRM by SMEs, recognizing, too, the differential impact laws and regulations may have on different industries. By removing potential hindrances to SMEs, then SME owners and managers can focus on their internal capability to adopt more effective HRM practices. Policy makers should also then pro-

Table 2. Moderated regression analysis of SHRM on operational performance

Variables MALAYSIA PHILIPPINES

β Coefficient t β Coefficient t

Step 1.

SHRM .342 2.796** .581 5.244***

Adj R2 change .164*** F = 20.976***

.480 F = 136.677***

Step 2.

SHRM x Legal Requirements .063 .305 .100 .847

SHRM x Business Environment Challenges -.027 -.164 .134 1.060

SHRM x Role of HR -.044 -.254 -.087 -.558

SHRM x HR Importance -.131 -.819 .088 .704

SHRM x Legal Requirements x Role of HR -.065 -.279 .162 1.147

SHRM x Legal Requirements x HR Importance .110 .402 -.217 -1.338

SHRM x Business Environment Challenges x Role of HR .255 .968 .133 .587

SHRM x Business Environment Challenges x HR Importance .122 .462 .281 1.662

SHRM x Legal Requirements x Business Environment Challenges x Role of HR

.208 .696 -.116 -.549

SHRM x Legal Requirements x Business Environment Challenges x HR Importance

.073 .265 .241 1.188

SHRM x Legal Requirements x Role of HR x HR Importance .421 1.206 -.178 -1.246

SHRM x Business Environment Challenges x Role of HR x HR Importance

-.072 -.193 -.107 -.627

Adj R2 .217 F = 3.168**

.482 F = 11.540***

*p < .05, **p < .01, ***p < .001

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

vide more training in terms of HR management, which resource-limited SMEs may not be able to do themselves. The presence of qualified labor seems to be a potential constraint for SMEs, as the study suggests may be the situation for Malaysia, in which case, governments must invest more in educating their populations along the areas that SMEs require the most. Habaradas (2009) did note that skills shortages were particularly strong in Malaysia as compared to the Philippines. However, the issue may not be an absolute labor shortage but a relative one, in that potential employees are reluctant to be employed in SMEs as their pay and benefits may not be comparable to the package offered by larger organizations, especially if they are multinationals as well.

As well, the challenging business environment needs to be parsed out as this variable in the study covered many aspects including competition for purchases of inputs such as raw materials, parts or equipment; competition in promotions, advertis- ing, selling, distribution; rates of obsolescence of products, services or processes; and rate of innova- tion. These are all aspects in which governments can intervene in order to remove, or minimize these challenges for SMEs.

For SME owners and managers, the findings from this study suggest that HRM is indeed a source of competitive advantage, and is an internal capability that they can and must attend to. How- ever, to optimize the use of this source depends on three areas that are necessary; the first two areas

Table 3. Moderated regression analysis of SHRM on economic performance

Variables MALAYSIA PHILIPPINES

β Coefficient t β Coefficient t

Step 1

SHRM .465 4.193*** .468 4.285***

Adj R2 change .291 F = 43.610**

.463 F = 127.671***

Step 2

SHRM x Legal Requirements -.155 -.781 .247 2.129*

SHRM x Business Environment Challenges -.058 -.374 .031 .246

SHRM x Role of HR .201 1.274 -.025 -.162

SHRM x HR Importance -.142 -1.004 .111 .902

SHRM x Legal Requirements x Role of HR .096 .508 .126 .906

SHRM x Legal Requirements x HR Importance .547 2.486* -.081 -.507

SHRM x Business Environment Challenges x Role of HR -.007 -.032 .094 .420

SHRM x Business Environment Challenges x HR Importance -.374 -2.016* -.072 -.435

SHRM x Legal Requirements x Business Environment Challenges x Role of HR

.261 1.136 -.056 -.271

SHRM x Legal Requirements x Business Environment Challenges x HR Importance

-.011 -.046 .283 1.416

SHRM x Legal Requirements x Role of HR x HR Importance .187 .599 -.175 -1.243

SHRM x Business Environment Challenges x Role of HR x HR Importance

.324 1.384 -.201 -1.194

Adj R2 .344 F = 5.200***

.498 F = 12.218***

*p < .05, **p < .01, ***p < .001

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

are largely within the control or discretion of the owner and managers. First, the HRM practices that are implemented in the organization need to cover the full range of managing employees, from job design, recruitment and selection, training, performance appraisal and compensation. SMEs must understand the nature of the jobs and detail precisely the duties and responsibilities entailed. Information about these jobs needs to be updated regularly, as that would be helpful in their hiring and training efforts. Recruitment and selection should focus on ensuring the basis for hiring and promotion is that of the individual’s ability that is related to the job and the organizational context. Training should still be provided to ensure that the employees continue to have the necessary knowledge and skills for the performance of their jobs. Evaluating their performance should be done more formally, and the information gathered from this process be utilized for training, promotion and compensation. Compensation is another key area and should depend on both the importance of the job to the organization, and on performance of the employee and of the organization. Second, the person in charge of the HRM function must be allowed to have a strategic role in the organi- zation, by being involved in decisions regarding the business strategy, and having leeway to decide on the HRM policies and procedures that he/she sees as the best fit for the organization’s strategy.

A third area addresses the external environment that to a large extent is outside of the control of SMEs. Nonetheless, for many countries, SMEs are an important sector that would help the economy develop, but it may be necessary to promote the sec- tor in order for governments to allocate resources to support its development. To be highlighted is the sector’s contribution to employment and the country’s gross domestic product. SMEs usually are a large number that could be organized, if not already happening, into a group that can lobby the government to implement laws that are conducive to their development, and to provide the resources needed for training, marketing, and research and

development. This organization can be a stand- alone or a sub-group within the umbrella of existing chambers of commerce, industry associations, or HR professional associations. These organizations can also provide support for their members in implementing some HRM programs that might be too expensive if undertaken by one small firm. For instance, the provision of employee benefits through group insurance would reduce the costs of premiums if there were more employees from different SMEs enrolled in it. The per-employee costs of using selection tools in the hiring process may also be decreased if the selection tool is shared among different SMEs.

Overall, we have addressed our three stated purposes: (1) determine whether or not SMEs in Malaysia and the Philippines have adopted a more strategic approach to managing employees; (2) determine whether the adoption of this approach provides the SMEs with competitive advantage; and (3) examine some antecedents, external and internal to the organization, to the adoption of a more strategic approach to managing employees.

We acknowledge that our sample sizes are small, as well as there can be no claims in terms of representativeness. We also did not differentiate these firms in terms of whether they are micro, small or medium, nor their life cycle stage, as the studies of Storey et al. (2010) and Kotey and Slade (2005) had pointed out are characteristics that would differentiate the uptake of HRM. There are other methodological issues that our readers must bear in mind. The data came from self- reports of those who are responsible for HRM. Thus, the respondents could be subjected to social desirability effects, answering more positively or in accordance with what they think the research- ers would like to hear, even if the on-line survey was anonymous. Nonetheless, reports of HRM practices and organizational performance seem to be lower in Malaysia where the possibility of identifying respondents and organizations is higher, given the data collection method involved.

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

As well, the perceptions of the HR person could be different from those who are the recipients of HRM practices, i.e., the employees (Paauwe, 2009). Others (e.g., Boselie et al., 2005) have also pointed out that the quality of implementation is an element that needs to be taken into consider- ation, and measured more directly. The questions pertaining to organizational performance in this study are retrospective, and recall can be inac- curate in either direction (i.e., better or worse). As this study is not longitudinal, the order of causality between HRM and performance cannot be definitively claimed (Paauwe, 2009). However, Sheehan’s (2013) longitudinal study concluded that reverse causality (where organizational per- formance influences HRM) is not the case for U.K. SMEs: HRM practices in 2007 continued to have a positive effect on productivity, innovation, lower labour turnover in 2011, albeit a decline in significance level was noted for productivity, and an increase for labour turnover.

However, in recognizing the challenges in- volved in conducting international research, Leung and van de Vijver (2008) suggested a consilience approach to address the limitations of a single study. The approach takes the findings from several studies that use different samples, such as multiple respondents from each organization, or sources of data, such as secondary sources or different listings of organizations, and research methodologies, such as in-depth interviews rather than survey questionnaires that could provide more insight on the processes involved in the adoption of HRM; together, these studies can provide the evidence in addressing the same questions. Thus, despite the methodological issues, our study is one we hope can add to a collective of such studies.

FUTURE RESEARCH DIRECTIONS

While we have addressed our three stated purposes, there are still questions that should be pursued in order to have a better understanding or knowledge

base to guide SME owners and managers, and policy-makers. For instance, given the findings in our study, the importance of human resources relative to other organizational resources should be investigated further. As suggested, the nature of the industry may play a role, the organization’s life cycle stage, characteristics of the owner and managers (Barrett & Myer, 2010; Tocher & Rutherford, 2009), or it may be due to the labor market in the country. At the organizational-level of factors influencing the adoption of SHRM and its impact on organizational performance, whether the SME is domestically or internation- ally oriented, or affiliated with larger organiza- tions through subcontracting networks (Tecson, 2004) are questions that governments would be keen to have answered in their quest to facilitate the development of the SME sector. In this light, future research should also address whether the success factors such as adopting SHRM make a difference between SMEs who are domestically focused as opposed to those who are international. For instance, Rowley and Abdul-Rahman (2007) noted that locally-owned companies in Malaysia do not place priority on HRM unlike the multi- nationals operating in Malaysia. Finally, in both the countries studied, SMEs are considered to be a way to address poverty often due to unemploy- ment. This aspect then might a critical distinction between SMEs in developing and developed countries. It is also an aspect that policy-makers in developing countries need to address if SMEs truly have a more important role in economic development, other than a temporary refuge for the unemployed.

Our study only focused on the legal and regula- tory environment and the economic environment of the country, and did not include the socio-cultural environment, an important country difference (Aït Razouk & Bayad, 2009; Cunningham, 2010; Saini & Budhwar, 2008; Wang & Qiao, 2007). While our comparative study implicitly recognized socio- cultural differences, a more direct and explicit measure of the socio-cultural environment needs

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

to be included in future research; using “country” as a proxy variable for culture is not sufficient to understand the impact of culture (Schaffer & Riordan, 2003). With this approach as well comes the recognition that there may be culture-specific human resource management practices that may be unique and more significant (Schaffer & Riordan, 2003; Tsui, 2004). While using the same measure of SHRM has its advantages in comparative stud- ies, the drawback is that of missing these prac- tices that Tsui (2004) had pointed out would be valuable contributions to our global knowledge. In this regard, the emic-etic approach suggested by Schaffer and Riordan (2003) should be incor- porated in future international research. Included in this would be the suggestion of Harney and Dundon (2006) of asking employees who would be a good source of information on what might help the SME in addressing some of the external pressures that it faces.

ACKNOWLEDGMENT

The project was funded by the Social Sciences and Humanities Research Council (SSHRC) of Canada.

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Zheng, C., Morrison, M., & O’Neill, G. (2006). An empirical study of high performance HRM practices in Chinese SMEs. International Jour- nal of Human Resource Management, 17(10), 1772–1803. doi:10.1080/09585190600965282.

Zheng, C., O’Neill, G., & Morrison, M. (2009). Enhancing Chinese SME performance through innovative HR practices. Personnel Review, 38(2), 175–194. doi:10.1108/00483480910931334.

KEY TERMS AND DEFINITIONS

Strategic Human Resource Management: A set of interrelated human resource management practices that together select, develop, retain and motivate the firm’s workforce towards the achieve- ment of the firm’s goals.

Malaysia: A country located in South East Asia.

Philippines: A country located in South East Asia.

Organizational Performance: Economic, financial, operational or employee performance of an organization.

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

APPENDIX

LIST OF VARIABLES

Strategic Human Resource Management

Planning

1. HR programs and activities are determined by explicit, formal planning procedures. 2. Long-term prospects influence our HR planning. 3. The HR function is involved in major strategic decisions made in our organization. 4. HR planning is linked to business planning. 5. HR practices and policies are in harmony with each other. 6. HR programs and activities are evaluated on a regular basis.

Staffing

1. Employees are hired or promoted on the basis of their job knowledge and experience. 2. Employees are hired or promoted on the basis of their ability to collaborate and work with others. 3. Employees are hired or promoted on the basis of their potential to learn. 4. Employees are hired or promoted on the basis of their fit with the organization’s culture. 5. In hiring or promoting, employees are assessed against criteria set by the organization, rather than

on the manager’s personal preference.

Job Design

1. The duties and responsibilities of jobs are detailed precisely. 2. Analysis of jobs is undertaken regularly and job descriptions updated. 3. Job descriptions allow the use of a broad range of the employee’s skills and abilities.

Training

1. There are formal training programs to teach new employees the skills they need to perform their jobs.

2. Formal training programs are offered to increase employees’ promotability in this organization. 3. Training programs are developed on the basis of assessed training needs of the organization. 4. The effectiveness of training programs is monitored regularly.

Performance Appraisal

1. Performance appraisals are based on input from multiple sources. 2. The performance appraisal process is standardized and documented. 3. The performance appraisal is used to determine an employee’s pay.

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

4. The performance appraisal is used to determine an employee’s promotability. 5. The performance appraisal is used to determine an employee’s training needs.

Compensation

1. Incentives and bonuses are given on the basis of the individual’s job performance. 2. Incentives and bonuses are given on the basis of how well our organization performs. 3. An employee’s base pay depends on the importance of his or her job to the organization.

HR Professional’s Role

1. HR works to align HR strategies and business strategy. 2. HR participates in the process of defining business strategies. 3. HR develops processes and programs to link HR strategies to accomplish business strategy. 4. HR spends time on strategic issues.

Importance of Human Resources

1. Obtaining and preserving the necessary FINANCIAL RESOURCES is much more important. 2. Obtaining and preserving the necessary TECHNOLOGICAL RESOURCES is much more important. 3. Obtaining and preserving the necessary MARKETING RESOURCES is much more important. 4. Obtaining and preserving the necessary MATERIAL RESOURCES is much more important. 5. Obtaining and preserving the necessary INFORMATIONAL RESOURCES is much more important.

Legal and Regulatory Requirements

1. Tariffs on imports/exports 2. Antitrust or anti-monopoly regulations 3. Regulations for protecting the environment from industrial wastes 4. Special regulatory bodies or legislation for industry 5. Labor legislation and legislation covering working conditions 6. Advertising and promotion regulation

Business Environment Challenges

1. Competition for purchases or inputs (such as raw materials, parts, equipment) 2. Competition for technical manpower 3. Rate at which products or services are getting obsolete in the industry 4. Competition in promotions, advertising, selling, distribution 5. Rate of innovation of new or better operating processes used in industry 6. Competition in the quality and variety of products or services 7. Competition in price of products or services

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

8. Rate of innovation of new or better products or services 9. Competition in delivery and after sales services 10. Rate of increase of labor productivity in recent years

People Performance

1. Ability to attract essential employees 2. Ability to retain essential employees 3. Employee morale and job satisfaction 4. Employee commitment to organizational objectives

Operational Performance

1. Public image and goodwill 2. Productivity 3. Development of new products/services 4. Quality of products/services 5. Customer satisfaction 6. Market share

Economic Performance

1. Long-term level of profitability 2. Growth rate of sales or revenues 3. Financial strength (liquidity and ability to raise financial resources)

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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs

Table 4. Means and standard deviations

VARIABLE COUNTRY MEAN STANDARD DEVIATION

SHRM Malaysia 3.20 .70

Philippines 3.85 .69

Legal Requirements Malaysia 3.10 .78

Philippines 3.77 .65

Business Environment Challenges Malaysia 3.28 .93

Philippines 3.98 .67

Role of HR Malaysia 3.00 .97

Philippines 3.83 .85

HR Importance Malaysia 3.54 .72

Philippines 1.91 .84

People Performance Malaysia 3.26 .71

Philippines 3.86 .73

Operational Performance Malaysia 3.42 .64

Philippines 3.97 .63

Economic Performance Malaysia 3.29 .71

Philippines 3.88 .75

Table 5. Beta coefficients of factor scores predicting SHRM and factor components and loading

BETA COEFFICIENT t COMPONENT FACTOR LOADING

MALAYSIA

Factor 1 .173 2.524* Legal Requirements 0.958

Factor 2 .584 8.556*** Role of HR Role 0.980

Factor 3 .209 3.056** HR Importance 0.992

Factor 4 .316 4.627*** Business Environment Challenges 0.944

Adj. R2 .502***

PHILIPPINES

Factor 1 -.211 -5.044*** HR Importance 0.952

Factor 2 .605 14.493*** Role of HR 0.912

Factor 3 .477 11.431*** Business Environment Challenges 0.896

Factor 4 .336 8.044*** Legal Requirements 0.877

Adj. R2 .744***

*p < .05, **p < .01, ***p < .001

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Chapter 2

Human Capital in Malaysian SMEs:

HR Practices, Uniqueness, and Value

ABSTRACT

This chapter explores Human Capital in Malaysian SMEs. Malaysia has placed significant policy em- phasis on indigenous SMEs as a basis for achieving economic growth and competitiveness. This renders the human capital infrastructure of SMEs of critical importance. However, the reality is that there is little information as to the nature of HR practices and their impact in Malaysian SMEs. This chapter aims to fill this void by exploring descriptive findings from a unique sample of over 200 Malaysian SMEs. Drawing on the work of Lepak and Snell in particular, the chapter offers insights into human capital uniqueness and human capital value in the firms investigated. The performance and policy implications of the research are discussed and future research avenues outlined.

INTRODUCTION

The significance of SMEs to economic develop- ment cannot be understated. Irrespective of the definition that is applied, smaller firms dominate the industrial landscape contributing to over 55% of GDP and 65% of total employment in high- income countries (OECD, 2005). This significance

is not adequately reflected in mainstream HRM literature which has tended to either ignore SMEs, or automatically assume them to be deficient if they do not adhere to normative ideals (Marlow, 2006). As an example, a browse through the Oxford University Press Handbook of Human Resource Management (Boxall et al., 2007) reveals a diverse range of chapters on HRM in various

Kenneth Cafferkey Universiti Tun Abdul Razak, Malaysia

Brian Harney Dublin City University, Ireland

Pua Eng Teck Universiti Tun Abdul Razak, Malaysia

DOI: 10.4018/978-1-4666-4731-2.ch002

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Human Capital in Malaysian SMEs

contexts (e.g. manufacturing, public sector, multi- national firms), while small firms, SMEs or firm size barely make the index. This makes it easy to understand why Gilman and Edwards (2008: 533) bemoan the ‘acute shortage’ of research exploring Human Resource (HR) practices in SMEs. This neglect is all the more surprising considering the human capital intensive nature of SMEs where the additional value added by each individual employee is more transparent and telling. Indeed, sound management of employees can be a critical factor determining the survival and growth of smaller firms (Barrett and Mayson, 2008). Equally, the ‘resource poverty’ inherent to smaller firms means that they are likely to be especially dependent upon their human resources (Marlow and Patton, 1993).

In those economies seeking indigenous growth policy attention has increasingly turned to SMEs and by consequence their infrastructure for man- aging and developing human capital. The objec- tive of this chapter is to explore this tendency in the context of Malaysia. The chapter begins by providing a background overview of SMEs in Malaysia and current government policy to en- courage SME growth. We then review some of the key theoretical lenses for examining human capital in SMEs, and provide an overview of the limited Malaysian research in this area. The latter half of the chapter opens an empirical window by documenting descriptive survey results examining human capital value and uniqueness in over 200 Malaysians SMEs. The chapter closes by explor- ing key implications of the analysis and pathways for future research.

BACKGROUND: THE MALAYSIAN CONTEXT

Government Policy

The Malaysian government has a long history of planned economic development, namely through three critical policy plans; the New Economic

Policy (NEP), National Development Policy (NDP), and National Vision Policy (NVP) (Ong et al., 2010). The present conceptualisation for economic development is contained in the recent ‘SME Master Plan’ (2012-2020). As a conse- quence of the Asian financial crisis of 1997, the Malaysian government has changed focus and recognised the value of the SME sector as a key means to insulate the economy from its previous vulnerability to external global shocks, in particu- lar by reducing an overreliance on foreign direct investment (Ong et al., 2010; Ahmed et al., 2011). Allied to this, in aspiring to achieve a ‘developed nation’ standing by, or before, 2020 the Malaysian government has also refocused attention on the human capital requirements of the nation (Hashim et al., 2005). The SME Master Plan sets out six specific growth areas for SME development and performance improvement, one of which centres upon human capital development. The plan notes that the Malaysian workforce typically lacks job readiness, has low utilization of existing training, and typically receive non-competitive rewards and benefits. The government’s intention is to increase human capital levels and intensity across the SME sector to enable innovation as a key driver of enhanced economic growth across the economy. At a macro-level the government objective is to broaden the employment base and increase aver- age per capital income in an attempt to achieve the status of a high income economy. At a more micro-level, however, very little is known about the actual in-firm processes which can potentially drive economic growth in Malaysia (Hashim et al. 2005). Similarly there is limited knowledge of the existing human capital levels or requirements of SMEs and how they may potentially help or hin- der this objective (Garengo and Bernardi, 2007).

SMEs in Malaysia

In most economies, including those in the Asia- Pacific region, SMEs dominate the industrial landscape (Abe et al., 2012). This is certainly true of Malaysia where, according to the SME Master

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Human Capital in Malaysian SMEs

Plan (2012), SMEs constitute 99.2 percent of all business organisations. In terms of relative impact, the SME sector accounts for 32 percent of national GDP, 19 percent of all exports while providing nearly two-thirds of total employment. These figures suggest that the impact and relevance of the SME sector in Malaysia cannot be understated. Nonetheless, providing a rigorous definition of what actually lies behind the label SME is not without difficulty (Abe et al., 2012). In Malaysia the National SME Development Council defines an SME using both sales turnover and the number of employees, while also providing an additional distinction according to industry type (see Table 1)

This approach to defining SMEs based on their line of business is also utilised in the context of economies such as India, Japan and the Taiwan Province of China (Abe et al., 2012). This type of definition also echoes early attempts in the UK to utilise an aggregate statistical definition which allows for variance by sector (e.g. Bolton Report, 1971). Yet while such an approach does favour local, intra-industry distinctions it does so at the expense of facilitating broader systematic com- parisons and considering a larger number of firms (Forth et al., 2006: 5). The response to such dif- ficulties has typically been recourse to numbers employed as the ‘most relevant measure of size’ (Kalleberg and Van Buren, 1996). However, it must be acknowledged that problems remain with

employment-based, numerical definitions as the actual categories used to distinguish between large and small firms can be somewhat arbitrary. More- over, numbers also take on a different meaning contingent on national context; US studies can take small as meaning less than 500 employees (Klaas et al., 2012), while the EU offers a more generous definition with medium sized firms seen as those employing 50-250 and small constituting those with more than 10 but less than 50 employ- ees. More rigorous definitions also deploy eligi- bility dimensions concerning annual turnover and ownership which ensure the status of firms as non-subsidiary and independent is also invoked.

Complexities of definition duly acknowledged, going forward the Malaysian government plans strategic investment in SMEs which is envisaged to raise the contribution of SMEs to some 41 percent of national GDP and 25 percent share of all exports. This suggests productivity and ef- ficiency gains brought about by better utilisation of human capital. Already the Human Resource Development Fund (HDRF) has shown a general positive impact on investment, capital intensity and productivity. Nonetheless, the core issue of talent management in terms of human capital is an extremely underdeveloped area in Malaysia, with little, if any, analysis conducted in the SME sector. The SME Master plan (2012) highlights the significant potential for intervention in this

Table 1. Malaysian SME definitions

Primary Agriculture Manufacturing (Including Agro-Based) and Manufacturing-Related Services

(MRS)

Services Sector (including ICT)

Micro Less than 5 employees or sales turnover less than RM 200,000

Less than 5 employees or sales turnover less than RM 250,000

Less than 5 employees or sales turnover of less than RM 200,000

Small Between 5 & 19 employees or sales turnover between RM200,000 and less than RM1 million

Between 5 & 50 employees or sales turnover between RM250,000 and less than RM10 million

Between 5 & 19 employees or sales turnover between RM200,000 and less than RM1 million

Medium Between 20 & 50 employees or sales turnover between RM1 million to less than RM5 million

Between 51 & 150 employees or sales turnover between RM10 million to less than RM25 million

Between 20 & 50 employees or sales turnover between RM1 million to less than RM5 million

Source: Ong et al. (2010: 41) and SME Masterplan

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Human Capital in Malaysian SMEs

domain; the Malaysian SME landscape is charac- terised by low productivity where the value added of per employee is estimated to have averaged at RM 47,000 (approximately $15,500), one third that of the value added by employees in larger organisations. Overall, the significance placed on SMEs in Malaysia highlights the importance of beginning to chart and better understand human capital interventions in this context.

HUMAN CAPITAL IN SMES: OVERVIEW AND PROSPECTS

It has long been stated that the role and impact of HRM in SMEs has not received adequate attention. This point finds even more force in the context of transition economies (Nguyen and Bryant, 2004). In order to explore Human Capital in Malaysian SMEs it is first necessary to examine relevant theory and research. A broad distinction can be drawn here between a line of argument that is supportive of universalistic reasoning and one that holds a more contextual bent. Universalistic theory suggests that SMEs are likely to benefit from the same type of HRM practices as applied in large firms irrespective of organisational context. By contrast, more contextual based theory considers the specific characteristics of SMEs and moves to better accommodate the institutional and cultural context in which they are embedded. We will consider each of these approaches in turn before highlighting how our research into Malaysian SMEs attempts to draw on insights from both of these perspectives.

In terms of the universalistic argument, US studies have largely advocated the role of HRM and its prospective impact on performance re- gardless of firm size (Huselid, 1995; Way, 2002). Following this logic Kaman and colleagues conclude from their research that “small firms can no longer be considered unsophisticated practitioners of human resource management” (2001: 43). Likewise, small firms are found to be

‘innovative in HRM’ (Dex and Scheibl, 2001) and have largely similar HR practices to their large firm counterparts (Golhar and Deshpande, 1997). Hayton’s (2003) examination of strategic human capital management practices found a positive effect on entrepreneurial performance measured as the degree to which the small firms examined pursue innovation and accepted risk and uncer- tainty. Sheehan (2013) deployed a longitudinal methodology examining the relationship between sophisticated HRM practices and organisational performance in SMEs over two time periods. Her results find that HRM practices were seen to have a beneficial impact over time thereby discount- ing arguments concerning reverse causality (i.e. that those better performing SMEs subsequently introduce more sophisticated HRM practices). Nonetheless, the treatment of firm size in some of this research in problematic. Hayton defined the small firm as having an upper parameter of 500 employees while excluding firms with less than 100 employees from the sample ‘due to the expectation that formal HRM practices would be limited for these firms’ (2003: 381). The subse- quent result of a positive impact of human capital management in small firms therefore needs some qualification. Another study exploring the factors motivating the adoption of ‘high involvement practices (HIPs)’ similarly omits organisations with less than 100 employees from its sampling frame, but is nonetheless able to conclude that “the adoption of HIPs is likely to vary neither on the size nor on the age of the firm. This may confirm the fact that the new trends in managing HR are not limited exclusively to large companies” (Ordiz-Fuertes and Esteban, 2003: 522). Others more cautiously highlight the merits of investment in HRM in specific circumstances e.g. in facilitat- ing growth trajectories (Kotey and Slade, 2005). In many cases, however, arguments concerning the financial costs of introducing HRM practices (e.g. sophisticated recruitment practices) and their pragmatic viability (e.g. formal communication mechanisms) in the SME context are neglected.

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Human Capital in Malaysian SMEs

A second stream of research has urged for caution against normative prescriptions and sim- plistic transposition of large firm HRM practice to the SME context (Harney and Dundon, 2006). Analysis of the UK Work Employment Relations Surveys (WERs) data indicates that the expected relationships between the presence of a HR spe- cialist and the adoption of HRM practices, and the associations between formal HR practices and employee satisfaction, are absent (Bacon and Hoque, 2005; Forth et al., 2006). Indeed, research has found that small, growth oriented firms may actually not benefit from having senior HRM executives (Welbourne and Cyr, 1999). Making sense of such contradictory evidence mandates approaches which are more sensitive to context and can offer explanatory accounts of the key contingencies influencing the type and form of HRM evidenced in SMEs. One key factor which complicates analysis of SMEs is the prevalence of informality in this context. Informal practice cannot be automatically read as deficient but in- stead operates in a dynamic fashion (Ram et al., 2001). A good example comes from Drummond and Stone’s (2007) research into High Performance Work Practices at the Sunday Times ‘50 best small companies to work’. Here they found little that matched what might be prescribed by universal- istic theory but instead that each firm “adopted a distinct bundle of workforce related practices, based upon its own perceived needs and priorities” (2007: 196). Similarly in their research on small firms in the road haulage sector Marchington et al., (2003: 20) note that firms utilise a range of ‘intelligent’ formal and informal methods specific to their context. Characteristics specific to smaller firms such as their ‘hierarchically contracted’ nature also mitigates against typically cited best practice such as internal promotion and formal communication channels. In attempting to cap- ture this internal dynamic Harney and Dundon (2006) outline an open systems theory of HRM. This also moves to accommodate the proximity of SMEs to their external environment. Indeed, the

extent of formality in place is likely to be heavily shaped by the broader institutional environment in which firms are operating in. In their study of SMEs in Vietnam Nguyen and Bryant (2004) found unique features impacting upon the extent of formality to include the collective value of the family, customer and supplier expectations coupled with pressures from banks to formalise HR practices in order to qualify for loans. They concluded that decisions on the level of HR in- formality “are actually influenced by a complex set of cultural, economic and institutional factors” (2004: 596). Other research by contrast advocates a more culturally neutral impact for HRM across similar contexts (Bae et al., 2003).

The distinction between universalistic and more contextual theories holds relevance for research into Malaysian SMEs. In terms of univer- salistic theory, research exploring the adoption of sophisticated HRM practices in Malaysia is largely underdeveloped (Osman and Galang, 2011). Of the research that is available there is a suggestion of an underutilisation of HR practices amongst Malaysian organizations (Caspersz, 2006), with multinationals likely to exhibit more sophisticated practices (Hassan, 2010). A recent CIPD (2012) study of over 100 Malaysian firms finds that there is some engagement with sophisticated HR although it is not obvious whether the findings hold relevance for the activities and effective- ness of SMEs. It is therefore important to draw on existing research (Klaas et al., 2012; Sheehan, 2013) to understand the extent of diffusion of sophisticated HRM practices in Malaysian SMEs.

By contrast, from the perspective of contex- tual theory, it is understood that comparison with the ideals of best practice HRM should form the beginning rather than the end of analysis. This highlights the importance of deciphering the Malaysian specific explanations for the HRM practices in place in Malaysian SMEs. In terms of institutional and cultural issues the CIPD (2012) research suggests that the issue of communication is likely to be a significant issue in Malaysian firms.

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Human Capital in Malaysian SMEs

Drawing on Lepak and Snell’s (2002) distinction between human capital uniqueness and human capital value is one way to examine the merits and potential of the government focus on human capital and the specific implications this may hold for SMEs. Such understanding is important as the Malaysian government has committed to enhanc- ing the human capital infrastructure of SMEs through some 32 vocational training programs at an expense of RM124.3 million (SME Annual Report 2009-2010). It is important that such policy initiatives draw upon a strong empirical foundation rather than automatically assuming SMEs to be small big businesses. This is especially the case as economic development is likely to occur in the SME rich domains of tourism and knowledge based enterprises.

METHODOLOGY

In order to shed some empirical light on HRM practice in Malaysian SMEs this chapter draws on original survey evidence. The survey approach enables a broad understanding of the nature of HRM practices in place, although its limitations in capturing the dynamics of informality and realities of day to day practice are acknowledged (Sheehan, 2013). The research was conducted in conjunction with the Malaysian SME Corporation. Surveys were randomly distributed to 500 members in September 2012 and, after follow-up letters, 202 completed surveys were returned representing a response rate of over 40 percent. The first section of the survey was designed to examine existing HRM practice and perceived effectiveness. HRM practices were measured using an adapted mea- sure from Klaas et al. (2012). Through extensive piloting Klaas and colleagues devised a measure which was deemed to capture the nature of High Performance Work Systems measured by the likes of Huselid (1995) in an SME context. An

early version of this measure was piloted with 10 Malaysian SME owner managers. Based on subse- quent feedback and concerns that the narrowness or breadth of HRM practice might not be captured the Klaas approach of exploring the proportion of workforce covered by each practice was amended to a likert scale (ranging from strongly disagree to strongly agree) to better assess the existence of practices. This measure goes someway in address- ing concerns surrounding simple yes/no, formal/ informal responses concerning the existence of practice (Sheehan, 2013). Human resource ef- fectiveness was measured using the Klaas et al. (2012) measure based on a five point likert scale from very dissatisfied to very satisfied.

The second section of the survey moved to better explore the internal dynamics of human capital management within SMEs. In particular, this section drew on the well-established work of Lepak and Snell (2002). Underpinned by the logic of transaction cost economics and the resource based view of the firm the survey measured hu- man capital value and human capital uniqueness respectively, deploying a likert scale ranging from strongly disagree to strongly agree. Finally, following Delaney and Huselid (1996), overall organisational performance was measured on a subjective basis as respondents were asked to com- pare performance relative to that of competitors. This relative measure is particularly appropriate in an SME context where the basis of threshold performance and the desire for profit maximisa- tion may not be directly comparable with that of larger firms (Gimeno et al., 1997). The empirical findings are discussed in two key sections; one related to HR practices and HR effectiveness and a second addressing human capital value and hu- man capital uniqueness. However, in order to set the context, it is first necessary to explore some demographics and broad findings concerning hu- man capital development in the respondent SMEs.

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Human Capital in Malaysian SMEs

DEMOGRAPHICS AND HUMAN CAPITAL DEVELOPMENT

The surveys were administered to those people with responsible for HR activities in the SME organisations. In terms of the individual position or title of those who completed the survey (after omitting missing respondents), 46.4 percent were the Chief Executive Officer/ Managing Direc- tors, 24.5 percent were the Executive Director and 29.1 percent were the General Manager. In contrast to international findings which suggests that a dedicated HR position is unlikely to be found in the majority of SMEs (Sheehan, 2013; Forth et al., 2006), 54.8 percent of organisations had a specific person with the designated sole responsibility for HR activities. This pro-activity may reflect the reality that the sample has close association with the Malaysian SME Corporation. Table 2 presents the organisational characteristics for the 202 SMEs that participated in the survey. In relation to organisational size, over 40 percent

of respondents had 10 or less employees, with 72 percent having 50 or less employees. In general this reflects the Malaysian definition of SMEs as largely constituting those firms with less than 100 employees (Ong et al. 2010: 41), some 86.55 percent of the current sample. With respect to the sectoral breakdown- services was the largest industry sector (55.7 percent of respondents), followed by manufacturing (28.9 percent), con- struction (8 percent) and finally agriculture with 7.5 percent. The overwhelming majority of SME were Malaysian owned (93.1 percent). Concern- ing the length of time organisations had been in existence, 12.9 percent were in operation for 2 years or less, 20.3 percent were in the 2-5 years range, 26.7 percent in the 6-10 years range, 27.2 percent in the 11-20 years bracket, and 12.9 percent in the 20+ years range. Importantly this means the focus of the current research is very much on existing firms and ‘smallness’ rather than new or emerging ventures which face different, very specific issues associated with ‘newness’ (Cardon and Stevens, 2004).

To get a sense of the nature of human capital and human capital requirements within the SMEs we can note that 78.4 percent of organisations have labour costs of less than 50 percent. Of these responents, 42.7 percent indicated that labour costs were less than 25 percent of total costs. At the higher end of the scale 5.5 percent of respon- dents indicated that labour costs were in excess of 75 percent of total costs. Findings in relation to human capital development requirements are presented in Figure 1. This clearly suggests a degree of immediacy and urgency associated with human capital needs. Specifically, with regard to current employees 62.4 percent of respondents indicated that they would immediately consider investing time, resources and effort in developing these employees, while another 27.2 percent said they would willing to do so within the next two years. In terms of core staff (exceptional employ- ees who critical for the organisations competitive advantage), 65.8 percent were willing to invest

Table 2. Characteristics of respondent organisa- tions

Variable Percent

Size: 1-10 11-50 51-100 100-250 250+

40.5 31.5 14.5 11 2.5

Industry Sector: Construction Agriculture Manufacturing Services

8 7.5 28.9 55.7

Ownership: Malaysian Asian (Non-Malaysian) Other

93.1 6.4 .5

Age: 0-2 years 2-5 years 6-10 years 11-20 years 20+ years

12.9 20.3 26. 27.2 712.9

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Human Capital in Malaysian SMEs

immediately, while 24.8 percent planned to do so with the next two years. Most interesting is that less than 9 and 8 percent of respondents respec- tively stated that it was not their intention to invest any time, resources and effort in developing em- ployees. This indicates that SMEs in Malaysia are open to opportunities to, and see the benefit of, investing in both core talent and employees gen- erally. This also echoes the CIPD findings where Malaysian firms were much more likely to place an emphasis on raising skill levels. The results indicate that organisations are marginally more receptive to investing in core talent over all em- ployees. Encouragingly, this suggests a clear degree of consistency between government poli- cy and emphasis in relation to human capital and the specific challenges identified by Malaysian SMEs.

HR PRACTICE AND HR EFFECTIVENESS

This section moves to examine the nature and extent of HR practices in Malaysian SMEs. This is one of the first studies to open an empirical

window on this topic (Osman, and Galang, 2011). Participants were asked to assess the importance of 13 various HR activities on a scale of 1-5 from strongly disagree to strongly agree. Rather than simply assessing the diffusion of a list of practices, this approach enables a richer assessment of key priorities and HR issues confronting Malaysian SMEs. The responses are presented in Table 3. Overall, there appears to be a consensus that HR issues are of significant importance to Malaysian SMEs evidenced by the concentration of answers in the agree/strongly agree categories. The high- est mean score was for the use of recognition and reward practices (Mean= 4.14, SD= .635) closely followed by the use of bonuses and incentives (Mean= 4.13, SD= .616). Reflecting the earlier discussion on the importance of human capital development the provision of formal training also ranked as highly important (Mean= 4.03, SD=.744). At the opposite end of the spectrum practices that were seen as least important included the provision of retirement options (Mean= 3.60, SD= .752) and the use of formal procedures to set pay levels (Mean= 3.75, SD=.684). These may reflect the demographical and institutional backdrop respectively. In common with the CIPD

Figure 1. Human capital development

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Human Capital in Malaysian SMEs

(2012) study communication and feedback in the form of performance appraisals, regular updates about business development, and the seeking input on how to improve the company also ranked highly.

Overall, the findings counter the view of an SME sector which fails to appreciate the role of HRM activities. That said, the measures deployed examined perceptions of the importance of prac- tices which cannot be automatically equated with diffusion into practice. One way to begin to ad- dress this is to assess perceptions of the effective- ness of current HRM practices in place in SMEs (cf Klaas et al., 2012). Table 4 captures Human resource effectiveness amongst the Malaysian SMEs studied. Specifically, it assesses the impact that current HR initiatives have in terms of at-

tracting the right employees, employee turnover and absenteeism, motivation, performance and improvements in skill levels. The majority of respondents indicated that they were satisfied with the impact of current practices, with the exception of the level of employee turnover where 46.9 percent respondents were neither satisfied nor dissatisfied. The overall mean for perceived ef- fectiveness of HR across the six areas examined was 3.42 (SD= .8). In the main participants could be described as exhibiting general satisfaction with the effectiveness of current HR systems. The highest level of satisfaction was for levels of ab- senteeism (Mean =3.55, SD=.753). This compares favourably with Klaas et al., (2012: 499) who reported a perceived effectiveness mean of 3.8

Table 3. Human resource practice

In your Organisation it is Important to

Strongly Disagree %

Disagree % Neutral % Agree % Strongly Agree %

Mean Std. Deviation

Provide formal performance evaluations.

20.1 61.3 18.6 3.98 .623

Provide frequent performance feedback.

4 24.1 53.3 18.6 3.86 .756

Provide regular updates regarding developments in the business.

2 16.6 60.8 20.6 3.98 .717

Provide formal training programs.

3 16.8 53.8 26.4 4.03 .744

Use incentives and bonuses. 1 10.2 63.5 25.4 4.13 .616

Use recognition and reward programs.

13.8 57.7 28.6 4.14 .635

Seek input on how to improve the company.

19.5 54.5 26 4.06 .673

Provide health insurance plans. 1.5 21.2 58.6 18.7 3.94 .677

Provide retirement plan options. 0.5 4.5 39.4 45.5 10.1 3.60 .752

Use selection tests or other formal screening methods when hiring.

1 30.2 50.8 18.1 3.85 .710

Use background screening for job candidates.

9.1 28.4 48.7 13.7 3.67 .825

Use written guidelines when dealing with an employee that doesn’t meet expectations.

4.5 28.6 52.3 14.6 3.76 .749

Use formal procedures to set pay levels.

3 29.3 56.6 11.1 3.75 .684

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Human Capital in Malaysian SMEs

(SD= .8) in the US SMEs that they studied. No- tably both samples draw from firms engaged with SME agencies. Nonetheless, the results also in- dicate the scope for improvement in order for SMEs to feel that they are exceling with respect to these important HR outcomes. Attention now terms to further examine the nature of human capital deployed in SMEs with respect to its per- ceived value and uniqueness.

HUMAN CAPITAL VALUE AND UNIQUENESS

Lepak and Snell (2002) have drawn on two im- portant theories of the firm to better understand prospects and implications for HRM practices. Drawing on the logic of transaction cost eco- nomics Human Capital value refers to “the ratio of strategic benefits to customers derived from skills relative to the costs incurred” (Lepak and Snell, 1999: 35). Human Capital value is mani- fest in factors such as organisational efficiency, innovation, value added, customer services and satisfaction associated with human resource driven skill sets. In essence the measure of human capital value stems from the extent to which it is core or peripheral to the value added embedded in the

firm’s final output- be they products or services. Overall, despite the varying levels of labour expenses reported earlier, the majority of firms indicated that their human capital was valuable to the activities of the firm (see Table 5). This was especially the case with respect to the skill sets required to maintain high quality products and services (Mean= 4.12, SD= .649). At the opposite end of the spectrum value added was lowest for skill sets that allows the organisation to offer low prices (Mean = 3.61, SD= .829). A preliminary reading of the role of human capital value might therefore suggest that it is related to the strategy of the firm- finding more importance in the context of a differentiation strategy based on quality, innovation and creativity and less so in relation to those domains aligned with a more low cost value proposition (Guthrie et al., 2002).

While human capital value is important, it can be purchased on the open market or brought into the firm through partnership arrangements as necessary. An important complimentary consid- eration following the logic of the resource based view is therefore to examine the extent to which human capital is rare and unique and thereby of- fers skills sets and values that are idiosyncratic to the firm (Wright et al., 2001). Arguably, holding human capital which is unique to the firm and not

Table 4. Human resource effectiveness

Very Dissatisfied

Dissatisfied Neutral Satisfied Very Satisfied

Mean Std. Deviation

Your firm’s ability to attract new employees.

1.5 12.6 32.3 52.5 0.5 3.36 .787

The level of employee turnover in your firm.

2.6 12.9 46.9 34 3.6 3.23 .816

Skill levels among your employees.

1 10.3 35.6 48.5 4.6 3.45 .782

The motivation and morale among your employees.

4.1 11.3 31.3 45.1 8.2 3.42 .940

Overall employee performance in your firm.

6.7 37.9 50.8 4.6 3.53 .690

The level of absenteeism in your firm.

1.5 7.2 32.8 52.8 5.6 3.55 .753

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Human Capital in Malaysian SMEs

readily available on the open market affords SMEs a strong basis for advantage and opportunity for developing a viable and sustainable value propo- sition. As noted by Lepak and Snell (1999: 36) “the degree to which assets are unique directly impacts their potential to serve as a source of competitive advantage”. Table 6 documents the findings concerning the degree to which indi- viduals in an SME provide a unique skill set. Questions here concerned issues such as the avail- ability of employees, difficulty in terms of replac- ing, and the degree to which employees are best in the industry and serve to distinguish the SME from its competitors. The majority of respondents placed a degree of emphasis on the uniqueness of the human capital available at their respective organisations. Almost all questions resulted in a positive response with the exception of statements relating to unique employees skills not being

available to competitors (58 percent were in dis- agreement or neutral) and that staff skills at the respondents respective organisations are consid- ered the best in the industry (55.1 percent were in disagreement or neutral). The response with the greatest level of agreement indicated that skills are developed through on the job experiences (Mean= 3.78, SD=.635), while the lowest was for skills that were not available to competitors (Mean= 3.30, SD= .792). Overall, Table 6 would suggest that participants recognised the impor- tance human resources plays in developing a unique configuration of skills that are not available to competitors. In contrast to the CIPD (2012) findings there seems to be significant recognition (nearly 70% in agreement) of the importance of skills that are customised to the SME’s particular needs.

Table 5. Human capital value

Individuals in your Organisation Have Skills Sets that…

Strongly Disagree

Disagree Neutral Agree Strongly Agree

Mean Std. Deviation

Are instrumental for creating innovations.

2 14.3 68.4 15.3 3.96 .615

Create customer value. 2 19.9 64.8 13.3 3.89 .635

Help minimise costs of production, service, or delivery.

2.1 18.5 64.6 14.9 3.92 .641

Enable our firm to provide exceptional customer service.

1.5 30.8 55.9 11.8 3.77 .663

Contribute to the development of new market/ product/ service opportunities.

2 20.9 59.7 17.3 3.92 .678

Develop products/services that are considered the best in our industry.

2.6 19.4 55.6 22.4 3.97 .722

Directly affect organisational efficiency and productivity.

0.5 15.8 64.8 18.9 4.02 .607

Enable our firm to respond to new or changing customer demands.

0.5 14.4 68 17 4.01 .580

Allow our firm to offer low prices. 1 8.2 30.1 49.5 11.2 3.61 .829

Directly affect customer satisfaction.

0.5 17.3 61.2 20.9 4.02 .635

Are needed to maintain high quality products/services.

10.8 64.1 25.1 4.12 .649

Are instrumental for making process improvements.

2 17.3 56.1 23.5 4.03 .708

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Human Capital in Malaysian SMEs

CONCLUSION

This chapter has offered some important insights into a previously unchartered domain, the nature of human capital management in Malaysian SMEs. Recent government policy in Malaysia has placed significant emphasis on the role of SMEs as a pathway for future economic prosperity. This is evidenced by the policy document the SME Masterplan. The CIPD (2012) survey provided anecdotal evidence that a high proportion of Malaysian organisations are actively trying to raise skill levels. This finding was mirrored in the current research- with a significant propor- tion of SMES indicating intent to address human capital developments as an immediate require- ment (see Figure 1). Consequently, government rhetoric concerning human capital and the need for development and enhancement would seem to match SMEs realities. This sets Malaysian SMEs apart from others in Asia and the Pacific where the necessity of investing in core talent to ensure

enhanced innovation capabilities is not as widely recognised (Abe et al., 2012).

The current research offers some encourag- ing findings with respect to the perceptions of human resource value (Mean= 3.93), human resource practices (M= 3.90) and human resource uniqueness (M= 3.54) within Malaysian SMEs. While human capital is noted as valuable, the general findings suggested that SMEs were less likely to feel their individual employees offered a skill set that was unique, especially relative to competition and in terms of being leading in the industry. This has direct implications for the likely sustainability of any advantage achieved. The less unique employee contributions and skills sets the more likely that these will either be replicated, or indeed, poached by the competition. Perhaps, directly reflecting this issue- the CIPD (2012) report found that organisations in Malaysia were the most likely across all the countries researched to feel that Malaysia will be a net exporter of talent in five years’ time, with 75 percent of organisa- tions feeling this will be the case.

Table 6. Human resource uniqueness

Individuals in your Organisation Have Skills

Strongly Disagree

Disagree Neutral Agree Strongly Agree

Mean Std. Deviation

Are not widely available in the labour market.

12.9 34 45.4 7.7 3.47 .840

Would be very difficult to replace.

14.4 37.6 41.8 6.2 3.40 .804

Are not available to our competitors.

0.5 15 42.5 37.8 4.1 3.30 .792

Are widely considered the best in our industry.

0.5 6.7 47.9 37.1 7.7 3.44 .754

Are developed through on the job experiences.

3.1 23.6 64.6 8.7 3.78 .635

Are unique to our organisation. 6.2 36.6 50.5 6.7 3.57 .710

Are difficult for our competitors to imitate or duplicate.

0.5 9.8 37.3 45.1 7.3 3.48 .791

Are customised to our particular needs.

2.6 28.4 61.9 7.2 3.73 .625

Distinguish us from our competition.

3.6 29.5 55.4 11.4 3.74 .701

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Human Capital in Malaysian SMEs

In terms of performance, at the organisational level the respondent SMEs indicating perceived high levels of performance relative to their industry (M= 3.93). However, the current findings suggest some scope for improvement with respect to satis- faction with current HR effectiveness (composite of existing skill levels, employee turnover and motivation and morale of the workforce) scoring a mean of 3.42. The stated intent of the Malaysian government is to enhance the productivity levels of SMEs. The SME Masterplan indicates that this productivity boost will come from more effective use of the existing human capital base rather than from additional workers. This suggests improv- ing performance in SMEs in Malaysia may be less about implementing new HR practices, but rather ensuring that those HR practices in place are affording employees the necessary autonomy, motivation and discretionary effort to enhance organisational performance.

One solution to enhance the issue of human capital uniqueness and HR effectiveness would be addressing the training issue identified by SMEs. This would include both formal targeted training interventions, but also firm specific mentoring, development and the creation of career paths and sharing of tacit knowledge. It has been noted that human capital and skill are the more prominent mediators between HRM and performance, while of all the available human capital interventions, training is most likely to be associated with mea- sures of future performance in the SME context (Sheehan, 2013). Another important intervention may be to create a network infrastructure for SMEs to exchange knowledge and ideas and of- fer targeted advice. In the context of SMEs it has been noted that a deficient networking structure “hinders effective deployment of technology and business development services as well as collabo- ration with other firms” (Ravi Ratnayake cited in Abe et al., 2012).

The survey approach taken in this chapter has been an important first step, but it is not one without limitation. Survey research is useful in

offering breath and providing statistics to inform policy, however it comes at the expenses of depth of understanding. Going forward research could pursue a more qualitative case based analysis to ex- amine the meaning of Human Capital Management for specific SMEs and to better understand how practices are cascaded from perceptions (intended practice) to day to day implementation (enacted practice). Incorporation of employee perspectives also offers a useful complement to managerial perceptions, and is likely to open up a rich basis for understanding the issues of uniqueness and productivity gains. Moreover, only through such an approach can the critical role of the family, community and the informal undertone prevalent in the SME context be adequately surfaced and accommodated. This will also allow a rounded assessment of local conditions and institutional context to aid targeted policy reform and interven- tion (Abe et al., 2012: 4).

Overall, it is clear that the neglect of SMEs is not exclusively an Anglo-Saxon phenomenon. Many countries experiencing rapid economic growth also risk downplaying the prospective role of SMEs. Malaysian policy, by contrast, has been pro-active in understanding the significance of SMEs and human capital development therein. An understanding of the practices of SMEs offers the potential to explore key challenges and therefore to offer evidenced based policy advice, as opposed to advice driven largely by a big business agenda. In Malaysia, as elsewhere, it is clearly the case that small business is big business and therefore warrants due consideration in policy discussions and interventions in order to provide for balanced and sustainable economic and social development. The image on the cover of the SME Masterplan depicts precious gems. These are said to signify the high impact programmes proposed, but also the highly valuable indigenous Malaysian SME sector. Human capital interventions in turn rep- resent the bridge between recognising this value and fully realising its potential.

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Human Capital in Malaysian SMEs

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KEY TERMS AND DEFINITIONS

Contextual Theory: A theoretical approach which recognises the key contextual and insti- tutional contexts in which firms are embedded.

Human Capital Value: Refers to the ratio of strategic benefits to customers derived from skills relative to the costs incurred.

Human Capital Uniqueness: Denotes the degree to which assets are unique with this in turn impacting their potential to serve as a source of competitive advantage.

Resource Poverty: Captures a condition that usually characteristics SMEs whereby they have resource deficiencies in terms of finance, resources and managerial capability.

Resource Based View: A theoretical viewpoint which stresses that the competitive advantage of a firm resides in its internal resources and capabilities.

‘SME Master Plan’: Malaysian government policy document outlining key initiatives to foster and develop the indigenous SME population.

Universalistic Theory: A theoretical approach which suggests that SMEs are likely to benefit from the same type of HRM practices as applied in large firms irrespective of organisational context.

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Chapter 3

Effective Human Resources Management Practices in Small

and Medium Enterprises: Global Perspectives of the

MIST (Mexico, Indonesia, South Korea, Turkey) Economies

ABSTRACT

Anil Chandrakumara University of Wollongong, Australia

Pramila Rao Marymount University, USA

DOI: 10.4018/978-1-4666-4731-2.ch003

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Effective Human Resources Management Practices in Small and Medium Enterprises

INTRODUCTION

This chapter explores HRM practices (recruit- ment and selection, training and development, performance appraisal and compensation) in SMEs (small and medium enterprises) in the MIST (Mexico, Indonesia, South Korea, and Turkey) economies. These four nations have been identi- fied as important global business participants for the next decade (Brent, 2009: Aycan, 2006; Leal, 2006). Based on economic analyses, Goldman Sachs, a global consulting company, has identified this list of emerging economies (MIST) as showing a lot of economic and trade prospects in the next decade. In 2001, Goldman Sachs identified the BRIC (Brazil, Russia, India and China) nations as having lots of potential to dominate the global business market.

The MIST economies are considered vibrant markets with increased potential for consumer buying. Mexico, with its geographical proximity to the US, is considered a strategic leader in the global export market. The government is also hoping to deregulate some of its state industries creating opportunities for international investors. Indonesia has abundant skilled and non-skilled em- ployees attracting multinationals to invest in both off-shoring and outsourcing facilities. South Korea has opened its doors to foreign direct investment after its financial crisis in 1997. It has experienced tremendous growth in several industries especially in its automobile and consumer industries. Turkey has demonstrated consistent fiscal growth since 2003 and is attracting foreign direct investment to develop it domestic market (Myles, 2012; Kapadia, 2012; Gupta, 2011; Brent, 2009).

Scholars suggest that most of the academic re- search tends to focus on large or “best” companies leaving the understanding of management prac- tices in SMEs largely unexplored. For example, out of 207 articles published in top tier journals, only 7 articles identified HRM practices of small and medium companies (Cassell, Nadin, Gray & Clegg, 2002). This is in spite of the fact that most

countries rely on SMEs for the majority of their business and trade prospects (Kishore et al, 2012; De Clercq, & Rius, 2007; Cassell, Nadin, Gray & Clegg, 2002). In a study of 156 entrepreneurs at SMEs, it was demonstrated that HRM practices was the most strategic concern for the management of these firms (Heneman, Tansky, & Camp, 2000).

Strategic human resource management (SHRM) presumes that much of the variation in HR practices across organizations should be explained by the organizations’ strategies. Also, firms demonstrating greater congruence between HR practices and strategies should enjoy superior performance (Delery and Doty, 1996; Arthur, 1992; Schuler and Jackson, 1987). The SHRM literature draws on a number of models, which includes universalistic, contingency, configura- tional, and resource- based perspectives (Rhodes, et al., 2008; Aycan, 2005; Bowen et al., 2002; Delery and Doty, 1996).

The contingency perspective of SHRM pre- sumes that the impact of HRM practices or systems depends on contextual variables (Hofstede & Minkov, 2010; Aycan, 2005; Bowen et al., 2002) such as strategy, structure, process, employee behavior, culture, institutional frameworks, and industry trends. Schuler and Florkowski (1996) have stressed the need to examine fit of HRM activities with competitive strategy, national cul- ture, and organizational life cycle. In this chapter, particular attention is given to examine whether there is any variation of HRM practices of SMEs in different countries that is associated with different cultural orientations (individualism/collectivism, power distance, masculinity/femininity, uncer- tainty avoidance, long/short term orientation). Indeed, if the same set of HRM practices is used across all the four countries, regardless of strategy, culture etc, then there is support for universalistic rather than contingency perspective of SHRM. It is also important to note that the relevancy of convergence (universalistic, best practices, high performing work practices) and divergence (cul- ture- bound and context specific practices) debate

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Effective Human Resources Management Practices in Small and Medium Enterprises

on these perspectives of SHRM. While the HRM practices used in different countries are inching towards global convergence, national culture and contingency factors such as institutional frame- work, business strategy continue to affect HRM practices in SMEs of MIST countries.

Therefore, this chapter addresses an important dearth identified in the literature associated with SHRM practices in SMEs of MIST economies by providing a global perspective. The section will begin with a theoretical framework and its relevance to SMEs. This chapter will then detail the following themes in the MIST economies; 1) Introduction to each country, 2) Role of national cultures, 3) Recruitment and Selection practices, 4) Training and Development practices, 5) Perfor- mance Management practices, 6) Compensation and Benefits practices. The chapter will conclude with a model of HRM practices of MIST countries and direction for future research.

Theoretical Framework

Given the above backdrop, this section will focus on institutional theory to better understand the management practices of SMEs. Institutional theory suggests that organizations operate under an umbrella of both formal and informal practices. Formal practices are usually established by insti- tutions that help or hinder organizations operate their businesses. For example, local governments may actively promote training initiatives for small and medium organizations. Informal practices are established cultural or societal rules that become naturally embedded as organizational practices. For instance, several cultures adopt personal refer- rals as their predominant recruiting method as their culture favors helping in-group members (family, neighborhood, church etc) (Hessels, & Terjesen, 2010; Roxas, Lindsay, Ashill, & Victoria, 2008).

A number of researchers (such as Hofstede, Hofstede & Minkov, 2010; Easterby-Smith et al., 1995; Sparrow, 1995) have explained the influence of national culture on HRM practices. Although

the definition and the scope of the concept of culture is debatable (Tayeb, 1995; Hofstede, Hof- stede & Minkov, 2010), studies suggest the most important processes or influence mechanisms can be attributed to national cultures (Budhwar and Sparrow, 2002). They are socialization processes through which managers operate (Hofstede, Hof- stede & Minkov, 2010; Hofstede, 1983, Schein, 1995), basic assumptions which shape managers’ behaviors (Hofstede, Hofstede & Minkov, 2010; Hofstede, 1983; Schein, 1995), value orientations and norms of behaviors (Hofstede, Hofstede & Minkov, 2010; Hofstede, 1983, Tayeb, 1995) and idiosyncratic cultural practices (Sparrow & Hil- trop, 1997; Hofstede, Hofstede & Minkov, 2010).

Comparative researchers also question as to how HRM is structured in different countries, what strategies are put into practice, what are some similarities and differences, and the role of institutional factors such as government poli- cies and educational systems (Clark at al.,1999; Brewster et al., 1996).

Current debate in the area of cross-cultural/ national HRM perspective suggests that both ‘culture bound’ and ‘culture free’ factors are im- portant determinants of HRM (Hofstede, Hofstede & Minkov, 2010; Rhodes et al., 2008; Rowley et al., 2004; Budhwar and Sparrow, 2002; Jackson and Schuler, 1995). Thus, culture and institutional frameworks have become very important elements of the contingency perspective of SHRM model at the organizational level.

Institutional theory experts suggest that organizations may experience changes in their adoption of formal and informal practices. Po- litical and economic changes can cause major transformations to local organizational practices. The former Soviet Union is a classic example of governance changing as organizations moved from a government-dominated approach to that of a market-centric. Multinationals are also considered change agents of formal or informal practices as such firms frequently introduce progressive practices in their subsidiaries overseas (Danis,

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Effective Human Resources Management Practices in Small and Medium Enterprises

Chiaburu & Lyles, 2010). For example, Indian organizations are slowly adapting to egalitarian practices (Lunch/Coffee with executives) in an effort to keep abreast with the forward practices of local multinationals (Rao, 2012).

SMEs form the backbone of most emerging economies’ exports and imports. They are very dependent on exogenous factors and are easily affected by any institutional (either formal or informal) changes in their environments. The following sections on the MIST nations describe how the institutional theory plays a strong role in the development of the HRM practices in these nations.

MEXICO

Introduction

Mexico is becoming a regional business leader in the Latin American market. A 2012 World Bank study on 183 economies provides important busi- ness indicators (such as ease of doing business, starting a business etc) indicates that Mexico is slowly inching its way to becoming prominent as it has the following scores; ease of doing business (Mexico 53), protecting investors (Mexico: 46), and trading across borders (Mexico: 59).

Its geographical proximity to the US and Latin America has allowed it to attract strategic busi- nesses as it ranked 8th globally for the maximum number of foreign direct investments. Mexico changed its trade policy slowly from import- substitution to export strategy creating a robust local economy (Cantu de la Torre & Cantu-Licón, 2009; Kohout, 2008). Over the decades, Mexico has gradually enhanced its international presence through various trade agreements in diverse con- tinents. Mexico is a member of eleven FTAs (Free Trade Agreements) which include both bilateral and multilateral agreements. It has FTAs with about 41 different countries. In 1986, Mexico be- came a member of the GATT (General Agreement on Tariffs and Trade) in its initial step to become a

member of the world trading community. In 1992, it became a member of the North American Free Trade (NAFTA) making significant inroads into the North American business market. The NAFTA has created an unified trading market making Mexico a leading exporter and importer in North America (Echeverri-Carroll, 2009).

The Mexican labor practices are dictated by the Ley Federal de Trabajo (Federal Labor Law or FLL). The FLL was introduced in the Mexican constitution in 1931 and has been modified sev- eral times to capture current employment trends. For instance, the 1931 labor laws were revised in 1970s and in 1990 to include areas on health and safety of the employees, labor unions, collective bargaining among others. The labor practices in Mexico are completely mandated by the federal laws and unlike other countries (such as the US) Mexican state laws do not implement any labor laws (Posthuma et al., 2000; McGuinness, 19980).

SMEs in Mexico are organizations that have 500 employees or less and usually are predomi- nantly family-owned (De Clercq, & Rius, 2007; Leal, 2006). Small organizations are defined as those that have employee between 30-100 em- ployees and medium firms usually have between 101-500 employees. In Mexico, it is common for different industry sectors (manufacturing, service, etc) to adopt their own specific definitions of SMEs within these general guidelines (less than 500) also. SMEs provide for more than 75% of the jobs demonstrating their pivotal role in the local economy (Leal, 2006).

The Mexican government provides substantial economic support to SMEs to ensure they are competitive in both their domestic and global markets (Echeverri-Carroll, 2008; De Clercq, & Rius, 2007). Some industry sectors take advantage of the federal support by deliberately developing SMEs. Successful local IT (information technol- ogy) firms seem to follow such a business model. IT organizations receive funds from PROSOFT, a specific federal initiatives to augment technology companies. Softteck is an example of a successful Mexican IT company today which was established

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Effective Human Resources Management Practices in Small and Medium Enterprises

in 1982 as a SME. Currently the organization has around 10,000 employees and competes with global technology firms (Echeverri-Carroll, 2008).

The Role of National Culture on HRM Practices

Hofstede, Hofstede & Minkov (2010) identi- fied national cultural dimension indexes for 107 countries making their study comprehensive and topical. This data comprises of the original IBM research of Hofstede’s and also has included other studies that replicated Hofstede’s surveys in coun- tries not included in the original IBM research. This study has further added a new dimension, indulgent versus restraint, augmenting the body of knowledge on cultural dimensions.

Mexico has the following indexes for power distance (81), individualism (48), masculinity (70), uncertainty-avoidance (82), long-term orientation (24), and indulgent versus restraint (97). (Please refer Table 1 that provides national cultural indexes and ranks on these six dimensions). A score of 100 is the maximum points that can be scored for each index (Hofstede, Hofstede, & Minkov, 2010).

Mexico’s high score on power distance and masculinity indicates an autocratic management style that has strongly been influenced by its historical and local rulers. Machisimo, or exag- gerated masculinity has also contributed to the concept of hierarchy and power in organizations (Gannon & Pillai, 2010). Its low score on indi-

vidualism indicates a culture that is characterized by a very tight collectivist framework where members distinguish in-group (family, close friends, church members) from out-group (ca- sual acquaintances, professional contacts) mem- bers. Such distinctions are demonstrated strongly in employment also as in-group members get preferential treatment in recruitment, training etc (Davila & Elvira, 2005). The high scores on un- certainty-avoidance reflect a national culture that has experienced a lot of insecurity through decades of Spanish domination and erratic political gov- ernance. Therefore Mexicans prefer organiza- tional policies that minimize any unpredictabil- ity or ambiguity in the process (Howell et al, 2007). Mexico’s low score for future orientation suggests that on an average Mexicans do not to plan strategically ahead. This may be because that the Mexican culture is accustomed to live very much in the present and manana (tomorrow) is another day (Gannon & Pillai, 2010; Gannon, 2004). It very high score on indulgent versus restraint suggest that the local people seem to enjoy and pursue leisure completely. Their col- lectivist affinity combined with their hedonistic tendencies make the culture replete with fiestas (festivals) and celebrations. For instance, Mexi- cans celebrate approximately 600 fiestas annu- ally that could be religious, communal or tradi- tional (Gannon & Pillai, 2010; Gannon, 2004; Gannon, 2001).

Table 1. Cultural Profile of MIST economies- Index* (Rank)

Countries Power Distance

Individualism Masculinity Uncertainty- Avoidance

Long-term Orientation

Indulgent Vs Restraint

Mexico 81 (10-11) 48 (30) 70 (8) 82(26-27) 24 (74-76) 97 (2)

Indonesia 78 (17-18) 14 (70-71) 46 (41-42) 48 (62-63) 62 (26-27) 38 (55-56)

South Korea 60 (43-44) 18 (66) 39 (59) 85(23-25) 100 (1) 29(67-69)

Turkey 66 (32-33) 37 (43) 45(43-45) 85(23-25) 47 (46) 37-38 (49)

* A score of 100 on the index indicates maximum points Source: Hofstede,G., Hofstede, G. J, Minkov, M. (2010). Cultures and organizations. Software of the mind. Intercultural cooperation and

its importance for survival. New York. McGrawHill.

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Effective Human Resources Management Practices in Small and Medium Enterprises

Recruitment and Selection Practices

In a study of 321 SMEs, it was identified since SMEs were predominantly family-owned busi- nesses. The recruitment and selection usually involved selection of family members for vari- ous roles within the organizations. If the family members are not able to participate in the busi- ness operations, personal referrals were used as primary methods of recruitment (Moheno & Calzada, 2008). In another qualitative study of 7 SMEs in Mexico and US, it was also identified that new employees were primarily recruited through informal methods of personal referrals. The main reason employers recruited in such a manner was attributed to the trust such applicants bring to the workplace. These new recruits are usually known to the employers through prior family or social connections making them very trustworthy (Martinez, 2005).

The use of personal referrals as a predominant source of recruitment method is emphasized in the Mexican HRM literature (Schuler et al, 1996; De Forest, 1998; Davila and Elvira, 2005). This recruitment method helps Mexicans promote their inner circle of family or friends which is very congruent with their strong collectivist orientation that emphasizes helping their kith and kin (Davila & Elvira, 2005). For instance, some universities in Mexico, despite having formal promotion systems, promote junior professors who know their superiors very well instead of promoting employees based on their performances (Elvira & Davila, 2005).

Training and Development Practices

In a study of 321 SMEs, it was identified a third of the companies offered some form of training and development to their employees. However employers were reluctant to invest generously in their employees as usually the turnover in SMEs is quite high. Employers are thus cautious to make

such financial investments (Moheno & Calzada, 2008). In another qualitative study of 7 SMEs in Mexico and the US, it was identified that employers offered training and development opportunities to employees who demonstrated dedication and com- mitment (Martinez, 2005). SMEs predominantly follow informal training approaches for new em- ployees such as job- shadowing current employees or having informal discussions. Such methods are considered not only very cost-effective but also helpful for rich contextual learning (De la Torre & Licón, 2009).

In Mexico, a tremendous advantage SMEs have is that training and development initiatives are significantly supported by federal government programs. A specific initiative known as PAC (Programa de apoya a la capacitacion) offers subsidized training and technical guidance to SMEs. The government program also arranges for SMEs to participate in business fairs and re- search grants. The Mexican government invested approximately $13 billion for almost 4 million SMEs over a period of five years (in the early 200s). They have realized that the majority of the domestic employment is provided by SMEs and thus their support will only enhance the local economy (Acevado & Bravo, 2005).

The federal project of PAC, formerly known as CIMO, (Programa de Calidad Integral y Modern- ización), was established in 1987 when Mexico joined the GATT community. The government became cognizant that the local KSAs should be comparable to global standards and invested in schemes and programs for the local workforces to enhance their KSAs (knowledge, skills and abili- ties) (Tan & Acevado, 2005). Further, the local educational system does not prepare Mexicans sufficiently to make effective transitions to their work environments. This puts a heavy burden on the local government to play the surrogate role for new applicants entering the workforce (Arias- Garcia, 2005).

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Effective Human Resources Management Practices in Small and Medium Enterprises

Performance Management Practices

Although there is moderate literature on perfor- mance management practices in large Mexican organizations (Davila & Elvira, 2007; Davila & Elvira, 2005) there is a scarcity of research on appraisal practices in SMEs. The majority of the SMEs in Mexico are family-owned comprising of employees who share common cultures and similar backgrounds (Gomez et al., 2012; Artistain & Rajagopal 2010; De Clercq, & Rius, 2007; Leal, 2006). Employees usually have their own family members or close relatives as their superiors mak- ing any formal evaluation process quite futile. Loy- alty, dependability, and trustworthiness become more valuable employment characteristics than formal practices of any performance management processes. Informal practices may include casual conversations and suggested corrective actions between superiors and subordinates. However, no formal punitive consequences are generally followed (Davila & Elvira, 2007; Davila & El- vira, 2005). Scholars also suggest the informality in performance management practices could be one of reasons that SMEs perform mediocre as employees are not held accountable for their work (Artistain & Rajagopal, 2010).

Davila & Elvira (2007) refer to the performance management process in Mexico as an “emotional agreement “between superiors and subordinates. Therefore in such a context the employment relationship becomes more important than any formalized practices in evaluating performances. These relationships become even more prominent in family-owned businesses like SMEs where employers and employees consider themselves as a part of a huge family.

Further the collectivist Mexican culture en- courages a paternalistic style of management that includes authority towards and nurturing of their employees. The superiors demonstrate complete control over their subordinates but also care genu- inely about their welfare (Martinez, 2005; Davila & Elvira, 2007). The paternalistic method has its

origins in the organizational approach of the early hacienda or large estates. Employers in these huge agricultural estates created the beginnings of an informal performance management system. Em- ployers looked after their employees’ needs and interests beyond the requirements of the job by providing lodging and food supplies. Employees were rewarded simply for their reliability and fidelity (Davila & Elvira, 2007; Martinez, 2005). This system of informality in the appraisal process continued to be adapted by organizations even after much modernization.

Compensation and Benefits Practices

In a study of 384 employees who were owners or employees of SMEs, it was identified that base salaries accounted for more than 50%, variable pay represented about 14%, and employee benefits made up the rest of their compensation packages. The Mexican law mandates that several benefits are offered to employees (Gomez et al., 2012; Posthuma et al., 2000).

The federal government requires employers offer several benefits that are considered unique to the Mexican culture. Employers provide their employees annual bonuses or aguinaldo before the end of the year (during December). The aguinaldo is approximately two weeks salary of an employee’s base pay (Arias-Galicia, 2005). Organizations have to also provide an annual profit distribution bonus which is usually 10% of their gross profits (before the payment of taxes) (Castellanos, Garcia-Verdu, & Kaplan, 2004; Posthuma et al, 2000).

Apart from the mandated benefits, Mexican employers act as patrons (father-figures) and pro- vide several benefits to ensure both the employees and their families are nurtured well (Davila & Elvira, 2005). The most common fringe benefits offered are saving plans, consumer credit funds, grocery coupons, subsidized cafeteria plans, housing credit payments (Davila & Elvira, 2005).

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Effective Human Resources Management Practices in Small and Medium Enterprises

Employees who work for minimum-wages are paid based on the location of their SMEs. The National Commission Minimum Wages (includes employ- ers, employees, and government representatives) has identified three geographical zones (A, B, and C) that pay different minimum wages. The owners of any SME have to be cognizant where to establish their operations as labor costs definitely vary (Castellanos, Garcia-Verdu, & Kaplan, 2004).

INDONESIA

Introduction

Indonesia is the fourth most populous country in the world after China, India, and the USA with a population of 234.6 million. The size of the labor force is approximately 108.2 million. It consists of almost 17508 islands and islets making it a large archipelago. The surrounding waters have a total area of about 10 million kilometers which is roughly about the size of a large country, such as the United States (Prijadi & Rachmawathi, 2002). Until recently, Indonesia was one of the least known countries in the business and manage- ment literature (Rhodes et al., 2008; Bennington and Habir, 2003; Bressnan, 1993), but since about 1997, the country has made the news for its continuous political, social, and economic crisis. Prior to the crisis, Indonesia had an annual GDP growth of 7% per annum (Liong, 1999). Reduced poverty and improvements in social indicators such as literacy levels and life expectancy has seen Indonesia become one of Asia’s newly industrial- izing countries (Bennington and Habir, 2003).

Despite major issues facing this country and significant international concerns about its future, reports on its HRM are limited mostly to labor economics and macro- level human resource de- velopments (Bennington and Habir, 2003). Hess (1995) also suggested that the extent of knowl- edge on HRM practices in Indonesia is limited. This paucity in the literature is important as it

highlights the significance and contribution of this chapter. It also showcases HRM in the fourth most populous country in the world. It contrib- utes to cross- cultural HRM knowledge as there is increased awareness for HRM researchers to take context more seriously (Chandrakumara & Sparrow, 2004; Jackson & Schuler, 1995).

There are several definitions of SMEs in Indo- nesia depending on which local agency provides the definition. The Central Statistical Agency (BPS) uses the number of workers as the basis for determining the size of an enterprise. Ac- cordingly, small enterprises (SE) and medium enterprises (ME) are business units with 5-19 and 20-99 workers respectively. The State Ministry of Corporative defines a small enterprise (SE) as a business unit with total initial assets of up to Rp (Indonesian currency) 200 million (about US$ 20,000), which does not include any lands or buildings. A SE is also defined as an organization with annual sales of Rp 1 billion (US$100,000). A medium enterprise (ME) is defined as a business unit with annual sales of more than Rp 1 billion but less than Rp 50 billion. In general, an SME in Indonesia is referred to as a business unit employ- ing less than 100 workers (Mukhamad, 2001).

SMEs have historically been the main players in the Indonesian economy especially as a large provider of employment opportunities, sources of economic growth, and foreign currency earn- ings. Typically, Indonesian SMEs account for more than 90% of all firms (Table 2) and thus provide livelihood for over 90% of the country’s workforce (Tambunan, 2008). The three sectors which employs most of the workforce are agro- based industries (38.8 million 43.75 workers), trading and hotels (22.2 million or 25% work- ers), and service (9.4 million or 10.55% workers) (Ministry of Public Welfare, 2007). According to BPS data, SEs in 1997 accounted for more than 39.7 million units, or about 99.8 percent of the total numbers of enterprises in the country in that year. This has increased to more than 48 million units in 2006. In terms of output, the performance

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Effective Human Resources Management Practices in Small and Medium Enterprises

of SMEs is relatively good as its growth. The growth of SEs and MEs was 3.96% and 4.59% respectively in 2001. This increased to 5.38% and 5.44%respectively in 2006. In terms of GDP, SMEs performances accounted for more than 53% percent in 2007 (Table 2).

The Role of National Culture on HRM Practices

The main language of Indonesian people is Bahasa, but there are 250 other regional languages and dialects (Bishop & McNamara, 1997). Muslims constitute the majority and represent 87% of the population. The rest of the population has the fol- lowing demographics: Protestants (6%), Roman Catholics (3%), Hindus (2%), and Buddhists (1%). The Indonesian population comprises of many ethnic groups such as indigenous Indonesians (pribumis), Chinese, Arabs, Indians and many others. The Chinese ethnic minority represent approximately around 5% of total population. This ethnic group dominates the Indonesian economy especially in the medium and large scale enterprise category. Next to the Chinese, the Arab com- munity, whose community is much smaller than the Chinese, is considered very successful. The indigenous group is generally the bottom in terms of having successful enterprises (Tarmidi, 1999).

Indonesia has the following indexes for power distance (78), individualism (14), masculinity (46), uncertainty-avoidance (48), long-term orientation (62), and indulgent versus restraint (38). (Please refer Table 1 that provides national cultural indexes and ranks on these six dimensions). A score of 100 is the maximum points that can be scored for each index (Hofstede, Hofstede, & Minkov, 2010).

Indonesia’s high score on power-distance indicates a work culture that is dictated by clear organizational hierarchies. A low score on indi- vidualism suggests a very collective society and the importance of in-group members (such as families and friends) to employees. The culture is leaning towards masculinity implying that there is a predominance of males in upper-level management positions and also possible gender discrimination in the workplace. The uncertainty-avoidance index indicates that the society is anxious about uncertain or ambiguous events making the local workforce prefer structured practices at the workplace. The high score on long-term orientation shows the culture prefers to plan strategically ahead and may not like to improvise. The low scores on in- dulgent versus restraint indicates that the culture demonstrates considerable restraint in the pursuit of pleasure (Hofstede, Hofstede, & Minkov, 2010).

Cultural influences on HRM is widely recog- nized by both scholars and practitioners. Despite

Table 2. SMEs contribution to Employment, GDP and Export

Employment 2004 2005 2006 2007

Micro &v Small Enterprises Medium Enterprises Large enterprises

91.4 4.8 3.7

91.3 4.9 3.7

92.4 4.9 2.6

92.3 5.0 2.67

GDP

Micro &v Small Enterprises Medium Enterprises Large enterprises

39.2 16.6 44.6

37.8 15.7 46.6

37.5 15.9 46.5

37.8 15.7 46.4

Export

Micro &v Small Enterprises Medium Enterprises Large enterprises

5.8 15.1 79.1

5.1 15.1 79.7

5.0 15.1 79.8

4.98 15.0 79.9

Source: Sembiring 2008

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Effective Human Resources Management Practices in Small and Medium Enterprises

Indonesia being the fourth most populous country in the world, little attention has been given to its human resource management (HRM) (Man- ning, 1998). Ahmad and Asti (1999) suggest that HRM has historically not had an important role in Indonesian management context. Hess (1995) also suggests that the extent of adopting HRM in Indonesia is quite limited. In the context of globalization, more attention is being paid to the need for effective HRM practices in Indonesia. This chapter explores a number of HRM practices adopted by SMEs in Indonesia including their legal requirements.

The Indonesian law mandates that the mini- mum age for employment is 15 years and the maximum work period is 7 hours per day or 40 hours per week. Working hours may be extended to nine hours a day or 54 hours a week with over- time pay. It is standard procedures for employers to have their new employees (who are permanent) undergo a three-month probationary period. The dismissal of any permanent employee requires the permission from the committee for settlement of labor dispute of the Department of Manpower. There are generally 13 public holidays, 12 days of paid annual leave, and 3 months of paid ma- ternity leave. The minimum wage is generally set by provincial and district authorities in Indonesia.

Recruitment and Selection Practices

Talent Management is an important concern for any organization regardless of its location. Tradi- tionally family connections were widely used by local private organizations as a means of recruit- ment. However, since early 1990s, there has been a change in recruitment practices and candidates’ qualifications are increasingly being considered instead of references from family and relatives (Prijadi & Rachmawathi, 2002). Current states of practices indicate the use of multiple recruitment methods by firms (e.g. word-of-mouth, print ad- vertisements, newspapers, magazines, commercial broadcasts, recruitment consultants, internet). For

blue-collar workers, the most common recruitment method used is word-of-mouth. For this category, usually labor supply always exceeds demand and there is no complicated selection process.

Huo, Huang, and Napie (2002) studied selec- tion practices across ten countries which includes small, medium, and large scale companies in In- donesia. The findings are largely relevant to SMEs because the SMEs in Indonesia constituted more than 90 percent of total number of establishments. This study revealed three top ranking employee selection practices adopted by organizations in Indonesia; 1) A person’s ability to perform the technical requirements of the job, 2) A personal interview, and 3) An employment test in which the person need to demonstrate the skills. Huo et al.,(2002) also indicated other characteristics that are important qualities to get hired in Indonesia. These were a person’s ability to get along well with others already working there, how well the person will fit the company’s values and ways of doing things, a person’s potential to do a good job even if the person is not that good when they first start.

According to the findings of Galang (1999), it was also revealed that SMEs and large enterprises do not differ significantly except in one practices (“beliefs that person will stay with the company” as hiring criteria”). His comparative study also found that the ability to perform technical job requirements and the ability to get along well with others as important hiring criteria used in SMEs in Indonesia. In a comparative study of SMEs management practices between Indonesia and Malaysia, Rosli et al (2012) reported that priority for skilled workers is given in new recruitments. Huo et al’s(2002) study suggests that Indonesian respondents have indicated a desire to see employ- ment tests play a large role in the future.

Training and Development Practices

Having planned to establish an industrial society, Indonesian government has increased investment in primary and secondary education and vari-

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Effective Human Resources Management Practices in Small and Medium Enterprises

ous forms of vocational and on-the- job training programs. Thus nine years of education has been made compulsory for every Indonesian citizen since 1998 (Prijadi & Rachmawathi, 2002). Skill training is now available through vocational se- nior secondary schools (which account for more than 1.3 million of senior secondary enrolments), 153 public training centers, (which offer short, specialized courses), and numerous privately run programs.

A comparative study by Rosli et al., (2012) revealed that SMEs in Indonesia provide in-house training for employees and encourage them to attend external skill training programs usually provided by the government agencies. Dros et al., (2002) studied training and development practices in ten countries which included Indonesian small, medium and large scale companies. Among the countries surveyed, Indonesia scored the lowest in current training investment for improvement of technical skills. The employees did show a high level of interest in enhancing the investment in training for the future. Similar to organizations in China and Taiwan, Indonesia uses training as a means of reward to employees. According to the findings of Galang’s (1999) comparative study, it was also revealed that SMEs and large enter- prises do not differ significantly and that training to improve technical job abilities and training to help employees to understand the business were among common practices of SMEs in Indonesia. In the utilization of training, Indonesia ranked very low in the area of improving interpersonal skills. However, Indonesia ranked high for provid- ing training for improvement of poor employee performance.

Compensation and Benefits Practices

There is a little transparency in the compensation systems that apply in both public and private sec- tors in Indonesia (Bennington & Habir, 2003). For white-collar workers and managers, pay and

benefits are an important consideration in decid- ing whether to work for a particular enterprise. Blue-collar workers do not have as many options to choose. Since labor supply always exceeds de- mand, it makes it hard for those workers to exercise bargaining power over wages. Even though the government has established regional minimum wages, blue-collar workers are often unable to turn down work at rates even below the minimum (Prijadi & Rachmawathi, 2002). It is very obvious in Indonesia that there is an enormous difference between the lowest and highest paid employees. For example, this difference ranges from 1:7 in the civil services (Rohdewohld, 1995) to 1: 20 – 1:15 in the private sectors (Bennington & Habir, 2003).

In a ten-country comparative study, Lowe et al (2002) reported the use of job performance as the basis for pay raises and pay incentives (bonus or profit sharing) are relatively low in Indonesia. Despite the fact that Indonesia being one of the highest ranked collectivistic countries in Asia, the degree to which pay is contingent on group performance is also relatively low. An employee’s seniority and benefits forms an important part of the total pay package in Indonesia. However, there is relatively low level of recognition of long term results and futuristic orientation in their pay poli- cies. However, a comparative study by Rosli et al., (2012) revealed that performance- based reward and recognition systems are being emphasized in SMEs in Indonesia.

Over the past 20 years, the employee social security system (Jamsostek) has been remarkably successful. Specifically, there are four kinds of pro- tection covered by Jamsostek: health protection, working accident, old-age, and death. A challenge for Jamsostek is how to protect employees work- ing for smaller organizations. The aim of the law is to extend coverage of membership to smaller firms including family businesses. However, this has proven problematic in Indonesia because of employers’ lack of finances coupled with the goal of operating a minimal payroll (Prijadi & Rach- mawathi, 2002). For effective HRM practices, it

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is important to consider employees’ expectations, among other factors, with regard to compensation practices. Lowe et al.,(2002) revealed that employ- ees expect relatively high level of pay incentives, futuristic orientation, seniority, long-term results, job performance in the determination of total compensation package.

Performance Management Practices

Performance appraisal systems vary across or- ganizations from management- by- objectives (MBO) approach to upward and 360-degree feedback. However, views on whether the MBO, upward, or 360 degree feedback actually works in Indonesian culture (multitudes of cultures) is quite clear because directing rather than delegating is the most preferred style by most managers in Indonesia (Bennington & Habir, 2003).

Milliman et al.(2002) observed performance appraisal practices of 10 countries including Indo- nesian small, medium and large scale companies. They surveyed four main purposes of performance appraisal: documentation, development, adminis- tration, and subordinate expression. Appraisal as a process of documentation was rated as low by respondents in Indonesia. Respondents from other Asian countries including Indonesia indicated a moderate desire to see appraisals being used as development tool. Countries such as Indonesia, US, Canada, China, and Mexico rate appraisals as currently being used solely for promotion ap- plication. Indonesia scored a low to moderate for allowing subordinates to express their concerns in the appraisal process.

In a comparative study by Galang (1999), it was revealed that appraisals in Indonesia usually recognize good performance, identify develop- ment activities, and allow subordinates to express their perspectives feelings. The main areas of concern in Indonesian organizations are produc- tivity and quality. For example, Report A (1997), Bennington & Habir (2003) report that “output per worker in Indonesia is about one quarter that

of Korea and one tenth that of the United States. However, it acknowledges that this data fails to take into account unit labor cost, which results in an Indonesian worker being seen as three times more productive than an American worker and twice as productive as a Korean worker”(Bennington & Habir, 2003;p.385).

SOUTH KOREA

Introduction

Over the past four decades, South Korea has demonstrated incredible growth and global in- tegration to become a high-tech industrialized economy. South Korea has adopted various economic reforms following the financial crisis including greater openness to foreign investment and imports. The country’s growth averaged about 4-5% annually between 2003 and 2007 and was estimated to be 3.9% in 2011(CIA World Factbook, 2013). Korea is the world’s largest manufacturer of DRAMS (Direct Random Access Memory chips), the world’s second largest manufacturer in ship-building, and is the fourth largest elec- tronic industry (Gross, 2007). The population is approximately 42 million. Approximately, 80 percent of the population live in urban areas. The capital, Seoul, consists of over 10 million people and represents the commercial and political hub of the country. South Korea is approximately 996 kilometers long and 217 kilometers wide covering a land mass of 99117 square kilometers. Thus the country is about the same size of the state of Indiana in the United States (CIA World Factbook, 2013).

SMEs in Korea include organizations that have 1-299 employees. The government began to pay increasing attention to the development of SMEs in 1990s. The Small and Medium Business Administration (SMBA) was established in 1995 in order to assist this process (KFSB, 2011). The SMEs in Korea have been playing a vital role in job creation, generating income, technological

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Effective Human Resources Management Practices in Small and Medium Enterprises

innovations, and improved product quality. In the manufacturing sector, SMEs comprises 99.7% and provides 74.3%of the total manufacturing employment . They are considered the backbone of the economy (Gregory et al, 2002). Accord- ing to Korean Federation of Small Business, the total number of SMEs was 3, 066, 484, which is 99.9 percent of total establishments in 2009. The total number of employees in SMEs was 11,751,022, representing 88 percent of employees of the country in 2009. As vertically integrated organizations, many Korean SMEs have become subcontracting companies for large conglomerates (Kong, 2000). South Korean SMEs can be classi- fied as either ordinary or venture. The differences in these two types are in their management and strategic priorities. Venture SMEs are defined as a “technology-intensive enterprise” or ‘an enterprise based on a highly advanced technology’ (Gregory et al., 2002, p.75).

The Role of National Culture on HRM Practices

South Korea has the following indexes for power distance (60), individualism (18), masculinity (39), uncertainty-avoidance (85), long-term orientation (100), and indulgent versus restraint (29). (Please refer Table 1 that provides national cultural indexes and ranks on these six dimensions). A score of 100 is the maximum points that can be scored for each index (Hofstede, Hofstede, & Minkov, 2010).

The South Korean work culture has a high score in power distance emphasizing clear differentiation between superiors and subordinates. The culture is low on individualism implying a collective spirit and the importance of harmony at the workplace. The culture is considered feminine as men and women’s roles generally overlap and the society tends to be nurturing and modest. The culture has a high uncertainty-avoidance suggesting organiza- tions implement structured employment-related practices. South Korea has the highest score on long-term orientation clearly implying a society

that perseveres, plans, and promotes work prac- tices that create such discipline. The culture has a low score on indulgent versus restraint indicating that priorities such as leisure and relaxation are not important for the local workforce (Hofstede, Hofstede, & Minkov, 2010).

While traditional Confucian values character- ize much of the HRM practices in Korea, current practices have a nice blend of contemporary or modern values (Koch, Nam, and Steers, 1995). Confucianism is a code of ethical behavior devel- oped by a philosopher who lived in China around 500 B.C. The foundations of Confucianists beliefs are contained within the so-called five cardinal virtues: filial piety and respect, subservience of women to men, strict seniority, mutual truth between friends, and absolute loyalty to one’s legitimate superiors. Ancestor worship and the importance of family are some other aspects of Confucianism. Several aspects of Korean workers behavior are related to this Confucian tradition. For example, the long working hours, dedication to hard work, saving for the future, emphasis on learning and education, and self- improvement (Koch, Nam, and Steers, 1995).

In absence of distinct natural resources, Korea’s strong labor force has served as the foundation of its modern economic development. 98 percent of South Koreans can read and write; 80% graduate from high school, and the majority of high school graduates get some sort of college or vocational training after high school (Kearney, 1991).

The Korean HRM practices have resulted largely from two forces. The most pronounced influence emerges from the Confucian tradition (as briefly noted above). Accordingly, top-down decision making, flexible life time employment, high mobility of workers, paternalistic leader- ship, loyalty, compensation based on seniority and merit rating, bureaucratic conflict resolution, close government-business relationships can be commonly observed in the Korean style of man- agement. The second and more recent influence is the push to utilize modern or western approaches

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Effective Human Resources Management Practices in Small and Medium Enterprises

to HRM (Koch, Nam & Steers, 1995). In addition, the industrial landscape of Korea is changing at a rapid pace due to globalization and technology.

This section reviews the general trends in HRM policies and practices in South Korea, which includes: 1) Recruitment and selection; Training and development; 3). Compensation and benefits; 4). Performance appraisal.

Recruitment and Selection Practices

Recruitment methods of Korean firms vary con- siderably according to factors such as industry, size of the company, positions applied, among others. For example, smaller companies tend to rely less on external recruitment and testing and more on personnel connections in recruiting blue- collar employees. This is also true of companies located in more rural areas of Korea. About 10 percent of blue-collar hires come from vocational school placements (Koch, Nam & Steers, 1995). One common method of recruitment in Korea is based on relationships and networking. Family members, relatives, friends and alumni are often good sources for referrals and recruitment (Gross, 2007). This practice is particularly relevant for recruiting blue-collar workers (Koach et al., 1995). In 2006, women constituted 42% of the workforce.

Huo et al., (2002) did a study of selection practices across ten countries that consisted of mix of SMEs and large manufacturing sectors in South Korea. As noted above, SMEs in South Korea represents about 99 percent total establish- ments. The findings of this study revealed the three top ranking employee selection practices in South Korea as: 1). An employment test in which the person need sto demonstrate the skills, 2) A personal interview, and 3) A person’s ability to perform the technical requirements of the job.

Huo et al.,(2002) found in their study on Korean respondents from multiple levels of organizations that a person’s ability to perform the technical requirements of the job, a person’s ability to get along well with his or her colleagues, and a person’s

potential to do a good job, (even if the person is not that good when they first start) are among the top ranked preferred selection practices. This study reports that the gaps between current and expected practices are relatively large in South Korea and deserve attention as they may lead to the likely direction of changes for effective HRM. Galang’s (1999) study also found that the ability to get along well with others as a hiring criteria common to SMEs and large enterprises in South Korea. In a survey of 1760 SME managers by Gregory et al., (2002), it was revealed that about quarter of the sample saw the need to improve the recruitment function as a prioritized area for enhancing the export readiness of Koreas SMEs.

With regard to the differences between ordinary SMEs and venture SMEs, Gregory et al., (2002) study revealed a little discrepancy of managerial planning inr recruitment between these two kinds of SMEs. Venture SMEs’ priority for recruitment practices was lower (9.9 percent) than that of ordinary SMEs (11.5 percent). This may be due to the fact that venture SMEs are more technol- ogy oriented than ordinary SMEs and hence pay relatively less attention to HRM practices.

Training and Development Practices

Korean organizations consider human resources to be the central building blocks for long-term corporate success and therefore a considerable effort goes into the development of employees at all levels (Bae et al., 2003). At blue collar levels, the primary instructional methods involve on- the-job training aimed at improving job-related skills and appropriate corporate behavior. As these employees gain experiences, the focus of training shifts to the development of future supervisory jobs (Koch, Nam & Steers, 1995). A popular way to improve job-related skills and knowledge was ‘job-rotation’, although neither this method nor the multi-skill training were systematically ap- plied and also varied among industries (Rowley at al., 2004).

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Effective Human Resources Management Practices in Small and Medium Enterprises

Drost et al., (2002) studied training and devel- opment practices in ten countries, which consisted of Korean small, medium and large scale compa- nies. Among the countries surveyed, Korea scored the second lowest for training in interpersonal skills and the highest for training for improving technical skills. The orientation towards work, helping understanding businesses, and teaching employees about company values are important training criteria in Korean SMEs. Galang’s (1999) comparative study also observed that training to improve technical job abilities and initial training for new employees as common practices across SMEs and large enterprises in South Korea. This study identified improving technical abilities, helping understand the businesses, and building team work are among the three top-ranked ex- pectations of training programs in Korean SMEs.

Compensation and Benefits Practices

Employee compensation has always been a dif- ficult HR function to examine mainly because of the confidentiality nature of this topic. Starting salaries are usually determined by one’s educa- tional level and entry positions and annual salary increases are largely determined by seniority and to a lesser extent on merit. As a result, employ- ees’ salaries tend to progress as employees move upwards in the corporate ladder (Koch, Nam & Steers, 1995). Galang’s (1999) comparative study found that incentives form a significant part of total earning of employees in SMEs as well as large enterprises in South Korea. While local companies typically provide profit-sharing indiscriminately to every employee at an average rate of 100 to 300 percent of the employees’ monthly salary, foreign companies usually base compensation more on individual performances. These different bonus programs reflect the emphasis Western and Korean cultures place on the concept of individual versus the group.

In a ten-country comparative study, Lowe et al.,(2002) found that incentives, seniority and job performance are among the top three component of current compensation system in SMEs in South Korea. Interestingly, futuristic pay orientation, incentives, and seniority are among the most important factors in employee’s expectations of SMEs in South Korea.

According to Korean labor standards act, em- ployers are required to pay one-and-one- half-times regular pay for each additional hour work beyond the eight hours mandated per day. Female employ- ees are entitled to one day’s paid leave per month and sixty days paid leave for pregnancy. Comple- menting societal and organization-wide changes were shift in employment practices by many or- ganizations to encourage high level of employee performance and employment flexibility (Bae et al.,(2003). Therefore, two radically changed fundamental dimensions of Korean HRM systems are: 1). Evaluation and remuneration which have moved from seniority-based to competence-based performance; and 2) employment flexibility which has changed from long-term attachment and high job security towards numerical flexibility.

Performance Management Practices

Many smaller firms use some form of an annual performance appraisal systems. At the blue collar and lower managerial levels, the primary emphasis in such evaluation is on employee development since promotion is largely based on seniority.

Milliman et al.(2002) observed performance appraisal practices of 10 countries, which included South Korean SMEs . They examined four main purposes of performance appraisal: documenta- tion, development, administration, and subordi- nate expression. Korean respondents ranked the process of their appraisals being developmental and towards promotion as high, while documen- tation and subordinate expression were ranked low. Korea, Canada, US, and Australia were in a cluster that rated the current purposes of their per-

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Effective Human Resources Management Practices in Small and Medium Enterprises

formance appraisal systems. The study also found appraisal for recognizing subordinates, planning and development, evaluating goal achievement and determining promotability as four “should be practices’ rated by Korean respondents. Galang’s (1999) comparative study also found appraisal to determine subordinate’s promotability as a com- mon practices among SMEs and large enterprises in South Korea.

TURKEY

Introduction

Turkey joined the European Union (EU) in 1999 signaling its interest to be a member of the Euro- pean community to enhance its trade prominence in the region. Until the 1980s, Turkey followed a very insular policy focusing predominantly on a self-sustaining agricultural economy (Karadeniz, & Gocer, 2007; Tanova & Nadiri, 2005). Today it is largely a service-based market with a strong focus on developing its human resource management (HRM) practices. The domestic IT and finance industries are considered robust with well devel- oped management practices (Aycan, 2006; Aycan, 2001). In 2009, Turkey was ranked 17th globally for its growth in GDP (gross domestic product) suggesting an optimistic economy (Koyuncu et al., 2011).

SMEs in Turkey play a strong role in the local economy providing almost three-fourths of the domestic employment. Approximately 95% of the companies in Turkey are SMEs. In Turkey, small organizations have approximately 10-49 employees and medium-size organizations have approximately 50-250 employees (Koyuncu et al., 201; Bozbura, 2007; Tanova & Nadiri, 2005). The textile industries have the majority of the SMEs followed by the automobile components and the iron and steel industries. The products and services

of SMEs are not only consumed by local consum- ers but also by domestic large organizations. Most of the SMEs are family-owned allowing only key members of the family hold important posi- tions (Koyuncu et al., 2011; Karadeniz & Gocer, 2007;Ozcelik, & Aydınlı, 2005).

The EU policies encourage its participating member countries to promote SMEs as it generates adequate trade and employment. EU regulations provide guidelines and support any cross-cultural alliances among the SMEs of EU nations (Tanova & Nadiri, 2005). The Turkish government also provides various initiatives to bolster the activi- ties of its SMEs. For instance, the employees of 500 SMEs were trained by the International Trade Center to understand the how to conduct business efficiently in other countries. These training programs included specific case studies and also industry-specific examples as to how to conduct business overseas. The management of the SMEs was also trained on “best practices” in other countries so that Turkish SMEs can compete efficiently globally (Gillies, 2004). In addition, the World Bank has provided financial support to Turkish SMEs realizing they form the backbone of the country’s economy (Koyuncu et al., 2011).

A new employment law was established in 2003 replacing the earlier regulations of 1970. The gov- ernment wanted to establish Turkey’s labor laws to be on par with those of the European Union. This law for the first time offered protection to employees suggesting that organizations develop job descriptions, establish rigorous staffing, pro- vide elaborate training, and record employees’ performance. The focus of this new law is to have well-established HRM practices that can be systematically evaluated. Historically, organiza- tions in Turkey rely on paternalistic management making personal relationships between employers and employees the most significant predictor in the practicing of employment practices (Aycan, 2006; Ozcelik, & Aydınlı, 2005).

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Effective Human Resources Management Practices in Small and Medium Enterprises

The Role of National Culture on HRM Practices

Turkey has the following indexes for uncertainty- avoidance (85), power distance (66), long-term orientation (47), masculinity (45), individualism (37), and indulgent versus restraint (37). (Please refer Table 1 that provides national cultural indexes and ranks on these six dimensions). A score of 100 is the maximum points that can be scored for each index (Hofstede, Hofstede, Minkov, 2010).

Turkey has a high score on uncertainty- avoidance suggesting a very strong preference for corporate procedures and policies. They also have a low tolerance for ambiguity and prefer structured work environments. Its score on power distance is moderately high demonstrating its well-defined hierarchical culture. Subordinates from such cul- tures are trained to act deferential and submissive to their superiors. Its scores on long-term orienta- tion indicate employees might not pursue strategic planning as a cultural norm. Individuals in such cultures look for instant gratification and might not invest in policies or practices that might lead to employment development in the future (such as succession planning). Its score on masculinity is moderately high suggesting assertive management styles as the preferred model. In such cultures, men and women may pursue different professional careers based on gender discrimination. Typically in Turkish organizations women are not provided leadership positions and are also not delegated jobs that require frequent travel. Women are primarily considered as homemakers and their jobs are only secondary to those of their homes (Aycan, 2001; Aycan, 2006).

Its low scores on individualism suggest that Turkish people tend to be more collectivist. Indi- viduals from such cultures are strongly nurtured to help their family and friends in personal and professional interactions. Turkey’s score on indul- gent versus restraint suggest that on an average local people seem to be restricted in the way they enjoy and pursue leisure. Further, the culture is

very fatalistic implying that individuals perceive their general disposition and well-being are not under their personal control (Collings et al., 2010; Hofstede, Hofstede, Minkov, 2010).

Recruitment and Selection Practices

Informal recruiting methods are very common in SMEs as they do not have the resources for established staffing methods. Hence such firms will adopt recruitment and selection practices that are cost-effective, reactive, and timely. Informal recruiting methods, such as word-of-mouth, also provide employers a pool of applicants who tend to be more loyal to the firm as the applicants usually know the employers through prior social interactions. These applicants also have realistic expectations of their jobs as the employers provide practical and matter-of-fact information about the jobs. Most of the times, applicants recruited through informal methods may not possess the KSAs (knowledge, skills and abilities) required for the jobs, yet they are recruited because of their personal connections in the organizations. In collectivist cultures, the organizational connec- tions applicants have are more important than the applicants’ KSAs (Cetinel, Yolal, Emekiz, 2009; Tanova & Nadiri, 2005; Aycan, 2001).

Informal practices, such as word-of-mouth, are extremely effective recruitment tools in collectivist cultures, such as Turkey, that believe in promoting in-group members. In-group members belong to the similar social and economic structures such as neighborhoods, families, religious groups, among others (Aycan, 2001).

In a study of 347 Turkish SMEs, it was iden- tified that staffing approach was very reactive. Organizations recruited employees only when there was a need for new applicants. There was no strategic planning or proactive initiatives for planning the workforces. The three predominant recruitment methods was word-of mouth, lo- cal newspapers sources, and occupational high schools. The least preferred methods of recruit-

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Effective Human Resources Management Practices in Small and Medium Enterprises

ing were internet and employment agencies. The selection methods predominantly used were interviews and employment testing. The final hir- ing decision was usually based on the decision of one person- the hiring manager or the owner of the organization (Cetinel, Yolal, Emekiz, 2009).

In another empirical study of 64 Turkish SMEs, it was observed 54.3% of these organiza- tions adopted employment agencies to recruit managerial talent and employment advertisements to hire non-managerial employees. Employment agencies offer the right talent as it is able to tap in a huge database of qualified applicants. This trend to adopt employment agencies in staffing for SMES might to be more relevant as they in- creasingly engage in trade and business with their global counterparts in the EU. SMEs in EU nations generally adopt the services of employment agen- cies to hire managerial talent with France using these services the most (Tanova & Nadiri, 2005).

In both these studies, it was demonstrated the final hiring decision was usually based on the decision of one person- the hiring manager or the owner of the organization. In small organiza- tions, it is not common to have various employees perform different human resource management functions (Cetinel, Yolal, Emekiz, 2009; Tanova & Nadiri, 2005). In another study of 172 Turkish SMEs, it was identified, that more than 50% of the firms did not have a formal HRM department and the hiring managers or owners performed the different HRM functions in the organizations (Koyuncu et al., 2011).

Training and Development Practices

SMEs usually lack the adequate institutional resources to invest in elaborate structured train- ing programs. Thus in training and development having new employees observe current employees perform their roles seems the most economical training method.. Further, these organizations are also reluctant to invest in formal employee development programs as generally employees in

SMEs do not remain for long in these organizations (Cetinel, Yolal, Emekiz, 2009; Tanova & Nadiri, 2005). Training opportunities in SMEs are not proactive and are usually provided to employees only when organizations receive customers’ com- plaints or if employees are not performing up to the organizational expectations. Most often the managers or the owners of the SMEs provide the training to the new employees (Cetinel, Yolal, Emekiz, 2009; Tanova & Nadiri, 2005).

In an empirical study of SMEs in Turkey, it was concluded employees in these firms prefer to adopt on- the-job and informal methods of train- ing as it allows firms to follow a cost-effective approach in developing their employees’ KSAs (Cetinel, Yolal, Emekiz, 2009). In another study of 64 SMEs, it was concluded that almost 60% of the organizations indicated they had established some kind of formal training policies for their employees. The results of this study indicate that some of these organizations do invest in initial- izing structured training programs. For instance, the SMEs in this study adopted external vendors (47%) and computer-based training (61%) apart from following informal training methods. It could also be that SMEs have started adopting formal training methods as these organizations have become more engaged with their European counterparts and would like to showcase a com- petent workforce (Tanova & Nadiri, 2005).

Bozbura (2007) demonstrated in a study of 76 SMEs that training and mentoring employees are important initiatives for these organizations. For instance, employers indicated that formal training for employees to enhance their understanding of their jobs is very important for organizations to provide. Further these companies also believed it was vital for organizations to support continuing education of their employees via tuition reimburse- ments. These organizations also perceived mentor- ing and apprentice opportunities as important skills that organizations should offer their employees.

In another study of 172 SMEs, it was demon- strated that informal methods of on-the job learning

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Effective Human Resources Management Practices in Small and Medium Enterprises

or learning from experienced managers was the most common method of training. Further, dis- cussing with other employees/managers in similar SMEs was helpful in understanding how to per- form operational duties better (Koyuncu, Burke, Acar, Wolphin, 2011). SMEs realize to compete in their regional global market their employees have to demonstrate the required KSAs. Such skills can be obtained only with organizational initiatives that allow for professional development and cross-cultural competence (Cetinel, Yolal, Emekiz, 2009; Tanova & Nadiri, 2005).

Performance Management Practices

Performance management is a very sensitive topic as Turkish employees are generally not used to receiving any negative feedback. The collectivist culture also makes any objective evaluations dif- ficult as employers and employees become very close bonds making unbiased evaluations difficult. These paternalistic relationships do not allow pro- viding fair evaluations that will help employees sincerely improve their performances. Many times the superiors inflate the performance ratings of their subordinates so that there is no disharmony in the workplace. The collectivist attitude also does not prefer nominating employees for any performance awards that might distinguish them from their colleagues (Aycan, 2001; Collings et al, 2010).

In a study of SMEs, almost 70% of the firms indicated they have established performance management policies. However, employers con- ducted appraisals only when required, such as if employees do not perform well or customers’ complaints increases. SMEs did not follow any standard time-frames or procedures in the imple- mentation of performance evaluations. Employ- ers in such organizations also feel that the small size of their organizations allow them to observe their employees informally without any formal mechanisms. Thus they can immediately identify

any lapses in performances and take corrective actions (Cetinel et al, 2009).

In a study of 340 that included large and small firms, it was identified that employees did positively perceive performance appraisals based clearly on job-related competencies. These types of appraisals allow employees to enhance their KSAs and thus job motivation. While there may be some preferences towards western practices, the cultural norm is more towards subjective evaluations that allow the superiors to provide their assessments based on their relationships with their subordinates (Collings et al, 2010).

In many Turkish organizations, the norm is not to discuss the performance evaluations with employees as such discussion becomes very con- tentious. In a study of 25 tourist establishments (large, midsize, and small), it was identified when performance appraisals are conducted, the evalua- tions of the employees are kept very confidential. Employees do not receive any formal commu- nication regarding how they have performed. A majority of the managers surveyed in this study recognized the method as flawed as the system does not serve its intended purpose- employees do not know how to improve their performances as feedback is not provided. Managers suggested providing written feedback as a way of minimiz- ing possible controversial outcomes during the appraisal process (Ozgen, Baser, Mimroglu, 2011).

Compensation and Benefits Practices

Employees’ salaries are usually based on orga- nizational tenure, negotiating skills, and social connections in the organizations. The high power- distance of the Turkish culture endorses clear status differentials in pay and benefits between white and blue- collar employees. White-collar employees usually receive cafeteria allowances, company automobiles, cell phones, house allowances, educational expenses for employees’ children, and private health insurances. Blue-collar employees

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Effective Human Resources Management Practices in Small and Medium Enterprises

receive transportation allowances, bonuses for reli- gious celebrations, and expenses for miscellaneous family issues. Superiors in collectivist cultures like to look after their employees like they belong to a large family. Usually benefits comprise almost two-thirds of an employee’s pay package (Aycan, 2006; Aycan, 2001; Jackson, 1991).

In a study of 98 respondents, it was identified that Turkish employees prefer seniority to merit- based pay. This characteristic is in congruence with the collectivist dimension as employees become very loyal to their in-group members (such as or- ganizations) and thus value organizational tenure. Employees therefore expect to be rewarded for their allegiance making seniority a very impor- tant criterion in pay practices. Employees prefer to be rewarded based on the collective achieve- ment of the group (organization) rather than on individual achievements per se. Seniority-based pay is further preferred by their high-uncertainty- avoidance culture which makes employees averse to practices that do not demonstrate uniformity in implementation (Goktan & Saatcioglu, 2011).

There are several benefits employees receive that are mandated by the law. A joint contribution for social security by both employers and employ- ees is compulsory for organizations in all sectors except for those in the agriculture and domestic. There is also a house savings and employee savings plans that organizations are required to provide (Jackson, 1991).

The next four sections summarize the findings of this cross-national study in discussion, impli- cations, future trends, and conclusion sections.

DISCUSSION

The objective of this chapter was to explore HRM practices in SMEs in MIST economies using existing theories and empirical evidence. These four nations have been identified as important global business participants for the next decade (Brent, 2009; Aycan, 2006; Leal, 2006; Galang, 1999). SMEs play an extremely important role in

all these nations by providing the majority of the local employment and serving as a pivotal hub in their economies. The findings provide evidence for cross national variations in HRM practices across the four different countries.

In Mexico, the recruitment culture largely works on personal referrals as the collectivist culture likes to promote in-group members. One might argue that the use of such practices as personnel referrals in the selection process is an aspect of the selection process in a wide variety of countries (convergence). Training and devel- opment is informal but the Mexican laws help SMEs compete well domestically and globally by providing subsidized training programs and professional guidance. Performance appraisal is informal and developmental as such organizations usually comprise of several family members. Com- pensation practices are established by the owners who usually provide some form of variable pay to motivate their employees. The Mexican law mandates several benefits that might not be the norm in other cultures (Arias-Galicia, 2005; Davila & Elvira, 2005; Jackson & Schuler, 1995). It is therefore evident that the HRM practices adopted in SMES in Mexico are largely influenced by national culture, formal institutional frameworks, and strategic orientations. As such, HRM practices adopted in SMEs in Mexico is more consistent with the contingency perspectives than the univer- salistic perspective of SHRM model (e.g. Bowen et al., 2002; Schuler and Florkowski, 1996). The relevancy of culture and institutional framework in HRM is also emphasized in the debate of di- vergence theorists (e.g. Brewester at al., 2004).

In Indonesia, employment testing and in- terviews seem to be the predominant method of hiring employees. It is interesting to notice that selection practices in Indonesian SMEs is more relevant to universalistic or best practices approach than contingency approach to SHRM. While Rhodes et al., (2008) emphasized the transferability of high performance of work practices in Indonesian context, Rowley et al., (2004) found that convergence is taking place in

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Effective Human Resources Management Practices in Small and Medium Enterprises

Asia-Pacific region. The training culture focuses on both in-house and external, which might be a different feature, as usually SMEs do not have the resources to provide in such investment. As revealed in Rosli et al., (2012) comparative study, outside skill training program in Indonesia are usually provided by government agencies. This shows that institutional impact of contingency approach is more relevant to training practices in Indonesia than resources based perspective of SHRM. Performance evaluation in Indonesia tends to be developmental and informal while compensation practices focus on seniority-based pay. The developmental and informal aspects of performance evaluation systems are in consistent with resource based view and cultural impact on HRM practices.

The practice of seniority-based pay is also a reflection of collective cultural values. In brief, HRM practices adopted in SMEs in Indonesia provide evidence to the use of a real mix of differ- ent SHRM models, supporting both convergence and divergence hypotheses. Glinow et al., (2002) also found some significant global or converging trends in HRM practices across cultures, industries and organizations. Indonesia thus presents a real case for an integrative model of universalistic, contingency, resource- based and institutional based view of SHRM model (e.g. Budwar & Sparrow, 2002; Schuler and Florkowski, 1996).

In South Korea, employment testing, inter- views, and personal networking are the dominant staffing practices. This is a reflection both uni- versalistic and culture bound selection practices in Korean SMEs. It is interesting to observe that employment testing is an important method of hiring in both in South Korea and Indonesia, placing a lot of emphasis on learning and educa- tion (Gannon, 2004: Huo et al, 2002; Galang, 1999; Kearney, 1991). Job-rotation and on-the job training are the most common training practices in South Korea. It seems that many aspects of selection and training and development practices in South Koreas represents high performance or

best practice arguments of SHRM. For example, Bae et al., (2003) also found that many compa- nies in Korea are experimenting with features of American style high performance work practices. Performance evaluations in Korea tend to be devel- opmental and informal. As we argued above in the case of Indonesia, the developmental and informal aspects of performance evaluation systems are in consistent with resource based view and cultural impact on HRM practices. Total compensation is based on both seniority and performance in SMEs in South Korea. This trend is totally in agreement with the initial expectation relevant to simultane- ous use of both global convergence trends and adaptation to cultural and national differences (e.g. Huo et al., 2002).

In Turkey, recruitment and selection practices are informal with word-of mouth and unstructured interviews being predominant methods. As these organizations are getting more sophisticated, they adopt professional search agencies to hire their managerial talent. This reflects simultaneous adoption of both convergence and divergence perspectives of SHRM models (e.g. Huo et al., 2002). Training and development practice was found to be following cost-effective approaches of on-the job training and personal coaching. This is in line with the arguments of business strategy-HRM practices link (e.g. Schuler and Jackson, 1987) and of the contingency perspec- tive of SHRM model. Performance evaluations are very subjective and it is not even the norm in the Turkish work culture. The whole process of performance management in Turkey needs to be significantly changed to reach global standards. Compensation practices favor organizational tenure over employee performance as employees liked to be rewarded for their loyalty to the orga- nizations (Bozbura, 2007; Aycan, 2006; Aycan, 2001). In brief, the Turkish experience is not far different from what is observed in Indonesia and South Korea, which reflect the elements of uni- versalistic, contingency, culture and institutional based theories of SHRM.

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Effective Human Resources Management Practices in Small and Medium Enterprises

SCHOLARLY AND PRACTICAL IMPLICATIONS

There are number of implications provided by this chapter. First, our findings contributes to SHRM literature and HRM practices in SMEs by providing evidence in relation to adoption of both universalistic and national culture specific HRM practices in the context of MIST countries. The findings supports both convergence and di- vergence hypotheses as we found simultaneous adoption high performing work practices and culturally relevant HRM practices across all the four countries (Budwar & Sparrow, 2002; Schuler and Florkowski, 1996).

Second, the chapter provides an important contribution to the international SHRM literature by providing a model of HRM practices that are being adopted by the SMEs in MIST countries. (Please refer to Table 3).

Third, our findings are equally important for both researchers and practitioners. As we have discussed our findings in relation to existing models and theories of SHRM, future researchers of MSEs in MIST countries may use our argu- ments and findings as preposition for furthered empirical testing. This is particularly important as we used existing data and information for our exploration. It is also important for MNCs, entre- preneurs and practitioners to understand the HRM

practices adopted in SMEs in various countries as these organizations seem to the backbones of their respective nations.

Fourth, the chapter also showcases the latest cultural scores of Hofstede et al (2010) for these four nations. It also introduces his latest cultural dimension (indulgent versus restraint) and its implication on work-related practices. It discusses the consequences of each of these cultural dimen- sions for HRM practices in each of these nations. Multinational practitioners will benefit from knowing the local and cultural values to augment their understanding of doing business with the local SMEs (Hofstede et al, 2010).

FUTURE DIRECTIONS

Future research should specifically focus on HRM practices in SMEs in emerging and new economies as there is a dearth of research in this specific literature. The research should also consider key organizational, institutional, societal, and cultural variables that may influence HRM practices in SMEs. These might vary largely among nations and their understanding might help multinationals create a better understanding of their operations. For instance, the local governments support SMEs operations immensely in both Mexico and Turkey (Bozbura, 2007;Aycan, 2006).

Table 3. A Conceptual Model of HRM Practices of SMEs in MIST Economies

HRM Practices Mexico Indonesia South Korea Turkey

Recruitment and Selection

• Personal Referrals • Interviews • Personal Tests

• Employment Tests • Personal Networking • Interviews

• Word-of mouth • Newspaper advertise- ments • Employment Agencies

Training and Development

• On-the job training • In-house training • External Training

• On-the job training • Job Rotation

• On-the job training • Computer-based training • External vendors

Performance Ap- praisal

• Informal Evaluations • Informal evaluations • Developmental

• Informal Evaluations • Developmental

• Informal evaluations • Evaluations kept confi- dential

Compensation • Individual bonuses • Benefits

• Seniority-based pay • Seniority-based pay • Incentives

• Seniority-based • Group bonuses

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Effective Human Resources Management Practices in Small and Medium Enterprises

Potential research topics could also include coping mechanisms for SMEs as they interact with multinationals from various nations. How will they become more adaptive in their own practices? They need to change traditional practices so that they can learn and grow from the latest trends in their industries. Collaborative partnerships between academics from different countries as well as between academics and practitioners may largely promote to develop the nascent research agendas for SMEs in emerging economies (Brent, 2009; Aycan, 2001).

CONCLUSION

This chapter has been concerned with exploring HRM practices of SMEs in Mexico, Indonesia, South Korea, and Turkey. Existing literature on theoretical frameworks and empirical research findings was used in the analysis and discussion. The findings provide evidence for cross national variations in HRM practices of SMEs across the four countries. These variations support evidence for both convergence and divergence debate. HRM practices such as selection and training and development adopted in SMEs in Mexico are largely influenced by culture and institutional framework. Performance appraisal and compensa- tions practices reflect both cultural and strategic aspects of HRM systems. As such, HRM practices adopted in SMEs in Mexico is more consistent with contingency perspectives than universalistic perspective of SHRM model. Indonesia pres- ents a case for adopting a real mix of different SHRM models, supporting both convergence and divergence hypotheses with an integration of universalistic, contingency, resource based and institutional based views of SHRM model. In the case of South Korea, we found a picture similar to Indonesia as it also presents a case of an integrative model which consists of universal- istic, contingency, resource based and institutional based view of SHRM model. The slight difference

we found between the two countries is that South Korea tends to adopts ‘best practices’ approach more than it does in Indonesia. Our finding in Turkey is not far different from the situations in Indonesia and South Korea, as it reflects the ele- ments of universalistic, contingency, culture and institutional based theories of SHRM.

As we expected at the beginning, HRM prac- tices used in different countries are inching towards global convergence, while national culture and contingency factors such as institutional frame- work and business strategies continued to be af- fecting HRM practices in SMEs of MIST countries (e.g. Huo et al., 2002). The dynamic and complex nature of HRM in MIST country context stresses the relevancy of institutional theory and different perspectives of SHRM model and the need for further empirical research towards developing an integrative framework of SHRM in SMEs.

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ADDITIONAL READING

Bae, J., Chen, S. J., & Rowley, C. (2011). From a paternalistic model towards what? HRM trends in Korea and Taiwan. Personnel Review, 40(6), 700–722. doi:10.1108/00483481111169643.

Cho, J., Lee, K. Y., & Lee, J. (2011). Dis- missal law and human resource management in SMEs: Lessons from Korea. Asia Pacific Journal of Human Resources, 49(1), 105. doi:10.1177/1038411110391705.

Cho, Y., & Gary, N. M. (2009). Successful IT start- ups’ HRD practices: Four cases in South Korea. Journal of European Industrial Training, 33(2), 125–141. doi:10.1108/03090590910939030.

Demirbas, D., Hussain, J. G., & Matlay, H. (2011). Owner-managers’ perceptions of bar- riers to innovation: Empirical evidence from Turkish SMEs. Journal of Small Business and Enterprise Development, 18(4), 764–780. doi:10.1108/14626001111179794.

Erdem, F., & Erdem, S. (2011). Functional strat- egies and practices of small and medium-sized family businesses. International Journal of Islamic and Middle Eastern Finance and Management, 4(2), 174–185. doi:10.1108/17538391111144506.

Fabi, B., Raymond, L., & Lacoursière, R. (2009). Strategic alignment of HRM practices in manu- facturing SMEs: A gestalts perspective. Journal of Small Business and Enterprise Development, 16(1), 7–25. doi:10.1108/14626000910932854.

Friedman, T. (2006). The world is flat. New York: Farrar, Straus and Giroux.

Greer, C., Stevens, C., & Stephens, G. (2007). The state of the unions in Mexico. Journal of Labor Research, 28(1), 69–92.

Habir, A. D., & Larasati, A. B. (1999). Human resource management as competitive advantage in the new millennium an Indonesian perspec- tive. International Journal of Manpower, 20(8), 548–562. doi:10.1108/01437729910302732.

Hynson, L. M. Jr. (1991). Doing business with South Korea - Part II: Business practices and culture. East Asian Executive Reports, 13(9), 17.

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Effective Human Resources Management Practices in Small and Medium Enterprises

James, C. H. (2003). Strategic human capital management in SMEs: An empirical study of entrepreneurial performance. Human Resource Management, 42(4), 375–391. doi:10.1002/ hrm.10096.

Millman, J., Nason, S., Zhu, C., & Cieri, H. (2002). An exploratory assessment of the purposes of performance appraisal in North and Central America. Human Resource Management, 41(1), 87–100. doi:10.1002/hrm.10021.

Olivas-Lujan, M., Ramirez, J., & Zapata-Cantu, L. (2007). E-HRM in Mexico: Adapting inno- vativeness for global competitiveness. Interna- tional Journal of Manpower, 28(5), 418–434. doi:10.1108/01437720710778402.

Peterson, D. (2010). A longitudinal study of as- similated corporate culture in Mexico. Journal of Management Research, 2(1), 1–26.

Rao, P. (2008). Executive staffing practices in US-Mexican joint ventures: A staffing model for IJV executives. In Best HRM Practices in Latin America (pp. 141–156). London: Routledge.

Rao, P. (2009). The role of national culture on Mex- ican staffing practices. Employee Relations, 31(3), 295–311. doi:10.1108/01425450910946488.

Rao, P. (2012). HRMex: Human resource man- agement in Mexico: Perspectives for scholars and practitioners. IAP Publishing.

Self, R., Donald, R. S., & Bell-Haynes, J. (2011). Intercultural human resource management: South Korea and the United States. International Journal of Management and Information Systems, 15(1), 41–48.

Solis, L. Raghunathan, T., & SubbaRao, S. (2000). A regional study of quality man- agement infrastr ucture practices in USA and Mexico. International Journal of Qual- ity & Reliability Management, 17(6), 597–614. doi:10.1108/02656710010336749.

Sung, T. (2003). Innovation across borders. T + D, 57(1), 10.

Sunoo, B. (2000). HR over the border. Workforce, 79(7), 40–44.

Tirta, N. M. (2011). Searching for potential and realized absorptive capacity of the firm: The case of japanese joint ventures in indonesia. IUP Journal of Knowledge Management, 9(4), 53–75.

Uysal, G. (2008). Relationship among HR and firm performance: A Turkey context. Journal of American Academy of Business, Cambridge, 13(2), 77–83.

Wilkinson, A. (1999). Employment relations in SMEs. Employee Relations, 21(3), 206–217. doi:10.1108/01425459910273062.

Yetim, N., & Yetim, U. (2006). The cultural orientations of entrepreneurs and employees’ job satisfaction: The Turkish small and medium sized enterprises (SMEs) case. Social Indicators Research, 77(2), 257–286. doi:10.1007/s11205- 005-4851-x.

KEY TERMS AND DEFINITIONS

Aguinaldo: Christmas bonus in Mexico. Individualistic Orientation: The degree to

which individuals in societies reflect individual- istic or collectivist behavior.

Indulgent versus Restrain: The degree to which individuals pursue activities to enjoy themselves.

Long Term Orientation: The degree to which individuals in organizations or societies plan for the future.

Masculinity: The degree to which organiza- tions or society promote gender equality.

Power Distance: The degree to which orga- nizations and societies accept and share power.

Uncertainty-Avoidance: The degree to which organizations and societies avoid uncertainty by establishing practices and procedures.

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Chapter 4

The Synergistic Potential of Human Resource

Management in Small and Medium Enterprises

ABSTRACT

In large-scale operations, strategically orientated Human Resource Management generally has a structural function. In small- and medium-sized enterprises, however, strategic intent has to be more intimately matched to entrepreneurial behavior of core management. In these firms, HR is not an added layer but rather a key synergistic element in their strategic configuration. Considering the economic challenges faced by the small firm, it would seem that some form of strategically orientated HR is ben- eficial; however, it is often unconsidered. Taking a resource-based view of the firm and a configurational approach to strategy, this chapter considers the challenges to strategically orientated HR adoption in small entrepreneurial enterprises. It examines the characteristics of entrepreneur-founders, strategic orientation, and strategic configuration in an increasingly globalized context. Challenges to HRM adop- tion are identified, and a number of possible solutions are considered.

INTRODUCTION

Guest and King (2001) asked a simple but pro- vocative question: “If good people management is self-evidently beneficial to organizations, why do not more of them adopt it?” (p. 11). In a later publication they returned to this question, noting that while the rhetoric surrounding the importance of people management was generally accepted and while the notion that people as “key assets in the fight for competitive advantage has taken hold

… and while it is no longer quite right to claim that in the absence of a crisis HR is inevitably a low priority… neither is it a priority” (Guest & King, 2004, p. 421).

The apparent paradox of recognizing people problems, but not adopting good people manage- ment, can be seen in the continuing reluctance of many large-scale organizations to adopt Human Resource Management (HRM); however, the total absence, or low priority, of HR perspectives is even more apparent in small- and medium-sized

David Starr-Glass State University of New York - Empire State College, USA

DOI: 10.4018/978-1-4666-4731-2.ch004

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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises

enterprises (SMEs). In a review of the extent to which HRM practice was adopted in U.K. manu- facturing SMEs, it has been noted that “very few of the organizations adopted a strategic approach towards HRM…. the dominant approach seemed to be one of reactive, opportunistic pragmatism, showing little development from the standard modern approach identified as most common in the early 1980s” (Duberley & Walley, 1995, p. 981). Harney and Dundon (2006), in a study of small-sized business enterprises in Ireland, recog- nized that these firms operated “in a contextually plural world” and that HR prescriptions should not be considered a miraculous “seamless garment,” but rather “a quilt composed of a distinct mix of policies and practices, in some cases uneven and contradictory, imbued with varying levels of formality and informality” (p. 69). Nevertheless, most of these firms did not examine the richness of the HR quilt, select appropriate scraps, or stich them into their own workplaces. When small- and medium-size firms do adopt a strategically orien- tated HR approach they expect pragmatic results, requiring their HR managers and consultants to “move beyond ‘talking’ about bridging research and practice and really work to help line managers use the knowledge…they want people problems solved… they may be searching elsewhere for their answers” (Welbourne, 2007, p. 469).

If SMEs are indeed searching for the answers to their people problems in places other than HRM, is that really unexpected or unreasonable? The newly created SME has little connection with the poten- tial of HR approaches, but the HRM community of practice seems to have even less connection with small- and medium-sized firms. Despite the prevalence of SMEs and their significant contribu- tion to most economies, Heneman, Tansky, and Camp (2000) in reviewing the literature found it “disheartening to note that scant attention in the SME research literature is given to the study of human resource management practices” (p. 11). When attention was shown the outcome often “appears to be rich in prescriptions, limited in

sound descriptive surveys, and sparse in analyti- cal research” (p. 20). Three years later, some of these authors woefully acknowledged that small and medium-sized enterprises “have been treated as second-class citizens by authors in the human resource management literature for far too long” (Tansky & Heneman, 2003, p. 299).

This chapter explores the adoption of HRM in small- and medium enterprises. In doing so, it argues that two considerations are relevant. First, the unique dynamics of the small firm need to be appreciated in considering the level and quality of HR approaches proposed. That appreciation should center on an open-system and resource-based consideration of the enterprise and de-emphasize the large-scale paradigms and “best practices” often reflexively suggested by HR practitioners. Resource-based views of the firm recognize the contributory value of human assets and human capital, linking human resources more tentatively to strategic performance (Way & Johnson, 2005; Wright, Dunford, & Snell, 2001). From this perspective, HRM is re-orientated away from a structural function to an active dynamic that is more relevant for the complexity of the SME. Synergism – the catalytic enabling produced by the strategic alignment of people and resources – seems more appropriate than the HR functional- ism often associated with large-scale enterprises.

Second, whether the small firm recognizes, considers, or implements strategic HR depends primarily on the attitudes and propensities of the firm’s founder-entrepreneur. To the extent that decision-making is a rational process, the challenge for the HR community – whether as participants in small firms or as consultants to these enterprises – is to provide considered and credible approaches that recognize the founder- entrepreneur’s vision. Rather than offer a one- size-fits-all seamless garment, the HR practitioner should appreciate the unique complexity of the firm’s context, the possible ambivalence of the founder-entrepreneur’s attitude, and the inherent patch-like nature of strategic HR approaches. This

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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises

requires sensitivity to the founder-entrepreneur’s traits and characteristics, but it also requires aware- ness of the broader social and cultural matrix. Although entrepreneurial leaders are often char- acterized by individualism and purposefulness, their predispositions and enactments are medi- ated by social and cultural factors, particularly national culture. In an increasingly globalized world, the ways in which different national-culture environments shape entrepreneurial behavior and entrepreneur-founder perceptions of HRM is significant (Soriano, Dobón, & Tansky, 2010). Certainly, at a country-level, HRM has been increasingly challenged to respond differently to different business cultures, whether in Central and Eastern Europe (Brewster & Bennett, 2010; Horwitz, 2011), or in China and South East Asia (Cunningham & Rowley, 2010; Li & Nesbit, 2012; Zakaria, Zainal, & Nasurdin, 2012).

The first section of this chapter provides a background of relevant HR issues that require consideration, particularly from a resource-based view of the firm. Using a configurational ap- proach, the second section examines a model for possible consideration and adoption of strategic HRM. It considers the characteristics of the entre- preneurial-founder, cultural and national-culture factors, strategic orientation, and the identifica- tion of elements in the strategic configuration. The following section then examines anticipated difficulties in adopting a HR approach that might work synergistically in the SME environment. The concluding sections suggest future research directions and offer overall conclusions.

BACKGROUND

Although naturally grouped by size, SMEs are a complex and heterogeneous group of entities: “not all small firm owners are entrepreneurs and not all small firms are entrepreneurial… many small firms are not the site for innovation while many small firm owners do not have business growth

as a goal” (Barrett & Mayson, 2006, p. 444). The SME can be focused on modest risk-taking, low growth, and non-entrepreneurial activities: owned or directed by an individual, or family, and primarily interested in income-seeking and income-maintenance. In these firms issues of growth and strategic development are not pressing, whereas concerns about stability and maintenance are. In other economies, market sectors, and cul- tural environments the firm’s emphasis may be on consolidation or expansion. In some contexts, the small firm may face labor-relations tensions or human resource scarcity in the labor force (Marchington, Carroll, & Boxall, 2003). Small- and medium-sized enterprises have to contend with a complex diversity of issues and it would be disingenuous to consider them a homogenous group defined only by the attribute of size.

This chapter focuses on the smaller firm that is entrepreneurially engaged. It may be operating in a business sector such as knowledge-production, information technology, or innovation. Entre- preneurial SMEs are marked by their orientation towards the markets in which they operate. They recognize the potential, and also the volatility, of these markets and they deploy core competen- cies, strive for innovative products and services, maintain competitive advantages, and seek to access expanding social capital networks (Felicio, Couto, & Caiado, 2012). To be implemented, strategic possibilities first have to be considered and then selected. In some market sectors, such as information technology and high-tech, it is common for the firm to be team-managed; how- ever, most SMEs are created and directed by a single entrepreneur-founder (Carland & Carland, 2012). It is the entrepreneur-founder who has to commit to a strategic orientation, which may ultimately adopt strategically-orientated HRM. The entrepreneur-founder is therefore a critical gatekeeper for HRM introduction.

Entrepreneur-founders may consider an entre- preneurial utilization of their assets, striving “to orchestrate activities and resources/assets within

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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises

the system of global specialization and co-spe- cialization… create/shape the market in ways that enable value to be created and captured… main- tain a good fit with (and sometimes to transform) the ecosystem and markets” (Katkalo, Pitelis, & Teece, 2010, p. 1179). Entrepreneurial utilization may be spontaneous and intuitive; it may also be considered and learned. Entrepreneurial utilization may become more than a personal disposition and develop into a consistent style of management that permeates and guides the firm (Fabi, Lacoursière, Raymond, & St-Pierre, 2010).

Enactments of entrepreneurial management ensure that the SME has an appropriate fit in its strategic landscape. This begins with recognizing the firm’s internal/ endogenous assets and ap- preciating the challenges and opportunities posed by external/ exogenous environmental forces. Strategic awareness requires evaluating products and services, assessing knowledge-capital and human-capital, understanding consumer markets and their dynamics, recognizing rivals and com- petitive advantage, and making judgments about the macroeconomic climate. Strategy determina- tion is the beginning of the process of alignment through which strategic assets are deployed to produce maximum advantage, albeit in a climate of risk and uncertainty. Strategic determination may – or may not – also include “good people management.”

Strategic determination can be daunting for the SME; however, it can also be exhilarating. Different perspectives have to be considered, but there is usually a lack of specialized analysts and growing complexity. A configurational approach is one way of dealing with this complexity. Con- figurational approaches embrace the totality of the strategic analysis, regarding it as a unified problem rather than a series of isolated and disconnected parts. Made famous by Miles and Snow (2003), configurational approaches accept complexity as an inevitable and normal business condition. They also recognize that inevitably there will be

a number of quite different pathways to approach what seem to be very similar strategic objectives.

Configurational approaches may be adopted on the recommendation of consultants; however, they may be adopted intuitively by entrepreneur- founders who are facing the natural complexity of the strategic scene (Hienerth & Kessler, 2006; Pittino & Visintin, 2009). Some researchers, for ex- ample, have found that strategic decision-making in Australian micro-firms is “remarkably intuitive and heuristic, suggesting that micro-firms might be a unique kind of firms that use nonrational mechanisms to make their strategic decisions… the [data] search is passive, by means of informal sources… idiosyncratic characteristics impregnate the decision-making” (Liberman-Yaconi, Hooper, & Hutchings, 2010, p.89). Other researchers, while noting the heuristic nature of the process, have found that the SME decision-making is more complex and nuanced (Gibcus, Vermeulen, & de Jong, 2006).

In trying to understand how strategic align- ment decisions are arrived at in the SME, a configurational approach provides a template against to assess outcomes. Such an analysis it is not used prescriptively to arrive at a priori con- figurational recommendations; rather, it is used descriptively to identify a posteriori clusters of attributes that have been recognized as salient in the firm’s strategic determination (Miller, 1981). The overall vision of challenge and solution – the gestalt – will obviously be seen differently by dif- ferent entrepreneur-founders; however, it seems that the initial process of assembling the pieces of the jigsaw puzzle is remarkably similar.

STRATEGIC CONFIGURATION AND HRM INCLUSION

Configuration approaches recognize the complex- ity of the operating environment, strategic assets deployment, and their interconnectedness and of- fer “a systemic and holistic view of organizations

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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises

where patterns or profiles rather than individual independent variables are related to an outcome such as performance” (Fiss, 2007, p.1180). Strate- gic configuration recognizes a systems approach, in which elements are regarded as co-dependent and where changing one of them will inevitably lead to changes in the others. Although a strategic configuration may select specific elements from within the system, it also considers the integrity and holistic nature of the element cluster from which the element was taken. Strategic configuration is not designed to provide a universal “best prac- tice” solution to problems encountered; instead, it recognizes an integrated pattern (gestalt) that suggests multiple patterns and solutions, all of which may apply to the uniqueness of the context encountered (Delery & Doty, 1996).

Using a configurational approach, Raymond, St-Pierre, Fabi, and Lacoursière (2010) identi- fied differing strategy considerations employed by small firms in Canada and France. In using this approach model to better understand stra- tegic formulation, they assumed four connected component: (1) the entrepreneur-founder’s char- acteristics; (2) his or her strategic orientation; (3) the firm’s strategic configuration; and, (4) a set of controlling variables. The entrepreneur’s personal characteristics (personal disposition, competence, and motivation) are fundamental in shaping and mediating his or her strategic orien- tation. The entrepreneur’s strategic orientation is then enacted through the specific selection of assets – such as networks, technology, products, markets, and perhaps HRM – that are considered appropriate in the firm’s strategic configuration. Once the strategic configuration is decided and deployed, it is subject to a cluster of controlling variables – such as size and age of firm, industrial or service sector, power of consumers – that medi- ate and moderate its effectiveness. To understand whether HRM is included or even considered in the strategic configuration, it is useful to explore the links in this chain: founder characteristics, strategic orientation, and strategic configuration.

Characteristics of the Entrepreneur-Founder

The influence of the entrepreneur-founder plays a pivotal role in the firm’s direction and strategy selection. The entrepreneur-founder has a strong identification with the firm, and also possesses a unique set of personality traits, experience, so- cial networks, organizational competencies, and propensities for risk and growth (Baum & Locke, 2004; Wiklund, Davidsson, & Delmar, 2003; Wincent & Westerberg, 2005). Early work on the psychological characteristics of entrepreneur- founders was often inconclusive, or contradictory, prompting some to suggest that this avenue of inquiry was either closed or at least a dead-end (Gartner, 1988; Low & MacMillan, 1988). More recent meta-analytical reviews, however, suggest that recurring psychological attributes are associ- ated with entrepreneurial engagement and success (Shane, Locke, & Collins, 2003). Psychological characteristics cannot be isolated from the constel- lation of economic, social, and cultural variables associated with entrepreneurial behavior, nor can they alone predict success: neither can they be neglected. Entrepreneur-founders and their character traits are intimately identified with the firm: their attitudes are part of its culture; their behavior is dominant in its operations (Leppard & McDonald, 1991).

• Achievement Motivation: The motiva- tion drive to accomplish something con- sidered personally significant was original proposed by David McClelland (1961; 1990). Collins, Hanges, and Locke (2004) found a significant correlation between achievement motivation and entrepre- neurial performance. In a meta-analysis, Stewart and Roth (2007) also found that motivational levels were significantly higher in those who founded new business ventures (growth-focused) compared with non-entrepreneurial managers (income-

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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises

focused). Achievement-need has a central role in the entrepreneur-founder’s creation and management of a SME; however, na- tional culture also plays a part in manner in which this need is expressed. For example it has been suggested that the entrepreneur descendants of Latin-Americans in Japan realize their need for achievement by im- proving existing business systems with “courage and determination”; whereas, indigenous Japanese entrepreneurs tend to seek achievement though confronting the “lofty challenges” of new business creation (Rahman & Rahman, 2011, p. 110).

• Locus of Control: Some individuals per- ceive present conditions and future out- comes as the result of their personal effort: control over events is an internal dispo- sition. Others attribute what happens to them as the result of external forces that are beyond personal control (Rotter, 1966). In Western entrepreneurs, a number of studies suggest a positive correlation be- tween a high internal locus of control and performance, both anticipated and actual (Boone & DeBrabander, 1993; Boone, DeBrabander, & Van Witteloostuijn, 1996). Although locus of control is gener- ally considered a psychological character- istic, it may also be moderated by social and national cultures dimensions. Western European national cultures tend to have high individualism and low uncertainty avoidance dimensions; whereas, in coun- tries such as China low individualism and high uncertainty avoidance may resonate with a lower internal locus and even with a Confucian heritage (Fuller, Spears, & Parker, 2010). Although internal locus of control has a robust association with en- trepreneurial behavior, it alone is a poor predictor of entrepreneurial success (Lii & Wong, 2008).

• Tolerance for Ambiguity: Life situa- tions, and certainly business environment, are rarely clearly defined and sharply fo- cused. Our knowledge of them is usually incomplete and tentative, and we may ac- knowledge that what is confronted is am- biguous and open to different interpreta- tions. Confronted with overly-complex or ambiguous situations, some individuals see them as essentially challenging while others consider them unsettling and threat- ening (Budner, 1962). Studies have sug- gested that an entrepreneurial disposition is associated with a greater tolerance for ambiguity, which might be expressed in a greater propensity for innovation and cre- ativity (Carland, Carland, & Aby, 1989; Tegano, 1990). Research findings, mostly from Europe, also show that high toler- ance for ambiguity and high internal locus of control seem paired and that both con- structs correlate positively with entrepre- neurial behavior (Cools & Van den Broeck, 2007). There is undoubtedly a national cul- ture dimension that has to be considered: although trait theory can shed light on the likelihood of entrepreneurial engagement, entrepreneurial behavior is expressed within a context of a supportive culture, society, and economy (Okhomina, 2010).

Strategic Orientation of the Entrepreneur-Founder

The dynamics of entrepreneurial SMEs have been attributed to entrepreneurial orientation: a propensity for innovation, pro-activeness, and risk-taking (Covin & Slevin, 1991; Miller, 1983). Lumkin and Dess (1996) also recognized these three dimensions, but added two more: autonomy and competitive aggressiveness. All of these be- haviors are expressions of the personal attributes and orientations of their entrepreneur-founders, representing the extent to which these individuals

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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises

are “inclined to take business-related risks, to favor change and innovation in order to obtain a com- petitive advantage for their firm, and to compete aggressively with other firms” (Covin & Slevin, 1988, p. 218). Attitudes towards risk-taking, pro- activity, and environmental hostility are all located in the entrepreneur-founder’s personal predispo- sition; however, as has already been mentioned, it is important to appreciate that these attitudes are significantly shaped by the local and national culture within which the SME operates (Kreiser, Marino, Dickson, & Weaver, 2010; Razak, 2011; Tang & Hull, 2012).

Individual dimensions of entrepreneurial ori- entation are not directly linked to specific strategic adoptions. Entrepreneurial orientation is also not reliably linked to firm growth; although, it seems to play an antecedent role. For growth of the firm to take place, it seems that a general entrepreneur- ial orientation needs to be purposefully deployed through the choice and use of specific strategies. This may not result in the growth of the firm, because the strategies employed are subject to controlling variables in the internal and external environments (Moreno & Casillas, 2008; Wiklund & Shepherd, 2005).

Entrepreneurial orientation is a general pre- disposition towards behaviors; strategic orienta- tion realigns these behaviors in specific strategic approaches. Venkatraman (1989), for example, saw strategic orientation expressed in approaches such as aggressiveness, analysis, defensiveness, futurity, pro-activeness, and riskiness. Successful entrepreneurs develop a strategic orientation that is sometimes recognized and articulated, but it may also remain intuitive and spontaneous. Once formulated – or intuitively sensed – the basic strategic orientation is express in a specific stra- tegic configuration. The strategic configuration identifies and makes salient the assets that have been considered and the ways in which they will strategically complement one another. Typically, assets include the firm’s propensity for innovation; its research and development capability (Thornhill,

2006); the firm’s social and operating alliances and networks (Watson, 2007); and – importantly for this discussion – the firm’s appreciation of the synergistic role of HRM (Kotey & Sheridan, 2004).

Strategic Configuration and the Inclusion of HRM

Potentially, HRM can provide more than a reac- tive power or pragmatic solution; however, to do more than this it must first be recognized and then recruited into pro-active strategies (Shanks, Seddon, & Wilcocks, 2003). It is important for the founder-entrepreneur, or the HR practitioner working with the firm, to appreciate that config- uring HRM as a strategic element provides “the opportunity to focus on adding strategic value, thus transforming the HR role from one of administra- tor to a strategic partner” (Dery & Wailes, 2005, p. 266). It challenges HR practitioners to develop a sense of strategic vision, to acquire the com- petencies to implement that vision in a complex environment, and to communicate these potential with the entrepreneur-founder. Optimally, the HR practitioner should be sensitive to the founder’s characteristics and personal strategic orientation, understanding how they have developed and why they may act as barriers – or gateways – to HRM inclusion in the firm’s strategic configuration.

In the process of inclusion within the small firm, HRM is challenged by its changing function and remembered past: a move towards strategic orientation, clouded by persistent memories of its administrative legacy. Raymond Caldwell (2003), recalling these old ambiguities and new uncertainties, cautioned that the HR manager must “develop an acceptable, if necessarily shift- ing modus operandi between competing ideals, rationales, and conflicting roles, each with their own logic and justifications…. [proving] they are the undisputed champions at surviving the challenges of role change” (p. 1003). In shifting the modus operandi of HR there are a number of actors that may have a significant role in the

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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises

firm: administrative experts, employee champi- ons, senior partners, and change agents (Ulrich, 1997a; 1998). If HRM is to assume a pro-active strategic partnership a great deal depends on the entrepreneur-founder understanding of its poten- tial, the ability of the external HR practitioners to bring about change, or the presence of resident “HR champions” in the decision-making process of the firm (Cassell, Nadin, Gray, & Clegg, 2002; Urbano & Yordanova, 2008).

When HRM has been adopted in the small- sized firm, there is a growing record of its ability to add strategic value: delivering higher-quality intake to the human resource base (Williamson, Cable, & Aldrich, 2002); contributing to labor productivity (Patel & Cardon, 2010); augmenting human relational capital (Welbourne & Pardo-del- Val, 2009); developing core competencies (Sund- berg, 2001); enabling increased productivity (Fabi et al., 2010; Raymond et al., 2010); and providing a unique competitive advantage that is difficult for competitors to replicate (Chow, Huang, & Liu, 2008). All of these potential advantages require HR practitioners to be accepted as part of the change process and strategic partners in the firm’s future; however, HRM repositioning is not untroubled and sometimes HR practitioners experiences difficulty in their new roles (Chiu & Selmer, 2011; Yusoff, 2012). Katrina Pritchard (2010).

Challenges to HRM Inclusion in SME Strategic Configuration

Studies consistently demonstrate that HRM can enhance entrepreneurial culture and organizational commitment, especially in high-value knowledge sectors (Giauque, Resenterra, & Siggen, 2010; Schmelter, Mauer, Börsch, & Brettel, 2010). Strategically aligned HR practice can positively impact growth and performance of the small- and medium-sized enterprise by producing higher profits, despite the additional costs associated with HR personnel and policies (De Kok & Den Hartog, 2006; Sels et al., 2006; Zheng, Morrision,

& O’Neill, 2006). Commenting on the introduction of high-involvement practices and work processes, Mark Ciavarella (2003) noted that “whatever the reason entrepreneurs have for not [implementing these] initiatives from the start, the outcome is clear – it will take many more resources to initiate the practices later in the organization’s development than implementing them at the very creation of the firm” (p. 353). Others have also been blunt about the impact and rational adoption of HRM in the SME: “HR practices seem to matter; logic says it is so; survey findings confirm it” (Ulrich, 1997b, p. 304).

Yet – despite the evidence of empirical stud- ies, the increased profitability, and the apparent logic of good people management – HRM is often neither considered nor included in SME strategic formulation. What are the challenges that block its wider adoption?

• Entrepreneur-Founder Characteristics: HRM adoption can be blocked, delayed, or promoted by the psychological perspec- tives of the entrepreneur-founder. A strong personal achievement-need motivation may inhibit the entrepreneur from seeking external alternatives or relying on outside alliances. Adding players to the firm’s op- erational landscape can challenge the en- trepreneur-founder’s locus of control and contribute to higher degrees of perceived ambiguity: even in large-scale firms the introduction of formalized HRM has been viewed by incumbents as a disruptive in- trusion (Van De Woestyne, Dewettinck, & Van Bruystegem, 2010). The entrepre- neurial-founder has constantly to decide on issues about which he or she has little experience, or limited understanding, and it would be disingenuous to believe that the “logic” of HR utilization is compelling. If strategic HR implementation is introduced successful, there may be an eventual sense of satisfaction for the entrepreneur-found-

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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises

er; however, even considering the issue may just as likely result in personal con- flict, doubt, and avoidance (van Gelderen, van der Sluis, & Jansen, 2005). Projections of leadership style are important and the entrepreneur-founder may have adopted an inward-looking egocentric style, cen- tered on private agendas and short-term goals. Alternatively, the style might be outward-looking, focused on the develop- ing collective that constitutes the firm. A more collaborative style may favor HR in- clusion, because the leader sees the firm’s success as a joint endeavor involving em- ployee participation As Todorovic and Schlosser (2007) observed: “a charismatic leadership style (with resulting organiza- tional citizenship behaviour by the follow- ers) will amplify the EO [entrepreneurial orientation]-performance relationship, while the Machiavellian leadership style (with corresponding follower behaviour) will reduce the EO-Performance relation- ship” (p. 304).

• Entrepreneur-Founder’s Strategic Orientation: A critical aspect of strate- gic orientation is the entrepreneur-found- er’s attitude towards growth. Hamel and Prahadal (1989) identified a construct that they termed “strategic intent,” in which value is placed on growth-related out- comes and in particular the internal, or or- ganic, growth of the firm. Strategic vision depends on orientation and intent. Through exploring, articulating, and sharing strate- gic intent, entrepreneur-founders can col- laboratively include other senior players in developing a strategic vision for the firm; however, articulating strategic intent may be difficult (Ice, 2007; Prahadal & Hamel, 1990; Verma, 2009). They may recognize their own entrepreneurial dispositions, but at the same time confuse them with stra- tegic intent, which is a more thoughtful

and considered “quest for new opportuni- ties and thereby a means of identifying a misfit between current resources and aspi- rations” (Døving & Gooderham, 2008, p. 848). There is also a connection between the intensity of the entrepreneur’s feelings towards products, technology, and con- sumers and the subsequent construction of strategic intent (Choi & Shepherd, 2004); however, its construction might also be in conflict with deep-seated personal senti- ments and attitudes. Formalized strategic planning tends to subordinate personal sen- timents and attitudes; however, in small- and medium-size firm strategic planning is generally not formalized and the entrepre- neur-founder’s personal sentiments play a much more dominant and determining role in the process (Miller & Cardinal, 1994; Wang, Walker, & Redmond, 2007).

• Strategic Inclusion of Human Resource Management: The strategic orientation is often expressed in preferences for produc- tion, marketing, or customers and these are reflected in the firm’s strategic configura- tion (Blois, 2001; Enright, 2001; Noble, Sinha, & Kumar, 2002). HRM can con- tribute to these preferred approaches, but does so by addressing antecedent factors such as richer and more flexible human capital. HRM can be a significant com- ponent of the strategic mix, but because of its indirect contribution it may be seen as distant and not considered as a pro-ac- tive component of strategic configuration. Strategic configuration also depends heav- ily on personal knowledge, prior experi- ence, and knowledge-exchange through social networks. In the early stages of the firm, networks usually link those who have similar backgrounds and common values. Later, founder-entrepreneurs may develop more extensive networks and ac- cess diverse perspectives and experiences,

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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises

whether in recruiting staff or in awareness of HRM potentials (Leung, 2003). In a study of American micro-enterprises (10 or less employees), Barczyk, Husain, and Green (2007) found that owners relied on prior personal experience to administer tra- ditional HRM functions in-house, believ- ing they had sufficient knowledge to do so. They may have possessed such knowledge; however, it is unclear whether they were experienced in strategic HRM approaches or had the networking richness to investi- gate such approaches.

Solutions and Recommendations

Utilizing the synergist potential of HRM in the SME can only take place if the founder- entrepreneur considers it relevant to the firm’s strategy. In reviewing the absence of a strategic HR approach, several barriers to its inclusion have been suggested. These barriers can also be understood as challenges. The challenge is for the SME to have an understanding of how HRM might be beneficial. It may well be that HRM is considered and rejected, and it may be that a rejection is appropriate; however, the possibility still exists that HRM was never considered in the first instance.

HRM may not appear in the firm’s strategic configuration because of the entrepreneur- founder’s attitudes towards growth, autonomy, or ambiguity. These may be amenable to change, but it has to be kept in mind that the inclusion of strategic HR can only add value if they resonate with the culture, values, and vision of the firm that has been created by the entrepreneur-founder. Should the founder seek other perspectives, it is critical that the firm’s HR champions, or exter- nal change-orientated HR consultants, address the complexity of the organization, recognize the importance of the entrepreneur-founder, and identify attitudes that block HRM inclusion in strategic configuration.

With entrepreneur-founders, it is critical that HR knowledge and benefits address real problems and inspire realistic adoption. That requires insight, vision, and confidence on the part of HR practi- tioners. Raymond Caldwell (2003) saw HRM as caught between an administrative past and “and a future HR self-image that may ultimately be beyond their reach… [they] may be unable or unwilling to embark on the daunting journey of reinvention that might finally assure them of their professional status, power or value creating role” (p.1003). Confidence becomes reified in actions and results. As Caldwell (2004) later conceded: “If we recognise these persistent gaps, and judge them realistically… then it is clear that personnel and HR practitioners may have to embrace a self- fulfilling prophecy of practice, driven more by the incrementalism of action rather the reassurances of facts” (p. 213).

More diffuse initiatives might also impact the adoption of strategically orientated HR practice in SMEs. In higher education, business administra- tion courses and programs traditional emphasize large-scale enterprises. When included at all, the SME is portrayed as an exotic and peripheral creature from which larger and more interesting firms may emerge. Given the increasing economic and social importance of the SME, time should be given to the complexities and vitality of the SME in taught courses, internship programs, and under- graduate research. In many countries, particularly North America, the increasing professionalization of HRM has distanced it from the involved people management that its own rhetoric advocates. This outcome is common in the professionalization of many people-centered activities, not just HRM.

A better connection with the complexities, challenges, and realities of the SME – gained through focused HRM education and appropriate internships – might be productive for all involved. Within higher education, more extensive engage- ment with surrounding SME communities is particularly valuable. Business Administration departments can add value to themselves and the

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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises

communities in which they are embedded by mov- ing beyond the campus: initiating collaborative programs, disseminating knowledge, providing training, supporting research and development, offering consultation, and creating knowledge- centers that incubate innovative ideas and ap- proaches (Karlsson, Booth, & Odenrick, 2007; Pecas & Henriques, 2006; Pickernell, Clifton, & Senyard, 2009).

At a regional and national level many contend that market forces shape behavior more profoundly than policy initiatives. This is partially true; how- ever, the positive impact of regional and national policy for SMEs and entrepreneurial enterprises is well-documented for the Netherlands, the E.U., North America, and Asia over the last ten years (Bakkenes, Schouwstra, & Snijders, 2009). Given the economic importance of SMEs, the challenges they face, and their contribution to employment and society, local and national government has a vested interest in improving SME practices and performances. An OECD (2002) report considered small- and medium-size firms in Canada, Finland, Germany, Japan, and the UK. It concluded that managerial weakness lay at the heart of many business failures, recommended governmental initiatives in areas such as training. The long-term viability and the success of SMEs can benefit from similar attention being paid to strategic HRM knowledge and practice. Responsive local policies and initiative might provide coaching and mentoring.

FUTURE RESEARCH DIRECTIONS

A persistent problem is defining the small-and medium-size entity. Statistical generalities (num- bers of employees, asset base, and revenue) do little to express the diversity, uniqueness, and dynamism of the small firm in different locations and in different market sectors. Indeed, size cri- teria and statistical approaches contribute to the homogenization of the small- and medium sized

firm, obscuring their differences. This chapter has focused on an entrepreneurial intent of those who lead SMEs, usually the dominant entrepreneur- founder; however, it is recognized that many SMEs are not inherently entrepreneurial. Typographies are useful, but research is required to provide a more effective distinction and classification of small firms that does not obscure the richness and diversity of differently-orientated firms operating in different market sectors.

Ethnographic research might explore individ- ual motivations, concerns, and pathways of those who start SMEs. Further research on individual diversity could provide a clearer typography and a sharper focus on the motivation, intent, prior experience, and present social networks of those who create SMEs (Roberts, Klepper, & Hayward, 2011; Sullivan & Marvel, 2011). Further research is also required to understand the decision-making processes in the SME, particularly in terms of strategic alignment and configuration. These areas remain fragmented, partial, and under-researched.

Research might further explore national cul- ture difference, which is particularly relevant for SME success is an increasingly globalized world with many emerging and transitional economies. HR practice is not a set of universal prescriptions that can be exported or advocated; instead, HR is concerned with people embedded in social and cul- ture realities that need to be recognized. Research in newly developing and transitional economies might clarify the challenges and opportunities for crafting HR practices that effectively responds to these differences (Cunningham, 2010; Psychogois & Wood, 2010).

Case studies are needed to explore how strate- gically orientated HR practices shape the actual performance of SMEs. “Best-fit,” as opposed to “best-practice,” is commonly advocated; however, research is needed to identify specific contexts, problems, and solutions. This might provide bet- ter answers to questions about the circumstances under which strategically aligned HRM is ef- fective. Research might focus on the individual

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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises

and collective experience within the SME, in an attempt to unravel questions about the ways in which different work place constituents recognize HRM success.

Most research on SMEs is cross-sectional, looking at a specific moment in time. This has the advantage of being convenient and timely; however, longitudinal studies would better inform the community of HR practice about how HRM becomes involved in strategic development, how problems are recognized and defined, how solu- tions are considered and implemented, and the degree to which these solutions are ultimately successful. Research initiatives might consider the qualitative changes that result within the culture and visions of the SME, as well as the quantitative impact of HR involvement.

CONCLUSION

HRM has evolved to resolve problems in the workforce and in the relationship between em- ployees, employers, and the world beyond. As an evolving discipline it has retained its original administrative and functional concerns, but it has also moved towards a more all-inclusive consid- eration of strategic challenges. As such, HRM is neither a simple set of procedures and practices nor a simplistic body of knowledge and practice. Increasingly, it is called upon to add value to the strategic orientation and the development of the firm in “contextually plural world.”

Small- and medium-size enterprises are best understood as inhabiting worlds of contextual plu- rality. HRM does not offer a miraculous “seamless garment,” but it does provide a “quilt of distinct policies and practices” that can contribute to the SME’s strategic formulation. HRM, strategically applied, has a track record of adding value to SME strategic assets and growth, yet it is often

not adopted by entrepreneur-founders. Looking at strategic formulation from a configurational perspective, there is a sequence of steps leading to the recognition of a strategic vision: competen- cies and characteristics of entrepreneur-founders, their strategic orientation, and the firm’s strategic configuration.

Potentially, HRM can be considered as a catalyst for enhancing performance: a synergistic element for future development. Sometimes, its inclusion comes from the dominant influence and perspective of the entrepreneur-founder; some- times, it comes from a resident HR champion. Sometimes, HRM inclusion comes about through the advice of external consultants and advisors. Sometimes, strategic HR approaches are consid- ered and then rejected; sometimes, however, they are never considered at all.

The small- and medium-size firm can consider and reject HRM for pragmatic reasons: added cost versus anticipated benefit, firm size and a low num- ber of employees. These are rational objections that can be empirically evaluated, and it may be that strategic HR approaches neither add sufficient value nor provide desired outcomes. However, there are other scenarios. Strategic HR approaches are unknown, or known but misunderstood; they are not thought of as solutions because they did not suggest themselves as answers to the entrepreneur- founder’s questions. In these scenarios, resident HR practitioners or external consultants can at least provide reasoned arguments as to why HR pathways might have a synergistic impact on strat- egy. HRM is not an inevitable constituent of the strategic configuration, but it has made valuable contributions to the success of some small firms. HRM provides a synergistic potential; however, it can only provide this if it is first considered and then included in the SME’s strategy. The challenge for HR practitioners is to make that consideration and inclusion happen.

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KEY TERMS AND DEFINITIONS

Entrepreneur-Founder: The creator of a firm, who remains dominant and pervasively involved with its growth and development, and who is focused on entrepreneurial engagement rather than income-maintaining security.

Entrepreneurial Orientation: Personal out- looks or proclivities of the firm’s leader that are intuitively considered when competing with other players in a marketplace. They include aggressive- ness, risk-taking, and innovation. To potentially secure competitive advantage, or reduce risk, the personal dispositions of entrepreneurial orienta- tion must be translated into actions and activities through strategic orientation.

Human Resource Management (HRM): The managerial process of recruitment, maintenance, and improvement of the human assets of a firm to provide a workforce that is sufficiently fit and flexible to deal with current operations, ongoing changes, and strategic positioning.

Small- and Medium-Sized Enterprise (SME): A firm with limited financial capital, unique human capital, and a leader motivated to create and exploit entrepreneurial niches in a given market or economy.

Strategic Configuration: An enactment, in which the firm’s resources are identified, selected, and aligned in anticipation of implementing a course of action to address a specific threat or opportunity. The configuration includes resources such as innovation potential, R&D, networks, and HRM.

Strategic Orientation: Personal characteris- tics considered and purposefully brought to bear on situations identified as posing threats or op- portunities for the firm. Characteristics include aggressiveness, analytical scrutiny, defensiveness, a concern for the future, pro-activeness, and a propensity for risk-taking.

Synergism: A context in which one element exerts a contributing influence on others and thereby significantly augments their combined effectiveness. While it might be unclear how the synergism works, the result is to produce a com- bined output greater than the anticipated sum of the individual constituents.

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Chapter 5

Managing Human Resources in Family Businesses:

A Review on the Current State of Research and New Proposals for the Future

ABSTRACT

Although a lot of research has been carried out in the field of family businesses in recent years, not much of it has focused on human resource management. After compiling the major studies, both negative as- pects (e.g. nepotism) and positive ones (e.g. employee commitment) have been identified. Therefore, the authors propose high-performance human resources practices to reduce the negative impact of family in business and boost the positive effects, increase their human capital, and achieve a competitive ad- vantage in this field. Finally, the authors provide key insights for practitioners, family business owners, and managers, and they propose future research directions.

INTRODUCTION

Family businesses play a significant role in global economy, employment creation, technological in- novation and economic progress (Dawson, 2012; Zahra, 2005; Zahra, Hayton, Neubaum, Dibrell and Craig, 2004). It is estimated that family businesses are responsible for 70% to 90% of global GDP annually (Family Firm Institute, 2012). This has

encouraged the increase in research in this topic and family business research is growing more and more, becoming the only area of research that has experienced exponential growth in the last years (Zellweger, Eddleston and Kellermanns, 2010).

This positive development is mirrored by the three annual conferences exclusively oriented to family business research: Family Enterprise Re- search Conference (FERC), International Family

Santiago Gutiérrez-Broncano University of Castilla-La Mancha, Spain

Mercedes Rubio-Andrés San Pablo CEU University, Spain

Pedro Jiménez Estévez University of Castilla-La Mancha, Spain

DOI: 10.4018/978-1-4666-4731-2.ch005

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Managing Human Resources in Family Businesses

Enterprise Research Academy (IFERA) and EIAS Workshop on Family Firm Management Research. Furthermore, two specific international journals rank very near the top - Family Business Review and Journal of Family Business Strategy.

Traditionally, research has focused on two distinct aspects: differences between family and non-family business, and variations in behaviour among family firms. But nowadays, we find stud- ies that have examined the link between family business resources/capabilities and its competitive advantage (e.g. Zellweger et al., 2010). Recently, Danes, Stafford, Haynes and Amarapurkar, (2009) have explored how human capital, social capital, financial capital and management structure con- tribute to family business performance.

Despite all this, family business literature has not devoted special attention to human capital (Dawson, 2012) and it suggests that family busi- nesses have difficulties managing their human resources, especially when it concerns family members or the transition from the founder to the successor (King, Solomon and Fernald, 2001). In a review of family business literature, Desman and Brush (1991) reported that only 4% of 202 citations reviewed, dealt with human resource management.

In this situation, family businesses need to de- velop new human capital that can take them beyond established routines and embedded relationships (Wright and Kellermanns, 2011). Human capital, according to the resource-based view (RBV) is the most valuable and difficult type of resource to imitate because it is to a large degree, the product of complex social structures that have been built over time (Barney, 1991). While tangible assets are typically imitated and thus unlikely to be a source of sustainable competitive advantage (Bar- ney, 1991), human assets are often hard to imitate (Gottschalg and Zollo, 2007). Recent research has empirically shown the positive relationship between human resource management practices and important organizational outcomes such as productivity, turnover, and firm performance

(Delaney and Huselid 1996; Huselid 1995; Arthur 1994), but this relationship has been analysed less often in the family business context.

In this chapter, we start with a review of the main characteristics of family businesses, we analyse the effects of family businesses on aspects of human resource management and we review the main studies on human resource practices in family businesses. Then, we focus on high perfor- mance work practices (HPWP) as the best way to manage human resources in family business and to reach a higher commitment from both family and non-family members in this type of companies. Finally, we provide some practical suggestions and examples for research opportunities and research questions based on this chapter.

THE IMPORTANCE OF HUMAN CAPITAL IN FAMILY BUSINESS

The theoretical definition of the term “family business” is still open to debate (Chrisman et al, 2005). Traditionally, scholars have understood the family business is a mix of two systems: family and business. The definition has focused on a combination of the four components involved in the family’s involvement in the business, namely ownership, governance, management and trans- generational succession (Chua, et al, 1999). If we are looking for a theoretical definition, we can understand the family business as the family’s influence over the strategic direction of a firm (Davis and Tagiuri, 1989), or as the intention of the family to keep control (Liz, 1995), or maybe as one with the unique, inseparable, synergetic resources and capabilities arising from family in- volvement and interactions (Habberson, Williams and MacMillan, 2003). In a recent study, Klein et al. (2005) developed and validated a scale to measure how the family’s involvement is used to influence the business. In this way, this involve- ment is showed as a continuous variable rather than as a dichotomous one.

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Managing Human Resources in Family Businesses

Quite often, family involvement makes it possible for these businesses to have unique characteristics and resources which give them an advantage over non-family business. Among these, Zahra et al. (2008) cite the following: reduced agency costs through owner control, longer-term investment horizons, increased commitment to intergenerational wealth, lower transaction costs due to a higher level of trust, and a less formal or more flexible organizational structure (Geer- aerts, 1984). All these resources and capabilities related to family involvement and interactions are denominated “familiness”. Familiness is defined as the idiosyncratic bundle of resources and ca- pabilities resulting from the interaction between the family and business systems (Zahra, 2005, Habberson et al., 2003).

With this potential source of advantages, some studies show how family businesses have achieved and sustained superior levels of finan- cial performance along the time (Anderson and Reeb, 2003; Mishra, Randoy and Jenssen, 2001). Familiness is considered so important because it reflects the positive aspects of the overlapping subsystems of family and business (Habbershon et al, 2003), and is often used as a unique ele- ment that can differentiate family and non-family firms (Pearson, Carr and Shaw, 2008). But these interactions between family and business are not always positive. Recent research shows that family influences can have negative effects on the family business too (e.g. Kellermanns, Eddelston, Sarathy and Murphy, 2012).

Pieper (2010) supports the view that a greater use of psychological theories in family business research, will improve the understanding of it. Concepts such as motivation, power and author- ity, obedience, group thinking, group cohesion, leadership or commitment are required to be taken into account when implementing a human resource policy adapted to family business.

In the same direction, human resource manage- ment literature is based on the premise that human resources are vital to an organization’s strategy

because, through their behaviour individuals have the potential for the formulation and implementa- tion of the strategy (Colbert, 2004). In this way, it is agreed that the individuals’ knowledge, skills and abilities are not sufficient to create value for an organization, unless they are used in a coor- dinated and organized way (Colvin and Boswell, 2007; Wright et al 1994). In this work we are accepting that it is the individuals, and not the firm, who own the human capital, and we claim that while family businesses need a high level of knowledge, skills and abilities a better alignment between the individuals and the organization is essential too (Wright et al 2001) in order to achieve a competitive advantage. Family businesses need to gain an alignment of interests, in order to create a committed workforce (Boxall, 1996).Thus, if family businesses do not possess a superior pool of human capital, in terms of knowledge, skills and abilities, they should reach a competitive advantage, through a better alignment between the human capital pool and the strategic goals of the firm (Gottschalg and Zollo, 2007; Wright et al, 2001).

Astrachan and Kolenko (1996) argue that inap- propriate human resource management is often the main cause of the high failure rate in this type of companies. The traditional key to develop human capital in family businesses has been separating family and business because sometimes family businesses have been regarded as less profitable than non-family ones (Dawson, 2012). Human capital has included knowledge, skills and abilities, but recently Hoy and Sharma (2009) include an intellectual and psychological dimension. In the context of family firms, human capital includes factors such as commitment or emotions, as well as integrity, compassion and forgiveness of family members (Dawson, 2012, Puhhakka, 2002) and all these factors are denominated “family human capital”.

In literature family human capital is consid- ered one of the most important resources for family businesses (Sirmon and Hitt, 2003), and

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Managing Human Resources in Family Businesses

represents a potential strategic resource for the firm (Sorenson and Bierman, 2009), because it is considered one of the most valuable resources that family businesses have.

In this way, we will try to propose an expla- nation of how the family can contribute to firm success. Some scholars have used the term “family human capital”, referring to knowledge, skills and abilities of family members (Danes et al, 2009; Salvatto and Melin, 2008; Carney, 2005, Simon and Hitt, 2003) but including factors such as commitment, alignment of interests, sense of responsibility, etc.

HUMAN RESOURCE MANAGEMENT PRACTICES IN FAMILY BUSINESSES

The literature in the field of human resource man- agement in family businesses shows that family influences can have both positive and negative effects on the family business (Kellermanns et al, 2012). Sometimes, these businesses have been criticised for nepotism when the founder favours relatives. Traditionally, it has been thought that it was extremely difficult for a CEO who is the father, mother or uncle to manage human re- sources objectively with family members (Reid and Adams, 2001).

Astrachan and Kolenko (1994) suggest that this special relation between family and business creates a volatile situation concerning tasks such as employee selection, compensation, appraisal and personal development, which are more dif- ficult in family businesses. In a study carried out analysing 219 family and non-family small and medium enterprises in Northern Ireland, Reid and Adams (2001) found that only 28% of family businesses reported using a formal performance system to assess family members and of that 28%, only 38% report that the remuneration the family members received was based on that formal system of assessment. However, in other cases, founders tend to under-reward their relatives working in the

firm and this “may lead to a situation in which incompetent family employees are retained while competent family employees are driven to seek employment elsewhere” (Lansberg, 1983: 42). If remuneration packages are not based on perfor- mance in family business, it can only create dif- ficulties within the business for other non-family management members.

The principal reason for this is that families are guided by implicit affective principles such as personal needs and long-term well-being, whereas businesses follow economic principles. The norm of fairness between parents and their children is similar to needs; while among siblings, equality is the dominant fairness norm. On the other hand, in the business context, fairness is based on the concept of merit (Lansberg, 1983).

Another problem is the relation between the human resource management systems with regard to selection and retention of employees. Stalk and Foley (2012: 26) claimed that “a job with the company shouldn’t be an entitlement. Family members deserve no special accommoda- tion”. Family firms’ owners are often criticized for employing family members who are less able than non-family members (Chrisman, Chua and Litz, 2004). But a company that selects incom- petent individuals (whether they are “family” or not) can put the firm’s survival at serious risk (Dunn, 1995) and qualified managers may avoid family businesses due to the exclusive succession system, limited potential for professional growth, lack of perceived professionalism and limitations on wealth transfer (Covin, 1994a; 1994b; Horton, 1986; Burack and Calero 1981). This situation is responsible for family businesses often lacking heterogeneity and professionalism in their man- agement teams (Sirmon and Hitt, 2003).

Something similar happens with the appraisal system. The standing of an individual in a family is determined more by “who the individual is” than by “what the individual does” (Lansberg, 1983). Family businesses have to know who contributes the most to the achievement of organizational

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goals and who the least. In the same way, Reid and Adams (2001) find a higher number of non-family businesses using appraisal clearly-defined systems for staff assessment than family businesses and suggest separating ownership and management as the solution to this problem.

Finally, training and development, is another area in which we found different points of view. For the family, training should focus on “whatever is best for him or her”, while for a business, train- ing should focus on developing the abilities and capabilities that will increase the achievement of organizational goals (Lansberg, 1983). Training and development are referred to as the most im- portant human resource practices in family and non-family enterprises but if you ask about invest- ment on training, it is a different thing (Reid and Adams, 2001). These authors suggest that a higher number of non-family enterprises systematically provide their employees with training based on their needs than is the case of family businesses. This causes workplace deviance that violates sig- nificantly organizational norms and, in so doing, threatens the well-being of the organizational and/ or its members (Robbinson and Bennett, 1997). It can include lying, insubordination, abuse of privileges, lack of regard for cost control, produc- tivity losses, loss of reputation, and much more (Eddelston and Kidwell, 2012). In many cases it is frequent to find family businesses having trouble attracting and retaining highly qualified managers because they think that their professional growth will be limited, or that they will be dismissed from succession (Covin, 1994a, 1994b; Burack and Calero, 1981).

Nevertheless positive effects can indeed be found in human resource management in family businesses. In fact, long-term orientation is of spe- cial relevance in the context of family businesses (Sieger, Bernhard and Frey, 2011). Thus, they have a stronger tendency to keep their employees even in times of economic recession (Lee, 2006), and this is likely to lead to increased trust, feel- ing of job security and a higher level of affective

commitment (Le Breton-Miller and Miller, 2006; Astrachan and Kolenko, 1994; Horton, 1986). Other positive attributes of family businesses in human capital include, as we have mentioned above, better interest alignment, identification with the organization, warm, friendly and intimate relationships and the potential tacit knowledge of the family members (Horton, 1986; Donelly, 1964). In a recent study, Dawson (2012) claims that family businesses are more likely than non- family businesses to be characterized by superior alignment of interests between their human capital and organizational goals due to higher external rewards, more flexible job design and stronger socialization systems.

For all these reasons (see Table 1), scholars note that the creation of a family business does not per se guarantee the advantages we have just listed. These will only be reached so long as the concept of “familiness” is developed (Sorenson, Goodpaster, Hedberg and Yu, 2009: 250). They distinguish between when the family is a substan- tive part of the firm, versus merely a symbolic or supportive element that is not integrated into firm behaviour or the organization’s culture (Zellweger et al, 2010).

Some researchers suggest that effective man- agement in family businesses requires the estab- lishment of structures and processes which link management and ownership (Ward, 1987; Lans- berg, 1983). This can be especially helpful in the area of human resource management to improve the practices of selection, compensation and eq- uity, appraisal, training and development and promotion (Reid and Adams, 2001). Literature has indicated that family businesses are slower adopting formal human resource practices when they are compared to their non-family counterparts (Kidwell and Fish, 2007).

Kidwell and Fish (2007), focusing on the wine industry in Australian family businesses, found that establishing formal human resource systems, particularly linked to employee involvement and motivation, was positively related to perceived

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effectiveness of a company´s human resources function, leadership, strategic alignment and profitability.

Another research carried out in Northern Ireland indicated that family businesses lagged behind non-family businesses in implementing human resource management policies and prac- tices but found indications that new generations of family ownership would likely transition toward more formal human resource policies (Reid and Adams, 2001; Reid, Morrow, Kelly, Adams and McCartan, 2000).

Furthermore, when family businesses change ownership (i.e. from owner to sibling partnership or from sibling partnership to cousin consortium) a flexible structure and defined processes are found to be more necessary. Transitions are often periods of uncertainty when the decision makers feel most anxious and vulnerable, and in this moment we need generate high commitment to the new structure (Gersick, Lansberg, Desjardins and Dunn, 1999).

Moreover, an integrated model of human re- source management that contributes to develop

family human capital (Reay, 2009; Shepherd and Haynie, 2009), doesn’t make differences between family and non-family members, helps in creating an organizational identity and builds up commit- ment based on the employees’ perceptions of how they are treated within their family business and that they are treated equally (Van Dick, Christ, Stellmacher, Wagner, Ahlswede, Grubba et al., 2004). All of these features will help to develop working environments in which non-family- member employees feel as though they were “one of the family” and not as an entirely separate group (Carmon, Miller, Raile and Roers, 2010).

Something similar happens with family mem- bers. For instance, cousin consortiums are more complex involving many more individuals, three or more participating family generations, with a large number of in-laws and cousins who are often strangers to each other (Gersick et al, 1999). All this affects the effective commitment of fam- ily members because it is not the same family commitment as when the founder first set up the business. Mintzberg and Waters (1990) suggest that formalization is an inevitable result of growth.

Table 1. Strengths and weaknesses of family business

Strengths Authors Weaknesses Authors

Long-term orientation. Sieger et al, 2011 Nepotism in the decision Making.

Astrachan and Kolenko, 1994

Tendency to keep the employees in times of crisis.

Lee, 2006 Lack of formal performance systems.

Reid and Adams, 2001

High level of trust and commitment among employees.

Le Breton-Miller and Miller, 2006; Astrachan and Kolenko, 1994; Horton, 1986

Remuneration not based on appraisals.

Reid and Adams, 2001

Better interest alignment and higher identification with business.

Dawson, 2012 Tendency to under reward their relatives.

Landsberg, 1983

More potential tacit knowledge. Horton, 1986; Donelly, 1964 Employ family members less able than non-family members.

Chrisman et al., 2004

More flexible job design. Dawson, 2012 Lower training and development system.

Reid and Adamas, 2001

Stronger socialization systems. Dawson, 2012 Abuse of privileges. Eddelston and Kidwell, 2012

New generations are more likely to set formal human resource policies.

Reid and Adams, 2001; Reid et al., 2000

Less use of formal human resource practices.

Kidwell and Fish, 2007

Source: the authors of this paper based on the authors cited.

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And the stage of evolution of the family business is thought to be of highly significant influence (Reid and Adams, 2001).

Therefore, a formal model of human resource management based on commitment from both family and non-family employees is necessary to improve the human capital in family businesses.

HIGH PERFORMANCE WORK PRACTICES (HPWP) IN FAMILY BUSINESSES

In recent years scholars have selected a number of human resource practices which truly bring a competitive advantage to a company and generate benefits. In the beginning, practices concerning information, training, remuneration and empower- ment (Leane and Florkowski, 1992; Lawler, 1986) were selected as the best practices to improve organizational performance. Then, other scholars added more practices such as extensive training and high salaries (Arthur, 1994) or selective recruitment, appraisals systems and job security (Wood and De Menezes, 1998).

Nowadays, although there is little consensus among researchers regarding the specific policies to be included in the configuration of high per- formance human resource practices (Collins and Smith, 2006; Datta, Guthrie and Wright, 2005; Delery and Shaw, 2001; Ferris, Arthur, Berkson, Harrel-Cook and Fink, 1998; Becker and Gerhart, 1996; Delaney and Huselid, 1996), we have found various studies which indicate that this system includes rigorous selection procedures, internal merit-based promotions, cross-trained teams, high levels of training, information sharing, skill-based pay and group-based rewards (Quiao et al., 2009; Sun, Aryee and Law, 2007; Gutrie, 2001, Levine, 1995; Arthur, 1994). Thus, high performance hu- man resource practices consist in gathering intel- ligence, ideas and motivation from all workers as well as having all the employees’ efforts geared towards the firm’s goals (Guerrero and Barraud-

Didier, 2004). This set of practices has been named “high performance work practices” (Delany and Huselid, 1996, Huselid, 1995), “strategic human resource practices” (Hiltrop, 1999, Huselid et al., 1997), “high involvement practices” (Lawler, 1986) or “high commitment practices” (Kwon et al, 2010; Meyer and Smith, 2000).

Literature in HPWP shows considerable evidence that these practices are associated with organizational performance (Wright, Gardner, Moynihan and Allen, 2005; Bartel, 2004; Batt, 2002; Gutrie, 2001; Appelbaum, Bailey, Berg and Kalleberg, 2000; Bae and Lawer, 2000; Huselid, 1995; MacDuffie, 1995; Arthur, 1994) because they render higher levels of motivation, satisfaction, commitment, and production in the employees and promote a more effective firm (Ostroff and Bowen, 2000).

HPWPs signal an organization’s intention to establish a long-term exchange relationship with its employees and most of them are related with high organizational commitment (Smeenk, Eisinga, Teelken and Doorewaard, 2006). Practices such as decentralization, participation, employment security, social interaction, management style, communication and performance appraisal, have been associated with high organizational commit- ment (Meyer and Smith, 2000).

As we saw before, the overlap between family and business systems can often benefit in their first year, when the informal nature of family relations doesn’t normally require a formal human resources model because the identification with the founder’s dream and the employees’ commitment is higher (Lansberg, 1983). The problems appear when the business grows and begins to generate conflicts in the organization, when non-family members and new family members are incorporated to the firm. Although different configurations of human resource management are suited for organizations with different identities (Smeenk et al., 2006), in family businesses, HPWP could help to reduce the negative effects of family on aspects of hu- man resources, as outlined above, improve the

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level of commitment in family and non-family members of the company and gain a sustainable competitive advantage.

A research study of small family businesses in Australia, found that the adoption of formal human resources practices focused on employee involvement and motivation systems, was posi- tively related to perceived effectiveness of a firm´s human resource management systems, strategic alignment and profitability (Kidwell and Fish, 2007). In the same direction, recent research shows how commitment systems aim to increase effectiveness and productivity and to encourage employees to identify with goals of the organiza- tion and to work hard to accomplish those goals (Withener, 2001; Wood and De Menezes, 1998).

But there is a lack of systematic research on commitment in family businesses. Usually in fam- ily business literature, the construct of commitment has been treated as a one-dimensional construct, with no research aiming at understanding the potential differences in its nature (Sharma and Irving, 2005). Commitment in family businesses has been identified as a key desirable attribute because research suggests that it is crucial for these family members to be committed to their business (e.g., Sharma and Irving, 2005; Sharma and Rao, 2000; Chrisman, Chua and Sharma, 1998). Moreover, while much research exists on commitment in the organizational behaviour literature (e.g., Meyer and Allen, 1991; McGee and Ford, 1987; Reichers, 1985; Morrow, 1983) but none in family business literature.

Scholars distinguish among three or four dif- ferent bases of commitment (e.g. Sharma and Irving, 2005; Meyer and Allen, 1991) - affec- tive commitment, normative commitment, and continuance commitment (which includes cal- culative and imperative commitment). Affective commitment has been described “as one of the most commonly research attitudes” (Van Dyne

and Pierce, 2004; Meyer and Allen, 1991). It is defined as the “affective or emotional attachment to the organization such that the strongly commit- ted individual identifies with, is involved in, and enjoys membership in the organizations” (Allen and Meyer, 1990: 2). Normative commitment is based on an individual’s feeling of obligation to pursue a course of action of relevance to one or more targets (Meyer and Herscovitch, 2001; Morrison, 1994). And calculative and imperative commitments (both are dimensions of continu- ance commitment) are based on an individual’s awareness of the costs associated with leaving an organization (Meyer and Allen, 1991).

If a family business wants to maintain and im- prove their employees’ commitment, they should focus on improving their human resource practices and know the relationship between each of them and each base of commitment. With this knowl- edge, the family business will reach a competitive advantage over non-family firms if they manage to extend the highest levels of commitment char- acteristic of the family business culture (Gallo, 1995; Poza, 1995; Aronoff and Ward, 1994), to the non-family members of the firm, who will make bigger efforts because they feel part of the same team and they seek common objectives and benefits for all (Vallejo, 2009).

The key to a human capital that generates competitive advantage is to improve organizational commitment in both family and non-family mem- bers of the business. In this way we integrate family and non-family employees in the same “team” to generate commitment and make sure that they all contribute to reach the objectives. Maybe, those relatives who are not employees will like the idea of the business having a way to manage its human resources which is more objective, formalised, has a good reputation, is clear and contributes to obtain high performance.

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CONCLUSIONS, PRACTICAL SUGGESTIONS AND FUTURE RESEARCH

The need of research in human resource manage- ment in family businesses is increasing, although what literature there is in this field has not paid enough attention to human resource management, which has been a neglected topic for a long time (Astrachan and Kolenko, 1994; 1996).

In addition, in today’s competitive environ- ment, companies must find ways to enhance their competitive advantage through effective use of their resources (Senge and Fulmer, 1993). Although all resources are important, Ulrich and Lake (1990) suggest that an organization’s human resources may be its most important and enduring asset. Competent people are the key to success and offer organizations their only sustainable competitive advantage (Pickett, 1998).

Nowadays several authors write about a re- source that family businesses should exploit in order to achieve a competitive advantage. We are describing “the family human capital” which includes in its definition other concepts like knowl- edge, skills and abilities of family members and also the following factors - commitment, alignment of interests, responsibility, involvement, etc...

The incorporation of psychological and emo- tional aspects to the study of the family firms has increased the researchers’ understanding of some characteristics and conducts of the family firms. This facilitates the design of better policies that help to reduce the company’s weaknesses and promotes its strengths. In the area of human resources, the overlapping of the family and business systems has always been analyzed as an inconvenience when trying to manage the human resources of the family firm both efficiently and effectively. Practices such as nepotism by the management of a family firm, different treatment of family and non-family employees, or the lack of a formal performance appraisal system have made the separation of both systems the best op-

tion to solve these problems. However, this has brought about the loss of those positive features that family firms inherently possess in the initial stages, which give them a competitive advantage. Among these we can cite stronger employee com- mitment, participation, work satisfaction and better alignment with the long-term goals of the firm.

Besides, recent research has empirically shown the positive relationship between human resource practices and important organizational outcomes such as productivity, turnover, and firm perfor- mance (Delany and Huselid, 1996; Huselid, 1995), but little is known concerning human resource practices in family businesses and their effect on performance (Reid et al 2002). Recently, Carson et al (2006) found a connection between five practices of high performance work systems and their impact on performance in small and medium family businesses.

On the basis of some characteristics that a previous review of the literature offers us, and which have been identified in family businesses, we found: nepotism, lack of professionalism, unequal treatment to family and non-family members and loss of employee commitment over time. Thus, we have paid more attention to the need of integrating both dimensions: family and business; trying to create a single team formed by family and non- family members through the implementation of a human resource management model focused on organizational commitment. High performance work practices (HPWP) are presented as a solu- tion for family businesses to obtain a long-term orientation, employee commitment and create a good work atmosphere (Swailes, 2002).

Literature on organizational behaviour focuses on how to develop employees’ commitment and which are its basis, but this has not been treated in family businesses. Traditionally, family busi- nesses have considered their employees’ com- mitment as a strong point of the family business, but it has not considered that the development of the company, the departure of the founder, and the inclusion of other members of the family, in-

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laws, and non-family members, does decrease the illusion and the commitment of family members. Therefore, we propose a model which increases the commitment of both family and non-family members. HPWP has been presented as a tool for family businesses to improve the human capital of the companies (Sun et al., 2007). And it is useful to integrate family and business in order to align all members’ goal in the same direction as this helps to obtain a competitive advantage for family businesses (Roca-Puig, Beltrán-Martín, Escrig-Tena and Bou-Llusar, 2005). Consistent with Gong, Huang and Farh (2009) affectively committed employees could also represent a valuable, relatively rare and unique resource that is difficult for competitors to copy.

Thus, family businesses which professionalize their human resource management and establish policies aimed at increasing the participation and commitment of their employees, will in turn improve the human capital of the firm and gain a competitive advantage. Among these policies, we may cite: an effective selection process which disregards family ties; a fair, motivating, above- average remuneration scale which rewards both individual effort and goals reached by the group; high investment in training focused on the orga- nizational needs; an information system which is shared by all employees; high job security; employee participation in the decision-making process. If these practices are applied, we will generate more flexible and innovative behaviour among our employees, internal conflicts will decrease and most importantly, we will maintain or even improve the commitment of both family and non-family staff.

As result of all that has been outlined above, we would like to point at new lines of research that can be useful to clarify certain questions to which the current literature gives no response, or one which is not clear enough.

The new lines of research could be the answers to the following rhetorical questions:

1. Do high performance work practices (HPWP) in family business generate higher levels of commitment among workers of fam- ily firms, in spite of not being the owners?

2. What type of commitment (affective, nor- mative or of continuity) is best to reach the highest profits in the family business?

3. We suggest that high performance work practices are good for the family business but – can the implantation of these practices also help to improve the process of succession as they enhance the training of the employees and their professionalism?

4. What other elements included in “family hu- man capital” would be necessary to promote the improvement of the competitiveness of the family business?

5. If managers demonstrate the advantages that the application of these practices bring about for the family business, which would be the principal obstacles that they would find to put them into practice?

6. The implantation of these practices of human resources not only helps to get economic benefits but it also ethical ones. Would it be possible to measure the latter in the company’s results?

These and other questions will have to be answered, in as much detail as possible, and they represent challenges that we would like researchers to take on in the upcoming years. Undoubtedly some of them will be answered and will represent an advance for the science.

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KEY TERMS AND DEFINITIONS

Familiness: Is defined as the idiosyncratic bundle of resources and capabilities resulting from the interaction between the family and business systems.

Family Business: Mix of two systems: fam- ily and business which can generate competitive advantage for the company.

Family Human Capital: It includes knowl- edge, skills and abilities, but in family businesses it includes factors such as commitment or emotions, as well as integrity, compassion and forgiveness of family members.

Family’s Involvement in the Business: It is a mix of ownership, governance, management and trans-generational succession.

High Performance Work Practice: Innova- tive practices of human resource management which improve employee commitment and per- formance of the company.

Nepotism: Favouritism shown by the founder to relatives.

Organizational Commitment: Employee identification with the company and with its goals.

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Chapter 6

DOI: 10.4018/978-1-4666-4731-2.ch006

HRM Practices and Problems in Family-Owned SMEs

ABSTRACT

INTRODUCTION

A small firm was defined as employing between 5 and 19 workers whereas a medium firm as having between 20 and 199 employees (Kotey & Folker, 2007). According to this definition, firms with 5-199 employees can be called as SMEs. Small and medium-sized enterprises (SMEs) which are mostly family-owned, play an important social and economic role in industry.

SMEs are known to be complex, distinctive and influenced by many factors and human resources play a vital role in developing and sustaining competitive advantage for SMEs Therefore, it turns out to be difficult to create a balance be- tween the formal human resource management (HRM) policies and the informal culture of the

SMEs (Chandler and McEvoy, 2000; Hornsby and Kuratko, 1990; Brand and Bax, 2002).

Until recently, HRM had been seen as un- necessary for smaller firms and there is lim- ited research about the HRM practices in SMEs (Obasan, 2012). On the contrary, several studies have reported HRM practices in larger organiza- tions. Therefore, it can be stated that HRM is typically more informal in SMEs compared with the employment practices associated with large corporate organizations (Marlow, 2002; Marlow; Taylor, & Thompson, 2010).

HRM is the way of thinking about how people should be managed as employees in the workplace and it refers the policies and practices involved in carrying out the “people” or human resource aspects of a management position, including

Burcu Özge Özaslan Çalişkan Istanbul University, Turkey

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recruiting, screening, training, rewarding, and ap- praising (Dessler, 2008). HRM practices such as recruitment and selection, employment security, compensation management, wages and incentive pay, performance management, training and skill development and career management are just a few of the practices acknowledged as having great value to the organization. It is believed that such practices for managing employees have positive effect on organizational performance (Guest, 2011; Snape & Redman, 2010). For example, the design of compensation systems including the consider- ation of external and internal equity is important for the employees and effect the motivation of the organization severely.

Research has shown that the most significant difference between HRM practices in SMEs and larger firms is the adoption of HRM practices. The main question is “are the HRM practices formal or informal?” Pinnington and Edwards (2000) believe that HRM theories or models of HRM are sometimes subdivided under two schools of thought, “hard” HRM and “soft” HRM. In es- sence, “hard” HRM focuses on managing and controlling employees in order to achieve the organization’s strategic goals, while “soft” HRM gives more recognition to the needs of employees and the importance of their commitment to the organization.

Family businesses which have got some crite- ria like ownership and control, decision making, business acquired from parents and employment of family members may be forced upon the times to employ, train, promote or lay off for close or extended family members. Thus, a family busi- ness manager should focus more on the HRM practices to identify any infirmities that may come into existence.

It is not easy for a manager who is a father, mother, brother, sister, uncle, cousin, etc. to cope objectively with family members who are their employees at the same time. Owner-managers usually have difficulties of having to choose between either hiring or firing an incompetent

relative, believing that the relationship between the family members might be damaged as a result. Under these circumstances, the manager should apply formal recruitment sources in order to attract suitable candidates. Set of important factors for human resource managers can be listed as honest and open communication, extensive use of peer- review processes that allow team members to provide direct feedback to coworkers about how they may be affecting others, and the promotion of collaborative decision-making so that man- agers jointly make key business decisions, and departmental teams determine their own best way of working together (Caudron, 1993). Thus, in order to be fair, family business manager should protect those important matters during managing employees.

There are many advantages and disadvantages of family controlled firms. Long-term orientation, greater independence of action, less pressure from stock market and takeover risk are some of the advantages. Furthermore, family firms have family culture as a source of pride that includes stability, strong identification, commitment, motivation and continuity in leadership. It is also important that there is greater resilience in hard times in family businesses. These firms are less bureaucratic and impersonal and this provides greater flexibility and quicker decision making. Knowing the business causes early training for family members. On the other hand, there are also many disadvantages of family firms. Less access to capital markets may curtail growth in family businesses. There may be a messy structure and no clear division of tasks in these types of organizations. Nepotism is another problem for family owned SMEs (Kets de Vries, 1993). Nepotism can cause inequitable reward systems and greater difficulties in attract- ing professional management to the organization. Founders may derive utility from seeing relatives involved in the business, they may decide to hire key managers from within their kinship network rather than turn to more talented professional managers. Beyond the direct effect of these lower-

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quality appointments on performance, nepotism may also have adverse spillover effects in that it creates negative incentive effects throughout the organization. If lower-down employees know that promotion decisions are not tied to performance, they might be less willing to exert high effort or to remain within the family business, thus mak- ing it more difficult to retain talent (Bertrand & Schoar, 2006).

Moreover, there might be spoiled kid syn- drome in such firms, and it is also possible to have internecine strife and family disputes in the organization. Paternalistic and autocratic rules may control the employees. The possibility of family members milking the business also arises, leading to a disequilibrium between contribution and compensation (Kets de Vries, 1993).

In most of the family businesses, the owner usually handles the HR function and there aren’t any written rules about hiring and firing employ- ees. In such enterprises, candidates come on their own, or managers rely mostly on personal network, especially from their family and friends. Budget for training usually turns out to be inadequate. There are no written job descriptions and no written policies for performance appraisal. These may be shown as some of the examples caused by the informality of the HRM practices in SMEs.

In order to increase the performance of the family businesses, the management should give more importance to HRM practices. The question of “how” HRM practices are adopted in family businesses should be more important than “which” HRM practices are adopted.

LITERATURE REVIEW

Human resource management (HRM) has been defined as the policies and practices involved in carrying out the “people” or human resource as- pects of a management position, including recruit- ing, screening, training, rewarding and appraising (Dessler, 2008). It is important to attract, develop

and maintain a talented and energetic workforce to support organizational mission, objectives, and strategies in HRM (Schermerhorn, 2001, p. 2400).

Human resources in a firm have an asset value that corresponds to the present value of future net cash flows that are derived from the skills, moti- vation, and adaptability of the firm’s workforce (Becker, Huselid, & Pickus, 1997). It means that human resource is very important for competitive advantage. Whether it is called “people”, “labor”, “intellectual capital”, “human capital”, “human resources”, “talent”, or some other term, the re- source that lies within employees and how they are organized is increasingly recognized as critical to strategic success and competitive advantage (Boudreau & Ramstad, 2007).

Cascio and Boudreu (2008) reported that people costs represent approximately 55 per cent of operating budgets across all US industries, thus it is important that more research focuses on organizational capability and human resource practices in family businesses. It is obvious that SMEs are the predominate form of business all over the world.

SMEs, the majority of which are family-owned, play an important economic and social role in many countries. Family businesses are critical to the health of the economy and to the life satisfaction of millions of people. These types of SMEs are special organizational forms whose originalities have both positive and negative consequences. Being in a family business affects all the par- ticipants and also all the functions about HRM. The role of chairman of the board is different when the firm was founded by a father, mother or siblings and the family members sit around the table at the meetings. Roles in the family and in the business can become confused. In these types of firms, professionality in all management func- tions and HRM practices become more important. Despite the importance of family-owned SMEs to economy and to job growth, there is little empirical research to encourage managers and CEOs facing rather intimidating human resource challenges

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(Carlson, Upton, & Seaman, 2006). Despite this, many functions with regard to human resource management practices exist in large organizations and not in the SMEs, which are more common in the marketplace today.

The appraisal of family members should include the opinions of subordinates, peers, and superiors instead of just the potentially biased opinion of founder or family in order to deal with the potential conflicts between family and business principles. It is obvious that effective management in family businesses requires the organization of structures and processes which link management and ownership (Lansberg, 1983).

There are a range of studies indicating small firms that are characterized by informal HRM practices although some suggest that there is a greater sophistication in HRM practices than would be expected. The vast majority of researches suggest that smaller firms make less use of high performance HRM practices than larger organi- zations do (Barron, Black & Loewenstein, 1987; Hornsby & Kuratko, 1990). Hornsby and Kuratko (1990) also searched HRM practices of small U.S. firms in three size categories and notified increased sophistication in practices with firm growth. This is in line with the finding that small organizations are more likely to operate in an informal and flex- ible manner than larger firms. Consistent with Hornsby and Kuratko’s (1990) propositions, Koch and McGrath (1996) find that, in general, firm size is positively related with the incidence of HRM sophistication and small firms provide less training to their employees. Westhead and Storey (1997, 1999) find that both managers and employees are less likely to get formal training in a small firm. In addition to this, they suggest that there appears to be a linear relationship between the size of a firm and the amount of formal structured train- ing provision. In a study by Jackson et al. (1989), smaller companies were found to be less likely to use formalized performance appraisals. Aldrich and Langton (1997) found that larger companies have more formalized recruitment practices

and smaller firms make less use of formalized recruitment practices. They also confirmed an inverse proportion between the number of family members who work in a firm and formal HRM practices. It is obviously proven that there is a negative relationship between family ownership and management and HRM practices. Research by Reid and Adams (2001) also accepted this pattern. They found that family businesses are less likely to have professional HRM practices, including the use of references, appraisal systems, a coun- terpart appraisal process, training evaluation, and merit-based pay systems. Reid and Adams (2001) explain this by suggesting that such firms have more limited organizational capabilities. Due to their limited organizational capabilities, family businesses have lagged behind their non-family counterparts in implementing HRM policies and practices.

Wilkinson (1999) noted that employment rela- tions in SMEs are classified by informality and that formal control systems and communication strategies are nearly nonexistent. He also argued that pointing out the rules and procedures is old fashioned in an environment where owners have to make quick decisions in reaction to market pressures.

Research has indicated that smaller firms make less use of professional HRM practices than compared to larger firms. Barret and Mayson (2007) argued that the most commonly found HRM practices in small firms reflect operational needs and pragmatic concerns: record keeping; staffing activities, such as recruiting and select- ing staff; and, to a smaller quantity, motivation and retention activities such as compensation and reward practices.

Smaller firms make less use of formalized recruitment and selection practices, and are less likely to use formalized performance evaluations and give less importance to training activities. Schulze et al. (2003) indicated that the family is a neglected variable in organizational research. De Kok et al. (2006) indicated that family firms

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are less likely to use professional HRM practices than their counterparts and they tried to explain whether and why family-owned and managed firms tend to use fewer professional HRM practices than other SMEs.

HRM is a sensitive area for family businesses. It is criticized for engaging in nepotism and in some cases it has failed to provide management training for family members. Therefore, the neces- sary starting point for these family businesses is to identify any strengths and weaknesses which may exist (Reid & Adams, 2001, p. 310). This leads to the fact that it is difficult to understand existing HRM practices in SMEs and to prescribe appropriate practices for these firms. The result should be an approach about HRM practices that fits to all SMEs. Theories on best practices sug- gest that certain HRM practices are relevant to improved organizational performance.

Small firms tend to have personalized and informal human resource practices. The devel- opment of suitable human resource policies and procedures is the main requirement of these family businesses.

Recruiting and Selecting

The quality of employees is the most difficult and the most important HRM requirement in organiza- tions. The ability to attract and retain competent and reliable employees has become a key element in developing an effective and sustainable competi- tive advantage. The selection and retention of a competent and qualified workforce is a vital and important issue in managing and operating a small business (Hornsby & Kuratko, 1990).

Recruitment and selection is searching and finding the sufficient quantity and quality of workforce and then selecting the right person for the vacancy among those candidates (Bolton, 2002, p. 32).

The first level of attracting the qualified candi- dates to the firm is human resource management planning and deciding the quality and quantity of

the personnel required to the jobs. The following stage is to contact with the potential candidates by using various recruitment methods. The last step is selecting the most qualified and beneficial personnel through the potential candidates (Daft, 1994, p. 406). Parallel to this definition, SMEs have to focus on recruiting, attracting, select- ing and retaining more qualified employees to organizations. As a family owned SME grows, its owners have to begin increasing the number of their employees and learn how to develop and implement human resource management (HRM) policies.

The selection and recruitment procedures used by SMEs differ evidently from large organiza- tions, being far more informal and unstructured. While recruitment methods such as newspaper advertising and the use of employment agencies are considered as formal recruitment methods, word of mouth and referrals are esteemed as informal recruitment methods (Tanova, 2003). Therefore, it can be stated that advertisement, internet and employment agencies are formal recruitment methods; whereas walk-ins and refer- rals are informal recruitment methods. Research showed that employers emphasize fundamental personality characteristics such as honesty and integrity strongly during the recruiting and se- lecting process.

Cassel et al. (2002) found that recruitment and selection procedures were used more than any other HRM practices. Given the long tradition that these types of practice have had within organiza- tions generally, and their necessity for keeping the business going, this is not surprising. In many of the jobs that people were being recruited for, word of mouth was seen to be an entirely appropriate way of getting the right person for the vacancy. As well as the word of mouth process has no initial financial outlay, it is a key criterion in the context of resource poverty.

It is known that SMEs do not recruit or turn over large numbers of people. It is the fact that there are so many SMEs (especially family owned)

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which makes them very important in the labor market. There is a lack of specific personnel func- tion in small businesses which means someone else in the organization can recruit and select when necessary as a part of his/her normal job. In addition to this, MacMahon and Murphy (1999) argued that if small firm owner managers wish to compete for scarce labour, they must themselves be capable of attracting and retaining staff in terms of their recruitment skills, ability to create attractive conditions, and attitudes to employees.

SMEs have to have multi functioning manage- ment personnel and so it is less likely that they will have a standardized policy or procedure on recruitment and selection. In small businesses, ability and aptitude tests are used across the board, whereas personality tests are more associated with management selection and the selection of older people into work. Employers considered the inter- view as providing the best source of information about what they deemed as the key characteris- tics. Qualifications and work experience, even when related to the job, are seen as being of less importance. These are evaluated through applica- tion forms or CVs. CVs and application forms are seen as being most useful for the characteristics of lower importance and for providing evidence of general ability and trainability.

Generally, for checking the originality of information provided, references are seen as use- ful tools. References provide reliable data about personality characteristics, ability and trainability (Bartram, 1995). When the applicant has been referred by a known and trusted contact, it is not necessary for the company to search the candidate profoundly.

It is worrying that employers adopt informal unstructured interviews as a way of assessing the key personal characteristics. It is clear that in every respect of selection there is a lack of training in SMEs, especially in selection interviewing and in formalized assessment methods. In order to be more productive, improved selection methods by SMEs should be considered.

Stewart and Knowles (2000) found it is appar- ent that SMEs seek the kind of skills and qualities which are commonly defined as transferable. It is also argued that the use of psychometric tests, presentations and panel and/or sequenced inter- views is not unusual and the use of job descriptions appears to be an established practice, while SMEs are less sophisticated than large organizations.

Kickul (2001) demonstrated that psychologi- cal contracts can have a considerable impact on workplace attitudes, commitment, and intentions to leave the organization. Therefore, it should be remembered that not only recruiting right person to a right position is sufficient. Making promises to retain these employees is the solution for ef- fective HRM in SMEs.

Recruiting and retaining high quality staff has to be a major challenge for SMEs. Although formal human resource procedures could help small firms, many owner-managers have suspicion about the value of such formalization, as they do not thorougly understand the opportunity cost of using such a human resource function (Carroll, Marchington, Earnshaw, & Taylor, 1999). Rather than adopting a formal recruitment and selection policy, the tendency is for the owner-manager to find temporary solutions.

According to Carrol et al. (1999), small firms indicated that recruitment was being undertaken carefully to make sure they found the “right’’ person, and this included the common use of informal, word-of-mouth recruitment methods. While the authors admit that this is comprehensible from the employer’s point of view, they do raise the question as to whether recruitment through informal networks reinforces existing race, gender or disability imbalances within the workforce, and whether certain groups are being permanently excluded from employment in small firms.

Job descriptions in small firms are uncertain because jobs change in time or develop and em- ployees usually create their own jobs. Carroll et al. (1999) found no evidence of systematic job analysis in U.K. small firms. They noted that

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managers perceive job descriptions to be too rigid, restricting the flexibility of their firms. On the contrary, MacMahon and Murphy (1999) reported that poor job descriptions lead to role conflicts and employee frustration. In many cases, both employers and employees are uneducated and unaware of their responsibilities, roles, rights, and obligations. In reality, for a small organization there generally is no need to have detailed job analysis, job description, and person specification procedure. It may be sufficient for one person to consider the job’s important aspects and the requirements of the employee. Afterwards, it must be considered that the vacancy can be filled internally or externally. Ultimately if the vacancy has to be filled externally, the aspects that need to be decided are; which suitable candidates are to be attracted, how they should apply, and what kind of selection techniques are goint to be adopted.

In small firms during the recruitment and selection process word-of-mouth methods are rec- ognized as having clear advantages. Low cost and speed of the process is one of the advantages. The employee who was recommended by an employee is less likely to quit from the firm. Therefore word- of-mouth recruitment is sometimes recommended to employers as a way of reducing staff turnover.

It seems that informal recruitment methods are used in SMEs, because the whole process of advertising, initial telephone screening, eliminat- ing through resumes, curriculum viteas (CVs) or application forms, shortlisting, interviewing, checking references and making a selection deci- sion is considered to be costly and lost time for many SMEs. On the other hand, informal methods have some disadvantages. One of them is the possibility of losing more suitable recruits from the candidate pool, the other one is to be misun- derstood and to be blamed for discrimination by some groups (Carrol et al., 1999).

Ibicioglu and Keklik found that while the first method preferred by the SMEs in Turkey for recruitment is advertisement, the least preferred method is internet. Despite the fact that internet is

the main tool for organizations today, it is disap- pointing that SMEs do not to use internet effec- tively. Using internet can reduce the recruitment costs and can facilitate reaching a larger range of candidates. In spite of the advantages such as low cost, shorter recruitment cycle time, reach of a wider range of applicants, better quality of response, up-to-date image to the firm, opportunity to address specific labor market niches, attracting the passive job- seeker, providing global cover- age at a constant basis, recruitment through the internet is used rarely in the SMEs.

Selection of board members in small family businesses is another typical dilemma. Small busi- nesses usually prefer not to activate their boards with externally recruited members. It is thought that this means introducing an alien element in the family business context. However when the firm grows, owners may become directors and then there is a need for a professional management structure which has to be supported by external resources (Johannisson & Huse, 2000).

Employee Training in SMEs

Given the growing importance of smaller firms in the economy, it becomes important to give at- tention on their experiences with regard to both their skill shortages and their attempts to overcome these shortages through training (Blackburn & Hankinson, 1989). Training is the key element for job satisfaction, commitment, ability and morale of the employees.

In terms of formal training, research in large firms suggests that training consistently has a posi- tive impact on individual worker productivity. In an examination of differences in formal training between large and small organizations, the cost of training programs and time spent away from productive work are important considerations for determining which training opportunities to provide to workers, as resources of both money and worker time are constrained. Orientation is one specific form of training and it is a long-term

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process where individuals learn their roles within an organization, and adjust to job demands, or- ganizational culture, and other employees. It is a kind of socialization process of organizational newcomers (Cardon & Stevens, 2004).

Hill and Steward (2000) argued that in many small organizations training does not take place at all. They also explained that, training in SMEs is usually reactive and informal, and further to that, it is short-term and almost exclusively di- rected at the solution of immediate work related problems rather than the development of people. In opposition to this, some authors supposed that training and development is a beneficial function for SMEs and that it will increase their business performance. However, research shows that the need for improved management skills in SMEs is obvious. Despite the importance of employee training to small business performance, less at- tention has been given to that field in the litera- ture. Actually, Jennings and Beaver (1995) have argued that small business missuccess constantly results from poor managerial competence. It was argued that the major distinguishing feature be- tween high growth and low growth small firms was the education, training and experience of senior managers. Westhead and Storey (1997) have suggested that, the rates of staying alive for small firms are significantly smaller than those of larger organizations, and the small firm could not see the return on its investment in training and development. Chandler and McEvoy (2000) argued that firms which invest in employee train- ing, engage in formal performance appraisal, and link these to incentive compensation are likely to have lower employee turnover, higher productivity, and enhanced corporate financial performance. Despite all these benefits however, it is discussed that smaller organizations will spend less on training than larger firms, because benefits from training are generally considered to occur in the long rather than the short term. Thus, the older the organization, the more likely it would be to invest in training and development. Perhaps the

most consistent finding in SME research is that the larger the organization, the more likely it is to engage in training.

Many workers in the SMEs are employed in workplaces that are unlikely to invest in training and development and have unsophisticated hiring and firing practices, where managers consider workers easily replaceable and lacking value. As such, workers in these workplaces are likely to stay below the desired skill level during their career life cycle. They will not experience an increase in their employability, and they do not want to be deprived from social security services and they never have chance to have well-paid jobs because of their lack of skills (Bacon & Hoque, 2005). It is claimed that less trained, less experienced, younger workers tend to work in small firms; not as a result of self-selection but because their lack of training and previous experience ruled out the possibility of working in large firms (MacMahon & Murphy, 1999).

It seems that few studies focused on especially management training. According to Loan-Clarke et al. (1999), it would appear that management training and development is more widespread among SMEs than previously thought. However, the characteristics of ownership, family manage- ment, size and number of managers appear to have a very strong influence on management training and development investment. The resistance in family-owned small businesses is likely to be more than elsewhere, since coordinators of management training and development could perhaps do more to persuade of its benefits in such organizations. Considerable time resource is likely to be required by those seeking to promote and provide manage- ment training and development to such SMEs. A focus on organizational development which is clearly business related, is also more likely to encourage training activity for all staff, and not only the managers (Loan-Clarke et al., 1999).

SMEs rarely apply formal training needs analysis and have no systematic approach to train- ing. Training in SMEs is mostly on-the-job with

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little or no provision for employee development (Kotey & Folker, 2007). Owner managers usu- ally consider formal training as a costly function that involves not only course fees but also the cost of lost output because it leads to employees being absent from work. Reid and Adams (2001) found that compared to other firms, family firms spent less of their annual salary and wage bill on employee training and were less likely to engage in systematic employee training needs analysis.

Due to the uncertainty in small firms, the own- ers try to avoid investing in training. As mentioned before, benefits from training tend to be realized in long term, and this makes investment in employee training unattractive to small firms.

Small firms usually have restricted vision because of the high levels of uncertainty. Fur- thermore, trained employees are more likely to be transferred by other employers because of the poor promotion opportunities in small firms. Addition- ally, small firms are generally less aware of the costs and benefits of training programs and do not have a proper idea about which training program is more beneficial for their organizations. As a result, it can be said that owner managers tend to avoid investing in training because of the incapability to imagine a direct positive link between training and performance. Loan-Clarke et al. (1999) claimed that nonowner managers often show a familiar interest in their employees’ career progression. Career progression is perceived as a threat by the family owners, so they are less likely to develop their subordinates’ managerial competence. Small firms have a higher probability of labor turnover, because they offer less opportunity for career de- velopment. As a result, better-trained employees will choose opportunities elsewhere, leaving the small firm behind with its less-trained employees and a depleted training budget. A proposed solu- tion to this problem would be to use company specific (on-the-job) training, which has little value to other firms (Brand & Bax, 2002). Therefore, employee training and development is likely to receive more attention in larger non-family firms,

rather than in smaller-sized family owned ones. It was noted that family firms were less likely to invest in management training, and explained that even though family owners often lack confidence in their abilities as managers, they are reluctant to give up personal control and to delegate tasks to others. Loan-Clarke et al. (1999) also discussed that competent non-family managers constitute a threat to less competent family owners. Since dominant family ownership and involvement in management are major differentiating factors between family and non-family firms, it would follow that formal employee training would be less practised in firms with greater family ownership and management than in firms that are owned by outsiders and managed by nonowners. In the light of this information, it can be claimed that family firms are less likely than non-family SMEs to provide employees with formal training.

It is clear that as the firm grows, training is incrementally delegated to specialists within and outside the organization, making training become more formal and structured. In such firms training is oriented toward developing employees for higher positions (Westhead & Storey, 1997). However, in many small businesses informal training is pre- ferred because it is less costly and it can be easily integrated into daily operations of the small firm, and employees’ specific needs can be sticked out easily through the informal training process (Hill & Stewart 2000).

Consistent with the literature, Kotey and Folker (2007) argued that on-the-job training is the predominant training method in SMEs and that the adoption of formal training increases with firm size, rapidly in the initial stages but slower thereafter.

Some researchers claim that informal training is consistent with the overall strategic orientation of small firms that is informal and flexible (Hill & Stewart 2000; Westhead & Storey 1997). SMEs do not notice on gains in sustained competitive advantage from a well-trained employee by con- centrating on informal training. SMEs generally

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prefer informal training because informal training fits better with SME strategic orientation. Returns from formal training programs are realizable in the long-term, but small firms are concerned with short-term survival (Hill & Stewart 2000;West- head & Storey 1997). Given the high level of de- fenselessness and uncertainty among small firms and their short-term orientation, training programs that are specific to the job, low cost, short-term oriented and aimed at developing a multi-skilled workforce may be more related to gaining com- petitive advantage at this stage. Essentially family firms may have the additional resource of family skills and involvement, allowing them to achieve similar levels of effectiveness with less formalized training. Most probably these additional resources enable them to gradually increase training as they evolve, rather than the more existing increase seen in the non-family firms. The approach to employee training in family SMEs is in harmony with their slower growth rates, informal management styles, limited financial resources, and greater emphasis on efficiency compared with non-family SMEs (Kotey & Folker 2007).

Blackburn and Hankinson (1989) argued that small firm owners are incredulous about the ca- pability of existing formal training programs and they tend to see training as an expense rather than an investment. According to research, the most important factors about training are found as the length of training, the cost of training, and the returns that would be achieved (Kotey & Folker 2007). Although the importance of formal train- ing in organizations is cited frequently, Johnson (2002) claimed that there is little convincing evidence to suggest that increased investment in formal training leads automatically to improved business performance for SMEs.

Performance Evaluation

Another important function related with HRM is the performance evaluation of the employees. Performance evaluation means measuring an

employee’s current and/or past performance relative to his or her performance standards. Per- formance management is the process employers use to make sure employees are working towards organizational goals (Dessler, 2005). Furthermore, this evaluation involves providing feedback on performance, and taking action to correct poor performance. Once integrated into the workplace, an employer needs to know how well the employee is performing and use performance appraisal to reward the employee appropriately, or to advise him about the advancement opportunities in the organization (Çetinel, Yolal, & Emeksiz, 2009).

Hornsby and Kuratko (1990) found that per- formance appraisal diversifies by firm size and sector. They identified employee performance as the assessment of abilities to meet targets, and the use of rating scales as appraisal methods. Con- trarily, MacMahon and Murphy (1999) claimed that owner managers are generally deprived of the skills necessary to apply effective performance reviews. They tend to perceive formal performance evaluation as waste of time. If owner managers directly control all activities about employees, performance appraisal would be informal in small firms. As the period of the control goes up, it is anticipated that appraisals would be more formal and occur at longer intervals.

Harney and Dundon (2006) argued that the owner manager was actually enthusiastic in ex- plaining that he had ‘no need’ for an appraisal system, regarding such people management activi- ties as a daily routine that is part of a supervisor’s tacit skill set. Although formal appraisals were largely absent, this does not mean that employees who worked particularly hard or were in need of motivation were not rewarded. Informal reward mechanisms included a Christmas bonus, a com- pany social event or being taken out for dinner in small teams.

As firms grow, it is expected that training and performance appraisal of operational staff will be delegated to middle managers. To control performance effectively, owner-managers would

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shift their emphasis from operational staff to middle managers. This means that they need to pay greater attention to training, development, and performance appraisal of managers to ensure that managers develop the skills and abilities necessary to perform their responsibilities (Kotey & Slade, 2005). It was confirmed that there were greater increases in the percentage using the various ap- praisal methods at the managerial level compared to the the operational level.

Kotey and Slade (2005) found that rating scales were the most popular appraisal methods at the operational level, and some employers compared performance between employees. As the number of employees increased, appraisal of their per- formance was delegated to managers. They also claimed that the use of peer and self-appraisals also increased with firm size. However, at the operational level the use of other appraisal meth- ods rarely changed as firms grew. Compared with the appraisal of employees performance, fewer firms appraised the performance of managers in micro and small firms. This may reflect the small number of managers in these firms and their close association with the owner-manager. In micro and small firms, appraisal of management performance may take place informally. The most common methods of appraising managerial performance were by rating scales and, to a lesser extent, their ability to meet targets. The use of targets has a flow on effect by holding managers accountable for performance targets, they in turn will ensure that these targets are achieved at the operational level (Kotey & Slade, 2005).

In family owned SMEs, founders experience many difficulties when trying to evaluate the performance of a close relative who works in the firm, particularly when it comes to objective evaluation of their own children. The standing of an individual in a family is determined more by who the individual “is” than by what the individual “does.” Applying a set of objectively derived criteria to evaluate a family member’s performance goes against the very principles that

regulate and define social behavior in the family (Lansberg, 1983).

Moreover, the founder’s difficulties in making such appraisals are frequently compounded by informational problems. These problems emerge when non-family employees dissemble a relative’s incompetence (Lansberg, 1983). On the other hand Carlson et al. (2006) argued that non-family managers were more satisfied with feedback from performance appraisals.

Performance appraisal practices in small firms generally tend to be informal (Cassell, Nadin, Gray, & Clegg, 2002). And in small firms these apprais- als are often used for monitoring and control rather than development purposes. Furthermore, perfor- mance review meetings served the dual purpose of providing feedback for developmental purposes as well as a forum for discussing compensation matters: they are used for evaluation or monitoring of performance (Barret & Mayson, 2007).

Employment Relations in SMEs

Industrial relations in small firms (when defined in terms of their employment size), are gener- ally described as harmonious (Barrett, 1999). Although Barrett’s study (1999) reported that it can be used to support the “small is beautiful’’ view, this ignores the fact that industrial relations in large firms are not greatly different. How size affects industrial relations in one small firm was examined in his study and it was proposed that, on its own, size does not provide an adequate explanation for industrial relations in small firms.

There is little evidence of a principled objec- tion to increasing employment regulation among owner managers but they have growing concerns about its cumulative impact on competitiveness and much of its appropriateness to the operational realities of SMEs. Approaches to regulation and the employment relationship among owner man- agers tend to be firm specific and embedded in the individual organizational context. Levels of productivity and reactivity are highly dependent

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on the values and the knowledge of individual owner managers, organizational history, a trade union presence and awareness of the workforce (Harris, 2002).

Employment relations in SMEs are often char- acterized as being different from those in large companies. It is possible to identify some common patterns which distinguish employment relations in SMEs from larger organizations. Their lack of resources of time, money and people is thought to inhibit the use of sophisticated management strategies, the appointment of human resource specialists, the development of unionism and hence collective bargaining (Kinnie et al., 1999). While there are a number of competing analyses regarding the context of employee relations within smaller firms, it is possible to suggest that one generalization might be cautiously applied: infor- mality regarding labour management compared to larger firms. Therefore, as the firm grows, it develops formal, identifiable policies, rules and regulations to define and control the employment relationship. It would be easy to argue that formal- ity defines the employment relationship in larger firms (Marlow, 2002).

The level of legal intervention in the workplace plays a significant part in how approaches to human resourcing develop and change over time (Harris, 2002). In general, employment legislation was seen as a burden in terms of time and administration in SMEs. In times of increased demand, regula- tion can simply be bypassed in SMEs (Harney & Dundon, 2006).

Wilkinson (1999) claimed that the future would be dominated by SMEs in terms of job creation and new patterns of work and that the SME sec- tor could improve the health of the economy and SMEs could act as a key source of innovation. SMEs are the important resources that generate employment to the labour market. Despite the importance of SMEs, there is a lack of industrial relations research in SMEs in literature. It arises from the problematic issue of SMEs size. There are many different definitions of a small firm related

to the numbers employed and this causes some problems about employment relations in SMEs.

The danger of many SME definitions is the assumption that all firms within the SME sector have similar characteristics. Size may be a fac- tor, but it is not sufficient to explain patterns of employment relations alone. Many internal and external influences like sector characteristics, economic indicators, technological improve- ments, ownership characteristics explain behavior (Wilkinson, 1999).

Wilkinson (1999) also argued that employ- ment relations in SMEs are characterized by informality and that formal control systems and communication strategies are almost nonexis- tent. He maintained that emphasis on rules and procedures is outdated in an environment where owners have to make quick decisions in response to market pressures.

Informal employment relations may be defined as a process of workforce engagement, collective and/or individual, based mainly on unwritten customs and the tacit understandings that arise out of the interaction of the parties at work. As such, informality is dynamic rather than a fixed characteristic, and is highly context specific (Ram et al., 2001).

There are some dynamics of informality in small firms. Generally, dynamics that employees and the employers negotiate about pay and market conditions were indicated in research. Low pay and the highly informal working times are the main problems that small firms are faced with.

It can be can be concluded by saying that there is a need for SME support services which have the expertise and capability to support the development of progressive employment policies.

Compensation and Benefits

Compensation includes series of decisions about payment of workers, pay levels, pay mixes, pay structure, and pay raises. Pay level is the com- parison of the salaries between the internal and

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external market; pay mix is the proportion of salary, benefits, and incentives in the total pay package; pay structure refers to the steps of pay rates among jobs in the organization; and pay raises concern the administration of pay increases with the organization. Compensation is an important function because it affects recruiting and reten- tion efforts of small firms. If they cannot pay employees enough, then they cannot recruit or retain required skills or knowledge, which they need in order to operate effectively. Furthermore, the compensation and reward system can be an important communication device to emphasize desired entrepreneurial activities and to signal legitimacy to external stakeholders (Cardon & Stevens, 2004).

The results of Carrasco-Hernandez and Sanchez-Marin (2007) shows that employee compensation differs between firms. The research describes how employee salaries vary according to the degree of family ownership and family involvement in the management. Specifically, the current results indicate that the pay level is lower in family owned and managed firms than in both non-family and professionally managed family firms. Moreover, there are no differences in employee pay levels between professionally managed family firms and non-family firms. Regarding the pay mix, employees in profession- ally managed family firms receive the highest proportion of variable pay in their compensation packages compared to family owned and managed firms and non-family firms, where the fixed pay has more weight in the pay mix. In this respect, employee pay mix is similar in family owned and managed firms and in non-family firms (Carrasco- Hernandez & Sanchez -Marin, 2007). Non-family managers were significantly less satisfied with the fairness of the compensation system (Carlson et al., 2006). Nepotism may be a factor about non- family managers feelings.

Hornsby and Kuratko (1990) found that size of the payroll had an impact on the level of HRM policy sophistication used in the firm. The design

of compensation systems including the consider- ation of external equity has also been linked with performance (Carlson et al., 2006). The design of compensation systems in terms of the form of incentive compensation used is also critical to the success of the organization. In fact, pay mix was found to be related to financial performance (Gerhart & Milkovich 1990).

The use of incentive compensation is propor- tional to organizational performance. The theory suggests that using incentive compensation, in- dividuals are motivated better to perform rather than by simply relying on fixed rewards (Carlson et al., 2006). Carlson et al. (2006) found that organizations that are high performing are more likely to offer a greater amount of incentives in order to address motivation and retention issues.

Which pay system is adopted by an SME is not the only aspect, but the fairness about compensa- tion is also a key element of individual and orga- nizational performance. Therefore, it concluded by saying that top management should give more importance to compensation and benefits in an organization to have maximum effectiveness from the employees and the business.

FUTURE RESEARCH DIRECTIONS

CEOs, policy advisors and managers need to be aware of any business practices that may improve the competitive edge of the firm. It is obvious that family businesses should frequently use employee reviews, written employee policies, written job descriptions, compensation plans or formal entry requirements for family members. The structure of family business that links man- agement and ownership reduces conflicts in the organization. Furthermore, it can be effective in the area of HRM to improve the practices of selection, compensation, performance appraisal, promotion, training and development in SMEs. Human resource management is a complex set of activities that are legislated within the organization

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to support through corporate strategies. Future studies will investigate the issue of comparing policy and practice in SMEs and large enterprises on a regional basis. Finally, the matter of which specific activities are associated with the HRM identified especially and how those specific activi- ties impact performance directly and indirectly in SMEs can be tackled.

CONCLUSION

Mazzarol (2003) argued that the faster the growth experienced by the small firm the more likely it will experience human resource problems. It is said that the main problem is finding and retain- ing high quality employees for many fast grow- ing SMEs. Founders and owners of such growth firms must learn to communicate their mission, vision and values to their employees along with a clear understanding of how the firm is to achieve these goals.

As the number of employees within the company increases, the need for a formal human resource manager or improved human resource activities arises. With less than 100 employees, the firm can probably operate successfully without a full-time personnel or human resource manager. However, once the employee base exceeds 150, a professional manager may be required and when this number becomes over 200, a dedicated hu- man resource department may become necessary (Mazzarol, 2003, p. 28). In response to increased competition and globalization, small businesses should also consider the management of the hu- man resource strategy in building a sustainable competitive advantage. The ability to sufficiently provide competitive compensation, employee par- ticipation, and effective training and development are some of the critical elements associated with the effective and efficient processes of SMEs.

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ADDITIONAL READING

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Michalski, A. (2011). Human resource controlling in small and medium-sized enterprises. Norder- stedt, Germany: GRIN Verlag.

Shinnar, R. S., Cho, S., & Rogof, E. G. (2013). Outcomes of family involvement in minor- ity owned family businesses. Journal of Family Business Strategy, 4(1), 22–33. doi:10.1016/j. jfbs.2012.12.001.

Westhead, P., & Storey, D.J. (1997). Training provision and the development of small and medium-sized enterprises. DFEE Publications Research Report, No. 26.

Wilkinson, A. (1999). Employment relations in SMEs. Employee Relations, 21(3), 206–217. doi:10.1108/01425459910273062.

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Chapter 7

DOI: 10.4018/978-1-4666-4731-2.ch007

Intergenerational Transition in a Small Family Business:

Evidence from a Process Study

ABSTRACT

Family businesses constitute the key infrastructure of wealth creation across the globe. One of the most important human-resource challenges they face is intergenerational transition, an issue that has received considerable attention from scholars in various countries. Despite this great interest, academics are still attempting to understand the phenomenon and provide effective managerial guidance on how fam- ily businesses can make it to the second generation. This chapter seeks to contribute to family business research by offering a more nuanced understanding of intergenerational transition that builds on a con- ceptualization of the phenomenon as a process rather than the prevailing view of it as an instantaneous event. In order to capture the processual nature of intergenerational transition, evidence is presented from a field study carried out in a small Italian family business that was the arena of three different intergenerational transitions taking place at different time periods. The evidence gathered suggests that the process is shaped by interaction of the different parties involved, who renegotiate their roles as it unfolds, with various factors playing a part.

INTRODUCTION

Family firms or businesses constitute the key infrastructure of wealth creation across the globe. In Italy, 56.9% of companies with a turnover of more than €50M are owned by families (2012 Observatory of Italian Family Firms Report), and this percentage is even higher in the case of small

and micro firms. These figures explain the birth of an academic field and a number of scholarly journals devoted to family business research.

Scholarly research has concentrated to date on unraveling peculiarities and commonalities with non-family businesses. Viewing the family busi- ness as a homogenous phenomenon with respect to the non-family concern leads, however, to a

Carlo Mari University of Molise, Italy

Olimpia Meglio* University of Sannio, Italy

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simplistic portrait that does not do justice to its heterogeneity. A family business is actually com- posed of two interdependent systems, namely the family and the business (Kepner, 1991), and the relationship between them can take various forms, thus resulting in great heterogeneity of family businesses across the globe. This is mirrored by the multitude of definitions of the family business and paradigms to be found in the literature. As an analysis of definitions and paradigms lies beyond the scope of this chapter, readers are referred to Westhead & Cowling (1998) for a comparative overview and to Chrisman, Chua & Steier (2003) for an introduction to family business theories.

Even though each of these definitions and paradigms presents an angled view of the family business, taken together they suggest that the fam- ily social and human capital is the most important asset, as it cannot be hired or imported.

The awareness that family businesses are het- erogeneous and that human resources are essential to ensuring competitive advantage and long-term survival has contributed to recognition of the importance of human resource issues in family business research (King, Solomon & Fernald, 2001, Lansberg, 1983). While the literature has generally neglected these aspects, Astrachan & Kolenko (1994) constitute an exception. The authors highlight the importance of activities such as recruitment, selection, development, and compensation policies. These polices may be affected by family values and personality issues as well as family culture (Dyer, 1986). Among human resource issues, Astrachan & Kolenko (1994) include the adoption of a succession plan, which is rarely formalized by family firms in the way that all other decisions regarding human resources are (Nguyen & Bryant, 2004). The lack of a formal succession plan could account for the widely recognized fact that the majority of family businesses fail to make it to the second generation (e.g. Barach, & Gantisky, 1995; Le Breton-Miller, 2004) . Despite the attention that this issue has received from scholars in various countries (Brockhaus, 2004; Litz, Pearson &

Litchfield, 2012), the findings are inconclusive and scholars are still attempting to understand how this transition can be successfully managed.

This chapter seeks to contribute to family business research by offering a more nuanced understanding of intergenerational transition that builds on a conceptualization of the phenomenon as a process rather than an instantaneous event, which is the prevailing view. In order to capture the processual nature of intergenerational transi- tion, evidence is presented from a field study car- ried out in an Italian small family company that was the arena of three different intergenerational transitions taking place at different time periods. Our findings offer a multi-authored account of this process, in which successors and founders have their say, and provides an understanding of the relations between them. They also capture the lengthy, ambiguous and ongoing nature of the transition, with roles renegotiated on a day- to-day basis and various factors, both internal and external, exerting their influence.

The chapter is organized into following sections: a review of the existing literature on intergenerational transition, discussing flaws in existing conceptualizations of this phenomenon and addressing the limitations of research methods employed in empirical studies; a description of the field study; presentation and analysis of the findings; and finally a discussion of the study’s limitations and future paths of research as well as managerial implications.

INTERGENERATIONAL TRANSITION IN FAMILY BUSINESS RESEARCH

This section compares different ways to con- ceptualize intergenerational transition in family businesses and goes on to review the existing literature on the subject. It ends with a proposal to employ a process approach as a fruitful research orientation to further current understanding of the phenomenon.

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Alternative Conceptualizations of Intergenerational Transition

The process of handing over management and ownership from one generation to another is generally referred to in the literature as succes- sion or intergenerational transition. Succession is defined as “the act or process of one person’s taking the place of another in the enjoyment of or liability for rights or duties or both” (Merriam- Webster’s Collegiate Dictionary, 2003: 1247). This definition permits two alternative views of succession: one that focuses on the final out- come of the process, described as the act of one person’s taking the place of another, and one that conceives it as something that unfolds over time. The latter view is the one adopted by the pres- ent authors, who therefore suggest that the term “intergenerational transition process” should be adopted as capable of conveying its nature more effectively. In particular, it does justice to the often steady and gradual withdrawal of the senior generation from active management in the firm (Morris, Williams, Allen, & Avila, 1997) and the existence of a time lag between the handing over of managerial functions and the transfer of ownership. Moreover, this process includes the socialization of successors into the operation of the family firm (Garcia-Alverez, Lopez-Sintas, & Gonsalvo, 2002) and involves acceptance and integration of the new management (Sharma, Chrisman, Pablo & Chua, 2001). The frequently used metaphor of “passing the baton” therefore paints a misleading picture of this phenomenon, as it fails to capture its nature as a lengthy, am- biguous, and socially constructed process with various actors playing a role: founders, succes- sors, families, other employees, customers and suppliers (Hall, 2003).

The conception of intergenerational transition as an ongoing process involving multiple stake- holders dates back to Handler (1990), who depicts it as one of mutual role adjustment involving the transfer of leadership experience, authority,

and decision-making power. More recently, Hall (2003) expanded the analysis of role changes during the transition process by adding value, emotions, and rationality as theoretical perspec- tives for investigation of the process.

To sum up, a view of intergenerational tran- sition as a process recognizes the interaction of various stakeholders and the influence of family as well as business factors that concurrently and iteratively shape its course and determine its out- come. The existing literature will now be examined in the light of these considerations.

The Existing Literature on Intergenerational Transition

While different labels are attached to this phe- nomenon, the literature focuses primarily on the first instance of intergenerational transition, with a few studies addressing second- or third- generation transition (e.g. Lee, 2006; Sonfield & Lussier, 2004). The existence of a whole host of studies shows that intergenerational transition is a well-researched topic. To make sense of the variety of issues addressed and methods em- ployed, the existing studies are categorized here as: 1) seeking to explain performance in family businesses; 2) focusing on the decision-making process; 3) investigating single constructs, such as commitment, or single actors, such as founders or successors; 4) approaching intergenerational transition as a process with the aim of developing a holistic overview.

Within the first category, analysis of the rela- tionship between family issues and performance is a major focus among family business scholars. A range of factors is investigated with a view to explaining or predicting successful intergenera- tional transition. Stewart & Hitt (2012) provide a detailed summary of empirical studies pub- lished in the 2000s to assess the effects of family involvement on firm performance. They review 59 empirical studies, mainly investigating public companies (e.g. Poutziouris, 2006), with only 12

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studies focusing on privately owned firms (e.g. Westhead & Cowling, 1997). These studies take into account various geographical contexts, rang- ing from Italy (e.g. Sciascia & Mazzola, 2008) to the USA (e.g. Villalonga & Amit, 2006) and Australia (e.g. Kotey, 2005). Some of them are country-focused (e.g. Saito, 2008), while others provide cross-country analysis (e.g. Fogel, 2006). Moreover, they assess the effects of different vari- ables on different measures of performance, and it is therefore hardly surprising that the resulting picture of the relationship between family involve- ment and performance should be ambiguous and the findings inconclusive. In our view, given the heterogeneity of family businesses, it is more useful to investigate how family and business fac- tors interact and shape one other and determine a certain performance. This is in line with Dyer & Dyer (2009: 218), who suggest that “ to measure family effectiveness we must get at the underlying family processes.”

The second category comprises studies in- vestigating the decision-making process during intergenerational transition. Bjuggren & Sund, (2001) identify different legal arrangements to deal with possible problems, which are contingent upon the legal system in force in a given country. Other studies analyze the decision-making process from the perspective of the future leader, focus- ing on the effect of both financial and behavioral sunk costs on the succession process (Shepherd & Zacharakis, 2000). Others focus on planning intergenerational transition with a view to offering practical guidance on how to make it successful (e.g. Sharma, Chrisman & Chua, 2003). Planning financial, fiscal and legal as well as emotional issues in advance has long been considered an essential tool for successful intergenerational tran- sition in a family business (Mazzola, Marchisio & Astrachan, 2006). Planning succession also means relying on an effective succession management program that deals with HR issues, such as the involvement of line management in identifying candidates or developmental assignments as part of the process (Taylor & McGraw, 2004). Various

scholars claim, however, that there is no connec- tion between planning and successful succession (Aronoff, 1998; Lansberg, 1999; Murray, 2003). Others point out that some firms, such as those based in northeastern England, neither believe in the efficacy of planning nor plan the succession process for periods of over five years (Kirby & Lee, 1996). The limitations of these studies arise, in our view, from failure to take into consideration behavioral factors that actually do affect how the intergenerational transition process evolves over time, above and beyond what has been rationally planned.

The third category presents a great deal of variation, with studies addressing aspects such as communication between founder and succes- sor (Janjuha-Jivraj & Woods, 2002), intra-family conflicts (Levinson, 1971), family cohesion and adaptability (Lansberg & Astrachan, 1994), the gender of actors involved (Harveston, Davis & Lyden, 1997), the role of family identity (Zellwe- ger, Nason, Nordqvist & Brush, 2013), successors’ career expectations (Sharma, 1997), and desirable successor attributes such as commitment (Sharma, & Rao, 2000), analysis of which can be extended to include all the family members (Handler, 1989; Sharma, 1997). There are also conceptual con- tributions such as Sharma & Irving (2005), who contend that commitment is a multi-dimensional construct and identify and discuss four bases of successor commitment to family firm—affective (based on perceived desire), normative (based a sense of obligation), calculative (based on an op- portunistic assessment of costs and benefits), and imperative (based on a perceived need).

To further understanding of the positive role of the family, Eddleston & Kellermans (2007) point out that stewardship relationships can play a key role in small family businesses by keeping family members focused on the well-being and success of the business and permitting the devel- opment of supporting mechanisms, which can be categorized as psychological (such as collective serving, commitment to values or the attainment of higher-order needs) and situational (such as a

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high level of trust). These studies are, in our view, a step towards a more nuanced analysis of key concepts in intergenerational transition.

The fourth category comprises studies address- ing the intergenerational transition process in a more holistic way. Miller, Steier & Le Breton- Miller (2003) inductively identify three possible patterns of intergenerational transition—conserva- tive, rebellious, and wavering—and discuss their possible impact on performance. Beyond this substantive contribution, the need clearly emerges for joint consideration of how family issues shape and are shaped by business ones.

The contribution of Cabrera-Suarez, De Saà- Perez & Garcìa-Almeida (2001) proceeds in the same direction with an integrative model incor- porating the characteristics of the founder and successor (age and gender) as well as the family and the business context. The authors do justice to the multiple, concurrent and sometimes conflict- ing factors that recursively shape this process. The main flaw of this model is the fact that they focus on founders and successors, while there are several other stakeholders to take into account, such as professional managers, other family members, employees, and customers. All of these play a part in the intergenerational transition process, which is described as one of mutual adjustment by Handler (1990). Lam (2011) further develops Handler’s view of intergenerational transition by pointing out that each individual play different roles simultaneously and putting forward the idea of multi-entity roles, which is a step towards comprehension of the ambiguities surrounding this process. This in turn requires reflection on suitable methods of inquiry, as discussed below.

Methodological Considerations in the Study of Intergenerational Transition

On the methodological side, the family business field has registered progress in the last 25 years through the increasing use of large-scale surveys

of representative samples of firms (e.g. Bird, Welsch, Astrachan, & Pistrui, 2002; Davidsson, Low, & Wright, 2001).

In an overview of past achievements and future perspectives, Sharma, Chrisman, & Gersick (2012) see this trend positively as a sign of greater sci- entific rigor but draw attention, echoing Zahra & Sharma (2004), to the danger of empirical research becoming mechanical with low value in terms of new knowledge of substantive issues surround- ing family businesses. In this connection, family business scholars advocate demolition of the pre- vailing paradigm of positive rationalist research ontology and epistemology that still dominates the field (Litz, Pearson & Litchfield, 2012). In a similar vein, Dawson & Hjorth (2012) argue against methodological conformity characterized by variance-based research aimed at identifying statistically significant systematic patterns of rela- tions rather than understanding how organizational processes actually unfold through time. Following this lead, the present authors contend that family business scholars are caught in a straight-jacketed mindset of hypotheses-testing on large samples, looking for the ultimate dependent, moderating or mediating variable explaining succession. The result is that research seems to be hamstrung by a set of standardized procedures that allow rigor but sacrifice deep understanding of the ambiguous process examined here. It is in order to remedy this situation that the adoption of a process research approach is advocated here.

Process research incorporates time with a view to obtaining an understanding of the world that is ignored or underestimated by variance-based conceptual models (Langley, 2009). The definition of process employed here is borrowed from Van de Ven (1992), who states that the word can be used in the management and organization field to designate causal mechanisms in variance models, to label certain types of variables or to indicate how and why significant temporally evolving phe- nomena take place. The latter conceptualization is adopted in this chapter, where a process is seen

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as a sequence of events or activities that describe how things change over time. This definition takes a historical developmental perspective and focuses on the sequences of incidents, activities, and actions unfolding over time and taking into account enabling and constraining influences from contexts inside and outside the firm. The underlying conception is that social reality is a dynamic process constructed by human agents through their actions. Actions shape and are shaped by social structures. The interplay between actions and structures take place over time in a cumulative manner, so that the past contains the seeds of the future. Embeddedness and temporal interconnectedness are therefore key features of process research (Pettigrew, 1992). The process research approach is adopted here as consistent with the conceptualization of intergenerational transition discussed above. In line with this view, the question addressed here is this: How does in- tergenerational transition unfold over time? With the research approach clarified and the research question stated, the following section presents description of the field study carried out.

THE FIELD STUDY

The term “field study” is used here to describe an investigation of ongoing organizational life in its natural settings with first-hand observations from the viewpoint of a particular individual or group (Van de Ven & Poole, 2002). The hallmark of such a study is the fact that it takes place in a natural social setting familiar to the subject (Lofland, Snow, Anderson, & Lofland, 2006).

Our approach to this study was case-based and processual (Pettigrew, 1992). In order to capture both complexity and depth, a qualitative case study was developed: “A case study is an empirical inquiry that investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident and in which multiple sources

of evidences are used.” (Yin, 1989: 23). As the focus of the research was on how different actors experienced and made sense of the ongoing inter- generational transition, the study was conducted as an interpretive inquiry (Lincoln & Guba, 1985).

It commenced in medias res with three in- tergenerational transitions at different stages of development. For this reason, a partly retrospec- tive and partly real-time research approach was employed with a view to linking past and present as well as external and internal contexts. In order to obtain a multi-authored account of the transition process, it was decided to investigate three units of analysis: the fathers, the sons/daughter(s), and the relations between them. A focus on relation- ships is essential to any understanding of how each intergenerational transition interacts with the others and how they shape one other over time.

The field study stretched over the three-year period from 2008 to 2010. Access to the research setting was obtained through the personal rela- tionship of one of the authors with Antonella (Mauro’s daughter). The idea of investigating the intergenerational transition arose out of informal talks with her and listening to her stories about the firm. What aroused our interest was the fact that she described it as a family business even though there was no familial link between the three founders. It is, however, intergenerational transition that makes the company a family busi- ness. The peculiarity of the situation prompted us to investigate this setting.

While access was easily negotiated, obtaining the cooperation of all the informants proved rather difficult for the same reasons. The relationship of one of the authors with Antonella was known, and it took time both to explain what was being undertaken and to make it clear to all the parties involved that they could speak freely. It was also important to guard against undue importance be- ing attached to Antonella’s viewpoint.

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The Research Setting

The research setting is a small Italian service company operating in southern Italy. Its core business is selling plumbing and heating materi- als both as wholesaler and as retailer. The first business accounts for 80% of turnover and sales to end consumers for the remaining 20% . The firm currently has 20 full-time employees.

Founded in 1976, the company is run by three shareholders, Luigi, Federico and Mauro, who are fully involved in the day-to-day managerial activi- ties. Luigi is responsible for the wholesale section, Federico for retail, and Mauro for finance and procurement. While Luigi, Federico and Mauro are not related and their wives play no part in the firm, they started it with the idea of “passing the baton” to their children and perceive it as a fam- ily business. Figure 1 shows the composition of the families. The names are invented in order to preserve anonymity.

Data Collection and Analysis

A range of both primary and secondary data was gathered during the study. Primary data were gath- ered mainly through focused interviews with the three founders and the three successors. Informal talks were also held with two siblings not involved in the process (Marco and Marianna) in order to ascertain their views. In the case of Federico, the interview took place in the presence of the whole family and thus turned into a group session with the wife, daughter, and son, who are not involved in the company, offering their opinions. This pro- vided some insight into the role played by family in the transition process.

Each informant was interviewed at least twice in sessions lasting one hour on average. Topics of interest were focused on and the informants were asked to reconstruct key events and experiences from 1976 on. All the interviews were recorded and transcribed with the informants’ consent. The interviews were also supplemented with observa- tions and informal talks set down in field notes. A chronology of events provided by one of the founders and minutes from key meetings served as secondary data.

Our analysis of the data drew on Langley (1999) for process data analysis strategies and Miles & Huberman (1994) for qualitative data analysis procedures. As the former points out, “Process data consist largely of stories about what happened and who did what when—that is, events, activities, and choices ordered over time” (Langley, 1999: 692), and are therefore messy and ambiguous. The initial collapsing of data into a chronological reconstruction of the three different transitions was followed by coding, codes being understood here as “tags or labels for assigning units of meaning to the descriptive or inferential information compiled during a study” (Miles & Huberman, 1994: 56). A list of codes was created by proceeding iteratively back and forth between data and theory. The next step was to identify patterns of codes, i.e. themes emerging from our data so as to account for both similarities and differences between the three intergenerational transitions.

Figure 1. The composition of the three families

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FINDINGS

Langley’s (1999) narrative strategy is adopted here as a tool for the analysis and presentation of process data. A narrative strategy serves to show how the three intergenerational transitions unfolded over time and shaped one other. The key events are set out in a timeline in order to facilitate understanding of their chronology (see Figure 2).

With a view to clarity of exposition, it was decided to present the three transitions first and then go on to discuss themes emerging from their comparison and overall picture.

The Luigi-Carlo Transition Story

The first successor to enter the firm was Luisa, hired as a simple employee. The plan was for the business to provide her with a fixed income but no responsibility in the decision-making process. Moreover, she was initially hired to stand in for an employee on maternity leave and therefore supposed to leave after just a few months. Things turned out differently, as we shall see.

The first generational transition perceived as such involved Luigi’s son Carlo, who joined the firm in 2002. While the father’s account suggests that it was taken for granted that Carlo would gradually take over from him, the son’s suggests that joining the company was not a foregone con-

clusion but perceived rather as an opportunity to work and earn some money, as he had no wish to continue his education at university level. Carlo’s entrance was therefore quite unplanned and he had no previous training on the job. The idea was for him to learn through hands-on experience. His father made it clear to the entire workforce, however, that he was no ordinary employee but rather the successor. For this reason, he took a dim view of Carlo’s tendency to work side by side with others. Carlo seems to have attached little importance to this, being simply willing to learn the business.

The learning process is described, albeit with different nuances, as a process of continuous adjustment and sometimes as a clash between different ways of envisaging and performing the role, with the father unwilling to make changes and the son trying to innovate. This adjustment process is not described as difficult by the par- ties involved. One possible explanation for this is the fact that the transition had been under way for six years at the time of the field study, and it is therefore possible that some initial friction between father and son had been resolved or rationalized ex-post. They both agree that while the acquisition of skills has been completed, the father is not yet ready to leave his post, and there is thus still some ambiguity about who is actually responsible for the role.

The Federico-Ludovico Transition Story

This story follows much the same lines. It began in 2003, one year later, and was facilitated to some extent by the previous transition. Federico too stresses the idea that the entrance of sons and daughters was a natural evolution of the firm, in a way the fulfillment of founder’s personal goals. The sentiment is best captured by his question, “What is the point of our work if we don’t hand over to our children?” Once again, the son’s entrance was not formally communicated (this

Figure 2. Chronology of key events

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is an ambiguous issue, as we shall see) and once again it took place because the son did not want to continue his education and was looking for a way to earn a living. Federico candidly admits to a problematic relationship with Ludovico and states that he encouraged him to look for a job elsewhere but helped him to join the firm when these attempts fell through. Federico’s account presents some inconsistencies. On the one hand, he used to take Ludovico to the office in order to involve him in the business; on the other, he encouraged him to look elsewhere. This confirms the existence of Federico’s problematic relation- ship with his son and pressure from the family (especially his wife) to assert Ludovico’s “right” to a job in the business. This is reinforced by the idea that if Marco (Ludovico’s brother, see Figure 1) does decide to join, there will be a position for him too.

In order to facilitate his son’s socialization and training on the job, Federico suggested that Mauro should serve as his mentor during this period. No formal program was established, however, and the training developed largely on a contingent, day-to-day basis. The interviews suggest that Federico is not so ready to hand over, seeing it as his responsibility to protect the company from his son’s possible mistakes and his son from pos- sible exclusion by the other successors. They also suggest a clash between different ways of doing things and the difficulty of changing the way “things are done around here”. Father and son simply seem to be speaking different languages and do not understand each other. Our findings indicate that they tend to avert the risk of open conflict by simply avoiding any frank discussion of sensitive issues. It emerges from Ludovico’s account that he does not recognize the primacy of his father’s experience. He stated several times during the interviews that he spent more time in the firm and therefore understood the situations much better than his father. This implies that he would be able to handle problems better but is not allowed to do so.

As for relations with the other successors, his philosophy seems to be: “I am here, as I have the right to be here. Nobody can change this situation and I won’t interfere with the others as long as they don’t interfere with me.” What is interesting is what he says about his sister and her attempt to replace his father through a switch of role from employee to successor. This is the only instance of candid reference to this situation, which means that Luisa’s position is yet to be clarified.

The Mauro-Antonella Transition Story

It was in September 2004, after graduating in busi- ness administration with a major in finance, that Antonella joined the company. On one hand, her introduction as Mauro’s daughter was considered both natural and inevitable; on the other, she was the first woman to join the company as a succes- sor. Luisa was actually the first of the children to be hired, but as an employee. Antonella therefore had to fight against prejudice from various sides: the founders, the employees, the suppliers, and the customers. She recalls joining the company with the conviction that she possessed skills and know-how acquired at university. This was a strength but also a weakness, as she had no practical knowledge of the difficulties of running a business on a day-to-day basis. She asked her father to give her a mentor within the company and focused on questions of taxation. Her back- ground enabled her to fill a gap in quite a short time. Though competent, she had to face several awkward situations involving clashes with her father and the other shareholders. She claims that her father “sacrificed” her simply in order to avoid conflict with the other shareholders even though she was evidently right, and that he never admitted this. She also recalls several heated discussions on different issues that continued at home, with her mother caught in the crossfire. They learned how to cope in time and stopped bringing work problems home with them, which was essential

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in order to avoid tension and conflict within the family. The result of this difficult situation was that Matteo, who was to have taken over from his father as head of procurement, decided not to join the firm, thus leaving the position vacant.

It clearly emerges from Antonella’s account that she experienced difficulties with Ludovico and some male employees. He tried on several occasions to place her in an awkward situation, with the others taking his side, and she felt they had a low opinion of her. This feeling gradually disappeared, however, and the situation has now changed completely with due appreciation of her skills and competence. Her feeling is that being female in a male-dominated company hindered the transition process or at least slowed it down. The problem now appears to have completely disappeared, however, and she believes the tran- sition to her father’s role is almost complete, as it is known that she can take the right decisions. Antonella knows that she can rely on her father if any doubts should arise.

A further consequence of her joining the company as a successor was that Luisa, who had previously been considered an ordinary employee, started renegotiating her role. This was made evident by the fact that she began to attend meet- ings of the founders and successors as though one of the latter. Mauro summed up the situation succinctly: “Luisa is an employee, but when she attends company meetings she is a successor.”

Themes Emerging from the Data

After this brief reconstruction of the three inter- generational transition stories, it is interesting to examine themes emerging from comparison of the different accounts offered by the parties involved in the process. Our data can be analyzed with reference either to the overall process or to individual interactions between actors throughout the process. The complementary perspectives thus offered can be taken together to improve our understanding of the intergenerational

transition process. Examination of how the dif- ferent transitions evolved over time shows how the approach adopted here makes it possible to capture the ambiguous nature of the process, as already outlined by Hall (2003) and Lam (2011). The process emerging from the three transitions contains elements of the conservative, rebellious, and wavering patterns identified by Miller, Steier & LeBreton-Miller (2003). It is possible to see how apparently opposing models can coexist in the same company simply by examining the daily interactions between the parties involved. Planned and unplanned actions, lack of communication and clearly announced actions, training on the job and university-level education, all play a part in the process, blending with one other into the flow of events. Moreover, investigating the intergenerational transition process through the accounts provided of that experience by those involved makes it possible to unravel conflicts between different goals and views about the future of the company that methods based on a variance approach would fail to detect. The three cases were thus compared so as to identify a number of points worthy of attention.

The first point emerging from the accounts offered by founders regards the way in which they announced the entrance of their children to the other shareholders. Luigi and Federico offer a partially overlapping account. They simply told the others: “My son is starting work here tomor- row.” Their recollection of that moment during the interviews does not, however, square with Mauro’s account. According to him, Federico said nothing and Luigi mentioned it only informally during a coffee break. The underlying message is that a son joining the firm is a natural event, something that will take place sooner or later, and not a matter requiring a company decision. This means that there is no need for formal discussion. Even though several years have passed, Mauro is still unhappy at the lack of transparency in the way intergenerational transition is handled. This is why he notified the others of Antonella’s deci-

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sion four months in advance and reminded them a week before she started work. Moreover, while it had simply been taken for granted in the previous cases that the successors would take over from their fathers, Mauro now initiated discussion of roles and responsibilities. It was, however, such a foregone conclusion that the successor would take the father’s place in the same role that no objections were raised.

Our findings are in line with the view that planning intergenerational transition is not only a matter of setting goals but also of communicat- ing those goals to all the parties involved in and affected by the process.

The second point regards the education and training of the new generation. Comparison of the three transitions reveals the different role played by education in the successors’ lives. While Antonella graduated in business administration with the idea of applying her knowledge within the company so as to improve its management, neither Ludovico nor Carlo was interested in fur- ther academic education. This reflects a different relationship with the family firm. Antonella wants to give something to the business, to improve the way it is run, whereas Ludovico and Carlo expect it to give them something, namely job security and an income. Apart from this difference, they all believe that getting hands dirty is essential to learning how to run a business. These findings suggest the need for careful evaluation from a process perspective with a view to identifying an appropriate mix of formal education and training inside and outside the firm.

Another point is the influence of gender on intergenerational transition. Daughter marginal- ization and paternalistic masculinity are addressed in the literature (Aisnworth and Wolfram Cox, 2003). Our study provides mixed evidence. Luisa’s story seems to suggest paternalistic masculinity, as employing her in the company was a way to maintain her dependent status. While Antonella did not suffer from this paternalistic masculinity, she did experience attempts to marginalize her.

Antonella reports prejudice on the part of founders, employees and successors. Federico and Luigi both admit that while they never ques- tioned the idea of her joining the firm, they were very skeptical of her ability to take over from her father. They also add that it took a year or two to change their minds. Mauro played a key part in this situation, as he never showed Antonella any favor, even when she was evidently in the right. His purpose in this was to avoid clashes with the other founders, which brings us to the next point.

Several sources of conflict were identified, ranging from role to gender. The most important is indisputably the tendency of founders not to question the way “things are done around here” and the attempt of successors to introduce changes. Gender conflicts regard the suitability of women to play a male role such as decision making. Analysis of the data reveals various conflicts under way between the parties involved—father and son/daughter, founders, and successors—with each influencing the others. Our findings sug- gest that family relations can become a liability when negative feelings and escalating conflicts get in the way of working together (Sorensen & Bierman, 2009). Managing these conflicts means finding a way to balance opposing interests, and the solutions vary a great deal. In some cases, conflict is simply avoided, resulting in a stand- off. In others, a third party is asked to judge the situation and suggest which of the opposing ideas should be adopted, thus revealing the inability of founders and successors to reach agreement in company’s best interest. These findings confirm the great influence of family ties on the dynamics of this process.

A final point regards the way founders and successors envisage the firm’s development. Despite all the differences detected between the three transitions, it is commonly felt by the suc- cessors that the firm would benefit greatly from the introduction of a third party to handle the turnaround and transition. They all believe that even though the figures do not indicate a crisis,

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the firm should be reorganized and managed more professionally. They maintain that the skills required to carry through this process cannot be found inside the firm and that hiring a manager from outside could prove helpful.

The founders never mentioned this possibility, which suggests that they do not think the time is ripe to hand over. Gagné, Wrosch, & Brun de Pontet (2011) shed light on these dynamics. Their analysis of family business leaders identifies two different capacities, namely goal adjustment (help- ing the successor to join the company) and goal disengagement (concrete steps to ease retirement). Our findings reveal a lack of goal disengagement capacity in the leaders examined. They are all middle-aged men, eager to work, and above all committed to protecting their shares of the firm and therefore the position of their children. These findings are in line with the idea of transition as a wavering process with unclear goals and confused roles.

CONCLUSION

This closing section discusses what our findings have to say to the community of family business scholars and to those involved into the day-to-day management of a family business.

Implications for the Academic Community

Our study jettisons the simplistic view of succes- sion in the family business as “passing the baton”, a metaphor that fails to capture the essence of a key process in the life of such an enterprise. Family and business systems influence one other all the way through this process, which can take a whole variety of forms depending on the different factors involved. It is therefore suggested that succession should be viewed not as an instantaneous event but as a process, for which the term “intergenerational transition” is more suitable. It is further suggested

that a process approach should be adopted in empirical research. These views underpin our investigation of how three intergenerational tran- sitions unfolded over time and shaped one other in a small Italian family business. Our findings provide a multi-authored account in which both successors and founders have their say, thus shed- ding light on the relations between them in such as way as to capture the lengthy, ambiguous and ongoing nature of the process, where roles are renegotiated on a day-to-day basis and various internal and external factors are involved.

The findings are in line with previous process research on intergenerational transition (Hall, 2003; Lam, 2011) and confirm both that transition is greatly influenced by the relationship between founder and successor, and that the family in- terferes in it. If a problematic relationship exists between them, it will most probably be accentuated during the transition process and come in turn to influence how this unfolds over time. While gen- der and education also play a role, their influence wanes over time, with training on the job and role adjustment prevailing in the long run.

Alongside these contributions, our study suf- fers from various limitations that should be noted in this closing section together with our sugges- tions for future research. The major weakness is the small number of cases examined. Process research is frequently based on a small set of cases, as the extensive field work required makes it very difficult to investigate more than one setting when the sites are at any distance from one another or the investigator is alone. While individual case studies offer a deep understanding of the contextual factors affecting a process, multiple case studies “offer scope to develop insights from cross-case comparison” (Bizzi & Langley, 2012: 228). It is therefore strongly recommended that family busi- ness scholars adopting a process approach should find a better balance between depth and breadth in constructing empirical samples of case studies.

Another limitation regards the research setting under investigation, namely a small firm. Although

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family businesses are frequently small, many of them are large. Research is therefore recom- mended to ascertain whether similar or different patterns emerge during the transition process in large companies.

Attention was focused on internal commu- nication during the study. While founders and successors are key actors, it would be interesting to investigate how employees and customers were informed of and perceived transition. This could cast light on how other stakeholders experience the process and how their perceptions change as it unfolds.

These suggestions can be encapsulated in the following list of research questions.

RQ1: How does intergenerational transition un- fold in large family companies? How does the size of the company interact with such a process?

RQ2: How do customers/suppliers perceive the intergenerational transition process of a family company? How does such perception evolve over time? How does it affect the busi- ness relationship with the family company?

RQ3: How do employees perceive the inter- generational transition process of a family company? How does such perception evolve over time? How does the relationship (loy- alty, trust and affective relationships) with the founder affect the relationship with the successor?

While the list is only tentative, it is our belief that answering these research questions by means of a process approach is an effective way to further our understanding of intergenerational transition in the family business.

Implications for the Business Community

Our findings can be read also in the light of possible managerial implications. Given the heterogeneity of family businesses, it is not our aim here to pro-

vide a list of best practices, the practical usefulness of which has in any case been questioned (Dana & Smyrnios, 2010 ). Our present aim is rather to consider what our findings may imply as regards managing an intergenerational transition process.

Attention should be drawn first of all to the fact that that flexibility is essential to the ef- fective handling of this process. This does not mean disregarding the possible role of planning but rather recognition that not even a carefully crafted plan can foresee and therefore manage the emotional and behavioral factors that actually shape the process.

In addition to planning, education and training are essential ingredients of a transition process. Tacit knowledge must be transferred from founders to successors. At the same time, fresh knowledge can be essential to revitalization of a business. A focused education provides the successor with basic know-how that needs to be fine-tuned through an on-the-job training program. Experi- ence in other firms operating in the same sectors can also prove an excellent source of fresh ideas for the successor to introduce into the family firm. Unfortunately, the successor often has no reason to look for experience in other companies or perhaps even in other countries, especially when the firm is small. The family company is seen not as an end in itself but rather as a way to get by. This can prove detrimental in the long run, as it may reduce the likelihood of implementing changes and innovations.

Due attention should be paid to the interaction between family and business. The hiring of an external consultant is frequently recommended as an effective way of resolving conflict and preserv- ing the company value, and the idea was in fact put forward by the successors in our study as an effective way to accommodate divergent interests among the parties involved. In any case, it is neither a magic formula nor a one-size-fits-all solution. This reinforces the need for careful evaluation of the situation and the constraining and enabling forces that affect the transition process.

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ENDNOTES

* Both authors contributed equally and are listed in alphabetical order.

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Chapter 8

The Role of Human Resources Practices in Conflict Management:

Implications for Small-Medium Enterprises

ABSTRACT

INTRODUCTION

SMEs can be conceptualized as entrepreneur or family owned, small and flat organizations, characterized by informality. An owner’s basic concern is the survival of the enterprise. In addi- tion to survival, striving for financial effective- ness would enable the firm growth and increase profitability. Thus, priorities of the organization shape the mission, vision and purposes at first hand. In such cases, the context of small business is likely push for efficiency through the inbalance

of minimum input and maximum outcome contro- versy. Therefore, it is evident that contextual and entrepreneural characteristics influence human resources management. When it is all about the financial capital, human capital might be ignored. It is for sure, small business is challenging from the standpoint of entrepreneurs. However, hu- man capital needs attention, especially when organizational goals would be reached through their contribution.

In this respect, this chapter addresses the con- flict phenomena in organizations; starting from

Nil Selenay Erden Istanbul University,Turkey

DOI: 10.4018/978-1-4666-4731-2.ch008

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the human resources management in SMEs and nature of conflict in small business in relation to human resources management perspective. After providing the background in conflict research, the HRM functions’ contribution to conflict manage- ment will be presented. Finally, recommendations for potential small business related problems in conflict management and future research direc- tions will be discussed.

In this framework, the objectives of this chapter are, as follows:

• Discuss issues related with human resourc- es management in small business.

• Discuss conflict phenomena in small busi- ness to sharpen the focus on work conflict.

• Identify the sources of conflict in small business.

• Build the link between human resourc- es management functions and conflict management.

• Suggest solutions for conflict resolu- tion through the implementation of HR functions.

HUMAN RESOURCES MANAGEMENT IN SMALL- MEDIUM ENTERPRISES

SME Growth

In general, small-medium enterprises are known to be companies that have less than 250 employ- ees. However, number of employees for SMEs differs from country to counrty; depending on the characteristics of the economy (Gibson & Van der Vaart, 2008). For instance, in Albania, a SME is defined as a company that has six to 80 employees while in United Kingdom SMEs are defined to be companies with less than 50 employees (Kushnir, 2010). Thus, no clear definition of SMEs exist as there are many criterion used to define SMEs; such as profitability, sales turnover or size (Storey, 1994), that would again vary among countries. To

overcome this confusion, we will use the term SME to refer to companies with less than 50 employees throughout the chapter.

It is a well known fact that a large percentage of newly established small firms die in the first five years, and solely the ones that can adjust to their environment are likely to survive. Once the firm has survived, external and internal barriers to growth come up as new challenges. Therefore, one can think that SMEs make transitions through stages of growth and every stage requires different management techniques (MacMahon & Murphy, 1998).

According to organizational life cycle models, there might be many stages of growth. However, growth stages are not stable with well-defined characteristics. (Kazanjian, 1988). For instance, at the first stage, informality and little planning would exist in a newly established firm. The entrepreneur could adapt formal procedures and establish a solid organizational design to pass through stage two; of which is concerned with growth. Management becomes more professional at this stage. Finally, the firm gets mature at the third step; by implementing rules and regulations while becoming more long-term oriented with planning and strategies (Smith, Mithcell & Sum- mer, 1985). One can think that most SMEs could be at stage one or in the middle of stage one and two; of which seems to be important in terms of firm growth.

SME growth depends on the amount and effective use of financial resources, product development and effective management of hu- man capital through formally established HRM functions (Dobbs & Hamilton, 2006). In this respect, human resources should be concerned as the internal capability of the SMEs and the source for competitive advantage (Katz, Aldrich, Welbourne & Williams, 2000). However, survival needs push for more concern over finance and marketing functions, hence to the underestima- tion of human resources management. As such, workers in SMEs are described as the invisible workforce (Wilkinson, 1999).

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Owners/Managers Role in HRM

Usually, owners/managers take the responsibility of HRM in small firms employing less than 50 employees (MacMahon, 1996). In this case, effec- tive HRM would be dependent on the managerial skills, attitudes and experiences of the owners/ managers. Even though the firm grows larger, owners/managers might still be unwilling to del- egate HRM functions. This might be due to the view that human management is not a technical matter that requires to hire specialists. The owner/ manager could also be willing to invest resources into other work areas rather than HRM, as well (Wilkinson, 1999). For instance, a study conducted by Matlay (1999) indicates that none of the 540 owner/manager respondents of British SMEs were prepared to delegate the responsibility of HRM functions to a specialist. This might also be due to the view that HRM would be seen as an essential function to fulfill business strategy. Therefore, either managers/owners think that for effective HRM there is no need to invest resources to hire HR specialists, or HRM is vital for company growth so that they would like to implement the HRM functions on their own way. In addition to mentioned reasons, Hill (2004)’s review on the barriers for human resources development in small business indicates that, in some cases owners are not well educated to consider benefits of effective human resource planning or short-term survival issues are more important than considering effec- tive management of human capital. For instance, training is perceived as the time away from job, as well as additional expenses for the owner. The link between training and performance is not well demonstrated due to the awareness level of the owner. On the other hand, employees might not be interested in training if they think they do not need to be trained to fulfill their duties. Although training would contribute to the development of employees, absence of promotion would demo- tivate employee desire for training- knowing that no change will occur even if they improve.

The concern of SME survival, possible fulfill- ment of HR functions by owner/ managers,and the limited firm size prevents the existence of HR department in SMEs as well as limiting our academic knowledge on human resources man- agement functions, concerns and needs in SMEs. What’s more, current HRM theory has been de- veloped in larger organizations and neglected the context of small business. Limited literature on HRM in SMEs offer two models; suggesting that either there is the happy family streotype charac- terized by close interpersonal relationships with employers, harmony, reasonable pay and flexible work or the bleak house model characterized by authoritative relations, conflict, long work hours and low wages (Cunningham & Rowley, 2007; Richbell, Szerb & Vitai, 2010). Both views seem contradictory and deliver a conclusion that em- ployee relations in SMEs might be complex due to weighted importance of firm survival concerns, preference of informal management styles and lack of specialized HR personnel. In addition to the lack of managerial inability to deal with con- flicts; external factors such as the state of product market, increased emphasis on cost reduction, and customer pressures for the delivery of products can harm the quality of working conditions and employer-employee relations, as well (Jones, 2003; MacMahon, 1996).

Informality and Managerial Behaviour as Root Causes of HRM Specific Problems

Informality is an important aspect of small firm employment relations and culture. Consequently, most of the SME owners/managers prefer informal management styles (Matlay, 2002). As a result informal networks of recruitment, informal styles of communication and ad hoc responses to staff problems would be common; leading to complex- ity, informality and contradiction in employee relations (Wilkinson, 1999). Matlay (1999)’s study reveals that nearly 90% percent of the British SME

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owners preferred informal management styles. This said, recruitment procedures were found to be dependent on the network of the owner/man- ager and evaluations of training needs were also based on the expectations and perceptions of the owners/managers. Another study comparing HRM functions of Canadian Small and Large Enterprises indicates a similar finding; as larger enterprises implement more formal HRM functions compared to smaller ones (Golhar & Deshpande, 1997).

Especially when HR functions are carried by owners/managers, managerial behavior becomes the root cause of HRM specific problems. Due to close proximity between owner and employees, relationships are more personalized and proce- dural informality exists (MacMahon, 1996). In this respect, disagreements could be taken more personally and transform task conflicts into rela- tionship conflicts. Occasionally, when there is no formal method of expressing disagreements with managers, or owner/manager does not encourage the discussion of differing views, the end result would be lower productivity or staff turn-over, of which are leading causes of SME failure (McEvoy, 1984). Therefore, conflict in the context small business receives special attention with regard to its potential effects on SME failure. In this respect, we will define conflict and discuss con- flict phenomena in the context of small business.

CONFLICT DEFINED

Basicly, conflict refers to the disagreements over any kind of topic. According to Rahim (2002), conflict is an interactive process manifested in incompabilities or dissonances within or between parties. Incompabilities can be over perceptions, desires, interests, responsibilities and ideas (Al- most, 2006; Swanstrom & Weissman, 2005). The conflict process can get started when one party perceives or feels that the other party is likely to harm or already harmed their concerns, so that incompability might be perceived by one party or disagreements resulting from those incompa-

bilities would already be occuring in a sense that both parties are aware (Sanson & Di Bretherton, 2011). Thus, conflict can start with the perceived threat that the other party is about to frustrate the other, or already frustrated.

Conrad (1990) states that conflict can be viewed to be a communicative interaction among people who are interdependent. Interdependence between parties can increase interaction in which the struggle of payoff maximization would give rise to disagreements (Kelley, 2000). This should not mean that unless people are interdependent, there will would no conflict. Instead, interdepen- dence should be considered as a potential element of conflict.

Scarcity of resources is another factor, which is very much likely to influence the exchange process between parties (Brinberg & Wood, 1983) that can also be regarded as a source of conflict. Based on the principle of payoff maximization, it seems reasonable to assume that interdepen- dent parties would have a tendency to have the biggest amount of resources. If we think of orga- nizations as systems that strive for effectiveness and profit maximization with employees who have to complete the assigned tasks with scarce resources, conflict becomes an inevitable aspect of organizational life.

The desire of the parties to have control over each other is another factor that leads to conflict (Fisher, 1977). For instance, power and status differences can result in the violation of equity or equality assumptions and set the base for con- flicting situations (Kabanoff, 1991). In this case, powerful ones might dominate others and trigger win-lose dynamics.

Conflict in SMEs

Most of the existing research on conflict has been done in public or large organizations. Thus, of interest is, whether the form and consequences of conflict would differ in the context of small business (Corts, Boz, Medina, Benitez & Mun- date, 2011).

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It is possible for employees from different generations to work in a SME. One could think that those different generations could also work in large organizations, as well. That is true, however, considering the small firm size and informality, employer and employees would have closer and personal interactions in a SME . In this case, the incompabilities between different generations’ work values and work related expectations would be more likely to create generational conflicts.

Generational Conflicts in SMEs

The characteristics of generational groups are summarized to point out the incompabilities between generations.

Baby Boomers: Are born between 1946 and 1964. They work hard, are loyal to their employer and ready to follow chain of command. They ex- pect job security, authoritative leadership, money and recognition rewards. They are technically challenged and prefer face to face contact (Yu & Miller, 2004).

Generation X: Referred to as Gen Xers are born between 1965 and 1980. For Gen Xers, work is a contract, they prefer to work on their own and be loyal to their profession instead of their employer. They question people around them instead of following chain and command. They also expect flexible and challenging jobs Therefore, they need instant feedback on how well they are doing (Haynes, 2011).

Generation Y: Referred to as Gen Y, are born between 1981 and 2000. They are energetic, not afraid to express their opinions and have an en- trepreneurial sprit. They look for creative tasks, participative climate, instant help and feedback. They prefer to contact via e-mails and social media tools (Kapoor & Solomon, 2011).

As Gen Xers and Gen Y have more similar characteristics, one can expect Baby Boomers to have disagreements with Gen Xers and Gen Y more often. If the SME is a family business, disagree- ments could occur between family members. This

could occur in many facets. For instance, younger family members would like to participate in deci- sion making while older family members would like younger ones to follow their decisions. This said, younger family members could question the decisions of older members and would like their views to be taken into account while older gen- erations could perceive this as disrespectfulness. Another possibility is that older parents might not be willing to let their power go off, they might even be distrusting the younger family members and fear that the business will fail with younger members’ leading. Despite everthing, succession planning could manage generational conflicts among fam- ily members; as it would help to fairly distribute company assets, pass control of the business and maintain family harmony while contributing to the future growth of family business (Wang, Watkins, Harris & Spicer, 2004).

Owners/managers and employees could also have disagreements due to generational differ- ences, as well. Then, the question is: what are new graduates looking for from their work and what are today’s SMEs expecting from their employees?

As mentioned, an SME is characterized by informal work relations and concerned with the survival and growth issues. Limited financial resources would force the owner to pay extra attention for costs. In that case; the owner who grew up in the baby boomer generation, would look for hard working, loyal employees who are ready to follow whatever they are asked for. This could mean demanding, routine, repetitive work, unparticipative climate and long working hours. On the other hand Gen Xers and Gen Y, would expect challenging jobs that would contribute to their skill development, flexible work that would give them more free time, and participative work that would let them participate in the work deci- sions. According to Szamosi (2006), today’s employees look for supportive management instead of authority, empowerment and respect, tangible and intangible benefits as well as training and development opportunities, open and honest

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communication, involvement in the company’s success. How much of those characteristics hold in an SME depends on many factors such as market conditions, industrial and job characterictics as well as the management style of owners. External factors could be highly out of the control of the owner/manager; whereas managerial skills could be improved in terms of meeting the expectations of the workforce. Until now, it is evident that par- ties could have opposing views and expectations due to generational differences. However, there should be more conflict scenarios based on the contextual characteristics of small business. Let us see what they are.

Vertical Conflict in SMEs: Disagreements Among Owners/ Managers and Employees

As previously mentioned, small businesses can start with the efforts of an entrepreneur or collobarative efforts of family members. In the entrepreneural condition, there would be one owner that would be willing to do anything for the survival of the firm. Hence, the owner would build a strong emotional bond between the self and the firm. This bond can effect the professional management style of the owner as well as his/her desire of having control on every detail of work- related issues. The desire to have control over all aspects of the small business would lead to a climate of distrust and anxiety in the work place. Evidence indicates level of trust and psychological safety would transform task conflicts into personal conflicts (De Dreu & Weingart, 2003). Therefore, one can expect destructive superior-subordinate conflicts to exist in SMEs.

Since the primary motivation of the owner would be to work for the survival and profit of the business, cutting expenses would be the best choice based on the idea of getting maximum output with minimum inputs. However, cutting expenses would lead to scarcity of resources, which is one of the most common sources of conflict

(Brinberg & Wood, 1983). Salaries, compensation and benefits would be negatively effected while the owner would push employees to work longer hours; which would decrease perceptions of justice and form the basis for decreased motivation and job satisfaction, (See McFarlin & Sweeney, 1992 for a review of organizational justice consequences).

If the small business is run by a family and characterized in a non-bureacratic structure, family member owners and non-family member employ- ees would co-exist together, in a close manner during the work hours. The amount of interaction would increase perceived incompatibilities and disagreements. Power and status differences could also to lead to conflicts between parties (Corts et al., 2011). Another source of conflict between family owners and non-family employees would be the perceived fairness of decision processes and outcomes; closely related with human resources management functions such as performance ap- praisal and compensation (Barnett & Kellermans, 2006). The granting of certain privileges to certain individuals or relatives, known as nepotism, can be highly common in small business. Nepotism effects the objectivity of selection, performance appraisal and rewarding processes. As nepotism has consequences on the effectiveness of an organization due to hiring incompetent relatives without proper selection procedures, it can also effect organizational loyalty, job satisfaction and individual performance of the work force in nega- tive terms (Keles, Ozkan & Bezirci, 2011; Asuna- kutlu & Avcı, 2010). As can be seen, mentioned conflict sources seem to be related to informality of managerial behavior and managerial influence on HRM specific issues.

Managerial Conflict in SMEs: Disagreements Among Family Members

If the small business is started with the collab- orative efforts of family members, certain family dynamics are likely to influence family members’

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work relations. In other words, the family would exert influence on business while business exerts influence on the family (Jernigan & Lord, 2010). Conflicts in the family life would be transferred to the conflicts at work place, as the family life will get involved with the business life. Therefore, relational conflicts would integrate with conflicts at work, mainly because of power struggles; such as who will make the decisions and who will be the next leader (Fisher, 1977).

Family members are usually different from the founder, as well (Davis & Harveston, 2001). For instance, the founder’s main concern would be firm growth, hence investing resources for developmental issues. On the other hand, family members might be interested in spending those resources to achieve a certain life style due to not having a desire to run family business. State of power sharing in ownership and generational differences in terms of work values, attitudes and expectations could also lead to destructive con- flicts (Brun de Pontet, Wrosch & Gagne, 2007). Excessive usage of financial capital, the division of compensation and benefits is another source of conflict, especially among younger members of the family, rising in the form of payoff maximiza- tion. This said, conflict between family member owners would have several adverse effects on the organizational climate as those conflicts can have a negative impact on the management of employees.

Horizontal Conflict in SMEs: Disagreements Among Co-Workers

Until now, we considered the SME as an organiza- tion with employees who work under the control of an owner/manager, or a family business including family member owners and non-family member employees. However, as the organization grows larger, staff managers could be hired to define the roles of line personnel; of whom directly operate or produce. Traditionally, staff managers coun- sel, assist and advice line personnel but has no formally defined authority in the other portions

of the organization (Browne & Golembiewski, 1974). Consequently, staff managers work in close interaction to the line personnel. In this case, task dependence, shared resources, power struggles and role ambiguities of staff specialists and line personnel become main sources of line-staff conflicts (Walton & Dutton, 1969).

A systematic job analysis provides job descrip- tions and clears roles associated with the jobs. However, in a small-medium enterprise, processes are less formalized and less structured. This is a source of role ambiguity as employees are required to fulfill a large variety of tasks and go beyond their responsibilities (Bernhard & O’Driscoll, 2011), which could give rise to disagrements between co-workers; in terms of work distribution. Previ- ously mentioned, nepotism is a source of conflict among family members and non-family employ- ees. Moreover, it might also trigger interpersonal conflicts between co-workers, due to the feelings of anger triggered by favoritism. Co-workers might also carry the deadweights of incompetent others as result of the inappropriate match between the person and the job (Donnelley, 1964).

Since human resources management do not posses a clear function of conflict management, the indirect contribution of human resources management functions (selection, performance appraisal, training, reward systems) to conflict management could be considered. In this respect, each HR function could act as a predined remedy for the potential sources of conflict regarding the context of small business.

CONFLICT MANAGEMENT THROUGH HRM FUNCTIONS

A newly established firm with small numbers of employees might not need to hire HR specialists as HR functions could be carried by owner/manag- ers. However, as the firm grows larger, the need for professional management and formal regula- tions would be necessary as the owner/manager

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would be overwhelmed with increased amount of tasks. Therefore, at the growth stage, hiring HR specialists to implement effective HRM would become necessary.

Human resources management can be defined as an approach to the management of human capital in an organization; in terms of contributing to the achievement of organizational goals through hu- man assets (Armstrong, 2008). Effective human resources management starts with the selection process as selection is concerned with match- ing available human resources to jobs. Second step is performance appraisal, highly essential for determining the developmental needs of the workforce. As a result of performance appraisal, training would provide adequate knowledge, skills, abilities that would contribute to performance. Another function of performance appraisal is re- warding employees which would also contribute to employee performance through motivation. Hence, the purpose of human resources manage- ment is to improve the productivity of people at the organization through HRM functions (Werther & Davis, 1989).

Selection

All other functions of effective HRM follow after recruitment as the primary objective of HRM is to attract and select the most appropriate human capital in the organization. Proper selection en- ables person job fit and person organization fit. It has the power to predict future job performance of the selected employee, as well. Making selec- tion mistakes is costly for an SME due to smaller number of employed personnel; as each personnel constitutes a greater percentage of the workforce compared to larger enterprises (Wyatt, Pathak & Ziberras, 2010).

Rated to be a key component of organizational success in small business (Williamson, 2000), selection is essential for the future success of SMEs. Occasionally, informality and managerial styles have high influence on small firm HRM

practices due to owner/managers having the sole responsibility and control over HRM proce- dures (Matlay, 2009). Therefore, more informal employee selection practices, such as employee referrals and unstructured interviews are known to adapted in SMEs (Dessler, 2013). Many SMEs do not conduct job analysis and do not validate the effectiveness of their selection processes, as well (Singh & Wohra, 2009).

In this respect, what are the steps of effec- tive selection? And how can SMEs adapt those steps? Generally, three basic steps are known to be common in effective selection. First, owner/ managers need a sound job analysis to prepare proper job descriptions that includes the selec- tion criteria. Job descriptions define the job in terms of its task requirements and include detailed information such as characteristics of the job, pro- cedures, methods, and standards of performance. Job specifications refer to people requirements; these are knowledge, abilities, skills and other personal characteristics required to perform the job (Voskuijl, 2005). Those specifications will serve as selection criteria. Second, based on the selec- tion criteria, appropriate selection tools should be decided. Those include personality and aptitude tests, blank forms, curriculim vitae evaluation, in- terviews or assessment centers. Finally, validation of the selection would help to determine whether selection was reliable, valid, fair and successful (Cook, 2009). However, implementation of those steps might not be possible for every SME due to lack of trained personnel or it might not even be necessary in every occasion. Therefore; owners/ managers should consider the context of their business such as the firm size, the growth objec- tives and the qualifications of vacant positions when deciding on the appropriate selection steps.

By way of job analysis, internet resources such as O*NET, can help owners/managers at writing job descriptions and defining job specifications. Building applicant pools is possible with inter- net, as the owners/managers can post positions via social media tools. Some personality and

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aptitude tests could also be easy to use if certain employee characteristics should be evaluated in a more objective manner (Dessler, 2013). Inter- views would be good performance predictors if they are structured (Sadler-Smith & Lean, 2004). Structured interviews requires owners/managers to prepare for the interview, such as defining specific evaluation factors, conduct the interview, and then match the candidate to the job (Dessler, 2013).

An objective and fair selection process will help to overcome nepotism and perceptions of unfairness.Clearly defined jobs will enable to overcome role overload and role conflict by fair distribution of work. As a result, implementation of sound selection procedures will eliminate sources of conflict such as undefined jobs, mismatch be- tween the person and the job, fairness perceptions and nepotism. Therefore, selection can act as a predefined remedy for potential conflicts rising due to work-related ambiguities, unfair staffing, deadweights of incompetent others and favoritism.

Performance Appraisal

Performance appraisal is the process by which organizations determine goals, evaluate work and distribute rewards (Varma, Budhwar & Denisi, 2008). Therefore, primary objective of perfor- mance appraisals is to enable the utilization of human capital, Second, appraisal results reveal areas of incompetency, and guide managers to decide on the content of training for knowledge, skills and abilities that needs to be improved. Third, appraisal results will identify high performers. In this respect, appraisal results will guide manag- ers to decide on motivating high performers with rewards or other benefits to pursue organizational goals (Arthur, 2008). Consequently, the results of the appraisals would help managers decide the ap- propriate action to implement; such as increasing performance through training or motivating high performers through effective reward systems. In this respect, performance appraisals are essential to increase organizational effectiveness.

The requirements of an effective system in- clude defining the employee goals driven by the business strategy, defining sound performance criterion to make systematic judgments and giving performance feedbacks to employees regarding continuous improvement (Tyson, 2006). Many large enterprises have performance appraisals systems (Lawler, Benson & McDermott). It is evident that large enterprises could implement performance appraisal systems with formal pro- cedures whereas informality of the small business could be effecting the fairness and objectivity of performance appraisals. Well, first we should know whether SMEs implement performance appraisal systems. If yes, then how do SMEs evaluate employee performance?

Research evidence indicates small firms in New Zealand have informal performance appraisals in line with the informal managerial styles adapted due to small context of the business. There was no clear evidence of employee goal setting. Own- ers/managers evaluated performance based on subjective judgments made through the available data; such as sale returns, customer feedbacks and actual job performance (Gilbert & Jones, 2000). Another study conducted among Australian small firms revealed that it was common to set employee goals and evaluate performance against goal sets. However, evauations were heavily relied upon management and supervisor control of appraisal functions. Existence of performance appraisal was related to the firm size and existence of HR man- ager (Wiesner & McDonald, 2001). It seems SMEs can conduct performance appraisals through the subjective judgments of owners/managers. It might not be possible to implement formal performance appraisals in the informal context of small busi- ness. However, the level of subjective judgments could harm fairness perceptions of employees and discourage them to perform well on their jobs. This could lead to poor performance, absenteeism, turn over, dissatisfaction and hostile attitudes towards the organizations.Taken together, increased nega- tive affect could influence organizational climate

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in negative terms and act as a source of conflict. To overcome negative consequences of subjec- tive performance evaluations; owners/managers should try to adapt more objective performance criterion based on the job specifications. Em- ployee goals could be set in line with the growth objectives of the firm. Structured performance appraisal interviews could be conducted includ- ing a review of job responsibilities, a review of performance standards, employee performance, setting goals and development of an action plan (Beaver & Hutchings, 2004).

Training and Development

Training refers to planned efforts to facilitate em- ployees’ learning of job-related competencies that are critical for successful job performance (Noe, 2008). As such, training contributes to employee development through improving knowledge, skills, abilities, competencies. Required attitudes, behaviors and human relation skills are other developmental areas that could be improved with training (Tyson, 2006). However, in order to omit the risk of doing too much or too little training, organizations must conduct training needs analy- sis. Need analysis will identify the areas of per- formance deficiencies that needs to be improved. Need analysis requires data gathering through interviews, observations, tests, performance ap- praisals or group discussions. Justifying the costs and benefits associated with training could also guide the managers to decide on the appropriate training methods (Brown, 2002).

Training could be seen as an investment regarding the development of human capital in the organization; hence directed towards effec- tive work performance and to the development of organizational performance. In this respect, training is highly essential for the improvement of internal capabilities. The positive relationship between training and firm productivity has been well established in the context of large enterprises (Black, Noel & Wang, 1999). This finding suggests

a similar relationship to exist between training and firm productivity in SMEs. Both employees and managers in SMEs could also be receiving less amount of training compared to their counterparts in larger enterprises (Hoque & Bacon, 2006). As training requires systematic methods of analysis, formal procedures and financial resources, how do SMEs compete with larger enterprises in the era of training their employees?

Research indicates most of the Indian SMEs preferred to hire trained employees who need no further training. The majority of the companies in the sample implemented on the job training after recruitment. A small amount of SMEs offered in house training by training specialists (Singh & Vohra, 2009). Another study reports 60% percent of the SMEs in the Australian sample had training budgets whereas offering training for younger personal and re-training for older personnel due to new technology demands. Both internal and external providers ran training in the organization. Training was also related with the firm size and presence of HR manager (Wiesner & McDonald, 2001). Another study conducted in Britain reported that majority of the SMEs analyzed training needs based on the perceptions and expectations of owners/managers. Training evaluation, provision and feedback were carried out informally, as well. Only a small number of owners preferred to outsource formal training as they thought it was required and managers’ time was limited to provide in house training (Matlay, 1999). In this respect, it is evident that informal- ity influences training function carried in SMEs. However, owners/managers could still improve training activities with minor changes instead of solely relying upon subjective experience. For instance, they could consider internet-based training or implement a four step training program themselves. This requires writing a job description, developing a task analysis record form, develop- ing an instruction sheet and preparing a training program (Dessler, 2013).

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Then, how could training and development of the workforce act as a predefined remedy regard- ing workplace conflicts? First, as training would contribute to the performance of the workforce, employees could well be developed in terms of fullfilling their tasks- this means high performers would not have to carry the weight of incompe- tent others. This would prevent sacrificing own work time to help others and potential failure in projects that requires teamwork. Second, training could directly attempt to improve human relations skills and conflict handling behaviors if designed with relevant training content.

Reward Systems

One of the most important elements of work is pay, it is what drives and rewards the employees for the work they do (Tropman, 2001). Consequently, what employees need and expect from work is the key to an effective reward system (Richbell & Wood, 2009). In this respect, organizations use monetary (pay and benefits) and non-monetary rewards (recognition, flexible work, psychologi- cal characteristics of work) as motivation tools (Heneman, Fisher & Dixan, 2001). Besides organizational, industrial, job and employee characterictics, performance appraisal results could also serve as a source for the allocation of rewards (Greer, 2001).

Why do organizations use rewards? First, it is the employer’s obligation to pay for employee ef- forts. Second and most basic, it is what motivates the workforce to work for the survival and growth of the organization. SMEs might not afford high salaries compared to larger enterprises. However, they can offer additional time off, compressed workweeks and flexibility because of their relatively small size. The small size of business could also enable recognition of the employees (Dessler, 2013).

How could rewards influence conflict? At first, they do not seem much related. However, research indicates the consequences of justice perceptions regarding organizational benefits and compensa-

tion systems can be desctructive or constructive in terms of having positive or negative influence on employee behaviors, attitudes and emotions (Martin & Bennett, 1996). A fair reward system based on objective performance evaluation would motivate employees to perform better while facili- tating positive attitudes towards the organization. On the other hand, an unfair reward system would negatively effect the morale level of the workforce; leading to hostile feelings among staff. The end result would be a negative organizational climate vulnerable to conflict. Favoritism among staff personnel would lead to decreased trust towards management; knowing that no change will occur even if they perform well, the employee might feel discouraged to perform well and continue working in the SME. In this respect, once more we direct our attention towards the informality of small business. Nepotism and unfairness per- ceptions are highlighted as potential sources of conflict among staff and towards management; hence highly essential.

RECOMMENDATIONS

So far, we have discussed the conflict phenomena in the context of small business as well as the indi- rect contribution of HRM functions in managing conflicts. Regarding the conflict issues discussed in the preceding section, some suggestions for small-medium enterprise owners are presented as follows:

• Accept conflict as a natural phenomena that occurs in every work place. Try to re- solve relationship conflicts. However, en- courage moderate levels of task conflict to increase the potential of your staff.

• Arbitrary management practices would create psychological conflicts within your staff. Keep in mind that conflict within the self is a source of stress that would hinder work performance.

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• Since unfairness perceptions of your work- force would hinder organizational effec- tiveness as the end result, implement fair procedures to increase fairness perceptions of your staff.

• Develop your conflict management skills. Manage your emotions and consider the characteristics of the situation to decide on the best conflict handling strategy.

• Enhance the amount and quality of the communication with your staff. If you are an approachable leader, they would be willing to ask for your help in unresolved destructive conflicts.

• If the SME is established as a family busi- ness, succession planning could act as a predefined remedy for generational and managerial conflicts. Basic steps of suc- cession planning include successor de- velopment, management of generational differences and establishing a fair compen- sation system.

• Successor development requires effective mentoring and training of the successor. Jobs and competencies that need to be de- veloped should be specified and developed step by step.

• Inter-generational differences should be managed with empathy. Formal procedures could help to overcome disagreements in a more professional manner.

• Fair compensation system should be estab- lished in order to satisfy both family and non-family members.

• Be an objective third party in staff conflicts. Enhance the communication between your staff and let them overcome their incom- pabilities. Motivate them to work for the common goals of your organization.

• Share your vision with your staff and let them be a part of your accomplishments.

• Pay attention to the needs of your work- force, as their accomplishments will be your accomplisments. Emphasize for the

harmony and team spirit. Remind yourself that they are the people who work for the survival and growth of your organization, same as you do.

• Hire HR people to carry out HR func- tions as your firm grows larger. Start the HR management process with well-defined jobs as undefined jobs are antecedents of role conflicts and intragroup conflicts among your staff.

• Try to establish job analysis and formal training methods for proper selection.

• Implement fair and objective performance appraisal systems through effectively car- ried HR functions. Make sure results of performance appraisals are linked with training needs and reward systems.

• Provide training for the development of your staff. Know that your staff can im- prove their conflict management skills.

FUTURE RESEARCH DIRECTIONS

Rapid growth in technology fosters globalization and ambiguity in work environments. Hence, future organizations will be in search of more efficient ways to adapt those changes as larger organizations are at a disadvantage of being inflexible in terms of adapting to environmental changes. From this stand point, the number of small- medium enterprises can increase. Thus, future research should consider the variables of interest in the context of small business.

In this respect, sources of conflict in small- medium enterprises, should be investigated. As such, conflict in small business would become more specific. Second, outcomes of constructive and destructive conflicts should be investigated in small and medium enterprises. At this point, qualitative data would suggest more in depth knowledge as a starting point to build research models. For instance, what is the mediating role of conflict between firm characteristics and orga-

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nizational outcomes? How does owner perceptions of conflict influence conflict management strate- gies of the staff? What is the role of conflict in predicting performance and turn-over rate? How do employees deal with conflict in the context of small business? Are there certain strategies preferred or do owner’s characteristics influence conflict handling behaviors of the employees? Are role conflicts common due to undefined jobs? Do fairness perceptions of HR practices influence conflicts among the staff? When do owners need HR people? How can owners and HR people foster a positive organizational climate-are there specific, small business related implementations? Literature survey on HR practices in conflict man- agement and HR management in small-medium enterprises indicates more research is needed in terms of increasing small business related con- flict management and HR practices in managing context-related conflicts.

CONCLUSION

This chapter has demonstrated the types and sources of conflict considering the character- istics of small-medium enterprises. Conflict is inevitable; beneficial if managed and harmful if non-managed. It could be a significant contribu- tor of creativeness and work performance or a threat for the quality of relationships that would hinder the work performance. Unresolved and emotion loaded personal conflicts experienced in the context of small business can become a source of negative attitude towards the job and the organization. End result would be decreased commitment and intent to leave. Considering the self-growth opportunities in terms of career development, small-medium enterprises might not have much to offer when compared with the opportunities employees have in larger organiza- tions. Therefore, owners face to lose their trained and valuable human assetts if they do not manage the morale level of their workforce, properly.

As the organization grows in size, the owner will start to deal with more demanding issues. Time and other likely constraints would decrease the owner‘s interest in needs of the workforce. This said, HR department would become a ne- cessity in terms of managing the effectiveness of human capital, quality of organizational climate and human relations. Basicly, we emphasized the importance of identifying the sources of conflict and curing destructive conflicts with predefined remedies through the effective implementation of HR functions. This was the main message for small-medium enterprise owners/managers; hoping that future research would identify more implementations to manage work conflicts consid- ering the characteristics of small business context.

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KEY TERMS AND DEFINITIONS

Conflict: Disagreement over any kind of issue. Conflict Management: Strategies and behav-

iors parties adapt to resolve the disagreements. Human Resources Department: A work team

of individuals who work towards the effectiveness of human capital in an organization.

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Human Resources Functions: The functions that are carried out to increase the effectiveness of human capital in an organization.

Job Analysis: The cornerstone of human resources functions, that aims to break a job into smaller units to determine knowledge, skills, abili- ties, competencies and personality characteristics that an individual should possess to perform the job.

Nepotism: Hiring relatives or incompetent oth- ers regardless of considering their qualifications.

Small-Medium Enterprise: An organization that employees less than 250 employees.

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Chapter 9

DOI: 10.4018/978-1-4666-4731-2.ch009

Occupational Health and Safety in SMEs:

Overview as a Part of Management System

ABSTRACT

INTRODUCTION

OHSMS has been developed as a mean of control- ling risks of hazards at workplaces. Such develop- ment occurs in many organizations because of the tightening regulations about occupational health and safety and the need for effective and efficient management of health and safety.

Considering the fact that SMEs generate employment to majority of the workforce, they need to be pointed out as an important element

of countries’ economical structures. The great majority of businesses in the European Union and elsewhere are smaller businesses (European Union 2006). In the United States, 97% of all firms employed less than 500 employees in 2003 (US Bureau of the Census 2006).

Another example is China, where SMEs are playing more and more important roles in the national economy and the social development of the country. With the significant contribution of SMEs, China has become one of the world’s largest

Burcu Özge Özaslan Çalişkan Istanbul University, Turkey

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developing countries. The SMEs have become an important driving force of economic growth. In China, more than half of gross domestic product per capita (GDP) and social sales, more than 70% of the newly added industrial output value, more than 40% of tax and more than 60% of total exports are created by SMEs (Jingdong, & Han, 2012).

SMEs create and provide jobs and have become sources of innovation. They create competition between enterprises and employees. It also has to be noted that employers have responsibilities to ensure the safety of their workers. As long as accidents and injuries occur at work, responsible organizations will try to improve workplace safety. However, the existing legislation are not suf- ficient to protect millions of employees (Clarke, 2006; Clarke&Robertson, 2008; Seneviratne & Phoon, 2006). Nevertheless McCallum, Schofield and Reeve (2013) indicated that judges in their study did see employers as centrally responsible for failures in workplace safety; however, some judges also struggled with the complex nature of occupational health and safety breaches, which they also thought could be attributed to worker carelessness in some instances. Legislation and regulation are used by governments around the world aim to protect workers against health and safety risks at work. A government can propose new legislation which needs to be passed as law by a legislative body. Enforcement of occupational health and safety legislation is conducted in most countries by special government enforcement agencies. Additionally, there are many agencies which help to implement occupational health and safety standards and regulations, such as social insurance agencies, private insurers, or certifiers of management systems. Only specific agencies have the power to enforce compliance, however. In many European countries the so-called “labour inspectorate” is responsible for occupational health and safety legislation enforcement. In the United Kingdom, it is the responsibility of the Health and Safety Executive. In the United States it is the Occupational Safety and Health Administra- tion’s responsibility. Even though the agencies’

names differentiate, their duties and instruments are essentially the same (Mischke et. al., 2012).

A small firm was defined as employing be- tween 5 and 19 workers and a medium firm as having between 20 and 199 employees (Kotey & Folker, 2007). Based on this definition, firms with 5-199 employees can be specified as SMEs. European Union Commission has provided a different perspective, stating that the category of SMEs is made up of enterprises which employ less than 250 people and have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 mil- lion (Official Journal of the European Union, 2003). Furthermore, in the “Annual report on small and medium-sized enterprises in the EU, 2011/12” SMEs are emphasized as they form the backbone of the EU economy –accounting for 99.8% of non-financial enterprises in 2012, which equates to approximately 20.7 million enterprises. The overwhelming majority (92.2%) are micro-enterprises, defined as those with fewer than ten employees. Small enterprises (employing between 10 and 49 employees) account for 6.5% of SMEs in the EU and 1.1% are medium-sized (50-249 employees). Large businesses, with more than 250 employees, comprise only 0.2% of enter- prises in the EU’s nonfinancial sector (Wymenga, Spanikova, Barker, Konings, & Canton, 2012).

SMEs form a major proportion of the com- panies all around the world. SMEs often lack the facilities, resources and work systems that characterize larger firms (Gardner, Cross, Fon- teyn, Carlopio, & Shikdar, 1999). There is lower participation in the prevention of occupational hazards in such organizations, because financial costs and time are often a problem for the com- panies. The lack of skilled personnel and the lack of access to necessary information are also one of the reasons resulting in poor occupational health and safety practices.

To set guidelines for good health and safety management practices, national frameworks for each country have to be considered. Implementa- tion of health and safety management systems can

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only be effective if the top management supports the process. Health and safety management must be integrated in a policy on the work environment issue. Risk assessment is the other important pro- cess about health and safety in the companies. If senior managers are unable to find time to take interest and do not take an active role in health and safety, it cannot be possible to suppose that the attitudes and performance of junior managers and the other employees will be affected posi- tively. The promotion of health and safety should not only be a function of good management, but should also be a normal management function in an organization. Health and safety should be treated like any other major management function in companies and should be based on Deming’s plan-do-check-act (PDCA) model of continuous quality improvement (Robson et al., 2007).

OHSMS in the organization has five main sections which follow the internationally accepted Deming cycle of PDCA, which is the basis to the “system” approach to management. These sections are namely policy, organizing, planning and implementation, evaluation and action for improvement (Booth & Lee, 1995).

The workforce is a valuable factor for com- panies. SMEs’ employees are usually younger, less experienced and less educated than their counterparts in large firms. Urwin, Karuk, Bus- cha, & Siara (2008) stated that the proportion of employees who have a degree level or higher qualification rises from 15.2 to 31.3 per cent of employees, as it moves up from consideration of micro-businesses to those with more than 250 employees. All other employees who report a lower level of ‘highest qualification’ make up a larger proportion of employees in smaller busi- nesses. This situation may increase the risk of accidents occurring in small organizations. Due to the lack of knowledge, education, and required information about health and safety; employees may not necessarily be aware of the risks they come across. They do not know how to protect themselves. In general, employees are less aware

of internal factors, for which they have the control. They usually tend to attribute health and safety problems to external factors.

The other dimension of occupational health and safety management is the workplace. Most employers tend to underestimate the importance of risk in workplace. They tend to adopt risk as a natural factor of the work activity. As a result, they do not attribute much importance to prevention. They usually do not have a systematic approach about health and safety. In order to manage oc- cupational health and safety in an organization, the starting point must be gathering information about the company. Thus, the managers who are responsible from the safety activities need to have full understanding of all present health and safety arrangements about the company. The managers have to accept health and safety as an integral com- ponent of management. On the other hand, know- ing about positive motivators like reduced lost time and overhead costs, improved quality control and productivity, enhanced company image, increased awards and benefits will be motivating for both employees and the managers. Risk management is also important for managing health and safety in the workplace. In order to develop OHSMS, the risks of workplace has to be evaluated. Health and safety has to be managed in SMEs with the help of practical activities, risk assessment, us- ing personnel protection equipment, accident investigation, measuring safety performance and developing safety culture. Around the three dimensions which are “employees”, “workplace” and the “top management”, OHSMS has to be improved in SMEs.

LITERATURE REVIEW

During the past few decades conditions at work, and occupational health and safety have greatly im- proved all over the world, but the general situation still remains below the necessary requirements. Working conditions of the majority of employees

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do not fulfill the minimum standards and guide- lines set by the International Labour Organization (ILO) and the World Health Organization for occupational health, safety and social protection. Kheni et al. (2008) argued that accident rates in developing countries are inadmissibly high and it is estimated that the numbers will increase in direct proportion to the speed of industrialization. The most important components to decrease the accident rates can be listed as the presence of safety officers with higher ranks; the presence of such managers who were personally involved in safety activities; training for new employees, with frequent retraining for existing employees; and more pervasive lines of informal communication between higher management and workers, e.g. daily communication between supervisors and their teams (Mearns, Whitaker, & Flin, 2003).

Most of the studies show that SMEs have dif- ficulties in implementing formal systems, and they find it extremely difficult to manage occupational health and safety (Champoux & Brun, 2003; Kongtip et al., 2008; Kheni, Gibb, & Dainty, 2010). Although SMEs have got significant economic driving force, accidents occur more frequently in SMEs compared to larger organizations. Informal management styles, lean management structures and absence of bureaucratic procedures that form key characteristics of SMEs all influence against the formal and transparent processes required by health and safety management systems, and only few successful examples of simplified health and safety management systems exist (Kheni et al., 2008). SMEs are more fragile financially, which makes occupational health and safety investments less attractive for them, because the financial ben- efits of prevention are not observed in the short term (Lamm, 1997). Furthermore, SMEs manag- ers/owners tend to be personally responsible for all management functions in their firms without any management training and consultative arrange- ments. Occupational health and safety programs are often poorly developed or absent (Gardner et al., 1999). Vassie, Tomas, and Oliver (2000) found

that SMEs spent between three and five hours per week on health and safety management matters, indicating that in most cases the enterprises did not employ a full-time health and safety professional and that health and safety management was only part of the respondent’s job. As a result, it can be professed that occupational safety and health is very low on their priority list.

Hasle and Limborg (2006) classified literature about occupational health and safety in SMEs. There are seven groups of research included: work environment and health (18%), workplace culture (11%), organization of preventive health and safety activities (25%), methods and tools (30%), intermediaries and support systems (32%), regulation and legislation (7%), economy and work environment (3%). Apparently, most of the studies concerning the subject are about intermediaries and support systems.

A survey indicated that the majority of small firms regarded health and safety as important, but adopted a “common sense” approach to it. It was also considered that regulations were too complex and time consuming. Thus, SMEs were reluctant to approach the UK Health and Safety Executive fearing that it might stimulate a visit (Vassie, Tomas, & Oliver, 2000).

Occupational Health and Safety Management System and Related Systems

The management system is best viewed as an organizing framework that should be continually monitored and periodically reviewed. It provides effective direction for an organization’s process management activities in response to changing internal and external factors. OHSMS is the part of the management system in an organization (Noble, 2000). OHSMS is differentiated from traditional occupational safety and health programs by be- ing more proactive, internally integrated better and by incorporating elements of evaluation and continuous improvement (Robson et al., 2007).

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General Scope of Occupational Health and Safety Management System

The identification of hazards and their correspond- ing control measures provides the foundation for a safety program and essentially determines the scope, content and complexity of a successful oc- cupational health and safety management system (Makin & Winder, 2008).

Due to complex business operations, regula- tion-based occupational safety and health activities are often forced to shift autonomous risk-based activities. Occupational health and safety manage- ment systems are considered to be a solution to this problem. When occupational safety and health programs are incorporated into OHSMS, they are conducted under management leadership and monitored as major aspects of business activities (Mori, Kameda, & Kobayashi, 2006).

Redinger and Levinge (1998) developed a uni- versal occupational health and safety management system assessment instrument. Management com- mitment and resources, employee participation, occupational health and safety policy, goals and objectives, performance measures, system plan- ning and development, OHSMS manual and pro- cedures, training system, hazard control system, preventive and corrective actions, procurement and contractor selection, communication system, evaluation system, continual improvement, inte- gration, and management review are the main sections of this universal occupational health and safety management system assessment instrument (Redinger & Levine, 1998).

OHSMS provides a set of tools that enhance safety risk management efficiency related to all the organization’s work activities. This system should be considered as a key part of the manage- ment systems of any organization (Santos, Barros, Mendes, & Lopes, 2013).

Integration of OHSMS and the Other Management Systems

Noble (2000) argued that an organization should have only one management system-not a stack of them- and OHSMS should be integrated into the existing organizational system. The integration of OHSMS into broader management systems was regarded in the literature and in consultations as necessary for effective OHSMS (Gallagher, Underhill, & Rimmer, 2001). For example, the integration of occupational safety health man- agement system and environmental management system can help companies to find solutions that handle both environmental and safety risks in an optimal way, therefore, further effort is required to develop the integration of occupational safety health management system and environmental management system performance evaluation (Chen, Wu, Chuang, & Ma, 2009). Integration of the safety function with other management func- tions such as quality and environment is argued to result in improved business performance and the important elements of an integrated management system that includes employee involvement, com- munications, training, documentatiton, records, hazardous materials, emergency preparedness and contingency planning processes and use of equip- ment, tools and the facility (Kheni et al., 2008)

The ultimate goal of using integrated manage- ment systems is to reduce time to perform tasks and to increase efficiency while reducing costs, waste, and personnel injuries. There is tremendous benefit to integrate the management processes together (Noble, 2000).

From the perspective of Deming cycle of PDCA, the principles of OHSMS are divided into five sections as mentioned above. The policy and planning include setting of the goals, determina- tion of the safety objectives and priorities, and preparation of the working program to achieve the objectives (Kuusisto, 2000, p.33). An organization

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should define its process control policy to ensure commitment to the management system. Execu- tion of management’s policy should be evident in internal documents and procedures, including management, supervisors, and staff training. The policies should include conformance to regulatory requirements, systematic risk assessments and process control evaluations (Noble, 2000). The safety policy should be put into practice through careful planning of the safety activities (Kuusisto, 2000, p.36).

Planning and implementation contains the elements of initial review, system planning, development and implementation, occupational health and safety objectives and hazard preven- tion. Through the initial review, it shows where the organization stands regarding occupational health and safety, and uses this as the baseline to implement the occupational health and safety policy (ILO, 2001). For effective implementation, an organization should develop the capabilities and support mechanism necessary to achieve its occupational health and safety policy, objectives, and targets. Policy should be posted and clearly communicated to all managers, supervisors, and employees. Action plans and target dates or milestones must be established and monitored to ensure plan execution (Noble, 2000, p.2). For small SMEs, general principles of planning and implementing for occupational health and safety are the same as for any organization. However, managers within SMEs should note that planning and implementing occupational health and safety could be carried out by a single individual or a small number of people within the organization. The approach adopted should be tailored to their needs (BS 8800, 2004).

OHSMS Performance and Certified Management Systems

A company can improve its safety climate through OHS initiatives. A better safety climate can lead to better safety performance and ultimately better financial performance (Fan & K.Y. Lo, 2012).

There are two main types of measures for evalu- ation of OHSMS performance. First ones are the conventional outcome measures of incidents and compensation claims. The second measures are Positive Performance Indicators (PPIs) which may be developed on a workplace or industry basis, may involve employees and other stakeholders in the development of relevant measures, and may also monitor aspects of the management system (Gallagher et al., 2001). An organization should measure, monitor, and evaluate the performance of the process and should take preventive and corrective action. It should also regularly review and improve the process management system in general, with the objective of continuous process improvement, progressive risk reduction, and complying with relevant standards or guidelines (Noble, 2000).

An SME should have arrangements for monitoring progress with the implementation of its health and safety improvement plans and for measuring the extent to which the targets and objectives set under those plans have been achieved. It should also have some arrangements for active monitoring (i.e. checking) to ensure that its control measures are working properly, health and safety rules and procedures are being followed and the health and safety standards it has set for itself are being met. It is also important to report and investigate accidents, incidents, near misses and hazardous situations. There should be some arrangements for analyzing the causes of any potentially serious events so as to identify the underlying root causes including causes arising from shortcomings in safety management system and safety culture. Measuring customer satisfac- tion in relation to safety of the products, services and activities SME provides are another important aspects of safety performance. Finally, SMEs should ensure supervisors to continue checking that information, instruction and training has been fully understood and being processed regularly by authorized staff (Hogan & Foster, 2013).

OHSMS is a systematic mean for employers to handle challenges and reduce haphazard attitudes

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to risks and problems in the work environment. OHSMS certification makes it possible for firms to document a certain pattern of working conditions to demonstrate both the public at large and its own customers that they are living up to established production standards (Granerud & Rocha, 2011, p. 1031).

Certified management systems have increas- ingly been adopted by firms in recent decades although they may be mandatory or voluntary and now cover the management of health and safety, especially through the OHSAS 18001 standard (Robson et al., 2007; Granerud & Rocha, 2011).

The OHSAS 18001 standard includes the principles laid down in the BS 8800, which is es- sentially a guide to Occupational Health and Safety Management Systems. BS 8800 is particularly useful to small and medium-sized organizations that have little formal occupational health and safety management systems in place, as it aims to provide guidance on how management of oc- cupational health and safety may be integrated with the management of other aspects of business per- formance, in order to minimize risk for employees and others, to improve business performance and to assist organizations to establish a responsible image within the marketplace (BS 8800, 1996).

In order to become certified, firms must not only accomplish the relevant legislation, but also improve performance and set up future goals re- garding health and safety on a continuous basis (Granerud & Rocha, 2011).

Following the successful introduction of the “systems” approach to management by the International Organization for Standardization (ISO) through its series on Quality Management (ISO 9000 series) and Environmental Manage- ment (14000 series) during early 1990s, public opinion was that the same approach could be used for managing occupational safety and health at the organization level. The possible initiation of work to develop an ISO standard on OHSMS was discussed at an ISO International Workshop on

OHSMS Standardization in 1996. The workshop formed the view that the ISO should discontinue its respective efforts and that the International La- bour Organization (ILO), because of its tripartite structure, would be a more appropriate body than ISO to elaborate international guidance documents for the establishment and implementation of effec- tive occupational safety and health management systems (ILO, 2001). It is not a coincidence that these systems have implementation procedures which are coherent with each other. All the systems are subject to a system approach that defines an organizational structure in terms of procedures, responsibilities, resources and documents.

Almost all countries have had legislative pro- visions for encouraging voluntary OSHMS and are now developing nationally applied OSHMS standards or guidelines. Kogi (2002) diversified national approaches to OHSMS: (a) mandatory OSHMS in specified undertakings with regulatory measures (Indonesia, Singapore); (b) nationally applicable voluntary OSHMS standards with the support of certification systems (Australia and New Zealand, China, Thailand); (c) promotion of national OSHMS models through guidelines is- sued by a statutory OSH body (Hong Kong, Japan, Korea); and (d) encouragement of the voluntary adoption of OSHMS without nationally applied models (India and Malaysia).

At the national level, ILO provides the estab- lishment of a national framework for OHSMS, preferably supported by national laws and regulations. Action at national level includes the nomination of (a) competent institution(s) for OHSMS, the formulation of a coherent national policy and the establishment of a framework for an effective national application of ILO-OSH 2001, either by means of its direct implementa- tion in organizations or its adaptation to national conditions and practice (by national guidelines) and specific needs of organizations in accordance with their size and nature of activities (by tailored guidelines) (ILO, 2001).

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OHSMS from the SMEs’ Point of View

Occupational health and safety problems in SMEs were studied in different countries in the last decade. They indicated a steady framework of factors that affect health and safety in SMEs. Key findings were that most SMEs had little or no awareness of occupational health and safety legis- lation and associated regulations and low priority was given to occupational health and safety by the managers/owners. The studies recommended that providers recognise the special needs on how occupational health and safety information should be prepared and delivered to SMEs (Seneviratne & Phoon, 2006).

The literature on small business and occupa- tional health and safety has identified a number of factors influencing the level of small business understanding and compliance with OHS require- ments. These factors can be listed as; difficulty accessing resources (such as lack of resources, inability to spread costs & wider market environ- ment); limited training or industry experience; pressure from large businesses to reduce costs; influence of large businesses requiring safe work systems from suppliers; influence of quality man- agement systems (such as qualified integration of occupational health and safety with quality management systems); and their relationship with occupational health and safety regulatory agencies (often perceived as distant and lacking an understanding of small business) (Gallagher et al., 2001).

Arocena and Nunez (2010) found evidence that the effort and type of occupational health and safety management system does significantly affect the injury rate in SMEs. More specifically, firms that complement traditional technical preventive activities with people and organization-oriented procedures are the most effective in reducing oc- cupational accidents. Such advanced occupational health and safety systems are significantly less developed in SMEs. Their results also revealed that the choice of occupational health and safety

system is determined by the quality of industrial relations, rate of unionization, intensity of price- based competition, access to public aid and training activities provided by the occupational health and safety public agencies, technology intensity and the manual nature of workers’ tasks.

SMEs are interested in safety schemes in order to improve or ensure the health and safety of employees, and to raise awareness throughout the organization. The key features required in any scheme are low cost, easy maintainability and to be tailored to suit sectorial needs (Vassie & Cox, 1998, p.72).

The importance of senior management involve- ment in managing health and safety has been shown to be a key factor in organizations achiev- ing excellence in health and safety performance and is admitted as a key element in achieving a positive safety culture (Vassie et al., 2000). An organization’s culture determines the level of safety to be obtained. The decision of the board of directors or senior management is acceptable for the prevention; whereas control of hazards is a reflection of its culture (Swartz, 2000).

ILO-OSH 2001 encourages the integration of OHSMS elements into overall policy and management arrangements, as well as stressing the importance that at the organizational level, occupational health and safety should be a line management responsibility, and should not be seen as a task for occupational health and safety departments and/ or specialists (ILO, 2001).

The manager should be acknowledge how to share the health and safety responsibilities as listed in the policy statement. This is the key element involving staff at all stages of development and introduction of the OHSMS. Health and safety education has to be provided to all employees in the company. Safety awareness of all the employees in any organization is crucial in order to improve the firm’s health and safety performance. Safety professionals in high performing organizations agree that effective employee involvement builds confidence and trust in the organization, develops

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more successful and productive employees, and supports the position that all are working together to achieve the objectives. Employees have to believe that they are responsible for their safety, and they must be provided with the training, tools, and the necessary authority to act (Swartz, 2000).

The safety awareness of managers and senior managers is especially important, since their deci- sions can influence critical safety actions (Vassie et al., 2000).

The awareness and knowledge of managers are the key principles of occupational health because they make decisions about several aspects of work that determine health and safety. As mentioned before, awareness, knowledge and skills are also needed by the workers and the self-employed for appropriate safety and health behavior and for adopting safe working practices (Goldstein, Helmer & Fingerhut, 2001).

The chief executive officer in a certain com- pany is also the chief safety officer. Managers can function as the chief safety officers, too and are to be regarded as role models. Managers cannot delegate these responsibilities (Swartz, 2000). Larger companies have the capital to employ external consultants or in-house executives, but in smaller firms there are few key employees who can concentrate themselves on safety concerns. However, it is undeniable that management com- mitment in health and safety management is the essential part of the OHSMS.

The people to whom a duty of care is owed; the physical workplace that people use or convert in order to produce goods and/or services; and the management employed to organize and direct the transformation of resources into organizational outputs impact on the nature of the organization. Hazards in the workplace may emerge from within, or from changes to, any of these three elements; at the interfaces between these elements; or at the boundaries with the external environment (Makin & Winder, 2008).

Safe Workplace Strategies

Safe place strategies are supported by the risk assessment process and the application of the hierarchy of controls up to the point where modifications are made to the existing physical environment. Safe place strategies also include arrangements for abnormal emergency situations, as well as the monitoring and evaluation to as- sess the efficacy of solutions applied and peer review of modifications. These techniques are most effective when the hazards are predictable and there is an abundance of information avail- able about the potential problems. The flexibility and adaptability of this approach represent some of its greatest merits, however it does not come without its limitations (Makin & Winder, 2008). In order to overcome the hazards derived from external and internal factors in the workplace, occupational health and safety regulations and standards are based on a technical approach to the management of occupational health and safety risk. According to this, risk management is defined as a three staged process. First, hazards in the work environment are identified; second, the risk posed by these hazards is assessed; and finally, appropriate controls for risks are selected according to a risk control hierarchy (Holmes, Lingard, Yeşilyurt, & De Munk, 1999).

Safe workplace strategies endeavor to provide that the existing physical environment is harm- free and the strength of this methodology lies in its practical and portable application and the intent to remove predictable hazards from their physical source. The shortcomings of this ap- proach are connected with the mechanics of the process itself and actually the action deals with what already exists rather than the planning stage (Makin &Winder, 2008).

There is a great amount of so-called “almost- accidents” and risk situations which consist of the whole statistical population in which accidents happen. Increasing environmental and workplace

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safety not only involves technical interventions, but also requires the adopting of management, organizational and training instruments which can influence “risk behavior” (Scipioni, Arena, Villa, & Saccarola, 2001). To be precise, it can be concluded that safe employee strategies are the most important part of the OHSMS.

Safe Employee Strategies

Safe employee strategies involve all the techniques that focus on equipping the person with the knowledge of skills to avoid creating dangerous scenarios in the first instance or with the ability to deal with unsafe situations should they arise; communicating awareness of situations that have the potential to cause harm; or with the recovery of a person after an illness or injury experience whether it be physical or psychological (Makin & Winder, 2008). Employees must be made aware of possible OHSMS risks in the work environ- ment, including product or service delivery risks and physical and chemical hazards. They should understand these risks as they relate to their work and recognize and take action to prevent work practices or activities likely to lead to accidents or process nonconformance (Noble, 2000).

To make employees safer, training is another required strategy. Safety training must be well planned, continuous and measured for results. Supervisors and employees have to believe that the content of the training program is what manage- ment expects them to apply, and that it serves real knowledge and skill requirements (Swartz, 2000). Each training item should describe methods for introducing and communicating new ideas into the workplace, reinforcing existing ideas and procedures, and implementing safety and health program into action (Reese, 2009, p.223).

Candidate’s accident proneness ratio is also important in the employee selection process. The goal of the manager or supervisor should be estimating if the candidate is tend to enact human behaviors that cause accident in the workplace (Dessler, 2008).

Management has to make the commitment to involve the workforce in safety and health at the worksite. Employees are most in contact with potential safety and health hazards and having a safe and health workplace is a vested interest. By the involvement of employees group decisions can be made and brain storming may be beneficial to the firm. Therefore, it is clear that employees are more likely to support and participate when they feel themselves more involved (Reese, 2009).

Safe Management System Strategies

Top management usually plans the company’s strategies and determines the company’s long-term goals. Organizational and safety culture are both effected by the top management. Thus, top man- agement is ultimately responsible for the defects in the company’s safety performance.

A safe systems approach addresses many hazards associated with lack of leadership and direction and as a result many of the options avail- able are preventive by nature – such as creating a safety policy; establishing safety criteria for the selection of suppliers, raw materials, design and equipment (Makin & Winder, 2008).

A safety initiative cannot succeed without soundly established and implemented safe work practices. The success of the safework practices is another reflection of an organization’s culture. It is understood in superior performing companies that establishing, communicating and implement- ing prescribed work practices are to be taken very seriously at all employment levels. Developing safe practice standards more often includes some form of employee involvement through which their input is sought. These work standards become the substance of training programs and of expectations by supervisors (Swartz, 2000).

The need for written health and safety programs has been considered as barricades for some time. Many companies think that written health and safety programs are only paperwork, and nothing more than another bureaucratic way of mandating health and safety in the workplace. However, over

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a period of years, data and information have been mounting in support of the need to develop and implement written safety and health programs for all workplaces. This perceived need for written programs must be tempered with a view to their practical development and implementation. A very small enterprise who has got one to four employees and no supervisors in all likelihood needs only a basic written plan. However, as the size of the company and the number of employees increase, the employer becomes more removed from the hands-on aspects of what now may be multiple facilities or worksites (Reese, 2009).

Safety audit is the way for measuring overall compliance with health and safety programs in the organizations. This tool can provide management with the means of tracking progress as well as program compliance. The safety audit should be designed to identify key elements that are to be included in an organization’s overall health and safety program, and must provide some form of measurement to continually improve on the orga- nization’s loss prevention efforts (Swartz, 2000). Well managed auditing programs usually stand out at the levels where hazard control and pre- vention are managed best. Hazardous conditions and practices are to be identified and corrected, and should be considered as the most important management determinants.

Drivers, Benefits and Barriers about OHSMS in SMEs

Many reasons enforce SMEs to integrate man- agement systems. Many authors identified these drivers. Customers, local government, local community, regulators and employees have been identified as the most significant elements which can force SMEs to improve their environmental performance and, as a result, to adopt a more integrated approach to management systems. Although most of the pressure comes from the regulatory agencies rather than directly from customers, customers are the key driver.

Beyond that, Griffith (2000) claimed that quality, environment and safety are key standards- based project functions that need to be managed in a systematic way. In context, these functions are support services. Each one is a precondition for en- terprise and effectiveness but they do not produce direct financial income. Therefore, management should look at the potential to reduce operational general expenses while maintaining a high level of delivery. SMEs have to establish improvements in quality, environmental performance and better health and safety management in order to comply with the increasingly strict legislation.

General Motors, Daimler-Chrysler, Toyota and other automobile manufactures also require all of their manufacturing facilities around the world to adopt an environmental management system and to certify them by international standards. They also need to encourage and assist their suppliers to do the same (Stamou, 2003). Consequently it can be said that integrated management systems are very important and obligatory for SMEs to cooperate with larger firms.

Jingdong and Han (2012) found that 11% large enterprises staffs were clear about OHSAS 18001 and 8% the respondents didn’t know the meaning. 6% SMEs knew OHSAS 18001 well and 69% were not clear about OHSAS 18001. 33% of the large enterprises had OHSAS 18001 certification and 15% of SMEs had it. As to whether occupational health and safety management was important to enterprises, 91% of SMEs believed it to be important and 83% of large enterprises agreed with it. Large enterprises were significantly bet- ter in the implementation of occupational health and safety management than SMEs. In addition to the “company equipment examination and repair”, SMEs ratio is slightly higher than that of large enterprises, however with other options large enterprises were higher than that of SMEs. With the guidance of this comparison, it can be noted that employees in large enterprises had better understanding of occupational health and safety than those in SMEs. They also found that

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25% of large enterprises have occupational health and safety department and related professionals. It was found that 56% of large enterprises collect and save related data and 89% of large enterprises organize physical examination. In addition to all these results, it was also found that SMEs have less related occupational health and safety training for workers, have less monitoring of hazardous substances and have less developed regulations and laws on occupational health and safety.

Safe operation of workplace is a moral obliga- tion imposed by modern society. This necessity contains consideration for loss of life, human pain and suffering, family suffering and cost of living (Reese, 2009). It is all the same for SMEs also. Furthermore, governments have legislations deploying the employer with the responsibility for safe working conditions and sufficient supervision of work practices. In addition to this, employers are also responsible for paying the costs derived from injuries.

OHSMS offers SMEs the opportunity to reduce damage to equipment, inventory or product loss and generation of hazardous waste and to minimize accidents and lost time (Noble, 2000). Accidents cost more than prevention. The direct and indirect cost of not to implement prevention strategy is compulsive for SMEs. It is hard for SMEs to bear such financial cost, making OHSMS an essential requirement for SMEs (Friend & Kohn, 2007).

OHSMS provides standard directions, poli- cies, and procedures for all SMEs’ employees, enforcing the firm to define its view of health and safety. It also provides a plan that shows how the firms’ health and safety initiatives work together. Therefore, it is a primary tool for communicating the standards set by the organization regarding health and safety (Reese, 2009).

The improvement of efficiency and quality of management is an outcome that SMEs can gain. A successful safety management system is a reflection of an organization’s culture (Swartz, 2000). OHSMS provides safer working conditions and make employees feel better. It also creates

a better company image among employees and improves relations between management and employees. SMEs can have competitive advantage with OHSMS.

Most of the SMEs are companies with limited budgets, thus they cannot allot reserves to initia- tives that perceived to be secondary company aspects. They also need management capabilities, which result in stagnation as the lower the percent- age of managers trained, the less the development of the companies’ approaches to new technologies. Moreover, the low level of employee awareness and involvement, as well as the time constraints influence significantly the achievements in the management systems area (Stamou, 2003). The short term orientation and the limited strategic capacity of the SMEs do not allow to have incen- tives for innovations. Lack of financial resources, lack of management and employees knowledge and training, lack of employee involvement and motivation, lack of time can be considered as barriers to have OHSMS in SMEs.

FUTURE RESEARCH DIRECTIONS

It is recommended that future occupational health and safety management interventions can compare the performance between SMEs that have OHSMS and SMEs do not have OHSMS empirically. Some performance indicators such as accident costs, absenteeism, turnover rates, loss time, almost- accidents, cost of compensation, and penal sanc- tions etc. can compared between the SMEs with respect to having OHSMS or not having. Such discrimination can shed light on other SMEs in order to develop OHSMS in their organizations.

CONCLUSION

The results of the studies in the literature indicate that most of the SMEs do not implement proactive health and safety measures to control the risks of

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hazards. In order to address the lack of awareness of health and safety standards required by legisla- tion, training and advertising are needed.

Ministries could organize some programs about occupational health and safety and they should target owner/managers. Non-governmental orga- nizations operating in developing countries, and government should provide funding to SMEs. The cost of implementing health and safety standards should also be identified within prime cost items in bills of quantities in the organizations.

Despite the difficulties of quality standards, some SMEs may have an appreciation of the benefits of a total quality approach to operational management issues. It can be clearly said that employers need to be educated on the importance of the improvement of employee health and well- being. SMEs usually do not have the advantages of dedicated resources, occupational health and safety services and human resource departments. In order to overcome these obstacles, the most important issue is to constitute a safety culture in the organizations.

Some prevention activities should be imple- mented frequently in small firms. The activities required to ensure efficiency are actually support- ing the integration of prevention into production activities in order to increase prevention manage- ment in small firms. Therefore, employees are sometimes unable to identify obstacles to the improvement of working conditions and safety in their firms. SMEs need support and guidance in order to deal with the barriers to improve OHSMS.

Although occupational health and safety man- agement is becoming increasingly seen as part of an organization’s management strategy, it has not been widely adopted by SMEs.

The literature review showed the lack of hu- man and financial resources, time, management commitment and the perception that management systems are revolutionary and only red tape. How- ever, SMEs require most of all information about the benefits of the systems and need guidance in

order to have OHSMS. Consequently it can be said that SMEs are not aware that implementing OHSMS not only improves the performance and efficiency, but also provides cut back in costs.

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Chapter 10

DOI: 10.4018/978-1-4666-4731-2.ch010

The Impact of the Entrepreneur’s Educational Level on the Employment

Creation by New Small and Medium Enterprises

ABSTRACT

INTRODUCTION

Entrepreneurship is considered to be important for job creation and economic development (Audretsch, 2003). Therefore it has been gaining increased attention by scholars and policy-makers

as a relevant research topic and as a mechanism for addressing economical and labour market issues. Academic studies from authors, such as Fritsch & Mueller (2008) and Baptista et al.(2008), de- veloped for Germany and Portugal, respectively, examine whether there is a relationship between

João Zambujal-Oliveira Instituto Superior Técnico, Universidade de Lisboa, Portugal

Luis Contente Instituto Superior Técnico, Universidade de Lisboa, Portugal

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new business creation and an increase in employ- ment growth at the regional level. These studies show that the impact of new business formation on regional development is not immediate but, instead, can be delayed in time for a period of about 10 years.

For example, in Great Britain as a whole, no significant relationship between start-ups and employment creation was found in the 1980s but for the 1990s a significant positive relationship for Great Britain as a whole was found. Van Stel & Storey (2004) feel this raises questions over poli- cies designed to raise rates of new firm formation as a strategy for employment creation. Investiga- tions carried out in the field of entrepreneurship and regional development bring an additional relevance to the field: regional differences in entrepreneurship may explain the differences in economic performance (McQuaid, 2002).

The current paper contributes to the un- derstanding of the relationship between new business formation and employment growth. Since there is empirical evidence that the role of entrepreneurial activity differs across the stages of economic development, in that there appears to be a U-shaped relationship between the level of development and the rate of entrepreneurship (Sternberg & Wennekers, 2005), this study aims to empirically identify and examine the main effects of several types of start-ups and business owners’ different educational backgrounds in employment growth, at the regional level. It is expected that a significant share of highly qualified workers stimulates employment growth (Lofstrom, 2000), since productivity tends to rise via technological complementarities or knowledge spillovers. Al- ternatively, Chen & Funke (2008) state that the debate surrounding the question of how inertia of highly regulated labour and product markets has a negative impact on the creation of jobs and unemployment can contribute to explaining why the growth situation sometimes does not occur. Moreover, the firm size matters in the case of em- ployment dynamics. SMEs are more constrained to

capital markets, so that capital is a complementary good for labor for these entities (Kölling, 2012).

These effects are analysed and compared within the period 1996 and 2007. Specifically, the following econometric estimations are developed using different segments of start-ups: all sectors; technology based; knowledge intensive; with at least one business owner with tertiary education; with no business owners with tertiary education; with at least one business owner with higher education in engineering; and with at least one business owner with higher education in manage- ment science.

Assessing the heterogeneity of businesses’ (and types of business ownership) dimensions that bear the potential to generate higher positive impacts on employment growth may bring relevant contribution and implications at various levels. While in the present investigation the specific variables under analysis and main results are strongly rooted in the literature and follow valid theoretical approaches and methodologies, there is also an original contribution regarding the use of business owner educational background as variables of interest. Since the 1980s Mcmullan & Long (1987) have been arguing that the real promise of education will only be realised when it is strategically organised for economic develop- ment and job creation. Moreover, this potential academic contribution can be equated with a contribution for supporting eventual higher-edu- cation and regional-development policies aimed at stimulating different types of entrepreneurship and job creation.

The remainder of this study proceeds as fol- lows: the next section presents and discusses previ- ous theoretical and empirical approaches regarding the interplay between entrepreneurship and job creation, economic development and regional development. Section 3 provides information on the data and methodology used for the empirical analysis. Results are presented and discussed in section 4 and, finally, sections 5 and 6 conclude the article with avenues for further research.

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BACKGROUND

Labour Market in Portugal

Portugal is a relatively small country when com- pared to Germany. It has considerably large urban agglomerations, with an industrial structure, which is constituted by small and medium enterprises (SME). In Portugal, large firms account for only a very small part of firms’ births (Baptista et al., 2008; Holl, 2004). It is often said that there are too many small firms in Portugal, and that average firm size is too small. However, when looking at SMEs it is hard to find a significant difference between Portugal and the average OECD country.

In recent years, rapid changes unleashed by the globalization, combined with a deteriorating economic conjuncture shrunk recruitment and changed employment conditions in the traditional types of employment that usually absorbed uni- versity students. Today, graduating students are beginning to evaluate the possibility of creating their own enterprises as a positive rather than re- sidual career option (Kolvereid and Moen, 1997). These characteristics are responsible for the fact that the Portuguese labour market emerges as one of the most regulated in Europe, even if it was the first country to introduce fixed term contract.

Portuguese labour market is characterized by a high degree of collective bargaining power as a result of unionization. Trade unions still play a relevant role in wage determination in the public sector. In the private sector, trade unions have almost disappeared. Despite of this, trade unions have retained their influence in the submission of new labour legislation through negotiations with employer associations and the government (Abreu & David, 2009; Varejão & Portugal, 2007).

Broadly speaking, since 1999 that Boeri et al. consider that exists a tendency for a significant deregulation of temporary contracts, while only modest changes had been made for permanent ones. Portugal and Spain are examples of coun-

tries that had significantly eased the regulation for permanent workers. Recently, introduced new permanent contracts with lower severance payments.

On the other hand, Auer & Cazes (2000) compared average tenures and the distribution of employment by tenures’ segments to get the patterns of job stability across countries and over time. They found the longest average tenures in Greece followed closely by Portugal. Germany is slightly below the overall average of 10.5 years, as are Ireland and Spain. Leschke & Watt (2010) showed that tenures remained broadly stable or increased in most European countries, declining slightly in Germany and Portugal and strongly in Ireland. Figure 1 indicates that temporary em- ployment as a share of total employment varies greatly. At well above 20%, it is highest by far in Spain and Portugal.

In what concern to labor market outcomes, Rogerson (2004) states that changes in aggregate unemployment rates mainly reflect changes in relative employment rates in industry. Table 1 summarizes the employment and unemployment by economic sector in Portugal. Actually, the agriculture-based economy decreased from 1% between 2002 and 2007, while the service-based economy increased 4.5% in the same period. Thus, Abreu & David (2009) consider that Table 1 shows enough evidence of transformation from an agri- culture-based economy into a service based one.

After all, the analysis of 175 regions of the EU 15 made by Pinto & Guerreiro (2010), permitted to find the dimensions underlying the innovative phenomena and create homogeneous groups of regions, determining the four most relevant fac- tors: technological innovation and economic structure; human capital and its availability on the employment market. Therefore, transferring qualified people to the economy creates value and getting graduates to create new business ventures seems to be to the most fruitful transfer mechanism (Franco et al., 2010). As a result, entrepreneurship

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The Impact of the Entrepreneur’s Educational Level on the Employment Creation

has been considered as a relevant factor for im- proving economic growth (Carree & Thurik, 2010) and the SMEs job creation potential has been widely demonstrated (Fölster, 2000).

Job Creation and Economic Development

The first contribution of new small and medium- sized enterprises (SME) formation to employment growth is the number of jobs directly created by new SMEs that successfully enter and grow in the market (Baptista et al., 2008). However, part of this direct effect can be attributed to the fact that new businesses stimulate job growth in other sectors

of the region (Andersson & Noseleit, 2011).The literature is not consensual regarding the effect of start-up creation on employment. While some studies argue that unemployment stimulates en- trepreneurial activity, another stream of literature concludes that higher levels of start-ups lead to a decrease in unemployment.

According to Blanchflower (2000) there is, among many countries, little evidence of an extant correlation between entrepreneurship and unemployment. He also states that, while the evidence shows support for a general negative effect, there is also evidence of positive effects for some countries.

Figure 1. Temporary employment as a share of total employment Source: European Labour Survey (Eurostat, 2010).

Table 1. Employment and unemployment by economic sectors (2002-2007)

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Therefore according to Baptista et al. (2008), it is important to take into account the indirect positive supply-side effects (spillovers) that the entrepreneurial activity can create, which can generate significant improvements in the competi- tiveness of a country, region or industry, leading to economic growth. Fritsch & Mueller (2008) provide a more detailed framework and descrip- tion of such effects: (a) efficiency guaranteed: the threat of or the effective entry of new business in the market makes the incumbent SMEs more efficient; (b) structural change accelerated: the entry of new SMEs and exit of incumbent SMEs constitutes a turnaround in the respective economic units, leading to structural changes; (c) amplified innovation: new companies often introduce radical innovations; and (d) greater variety of products: new businesses can introduce innovations in products and processes, which lead to customer needs being met more efficiently. The increase in variety may boost economic development.

In particular, Schroeter (2009) explained how the distinct characteristics of urban areas contrib- ute to the emergence of high-quality start-ups that are known to cause larger employment effects than other types of new businesses. She argues that the relatively intense competition in urban areas further stimulates the economic effects of new business formation in agglomerations.

Regional Development

According to Audretsch (2003), for studies of entrepreneurship at the regional level, the most common and extensively used variable accounting for performance is growth – typically measured in terms of employment growth. For this author, the vast majority of this type of research tries to find the link between the start-up rate (as a measure of entrepreneurial activity) and economic growth. Most of them do not consider that, during the start- up phase, the firms are unable to increase their financial leverage and so their capital structure fails to promote correct investment strategies (Segarra

& Teruel, 2009). Some authors have extended this type of approach to try and measure the impact of new business generation in job creation over time.

For example, Fritsch and Mueller (2008), looking at the effects of new business creation on employment at the regional level, concluded that the effects of new SME formation on net employ- ment are small in the year of entry and become negative during the first six years. Positive effects occur, but only after this six-year period, reach- ing a maximum peak at around the eighth year and eventually disappearing after the tenth year. Sometimes, in accordance with Daunfeldt et al. (2005), the delay hides real market uncertainty that affects the entry decision. Studying the Swedish retail food market, these authors concluded that the entry was less frequent in highly concentrated local retail food-markets characterised by a high degree of uncertainty.

While the initial negative effects are due to the failure of new businesses and the exit of incum- bents, the positive effects are probably associated with spillovers (Fritsch & Mueller, 2008). The model formalised by the authors to describe this temporal impact on employment development is illustrated in Figure 2. Recent evidence focuses on the relationship between finance development

Figure 2. Direct and indirect effects of new busi- ness formation on regional employment growth over time

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The Impact of the Entrepreneur’s Educational Level on the Employment Creation

and productivity (Beck et al., 2000; Levine et al., 2000) and supports the existence of a causal relationship between financial development and economic growth (i.e., growth in real gross domes- tic product per capita, and productivity growth). For example, King & Levine (1993b, 1993c) have found that financial development has a positive effect on productivity, and Beck et al. (2000) have shown that financial intermediaries help economic growth through more efficient resource allocation rather than through investments or savings.

Baptista & Preto (2011) argue that the higher the entry rate is into the knowledge-based sectors, the higher both job destruction (due to increased competition and exiting capacities) and job cre- ation (due to supply-side effects) will be. Bap- tista et al. (2008), analysing the effects of new business creation at the regional level in Portugal, concluded that the indirect effects of this creation only begin to occur about eight years after the entry of new companies in the market. They also concluded that these indirect positive effects promote growth and employment within the re- gion, but there is a nine-or 10-year lag until this effect begins to become observable in the econ- omy.

Following Fritsch & Mueller (2008) and Baptista et al. (2008), that is, taking into account the time intervals found by Baptista & Preto (2011) to address the lag structures of the effects on employment changes, taking into account the formation of different types of new companies, gives us as follows: (a) start-ups larger than average versus start-ups smaller than average; (b) foreign- owned start-ups versus domestic start-ups; and (c) knowledge-based start-ups versus other start-ups.

Their conclusions are that the creation of new businesses that are larger than average, new com- panies with foreign capital and new companies in knowledge-based sectors have considerably stronger positive effects on employment change than their counterparts. Baptista & Preto (2011) also consider that these types of start-ups seem to be responsible for most of the effects of new SME formation in industrial restructuring and employ-

ment growth. In sum, there is strong evidence that, at the regional level, the creation of new busi- nesses has a positive impact on job creation and, consequently, on economic development. These effects take place only after a certain period of time, depending on the country.

Human Resource Management and Employment Growth

It should be natural existing a theoretical link between human capital management (HRM) and employment growth, as both refer to people in the firm context. By considering that human resource strategies frequently have a delayed return (Black & Lynch, 1996; Boxall & Steeneveld, 1999), it implies that cross-sectional studies may not detect the long-term effects of human resources practices (Cosh et. al, 2000). Therefore, the employment growth turns into a relevant variable for analysing long-term effects of HRM, even knowing that, according to the contingency theory, Chandler and McEvoy (2000) consider the effects of human resource practices depends highly on the context.

Figure 3 permits to visualize the conceptual model on managing people within SMEs. It helps us to realize how entrepreneurs rely heavily on their social relationships for creating start-ups and contributes to reinforce the relation between the entrepreneur level of education and the HRM. Rauch et al. (2005) described a model where own- ers’ human capital as well as employee’s HRM affect employment growth. They also concluded that HRM was most effective when employees’ hu- man capital was high. Behind Rauch et al. (2005), there is a row of authors who consistently found positive relationships between business owners’ human capital and small business success (Brüderl et al., 1992; Chandler & McEvoy, 2000).

According with Baron and Kenny (1986), the relationship between HRM and employment growth can be conceptually represented by three not contradictory models: a direct effect model (DEM, Model 1), a mediator model (MTM, Model 2), and a moderator model (MDM, Mod-

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el 3) described in Figure 4. The robustness of DEM is a prior condition for applying MTM (mediator). However, the model MTM is the most simple one because it reduces the number of causal paths may be valid. The model DEM implies direct effects of the owners’ human capital besides employees’ human capital and HRM, analysing how these variables contribute to employment growth. The MTM shows the perspective of Brüderl et al. (1992), confirmed by Hitt et al. (2001) and Wright et al. (2001), of assuming owners’ human capital as a resource with capac- ity to improve HRM, which leads to employment growth. In what concern to the relationship be- tween owners’ human capital and employment growth, MDM is conceptually similar to DEM. Its divergence comes from the role assumed by the employee human capital. It acts as a modera- tor of the relationship between HRM and employ- ment growth, decreasing the influence of strategy interactions on HRM (Youndt et al., 1996). How- ever, the assumption of the moderator effect on MDM also seems to be relevant for our study because it assumes that better educated people have a higher potential to contribute to the em- ployment growth.

Recently, Rauch et al. (2005) confirmed, in German firms, the effect of HRM on small busi- ness development. Once more, they concluded that HRM was positively related to employment growth. Besides finding evidences showing that SMEs grow faster than larger ones, Cosh et al. (2000) also found a significant effect of training on employment growth. Even criticizing strongly the training literature to be more perversely con- cerned with its impacts on employment growth rather than sales growth, Bryan (2006) obtained strong evidence confirming the relation between training and employment growth.

DATA DESCRIPTION AND METHODOLOGY

Data Set Description

The data used in this study come from the micro- data set Quadros de Pessoal, which originates from mandatory information submitted annually by Portuguese companies to the Ministry of Labour and Social Solidarity. The information in this data set includes the mobility of companies, establish-

Figure 3. Conceptual overview of literature on HRM and entrepreneurship Source: Brereton and Jones (2001).

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ments, workers and business owners in the period 1986–2009. The data set includes annual reporting of all private establishments with at least one paid employee in the Portuguese economy. Therefore sole traders or self-employed individuals without employees are not included. Some industries are not included in the data, namely: agriculture, military, government, and institutionalised work- ers. Additionally, as suggested by Parker (2009) and in line with Fritsch and Schroeter (2011), information about start-ups and employment in fisheries, energy, mining, railways and postal services, because of their highly regulated market conditions, will be excluded from the data set for the present empirical analysis.

Table 2 shows that the Norte region has the strongest incidence of SME creation across all industries. Regarding all regions, the creation of

technology-based and knowledge intensive start- ups accounts for a small percentage of the total start-ups. The mean values of start-ups with no business owners with higher education attainment are considerably higher than the mean values of start-ups with at least one business owner with higher education for all regions. As observed, for both types of start-ups with at least one busi- ness owner with higher education in engineering or management, the Lisboa region presents the higher mean values, followed by Norte and Centro.

Methodology

The current section discusses the methods em- ployed to estimate the regression models and to analyse the effect of new firm creation on regional economic development over time at the spatial

Figure 4. Models of human resource effects on employment growth Source: Rauch et al. (2005)

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level of regions. The activity of new business formation is measured following Baptista et al. (2008) and Garofoli (1994). The last author deals with the hypotheses to be tested for the interpreta- tion of the regional differentiation in firm birth and analyses the problem of the choice of socio- economic variables which must be examined. Both authors argue that, in order to control for different sizes of region, entry rates must be mea- sured using regional work force as a denominator (Labour market approach, re = numberof newfirm- sworkforce). According to Fritsch and Schroeter (2011), the denominator must be in thousands. To identify and to analyse the diverse effects of new business formation on employment, a robust fixed effects estimator is employed. The regional development indicator used is the average change in annual employment. To avoid disturbances due to short-run fluctuations, the geometric mean is calculated over a period of two years (2007–2009; (Baptista et al., 2008; Fritsch & Mueller, 2008; Fritsch & Schroeter, 2011). The composition of business dynamics (net-entry of start-ups) and the different impacts of different start-up activity on regional employment change are estimated by the non-linear least squares regression equation:

η α β εr 0 2 t-1,t-10 r,t-1 r,t,t ,t +X += + r, (1)

• ηr,t0,t2: Average growth on regional employ- ment between period t0 and, t+2 in region r.

• βr,t-1,t-10: Start-up rate, calculated as a mean over a 10 year period.

• χr,t-1: Control variables; εr,t: error term.

The model uses a lagged regressor ηr,t0,t2 and the control variables are included to take into account other factors that, beside the start-ups, are also relevant to regional growth. In particular, the population density is included as a variable that represents certain local characteristics that may affect regional growth (Duranton & Puga, 2004), such as the wage level, real estate prices, quality of the infrastructure, or qualification and diversity of the labour market (Fritsch & Schroeter, 2011). According to this author, the population density is the most significant regional feature, since human capital is an important determinant of regional growth (Glaeser et al., 1992) and the share of highly skilled employees; that is, the percentage of workers with higher education is included in the model.

Table 2. Data description (average values for 1996–2006)

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Using the Kauffman Firm Survey, Sanyal & Mann (2010) also examine how characteristics of a start-up’s assets, information about the start-up, and entrepreneurial attributes relate to financial structure at inception. They have concluded that start-ups with human capital embodied in the entrepreneur or intellectual property assets have a lower probability of using debt and more edu- cated founders are more likely to be financed by external sources.

The model also contemplates the the percentage of workers with a degree given that the human capital is a significant determinant of regional growth (Glaeser et al., 1992). In order to correct the effects of the number of start-ups in the com- position of regional industries, the model applies a procedure to correct for the confounding effect of the regional composition of industries on the number of start-ups; a shift-share procedure was employed to obtain a sector-adjusted measure of start-up activity (Audretsch & Fritsch, 2002). Since the industrial structure is measured as the number of establishments, the first step is calcu- lating the hypothetical number of establishments in each industry j for each region i:

η ξ ξ

ξij h

i j i j

ij i

=E E E

E j

* * *ϕ = =∑ ∑ ∑

(2)

• ηij h : Hypothetical number of establish-

ments from the industry j by each region i. • Ei: Total number of establishments in the

region i. • Ei /E: Share of establishments from indus-

try j in the total number of establishments. • Ei: Total number of establishments in in-

dustry j. • E: Number of establishments from indus-

try j in region i.

The second step estimates the impact of a shift in the industrial structure of a region in the number

of start-ups. It multiplies the difference between the hypothetical etaij

h and the observed number of establishments in each industry by the national rate of start-ups of the respective industry. Adding the results from all sectors, we are able to obtain the number of start-ups induced by differences between the industrial structure of the region and the national average:

η ξ η ξ η

Φ ξ η

i 8

ij ij h

j j ij ij

j ij ij

j i

i i

= ( - )* r = ( - )*

E = ( - )*

∑ ∑

∑ ∑ ∑∑

(3)

Subtracting the number of induced start-ups to the total number of start-ups, the model generates the industry-adjusted number of start-ups by each region (Fritsch & Mueller, 2008). These industry- adjusted number of start-ups can be defined as the number of new businesses within a region that would be expected if the industry’s compo- sition was identical in all regions. This measure adjusts the raw data to emulate the same industry composition in each region (Fritsch & Schroeter, 2011). In the next section the paper organises the experiences considering different models. Each model distinguishes from the others by the start- ups rate included. For example, model I includes the start-up rates from all industries.

RESULTS

We have used econometric analysis in order to identify the different determinants of the start-up rates. Table 3 presents our results, using specific start-up rates for different types of start-ups. The columns of the table show the models associated with types of start-ups. First, the model was ap- plied taking into account the start-up rate in all industries (model I). As shown in the results, start- ups throughout all industries have a statistically

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significant negative effect on the average change in regional employment. Taking as a reference the results obtained by Fritsch & Schroeter (2011), an equally significant impact would be expected but, in contrast, it would be positive.

While model II includes the technology-based SME start-up rate, model III focuses on the knowledge-intensive SME start-up rate. Both rates are included in model IV. By comparing model II with model III, evidence shows that, for both models, start-ups have a statistically significant effect on the average variation of regional employ- ment and, once again, their coefficients are negative. The impact of knowledge intensive start-ups is slightly more negative than the impact exerted by technology-based start-ups. Combining both start-up rates in one single model (model IV), the results do not suffer major changes.

Subsequent analyses focus on business owners’ educational level and background. Specifically, model V includes the rate of start-ups with at

least one business owner with higher education and model V looks at the rate of start-ups with- out business owners with higher education. As shown, the start-ups with at least one business owner with higher education have a statistically significant negative effect on the average variation of regional employment (model V). For start-ups without business owners with higher education, there is also a statistically significant and negative impact, on average change in regional employ- ment (model VI).

Finally, different additional estimations are made taking into account the rate of start-ups with at least one business owner with higher education in engineering (model VII), the rate of start-ups with at least one business owner with higher education in management (model VIII) and the rate of start-ups accounting for both educa- tional backgrounds (engineering and management; model IX). Comparing model VII with model VIII, results show that, in both models, start-ups

Table 3. Employment effects of new business formation differentiated by the type of start-up

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have a statistically significant effect on the aver- age variation of regional employment and, once again, their coefficients are negative. The impact of start-ups with at least one business owner with higher education in engineering is slightly more negative than the impact exerted by start-ups with at least one business owner with higher education in management. By analysing both start-up rates within the same model (model IV), one can observe that the results do not suffer major changes and the effects continue to be statistically significant and negative.

For all different types of start-ups, the R- squared values show that the models explain a large percentage of the variance. Regarding the control variables, as expected a statistically sig- nificant positive effect of human capital intensity and population density in regional employment growth in all models was found. It should be noted that such effects are more positive for the share of highly skilled employees than for the popula- tion density. The regional industry structure is also statistically significant for the variation of regional employment, but its coefficient is nega- tive and close to zero.

FUTURE RESEARCH DIRECTIONS

Based on the results of the current research, the recommendations for future research would be to broaden the analysis. The research can be expanded by gathering participants from other organisa- tions or other countries and the study should be replicated with other targeted populations to draw generalisations. In our view, the challenge to future research will be to more finely address the efficacy of public employment policies in the regional employment growth process and the outcomes of such different types of entrepreneurship initiatives on local employment markets.

We also could point to the path followed by Gatewood et al. (1995) that measured attributions before potential entrepreneurs had started their

businesses in order to make stronger claims for causal relationships between initial attributions and each company’s subsequent success for cre- ating jobs. Alternative paths of research are sug- gested by Dobbs and Hamilton (2007) who focused their study on small business growth as a process rather than an episode. These authors claim that future research should adopt multiple measures of growth and be based on theory longitudinal in scope but idiosyncratic in its focus. Additionally, Dobbs and Hamilton (2007) consider that empiri- cal work should seek to explain the periodicity of growth and the role that learning plays in the idiosyncratic development of small businesses.

CONCLUSION

The economic growth that comes from entrepre- neurship through the creation of companies can be translated directly into job creation, or indirectly through the stimulation of efficiency, structural changes in industries, innovation and variety of products that meet consumer needs. There is strong evidence that, at the regional level, the creation of new businesses stimulates job growth, but such effects are noted only after a few years. Taking into account the range of 10 years, found previously (Baptista et al., 2008; Fritsch & Mueller, 2008), an analysis was done on the effects of start-ups of all sectors considered, technology-based start-ups, knowledge-intensive start-ups, start-ups with at least one business owner with higher education, start-ups with no business owners with higher education, and start-ups with at least one busi- ness owner with higher education in engineering or management.

As discussed in the literature review chapter, recent studies indicate that there is a positive re- lationship between the creation of new businesses and subsequent growth in regional employment; however, the results obtained by the empirical analysis do not confirm such conclusions, since the start-ups rate for all sectors considered between

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1996 and 2006 is statistically significant, but with a consistently negative effect on the average change in regional employment between 2007 and 2009. In line with the literature, it would be expected that both the creation of new technology-based businesses and of new knowledge-intensive com- panies would lead to positive effects in employ- ment change. Such assumptions, once again, have not been confirmed.

In contrast, it was concluded that, in both cases, the rates of start-ups have had statistically significant effects on the average variation of regional employment, and those effects were negative. Therefore, these results seem to confirm previous findings of Andersson & Noseleit (2008) who have concluded that start-ups in high-end services have significant negative impacts on em- ployment in other sectors but a positive long-run impact. Perhaps Caballero & Hammour (1996) can contribute to explain these discrepancies. When they analyzed the timing of ongoing job real- location that results from innovation, concluded that incomplete contracting between labour and capital can disrupt this synchronised pattern and decouple, employment creation and destruction. Furthermore, we should remember that an analysis of job flows made by Spletzer (2000) indicated that firms’ births and deaths account for only 19% of quarterly job creation and destruction.

The results obtained when considering the rates of start-ups with at least one business owner with higher education or the rates of start-ups with no business owners with higher education show statistically significant negative effects. The same happened with the rates of start-ups with at least one business owner with higher education in engineering and the rates of start-ups with at least one business owner with higher education in management. The latter two rates of start-ups showed the most negative coefficients. On the other hand, there were significant and positive effects from the share of highly skilled employees and population density. It might be noted that the

share of highly qualified workers resulted in a more positive impact than the population density.

From these results it was concluded that, for the period under analysis, start-up rates had nega- tive impacts on the average variation of regional employment and high levels of entrepreneurship appear to lead to a decreasing effect in job creation. Regarding the share of highly skilled employees, positive effects on the average change in regional employment have been observed over all models. Subsequently, these results suggest that the greater the percentage of employees with higher educa- tion in a given region, the greater the economic development of the region, measured as changes in employment. Armington and Acs (2002) partly supported these conclusions, finding evidence of significant differences in new firm formation rates from industrial regions to technologically progressive regions.

As Fingleton (2003) comments, the conjecture that human capital plays an important role for regional growth is not new. This argument recalls Lucas (1988), who saw human capital as a central factor of production and Mankiw et al. (1992) have concluded that changes in human capital translate themselves into significant changes of growth rates. By considering the perspective of Kiker and Santos (1991) who studied the determinants of labour market earnings in the Portuguese work force and presented evidence on the different education levels and regions, the conclusions suggesting that labour markets appear to be geographically in disequilibrium can explain the regional employment variations.

Thus the more relevant public policies which analyse and implement entrepreneurial activity with higher potential and, eventually, more op- portunity oriented, are those policies relating to the strengthening of skills and capabilities of individuals through education and training. Sometimes the price demanded by these public policies to create highly skilled jobs it is too high. Timothy & Kevin (2012) estimated the cost of the tax credit R&D jobs in the state of Washington and

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concluded that it was so high (in part because the credit was non-refundable) that about one-quarter of the firms receiving credits were maxed out on credit eligibility. In a sense, the paper of Chen & Funke (2008) is an attempt to provide a unify- ing modelling framework on the inter-linkages between regulation, investment and employment. Its simulation shows that the intensity of product market competition variables, in tandem with hiring and firing costs, is an important driver of employment and growth.

Our study, while investigating some of the variables traditionally associated with start-ups and regional employment change, seeks to provide an original contribution by exploring and testing specific variables at the business-owner level, such as educational attainment and background. Hopefully this attempt to broaden the spectrum of explanatory variables associated with job genera- tion can bring new perspectives and discussion to the fore and act as an incentive for further studies on the topic. It is also hoped that the present ap- proach and results can facilitate and contribute to decision making with regards to public poli- cies tailored at fostering entrepreneurial activity. Policy-makers should be well aware of the diverse effects of new firms on regional employment.

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ADDITIONAL READING

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KEY TERMS AND DEFINITIONS

Econometrics Analysis: Statistical and mathematical analysis of economic relationships. Econometrics creates equations to describe phe- nomena such as the relationship between changes in firms creation and employment growth.

Entrepreneurship: The capacity and willing- ness to develop, organise and manage a business venture along with any of its risks in order to make a profit. The most obvious example of en- trepreneurship is the starting of new businesses.

Highly Skilled Jobs: Combination of oc- cupation (professional) and education (college- educated) jobs.

Regional Development: The provision of aid or assistance to less economically prosper- ous areas.

SME: Small and medium-sized enterprises. The main factors determining whether a company is an SME are the number of employees and either turnover or balance sheet total.

Seed: Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase.

Start-Ups: Financing provided to companies for the product development stage, and further funds are required in order to initiate commercial manufacturing and sales. These companies do not generate profits yet.

OCDE: Organisation for Economic Co- operation and Development.

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Chapter 11

DOI: 10.4018/978-1-4666-4731-2.ch011

Placing SMEs at the Forefront of SHRM Literature

ABSTRACT

INTRODUCTION

Scholars and practitioners have long recognized the importance of small- and medium-sized en- terprises (SMEs) in the stimulation of economic development (e.g., Schumpeter, 1934; Birch, 1987; Mazzarol, Volery, Doss, & Thein, 1999; Baumol & Strom, 2007). To illustrate the magnitude of the impact of SMEs, consider that in the United States SMEs are responsible for over 80% of new jobs created annually (Hisrich & Grachev, 1993).

Despite this importance of SMEs to the economy, strategic human resource management (SHRM) scholarship remains focused on larger corporations and does not provide enough emphasis on SMEs (Klaas, Semadeni, & Ward, 2012). For example, Huselid’s (1995) seminal study on high perfor- mance work practices (HPWPs) excluded firms with fewer than 100 employees, an approach that is all too common in the HPWPs literature. Way (2002) is a notable exception in that it focused on organizations with more than twenty employees. While this is certainly important, relevant, and

Josh Bendickson Louisiana State University, USA

Eric W. Liguori California State University – Fresno, USA

Jeffrey Muldoon Louisiana State University, USA

Lindsay N. Newport The Martin Agency, USA

K. Mark Weaver University of South Alabama, USA

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a step in the right direction, organizations with fewer than 20 employees vastly outnumber those with more than 20 employees, and labor laws vary greatly in many locales for an organization with more than 25 employees compared to an organi- zation with fewer than 12 employees. This legal disparity, along with the general lack of empirical investigation of SMEs in SHRM, illustrates the critical need for further research of this type.

In general, HPWPs use tactics such as staffing, self-managed teams, decentralization, training, flexible work assignments, communication, and compensation to better develop, train and motivate workers (Evans & Davis, 2005). Thus far, the HPWPs literature has enlightened scholars and practitioners alike to the fact that these human resource practices profoundly impact employee and organization performance, and while most studies focus on larger firms, the relationships can be applied to SMEs as well.

Past research demonstrates that as firms em- brace HPWPs they experience higher levels of economic and social performance (Combs, Liu, Hall, & Ketchen, 2006; Crook, Ketchen, Combs, & Todd, 2008). Yet, HPWPs are often costly, require highly dense networks of employees, and require a fully committed, staffed human resource (HR) department with top management support (Cappelli & Neumark, 2001; Collins & Clark, 2004; Nahapiet & Ghoshal, 1998). As SMEs often lack the resources to maintain a HR department and bear the costs involved, it would appear that a “one size fits all” approach is not feasible for SMEs. In fact, SME employees are often more interconnected due to the smaller organizational size, and therefore SME management can more easily foster commitment from individual em- ployees via flatter organizational structures and fewer degrees of separation from ownership. Thus, while size may in some ways limit the application of HPWPs in SMEs, it may also in some ways amplify the impact as well.

In this chapter we examine the human resource practices of SMEs using U.S. data from a national sample collected by the National Federation of

Independent Businesses (NFIB; N=755). Figure 1 presents a visual theoretical overview of the HPWPs topics. Ultimately we take a realistic look into the practices of U.S. SMEs, discussing each from a HPWPs perspective. To begin, we define HPWPs, explain why they lead to higher degrees of performance, and provide a theoretical rationale for this higher performance. We then discuss how contingencies such as firm size influence the deployment of HPWPs, asking the following questions in the process: To what extent are HPWPs amicable to a small business, and to what extent do HPWPs need to be adapted to fit the SME? In doing so, we address the following: (1) the need for SME-centric HPWPs, (2) some specific HPWPs (e.g., compensation consider- ations, training and development, payroll, equal opportunity, workforce behaviors), (3) an overview of the data collected and results, (4) solutions and recommendations, and (5) study limitations and future research directions.

Background: What are High Performance Work Practices?

Traditionally, neither scholars nor managers fo- cused on the role that human capital could play in obtaining higher firm performance, and from a strategic standpoint, the HR function was the least influential (Snell, Shadur & Wright, 2001). Indeed, as Snell, Youndt and Wright (1996) ar- gued, the goal for most firms was to take out the human factor in terms of strategy, substituting capital for labor and separating those who work from those who think. This distinction began to blur over time as both scholars and managers began to realize how important human resources were to firm profitability. From this perspective, although workers were the most difficult asset of the firm to control, they were also potentially the most profitable and important resource (Pfeffer, 1994; 1998). Realizing this, scholars began to study the role of human resources and its impact on strategy, creating a new subset in HR referred to as Strategic Human Resource Management

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(SHRM). Wright & McMahan (1992, p. 298) defined SHRM as “the pattern of planned human resource deployments and activities intended to enable the firm to achieve its goals.” Essentially, SHRM seeks to encourage HR and other manag- ers to consider the impact of strategic goals and external factors on human resource management and human resource configurations. In doing so, managers began to make a distinction between HR with an emphasis on cost reduction (old viewpoint) and HR with an emphasis on value creation and firm performance (new viewpoint).

The distinction between old and new ways of thinking about HR began to emerge as scholars developed better and better ideas on the concept of human capital (Becker, 1964). Borrowing Gary Becker’s concept that human capital is normally distributed and can increase profitability for those who control it, scholars began to recognize that the distinctions between strategy and human resource management were blurred. As Snell, Shadur and Wright (2001, pp. 627-628) put it, if

“what people think and how they behave” influence performance, then human resources are really the sine qua non of strategic management. A trans- formation in corporate governance was another important development was the understanding that if human capital matters in firm performance, new and more efficient ways are needed to create and ensure the cooperation of workers and the organization than simply using economic incen- tives were needed (Nahapiet & Ghoshal, 1998; Leana & Van Buren, 1999). Thus rather than us- ing pure economic incentives, organizations are encouraged to promote trust and cooperation so that individuals will be more willing to exchange resources and share information.

SHRM also commonly involves the use of HPWPs, which are a comprehensively aligned set of practices designed to create a more knowledge- able and motivated work force via the recruiting, selecting, compensating, performance managing, and training of a firm’s potential and current employees (Huselid, 1995).Essentially, HPWPs

Figure 1. An embedded overview

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were designed to decentralize the organization and place more power, knowledge, information, and resources at the hands of the worker (Snell et al., 2001), thus creating communities the “thinker” and the “doer” roles are blurred. Although there is considerable debate over what practices should be included in a catalog of HPWPs (e.g., Huselid’s selection of practices are different than Pfeffer’s; cf., Huselid, 1995, and Pfeffer, 1994,1998), there is neverthelesssignificant evidence that HPWPs lead to functional turnover, higher firm perfor- mance, and more satisfied workers (Becker & Gerhart, 1996).

Over the years, several criticisms have been directed at HPWPs. The first common criticism is the lack of theoretical development and the atheoretical approach of the initial HPWPs work (Wright & McMahan, 1992). Although there are several major theoretical approaches used in HPWPs, one of the most common and useful is the resource-based view (RBV; Wright, Dunford & Snell, 2001)which suggests that firms develop heterogeneous resources that allow them to gain competitive advantages over their rivals. Unlike Porter’s approach, RBV focuses on internal versus external factors (Wernerfelt, 1984; Barney, 1991), stating that if firms control rare, valuable, imper- fectly imitable and non-substitutable resources, then they will enjoy superior performance. A valued resource is one that provides value to a firm, and a rare resource is one that is not readily available in the market place. A firm may possess valued resources, but unless valued resources are also rare, then they will not provide a firm with a competitive advantage. In addition, once firms have developed valued and rare resources, other firms will be motivated to try to copy or find a substitute. Inimitable resources are resources that cannot be easily copied, and non-substitutable re- sources are those resources that cannot be replaced. If a resource fits all of the above criteria, then it will lead to sustainable competitive advantage (Barney, 1991).

Although scholars have criticized the HPWPs approach for being tautological, others have dem- onstrated that firms that employ these practices will enjoy superior performance (Snell et al., 2001). In this case, SHRM scholars have found that those firms that use HPWPs will enjoy com- petitive advantages over companies that do not. This occurs because human capital is normally distributed, and some workers have more knowl- edge, motivation, and skills than other workers do. Thus, although the practices can be easily copied, Wright and coauthors (1994) found that human capital pools may not be copied, due to the normal distribution of talent and motivation or the various social interactions between workers themselves (Wright, McMahan, & McWilliams, 1994). In addition, Lado and Wilson (1994) argued that it was the unique interaction of HPWPs that created competitive advantage.

Another criticism of HPWPs is that it treats the relationship between HPWPs and performance as a black box with little understanding of any mediating factors that are at play (Evans and Da- vis, 2005). From the perspective of the manager, how these practices lead to superior performance remains an unknown. Several notable studies have emerged that explains the relationship in detail. For example, Evans and Davis (2005) found that not only do the practices lead to better workers, but they also encourage the workers to provide more prosocial behaviors and create reciprocity, thereby encouraging greater levels of exchange which makes the organization a better place to work. Takeuchi, Chen, & Lepak (2009) found that HPWPs lead to higher levels of job satisfac- tion and affective commitment, both of which are important motivational factors in terms of gaining performance and exchange of resources. Other explanations include that fact that firms with HPWPs have an easier time recruiting the top talent and being more efficient in deploying that talent.

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The HPWP Contingency Approach

Whereas scholars understand that some HPWPs are better than others, there is considerable de- bate specifically regarding the role of external fit (Snell et al., 2001). The contingency approach analyzes whether certain practices are universal or, instead, require managers to tailor and fit them to the specific needs of individual firms. In addi- tion, there is significant discord over the extent to which strategy and human capital influence what types of HPWPs should be deployed in a firm. For instance, some scholars argue that the type of adaptive strategy (viz., prospector, analyzer, reactor, defender) to which a firm subscribes will influence the types of HR configuration that firm should use (Delery & Doty, 1996). Some scholars argue that human capital should be treated accord- ing to the employee’s strategic value to the firm, with highly important, difficult to replace workers receiving the majority of benefits, compensation, attention, and resources (Lepak & Snell, 1999), while others believe practices are universal and the types of contingencies that firms face do not matter (Huselid, 1995; Pfeffer, 1994).

Compounding this problem is the fact that HP- WPs often involve high financial and social costs (Cappelli & Neumark, 2001; Nahapiet & Ghosal, 1998). For instance, firms that use HPWPs often pay higher wages for workers since they gener- ally hire higher quality employees. In addition, HPWPs include high social costs since workers are required to spend more time building relation- ships with coworkers. These high costs associated with HPWPs are a prime example of the pitfalls involved with only investigating HPWPs in the context of larger firms, as many SMEs simply do not possess the assets necessary to deploy HPWPs in the same manner and magnitude as larger firms.

Recent findings from a symposium published in the Academy of Management Perspectives cri- tiques SHRM for using examples generated from large organizations like National Cash Register, Ford Motor Company, and Standard Oil (Kaufman,

2012). Despite this criticism, other works from this very symposium, albeit in different contexts, relied solely on larger organizations for their stud- ies, revealing the magnitude of the problem (e.g., Haier, IBM, and China Mobile; Liang, Marler, & Cui, 2012). The point here is not to discount any of the aforementioned studies, but rather to address a concern in the range of organizations we are considering in the SHRM literature. Al- though SMEs represent a far greater percentage of industry, large organizations appear to reap the greatest benefits from scholarly research (Cardon & Stevens, 2004), and while we see potential in finding similarities between sub-units and SMEs, scholars often research the former without being able to confidently generalize to the latter (e.g., HPWPs and bank branches within a larger orga- nization; Liao, Toya, Lepak, & Hong, 2009). In adding to the issue, studies that have considered SMEs and their HPWPs often do not reflect SMEs as a whole. For example, Way’s (2002) study of HPWPs in SMEs did not take organizations with fewer than 20 employees into account, thus focusing only on the larger firms among SMEs.

Our focus here will be examining the extent to which HPWPs are applicable to SMEs and how these practices vary (if at all) in smaller firms. In doing so, we add to research that has examined whether internal and external factors such as managerial influence or legislate influence HR practices (Harney & Dundon, 2006). We know that some of the HPWPs most important to strategic outcomes in SMEs are compensation, benefits, job security, equality / equal opportunity, training and development, and communication, but due to data availability (discussed later), we focus specifically on compensation, right-sizing the firm, training, and equal opportunity. In doing so, we contend that these HPWPs are important practices that SMEs can employ to maintain employee morale as well as foster retention, job satisfaction, motivation, and productivity.

Looking forward, it is important to remember that SMEs may already use HPWPs. As an ex-

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ample, one of the major concepts behind HPWPs is to foster a work force based on social rather than economic exchange (Nahapiet & Ghoshal, 1998). Economic exchange requires exchange conditions to be clearly set ahead of time, whereas social exchange does not. As Blau stated(1964, p.93), social exchange is the “general expectation of some future return, [although] its exact nature is definitely not stipulated in advance.” Given the fact the exchanges in SMEs occur often without bureaucracy and may include family members, such an approach may not be necessary since the relationships involved are often already closer and more social than those in a larger firm. Similarly, the relationship network in a small business will likely be small as well, thus creating by nature strong ties with high levels of interactions, trust, and connection (Krackhardt, 1992; Granovetter, 1973).

DATA COLLECTION AND IMPLICATIONS

A third-party surveying subcontractor specializing in public data collection interviewed 754 SME owners and managers via telephone. Respondents were randomly selected from the INFOUSA da- tabase and represented small- and medium-sized firms within the continental U.S. employing be- tween 1 and 180 employees. Respondents were primarily male (62%), the firms owner (68%), college-educated (80%), and averaged 49.8 years of age. Respondent firm size averaged 12 full time equivalent employees and was representa- tive of a variety of industries, including retail (20%), wholesale (4%), professional & personal services (30%), construction (8%), etc. The overall participation rate was 41.5% and calculated using the AAPOR Participation Rate 4 formula. The participation rate is reported in lieu of a response rate because initial respondent eligibility was unknown (Standard definitions: Final, 2008). An abbreviated summary of the survey questions

representing key HR considerations in SMEs is provided in Table 1. Table 2 provides a summary of the results.

Focal HPWPs in SMEs

At the onset of our research, we believed there to be a low occurrence of HPWP in SMEs. This be- lief stemmed from two complementary thoughts, namely (1) that SMEs would not willingly part with the capital necessary to institute HPWP as willingly as their larger counterparts, and (2) past research had likely explored HPWPs in SMEs only to realize there was nothing of interest (i.e., pub- lishable) occurring (n.b., this was an observation of a colleague of the authors that was seemingly plausible at the onset). Nevertheless, we contented that HPWPs were not only affordable for SMEs, but that they had to exist and perhaps were just conceptualized differently. The following sec- tions address the focal HPWPs of our study, and confirm that HPWPs are in fact employed by U.S. firms of all sizes.

Compensation-Related Issues

Compensation covers a broad range of HR issues, including performance-based pay and benefits packages. Compensation programs affect em- ployee behavior yet are often under-implemented in practice despite findings which suggest that pay for performance is an important aspect within HPWPs (Rynes, Brown, & Colbert, 2002; Pfeffer, 1994). Compensation is vital to HPWPs and orga- nizations that seek to attract the best talent must understand the powerful roles that incentives play in encouraging behavior. Unfortunately, smaller firms often struggle to find qualified workers (Brown, Sturman & Simmering, 2003; Golhar & Deshpande, 1997) and therefore giving greater emphasis to pay can have positive implications on acquiring qualified staff. The research that has been conducted found that compensation is differ- ent in large organizations than in SMEs such that

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Table 1. HR survey questions administered to SMEs

Of your (response in S2) employees, about how many are full time?

How frequently do you pay your full-time employees?

At what intervals do you pay your full-time employees? Do you pay any?

What determines how often an employee gets paid?

Do you pay your part-time employees with the same frequency that you pay your full-time employees?

How frequently do you pay your part-time employees?

Do you do the payroll in-house, have an outside accountant or bookkeeper do it for you, or do you hire a payroll service company for that purpose?

In your business, who does the payroll?

About how many HOURS per pay period does it take to make out the payroll, including reviewing the time cards or similar data, calculating pay and withholding taxes, preparing the checks, and other associated tasks?

Are most of the steps in preparing your payroll computerized?

Why do you continue to do your payroll in-house?

Approximately, how much does the outside accountant or bookkeeper charge you every time he or she does your payroll?

Do you pay him or her a flat fee or an hourly fee to do it?

Do you send your payroll records to the accountant or bookkeeper in electronic or paper form?

Does the accountant or bookkeeper manage the financial transactions for you, such as tax deposits, or do you conduct that part of the process in-house?

Approximately, how much does your payroll service company charge you per month for the service when the company does your payroll?

Do you send your payroll records to the payroll service company in electronic or paper form?

What is the most important reason that you chose to engage a payroll company rather than doing your pay in-house?

How often do you remit payroll taxes to the federal government?

Do you use an Internet banking arrangement that allows you to remit your payroll taxes electronically?

Do you have direct deposit for employee pay checks, that is, do you give employees the option of having their paychecks automatically deposited directly into their bank account?

About how many of your employees use direct deposit?

Do you allow employees to make direct deposits to more than one account? For example, could part of the employee’s check be directly deposited into a checking account and part into a saving account?

What is the maximum number of accounts that an employee can have his or her money deposited into, or has that issue never arisen?

Can two or more deposits for a single employee be sent to two or more financial institutions?

What is the most important reason that you instituted direct deposit?

Has direct deposit generally been helpful, a hassle, or inconsequential to the operation of your business?

What is the most important reason that do you not have direct deposit?

Employees can change their tax withholding by completing and filing a new W-4 form. Considering the frequency of employee changes and any administrative issues for you, are W-4 changes one of the most difficult or one of the least difficult government paperwork burdens you have?

Do you have any employees who claim eligibility for the Earned Income Tax Credit and submit form W-5 to you?

Considering the frequency of claims and any operational issues involved for you, is administration of the Earned Income Tax Credit one of the most difficult or one of the least difficult government paperwork burdens you have?

Do you offer your employees a retirement plan?

Is it a 401(k), a SIMPLE plan, profit-sharing, a SEP plan, or something else?

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Table 2. Descriptive statistics

Category Description # %

N Sample Size 754

Gender (Overall) Male 515 68%

Female 239 32%

Gender (Managers Only) Male 60 48%

Female 64 52%

Gender (Owners Only) Male 35 63%

Female 21 38%

Gender (Manager-Owners) Male 420 73%

Female 154 27%

Full-Time (FT) Employees No FT 66 9%

1-25% FT 36 5%

26-50% FT 103 14%

51-75% FT 102 14%

76-100% 446 59%

Retirement Plan Offerings Available 270 36%

Not Available 476 63%

Don’t Know/Refused 8 2%

Payroll Procedures (Overall) In-House 445 59%

Outside Individual 101 13%

Payroll Service Company 190 25%

Don’t Know/Refused 18 3%

Payroll Procedures (<10 emps.) In-House 268 69%

Outside Individual 57 15%

Payroll Service Company 58 15%

Don’t Know/Refused 8 2%

Payroll Procedures (10+ emps.) In-House 177 49%

Outside Individual 44 12%

Payroll Service Company 132 36%

Don’t Know/Refused 10 4%

Education Level Didn’t Finish HS 19 3%

HS Diploma/GED 153 20%

Some College/Associate’s 171 23%

Vocational/Technical 14 2%

College Diploma 254 34%

Advanced/Professional Degree 127 17%

Don’t Know/Refused 16 2%

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SMEs are at more risk regarding pay than larger firms, but as the firms increase in size these risks diminish and firms isomorph toward larger organi- zations (Cardon & Stevens, 2004). Below we focus on two specific compensation-related topics and consider how their evaluation and implementation should account for organizational size.

Payroll

Payroll is the process by which members of or- ganizations receive compensation for their work. The complexity of payroll processes and systems greatly vary across organizations and must account for a number of influencing factors including but not limited to the type of employees, the type of work being done, hourly compensation versus salaried pay, full-time versus part-time, benefits, pensions, and industry-specific factors. Some of these factors are so complex that they will require organizations to outsource the process to another organization, whose expertise may be payroll. Hence, organizations adhere to the principles of transaction cost economics when deciding whether they will “make” payroll (i.e., manage their own) or “buy” it (i.e., outsource payroll to a third-party individual or organization; Geystens, Steenkamp, & Kumar, 2006; Williamson, 1975).

Payroll decisions seem to correspond with employee size among SMEs. Historically, SMEs have outsourced payroll to allow themselves the leeway necessary to focus more heavily on their core competencies (Thomas & Thomas, 2011). The survey (N=754) of SME owners and manag- ers revealed that approximately 59% of SMEs on average conduct their payroll functions in-house, which is a greater percentage in comparison to larger organizations. In addition, subdividing the SMEs included in the study by size even more clearly reveals that payroll decisions seem to rely on organizational size. Approximately 70% of SMEs with fewer than 10 employees process their payroll in-house, but only around 50% of SMEs with 10 employees or more handle their

own payroll. As discussed previously, the inverse relationship between firm size and in-house payroll responsibilities seems to suggest that as the number of transactions (employees) becomes fewer, the likelihood of SMEs performing their own payroll increases.

Keeping this in mind, it is important that SMEs that choose to handle their payroll in-house adopt a communication-centric HPWP in handling em- ployees’ payroll-related issues. Organizations that choose to outsource payroll operations have the luxury of deferring employees’ payroll-related concerns and questions to a third-party organi- zation. If there is a mistake with an employee’s paycheck, an organization outsourcing payroll can deflect responsibility for the mistake to the third- party payroll service provider. If a payroll mistake occurs within an organization that conducts payroll in-house, however, the organization runs the risk of the mistake negatively affecting the employee’s trust in the organization, morale, et cetera and the organization’s internal HR department is left to deal with any residual damage.

Yet, there is a tradeoff here in terms of payroll. While some issues with payroll may be deflected to the third party, often times the presence of a contractor may create additional social costs since the monitoring of third parties is difficult and costly (Williamson, 1975). One way around this is for the owner of the SME to develop relationships with potential third parties by developing social relationships with them as a means of ensuring trust (Larson & Star, 1993). Thus, SME owners and managers should be encouraged to develop a social network when they outsource, as a means of encouraging appropriate behaviors from those they do business with, given the embedded nature of exchanges (Granovetter, 1985). One additional issue of dealing with payroll and pay for performance is that a large portion of SMEs are family owned businesses (Wortman, 1994). A family owned business may have different ways of providing compensation than simply monetary. Accordingly, implementing the HPWP of clear,

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honest, and frequent communication with employ- ees can help minimize this damage should any payroll-related incidences occur such as unwar- ranted social comparisons between employees (Brown et al., 2003).

Benefits

In comparison to larger organizations, SMEs offer their employees fewer benefits options, includ- ing but not limited to 401(k)s, investment plans, and benefits packages. In fact, only 36% of SME owners and managers claimed to offer retirement plans to their employees. This is likely due to is- sues of cost, among other things, as SMEs cannot negotiate with benefits providers as proficiently as larger organizations can. For instance, a large corporation such as Wal-Mart will not only be more effective in gaining low costs through negotiations, but since there will be so many employees, the insurance becomes less risky for the insurance corporation (Shi & Singh, 2012). Yet there are still reasons why the SME should offer insurance. The positive outcomes of offer- ing a satisfactory quantity and quality of benefits options, including retirement plans, are two-fold. First, organizations that provide their employees with sufficient voluntary benefits options find it easier to attract a breadth of qualified candidates for open positions. In addition, offering better benefits increase employee productivity and improve employee retention (Jackson, Schuler, & Werner, 2012).

It is understandably not possible for all SMEs to offer benefits packages comparable to those offered by larger competitor firms but especially larger-small organizations should be capable of mirroring larger organizations (Cardon & Stevens, 2004; Golhar & Deshpande, 1997). That being said, these SMEs should implement other HPWPs such as fostering psychological empowerment which by making the work more enjoyable will also reduce stress (Halbesleben & Buckley, 2004). As there are less workers and bureaucracy, a worker

in an SME will be more likely to feel important since they will have the ability to self-determine at work (Spreitzer, 1995). One of the major is- sues with modern work life is the breakdown of meaning, satisfaction and intrinsic enjoyment for many employees (Pfeffer, 2007). Studies have found that when workers feel empowerment, their stress is reduced, fears of being injured are reduced, burnout is reduced through providing employees with a sense of meaning and impact on their work environment (Halbesleben & Buckley, 2004; Muldoon, Matthews, & Foley, 2011). A particular area that SMEs perform well in is offer- ing flexible work hours, but only in cases where it makes business sense (Dex & Scheibl, 2001).

As implied previously, one way to provide for compensation and benefits is to create envi- ronments where workers can feel that they have more meaning. As many SMEs are family owned, for instance, by creating a sense of connection between employees and the family may in turn reduce stress. This type of dynamic is not likely as common at a larger corporation where family and friend networks are less probable to exist, and contracts are more economic, rather than social (Nahapiet & Ghoshal, 1998). Another possibil- ity would be to create opportunities for further training as a means of providing workers will the ability to improve their condition. For example, SMEs could hold seminars to improve financial literacy or provide employees with continuing education options that they may not have otherwise offered. To summarize, SMEs can still attract top talent, but they need to offer different resources and conditions for employees to grow. Of course, their ability to do so will be influenced by the conditions of the workplace, resources the firm controls, and ownership issues.

Training and Development

Training and development are a well-researched HPWP, and meta-analyses of the SHRM litera- ture show training to be effective in promoting

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cognitive learning, changes in work behaviors, contribution to strategic issues, changes in orga- nizational culture, improved quality, and customer satisfaction, among other things (Arthur, Ben- nett, Edens, & Bell, 2003; Jackson et al., 2012). That being said, training and development needs vary greatly both across and within firms based on several characteristics (e.g., organizational structure, organizational size, person, job duties, or demographics). For instance, it is easier for a large corporation to have a formal training pro- cess and department since they possess the slack resources needed for such an approach (Cardon & Stevens, 2004). They can bear the costs of having strong HR departments. While training and development is beneficial at organizations of all sizes, key differences across organizations should be taken into consideration to ensure that training and development opportunities achieve maximum impact. In a SME, training is important because workers have to fill many roles (Cardon & Stevens, 2004). As an example of this, we will focus on person-related training need differences between SMEs and large organizations.

Only roughly 50% of managers in SMEs have earned a bachelor’s degree or higher, but the per- centage of college-educated managers is much higher in larger organizations. While commonly accepted hiring practices imply that education is universally valued among firms of varying sizes, these results imply that either larger organizations more strongly emphasize educational attainment or that more highly educated individuals strive to work in larger organizations (Davidson, 2011). A potentially valid viewpoint on why this is the case is that education is often used as a proxy for intelligence and since larger firms must adhere to employment laws, they can use education as a means of judging intelligence without the potential costs of lawsuits (Spence, 1973). In ad- dition, tuition assistance is more readily available at large firms than in smaller firms (Cappelli, 2004), essentially compounding the educational disparity between large and small organizations

and ensuring that the rich (large firms) get richer in terms of employee education levels while the poor (small firms) continue to suffer.

As a related side note, employees with greater cognitive ability benefit more greatly from train- ing and development and are also more capable of adapting to and taking advantage of new technolo- gies (Salas & Cannon-Bowers, 2001). Although the two are not perfectly correlated, education level is often considered to be a suitable proxy for cognitive ability (Spence, 1973). Because many modern-day training programs heavily integrate technology into their curricula, employees with lower education level (and thus lower cognitive ability/technological know-how) such as those more commonly found in SMEs, are less likely to benefit from training opportunities than those with higher levels of educational attainment.

SMEs can address educational/cognitive dis- parities by offering tailored training solutions that (1) maximize the impact of training by tailoring training to employees’ cognitive abilities and education levels and that (2) are a suitable yet more efficient substitute for formal education. First, SMEs can offer training and education opportunities that are tailored to the individual capabilities and needs of their employees instead of capitalizing on turn-key training offerings that are standard across organizations and industries. Adapting training opportunities to the specific needs of SME employees will allow employees to achieve maximum benefit from their studies versus being faced with a curriculum that is either too complex or too overly simplistic. In addition, SMEs can try to account for an educational deficit among its employees by offering on-the-job training as a suitable alternative for formal education. Such training can save both employers’ and employees’ time by focusing specifically on imparting knowl- edge that directly applies to the job at hand and is also likely a much more cost-effective alternative to typical tuition assistance programs.

Moving forward, SME office managers and other human resource employees are more likely

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to be assigned a wide variety of tasks than simi- lar employees working in larger organizations. Employees who are expected to perform a broad set of responsibilities are less likely to receive specific training opportunities than employees in specialized roles. To address this issue, SMEs should conduct a systematic employee needs as- sessment (another HPWP) to guide training design, development, delivery, and evaluation (Arthur et al., 2003). Training and development presents a great deal of short- and long-term organizational improvements, but accomplishing these improve- ments requires implementing processes (e.g., needs assessments) to ensure that appropriate train- ing opportunities are offered for SME employees when/where needed, regardless of the breadth of tasks for which they are responsible.

Equal Opportunity

Another critical aspect of HPWPs is the impor- tance of selection and promotion opportunities based on merit and fairness (Pfeffer, 1994). One of the principle benefits to such an approach is if used properly, may reduce friction caused by discrimination and bigotry (Pfeffer, 1994). Large corporations, especially those that use humanistic management techniques, are often considered better places to work and are more fair in their treatment of minorities. (Pfeffer, 2007) One especially important aspect of diversity is the concern over gender in the workplace, whether it is for a large corporation or a SME. The gender of a small business owner plays a significant role in determining business performance, but the re- lationship between the two is far from clean-cut (Rosa, Carter, & Hamilton, 1996). Thus, gaining further insight into the gender breakdown of SME owner-managers is a useful undertaking. A Di- versityInc (“Where’s the Diversity,” 2012) study of the top 50 Fortune 500 companies found that only 24% of CEOs are women. The NFIB survey determined that this trend carries over into the small business environment as well, with 32% of SME heads being female.

Isolating managers from owners and owner- managers in the NFIB survey data revealed an interesting shift in gender breakdown, however. The gender gap among SME leaders identified solely as managers (not owner-managers) was much less than that of SME leaders overall, with 48% of SME managers being female. These ob- servations raise two similar yet unique questions when it comes to the role of gender among SME leaders. First, the overall gender disparity among both large- and small-sized business raises the question of the causes and effects of such ineq- uity. In addition and perhaps more interestingly given the topic at hand, the greater proportion of women as SME managers (versus SME owners) strongly alludes to the existence of gender-based challenges in the SME environment.

Recent research suggests that SMEs do in fact, struggle with gender inequality issues, especially when it comes to business performance and suc- cess. Loscocco and Bird (2012) recently found that small businesses headed up by females were less likely to be successful than those headed up by males due in part to the fact that work-family balance issues weigh more heavily upon females than males. In addition, men are more likely to uncover business opportunities due to a gender imbalance in both human and social capital (Gonzalez-Alvarez & Solis-Rodriguez, 2011).

Similarly, gender disparities in SME leaders’ job training and relevant career development experiences also play a role in determining suc- cess. Using a survey of managers across various business sizes and types, Ohlott, Ruderman, and McCauley (1994) confirmed the existence of gender differences in career training and devel- opment experiences. Loscocco and Bird (2012) further investigated such differences through the lens of small business performance, ultimately concluding that the higher success likelihood of male-owned (versus female-owned) small busi- nesses is at least partially attributable to dissimi- larities between gender and previous employment experiences.

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Finally, there has been discussion over the role that gender plays in females’ decision to pursue self-employment opportunities like SME ownership (Hughes, 2003). Some scholars argue that females willingly pursue self-employment to avoid the effects of gender inequity in traditional work environments and/or to take advantage of the independence and flexibility inherent in self- employment. Other scholars, however, are more pessimistic, believing instead that women are somewhat unwillingly forced into self-employ- ment by a lack of available jobs.

Establishing a more in-depth understanding of these gender inequalities and their origins is an important first step toward eradicating such disadvantages among future generations of SME leaders. In addition, HPWPs like training and development opportunities, as discussed in the previous section, can be used to lessen the effects of gender inequalities whether it is adding ad- ditional skills or providing experiences that may increase self-efficacy (Gist, 1987). SMEs should be sure to take a tailored approach to such training, however, ensuring that women and men receive training based on their individual strengths and weakness. Otherwise, the disparities will continue.

Full Time Employee (FTE)

According to the U.S. Department of Labor, part- time workers compose approximately 18.7% of the employed civilian workforce (United States De- partment of Labor 2013a; 2013b). In comparison, the NFIB survey of SME owners and managers revealed that, on average, 23% of SME employees are part-time workers, a number slightly higher than the national average. One of the reasons why the workforce has become part-time is due to concerns regarding health insurance, especially with the ongoing increases in healthcare costs in the United States (Shi & Singh, 2012). Yet, another reason, for more part-time workers being hired is that firms are encouraged to “right-size” the firm, rather than downsizing as a firm faces

fluctuations in the market. Rather than simply laying-off workers, which would violate best practices, organizations are encouraged to hire part-time workers since those workers do not have expectations of full employment and can be laid off with minimum social costs (De Meuse & Marks, 2003).

As a result, job-related attitudes and behaviors vary between part-time and full-time employees (Conway & Briner, 2002). Knowing this, and knowing that SMEs employ a larger-than-average proportion of part-time employees, SME owners and managers should take great care in account- ing for the unique characteristics of part-time employees to minimize the occurrence of em- ployment level-related issues and thus maximize productivity and profitability.

For example, research has shown that turnover is more unpredictable among part-time workers than among full-time workers (Peters, Jackofsky, & Salter, 1981). This volatility is more problematic for SMEs than larger firms because SMEs are more likely to employ part-time workers (and thus more likely to experience unexpected employee turnover) and because the value of each employee is greater in a SME due to the inherently smaller employee base of SMEs. Thus, firms of all sizes should seek to minimize turnover via HPWPs, but doing so is of critical importance to SMEs. Yet, these findings need to be tempered by the fact that a great number of people employed by SMEs are either family or friends of the owner. As such, they are not a true market contract as with the normal relationship with an employee in a larger organization. This presents some benefits and costs. If an employee leaves the firm, it could lead to some family issues and the employee may face sanctions outside the firm. Yet, they may not be willing to punish the family member based on the relationship. For example, if a parent employs a child, they may not punish the child, due to the “rotten-child phenomena,” thus they may be lim- ited in sanctions as they are unwilling to punish the child (Becker, 1974). Or the child may feel

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a great sense of connection with the parent, and may be less likely to turnover. Another example would be Patel and Conklin (2012), who studied the interplay between HPWPs, employee reten- tion, and labor productivity in 145 businesses with fewer than 100 employees. They ultimately concluded that fostering and emphasizing group culture among employees, a HPWP, corresponded with improved employee retention and perhaps even higher labor productivity, albeit indirectly.

The potential benefits of HPWPs in relation to part-time employees and SMEs are not rel- egated solely to turnover reduction. For instance, job satisfaction patterns also differ based on employment level (Logan, O’Reilly, & Roberts, 1973), and research has shown that HPWPs like salary adjustments and job enrichment strategies positively correspond with improvements in job satisfaction (Luna-Arocas & Camps, 2008). Yet by also fostering a group environment and a family atmosphere, individuals within the organization will experience an increase in satisfaction and meaning. The SME may possess excellent condi- tions for this approach as the owner/manager (who is the agent through which a worker develops their attitudes towards the firm) has such an impact on the worker.

SOLUTIONS AND RECOMMENDATIONS

The implications arising from the various differ- ences between SMEs and larger firms discussed above shed light on a number of strategic rec- ommendations. First, as mentioned previously, compensation-related issues such as payroll and benefits provide fertile grounds for SME actions to differ from large organizations. Communication between employees and those completing payroll is critical in SMEs that perform payroll functions in-house, as there is no third-party provider whom employees can contact with questions. Also, if the SME contracts outside the firm, the owner of the firm should hire those firms with excellent reputa-

tions and with whom s/he has a social relation- ship with. If a SME is unable to provide certain resources inside the firm, utilizing the social net- work of the owner will be paramount. Chambers of commerce, Rotary Clubs, and LinkedIn may provide cost effective ways to identify options in your local community, as well as avenues by which feedback on past performance of potential vendors can be solicited easily and with candor.

In addition, SMEs have a higher proportion of part-time employees than larger firms, and the payroll process is often much less clear for these employees. Thus, while organizations enjoy the efficiency inherent in paying these employees less frequently than full-time employees, further inqui- sition into understanding best payroll practices for both full-time and part-time employees should be a priority for SMEs. On a related note, SME man- agers should give part-time employees additional emphasis/attention, including the opportunity to participate in the organization’s decision-making process, even if unorthodox. Such an initiative would likely be much more fruitful for SMEs than larger organizations given the greater proportion of part-time employees employed within. Emphasis must be given to the labor laws that govern hours worked and employee job categories as these vary from location to location, often even within the same state. In some instances, pay frequency is not something the employer has the flexibility to control, thus limiting the ability of the employer to try and exploit frequency as a benefit.

Next, under the compensation umbrella, SMEs should consider the ways in which they can use their smaller size to their advantage in imple- menting HPWPs and other strategic management techniques. For example, SMEs may be unable to compete with stock options and pension plans offered by larger organizations due to the fact that they simply are not large enough in number to achieve the bargaining power (and, thus, lower- cost benefits) of their competitors. Nevertheless, SMEs should instead focus their efforts on provid- ing employee benefits that are within their realm of possibility, including but not limited to flex-

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ible work initiatives and profit-related bonuses. In doing so, we recommend that organizations consider factors which may prevent them from embracing human resource configurations, as Bacon and Hoque (2005) have recommended. Both of these measures are fiscally feasible and could potentially impact employee job satisfaction and performance to the same extent as more tradi- tional benefits offerings. Other options, that may be good substitutes for stock options and pension plans, are 401k savings plans. While 20 years ago the implementation of such plans was cost and/ or time prohibitive for SMEs, today technology enables brokers to easily administer these plans as part of normal payroll cycles (e.g., Paychex and ADP, the two largest payroll and benefits proces- sors nationally, offer this as an add on service to their SME clients).

Moving forward, training and development must be considered distinctly different between SMEs and large organizations. Employee needs should be evaluated based on a variety of factors, including education level, gender, and demograph- ics, among other things. These factors should be analyzed through a needs assessment to identify appropriate training opportunities for each em- ployee. For example, males and females may have different work experiences due to inherent gender differences, and a holistic needs assessment should uncover these differences. Furthermore, individu- als in small businesses tend to have lower education levels than individuals in large businesses, and as discussed previously, training activities should be tailored to account for these differences.

We would also like to draw further attention to the fact that differences between SMEs can sometimes be as distinct (or perhaps even more so) than differences observed between SMEs and large organizations and should thus be kept under constant consideration. For example, one HPWP, job rotation, increases employee commitment and productivity (e.g., MacDuffie, 1995). Job rotation is based on characteristics of individual firms and not the overall size of the firm. Thus,

a proper optimization of job rotation cannot be achieved by comparing SMEs to large organization but instead must be accomplished by an in-depth analysis of the individual SME itself and how it perhaps differs from other similar SMEs.

Lastly, our final and perhaps most fundamental recommendation is to continue to address the HP- WPs both mentioned and not mentioned within this chapter, as doing so will allow the SHRM literature and SME scholars and practitioners to continue developing and improving their human resource practices in an educated, informed manner.

LIMITATIONS AND FUTURE RESEARCH

The data analyzed for this study focused solely on SMEs. While we used this data to compare SMEs to larger organizations, we did not collect original data for the latter. Additionally, more advanced statistical analysis may lead future authors to draw more nuanced and concrete conclusions. The analyses performed largely treat SMEs as a whole and thus do not account for within-group differ- ences, and how these differences may contribute to strategic and tailored HPWP development. As such, some contingencies between SMEs such as industry, family ownership and other potential variables may have been ignored.

Furthermore, exploring differences between SMEs will also provide a further understanding of how HR functions vary based on factors other than merely organizational size. We believe dis- tinguishing SMEs from large organizations is a necessary first step in such an undertaking, and thus this analysis achieves its purpose. That being said, further research pitting SMEs against each other could help us further these conclusions. For example, do SMEs that use HPWPs early in the formation, experience higher or lower growth than those who do not? In addition, examining the various strategies and relationships of the owners of the SMEs may allow for a greater understanding

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CONCLUSION

HPWPs lead to both behavioral- and performance- oriented beneficial outcomes, including improved organizational citizenship behaviors and better firm performance (e.g., Evans & Davis, 2005). Gaining a richer understanding of these HPWPs in the SHRM literature, especially as they specifi- cally pertain to SMEs, helps enable organizations of all sizes to strategically improve their human resource management function. While research has been diligent in investigating HPWPs among larger organizations, we believe continued work is warranted at the SME level. As scholars, we should continue supplying the demand for such management knowledge (Abrahamson, 1996), and we hope this effort as well as the effort of our fel- low scholars will make incremental advancements in facilitating further development of HPWPs in SMEs. While certainly SMEs have come a long way in the last 125 years in relation to how they treat employees (cf., Liguori, 2012), it’s now time for smaller organizations to get strategic and evaluate the potential positive impact that HPWPs may offer.

ACKNOWLEDGMENT

The support of the National Federation of Inde- pendent Businesses is gratefully acknowledged.

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KEY TERMS AND DEFINITIONS

Benefits: A form of the total compensation provided to employees over and above the amount of pay specified.

Compensation: The total package given to employees which typically includes money and may also include other benefits such as health coverage, paid time off, and so forth.

Equal Opportunity: Fair treatment of em- ployees in the workplace regardless of individual differences such as race, color, age, gender, and religion.

High Performance Work Practices (HPWP): Comprehensively aligned activities such as recruitment, selection, compensation, and train- ing designed to create more knowledgeable and motivated employees.

Payroll: The process of paying employees for services which were provided to the organization during a certain period of time.

Small and Medium Enterprise (SME): Companies whose personnel numbers are under a certain limit, often quantified as less than 250 employees.

Strategic Human Resource Management (SHRM): The use and deployment of planned human resource activities intended to enable organizations to achieve goals.

Training and Development: An organiza- tional activity designed to improve individual and organizational performance.

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Chapter 12

How SMEs in the Car Maintenance Services Industry Recruit Employees from the Dense Forest of Hopeless

Unemployed Youths: Case Study of Two Selected

Cities in Tanzania

ABSTRACT

There is a general consensus among scholars that the HR practices by corporate companies cannot be imitated by Small and Medium Enterprises (SMEs). Even though it is a neglected sector, SMEs in Tanzania are considered to be a major contributor to the national economy in terms of tax payment and job creation. Using a case study, this chapter investigates human resource practices in the recruitment process among the SMEs in a car maintenance sub sector. The nature of doing business is more informal, whereby a customer can bring a car to the garage and the technicians work on the car without bargain- ing for the cost of the work. Accordingly, there have usually been complaints from customers regarding over charging for the services offered and lack of trust among technicians, especially on matters relating to falsification on spare parts. In addressing this problem, garage owners have to make sure that they employ people with good character; those who cannot temper with customers’ property tarnish the im- age and reputation of the company.

Felix Adamu Nandonde Aalborg University, Denmark

Pamela John Liana Open University of Tanzania, Tanzania

DOI: 10.4018/978-1-4666-4731-2.ch012

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SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths

INTRODUCTION

The collapse of the central planning system (Ujamaa policy), in which the government was responsible for providing a job ‘for every one’, has created significance employment uncertainty in Tanzania (Bagachwa and Maliyamkono, 1990, Mbwambo 2003). In this regard, small and medium enterprises (SMEs), which mostly constitute the private sector, become even more important in creating new jobs.

Although SMEs have a big role to play in the economy, their management practices are still vague (Bryant and Nguyen, 2004). And even though SMEs create a significant portion of jobs and employment, current research on human re- source recruitment (HRR) has focused primarily on large firms that employ fulltime specialised personnel (Annette and Marilyn, 1999, Hene- man et al, 2000, Hornsby and Kuratko, 1990). This vacuum compels SMEs to either use human resource practices that were developed for large firms or not to use any practices because of not being appropriate for them.

Unlike the firms in developed countries, SMEs in the emerging economies are operating under weak market infrastructures (Peng, 2001, Mbwambo, 2003, Mbwambo and Tundui, 2003, URT, 2002, Wabwire, 1996). SMEs in developing countries may be familiar with HRR practices used by corporate organisations, but the recruitment practices of SMEs, arguably, may be very differ- ent from those in large firms (Bredl, et al 2009). Thus, despite the fact that SMEs in Tanzania play a very important role in economic development and job creation, there is very little knowledge about how they recruit human resource.

The subject of HRR in SMEs has received less attention in developing countries (Bryant and Nguyen, 2004, Aryeetey and Offori, 2011). In Tanzania, research on HR has focused much on local and central government (Bana, 2008, Itika, 2010, Issa, undated). This implies that research in SMEs human resource recruitment is

urgently needed in developing economies such as Tanzania. This chapter addresses the need of carrying out research in this area by asking one basic question: “What human resource recruitment practices do Tanzania’s car maintenance SMEs formally exercise?” The answer to this question will provide owners of car maintenance and public policy makers in the country better perspectives of the challenges that SMEs face, instead of relying on what is available in the HRR studies on larger firms and models from developed countries.

Overview of Car Maintenance Business in Tanzania

The definition of SMEs is still subject to debate among scholars. According to Copeland and Weston (1998), the concept lacks universal ap- plicability. This is true because if sales turnover is used as the benchmark, then which currency would you use and what about the impact of ex- change rate? Van der Wijst (1989) defines SMEs as a privately owned firm with 1-9 and less than 10-100 employees. Jordan et al (1998), on the other hand, define SMEs as the firm with fewer than 100 employees and with less than € 15 million turnover. It is clear from literature that scholars have not reached consensus on what should con- stitute SMEs, in terms of as to whether to to use annual turnover, the size of enterprises, ownership of the enterprises, or the value of fixed assets. This study uses a definition based on quantitative dimensions (number of employees and number of revenue). Globally, the concept of SMEs varies from one country to country; in Tanzania, SMEs categorization has been on four tiers as shown in Table 1.

On the other hand, the country has scanty statistics on SMEs (The Guardian, 2010). Tanza- nia Chambers of Commerce Industries and Ag- riculture (TCCIA) estimated that there are 1 million entrepreneurs in the country, which con- tribute 30% of the GDP and employ 40% of the total population (www.tccia.com).

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SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths

According to the National Bureau of Statistics (NBS) (2011), estimated 12% of the Tanzania population consist of the unemployed people (www.nbs.go.tz). According to Business Times, (2011) report, unemployment rate among the youth in the country stood at 13.4% in 2010. Such a large army of unemployed young and energetic people indeed poses a threat to the country’s future political stability and peace. On the other hand, the government has embarked on various strategies with the aim of absorbing the youth into different formal and informal legal activities that could help them earn a living. One such strategy is the National Strategy for Growth and Reduction of Poverty (2005-2010).

Car maintenance subsector seems to be promis- ing in terms of redressing youth unemployment due to the fact that the number of cars has been in- creasing in the country. For instance, it is estimated that in the commercial city of Dar-Es-Salaam 1 in every 4 people has a car (Daily News, 2012). Currently, the city has the population of more than 4 million people. This provides a potential market for the SMEs in the car maintenance in the country.

Table 1 shows that SMEs can be categorised based on capital investment as it has been done in certain project. However, this criterion may not work with many of the individuals involved in the private sector. This is because SMEs are not ready to disclose their income and investments; and on the other hand, the data cannot be easily available because the owners operate informally.

Research Problem

There is a general consensus among scholars (Deshpande, and Golhar, 1994, Ivy, 1997 and Deshpande and Golhar, 1997) that SMEs are the engine of the economy in the developed and developing countries. However, Tanzania has not benefitted from the full potential of the SMEs due to the following reasons namely; unfavourable legal and regulatory framework (Nkya, 2003, URT, 2002), undeveloped infrastructure (URT, 2002, Mbwambo, 2003), limited access to finance, and poor business development services (Maziku, 2012, Anderson and Ssendi, 2009, URT, 2002).

SMEs in car maintenance in Tanzania work under constraints that threaten their very existence (Leonard and Mfaume, 2004). Firstly, the group is characterised with low revenue per year (Mb- wambo, 2003), low level of education (Spring, 2009, Leonard and Mfaume, 2004) and majority do not have any formal training, (Leonard, and Mfaume, 2004, Mwananchi, 2012), they also do not have any permits to work in the areas where they operate, (Leonard and Mfaume, 2004, Nkya, 2004) as they usually use road reserve to undertake their businesses.

To survive in this business environment, trust is very important among workers employees, and customers who bring their cars for services in these garages. The nature of doing this kind of business in Tanzania is highly informal whereby customers can leave a car at the garage without any notification; this is in addition to the reality that the technicians would work on the car without knowing how much he/she was finally going to be paid by the customer. The cost of the services is usually agreed upon after the services.

In most cases conflicts between car owners and technical attendants, are common phenom- enon, especially regarding the value of the items replaced in the car during the service. Normally, complains abound on over charging for the services and on the fact that sometimes used spare parts

Table 1. Categories of SMEs in Tanzania

Category Employee Capital Investments

(TSHS) Million

Micro enterprise 1-4 Up to 5

Small enterprises 5-49 Above 5 to 200

Medium enterprises 50-99 Above 200-800

Large enterprises 100 Above 800

Source: URT, 2002

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are replaced and charged for the prices of new and genuine spare parts by unscrupulous technicians.

To minimise these conflicts the garage own- ers employ well behaved and trustworthy people who cannot temper with customers’ vehicle parts for fear of damaging the image and reputation of the company. In order to realize the potential of SMEs, issues on how human resource is utilised by the sector deserve a consideration. This study set out to explain how SMEs recruit employees from the community.

LITERATURE REVIEW

Theoretical Literature Review

Recruitment and selection practices are the key factors for success of any organisation (Ongori, 2010). The ultimate goal of recruitment and selection is to have people with similar skills, knowledge, experiences, core competences and preferred attitudes that will enable an organisation to survive in a stiff business competition (Boddy, 2006, Itika, 2012).

According to Armstrong (2009), if an organi- sation fails to attract skilled and knowledgeable human resource, such an organisation is likely to fail to achieve its objectives. Some of the problems which SMEs face include high labour turnover and organisation conflicts (Aryeetey and Ofori, 2011, Bredl, et al, 2011). To minimise these problems, proper recruitment and selection procedures of employees becomes very crucial.

A system theory which is propounded by Dun- lop (1958) considers human resource recruitment as a system that constitutes inputs, process, and output. However, small scale businesses have a shortage of managerial skills (Daniels, and Ng- wira, 1993 and Monsted 1989). In addressing this problem among the SMEs Aryeetey and Ofori (2011) suggest three things: (1) developing the managerial skills of the owner (2) employing managerial consultant when problems arise; and

(3) recruiting an employee who would perform managerial tasks. SMEs have to make sure that they attract and recruit talented youths. However, this is not what actually happens in the labour market whereby graduate have no jobs and SMEs have no skilled employees (Budhwar, and Saini, 2008).

SMEs in developing countries face many prob- lems ranging from financial related constraints to those related to access to finance (Anderson and Ssendi, 2009, Gagoitseope, and Pansiri, 2012). Such constraints limit SMEs from implement- ing the three suggestions by Aryeetey and Ofori (2011). On the other hand, corporate organisations fail to absorb all graduates from technical colleges and higher learning institutions.

Another theory is the resource based value theory (RBVT). The theory originated in the economics some times back and propounded in 1990s by Barney (Barney, 1991). Penrose (1958) propounds the idea that firms should be analysed from resource side and only focusing on the product side at the level of industry. The RBVT focus on internal analysis of the differences in resource endowments of the firms (even within industry) and explains how these differences can be a source of sustainable competitive advantage (Armstrong, and Shimizu, 2007, Barney, 1991). As Barney (1991) argues, a firm has the potential of generating sustained competitive advantage from firm resources that are valuable, rare, inimitable and non substitutable. The RBVT was chosen as a conceptual framework because it provides a theoretical bridge between HRM and a firm competitiveness (Friedmann, et al 2010, Dunford, et al 2001). Since its inception, the theory has faced criticism (see Barney, et al, 2011, Barney, 2001, Armstrong and Shimizu, 2001 for detail). Applying the RVBT concept to research has led to discussions of opposing implications among scholars (Dunford, et al 2001). Despite the criti- cism (Armstrong and Shimizu, 2007, de Kok et al, 2006), the RBVT has become the most ap- plied theory in HRM research. However, scholars have different views on the use of the RBVT and

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HRM. As McMahon et al (1994) argue, human resource may lead to competitive advantage, on the other hand, Lado and Wilson (1994) argue that sustainable competitive advantage lies within HR practices. According to Friedmann, et al (2010), and Barney, (1991), HR practices constitute a complex and interdependent system that cannot be copied easily. Exploring the influencing role of HR on the competencies of the firm (Dunford et al, 2011), suggest that HR systems (as opposed to individual practices) can be unique, causality ambiguous and synergistic in how they enhance firm competencies, and thus could be inimitable. This study follows the RBVT to HR practices whereby the value, uniqueness, and unilimitability are argued to enhance efficiency. According to de Kok, et al (2006), the RBVT supports relation- ship between the firm size and organizational complexity on the one hand and professional HRM practices on the other. In the Tanzania’s business context, this means HRM practices with those three features will help SMEs to survive in competitive business environment. But to have employees with these features, a firm has to practice HRM recruitment processes that depend on RBVT. The SMEs dependency on community seems to be an inevitable phenomenon because of the financial constraints that limit them from employing qualified staff and or formalizing of their operations.

To survive in this situation, SMEs have to depend on the surrounding community for the supply of unskilled labour because they (SMEs) cannot employ skilled labour from universities and technical education institutions. This, in turn, reduces their competitiveness in the provision of services while on the other hand financial institu- tions encourage SMEs to take loans which however make them unable to attract highly skilled labour.

In broad perspective, SMEs in car maintenance depend on the human resource from a pool of poor skills. In addressing the problem unquali- fied staff, SMEs recruit unemployed individuals as trainees. However, the challenge with regard to this approach revolves around bringing ethical

and moral behaviour of new recruits up to the acceptable standards.

SMEs Recruitment Processes

Armstrong (2009) identifies three stages of human resource recruitment and selection procedures, which include (1) defining recruitments (preparing job; evaluating alternative sources of applicants either inside or outside the organisations) (2) attracting candidates; (through advertising the vacancies inside or outside the organisation); and (3) Selecting candidates (through interview, testing, assessing candidates, obtaining references and preparing the job contracts).

The problem many companies in developing countries face is lack of trust among employees (Egbert, 2001). To overcome this problem com- panies, in most cases, use a network of friends to get employees (Bredl et al, 2011). As Trulsson (1997) observes, business owners in Tanzania rely on friends and other sources when searching for employees. On part of entrepreneurs, this is more challenging because in some situations (Bredl, et al, 2001, Ongori, 2010), they (entrepreneurs) don’t have enough means of screening their workers and do not use formal procedures such as signing of work contracts. In the study conducted in Tanzania, Bredl et al (2009) found out that employers either formalize their human resource operations or not, do otherwise, depending on the size and age of the firm. Furthermore, the same study reveals that Tanzanian-Africans do not formalize their human resource recruitment unlike their counterparts Tanzanian-Asians.

In a study conducted in Tanga, Tanzania, Egbert (2001) found that SMEs owners use two criteria, namely; trust and qualifications in the recruitment of employees. Lack of trust is the biggest problem in the world of business today, and it is very ram- pant in the SMEs because they (SMEs) don’t have a good mechanism of screening new recruits and thus these SMEs recruit workers without formal skills (Ongori, 2010, Bredl et al, 2011).

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In another study, Huselid,(1995), Adams and Reid (2001) found that firms that use comprehen- sive employee recruitment selection procedures, extensive employee involvement and training, and formal performance appraisal approach linked to incentives are likely to enhance corporate financial performance. However, training is normally faced with setbacks in many organisations due to finan- cial difficulties (Dunford, et al, 2001). The situa- tion is even worse with SMEs because they face with financial constraints, and researchers have found that training is not one of the components that are taken into consideration more serious. However in most cases, SMEs carry out informal training following the nature of their organisation that jobs are a routine and there is no specialisation (de Kok and Kok, 1999). Aldrich and Langton (1997), found a negative relationship between the number of family members who work in a firm and the formal HRM practices. Furthermore (de Kok et al, 2006, Adams and Reid, 2001) found that family firms rarely consider experience and level of education in making decisions on promotion. In a study conducted in Ireland, Adams and Reid (2001), found that SMEs were not implementing professional HRM practices.

Study Area

The respondents of the study were recruited based on the agreement that the researchers would treat the information provided with the highest level of confidentiality and would conceal the identity of the respondents. The problem was that SMEs were sceptical from participating in the research for fear that the government and its agencies would investigate their operations. For that matter hy- pothetical names such as garage A, B, C, and D.

The study data were collected in Morogoro and Dar-Es-Salaam using a random sampling technique. The researchers approached the or- ganisation and introduced the study and upon agreement, the date for the interview and time were agreed upon. Eight SMEs were approached to participate in the study, four refused for fear

that their business secrets would be revealed. Snow bowling technique was used to get other four SMEs with reference to the first one. Two respondents were garage owners who operated in both cities and whose car maintenance services were also used by the researchers. The technique is biased, but, it was reliable because the person suggested by someone (who is also in the sample) is likely to share similar characteristics with the first person (Zikmund, 2009, pp.384).

Data Collection

Unstructured questionnaire was used for data collection. The questionnaire was developed after consulting literature such as Bredl et al, (2011), Egbert, (2001) and Trulsson, (1997). The questionnaire contain questions such as: When did you start this business operation? Was your business registered? Where is the source of your employees? How do you recruit trained mechan- ics? Do your use interview in recruitment? What methods do you use in the selection process of the employees? Do you consider gender balance in your recruitments? Does your company face labour turnover? If yes what are you doing to retain those talents?

The researchers shared with the respondents, the objectives of the study and tools that were to be used in the data collections. The interviews were all tape recorded to allow the researchers to concentrate on the conversations during the interviews. However, for ethical reasons, the in- terviewees were informed about the tape recording and its purpose; that is, allowing the researcher to keep a record for data analysis. Upon agreeing on the procedures by both parties, then the interviews began. All interviews lasted for 30 to 45 minutes depending on how busy the respondent was. The researchers visited the respondents’ premises for convenience and for verifying some of the things cited. The interviews were conducted from June to August in 2012 in the cities of Morogoro and Dar-Es-Salaam.

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Case Selections

Yin (2009) defines case study research method as an empirical inquiry that investigates a contem- porary phenomenon in its real life context, and when the boundaries between the phenomenon and the context are not clearly evident; and in which multiple sources of evidence can be used. A multiple case study design was used in this study whereby four cases were studied as a unit of analysis. In selecting the SMEs three criteria developed by Nkya (2002) were used in the study as follows.

• The enterprises must have operated for at least five years.

• The enterprises must not at the time of the study be employing more than a hundred people.

• The enterprises management should be willing to provide the necessary information.

Data Analysis

The collected qualitative data from interviews with the owners of car service stations were analysed using critical discourse analysis (CDA). The transcribing of the data was conducted before the analysis of the data. The CDA looks at the linkages between the language used by the person such as (voice, intonation and body language), and the social context during the interview (Winstanley, 2009). The transcribing started on the same day after the interview while information from the respondents was fresh in the memories of the researchers, the context and analysis of the case also started almost immediately.

Findings

Four companies, two from Dar-es-Salaam and two from Morogoro were included in the study

(see Table 2). The company names were A and B from Morogoro and C and D from Dar-Es-Salaam.

SMEs RECRUITMENT PROCESS

Recruitment Sources

SMEs use two sources of recruitment, internal and external. However, the internal one is very strong because when trainees (for the purpose of this study trainee is the one who did not attend any formal mechanical training but has received training at the car services centre based on the skills and experiences) graduate from the com- pany, they decide to remain with the company because of a long relationship they have had with the organisation. The external sources are not a major source, even though they generate a good number of recruits. However, in most cases, these recruits do not stay with the company for a long time due to low pay and harsh working conditions. Similar findings are reported by Johnson (1993), who shows that SMEs see graduates as a product of the academic world. One owner said:

Some of the technicians from colleges do not have good practical training but they are good in theory, while here we don’t need theory. So they find this as not being the right place for them.

Table 2. Business status

No Name of the

Company

Number of

Employees

Year Started

Legal Status

1 A 18 1992 Valid

2 B 7 2005 Not valid

3 C 12 1990 Valid

4 D 11 2000 Valid

Note: the name of the companies have been hidden for confi- dentiality

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RECRUITMENT METHODS

Indirect Methods

The study found SMEs not advertising vacancies in the local media and neither do have job descrip- tions. Interesting findings were on the source of human resource, that SMEs depend do not use formal sources such as vocational training and colleges; but they use relatives, family friends and own family members as their major source of labour supply. One garage owner said:

You have seen that I have seven employees who are working here one is a young boy; his mother is working in the next door, the other one is a child of the owner of the auto spare parts shop and two are my relatives; this helps us to protect property of our customers.

The findings of this case study reveal further those SMEs in a car maintenance industry use more informal and unstructured means of recruitment. The findings correlate with the ones in a study by Bartram et al (1995) who found that recruitment in small businesses is unlike that in SMEs.

When asked why they do not advertise vacan- cies in local media to enable them attract skilled staff, SMEs gave several reasons; for example one owner of a car service centre had this to say:

People come to our offices to ask for jobs, but we don’t have enough places for them, why advertise?

Another respondent made this remark:

Due to the nature of this business, you don’t need to incur more cost; also employees are very mobile so you don’t need to advertise.

This shows that the problem with SMEs in car maintenance industry is not getting skilled labour; rather it is how to retain the skilled staff. This is unlike in large firms where employees get good

pay and work under good working condition. Large firms can therefore, afford to retain their staff quite easily.

SMEs AND SELECTIONS OF THE EMPLOYEES

Interviews

The study found two techniques being used in selecting new recruits. One involves indirect methods (to get trainees), whereby companies conduct informal interview to candidates accom- panied with members of the families. A family member can either be a parent or guardian and who has to provide reference for candidate and be answerable for any wrong doing committed by the candidate. The owner of the garage will ask for a verbal commitment from the parent/guard- ian to assure the company that the trainee would not display an unacceptable behaviour. Also, the family member has to provide pocket money to the candidate during the first few days of the training sustain him or her at the garage. One of the owners has this to say:

We will question the parents on the commitments of the youth that (he/she) will behave and not steal other people’s properties.

The agreement is made between the parent and the owner of the garage and not the child. This means the parent would be responsible for any loss resulting from the candidate’s misbehaviour. One garage supervisor commented,

We don’t have any alternatives but to protect ourselves, otherwise we will pay a lot of money for mistakes which are not ours.

To avoid recruiting children with bad behav- iour, the company would usually recruit techni- cians from next of kin. Such a procedure saves the

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owners from the hassles of searching for detailed information of the trainee in terms of whether or not the candidate is of good character.

Personality and Ability Test

A recruitment process of candidate from voca- tional training institutions and colleges is different from that of those who have not attended formal training. As for the former, there is usually, a small test on the field on the use of various mechanical tools. As one garage owner says:

In 2008 there came one guy claiming to have graduated from a vocational centre and has skills on metal welding. I gave him a small test of setting the gas cylinder and valve cylinder but he failed.

Furthermore, personality and ability tests are used to evaluate the physical nature of the candi- date to see if he/she can work in a particular field. The personality test, which can be carried out to either a trainee or a graduate, corresponding with the nature of the job (Boddy, 2005) as one car services centre observes.

What we do at the very first time is to look for the physical strength of the candidate one and then we advice him or her where to go and work, we also look at the ability of the trainee in captur- ing technical things; these are very important for selection.

To test for the ability, normally a small as- signment can be given to the recruit in the early days of training. Such an assignment may look at things like how fast can the candidate identify the size of a spanner, car parts or spares. The results of the test are then used for placement purposes, whereby one can be assigned to work either in a car wiring section, panel beating, engine mechan- ics, or in other related section. It was observed

that SMEs reward is related to the quantity of the output as this garage owner reports:

We don’t work for high income people or corpo- rate organisations because we don’t have modern technologies which our competitors have; due to this our payment is quite low and in most cases we first do the job and request for payment later. Car owners usually start bargaining while the job is already done. Such trends have severe conse- quences on our revenue collection.

SMEs do not sign job contracts with their employees. Perhaps this is the reason why many graduates do not work with them. In a study conducted in Ghana Aryeetey and Ofori (2011) found out that the SMEs face great challenges in retaining graduates.

Thirst for Being Independent

In most cases, a garage receives a number of trainees in a day, however in many cases; it is only a few who get retained at the organisation. When trainees become knowledgeable most of them run away without even saying goodbye.

I had two boys last year who were working under my supervision and could sometimes receive job when customers call in; but both of them have left without even sending a text message to me that they were quitting. I heard from my friend that my trainees are in Mbeya and have opened their office there.

SMEs in a car maintenance industry lose a lot of skilled personnel because of high rate of labour turnover among the young talented personnel due to poor pay. There are two main reasons as to why young talented trainees quit jobs without even saying bye. First, because trainees detest working at the garage with their trainer, this is because a

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trainee will not get new customers because as all customers who visit the garage would want to see the supervisors, even though the trainees are the ones who would do the job. Second, is the fact that payment for the any job done is made to the supervisors; the trainees get paid in accordance with the business trend of that day.

Gender Balance in Recruitment

Researchers asked garage owners if they take into consideration gender issues during recruitment of the trainee or employees. From the results, it was noted that the nature of the job limits participa- tion of women in the garage business because the SMEs use low level of technologies and most of the activities depend on the use of muscles. Ac- cordingly, this sub-sector is usually gender –im- balance. However, some girls still continue to join the sub-sector, which is growing in the country due to importation of used cars from Japan, In- donesia, South Africa, and Singapore, as well as Europe especially in the United Kingdom. Usually, women who participate in the garage activities are engaged in the welding, car painting and wiring as this garage car owner observes:

Two women were employed in our organisation but, both of them have been engaged without the notice of our customers. If you are not keen customers can turn you into a father of the young lady. So we are trying to observe gender balance, however we face great challenges in engaging female ap- prentices in a garage business. This is mainly because ladies often fall in love with customers and vice versa; such love relations sometimes end up in taking each other’s hand in marriage. When our lady apprentices get married, their husbands no longer allow their wives to come to the garage again and meet a forest of men.

Men in Africa are considered to be bread winner, heads of the family and political leaders (Tarimo, 2004). It is therefore assumed that men

in Africa can decide the future of their spouse after marriage. One garage owner reported that he had engaged three girls the year before, but only one of them stayed behind and was still working at the garage. According to Nkamnebe et al (2010), the perception of African community is that women’s place in the kitchen. This explains it is difficult to retain young women to work as mechanics in the car maintenance centres because one has to fight against the customers’ mentality that these young girls are here to be befriended.

Retention of the Talented Youths

SMEs at the car maintenance sub-sector also face a challenge of retaining talented youth due to a number of reasons. First, the entry barriers to the sub-sector are quite low; anyone can start his ga- rage provided he/she has the basic knowledge on how to repair a car. One supervisor commented:

Nowadays there are no technicians because the spare parts are easily available especially for Japanese cars.

This simplistic nature of starting ones’ own garage leaves old garages without talented work- force; because the youths can afford to operate their own garage. Also, most garages operate without following proper procedures of running a garage business. For example, one of the garages which even the author of this article sends his car for service operates illegally. The garage is in the open space where young people with skills and spanners can meet and assist car owners to get service at more affordable prices that the ones charged by registered companies that are required to pay taxes.

On the other hand, registered garages provide car maintenance services to well off people, government officials, and private companies or organisations. Informal SMEs offer similar ser- vices to low income earners who pay less; and this in turn, constrain these SMEs from retain-

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ing talented people, because they do not regular rewards for them to salaries, rather they can only afford to pay wages on daily basis.

FUTURE RESEARCH

Due to globalisation pressures, the local market is flooded with highly skilled labour from Asia and Europe. These people provide services which were once been provided by local people. How- ever, this trend looks favourable to consumers, because they (consumers) can now get services using modern technologies. On the other hand, there is a growing tension among the locals who were once depending on the field.

However, the interesting part is the understat- ing of how different cultures organise and work together. How Tanzanians perceive techniques of handling human resource issues that are found in a car services of sub sector of owners from other countries.

This study used qualitative method which limits generalisation, although the business environ- ments in African countries are similar. Accord- ingly therefore, the findings need to be interpreted with caution. Further research can use quantitative analysis method to allow generalisations of the concepts for broader applicability.

CONCLUSION

Bohlander and Snell (2007) see recruitment as a process of encouraging and evaluating people who apply for current and anticipated job opportunities; and selection as a process of choosing individuals who have relevant qualifications to fill the current and anticipated job openings. However, the study has revealed that SMEs in a car maintenance sub sector are not using recruitment tools such as advertising through the radio or televisions, the print media, or the internet. This implies that it is difficult for these SMEs to get qualified staff. On

the other hand, the demand for jobs gives these SMEs the opportunity of having a pool of potential employees in the labour market.

The interesting finding is with regards to the use of family members to provide references for candidates vying for recruitment in the car maintenance industry. This innovation gives those (SMEs) a chance to build a strong team of good behaving, positive attitude, and trustworthy indi- viduals. Such attributes are very critical in the car maintenance industry because car owners usually complain of having their car parts been replaced with fake ones by unscrupulous technicians.

This study has also shown that SMEs are not practicing general recruitment procedures due to a number of factors, which include lack of funds to cover the cost of advertisement in the electronic and print media. There is also, the issue of reward system because SMEs work with customers in low income bracket, thus the small holder entre- preneurs cannot afford a good reward system to enable them retain talented employees, especially graduates. Additionally due to high labour turn- over many SMEs end up losing talented youths who always keep on looking for greener pasture.

On the other hand, SMEs are generally consid- ered as the engine of the economy; accordingly, various programmes have been introduced at the national level with the intention of formalizing SMEs. According to Beck et al, (2010), the banks find SMEs as a lucrative market to lend different products. The banks provide loans to SMEs which are faced with high labour turnover and that compromises the ability of these SMEs to compete in the services market. Persistent high labour turnover it likely to make a number of SMEs default payment back their loans. The reason is simple; they don’t have well talented young mechanics with formal education. It can therefore be suggested that the banks ought to enable SMEs to recruit well talented mechanics and design retention strategies for the recruits to continue working in the firms owned by SMEs in order to help the latter improve performance.

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Policy Implications

This study has several policy implications in Tan- zania. While the current cultural and economic context may encourage informal HRM practices, the study indicates that there is a positive asso- ciation between a firm’s size and HR formality and performance (Brayant and Nguyen, 2004, Athur, 1994, MacDuffie, 1995). This implies that the government should support programmes that introduce more professional training and education to SMEs. An organisation like Small Industries Development Organisations (SIDO) and Local governments can be used to support SMEs in acquiring this education. Furthermore, public universities such as the Open University of Tanzania and MUCOOBS with centres in almost every region in the country can be integrated to support SMEs in getting HRM education. Cur- rently, education which is provided to SMEs in the country is not coordinated and regulated in the manner that can encourage private institutions to come up with their own syllabuses.

Also in the training awareness among to the owners of the car service stations need to be raised. This is because the current study has identified those SMEs in the subsector are not proud with what they are doing. While in Kenya, (D’Lima and Oyuga, 1992, Obura, 1996) workers in an informal sector are proud of their job while in Tanzania the opposite is the case. This trend will destabilize their will and jeopardise their future.

Managerial Implications

Scholars in management and SMEs believe that SMEs can adopt what large companies are do- ing but not the other ways round (de Kok, 2006, Cassel, 2002). However, the findings of this study suggest that large companies can also copy what SMEs in a car maintenance industry are doing with HR recruitment process. The finding has also shown that SMEs in Tanzania request for references from the next of kin of the candidate

to comment on the behaviour of the latter with the intention of avoiding recruiting unethical people. Currently common practice by large companies is to request for reference with a condition that the referee should not be a relative or a member of family. The assumption is that relatives or family members can recommend a candidate favourably you. However, unethical practices such as theft, embezzlement, bribery and corruptions still abound in these organisations with these formal recruitment procedures. Such practices could be minimised if some one was to realise that stealing, embezzlement or involvement in other similar acts would lend one’s relatives in trouble. Furthermore, SMEs in car maintenance sector they interview the guardians or parents of the candidate, in order to be assured that the candidate is indeed reliable and a responsible individual. The assumption is that during the probing the honest guardian or parent will provide positive commendation for a bad behaving family member, with the realisation that such an act may have severe consequences not only to the candidate but also to the guardian/ parent him/herself.

Scholarly Contribution

Chandler and McEvoy, (2000), Barrett and May- son, (2006), observe that although published research indicates that effective management of HR is one of the most important problems faced by SMEs, there is still an acute shortage of research that investigate the common practices in small businesses. This study aimed at investigating the practices used by SMEs in a car maintenances sub sector in Tanzania. Generally, HRM practices among the SMEs vary depending mostly on the nature of the job and sector (Barret and Mayson, 2005, de Kok et al 2006). This study has shown that SMEs a car maintenance sub sector in Tan- zania has its own mechanism of handling human resource issues and which help them to minimise the problem of unethical behaviour among the staff at the working place. Some of the mechanisms in

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recruitment include the use of family members as referees, interviewing, the candidate’s guard- ian or parent, and the use of in house training for capacity building purpose. Furthermore, scholars wishing to do further research on SMEs and their practices should focus on much on what they (SMEs) are doing instead of expecting them to adopt corporate managerial methods which have no importance to them for the improvement of their business performance. Currently, their is a belief among scholars that SMEs are not rational but will copy each and everything provided it has been implemented for some years by the corporate companies.

ACKNOWLEDGMENT

Authors would like to thank Dr Hashimu Mo- hammed and Dr Daniel Ndyetabula, both from Sokoine University of Agriculture and anonymous reviewers for their valuable comments and critics.

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Chapter 13

The Rise, Decline, and Regeneration of Industrial Districts:

Enhanced HRM, SMEs, and Location

ABSTRACT

Who does what, and how, is central to Human Resource Management (HRM). Where people do it has been central to theories of location and the clustering of firms in industrial districts. Yet there has been little synergy boundary spanning between HRM and location theories. This chapter seeks to redress this in relation to the rise and decline of industrial districts of small and medium firms and to draw implica- tions for their potential regeneration. It relates this to cost-based models of locational and competitive advantage, theories of flexible specialisation, the “triple helix” concept of enterprise-university-gov- ernment relations, and the challenges both for entrepreneurs and for policy makers in an era in which industrial districts are no longer only local but already have “gone global.” In forwarding the concept of “enhanced HRM,” the chapter advocates that public policies for SMEs should encourage surfacing tacit knowledge in new product innovation, achieving kaizen style continuous improvement, stretching core competences, profiling and extending latent abilities and implicit skills, and boundary spanning to synergise research with new high-tech start ups. While critical both of Michael Porter’s dismissal of tacit knowledge and kaizen, and of European research and regional policies, the chapter gives examples of success in such policies and how “enhanced HRM” can draw from them to regenerate industrial districts.

Stuart Holland University of Coimbra, Portugal

Teresa Carla Oliveira University of Coimbra, Portugal

DOI: 10.4018/978-1-4666-4731-2.ch013

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INTRODUCTION

There have been a range of analyses of location and competitiveness, including regional and ur- ban studies, theories of networking, theories of innovation and ‘new economic geography’ (e.g. Krugman, 1995), but fewer in terms of human re- source management rather than local and regional development policies. There is a wide literature on the role of tacit knowledge in competitiveness but only some on its role in successful small and medium firms (SMEs) in industrial districts. This chapter seeks to address such issues from a Schumpeterian perspective on product and pro- cess innovation. It is critical of the local ‘cluster analysis’ of Michael Porter (1980, 1990, 1998) and contrasts it with the more dynamic analysis of local and global polarisation of François Perroux (1955, 1961, 1964, 1965) which was influenced by Schumpeter’s (1949) concept of ‘creative destruction’ as well as parallel dynamics in the circular and cumulative causation of growing and declining areas in Gunnar Myrdal (1957).

Drawing on Streek (1989) it analyses the concept of flexible specialisation and the claims for this of Piore and Sabel (1984) and Beccatini (1978, 1986, 1990, 2003) for a new production paradigm in the industrial districts of the ‘Third Italy’. It recognises the importance of flexible specialisation for some industrial districts of small and medium firms, yet also evidences that by failing to match high levels of process innovation by product innovation many of the districts in the ‘Third Italy’ already were in decline by the time that Piore and Sabel and Beccatini claimed to have derived a new production paradigm from them. It also illustrates cases of ‘reverse globalisation’ such as how regeneration of a declining Italian industrial district which at its height accounted for a quarter of Italian textile and clothing exports - Prato - has seen the development a ‘parallel’ district through immigration of Chinese entrepreneurs.

The chapter also shows that the industrial district model of Piore and Sabel and Beccatini

assumes a micro foundation of small and medium enterprise within a framework of imperfect com- petition. In qualifying this in a global context, it distinguishes micro local economic systems such as small firm industrial districts from meso intermediate regions in the global economy, such as Southern Europe or South East Asia (Amoroso, 1996, 1998; Gallina, 2003; Papadaskalopoulos et al., 2005; Roth, 2007; Scott & Garofoli, (2007). It also differentiates micro from large meso firms and how the latter influence both micro and global outcomes. It further distinguishes between very small firms of less than 10 employees and medium sized firms, recognising that the former may have little scope for HRM, whereas enhancing it may be imperative for those that Eurostat definitions deem micro, of up 250 employees.

It illustrates the difference between sponta- neous creation of SME industrial districts and government creation of industrial processing and export zones in Asia, and especially China. It claims that effective responses by micro firms to globalisation need ‘innovation trajectories’ in a manner closer to Schumpeter’s (1949) concept of product and process clusters than only to Por- ter’s (1980) local clusters. It shows that there has been an acceleration and compression of the new and growth phases of a product cycle and that multinational corporations may rapidly locate the growth phase anywhere in the global economy. Whereas the innovative new phase of such a cycle still may be in mature economies and SME high tech start-ups may have an advantage at this phase since bigger business may be ‘locked into’ (Witt, 1997) and ‘path dependent’ (Deeg, 2005) on its own larger scale and longer term research and development programmes.

In forwarding the concept of ‘enhanced HRM’ the chapter advocates that local and regional agencies should be directly concerned with (1) surfacing tacit knowledge in new product in- novation (Ichijo & Nonaka, 2007); (2) achieving kaizen style continuous improvement in process innovation (Colenso, 2000); (3) ‘stretching’ core

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competences (Miller, Lawless, and Carton, 2011); (4) extending latent abilities and implicit skills (Oliveira, 2007; Oliveira & Holland, 2007) to cre- ate new ‘skill clusters’; (5) boundary spanning to synergise unapplied research with new high-tech start ups (Mazzucato, 2011) as well as thereby (6) fostering Schumpeter’s (1949) ‘creative aptitude’, and applying it in actual innovation rather than only assuming that public policy can create the condi- tions in which the private sector might innovate.

It outlines that where new innovation trajecto- ries and the creation of Perroux’s (1965) ‘entirely new’ sectors have been successful this in key cases has been due to governments creating ‘platforms’ for innovation and the creation of new markets by SME start-ups. It illustrates that this has been the case in the US by the federal government boundary spanning between researchers and what initially were small firms (Lazonick, 2009: Block & Keller, 2011; Mazzucato, 2011). It contrasts such proactive boundary spanning with the pas- sive institutional logic of science and technology framework programmes in the European Union. It illustrates a missed chance for this and for more proactive HRM policies in the 2000 Lisbon Agenda and its 2005 re-launch.

It ends by recognising that austerity pro- grammes pursued by European governments and institutions since the onset of the Eurozone crisis in 2010 have hindered SME growth and inhibited new high-tech start-ups. It outlines how alternatives to this could be modelled not only on what it proposes as ‘enhanced HRM’ but on the US New Deal which offered major gains for the meso-region of the Deep South through the Tennessee Valley Authority, including support by European employers and trades unions for bond

finance, recycling global surpluses and enabling a European venture capital fund for SMEs which could assist their survival, high-tech start-ups and the diversification of declining industrial districts.

How Small is Beautiful?

In a case which at the time attracted great atten- tion in the early 1970s, E. F. Schumacher argued that ‘small is beautiful’ (Schumacher, 1973, 1999). This was ironic since he had spent most of his professional life working for the British National Coal Board rather than with SMEs. But has force in that smaller firms may be fleeter footed in promoting or reacting to change, and more entrepreneurial, than either organs of state or monolithic corporations. His case also had a neglected implication for HRM in the sense that the subtitle of his book Small Is Beautiful was Economics As If People Mattered.

Yet if small is beautiful this depends on how small, and in what regard. For example, a report to the European Commission (Ecorys 2012) has found that a company with over 250 employees is twice as more likely to have introduced in- novations than a small company with under 10 employees. Realism is needed also on whether a very small firm of less than 10 employees can adopt any HRM practices, and how few SMEs have a high technology base. For example, Table 1 indicates the different size categories of firms in the European Union in 2011. More than 20 mil- lion SMEs in the EU amounted to over 99% of its enterprise and 67% of its employment. But nine out of ten of them had less than 10 employees. Table 2 also shows how few firms have a high technology knowledge base.

Table 1. SMEs and Large Firms in the EU-27 2011

Employees Less than 10 10 to 49 50 to 249 Over 249 SMES

No. of firms 19,143,521 1,357,533 226,573 43,654 20,727,627

% 92,2 6,5 1,1 0,2 99.8

Source: Ecorys (2012)

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Moreover (1) fewer than one in ten SMEs have earnings from exports. (2) The main export ob- stacles for SMEs not only are the lack of knowledge of foreign markets but also lack of finance. (3) In domestic markets they also have reported a lack of demand with either low growth or recession since the financial crisis of 2008, and the auster- ity response to it within the Eurozone. Nonetheless, (4) despite high unemployment, and especially youth unemployment, they face a lack of already skilled labour and problems in gaining an appro- priate workforce. Especially in the new member states, a significant number of jobs remain unfilled (Ecorys, 2012). What is striking is that the fourth of these factors is an HRM issue concerning not only SMEs, but also public policy and the degree to which local or regional governments can assist in remedying this. We address such issues in what follows.

Industrial Districts: Marshall and After

In his ‘Principles of Economics’ (1890), which ran through eight editions until 1920, Alfred Marshall developed the concept of external economies by which it is cheaper for a firm to specialise in some products and buy in others from firms that also specialise to gain mutual advantage from their different economies of scale. Marshall related this

to industrial districts, the role of local knowledge in successful local economic systems and the im- portance of ‘industrial atmosphere’ even if he did not much elaborate on this. Marshall also stressed the role of geography and geology in the rise of industrial districts, such as the steel production and cutlery industrial district of Sheffield being close to iron ore deposits, the British potteries being close to clay deposits, and also the role of infrastructure and transport links.

When Marshall developed his industrial district concept, proximity counted not only for shared external economies but also because of high transport costs in a world still only developing the internal combustion engine, and with no mass motor transport for freight. Such costs were central to the theory of agglomeration of Alfred Weber (1909, 1928) and to the ‘central place’ theory of Walter Christaller (1933, 1966) and August Lösch (1944, 1952). Yet, over the twentieth century, they fell by over 90% in real terms (Glaeser & Kohlhase, 2003). Besides which, the main costs in transport are not distance but in the purchase and insurance of vehicles, stock and inventory control, machines for loading and unloading, and the labour for handling or driving (Holland, 1976a). With motorways, container transport and jumbo air freight, proximity is not a sufficient condition for competitive success.

For example, there is no automatic synergy through local external economies within an indus- trial district simply because firms are close to each other. An example given by Romero (2000) is of the industrial district in the northern Portuguese region of Vale do Ave. The industrial structure of the district has been dependent on a small core of sophisticated firms, supported by a layer of a few others, but without any characteristics of an industrial district in the sense of Marshall. Romero found that not only were there no synergies in terms of joint innovation or R&D within the district but, other than for the core firms and their direct sup- pliers, there were no synergies whatever.

Table 2. Firms by technology and knowledge base in EU-27 2011

Sectors Firms % of firms

High tech Pharmaceuticals, electronics

45 871 0.2

Medium- high-tech

Chemicals, machinery, vehicles

192 980 0.9

High to medium- high-tech

Metals, rubber, plastics

238 851 1.2

Source: Ecorys (2012)

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Flexible Specialisation

In what has been become known as a neo-Mar- shallian approach, Piore and Sabel and Beccatini reinvoked Marshall’s industrial districts in the context of the ‘Third Italy’ of Emilia Romagna, Tuscany, Umbria and Veneto, contrasting this with the ‘First Italy’ of the industrial northern triangle of Turin, Milan and Genoa and the ‘Second Italy’ of the southern Mezzogiorno (Piore & Sabel, 1984; Becattini, 1978, 1986, 1990, 2001, 2003, 2004). The Third Italy districts were not as geologically dependent as those initially identified by Marshall. They had little to no coal, iron ore or other useable mineral deposits. There were other differences also from Marshall in that Becattini paid more attention to social relationships between small and medium firms and their entrepreneurs than Marshall had. In parallel, in their New Industrial Divide Piore and Sabel (1984) distinguished flexible specializa- tion by small and medium firms from inflexible Fordist mass production and claimed that this as a new production paradigm.

Streek has distinguished between Fordist and post Fordist production in terms of standardised and diversified product strategies (Streek, 1989). Thus in terms of the left upper quartile of Figure 1, low volume standardised production was typical of local handcraft production in the ancient world, such as of sandals or pottery or other household goods (Landels, 2000), It also was typical of

production controlled by medieval guilds. It was inflexible mass production as in the lower left quartile of Figure 1 that Ford achieved by Tay- lorist division of labour and economies of scale and that FIAT and others achieved in the ‘First Italy’ of the northern industrial triangle of Turin, Genoa and Milan. In the case of Ford, and his se- rial assembly line, this yielded vast productivity gains which eliminated more than three hundred SME handcraft assemblers of automobiles (Lacey, 1987). But, after WW2, this was progressively overtaken in Japan by more customised flexible mass production as in the lower right quartile of Figure 1 and of which the prototypical example was the Toyota Production System (Womack, Jones & Roos, 1990). It was low volume flex- ible specialisation of the right upper quartile of Figure 1 that Piore and Sabel identified with the Third Italy.

Limits of the Porter Competitive Advantage and Cluster Model

Much of the literature on industrial districts refers to Michael Porter’s ‘industrial cluster analysis’ and his theory of competitive advantage (Porter, 1980, 1990, 1998). Some has recognised that his cluster concept was a reworking of Marshall despite Porter making only passing reference to Marshall, or neo-Marshallians such as Becattini. One of Porter’s merits was to address competition

Figure 1. Standardised and diversified product strategies Source: Adapted from Streeck, W. (1989).

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between firms rather than alleged comparative advantage between countries, even if he then compromised this by writing of The Competitive Advantage of Nations (Porter, 1990). But there are open questions on how Porter’s iconic ‘competitive diamond’ and his related ‘cluster’ theory either is original or useful in terms of the regeneration of declining industrial districts.

For example, the five factors the main variants of the Porter ‘diamond’, have been (1) corporate strategy and structure; (2) demand conditions; (3) factor conditions including in particular the supply and cost of labour, and (4) the economic context of whether there are related and supporting industries, (5) the role of government. The first of Porter’s five factors, corporate strategy and structure, had been stressed inter alia by Chandler (1962). His second and third factors in terms of the role of demand and the costs of supply have been recognised since Adam Smith and are the foundations of any introduction to economics. The fourth factor in Porter’s competitive diamond is whether there are related and supporting indus- tries in local clusters of firms which already was in Marshall’s (1890) industrial district concept. The fifth, on the role of government, whether national or local, is important, but also had been stressed earlier at both local and national levels by Perroux (1964, 1965).

One of the limits of the successive variants of Porter’s competitive advantage model is that they are based more on product differentiation than on innovation. The concept of product differen- tiation dates from the imperfect or monopolistic competition of Joan Robinson (1933) and Edward Chamberlain (1933) and still can be important in enabling a higher price for basic products such as leather goods or clothing where the differentiation may be in design but otherwise can be enhanced by gaining the brand attachment of a name such Gucci or Armani. Yet while these may be designed in Italy, or Europe or the US, they no longer neces- sarily are produced there, any more than an iPad, rather than in Asia.

Moreover, the principles of oligopoly and tech- nical progress (Sylos-Labini, 1962, 1968) vital to understanding the dynamics of global competition (Hymer, 1972) do not feature in Porter, for whom technical progress and innovation are not the tra- jectory which Schumpeter (1949) saw as lifting both economies and societies to higher levels of income and welfare, but an ‘add on’. Other than in some passing references to innovation, such as by Dutch tulip producers in marketing, it was not until 2001 that Porter began to focus more on innovation itself, while still claiming that access- ing it would be more local than global (Porter & Stern, 2001).

Porter further deemed tacit knowledge to be ‘inexplicable’ despite this being widely recognised in management theory as vital to competitive advantage, and to whose relevance for SMEs we return later in this chapter. He also dismissed in- novation such as kaizen style continuous improve- ment as having been illusions and failed American managers with a one line with reference to rapid die changes, such as in pressing cold steel body parts for cars, but without offering supporting evidence other than claiming that:

continuous improvement has been etched on managers’ brains. But its tools unwittingly draw companies towards imitation and homogeneity. Gradually, managers have let operational effec- tiveness supplant strategy (resulting in)… zero sum competition, static or declining prices, and pressures on costs that compromise companies’ ability to invest in the business for long term (Porter, 1998 pp. 42-43, 45).

Yet this is a failure to understand that con- tinuous improvement in Japan has been based on rejecting imitation and homogeneity, and motivating employees to suggest ongoing means of enhancing the labour process and making it more efficient (Colenso, 2000) which is an HRM function. One of the failures of US managers was that they thought kaizen was a technique – an

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add on to what they already knew. As Kaplinsky and Posthuma (1994) have put it, the answer to why kaizen has not ‘delivered’ for so many firms outside Japan:

lies in the social rather than the technical domain, for the essential principles of these Japanese tech- niques - their technics - are easily comprehended and not technologically complex… [But] their successful adoption overturns many of the social relations of domination which were so important in the evolution of Taylorist forms of production management and control (Kaplinsky & Posthuma, ibid, p. 285).

Polarisation and Cumulative Causation: From Local to Global

While Porter’s derivative cluster model gains ritual reference in literature on local economic systems, the more original concepts of polarisation and ‘growth pôles’ in the work of François Perroux now rarely gain a mention, and merit recovery. Like Marshall, Perroux (1955) initially stated these in terms of local external economies but then went beyond this in terms of identifying innovation trajectories by leading ‘firmes motrices’ (Per- roux, 1961) rather than only mutually reinforcing external economies, such as in Marshall’s (1890) concept of in an industrial district.

This stress on innovation, and Perroux’s parallel claim of the need to develop ‘entirely new’ product markets was adopted in the French Ministry of Economy and Finance and Economy and became central to long-term planning in France.1 His concept of a firme motrice which often could be the core firm in a successful local economy, combined with Sylos-Labini’s (1962, 1969) analysis of how oligopolies could domi- nate macroeconomic outcomes influenced one of us in making the distinction between meso and micro firms (Holland, 1974, 1976a,b, 1979, 1980, 1987a,b).

The title of the book which gained Perroux influence with French policy makers was Les Techniques Quantitatives de la Planification (Per- roux, 1965) even if most of it was concerned with qualitative change through national and regional policies to support and promote innovation. His concept of growth pôles (Perroux, 1955) was central to the concept of technopôles in France, or clusters of innovative firms sharing a joint in- novation trajectory to gain competitive advantage, rather than the more static concept of external economies in Marshall. He further extended the concept of polarisation to asymmetries and uneven development (Perroux, 1964) rather than assuming that comparative advantage would assure equilib- rium outcomes in global investment and trade.

Perroux also recognised in the 1960s that, in the postwar period, firms were going global not only as in how, prewar, they had invested in colonies but also since they were being attracted to developing countries by lower cost labour and the importance of offsetting this in Europe by in- novation. This was confirmed by evidence given by multinational companies in Britain in the 1970s to the Expenditure Committee of the House of Commons that the cost of labour in Taiwan, the Philippines, Mexico and Brazil could be as little as a tenth that of the UK. Since labour could be as much or more than 40% of total costs, while investment typically as little as 15%, it was a key reason why even 40% investment grants were not attracting them to the British regions, with evi- dence also that, if they did so, it was because of the need for a pool of accessible labour from which they could select, and which was not available to them in the South East or Midlands of England (HC, 1974; Holland, 2013).

Asymmetric dynamics as in Perroux’s concept of polarisation also was central to the parallel economic and social theory of Gunnar Myrdal. He conceptualised this in terms of circular and cumulative causation, where strong points within an economy would tend to attract both capital and labour with positive ‘spread effects’ whereas

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this inversely would ‘backwash’ other regions by depleting them of capital and younger more adaptable labour. Myrdal analysed this in terms of asymmetries in capital and labour flows in his Economic Theory and Underdeveloped Regions (Myrdal, 1957), where he used the term ‘region’, as did his fellow Swede, Bertil Ohlin (1933), to refer either to a region within one country or to a global region. In his An American Dilemma Myrdal had related the concept of circular and cumulative causation to the dynamics of social and ethnic advantage and disadvantage in the US (Myrdal, 1944), which also is relevant to self-reinforcing growth and decline of industrial districts, whether or not they have significant ethnic minority populations.

‘Enhanced HRM’

In what follows we suggest that ‘enhanced’ HRM has a key role to play in identifying tacit knowledge, latent abilities and implicit skills in firms in declin- ing industrial districts which could be surfaced in new process and product innovations. Also that this concerns the degree to which policies for local or regional development can advance from concern only with investment in ‘hard’ physical infrastructure to extending Mintzberg’s (2004) concept of ‘soft’ HRM within firms to interactive learning between them.

Yet ‘enhancing’ HRM also needs to recognise its current scope and limits. After decades in which the term HRM has displaced ‘industrial rela- tions’, Guest and others (e.g. Guest, 2011; Guest & Bos-Nehles, 2012; Guest, Paauwe & Wright, 2013) recognise that we still need to gain a better understanding of links between it and performance. Also what we are recommending amounts to what what Mørk, Hoholm, Maaninen-Olsson and Aanestad (2012) have deemed ‘boundary span- ning’ or Sitkin, Kelly, Miller, Lawless, and Carton (2011) have called ‘stretching’. With challenges also in that Sitkin et al., ibid) (have maintained that stretch goals, paradoxically, may be the most seductive for organizations that can least afford

the risks associated with them, while Mørk et al. (2012) have found successful cases of boundary spanning only within organisations rather than between them.

Yet ‘boundary spanning’ and ‘stretching’ can be cognitive as well as institutional, and can be achieved by very small firms such as was the case with high tech start-ups such as Steve Wozniak creating the Apple 2, which transformed the lap- top market, by intuitively configuring and then reconfiguring it in a few weeks, even if Steve Jobs initially overpriced it. Or as with Hewlett and Packard starting in a garage, if also knowing that there was a potential market since the US Defense Department wanted more computing power for less weight (Waters & Nuttall, 2012). In terms of ‘stretching’, Sitkin et al., (2011) also cite the case of Takeuchi, Osono, & Shimizu (2008) that reaching for the seemingly impossible goal of a 100 percent improvement in fuel efficiency played a key role in the development of hybrid vehicle technology by Toyota.

Moreover, drawing on the concept of ‘bound- ary spanning’ of Mørk et al. (2012) we also cite proactive examples of this by the federal govern- ment in the US which have been highly effective in enabling synergies between researchers, enterprise and government including the creation of both new high tech SME start ups and also entirely new civil rather than defence related markets. Which also, for either small or medium firms able to undertake what Argyris and Schön (1978, 1996) have characterised as ‘reflective practice’, may mean gains from ‘delving down to learn up’ by surfacing tacit knowledge and implicit skills for competitive advantage (Oliveira, 2007; Oliveira & Holland, 2007).

Black Boxes

In a paper on interactive learning and economic performance Lundvall (2005) has submitted that getting closer to understanding how learning takes place needs opening the ‘black boxes’ of ‘verti- cally organized’ production chains. But the same

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case can be made for opening the ‘black boxes’ of horizontal production chains either in an industrial district, or in globalisation, through networking, while little analysis of these has included what may be the implications for HRM.

Thus Ramsay et al. (2000), Purcell et al. (2003) and Guest (2011) have stressed the need for further research to open the ‘black box’ of the links between HRM and performance. Beardwell, Holden, and Claydon (2004) have evidenced lack of either clarity or consensus on what constitutes best HRM practice, submitting that it is difficult to convince firms operating within tight financial margins to invest in HRM policies. To which it could be added that ‘the drive to survive’ for small and medium firms means that they may reactively reinforce ‘hard’ HRM such as performance ap- praisal while ‘soft’ or ‘enhanced’ HRM that would mean enhancing competences gets side lined. But regenerating declining industrial districts and whether at least some firms within them can innovate, with synergies for others, suggests the need to explore and extend HRM policies which are mainly internal to firms, such as in terms of training in what is ‘known already’, to include the development of new joint competences through networking.

This has been examined and to varying degrees evidenced by Lee and Chen (2000) in terms of actual and potential synergies in multiple busi- ness activities, by Liu and Chen (2011) in terms of competence leveraging; by Asheim (2007) in terms of industrial districts as ‘learning regions’ and by Maskell and Malmberg (1999) and Malm- berg and Maskell (1999) in terms of localised learning and industrial competitiveness as well as by Nooteboom (1999) in terms of inter-firm alliances. But while these studies may have been enlightening, their implications for HRM rarely have been followed through. HRM, innovation strategies and trade and location theory have tended to stay within their own boxes.

Boundary Spanning and the Triple Helix Model

The recent HRM literature on boundary spanning (e.g. Guston, 2001; Mørk et al, 2012) has mainly been concerned with doing so within firms or institutions. Yet this also can be between them (Breschi & Malerba, 1997; Santos, Abrunhosa and Costa, 2006), and also between firms, uni- versities and governments, as has been developed in the ‘Triple Helix’ model by Leydesdorff and Etzkowitz, (1996) and Leydesdorff (1998, 2012).

As represented in Figure 2, the Triple Helix principle is basically simple, even though this has been developed in three main variants. Thus in Triple Helix 1 the three spheres are defined insti- tutionally (university, industry, and government). Interaction across otherwise defended boundaries is mediated by industrial liaison and technology transfer. In Triple Helix 2 the helices are defined as different communication systems consisting of the operation of markets, technological innova- tions and control at the interfaces (Leydesdorff 1997). The interfaces among these different func- tions operate in a distributed mode that produce potentially new forms of communication as in a sustained technology transfer interface or in the case of patent legislation. In Triple Helix 3 the spheres of university, industry, and government, in addition to performing their traditional func- tions, each assume the roles of the others, with

Figure 2.The triple helix model Source: Leydesdorff (2012)

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universities creating a penumbra, or performing a quasi-governmental role (Leydesdorff, 2012).

Key questions arising, however, are whether the Triple Helix concept over-identifies the rela- tions between government and universities rather than between government and enterprise. Also to what degree this works in practice. For example, in a study of Hungary, Lengyel & Leydesdorff (2011) found three regional systems of innovation following the transition of the 1990s and the ac- cession to the EU in 2004. These included: (1) a metropolitan area in and around Budapest, (2) a knowledge-based innovation system in the west- ern part of the country which has transnational links other EU countries, and especially with adjacent Austria and Germany and (3) an eastern part of the country where old (state-led) dynam- ics still prevail. In reporting on this, Lengyel & Leydesdorff (ibid) found that there is little syn- ergy between these three regional systems. In reporting also on an as yet unpublished recent study of Norway, Strand & Leydesdorff (cit. Leydesdorff, 2012) found that foreign direct in- vestment in the marine and maritime industries in the coastal regions of the country were a greater source of synergy in knowledge-based developments than the university environments of the major centers in Trondheim and Oslo.

Leydesdorff (ibid) allows that the respective roles of academic, industrial, and governmental contributions have not been sufficiently explored and that the context of competitive challenges from globalisation in Triple Helix studies often are displaced by their local focus. Evidence also suggests only modest support for Leydesdorff’s (2012) claim of universities creating an industrial penumbra, or performing a quasi-governmental role. For example, in reporting on data from Eu- ropean universities and public research institutes, Piccaluga, Daniele, and Patrono (2012) found very little confirmation of knowledge transfer between them and industry. The total number of spin-offs created each year in Europe is stable, around 500, but the average number of them per university is only 1.6.

We suggest later that the failure to achieve higher levels of such boundary spanning may lie less with the principle of the Triple Helix model than the inertial institutional logic of the Science and Technology Framework Programmes of the European Union. For example, their criteria for project research grant approval have been highly dependent on whether projects could produce an article in an internationally refereed journal without concern that they should create a new product, process or high-tech start-up. Whereas also, while the ‘publish or perish’ syndrome for academics has reached near notoriety, it has been found by Oliveira, da Costa and Holland (2013) that engineers are far more interested in manag- ing and intra-firm success than seeking external recognition from publishing, while doing so in international journals does little to promote syner- gies with local SMEs.

US Boundary Spanning, Innovation and High Tech Start-Ups

The principles of boundary spanning nonetheless have been followed with notable success in the US. Even during the high period of neoliberalism, the federal government initiated ‘base up’ research and ‘launch platforms’ with the Small Business Innovation Development Act, signed by Ronald Reagan in 1982, and which required government agencies with large research budgets to designate a fraction (originally 1.25%) of these to support initiatives of small, independent, for-profit firms. Block and Keller (2011) and Mazzucato (2011) have shown that between 1971 and 2006, 77 of the most important 88 innovations rated by R&D Magazine’s annual awards had been fully depen- dent on federal support, and not only, if especially, in their early phases.

A year after the Small Business Innovation Development Act a further spur to private sector innovation occurred, in the biotech industry. The 1983 Orphan Drug Act (ODA) made it possible for small, dedicated biotech firms to carve what initially was a niche in the drug market. The act

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included some tax incentives, clinical as well as R&D subsidies, fast-track drug approval, along with protection of intellectual and marketing rights for products developed to treat rare conditions. A rare disease was defined as any disease that affects less than 200,000 people and given this potentially small market, it was argued that without such incentives these potential drugs would remain ‘orphans’. The protection provided by the act enabled small firms to improve their ‘technology and innovation platforms’. Orphan drugs played an important role in enabling biopharmaceutical firms such as Genzyme, Biogen, Amgen and Ge- nentech to become meso players in the industry and in the global economy (Mazzucato, 2011).

The under-recognised outcome was that by 2008 most innovations in the US not only were government sponsored but government initiated through boundary spanning of pure R&D applied research in different disciplines and institutions ranging from federal funding of the research for Google’s algorithm through to and nanotechnol- ogy. Thus Mazzucato (2011), Block (2008) and Block and Keller (2011), as well as Lazonick (2009) and Lazonick and Tulum (2011), have demonstrated that government can create innova- tion platforms and do so in a manner that spans boundaries between both intellectual disciplines and firms, including new high-tech start-ups, thereby creating the ‘entirely new’ products and markets that had been advocated earlier by Per- roux (1964, 1965).

We suggest that this is an example of what we propose as ‘enhanced HRM’ in the sense of synergizing human resources between institu- tions rather than only HRM within them and has significant implications for the regeneration of declining industrial districts if proactively pursued by local and regional development agencies and innovation centres. We also propose that such enhanced HRM can surface tacit knowledge, latent abilities and implicit skills in new skill trajectories rather than be concerned with more commonly accepted HRM practices such as formal training or performance evaluation.

Tacit Knowledge and Local Economies

Belussi (1996, 1999, 2001) and Maskell (2001) have sought to relate the viability of industrial districts to knowledge-based theories of the firm, including both tacit and implicit knowledge. This was initially identified by Thorndike and Rock (1934), and then gained higher profile through the physicist Michael Polanyi (1958, 1962, 1968) who held that such knowledge was more vital, even for the ‘hard sciences’, than deduction, inference or conscious calculation. He recognised that ‘there are things that we know but cannot tell’ (Polanyi, 1962, p. 601), and claimed that this is strikingly true of our knowledge of skills, of which his best known examples are riding a bike or swimming, which one may have learned to do but without readily being able to explain how one did. Or, in an example given by Nelson and Winter (1980), a runner tacitly knowing the risk of muscle strain, without any explicit knowledge of physiology.

According to Polanyi semantic knowledge through speech or reading conveys little unless we can relate it to previously acquired meanings derived from experience, which is consistent with the claim of the later Wittgenstein (1953) that all knowing, or claiming to know, depends on a tacit presupposition. Kakabadse et al. (2001) submit that surfacing tacit knowledge can reveal ‘invis- ible assets’ in terms of what employees know but has not been identified, and has been widely seen in management theory as a key to competitive advantage (e.g. Ambrosini & Bowman, 2001; Edmonson, Winslow, Bohmer & Pisano, 2003; Nonaka, 1994, 1998; Nonaka & Takeuchi, 1995; Ichijo & Nonaka, 2007).

As already indicated, Belussi (1996, 1999, 2000) has claimed that accumulation of tacit knowledge is vital for the success of industrial district and local production systems. She stresses that tacit knowledge tends to be dependent on where it has been gained within firms, economic and social networks, and within districts and local systems. Thus, while codified knowledge may be

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simply transmitted, as on the web, such as a com- puter aided design, tacit knowledge by its nature is embodied in individuals and firms and its main characteristic is that it is localised. She also has related this to ‘cognitive division of labour’ and knowledge creation, based on the accumulation over time of tacit and ‘locally sticky’ knowledge, as also claimed by von Hippel (Hippel, 1994, 1998).

Belussi’s approach, is similar to that of Nonaka in his ‘SECI’ model which is replicated in Figure 3, and known as such from the initial letters of four stages of interfacing tacit and explicit knowledge: (1) Socialisation, either in informal sharing of ex- perience, or doing so more formally, in a manner similar to Schön’s (1983, 1987, 1991) reflective practice; (2) Externalising an idea or practice which may not earlier have been ‘in the open’ by group discourse to refine it; (3) Combining tacit and explicit knowledge, such as in developing an idea or building a prototype, which was what Henry Ford did with a small inner circle in developing his concept of the innovative Model T (Lacey, 1987); (4) Internalisation of new explicit knowledge as

this becomes part of a group knowledge base in the sense of something now ‘known already’ and tacitly accepted as common practice.

Nonaka has claimed that it is the process of surfacing what is tacit that counts in innovative thinking and management. As he puts it:

When tacit and explicit knowledge interact.., something powerful happens... What’s more, as new explicit knowledge is shared throughout an organisation, other employees begin to inter- nalise it – that is, they use it to broaden, extend and reframe their own tacit knowledge (Nonaka, 1998. Pp. 29-31).

Giving examples from NEC, Sharp, Canon, Matsushita, and the auto sector, he submitted that:

In each of these cases, middle managers syn- thesised the tacit knowledge of both frontline employees and senior executives, made it explicit, and incorporated it into new technologies and products (Nonaka, 1994, p. 45.).

Figure 3. From tacit to explicit: Nonaka Source: Derived from Nonaka (1998)

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Yet, although not commonly conceptualized as such, surfacing tacit knowledge, latent abilities and implicit skills through discourse (Oliveira, 2007; Oliveira & Holland, 2007), should be inte- gral to human resource management and enable diversification of core competences.

Boundary Spanning and Diversifying Core Competences

By contrast with Porter’s (1980) stress on strat- egy, Prahalad and Hamel (1990) and Hamel and Prahalad (1994) introduced the concept of core competences in relation to how to identify and co-ordinate diverse production skills, how to integrate multiple technologies and how to trans- fer knowledge across organisational boundaries. In this sense Prahalad and Hamel, predated the boundary spanning within an organisation of Mørk et al. (2012). They focussed more, however, on how core competences may be enhanced if they are synergised and shared. Further, as with tacit knowledge, a core competence is difficult for competitors to imitate because it is a complex combination of both skills and attitudes, such as ‘user friendliness’ at Apple, which helped it sur- vive Steve Job’s initial misjudgement in pricing the Apple 2. A ‘defiant attitude’ also was stressed by the engineer who developed kaizen continu- ous improvement at Toyota after WW2, Taaichi Ohno, when it was struggling to avoid bankruptcy (Shinohara, 1988).

Thus while Porter had turned strategic think- ing back in the direction of strategy such as in Chandler (1962) Prahalad and Hamel sought to change it in the direction of HRM. On the other hand, one of the consequences of their claim was to reinforce the parallel case advocated in the 1990s by Hammer and Champy (1993) that a company should out-source any competences that were not ‘core’ (The Economist, 2008) or as Hammer (1990) had bluntly put it in the subtitle of a paper published in the Harvard Business review: ‘Don’t Automate, Obliterate’.

An example from the 1970’s relevant to the diversification of core competences was the Alter- nate Corporate Plan of the Lucas Aerospace trades union combine committee chaired by Michael Cooley (Wainwright and Elliott, 1982; Cooley, 1987). Cooley, a mathematician, engineer and linguist was an adviser to an EU Socrates-Leonardo programme directed by one of us on identifying tacit knowledge, latent abilities and implicit skills from informal learning-from-life and non formal learning-from-work (Oliveira, 2003). Lucas Aero- space was a company whose sole client was the UK Ministry of Defence, and which specialised in components for fighter or other military aircraft. The engineers at Lucas Aerospace were tired of designing weapon platforms for what implicitly were instruments of death and, encouraged by Cooley, proposed to management that they should apply their core competences to instruments for health, safety and the environment.

Rather than seeing this as an opportunity, or a new dimension to HRM, the management felt threatened by this challenge to its authority. Ac- cording to its own mind set (Senge, 1990), project proposal and human resource deployment was a management prerogative and a boundary which workers should not overstep. Cooley asked them whether they ever had considered that the Cold War might end some day and that diversifica- tion of core competences into civil products and markets could be a safeguard against future cuts in defence spending. Dismissing such a prospect, the management rejected the proposals outright. The engineers then adopted a ‘work-to-rule’ which brought the company virtually to a halt. In return, defensively and without goodwill, the management agreed to the combine committee using company facilities in their own time to design, develop and prototype their own alternative products (Wain- wright and Elliott, 1982).

The outcome at Lucas Aerospace was sug- gestions by its engineers which resulted in over 100 new product prototypes none of which was adopted by the company but which were patented

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by the trades union combine committee. One of the most striking was the development of a portable kidney machine. The insight that led to its design not only is an example of Nonaka’s (1994, 1998) interfacing of the tacit and the explicit, but also was an interfacing of tacit learning-from-work and explicit learning-from-life. The Lucas engineer who designed it knew that people needing dialysis had to attend a health centre or hospital. But his mind set was to miniaturise components, and he applied the same principle to reducing the weight and size of a dialysis machine, therefore making it portable. The machine now is commonplace and has increased both individual and social wellbeing.

When the Cold War ended and UK defence procurement was cut, the management at Lucas Aerospace for the first time recognised that there could be merit in proposals for product diversi- fication. But most of those involved in the 1970s combine committee’s Alternate Corporate Plan by then had moved on or retired, while their convic- tion of the feasibility of surfacing tacit knowledge, and readiness to do so, had been lost. Whereas Cooley became economic adviser to the Greater London Enterprise Board whose model was less an assumed spontaneous agglomeration of small and medium firms on the lines of an industrial district than municipal promotion of innovation and diversification of local firms which otherwise had no proactive HRM and were adopting defen- sive cost and job cuts in reaction to international competition.

The model for the Greater London Enterprise Board was that of a UK National Enterprise Board, designed by one of us in a series of papers for the Labour Party, and introduced by the 1975 Industry Act (Holland, 2013). Yet the Thatcher government, with some relish, abolished the Greater London Council in 1986 and the Greater London Enterprise Board became an independent company, Greater London Enterprise (GLE), and thereafter was reliant on its own income to fund its activities. The government also abolished the National Enterprise Board.

This had supported Clive Sinclair, who in the 1970s had 40% of the lap top computer market in the UK, by enabling funding for him of new company start- such as Inmos and Nexos in the US. Without such support, and although Margaret Thatcher recommended him for a knighthood as an example of private sector small firm entrepre- neurship, Sinclair shortly thereafter was bankrupt, opening the way for Toshiba and others to scoop the UK lap top market that he had opened. Only some of the initial design for a Greater London Enterprise Board survived in that profit from GLE’s commercial activities were reinvested in delivering not-for-profit activities and since when the Greater London Enterprise has been the most active investor in SMEs in London (GLE, 2013).

Local Industrial Districts

As already indicated, Piore and Sabel (1984) and Beccatini (1978, 1986, 1990, 2003) evidenced that industrial districts or in the sense of SME local economic systems were flourishing in the Third Italy. Small and medium manufacturers in Tuscany, Emilia Romagna, Umbria and Veneto, as in much of Western Germany, took advantage both of local external economies and handcraft skills to customise on the lines of Piore and Sabel’s (1984) ‘flexible specialisation’. In many cases this was in still traditional sectors such as shoes, leather goods, textiles and clothes in which SMEs through flexible specialisation could rapidly meet changes in market demand.

This both was new and impressive. At the end of World War II, the local production system of the Third Italy had been concentrated in a limited number of large, integrated firms, producing low- quality textiles. But such firms had an ‘inertial organisational logic’ typical of many meso firms relying on inflexible economies of scale rather than flexible production and economies of scope. With increasing international competition, many either closed or started to outsource part of their value chain by local subcontracting to new small

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firm start-ups. In this way, a number of small firms compensated for employment decline in bigger ones. By the early 1970s 1960s these micro firm districts employed more people in industry than the ‘golden triangle’ of Milan, Turin and Genoa (Piore & Sabel, 1984). Their average size was and continued to be very small. According to the Italian Federation of Districts, in 2011, 86% of all district firms had less than 10 employees (IFD, 2012, cit Sun, 2012).

But Piore and Sabel also discounted the failure of SMEs in much of the Third Italy to diversify its traditional production base. For instance, Tuscany has been highly proficient in processing wool into textiles and fashioning leather since at least the pre-Roman Etruscan period. Rising demand with rising real incomes after WW2 gave new life to such industries. The local entrepreneurs of the Third Italy also were brilliant at process innovation in better ways of making the same things through new technology including computer aided design and manufacture. Yet a CAD design such as for clothing could be sent to electronically to the other side of the world for cutting, stitching and assembly and then shipment to markets rather than manufactured locally (Holland, 1991). Moreover, such technical progress and out-sourcing tended to displace labour rather than create new jobs.

A notable exception was Benetton, initially a small family firm which achieved process inno- vation in its own variant on just-in-time delivery, such as retaining the colouring of garments to the last stage of production to keep in line with changing fashion trends. Yet, as Belussi (1996) has stressed, Benetton was not a local industrial district, but a network, both in retail franchising and in production in Veneto, where a chain of small firms were dispersed rather than concentrated in one location.

Other commentators on industrial districts (e.g. Amin, 1999; Belussi, 1999, Garofoli, 1992, 1993, 1994, 2002; Martin & Sunley, 2003; En- gelstoft, Jensen-Butler, Smith and Winther 2006) have similarly suggested that the case for spatial

concentration for a Third Italy as a production paradigm has been exaggerated, not least since the Italian 1991 industrial census showed that many of small firm industrial districts in the Third Italy already was in decline. Muscio and Scarpinato (2007) have qualified this by claiming that such decline was typical of Italian manufacturing as a whole, but this does not therefore support the claim of Piore and Sabel (1984) for such districts as a ‘new industrial divide’ between Fordism and post Fordism.

Realism

Giuliano Bianchi (1998), at the time director of regional programming for the Region of Tuscany, recognised that the evolution of the Third Italy from 1951-91 was dynamic but identified two key limits in the neo-Marshallian analysis of industrial districts: first, that their employment already was in decline by the time of the 1991 industrial census; second, that idealisation of the districts as a new production paradigm impeded timely adoption of appropriate policies for their diversification.

Agnew, Shin and Richardson (2005) also have observed that claims for the Third Italy as a new production paradigm received only limited empiri- cal support in terms of export performance. After examining Italian province level export data from 1985 to 1999 they concluded that this wrongly projected localised examples of some successful industrial districts to an entire geographic region, and downplayed the role of the North, and par- ticularly the centrality of Milan. This already had been observed by Cappellin (1989), who showed that many small and medium firms in the Milan area were flourishing by providing new services in what was an industrial metropolis rather than a Marshallian industrial district, whereas many of small firm industrial districts in the Third Italy faced had failed to diversify and develop related services.

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Besides which, a recent analysis of the com- petitiveness of Italian industrial districts (IFD, 2012, cit Sun, 2012) showed their very high dependence on quality and product design (over 60%) and image and brands (16%). Product inno- vation ranked at only just over 4% and the model of organisation of the firm at little more than 2%. Sun (ibid) has suggested that this is changing, especially with environmental regulation and a more active approach by intermediate agencies supported by some local governments to achieve district-level cooperation on developing related technology citing the district of aeronautic prod- ucts in Varese and that of bio-medical products in Mirandola as two examples. But as yet these appear to be exceptions. Meanwhile, the brand attachment advantage of ‘Made in Italy’ already was being transformed.

The Transformation of Prato

A key Italian industrial district specialising in textiles since the 12th century is Prato, near Flor- ence (Origo, 1963). After WW2 much of its labour supply was by migration from southern Italy and at its height in the postwar period it was producing a quarter of the textile exports of Italy. This is a striking indication of success granted the more recent evidence for the EU-27 cited earlier than less than one in ten SMEs export at all. But by the 1990s, through process innovation displacing labour and competition from newly emerging economies in Asia, its employment was in decline whereas from the second half of the decade, its clothing industry grew significantly. But this was not by Italian textile entrepreneurs in Prato than by an inflow of Chinese immigrants who set up their own clothing workshops in premises which had been vacated by Italian firms during the district’s earlier down-sizing (Ottati, 2009).

The inflow was cumulatively self-reinforcing in the manner stressed by Myrdal (1944, 1957). Chinese immigrants rarely sought employment in Italian owned local companies. They set up

small or very small firms of only two or three people where they manufactured knitwear and high-street garments, and in the main employed only Chinese personnel, with only a few medium sized firms also employing Italians as executives. Chinese-owned firms showed a tendency towards ‘ethnic vertical Integration’, rather than horizontal integration with local Italian firms, often buying in textiles for clothes-making from China rather than Italian firms in the Prato district (UIP, 2012).

The scale of the inflow, and its speed, was phenomenal. Within only fifteen years, 60.000 Chinese workers amounted to a quarter of the population of the district. Thus a ‘parallel indus- trial district’ developed with little dependence on local external economies with the earlier Italian district. This also meant that the firms established by Chinese immigrants could gain an advantage that their counterparts in China could not - the stamp of ‘Made in Italy’ - while their very low and little more than subsistence wages challenged the ambition of the local authority and the local chamber of commerce to achieve both a high performance and high income local district (UIP, 2012).

Local and Global Value Chains

Further, though leaders in process innovation, few firms in the Italian industrial districts were able to command a value chain through to distri- bution and sales, such Benetton from its base in Veneto. This has not only been a problem for the Third Italy. Others have identified difficulties in sustaining value within such a chain either in a manner which cannot readily be outsourced to lower cost countries or, inversely, how the latter can gain from them (e.g., Morris, 2011; Gereffi & Sturgeon, 2005; Giuliani, Pietrobelli & Rabel- lotti, 2005; Kaplinsky, 2000, 2007; Humphrey & Schmitz, 2002).

In highlighting the dynamics of global value chains, Humphrey and Schmitz (ibid) have deemed integration into them as a ‘two-edged sword’ and

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which also has meso-micro dimensions. For the oligopsony by a few dominant firms in purchas- ing high tech components, or major retailers for finished articles in a traditional sector such as textiles, is an unequal power relationship. While the demands of such meso buyers can mean that micro suppliers need to upgrade processes and skills, the scale of their bulk buying, such as of 300.000 or more items at a time, can mean that small and medium firms cannot meet this, and result in large firms coming to dominate industrial districts in emerging economies (Wang, 2010).

Western Decline and Global Regeneration

In the aftermath of the catastrophe of WW1 Oswald Spengler gained renown for what was translated from its German editions in two vol- umes (Spengler, 1918, 1922) as The Decline of the West (Spengler,1959). In these he argued that among the reasons for this decline would be its presumption that its scientific rationality would give it indefinite advantage against other regions of the world, yet which displaced that when Asia could combine western technology with low cost labour it then could out compete anything produced in the West.

Shortly before his death, he presciently related this to industrial districts, warning that, already:

Today, more or less everywhere - in the Far East, India, South America, South Africa - industrial regions are in being, or coming into being, which, owing to their low scale of wages, will face us with a deadly competition. The huge masses of men centred in the Northern coal areas, the great in- dustrial works, the capital invested in them, whole cities and districts, are faced with the probability of going under in the competition. The centre of gravity of production is steadily shifting away from them... (Spengler, 1932, p. 51).

From Comparative to Absolute Advantage

For nearly a century the West displaced this by the premise dependent assumption that comparative advantage, as claimed by Ricardo (1817), would mean that some countries always would be more efficient in some products than others, which was assumed by the postwar General Agreement on Tariffs, the IMF and the World Bank. This displaced the warning of Adam Smith that free trade would tend to be on the basis of absolute advantage, and his prescient recognition in his Glasgow lectures, on which he later drew in his Wealth of Nations (Smith 1776) that:

The cotton and other commodities from China would undersell any made with us, were it not for the long carriage, and other taxes that are laid upon them (Smith, [1763], 1975, pp. 141-142).

Like Ricardo, later variants of the comparative advantage principle such as by Samuelson (1948, 1949, 2004) assumed no capital mobility. which was false even at the time that Ricardo made the case, since the wine in which he assumed Portugal would have a comparative advantage in its trade with England had been developed by English firms investing in its production, and especially that of port, in the Douro Valley which were early examples of multinational companies rather than local national firms (Holland, 1987b, 2009, 2011; Holland & Oliveira, 2013).

A decade ago, it was estimated that multi- national companies could reduce their direct and indirect labour costs by up to 70 per cent by outsourcing to or locating production in Asia (Farrell, 2005), which was a confirmation of the previously cited findings three decades earlier by the House of Commons Expenditure Committee, to which one of us at the time was adviser, that this could be the case (HC,1974). By 2010 more than half of China’s manufacturing exports were by American, European, Japanese and Taiwanese

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companies located in China (McKinsey, 2010; Yadev, 2010). Most of this was either in industrial districts or economic zones. As Sun (2012) has recognised, some of this was informed by Italian experience of industrial districts.

Product Cycles, FDI and Export Substitution

As Legge (2005) has recognised, flexible speciali- sation can imply that labour intensive, low skill assembly is located in low labour cost areas of the global economy, and research and development retained in the parent companies home country. New products still are being introduced by US and European companies in their ‘home markets’. But they now may face a competitive disadvantage if they do not as soon as possible ‘go global’.

This relates to an acceleration and compres- sion of the Vernon (1966) three phase interna- tional product cycle, as outlined in Figure 4, as well as for how long and why firms may retain ‘core’ activities and especially core technologies and competences and ‘at home’ rather than also or otherwise ‘go abroad’. This not only poses a challenge for industrial districts in either Europe or the US, but also for Japan and relates to how Japanese companies increasingly have located the second growth phase of a product cycle in lower cost economies in Asia paralleled by direct investment in the US and Europe. This, rather than only the 1985 Plaza accords which revalued the yen, or its late 90’s banking crisis, has been a neglected but key factor in the slowing growth of the Japanese economy.

By the early 1980’s a survey by the Japanese International Trade and Industry Ministry MITI found that four out of five Japanese firms decid- ing on direct investment in other countries did so with the intention of substituting exports to them, whether to avoid tariff retaliation, or currency fluctuations, or ‘get closer to the market’ or to gain lower labour costs for at least part of their value chain (Kono, 1984). Japanese direct invest- ment and production in these countries therefore

substituted for a large share of Japanese exports to them, and thus slowed Japan’s economic growth.

This export-substitution effect of foreign direct investment was noted by Bertil Ohlin in a book for which he gained the Nobel Prize in economics (Ohlin, 1933) even though later ignored by Samu- elson in the so-called Heckscher-Ohlin-Samuelson model of comparative advantage (Holland & Oliveira, 2013). For Japan, this has been highly significant since up to a third of the production of the Japanese auto majors early into the 21st century was abroad, with components supplied either by Japanese companies which had gone with them, or local suppliers. This has reduced the rate of growth of exports from Japan and, with it, the generation of income and employment. It is not because Japanese flexible specialisation has been tried and failed that the Japanese economy has slowed down. Rather, it has slowed because the Japanese companies most successful at it have gone global (Harding & Soble, 2009; Perry, 2012).

Yet this does not mean that core manufacturing in Japan is finished. Japanese manufacturing’s share of gross domestic product, at some 20% in

Figure 4. Accelerated innovation and global location Source: Holland (1987)

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2010, was high by developed-country standards, and comparable with that of Germany, against less than 12% in the US and 11% in the UK. This also is despite Japan’s outward foreign direct investment being more than ten times its inward investment inflow, as with Japanese auto firms producing in the US for the American market, including their first and second tier suppliers, and much of the remaining manufacturing value added in the UK being due to Japanese firms locating and produc- ing there (UNCTAD, 2011).

Nor does this deny that firms in mature econo- mies can sustain innovation in the initial phase of a product cycle before its standardised production phase may be relocated elsewhere. For example, despite foreign direct investment outflows on major scale since the 1980s, leading Japanese companies similar to Perroux’s firmes motrices have been retaining development of new products either in or near to a ‘mother plant’ in Japan. For in the innovative first stage of a product cycle, as originally identified by Vernon (1966), there are a host of things that need to be ‘ironed out’, ‘delved into’ and ‘learned up’ (Oliveira, 2007) while much of this involves surfacing tacit learning (Suh, 2012). Japanese production abroad therefore still relies on first stage product development in Japan (Yamaguchi, 2006; Abo, 2007).

Two other kinds of plant have been retained locally in Japan: ‘quick factories’, producing just- in-time goods for the domestic market, and ‘key- stone’ production facilities, kept alongside local research centres to provide immediate feedback to product designers. Harding and Soble (2009) cite Takanobu Ito, chief executive of Honda, as saying that the broad trend at his company is away from exports in favour of localised foreign production, but that there still is an important role in Japan for such keystone facilities:

Our approach is to perfect the newest and most advanced technologies in Japan before transfer- ring them overseas…These technologies aren’t just products, they’re connected to the production

process itself. This means that without produc- tion [in Japan], our technology couldn’t advance (Harding & Soble, ibid).

Some firms that have moved down this road have reduced jobs in Japan but still maintained high levels by diversifying them in the sense of Schumpeter’s innovation clusters. Yamaha Motor employed 11,000 workers in Japan at the start of the 1980s, when it made three out of four of its mo- torcycles locally. By 2009 domestic bike produc- tion had dropped to 5% of the total but Yamaha’s Japanese workforce has shrunk only slightly, to 9,000 in Japan not only because this includes employment in the company’s headquarters, but also because Japan still is where its leading firms locate product and process innovation (Harding & Soble, ibid). But such leading firms are meso multinational rather than only micro local SMEs in local industrial districts.

Asian Mega Zones and Meso Firms

Further, while local industrial districts in Italy were spontaneous local economic systems of small and medium firms rather than the outcome of central or local government policy, the economic zones of Asia have been planned and created by governments in terms of advance preparation and financing of world class infrastructure and com- munications intended to attract direct investment inflow. There also are different kinds of zones which have been developed by the government - Export Processing Zones (EPZs), Development Zones (DZs) and Special Economic Zones (SEZs) (Wang, 2010).

Before China set up its first Export Processing Zone in 1979, EPZs had started spreading in Asia. Unlike Japan, which not only had not welcomed but had resisted foreign direct investment rather than relying on its meso firms to drive indigenous export led growth, Hong Kong, Singapore, South Korea and Taiwan had welcomed it in their EPZs. It was when China decided to adopt them, and

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invest in infrastructure for them and for Develop- ment Zones (DZs) and Special Economic Zones (SEZs) on a mammoth scale that the number of such zones in Asia increased to 500 by 1996 and then leapt to 2,700 by 2003. Of the 42 million workers in such zones, 30 million of them work in more than 200 of them in China (Fu & Gao, 2007), i.e. one and a half times the total employ- ment of SMEs in the European Union (Table 1).

One Taiwanese firm in China, Foxconn, is a meso enterprise on a mega scale. It is the coun- try’s largest private sector employer, the world’s largest contract maker of electronics and employs 1.2 million mainland Chinese workers. A major customer is Apple, and because of the high pro- file of Apple, it has been subject to criticism for exploitation of its labour force following suicides and alleged death from overwork. Yet also was among one of the first to follow the Chinese gov- ernment’s recommendation to recognise trades unions in 2013 and raise minimum wages (Hille & Jacob, 2013).

Yet such zones, combining meso and mi- cro firms, were not only established by central government in China. Wang (2010) cites the Changshu Commercial Zone as an example. It was established in 1985 by Changshu Commercial City Holding Company in the garment district of Changshu city, Jiangsu Province. More than 5000 apparel firms and 1000 apparel related firms were fostered by its creation. Wang also has illustrated the role of core firms in even entirely traditional sectors. For example, three meso enterprises of Sanxiao, Wu’ai and Mingxing dominate a tooth- brush cluster in Hangji, Jiangsu province, and have significantly contributed to knowledge diffusion, the training of workers, and the improvement of business management (Wang ibid), each of which are enhanced HRM roles. Wang’s (2010) evidence is a confirmation of Perroux’s case on firmes motrices in the now highly global era that he anticipated (Perroux, 1964).

Initially, China’s different export processing development and special economic zones were on

or near its coast. But Christerson and Lever-Tracy (1997) evidence dense networks of small micro firms emerging in rural China that in many ways resembled the industrial districts of the ‘Third Italy’. They are globally competitive in market niches, they contain networks of relatively au- tonomous firms which are at least partially locally owned and managed and which often take part in high-value activities such as design and marketing.

Global Spread and Backwash Effects

As already outlined, the growth of China’s zones aimed to attract foreign direct investment on the basis of low wage manufacturing of consumer goods (Rawski, 2005). But not on the basis of ex- ternal economies between small scale micro firms rather than attracting multinational companies as the not only the low cost of labour but also the high quality of infrastructure in the zones, their world class transport links, including airports al- lowing hub-and-spoke delivery of finished goods or components within less than 24 hours, also attracted modern and advanced technology firms.

There also was the unprecedented growth of the internal Chinese demand for manufactures which was about to overtake that of Germany and the US. While also inducing leading western and Japanese multinational (meso) firms in modern and advanced technology sectors to accept the invitation of the Chinese government to undertake joint ventures with mainly government owned and controlled companies. Yet, in the manner of Myrdal’s (1957) spread and backwash effects this meant less investment and production in the US or Europe, or closures. Both Boeing and Airbus have run down swathes of production in both since and transferring them to China. For Airbus this includes no less than a quarter of its total employment in Europe, and the closure of six of its European plant (Watts, 2007).

Moreover, once initially micro Chinese firms had gained technology transfer from companies such as Siemens in advanced passenger trains, and

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learned up on flexible specialisation from joint ventures with Japanese, Taiwanese and South Korean firms, many of them by then were meso went independent (Bradsher, 2012). Sutton (2004) has shown that its leading auto producers, while threatening some of some thirty other smaller micro firms extinction, had achieved world class standards of post Fordist kaizen style continuous improvement and kanban just-in-time delivery from their first tier suppliers by early into the new millennium and were extending it to second tier suppliers. Meanwhile China not only had its own aerospace industry, and already was producing its own mid range passenger jets but, discarding its joint ventures, planned to produce its own super jumbo by 2020, and where the learning gains from Boeing and Airbus in China have made the prospect credible to industry analysts (e.g. Arnold, Hollinger, Williamson & Weismann, 2007).

Inversely, in India, the government’s initial insistence on joint ventures with indigenous firms in any foreign direct investment meant that com- panies such as JCB, Honda, Suzuki and Michelin first teamed up with local firms, but then went independent as soon as a change in government regulations allowed it. For instance, in the case of Suzuki’s break with the third largest India mo- tor cycle manufacturer TVS, a TVS spokesman reported that: in terms of the most interesting new technical developments, Suzuki ‘wanted to keep its technology for itself’ (Marsh, 2006).

The Challenge for Enhanced HRM

The size of both enterprise zones and industrial districts in Asia dwarfs industrial districts in the West. Besides which, until the financial crisis of 2008-09, China had been growing at 10% per year for near three decades and up to 7% thereafter whereas, by 2013, both the US and Europe were in recession. Further, the scale of the financial and physical investments undertaken by China in such zones, and their employment levels, are unlikely to be replicated in the West. In analysing one of

the major export processing zones in China, at Shanghai, Cheng, Zeng and Zhang, (2012) also have found a three phase life cycle by which it has moved from processing through to more au- tonomous manufacturing and then to endogenous innovation jointly with Chinese R&D institutions rather than relying on technology transfer from joint ventures with multinational companies.

This poses questions on how the West can safeguard and regenerate much smaller industrial districts composed mainly of small or very small firms. The challenge of this is formidable and may not be met. Yet we suggest that, if it were, this would need to be by advancing the forefront of innovation in the first phase of a product cycle, and continually advancing it by process and product innovation which would give it a leading edge in what thereafter either would be followed by Asia or matched independently on its own in other process and product innovations.

Which is where we see roles for ‘enhanced HRM’ in the several senses that were outlined earlier, including fostering Schumpeter’s (1949) ‘creative aptitude’, and applying it in actual innova- tion rather than only assuming that public policy can create the conditions in which the private sector might innovate, enabling how it actually does so in terms of promoting synergies not only between firms but within them, at group levels. Yet which also implies recognizing Schumpeter’s (1949) case that this is likely to involve intuition, which has been the Cinderella of western social ‘science’ despite gaining widespread recognition in both management decision-making and the hard sciences (e.g. Kahtri & Ng, 2000; Sadler-Smith, 2008; Glöckner & Witteman, 2010).

Concept Cycles and HRM

Vandenbosch at al., (2006) have observed that although any innovation may be triggered by a single intuition or insight, the idea itself then is likely to be re-shaped and also often re-invented during an ongoing iterative trial-and-error process

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of its development, which is one of the features that we suggested should be adopted in ‘enhanced’ HRM. This also has support from cognitive theory and neural research in that intuition does not ‘come from the blue’, though it may appear to do so, but by an interfacing of conscious and unconscious processes by a referential rather than inferential rationality (Bartlett, 1995; Wittgenstein, 1953; Edelman, 1992; Oliveira, 2005, 2006; Oliveira & Holland, 2012).

Thus if an innovative idea or concept is intui- tive, it is likely to refer to a previous solved or unresolved insight but its development will be iterative in a step-by-step approximation to what then becomes definitive whether in a product or process, where the process also may be a service, as with Skype or YouTube. Within two years of its launch, Skype had so challenged telecom giants, and attracted such advertising, that it had been worth $2.6 billions to its two founders Niklas Ze- nnström and Janus Friis when they sold it to Ebay. Within eighteen months of its launch in February 2005, YouTube had a 100 million people daily on line (Van Duyn, Taylor & Waters, 2006). Such successful high-tech start-ups SMEs also may have an advantage in this regard in that iterative development of a new product or process may be blocked in bigger meso business by what Witt (1997) has deemed ‘lock-in’ and Deeg (2005) has deemed ‘path dependence’ in trying to validate investments they already have made in their own larger scale, longer term and less flexible R&D programmes.

The risk of being ‘too different’ through what may prove unduly radical innovation also is one reason why global companies for decades have undertaken strategic alliances in R&D to the point of courting the attention and distrust of competition authorities. Most global companies neither want to be too behind or too in advance of an innovation frontier since if too behind they may not catch up, whereas being too far in advance they may be on their own with a niche item rather than what comes to be the market standard for the growth phase of

a product cycle. Better products that never made this include the Betamax video, widely deemed at the time better than JVC’s VHS, whereas VHS became the market norm (Grindly, 1995).

Networking, Innovation and HRM

In principle, one of the main potential gains for small and medium firms is whether they can gain some of the features of larger multinational companies by networking research and product development which was a claim by one of us in the drafting of the 4th Framework Programme for Science and Technology of the EU. This gained the condition that a successful application should include at least a partner in an Objective 1 (less developed) region and preferably also an Objec- tive 2 (depressed) urban area (Holland, 1993). It was informed by Perroux’s (1965) concept of Schumpeterian innovation trajectories and was designed to shift regional development assistance beyond investment in ‘hard’ infrastructure such as motorways to ‘soft’ investment in fostering creativity including the surfacing and transfer of tacit knowledge (Holland, 1993).

Again, this relates also to knowledge-based theories of the firm rather than only local external economies. Newman, Hanges, Duan and Ramesh (2008) distinguish between (a) traditional HRM models of organisational culture and climate premised on behaviour within an organisation or group and (b) a network-connectionist model where the connections are between them. They also relate this to schema theory, claiming that in the network-connectionist case it is possible for entire schema patterns - or features of them - to be held in common, while schemas are likely to be shared more strongly by cohesive network subgroups. In a manner suggestive for theories of local agglomeration and clustering they suggest that ‘these mental schemas come to be shared through interpersonal interaction that takes place in cohesive, informal social network clusters’ (Newman et al, p. 120).

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But again, this may depend on proactive HRM policies rather than assuming that such personal interaction happens without them, as was not the case in the earlier cited example of the Vale do Ave (Romero, 2000). An open question also is the degree to which this is feasible for very small rather than medium firms. As, for example, in the Italian Federation of Districts’ 2011 finding that 86% of all industrial district firms had less than 10 employees.

If ‘enhanced HRM’ can enable entrepreneurs in SMEs to identify tacit knowledge, and bound- ary spanning is able to identify ‘platforms’ for regeneration of industrial districts, this will depend on whether they are open to considering it and in Freeman’s (1995) typology already are leaders, or potential leaders of a cluster of follower firms. Also, whether entrepreneurs of small firms who initially succeeded in part because of what von Hippel (Hippel, 1994, 1998) has called ‘sticky’ tacit knowledge may get stuck into a particular mind set (Senge, 1990) and cannot escape from it anymore than some larger meso firms which may be locked into (Witt, 1997) or path dependent (Deeg, 2005) on their own innovation trajectory.

This has implications for boundary spanning in shifting HRM from concern with performance criteria within a prevailing production paradigm, to concern with innovation and whether or not a firm, aided by a regional development agency or innovation centre, can shift from a narrow preoccupation with costs to proactive concern with promoting product and process innovation, whether in local joint innovation trajectories, or by networking. It confronts a dilemma in relation to the earlier stress on tacit knowledge being a key to competitive advantage (Ambrosini & Bowman, 2001; Edmonson, Winslow, Bohmer & Pisano, 2003) in that, in principle, this should mean that firms should retain such knowledge ‘in house’ rather than open their doors to other partners. Yet there also is the counter case that networking ideas and ‘innovation clusters’ may be crucial to

sustaining a joint innovation trajectory near to or advancing a global innovation frontier.

Clustering of products in innovation trajecto- ries can avoid dependence on only one product innovation which may excel in technical terms yet not become the standard for the market, and therefore neither achieve the growth or mature phase of a product cycle. It relates to what Quinn (1995) has called ‘side bets’ and ‘logical incre- mentalism’ in observing that:

Even after selecting the approaches to empha- size, innovative managers tend to continue a few others as smaller scale ‘side bets’ and options. In a surprising number of cases, these alterna- tives prove winners when the planned option fails (Quinn, ibid, p 713).

But this depends on organisational and opera- tional culture and relates also to effective HRM that can foster and sustain the transition of innova- tive concepts into practice. For example, several smaller Italian companies from the later 1980’s had prototyped electric scooters which have the advantage of not sounding like a wasp, nor pollut- ing in the manner typical of two stroke engines. Yet Piaggio, maker of the Vespa, or ‘Wasp’, located in Tuscany, and the only Italian company in the sector with global reach, would not adopt them for volume production, despite increased competition from Asian producers in conventional scooters and smaller motor cycles, and although most Ital- ian cities had formally committed themselves to introducing low emission zones.

The tacit rules and implicit norms (Oliveira, 2007) of first wait-and-see whether a market emerges, rather than lead the market, were too strong. It was only from 2003, by which time Piaggio’s debts were 60% of its annual sales, and workers were frustrated and confrontational, that a new management team took over the company and developed a new ‘hybrid’ or ‘green’ Vespa. But which still faced dilemmas in marketing an‘entirely new’ product less from failure to innovate than

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from the growth of demand for its conventional scooters and motor cycles in Asia, and especially China (Reuters, 2011). As with Betamax versus VHS, the better new product did not become the market norm.

Networking as Reducing Psychological Distance

Manuel Castells, with Borja and Himanen, has been among the most eminent of those advocating that networking is a key response to globalisation (Castells & Himanen, 2002; Borja & Castells, 1996; Castells, 1997). As indicated earlier, re- duced transport costs since the time that Marshall and Weber stressed them in terms of industrial districts and agglomeration economies no longer are a barrier to global location of production nor, therefore to global networking by even medium and small firms.

Further, language and cultural similarities may close ‘psychological distance’. For instance, in an extensive study for OECD on the effects of globalisation, Coe (2007) found that language, cultural similarities or familiarity played a key role in the degree to which China could gain from and utilise foreign direct investment effectively, and that the Chinese diaspora in east Asia were the first investors to seize the opportunity of its open-door policy, contributing more than half of China´s FDI during the 1990s. English as the now lingua franca, also helps. India, after keeping its US diaspora at arm´s length until the 1990s, now embraces it, with a contribution which is more technological than financial. Both countries have large, highly educated, and prosperous nationals in Silicon Valley. This recently has been shifting, with a reverse flow of highly educated and trained professionals coming back to Asia from the US (Tainio & Lilja, 2003; Lazonick, 2009).

Yet reduction of psychological distance may have both regional and global dimensions. For example, most Portuguese entrepreneurs can understand and read Spanish whether or not they

have higher education, nor need a translator, nor are far from home either literally or in cultural terms when in Spain. Reis (2007) has stressed that what has happened in terms of linkages since Portugal joined the European Community has been more a process of Iberisation than Europeanisation or globalisation (Actualidad, 2007). It therefore is probable that Portuguese SMEs should be enhanc- ing partnerships and strategic alliances both in Spain and in common language Brazil for joint in- novation through lateral synergies without needing vertical integration in organisational hierarchies or needing to depend only on a local industrial district or cluster. A key in this regard therefore may be for smaller firms to focus on not only intraregional but also interregional cooperation, with regional and municipal governments, and development agencies, helping to synergise this.

Europe’s Inertial Innovation Agenda

The need for innovation, competitiveness as well as economic and social cohesion underlay the preparation and publication of Commission President Jacques Delors’ White Paper on Growth, Competitiveness and Employment of 1993 (EU, 1993; Holland, 1993). New policies followed such as the ADAPT programme which could fund retraining and skills extension for firms in declining sectors. ADAPT was inspired by the Lucas Aerospace model (Wainwright and Elliott, 1982) of drawing on and adapting employees’ tacit knowledge, skills and experience to enable smaller firms to diversify and was strongly sup- ported by the Commission’s directorate general for employment and social affairs. Another was the RECITE regions and cities of Europe programme, which was based on the principle that small and medium firms could gain some of the features of larger multinationals through networking (Hol- land, 1993).

But both programmes lacked profile, agency and adequate finance not least since their rationale conflicted with dominant institutional ideology

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of the most powerful directorates generals of the Commission, such as those for finance, competi- tion and trade, that the legitimate role for public policy was in creating the conditions within which the private sector could flourish, rather than the boundary spanning such as evidenced by Maz- zucato (2011) and Block and Keller (2011) to help it diversify and innovate. This is reflected in successive Framework Programmes for Science and Technology. Yet, although they have been networked since the early 1990s, these are ‘pure’ research programmes which lack insistence that finance for research should be related to actual innovation.

The officials administering these programmes in the research directorate general of the Commis- sion sign on and sign off such projects without any obligation to ensure that this has been followed through by creating any new high-tech start-up, or aiding any firms in a traditional sector to diver- sify. The budget for these programmes also has been so low that as few as one in twenty funding applications are approved, giving rise to appre- ciable ‘submission fatigue’. Few of the small and medium firms in the EU facing competition from globalisation have the time, expertise or resources to enter such a one-in-twenty chance of funding approval. In a Barometer public survey report in 2012 42% of respondent companies identified municipal, local or regional government as the most innovative, 19% national government, and only 11% the EU Commission (EU, 2012). In a further finding, suggesting support for enhanced HRM (EU, ibid), a majority of firms sampled did not think that public policies were delivering training systems enabling personnel to innovate.

Missed Chance: The Lisbon Agenda

Several policy recommendations in the prepara- tion of the Lisbon Agenda European Council, (2000), to which one of us was an adviser, aimed to counter this, including gaining post Fordist flex- ible production and flexibility-by-consent rather

than flexibility-by-constraint (Holland, 2000). One of the flaws with the Lisbon Agenda was that it included the phrase that Europe should become the world’s ‘most competitive’ economy by 2010’ rather than ‘one of the most competitive’. Another was that while governments signed up to it, they failed to implement it or ensure the resources for it to gain regional and local resonance.

The rationale for the Lisbon Agenda was Schumpeterian in his sense that it is not lower cost and price alone that shifts economies and societies to higher levels of income and welfare, but process and product innovation (Schumpeter, 1949; Holland, 2000, Oliveira & Holland, 2006) while these can be enhanced through flexibility- by-consent and innovation agreements between management and labour at enterprise level. The EU Commission followed Lisbon through with two documents which made this explicit: ‘The European social dialogue, a force for innovation and change’ (EU, 2002), and the Communication on ‘Partnership for change in an enlarged Europe - Enhancing the contribution of European social dialogue’ (EU, 2004) grasping and pushing the point that Lisbon was not simply about formal training but innovation by social partnership.

The Lisbon Agenda, therefore, was a call for innovation-by-agreement between social partners at plant, branch or other local level to gain and sustain skill and innovation trajectories (Holland, 2000; Oliveira & Holland, 2006). But the agenda, again, unlike the boundary spanning of innovation in the US, lacked agency and especially funding for regional and local institutions to pursue it. Com- mission President Manuel Barroso then responded to the failure to make progress on its ‘relaunch’ in 2005, by proposing a European imitation of America’s MIT rather than an institution such as Japan’s MITI which had successfully synergised research and diversified leading Japanese firms on a ‘boundary spanning’ basis after the crisis for Japan following the 1970s oil shocks (Ohmae, 1982; Okimoto, 1989).

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Centres, Peripheries and Crises

Besides which, the growth and survival of small and medium firms in not only the Third Italy but also elsewhere in southern Europe has been in question since the onset of the Eurozone crisis following the salvage of banks from their folly in buying subprime and other toxic derivatives (Sarmento & Nunes, 2012). The EIM Business and Policy Research group found that 63% of sampled firms with less than 10 employees, and 58% of those with from 10 to 249 employees reported falling demand as their main problem whereas only 10% of the former and 13% of the latter reported no negative effects (EIM, 2011). In 2011 only SMEs in Germany and Austria ex- ceeded their 2008 levels of real value added and employment, while these had stalled since 2008 in Belgium, Finland, France and Luxembourg. In the remaining EU countries, SMEs had not recovered their pre-crises levels (Ecorys, 2012).

Part of this related to the constrained prem- ises for the introduction of the euro, where it was presumed that limits to debt and deficits in a single currency area would assure its survival. This had been criticised years before, drawing on both Myrdal (1957) and Perroux (1964), stressing that without offsetting public investment poli- cies the introduction of a single currency could disintegrate Europe (Holland, 1980). The same case then was made in a report for Jacques Delors which he had personally requested and commis- sioned for policies and financial instruments to offset the deflationary debt and deficit conditions for a single European currency and to realise the commitment to economic and social cohesion of the first revision of the Rome Treaty in the 1986 Single European Act (Holland, 1993).

The model for this was the US New Deal and how disparities in income and employment in different regions could be offset not only by fis- cal transfers but through bond funded social and environmental investments. In his TVA and the Grassroots, Selznick (1949) had showed that the Tennessee Valley Authority both was a regional

development programme and a social instrument not only within a democracy but reinforcing it at local levels. This included engagement of local communities in their own future, such as in not only directly and indirectly supporting small and medium firms but also in promoting production cooperatives.

The report to Delors (Holland, 1993) recom- mended that the EU should issue its own bonds through a European Investment Fund to finance regional development programmes and promote innovation in new high tech start ups through a European venture capital fund. This was opposed at the time by Germany, although Delors managed to get the European Investment Fund set up and with terms of reference in its statutes that en- able it to issue EU bonds. Delors then endorsed this in his Commission White Paper on Growth, Competitiveness and Employment of December 1993 (EU, 1993). But Helmut Kohl was opposed and the proposal stalled.

Eurobonds then hit headlines after the 2008 financial crisis and the onset of the Eurozone crisis from 2009. But Angela Merkel, having first displaced Helmut Kohl as leader of the CDU and then replaced him Chancellor, still was opposed. This proposal for bond finance for recovery, and for a European venture capital fund for SMEs and new high tech start-ups was supported by European employers’ federations, including those of Ger- many, and trades unions, in a report of February 2012 (EESC, 2012), but still opposed by Germany and not supported by Austria, the Netherlands and Finland. Notably, Germany and Austria at the time had no problems with their SMEs, central to their policy of medium firm Mittelstandspolitik, since they had by then exceeded their 2008 levels of real value added and employment (Ecorys, 2012).

The issue is still open, if closing too fast. Financed by EU Bonds, a European venture capital fund would have major potential for the regeneration of declining industrial districts. An option open at the time of this chapter going to press is that the European Council could introduce both bonds for eco-social investments to promote

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recovery and a European venture capital fund by ‘enhanced cooperation’ which it had adopted for a Financial Transaction Tax, and which does not need all member states to support such a proposal even though, directly and indirectly, they would benefit from it through direct and indirect multipli- ers (Holland, 2010; Varoufakis & Holland, 2012) and thus Myrdal’s spread rather than backwash effects. Whether enough European governments will learn up from this potential, and act without Germany, or in moving such a policy proposal by enhanced cooperation, persuade a German gov- ernment not to oppose it, rather than be outvoted, remains to be seen.

Summary

This chapter has stressed the relevance of knowl- edge based theories of the firm for competitiveness, innovation and their implications for local and regional development policies. It has claimed that the re-invocation of Marshall’s industrial district concept as a paradigm by Beccatini, Piore and Sabel and others, based especially on claims for their initial success in the Third Italy, was exag- gerated and that employment in these already was in decline by the time that Porter rebranded industrial districts as industrial clusters. It has outlined that one of the reasons for this was that the firms concerned were strong on process in- novation but not on product innovation. Another was outsourcing by the more successful among them to lower cost economies.

The chapter also has submitted that the in- dustrial district concept is weaker than the more dynamic concept of polarisation and growth pôles in François Perroux and that of circular and cumulative causation in Myrdal. It has suggested that the role of Perroux’s firmes motrices or core or meso firms has been neglected in the dynamics of regional success. Whereas the industrial district concept both in Marshall and neo-Marshallian analysis has assumed spontaneous creation of lo- cal agglomerations of small and medium firms, it

has distinguished this from government creation of economic zones in Asia, and especially China, while allowing that industrial districts within or adjacent to them share features of the initial suc- cess of the Third Italy model.

In analysing global value chains its cited Kap- linsky and Humphrey and Schmitz’s warning that integration into them is a ‘two-edged sword’. In analysing the acceleration and compression of the Vernon product cycle model with globalisation, it has shown that Japanese meso firms have retained not only research but also the innovative first phase of such a cycle in Japan to prototype new products and processes, and done so by both retaining and diversifying core competences. It has related this to knowledge based theories of the firm and the interfacing of tacit and explicit knowledge in both the rise and decline of industrial districts.

The chapter has reocgnised the strength in principle of the ‘Triple Helix’ model of industry- university-government synergies as forwarded by Leydesdorff and Etzkowitz, but demonstrated that this so far has achieved little in European practice. It has cited evidence that small and medium firms find municipal, local and regional governments of more use to them in considering innovation than the European Union. It suggests that this more local or regional role can be enhanced by learning up from HRM as surfacing and extending tacit knowledge, latent abilities and implicit skills in promoting innovative products and processes and achieving new innovation trajectories in the manner recommended by Perroux.

It has drawn on management studies of bound- ary spanning on the lines of Guston (2010) and Mørk et al. (2011) within firms and institutions and shown that this has been feasible between researchers, firms and government institutions in enabling ‘platforms’ for the launch of entirely new products, and the creation of entirely new markets. Although this, in the US, was a national policy, the chapter has suggested that it can inform and synergise local and regional innovation systems.

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The chapter has strongly criticised the inertial innovation agenda of the European Commission, and the degree to which this lacks such proactive policies to create new SMEs in advanced technol- ogy as well as the need for venture capital finance for small and medium firms and new high tech start ups. It also has indicated that such venture capital could be funded by bond issues rather than fiscal transfers, which has been recommended by the Economic and Social Committee of the EU, including both employers and trades unions and representatives of civil society.

IMPLICATIONS FOR FUTURE RESEARCH

This nonetheless leaves open key questions which less concern the case that some SMEs could gain from an enhanced HRM approach encouraged and exampled by local or regional development agencies or metropolitan authorities, than which among SMEs would be open to it. The first is- sue has been addressed in the paper, in that it is probable that this would tend to be in medium sized rather than very small firms. Even when firms of less than 10 people, such as the founding partnership of Steve Jobs and Steve Wozniak at Apple, or of Niklas Zennström and Janus Friis with Skype, have succeeded, this has been less driven by concern with HRM than with an intuitive drive to translate concepts into products.

Another issue is that even in the firms of less than 250 people, there still may be less concern with HRM than simply ‘getting on with the job’ and which also relates to boundaries between them. Such as an engineer or production line manager, whether or not even titled as such, be- ing concerned with engineering and production, while a sales manager, if there is one rather than an owner entrepreneur assuming to do it, being primarily concerned with sales.

This also relates to issues which this chapter has not addressed, and which merit further research,

including power dynamics in small firms and the age and educational level of the entrepreneurs. This is not so much presuming that higher education is a necessary condition for openness to HRM. It is common knowledge that younger founders of successful start-ups may even have dropped out of higher education such as with Bill Gates at Microsoft and Mark Zuckerberg with Facebook while in the successful postwar phase of Italian industrial districts many of the entrepreneurs had none, but had been working in the industrial triangle of Milan, Turin and Genoa and brought their tacit knowledge and implicit learning back to the Third Italy with them.

Rather it may have an inter-generational di- mension with both positive and negative effects. Founders of successful firms may want their offspring to follow them in managing them, and some do. Yet as founders, and often controlling shareholders, fail to allow them sufficient au- tonomy to diversify either products or processes or consider new thinking on how the firm should be managed. Or, never escaped from the mind sets in the sense of Senge (1990) that they knew all there was to know about how to manage them, yet then were perplexed when globalisation chal- lenged their survival.

Which is what one of us found after being invited to design the Greater London Enterprise Board in that managers of medium sized firms in traditional sectors came to it simply wanting sufficient subsidies to survive and could not cope with, or therefore accept, the offer to profile the tacit knowledge, latent abilities and implicit skills of their own workers to achieve product or process innovation since, as with the managers of Lucas Aerospace, they saw this as a challenge to their own authority as managers. Which also could be perceived as an unwillingness to open the ‘black box’ by which they presumed that they knew how to manage already, yet also as fear of a Pandora’s box in which their right to manage could outcome in loss of control, even if most them, as a conse- quence, also thereafter lost their companies.

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By contrast, we have found that one of the most successful medium sized firms in Portugal, whose core competence was in construction, achieved this in the first instance because its founder was prepared to delegate to two sons and allowed them a high degree of autonomy, including freedom to diversify into unrelated product markets, such as tourism and also biotechnology. Also that the sons themselves, and their senior managers, both en- gaged and attended courses in HRM commissioned from us by the company, and then commissioned another series of courses for middle managers.

In MBA courses for managers in medium sized firms we also have found an openness to the potential of surfacing tacit knowledge when given an example such as that of the Lucas Aero- space Alternative Corporate plan since, while the surfacing of tacit knowledge as a concept is theoretical, the emerging products were ‘for real’. As also in their interest that there may be a tacit ‘referential coefficient’ in intuition, and that this should not be discounted as the basis for process or product innovation, which was welcomed by the vice president of a medium firm who admitted that he had relied on this in a recent acquisition even though, to gain the relevant bank finance, he could not admit as much rather than array a highly quantitative but purely hypothetical cash flow forecast from it.

It also may be that there is ‘phoenix’ style regeneration potential for a medium sized firm in an industrial district facing a succession crisis if some of the family controlling it can recognise the potential for product and process innovation. As we learned from the outcome of one of our MBA courses when a son who had been the intended successor to its founding father was killed in a car crash, and when his sisters nominally took over control, yet recognised that they had no management experience. Whereas an operational manager who had been on the MBA course was able to persuade them that there was scope for innovation and diversification from identifying

the tacit knowledge, latent abilities and implicit skills of its workers, which neither the found- ing father nor the son as intended heir ever had conceptualised. Which the sisters accepted and empowered him to do so.

We suggest that such issues concerning control and succession in SMEs, and in recognising and recommending the case for ‘enhanced HRM’ as integral for local and regional development policies, merit further research in relation to the potential regeneration of industrial districts. Not least since, in an era of constraints on national or regional budgets, such a ‘mind shift’ in drawing on tacit knowledge, latent abilities and implicit skills, is near costless and that in ‘delving down’ to do so, many small and medium firms, if still a fraction of the total, may become leaders within an industrial district, span boundaries with others and not only survive, but flourish. As also, that regional development agencies and innovation centres should indicate that priority will be given in applications for finance by SMEs, even within currently constrained budgets, to those among which undertake to implement one of more of the six main dimensions of ‘enhanced’ HRM which were outlined at the outset of this chapter.

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KEY TERMS AND DEFINITIONS

Boundary Spanning: Innovative synergies within and between firms and institutions, includ- ing public institutions and agencies.

Bonds: Fixed interest borrowing potentially shifting savings into investments.

Core Competences: Knowledge based techni- cal and human abilities and skills.

Diversification: Introduction of alternative products, processes and skills.

Enhanced HRM: Engaging ‘best practice’ human resource management such as surfacing and extending tacit knowledge and enhancing skill trajectories to promote innovative products and processes.

Growth Pôles: Centres attracting new activi- ties and which can be introduced and fostered by public policies, including technopôles.

Industrial Districts: Local economic systems of small and medium firms.

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Innovation: Introduction of new products or processes and creation of new markets.

Innovation Trajectories: Dynamic innovation and product clusters and skill extension.

Macro: Aggregate and large, either for eco- nomic or social outcomes.

Meso: Intermediate (Greek: mesos), such as for a global multinational company or for a region in the global economy wider than local or national economies.

Micro: Small or medium, for either for a firm, or a local geographical area.

Networking: Joint research and product devel- opment by firms and public institutions; reducing spatial and psychological distance.

Tacit Knowledge: Less than conscious know- ing, including know-how.

ENDNOTES

1 Volunteered to one of us by the head of plan- ning in the French Ministry of Economy and Finance, Jean Saingeour, in January 1966 with examples of such long-term planning to achieve 80% self-sufficiency in energy through nuclear power, its Plan Calcul na- tional computer programme, its TGV high speed rail network, and the supersonic Con- corde which never covered its development costs but was vital in developing skill tra- jectories in the southern French technopôle of Toulouse, and in enabling France to be a major player in the Airbus programme on a pan European basis, which first challenged and then overtook the US company Boeing.

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Chapter 14

Self-Managing Teams in Small and Medium Enterprises (SME)

ABSTRACT

Small and Medium Enterprises (SMEs) are looking for a sustainable and profitable business concept. They use a human resource model according to the situation and establish a democratic system with flexible work, focusing on responsibility and initiative and increasing the self-control of the team´s members. Self-managing teams have been used more and more in recent years in the business environment. They are relatively autonomous work groups whose members share responsibility and leadership to accomplish their independent tasks. Their objective is to develop a type of collective knowledge that requires the pooling of individual knowledge. Their characteristics include independent, autonomous decision making, shared responsibility, and shared leadership. Sometimes, self-managing teams are also responsible for personnel decisions within the team, such as working hours, the selection and contracting of members, dismissal, and even determining salaries. In sum, the authors propose self-managing teams (such as High Performance Practices) as a good human resource management in small and medium enterprises and show how they can help to create organizational effectiveness and competitive advantage in SMEs.

INTRODUCTION

The orders and flow of the chapter are: First, justification of need to forming SME´s team (self-managing teams, such as high performance practices, in SMEs as the key to compete in the environment given the above premises) and the

theoretical framework human resource manage- ment in SME. Then, we studied work Teams (High Performance Practices) and the self-managing teams: definitions, negatives aspect, favoring results, corporate culture, characteristics and Self- managing teams and organizational effectiveness. Finally, conclusions and future research directions.

Mercedes Rubio-Andrés San Pablo CEU University, Spain

Santiago Gutiérrez-Broncano Castilla-La Mancha University, Spain

Luis Varona-Castillo San Pablo CEU University, Spain

DOI: 10.4018/978-1-4666-4731-2.ch014

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JUSTIFICATION OF THE NEED TO FORMING SME´S TEAM

Various types of organizations must manage rap- idly changing operational contexts. To respond to these demands, organizations should relying more heavily on team-based work arrangements (Rosen, et. al.2010). Adaptability is crucially important to organizational success due to externally-induced organizational change and those organizations successful at adapting would be most effective in the marketplace (Terreberry, 1968).

Through team working, organizations can flexibly adapt and react to turbulent and dynamic environments, and thereby focus their efforts to more efficiently handle subtasks resulting in overall organizational effectiveness (Richter, et. al. 2011).

Therefore, organizations increasingly rely on teams to manage the complexity of modern work. So that, teams must be able to react quickly and accurate to the changing environment (Rosen et. al. 2010) (See Figure 1).

Also, economic and technological factors have encouraged employers to adopt flexible work arrangements (FWAs) as a means to respond to the increasing competition, market volatility, economic recession and the changing needs of the workforce (Michie & Sheehan-Quinn, 2001; Stavrou, 2005).

The degree and nature of product market competition have heightened considerably. Cost effectiveness and quality have become critical. At the same time, authors identify people time and again as being the key to finding and sustain- ing a competitive edge (Bacon, et. al 1996). An influential literature emanating from the United States (Beer et al., 1985; Kochan et al., 1986; Fombrun et al., 1984) has identified new ap- proaches to managing human resources. The broad message has been compounded by reflection on Japanese management practices (Schonberger, 1982; Oliver and Wilkinson, 1992; Pascale and Athos, 1982; Trevor, 1988). In Britain, the idea

of human resource management (HRM) has come to be accepted as a very important - arguably the most important - area for debate and practice in the whole field of employment management, personnel management and industrial relations as broadly defined (Guest, 1989; Storey, 1992; Storey and Sisson, 1993).

We propose self-managing teams (such as high performance practices) in SMEs as the key to compete in the environment given the premises.

OBJECTIVES

• To analyze the importance self-managing teams in SME.

• To study definitions, background and char- acteristics of self-managing teams.

• To research the distinctions between a work group and team-work.

• To analyze the conditions for self-manag- ing work teams in SME.

• To check the association with self-manag- ing sustainable, organizational effective- ness and therefore a competitive advantage in SME.

• To study the new role external and internal leader and the difficulty of replace leader- ship functions in SME.

• To analyze the negatives aspect of self- managing teams in SME.

Figure 1. Environment factors informing teamwork

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CONCEPTUAL FRAMEWORK OF HUMAN RESOURCES IN SMEs

Hamey suggests a theoretical framework of human resources in SMEs with the following significant factors: external influences and internal dynam- ics (See Figure 2). The first consist of market structure (product), suppliers, customers, industry, the value chain, the level of technology and in the regulations. As we have internal dynamics: the typology of the same employer or owner of the company, the management style, the presence of a joint trade, size and employees.

High-performance human resource practices (and thus, self-managing teams) can help to cre- ate an organizational effectiveness and therefore a sustainable competitive advantage in SMEs.

WORK TEAMS IN SMEs

With organizations moving towards team-based structures, the last decades have seen an enor-

mous boom of a variety of team-working forms. (Ritcher,et. al. 2011). Some of the distinctions team-based working is at the heart of many produc- tion and service organizations (Mueller, Procter & Buchanan 2000; Van Hootegem, et al., 2005), and also of course in SMEs.

Distinctions between a Work Group and Team-Work

First, one of the most basic distinctions is between a work group and a fully functioning team. A work group contains a set of people who work together to perform some task. It´s characterized by having members that interact to share informa- tion and take decisions, thereby facilitating one another’s professional development within their area of responsibility.

Members of the group are not required to, and do not have the opportunity to carry out collective work that requires the efforts of all, resulting in a lack of synergy in the work they each carry out

Figure 2. Open systems conceptual framework of factors influencing HRM in SMEs1

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as there is little or no interdependency between the different functions.

In a work group, the members share a common goal and are coordinated by a leader, but their performance is a function of individual effort which is evaluated by individual performance evaluations (Levi & Slem, 1995).

In contrast, a team is a small number of people with complementary skills who are committed to a common purpose, set of performance goals, and approach for which they hold themselves mutually accountable (Katzenbach & Smith, 1993).

Team Work

This definition of team work still permits a wide variety of types. Work teams can be relatively permanent operating organizational units, such as production work teams; or they can be tem- porary organizations focused on a limited task such as research and development project teams or managerial task forces (Katzenbach & Smith, 1993). Teams can be part of an organization’s operation, or they can be used as a mechanism of evaluating and changing an organization such as Quality Circles and Total Quality Management teams (Lawler, 1986).

Moreover, in some companies it is common for people to be members of five, ten, or twelve or more teams at a time (Martin & Bal, 2006; Zika- Viktorsson, Sundstrom, & Engwall, 2006). As noted by Milgrom & Roberts (1992), firms adopt this approach to organizing work to leverage their resources more effectively and to promote knowl- edge transfer—that is, to enhance both productiv- ity and learning. However, classic work on the productivity dilemma (Abernathy,1976) suggests that the routines put in place to enhance productiv- ity often hinder the practices that foster learning (Adler et al., 2009; Benner & Tushman, 2003), with learning and performance often working at cross-purposes—especially in teams (Bunderson & Sutcliffe, 2003; Singer & Edmondson, 2008).

The problem will be to play the SMEs due to its reduce size and difficulty of creating multiples work teams.

Although teams require interaction to perform a common task, this does not mean that team members have to be located in the same place. “Virtual teams” exist in which members interact entirely through electronic medium such confer- ence calls, electronic mail, and video conferences (Willis, 1991).

There are a variety of factors which relate to the successful use of team work. The factors found can be grouped into the following factors support (Hat- man, 1986; Manz et al, 1990), human resources (Katzenbach & Smith, 1993; Hirschhorn, 1991) and team relations (Lawler, 1986; Carr, 1991).

Besides, the creation of new work teams is the result of certain changes in the business environ- ment. These teams are better prepared to tackle the new challenges presented by today’s markets (Tushman & O´Reilly, 1997; de la Florida, 2002). Innovative teams result from the creation of new work teams: Multifunctional teams, Virtual teams, Open-innovation teams, Self-managing teams.

SELF-MANAGING TEAMS (SMT)

Self-managing team are a high performance prac- tices. Must first define the background in SMEs, several definitions, conditions and SMT such as high performance practices.

Background

Although the idea of using self-managing teams (SMT) at work has been around since the 1960s (under the name of autonomous work teams), there are few examples of successful SMT in the U.S., and most of the examples are with production and service workers (Manz, 1992). These work teams perform complex, but relatively routine tasks. Employees are cross-trained so that they can work on different parts of the production process. They

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also receive training on team work skills so that they can manage work assignments and internal relations. In most cases, these production SMT exist as part of an organizational development program which provides a protected or supportive environment for them (Levi & Slem 1995).

In the 1990s, the focus of team work activi- ties began to change. For example, on the fac- tory floor, companies which had been successful developing teams continued their organizational change efforts by trying to make the teams more self-managing (Manz, 1992).

So, organizations which have been successful at developing and using teams want to continue the organizational development process. To many of them, the next step is the use of self-managing teams (SMT) (Wellins & George, 1991). SMT provide a number of benefits beyond the use of standard work teams.

Definitions

The primary use of self-managing teams (SMT) has been to foster continuous improvement of work processes (Magjuka, 1991).

Self-managing team is considered a work form that allows the optimization of both workers’ needs and technological requirements, thereby enhancing both organizational effectiveness and staff attitudes.

Yang & Guy (2011) defined a self- managing team as a relatively autonomous work groups whose members share responsibility and lead- ership to accomplish their independent task. Their objective is to develop a type of collective knowledge that requires the pooling of individual knowledge (Grant, 1997; 2001).

Self-managing teams are non-hierarchical groups of individuals with different and comple- mentary experience and knowledge (Lazear, 1998). Their objective is to develop a type of collective knowledge that requires the pooling of individual knowledge (Grant, 1997; 2001¸ Nonaka y Takeuchi, 1995).

Self-management also shifts the responsibil- ity for team success to the team members. This requires the team members to handle the internal social relations of the team.

Hence, any type of team may be self-managed in SMEs, but this type of management is usually reserved for teams that carry out the same type of functional task on a regular basis, with members that remain constant over a long period. Tasks are usually related or interdependent and they are used fairly regularly in manufacturing processed, although recently they can also be found in the provision of services. The team members offer similar functional experience and usually take turns in carrying out the different tasks for which the group is responsible.

Conditions

Most studies (Cohen & Bailey, 1997; Kirkman & Rosen 1999; Pearce & Ravlin, 1987) outline the following conditions as favouring self-managing results:

• Establishing clear objectives. • Complex and important tasks. • Consistent members. • Access to relevant information. • Sufficient recognition and remuneration. • Strong support from superior management. • Excellent interpersonal skills between

members. • High level of discretion over work

processes. • Competent and instructive leadership.

Self-Managing Teams Such as High Performance Practices

There is an incongruence with respect to the effectiveness of organizational teams that is similarly reflected in the human resource man- agement (HRM) literature. High-performance human resource practices consist of a set of

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coherent practices that enhance employee skills, participation in decision making and motivation to put forth discretionary effort (Appelbaum, E. & Batt, R 1994).

Although some do not consider team working an aspect of high-performance work systems (e.g. Huselid & Becker 1995), others do (e.g. MacDuffie 1995). Some even question whether team work- ing rather represents a management fashion to disappear in the course of time (cf. Abrahamson & Fairchild 1999; Allen & Hecht 2004).

In any case, semi-autonomus teamwork allows the integration of worker needs, flexible adapta- tion to and coordination of the respective work, teamwork is considered more effective than other work forms such as traditional individual work. A series of quasi-experimental studies implement- ing team-based working conducted mainly in the 1970s and 1980s supported one of STS’s most basic tenets of superior effectiveness of (semi-) autonomous team working compared with tradi- tional work forms (see Pasmore 1982; Pasmore, et. al 1982; Pasmore 1988; Levine & Tyson 1990). MacDuffie (1995) says team working as part of strategic HRM appears effective if accompanied by complementary HRM practices. High perfor- mance practices (Lawler, 1986; Walton, 1985; Wood & Albanese, 1995) or high involvement practices (Huselid, 1995; Taylor et al., 2008), for example, Selective recruitment, Fixed contract- ing, Extensive training, Performance evaluation, Contingent compensation, Internal promotion, Teamwork, Shared information and Job security (Pfeffer 1994).

NEGATIVES ASPECT OF SELF- MANAGING TEAMS IN SME

However, there are also criticisms and negative aspects of this type of work, as it does not always produce the desired improvements in performance (Chaston, 1998).

Hard to Create

Authors Levi & Slem (1995), affirm self-managing teams are hard to create. All of the organizations in this study are advocating the development of self-managing teams and have tried to enact them, but they have had only limited success with their attempts to promote self-management in SMEs.

Free-Rider Problem

Taking as a reference the theory of social dilem- mas (Cabrera, 2002), one of the main problems created by this type of work group is that when it involves the voluntary contributions of differ- ent members of a collective, everybody benefits regardless of whether or not they have contributed to the success (Olson, 1965). Non-contribution may become the dominant strategy, meaning that no collective knowledge is gained (Cabrera, 2002), which would explain the resistance of other members to sharing their knowledge. This type of opportunist behaviour is based on lies, decep- tion and calculated effort, known as the free-rider problem, whereby team members benefit from the group effort (Lazear, 1998).

Difficulty of Replace Leadership Functions

Other problem with self-managing teams is that there are many leadership functions which are hard to displace with team work. The leader of a team handles administrative issues, sets the agenda and facilitates the team’s interactions, provides direction and goals, manages the team’s external relations, handles personnel matters like perfor- mance evaluations and rewards, and deals with personnel problems. In theory, all of these func- tions can be replaced through self-management. However, some of these functions are difficult to replace, especially those which deal with external relations and personnel issues.

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The idea of self-management is attractive to many employees in theory, but so is having a good leader to work under, learn from, and be rewarded by these practices. Programs to promote self-management often suffer because of limited training, difficulty in the relationship between the team and other parts of the organization, and a reward and performance evaluation system which is not appropriate.

Conflicts in Self-Managing Teams

The presence of conflict can have many negative effects on team performance. It can disrupt the coordination of activities, cause a lack of mutual monitoring and back-up behavior, inhibit com- munication, and consequently bring about a loss of trust and motivation. Thus, it is imperative to minimize conflict during plan execution. The first strategy is to prevent conflict. Once it has occurred, however, reactive conflict management is the process of working through task, process, and interpersonal disagreements among team members (Marks et al., 2001). Management of conflict during plan execution must occur as quickly as possible in order to reduce the amount of disruption to other processes. Reactive conflict management can involve many strategies, includ- ing negotiation and mediation.

Hence, conflict is an danger. for example the frustration, can lead to poor performance, resis- tance when it comes to sharing knowledge, which reduces performance, and can also be psychologi- cally unhealthy for the individuals. Many factors can inflate or deflate emotional levels during plan execution, and generate conflicts such as hostility between members, frustrating task conditions, or failures in execution. Strategies such as team building activities, stress-relieve training or even joking and complaining, when used properly, can be effective for affect management. (Rosen, et. al 2011).

Rewards

Commitment to the team requires that the orga- nization develops rewards for successful team participation (O’Dell, 1989). These rewards can be based on the success of the team and/or the individual’s contribution to the team. Organiza- tional rewards require a performance evaluation system which measures both team success and an individual’s contribution to the team. This is important both for the individual contributor, and to provide feedback to the team on its performance (Hirschhorn, 1991).

Rewards are another problem which exists in SMEs which may limit the development of team work (Ellis & Honig-Haftel, 1992).

For example, R&D professionals are often individualists who would prefer to be rewarded for their individual efforts. Besides, the relation- ship of patent output to the reward systems for individual R&D scientists in high technology firms, when a subset of small firms was inves- tigated separately, non-monetary rewards were shown to be ineffective (Honig-Haftel&Martin, 1993). This may discourage their commitment to self-managing team work where their individual efforts are incorporated into the success or failure of the team. Rewarding professionals in many organizations leads to promotions into manage- ment; however, technical professionals may not be suited for the interpersonal aspects of manage- ment. Consequently, professionals and managers often have conflicting views about how well the organization rewards its professionals (Sankar et al., 1991).

Performance Evaluations

Like the problem with rewards, performance evaluations may be a problem for self-managing teams in SMEs. Professional work, in general, is difficult to measure and evaluate which makes performance evaluations difficult. These forms may make any performance evaluation seem unfair (O’Dell, 1989).

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Therefore, we propose to measure the perfor- mance evaluation of all self-managed team and not individual contribution.

ADAPTATION OF CORPORATE CULTURE TOWARDS SELF- MANAGED TEAMS

The attempts to create self-managing teams range from an organization-wide effort promoting a change in corporate culture to the creation of a few small self-managing teams to see how they work. Although there were pockets of success with these programs, self-management does not necessarily expand or “trickle down” even when it is successful. Rather than using self-managing teams as a tool to promote a change in corporate culture, it is more accurate to say that without an appropriate corporate culture it is difficult to create successful self-managing teams.

Levi & Slem, 1995, come to the conclusion that the overall success of team work depends on corporate culture. A corporate culture which encourages employee involvement and partici- pation is a necessary support for team work and self-managing teams. A supportive corporate culture is related to a lack of resistance from managers about teams, better relations between teams and other parts of the organization, and the increasing use of teams in the organization. Self-managing teams are much more likely to be successful in organizations where the corporate culture and value system support empowerment and team work. Overall, corporate culture is the single largest predictor of the differences among the companies’ successful use of teams.

Developing a corporate culture which supports teamwork is a long term process it is not some- thing which can be dictated by top management or announced as a new organizational program. Changing corporate culture requires a long term, consistent effort on the part of management to show that employee involvement and team work

is valued and rewarded by the organization. This needs to be done by both communication and action. Corporate culture provides the foundation Once the organization begins to create a corporate culture which supports team work, the culture will support a wide variety of teams, and eventually the transition to self-managing teams.

In summary, Figure 3 shows the evolution with Self-managing teams (individual work, group work, team work, R&D teams and SME perspectives), relevant concepts in function of the evolution, by different authors.

CHARACTERISTICS OF SELF- MANAGING TEAMS

In self-managing teams the members must com- plete their own tasks, control the result obtained and take responsibility for the innovation achieved. Therefore not only are suggestions made but also responsibility for implementing the chosen solu- tion and its results is a collective responsibility. The organization in charge defines that mission, the scope of operations and the available budget. All other responsibilities delegated to the team vary from one organization to another.

Characteristics include independent tasks (Kirkman & Shaphiro, 1997), autonomous deci- sion making (Wellis et al, 1991), shared respon- sibility (Wall et al, 1986) and shared leadership (Hackman 1987; 2002).

Sometimes, self-managing teams are also responsible for personnel decisions within the team, such as working hours, the selection and contracting of members, dismissal, and even determining salaries. According to the literature review, most important characteristics are.

Cohesion in SMT

Allen (1971), in his seminal work, relates the con- cept of proximity (cohesion) to that of “physical distance”, measured in terms of feet or meters. The

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measure considered by Allen is dyadic, in that it refers to pairs of individuals or, better, to pairs of physical locations that do not vary in reciprocal distance over time.

Moreover, we argue that close physical proxim- ity of team members is also instrumental for the development of team cohesion and work norms of strong effort. If team members are in close vicin- ity, stronger social integration is likely (O’Reilly

et al., 1989) as team members are more easily accessible for both task-related and also personal interaction. Team members in close proximity, by the higher likelihood of informal and spontaneous communication (Allen, 1971), will tend to interact not only on task-related matters, but also on social and personal matters, strengthening ties among team members leading to stronger team cohesion. Support for this notion comes from the strong

Figure 3. Evolution with self-managing teams

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and positive relationship between interaction fre- quency and interpersonal attraction, an important component of cohesion (Zaccaro & Lowe, 1988). Also, Shaw (1981) describes a positive relation between physical proximity and the existence of cohesive groups “psychological distance”.

Cohesion is likely to create stronger social norms regarding work effort as individual con- tributions to the team tasks can more readily be observed and are thus more identifiable in the team, reducing tendencies of social loafing (Latané et al., 1979). Furthermore, team members in proximity are more likely to develop a stronger sense of group identity (Scott, 1997), creating a commitment to the team and its goals (Hoegl & Parboteeah, 2003), and leading to increased effort on the common task (Locke & Latham, 1990).

Ensley and colleagues remarked the success of a venture is often a reflection of its team’s ability to meld talent and ability in a creative and (Ensley, Pearson, & Amason,2002).

Team Size: Smallest Self- Managing Teams

Team size has been considered an important structural variable determining team processes (e.g., team collaboration, social loafing) and, subsequently, team performance (i.e.,the effec- tiveness and efficiency of task completion). But, teams in business organizations today are often too large (Hoegl, 2005).

Research suggests that smaller teams provide for more direct and efficient intrateam communica- tion (Bray et al., 1978), greater effort by all team members (i.e., reduced social loafing; Latané et al., 1979), and, hence, a better utilization of all team members’ potential.

What´s optimal team size in terms of a specific number? Research evidence does not provide an absolute optimal team size in terms of a specific number, nor is there any conclusive indication of an absolute optimal range. As scholars have pointed out, the right team size will certainly depend on:

• Work to be performed (Hackman, 1987). • Size of the project task (Hoegl, 2005). • Teamwork requirements (Hoegl, 2005). • Task complexity and uncertainty (Hoegl et

al., 2003).

Also, team size affects teamwork, for example:

• Several aspects of teamwork quality. • Sharing of technical and coordinative in-

formation (Zenger & Lawrence, 1989). • Communication structure. • Social loafing phenomenon. • Performance. • Participating members in teamwork (Bray

et al. 1978). • Effort, knowledge, skills, and experience

to their full potential each team member.

Diversity

Hence, member´s team heterogeneity or diversity remains a highly controversial (Nielsen, S. 2010)

Researchers have focused a great deal of at- tention on team diversity. Bettenhausen (1991) identified cultural differences as a critical area of concern for teams.

Yet, three metaanalyses (Horwitz & Horwitz, 2007; Stewart, 2006; Webber & Donahue, 2001) have found relatively weak relationships between diversity and team performance. Reasons for weak relationships, as well as opportunities for refining diversity research, were advanced by Jackson, et. al (2003), who point out the need to examine less obvious but perhaps more critical types of diver- sity, to pay more attention to team settings and contexts, and to use more sophisticated multilevel methods of analysis. The first idea has resulted in some success, as Horwitz & Horwitz (2007) found task-related diversity to have stronger re- lationships with performance than demographic diversity does.

So far, extensive efforts to link diversity with team performance have thus been relatively futile,

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even when the type of diversity has been more carefully scrutinized.

Future progress related to diversity may thus rely on other opportunities identified by Jackson et. al.(2003) such as paying more attention to context and using multilevel methods.

Empowerment

The empowerment of human resources is inevi- table and without empowerment, neither manag- ers nor the organizations can be successful in the long run.

Empowerment is too an inner motivation which depicts the staff active role in their orga- nization. Tomas & Welt house (1990) insisted that empowerment is a four-dimensional issue; consisting of competence, meaning, choosing and self-efficacy (reviewed by Spertizer 1995) On the other hand Canger & Kangungo thought that self- empowerment indicator is the personal efficacy (1988). In their studies have evaluated these four factors. According to Mishra et. al (1998) added reliability to these aspects too.

To empower human resources, staff shall be treated the way they feel themselves as alive cells of organization body and by feeling meaningful and beneficial and trusted, they make their best in the given jobs and improve the efficiency of the organization. So in order to provide individual and organization goals, an environment of trust shall be prepared which gives the people sense of confidence and effectiveness which ensure them that they have the ability to influence or control the results of activities (Tohidi & Jabbari, 2012)

Interdisciplinary

No individual working alone could carry out the same tasks or produce the best innovations. For this reason companies turn to a combination of individuals with different and complementary skills and perspectives, deriving from this coop-

eration the achievement of these improvements and innovations. (See Figure 4).

SELF-MANAGING TEAMS AND ORGANIZATIONAL EFFECTIVENESS IN SME

Over the past decade, human resource management theory has come under pressure to demonstrate its contribution to organizational performance (Hayton, 2004; Laursen, 2002; Soutaris, 2002; Stewart, 1996; Twomey & Harris, 2000). Morrison & Phelps (1999) have stated that the success of organizations today, especially technology firms, depends on the continuous improvement of the employees’ performance.

In order to respond rapidly to market needs and increase profits, the best companies are con- stantly searching for proven practices that offer a competitive advantage. Yang,L. et al (2011). These companies generally avoid practices that do not provide some proven added value.

Despite the fact that trade magazines are full of articles describing the successful applications of self-managing teams (Cordery et. al. 1991), some precautions must be taken. The results of these teams on the investigations carried out are not always consistent and do not reflect great im- provements in performance (Banker et al., 1996; Cohen & Ledford, 1994).

Self-managing teams (such as High Per- formance Practices) as a good human resource management in small and medium enterprises (Way, 2002) and how they can help to create an organizational effectiveness and therefore a competitive advantage in SMEs.

Studies supporting the importance of self- managed teams. In a recent review of survey studies examining the link between teamwork and organizational performance, Delarue et.al (2008) called for scientific enquiry in testing the effectiveness of teamwork. This study aims to

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respond to this call by systematicall y examining whether team working in organisations is related to organizational effectiveness. Appelbaum & Bailey (2000) conclude that team-based working leads to improvements in organizational performance on measures of both efficiency and quality.

The advantages of self-managing teams are team members more committed to the work, an efficient management of labour issues, greater efficiency and job satisfaction, less employee turnover and less absenteeism.

But, their greatest advantage is without doubt the improved knowledge of the group (Lazear, 1998). Besides, the company’s competitive advan- tage is better protected than a situation in which knowledge rests with just one individual (Wright

et al., 1994). When the members learn to carry out multiple tasks the team’s flexibility increases when resolving problems, the work becomes more interesting and there is an opportunity to learn new skills.

Efficient Organization

Self-managing make the SMEs efficient because: Reduction in Staff Turnover: Studies have

shown that employees are more attached to their work groups than to the larger organisation, and work–group attachment is a predictor of staff at- titudes such as satisfaction and intention to leave the organization (Riketta & van Dick 2005). In fact, researchs has shown that organizations us-

Figure 4. Characteristics of the teams, according to the authors Elaboration: Team research

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ing certain flexible work arrangements (and are implicit in their self-management team) may ben- efit from substantial reductions in staff turnover (Baltes et al., 1999; Konrad, A.M & Mangel, R 2000; Perry-Smith, J.E & Blum, T.C 2000).

Motivation can influence the willingness of an employee to follow in the SMEs, since there a positive association between motivation and self-managing.

A Data: Estimates report turnover costs as high as $75,000 per employee (Abbott, De Cieri & Iver- son,1998). Stavrou (2005) cites that a departing employee is estimated to cost the equivalent of 150% of his/her annual salary, while work–family policies, such as flexible work arrangements, cost only 32% of one’s annual salary. In turn, flex- ible work are seen often as a method that might reduce turnover costs (Saltzstein, A.L. Ting, Y. & Saltzstein, H.2001).

Therefore, cost reduction is an important reason for raising flexible work arrangements, still need self-managed teams.

Simplification Organizational: Self-managing teams place the entire task under the control of the team members (Hackman, 1987). This reduces the need for managers, allows the organization to reduce the levels in its organizational hierarchy reducing the need for supervisor and middle level managers, and allows the remaining managers to focus on other tasks such as long range planning or external relations.

CONCLUSION

Although has been highlighted advantages of self- managing teams in SME, the implementation of these policies remains erratic across organizations (Glass & Estes, 1997; Golden, 2001; Hogarth et al., 2000).

Besides, although the results confirm that self-managed teams can contribute to improving certain aspects of performance, the scale of im- pact seems much less than that suggested in many

articles. Furthermore, in certain circumstances it appears that a move to self-managed teams in small service-sector firms may have a somewhat nega- tive impact on certain aspects of organizational capability. Probably, the only certain conclusion that can be drawn is that the effect of moving to- wards more autonomous work groups should not be expected to be the same for every organization. Hence perhaps the safest advice which should be offered to managers in SMEs is adopt a contin- gency approach of carefully examining the specific circumstances confronting the organization and to then determine whether the desired improvement goals can best be achieved through the creation of self-managed teams. (Chaston 1998)

Studies supporting the importance of self- managing teams in SMEs, as a means to respond to the: complexity of modern work, Turbulent and dynamic environments, Increasing competition, market volatility, economic recession.

We propose self-managing teams (such as high performance practices) in SMEs as the key to compete in the environment given the above premises.

Self- managing team as a relatively autonomous work groups whose members share responsibility and leadership to accomplish their independent task. Are non-hierarchical groups of individuals with different and complementary experience and knowledge.

Order for self-managing teams work properly in SMEs, need to have certain features: Size team, Teamwork quality, Communication, Coordina- tion and collaboration, Effort, Cohesion and proximity, Flexibility, Empowerment, Diversity Multidisciplinary

However, there are also criticisms and nega- tive aspects of this type of work: Hard to create, Free-rider problem, difficulty of replace leadership functions, conflicts in self-managing teams and rewards for successful team participation.

Besides, any type of team may be self-managed in SMEs, but this type of management is usually reserved for teams that carry out the same type of

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functional task on a regular basis, with members that remain constant over a long period.

There is a benefit to the importance of the relationship between corporate culture and team work. Hence, the importance of corporate cul- ture as a primary support for team work is both a problem and a benefit. Corporate cultures are not easy to change.

Self-managing teams have a close association with sustainable competitive advantage. Make the SMEs efficient because: Reduction in staff turnover and achieve simplification organizational

Hence, in line with the overriding aim of the chapter “To analyze the importance self-managing teams in SME”, the contribution of the topic treated “self-managing teams in SME”, propose creates a new site of understanding.

Finally, we recommendation:

1. To use the Self-managing teams to compete in the environment given the above premises: turbulent and dynamic, increasing competi- tion, market volatility, economic recession changing needs of the workforce.

2. To consider the characteristics of self- managing teams in SMEs, such as, size team, proximity, diversity and Empowerment an achieve a sustainable competitive advantage

FUTURE RESEARCH DIRECTIONS

• To find solves to avoid problems in per- formance of self-managing: free-rider problem and replace leadership function in SME.

• Further research is needed to evaluate bet- ter the policy performance in self-man- aging teams and the rewards for success- ful team participation measuring too both team success and an individual´s contribu- tion to the team.

• Also it´s important study the responsibility for team success to the team members. And

research about team members to handle the internal social relations of the team.

• To research the importance of the relation- ship between corporate culture and team work, and how to change the corporate culture to self-managing teams in SME, because overall success of team work de- pends on corporate culture.

• To research in leadership and self-man- aging teams in SME, for example, roles of the external and internal leader, and team communication, collaboration and cohesiveness.

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KEY TERMS AND DEFINITIONS

Cohesion (or Proximity): The close vicinity, accessible for both task-related and also personal interaction. Also “physical distance” and “psy- chological distance”.

Diversity: Critical area of concern for teams. Member´s team heterogeneity or diversity, cultural differences in the work group.

High Performance Practices: Innovative practices of human resource management which improve the commitment and the performance of the company.

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HRM: A way of implementing HRM strate- gies, policies and practices in organizations, based on external influences and internal dynamic. Is a function within an organization. Provides direc- tion for the people who work in the organization.

Interdisciplinary: combination of individu- als with different and complementary skills and perspectives, deriving from this cooperation the achievement of these improvements and innova- tions.

Self-Managing Team: They are non-hierar- chical groups of individuals with different and complementary experience and knowledge, to develop a type of collective knowledge. They are a semi-autonomus teamwork whose members share responsibility and leadership to accomplish their independent task, allows the integration of worker needs, flexible adaptation to and coordination of the respective work.

Work Teams: Some persons with comple- mentary technical and personal skills, that interact to achieve a common objective, the outcome of which is a collective result that is greater than the sum if the individual parts for which they are all responsible.

ENDNOTES

1 Source: The authors based on Arthur and Hendry´s (1992) model, supplemented with adaptations from similar propositions from McMahon (1996) and more recently Cassell et al (2002) and Harney, B. and Dundon, T (2006), pp. 54.

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Chapter 15

DOI: 10.4018/978-1-4666-4731-2.ch015

Decision Making in SMEs: Insights from Business Ethics

and Entrepreneurship

ABSTRACT

INTRODUCTION

Especially in micro and small sized enterprises, the individuality of the entrepreneur is highly in- fluential both for daily operations and for the long term strategic decisions made for the company. This also includes human resources practices and related decisions; as in majority of micro or small sized enterprises, it is the owner who is the final decision maker in all relevant departments. Employee related decisions may have ethical implications within the areas of discrimination; downsizing or termination; health and safety, promotions and motivation.

This is because management and ownership cannot be detached from each other and the en- trepreneur’s preferences on self interest impacts on the company for better or worse (Spence & Rutherfoord, 2003; Smith & Oakley, 1994). When at least 90% of all private enterprises in most of the countries are SMEs and they are the primary source of employment, it is crucial to understand the decision mechanism of entrepreneurs who run these companies (Tanova, 2003; Beardwell et al., 2003). This chapter explores theories and concepts of ethical decision making in SMEs and how individuality of entrepreneurs affects their organisations.

Gizem Öksüzoğlu-Güven University of Mediterranean Karpasia, Northern Cyprus

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It crossbreeds the concepts of greed and power (Fassin, 2005; Gallo, 1998); cognitive moral development (Kohlberg, 1968; Gilligan, 1982); ethical ideologies (Forsyth, 1980; Rest, 1986) and entrepreneurs’ psychological characteristics (Shane, 2003; Trevino, 1986) in order to build a bridge between individual moral psychology and on entrepreneurial decision making. Nevertheless, although individual ethical values correlate with the decision-making processes; enough research has been done to show that external factors play a very crucial role in that process as well (Allmon et al., 2000). Therefore, the chapter also critically discusses organisational factors and entrepreneur- ial environment (Hegarty & Sims, 1978; Wu, 2002; Longenecker et al., 2006; Stead et al., 1990) and how these can influence an individual decision making process of an entrepreneur.

However, when examining external factors, the claim is that the influence of the very same external factors changes from one entrepreneur to another since every individual’s social constructs, experiences and expectations are different. This is why, the main ideas that are put forward in this chapter revolve around the moral individuality of entrepreneurs and the discussions in this chapter provide variety of perspectives on how moral individuality impacts decision making in SMEs. Furthermore, the chapter acknowledges that the cognitive decision making process of entrepre- neurs are limited due to human nature; therefore expecting fully informed decisions on every occasion is unrealistic (Bommer et al., 1987). The chapter finalises the discussion of decision making in SMEs by concluding with a theoreti- cal framework that is useful for case analysis and future research.

The objective of this chapter is to provide an alternative approach to our understanding of how to make employee-employer relationships more effective in SMEs through critically exploring factors influencing individual entrepreneur’s ethi- cal decision making process and characteristics. This chapter is informed both from individual

psychology and moral philosophy; thus, due to its interdisciplinary nature, it is aimed to provide an alternative perspective on employment relations in enterprises through exploring the individual entrepreneur.

BACKGROUND

Rooting from ‘ēthos’; original meaning of ethics is character traits (Blackburn, 2005). Today, ethics has a deeper meaning; it evaluates human conduct and how human beings essentially supposed to behave, particularly to each other (Honderich, 2005). We can say that business ethics deals with the moral issues that emerge when we apply the concept of ethics to the business environment and practices.

According to Jones (1991) ethical decision is the one which is both legal and morally acceptable to the larger community (Jones, 1991, p.367). Con- versely, unethical decision is defined as a decision that is either illegal or morally unacceptable to the larger community (Jones, 1991, p.367). However, here, ‘unethical decision’ refers to a decision that is morally unacceptable and ‘ethical decision’ refers to a decision that is morally acceptable. These two particular definitions provided in this paper exclude those decisions which are legal but are morally unacceptable based on the notion of ‘ethical’.

Bommer et al., (1987) states that what is legal is not necessarily ethical; ethical and legal are not synonymous. However, legal dimension of ethics is an important element in ethical decision-making. Entrepreneurs do not act lawfully just because of the legal consequences an unlawful behaviour may lead to, but also because of society’s percep- tion of ‘illegal’ and obedience to what is morally required by the society. Business related crimes, frequently cannot be prosecuted because it is dif- ficult to understand the intricacies of the offence. Moreover, usually since the harm is not physical but rather economic, the case may be given low

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priority in prosecution. This results in the evalu- ation of the relatively light prosecution against the relatively large personal or corporate financial rewards. Thus, an entrepreneur who does not perform a business-related crime restrained from acting corruptly not because of the law’s existence but because of the moral forces. (Bommer et al., 1987). Nevertheless, albeit the difference between the interpretations of moral and legal in defining ‘ethical decision’, they both play a crucial part in the entrepreneurial decision-making process.

HR is an important aspect of businesses and deals with number of crucial decisions daily and strategically including training, development, promotion, retirement, discipline and contem- porary issues such as job security, discrimina- tion and mobbing. (Romme et al., 2012) argues that a firm’s organizational practices and future paths are affected by the founder’s blueprints of the employment model. Therefore, when we are examining employment relations and human resources at small businesses, it is crucial to understand entrepreneurs as individuals; so that their mark and influence on the organization can be fully uncovered.

CONCEPT OF ETHICAL ENTREPRENERUSHIP

SMEs are very crucial to the economy and employ- ment of a country. For instance, we see a significant increase from estimated 4.3 million in 2005 to 20.7 million in 2011 in number of SMEs despite challenging economic conditions in 2011/12; serv- ing as the backbone of EU economy by providing employment for more than 87 million people (EU Commission, 2005; EU Commission, 2012). Thus, exploring entrepreneurs and their decision making is crucial as they shape our societies.

In order to understand a company’s ethical behaviour, many ethical decision making research- ers examine individual attitudes of the decision maker and their individual values (Wu, 2002).

Since in small businesses firms are more likely to be managed by the owners, ownership and management are not separated as in the case of larger, multinational firms. As management and ownership cannot be detached from each other in SMEs, individual entrepreneur’s preferences between individual interests and ethics impacts on corporate business ethics both positively and negatively (Smith & Oakley, 1994; Spence & Rutherfoord, 2003; Wu, 2002, p.163). It is also true that many SME owners are also human resources manager of their companies and make decisions in regards to their employees.

Karen Legge (1995) questioned ethicality of human resources in 1995. Since then, although significant research was done on this topic, this fundamental question is still valid. Due to its nature, human resource management has human beings in the core of practice. Within the process of interactions, number of ethical tensions arises (Jack et al., 2012). One of the main arguments emerges as a result of liberties of individuals. Aristotelian ethics suggests that a leader needs to provide a working environment for employees so that they can realise and find opportunities to fulfil their potentials rather than being told what to do and do that unwillingly (Aristotle, 2000). However, strength of individual entrepreneur’s desires, self-expectations and pressures is a crucial obstacle in providing what Aristotelian ethics suggests.

Empirical studies suggest that SMEs lack the motives to practice social responsibility (Thomp- son & Hood, 1993; Wu, 2002). It should not be ignored that there are factors exist that influence ethical behavior of businesspeople; business is about money, power and working with people and people are not perfect (Fassin, 2005).

Greed and pursuit of profit; the nature of com- petition and the desire to beat the other party in a competitive environment; and the need to insure or restore some standard of justice that may have been violated have been identified as three major dimensions that may drive individuals to unethical

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practice (Fassin, 2005). Fassin (2005) argues that one of the elements that business is associated with is power, and it is the ultimate requirement for a manager to run a business (Fassin, 2005). When objectively examined power is neither something bad or nor good but rather is about the way it is possessed and it is utilised. If a company acts responsively towards its society, this is a positive utilisation of power (Gallo, 1998).

In both non-family owned SMEs and family- owned businesses the power might be misused as the owner runs the business. Since the owner has the power in the sense as it is discussed above, it gives him/her the control of company (Gallo, 1998). Any misuse of power, may result in the form of lack of social awareness. Then the ques- tion of why people misuse their power emerges.

Some people do always behave ethically in their private and social lives; whereas others do not. Therefore, it is questionable to what extent it is sensible to expect same people that are not behaving ethically in their private and social lives to act ethically in their professional lives (Fassin, 2005). It is important at this point to mention that as the individuals’ ethical attitudes are different from each other as these depend on many vari- ables and individual attitudes of entrepreneurs largely affect the company’s ethical attitude. There is a significant literature suggesting that the size of a business influences business ethics. This argument can also be supported through the discussions presented up to this point, because an entrepreneur’s influence is more significant when the organization is shaped dominantly based on an individual’s decisions (Fassin, 2005; Wu, 2002). Forsyth’s (1980, 1981, 1992) studies which are also discussed in this chapter, provide useful tools to analyse ethical decision-making processes of entrepreneurs.

There are people who cheat in sports and in games. According to Lombardian doping game, for players ‘winning is not everything, it is the only thing`; therefore some competitors cheat by using doping (Bird & Wagner, 1997, p.751).

Berentsen & Lengwiler (2003) suggested that the doping problem in sport events is very similar and can be applicable to business to promote further understanding of competition in the business environment (Berentsen & Lengwiler, 2003).

As in sports participants, managers strive for success and the last thing they want to do is fail. Failure in business, especially for new businesses is a very likely incident and it can create a lot of pressure on entrepreneurs, as having the second chance is a very rare thing in the current market system. Therefore, in order to succeed, all means are ‘acceptable’ for them. Especially when psy- chological sides of this issue are considered the pressure that entrepreneurs experience can be understand. (Fassin, 2005).

For example, acceptance of the failure and admitting this to family, friends and community is the main fear of business owners-managers since the case of overnight transformation form success to failure is very hard to cope with. It is understandable considering this pressure, how; even an ethical, honest businessperson can be tempted to behave in an ethically questionable way as an option. ‘Numerous rationalisations lead to unethical behaviour from usually intel- ligent, honest people who transgress the border between right and wrong’ (Gellerman, 1986 cited in Fassin, 2005). It is the belief of the most social observers that in most of the societies, there is a major negative moral change and businesspeople, public figures and politicians engaged in ethical violations and this is a commonality in world of sports, religion, business, politics and academia (Fassin, 2005). This can be related to the com- petitive market forces of the current economic systems. In many of the transition economies such as Eastern-European countries, China and Russia as a result of the absence of regulations, entrepre- neurs built fortunes in considerably short times without ethical considerations. Therefore, it can be concluded that not only individual factors but also economic and legal environments play a part in the entrepreneurial decision-making process.

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Following sections discusses all these various forces impacting decision-making processes of individual entrepreneurs.

Theoretical Understanding of an Entrepreneur’s Moral Psyche

In order to understand entrepreneur’s decision- making process, first the theoretical grounds of ethical decision-making need be understood as they provide a psychological angle to human behavior.

Cognitive Moral Development (CMD) pro- posed by Kohlberg (1968) and Expectancy Theory of Porter and Lawler (1968) which is an extension of Expectancy Model of Vroom (1964) constitute the theoretical bases of ethical decision-making. Expectancy Theory suggests that motivation is a function of the subjective probability that effort will lead to successful behaviour (expectancy); that such success will lead to a number of positive and negative outcomes (instrumentality) and finally the combined value of those outcomes (valence) (Knouse & Giacalone, 1992, p.370). Expectancy theory is similar to utilitarianism in the sense that in both concepts individual’s decisions are based on rational choices. Their reasoning are based on possible consequences and both have the drawback of the identification and evaluation of all possible consequences by an individual before a decision is made which is a requirement for both systems to work correctly (Knouse & Giacalone, 1992, p,370). Rationality here refers to the best selection of means to achieve an objective consistent with the value system of the decision-maker (Bom- mer et al, 1987, p.274). However the ability of a human-being to identify and evaluate all the consequences is limited.

Although Expectancy Theory is a widely used framework for contemporary behavioural science, Kohlberg’s CMD is still among the most cited work in this area and as mentioned before it is one of the key literatures in ethical decision-making (Longenecker et al., 2006; McDonald & Pak, 1996;

Trevino, 1992). In his theory, Kohlberg defines six stages of moral development, which are grouped into three general categories.

1. Pre-Conventional (Pre-Moral): In this category, individuals base their judgment of right and wrong base on their own physical needs, instead of societal standards. At this category, individuals follow the rules mainly as a result of fear of punishment.

2. Conventional Level: In this category main determinant of an individual’s perception of right or wrong is based on norms and regulations of society.

3. Post-Conventional: An individual at this category has the capacity of reflection, responsibility, inner source of morality and justice, and logical reasoning. Even though (s)he accepts the legitimacy of the societal rules, at times s/he questions the demands of the society. (Bommer et al., 1987, p.273; Knouse and Giacalone, 1992; Kohlberg, 1968; McDonald and Pak, 1996).

There were many studies in business ethics regarding the consistency of the CMD, providing evidence that age and education are positively related with the increase of CMD (McDonald & Pak, 1996; Robertson & Fadil, 1999). However, Kohlberg is criticized with the claim that hierarchy of moral stages is not universal and it can change from one culture to another as opposed to his proposition that moral development is universal (McDonald and Pak, 1996; Robertson and Fadil, 1999). Also, Gilligan (1982) criticized Kohlberg’s Theory because of his assumption that his theory is applicable to both genders when he only conducted his study on an all male longitudinal sample. In her study on abortion decisions of women, Gil- lian suggested that Kohlberg’s justice dimension and moral reasoning is gender biased. (Gilligan, 1982). However, for instance, Derry (1989) found no significant differences in the moral reasoning of

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men and women in a study of business managers (Derry 1989 cited in McDonald and Pak, 1996).

Once an individual completed cognitive moral development process, past experiences have a significant influence on our decisions and the way we shape our future. In employment relations past experiences also are important informative source points for individual entrepreneurs. Fern et al. (2012) argues this on a macro scale and suggests that over relying historical industry experiences may also lead to replicating similar approaches on the legacy firm (Fern et al., 2012).

‘When a person is behaving morally, what must we suppose has happened psychologically to produce that behaviour?’, Rest (1986) posed this question and provided the Four-Component Model to guide the analysis of an individual’s moral decision-making process:

1. Recognition of the moral issue. 2. Making a moral judgment. 3. Resolving to place moral concerns ahead of

other concerns (establish moral intent). 4. Acting on the moral concerns. (Jones, 1991,

p.368).

During 1980s, with the work of Forsyth (1980, 1981, 1992) and Forsyth et al., (1982) cognitive processes and their impact on ethical reasoning and decision-making started to be the focus of attention. From these studies a conclusion was drawn stating that individuals’ moral judgments are significantly different from each other. (Mc- Donald and Pak, 1996, p.976).

Similar to Rest (1986), Forsyth (1980) devel- oped taxonomy of ethical ideologies to provide a framework to study individuals’ moral judgments on the assumption that decisions in certain busi- ness practices are influenced by individual moral philosophies (Forsyth, 1980). Forsyth (1980) model assumes that “individuals’ moral beliefs, attitudes and values comprise an integrated con- ceptual system or personal moral philosophy” and they differ from person to person (Forsyth, 1980, p.461). According to Forsyth’s typology,

four ethical dispositions exists; subjectivism, situationism, exceptionism and absolutism. Whilst making ethical decisions, subjectivists decide ac- cording to the circumstances, and therefore they are considered as pure relativists. Situationists are considered as ethical individualists and they decide their act by using a combination of both situations and personal principles. Exceptionists are considered as pragmatists and they act accord- ing to the moral rules but in special circumstances they may change the application. Lastly, absolutists believe that best possible outcome can be achieved if universal rules of behavior are followed (Forsyth, 1980; Allmon et al., 2000).

Forsyth and Berger (1982) studied college students’ ethical ideologies’ impact on their moral behaviors; specifically in this test they looked at the cheating tendencies (Forsyth & Berger, 1982). The findings supported that even though there was no difference in cheating behaviors in relation to ethical ideologies; there were differences in moral reasoning and the way students felt about their moral misbehavior in relation to ethical ideologies (Allmon et al., 2000; Forsyth & Berger, 1982). Also, Forsyth’s (1981) research findings about moral judgment and ethical ideologies suggested that consequences of the situation and the respon- sibility change the way people judge moral events if they have different ethical ideologies. Forsyth’s studies are considered as a good tool to analyze an individual’s ethical ideology and it has been applied by many scholars; for instance Allmon et al., 2000 used Forsyth taxonomy in a study where they examined determinant of perceptions of cheating. Individual ethical values correlate with the decision-making processes to an extent; however enough research has been done to show that external factors also play a very crucial role in that process (Allmon et al., 2000).

As ethical ideologies have a significant in- fluence on decision-making of individuals, it is crucial to look at the individual ethical ideologies and their differences in interpreting these social factors into their business lives. Forsyth gave the parallel philosophical standings of each ideology

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as such; situationism is parallel with ‘utilitarian- ism’ and ‘value pluralism’; subjectivism is parallel with ‘egoism’; absolutism is parallel with deonto- logical ethical system; and lastly exceptionism is parallel with ‘rule-utilitarianism’ (Forsyth, 1992). Utilitarianism is used to define the philosophical ideology where an action is considered right only if it conforms to the principle of utility meaning performance of the act should be ‘more produc- tive of pleasure or happiness, or more preventive of pain or unhappiness’ (Mautner, 2005, p.636). Value Pluralism is interchangeably used with political pluralism and moral pluralism. It refers to the view that there are many of the things in question; as there are many different moral val- ues and the value might be perceived in different ways. Egoism considers individuals as ‘always motivated by self-interest’ and rule-Utilitarianism refers to the distillations of past experience about the tendencies of actions that eliminate the need to calculate consequences in every case (Blackburn, 2005, p.110; Boatright, 2000, p.37).

Historically, it is assumed that most of the managers employ a utilitarian framework in their analysis of ethical problems. The limitation of ‘comprehension of all’ by the decision-maker is actually a counter-argument to utilitarian perspec- tive. Utilitarianism advocates ‘generation of the maximum good for the greatest number’ and being a consequential theory, utilitarianism proposes that a decision is made based on the evaluation of the end-results and promoted by a concerted effort to maximize outcomes. (McDonald & Pak, 1996). As mentioned earlier limited capacity of human- beings to interpret and evaluate all possible con- sequences is discussed in section 4.4. Besides the limitation of evaluation of all possible outcomes, there is a question of whether managers solely rely on a utilitarian framework to make decisions that require ethical thinking or not. There are other alternative paradigms in normative philosophy where those can be employed during an ethical decision-making process. These are:

• Hedonism: Extreme selfishness. • Pragmatism: Whatever minimises

conflict. • Salvation (a): Good works to earn

redemption. • Salvation (b): Isolation, mediation and

devotion. • Golden Rule: Based on faith, charity and

reciprocity. • Divine Right: Maintenance of the

“pecking-order.” • Egalitarianism: Push down the rich, push

up the poor. • Paternalism: Protection and security. • Physiocrats: Nature is sacred (McDonald

& Pak, 1996, p.974-977).

When we look at more recent work of schol- ars, such as Shane (2003) it can be observed that Shane’s (2003) work is parallel with Forsyth’s (1980) and similarly, Shane states the connec- tion between psychological characteristics and decision-making. By organizing personal factors, under the name of psychological factors provides an explanation of the possible reasons of why entrepreneurs decide to exploit opportunities (Shane, 2003). As entrepreneurs go through the decision-making of whether or not to exploit an opportunity, they may at the same time, be faced with a dilemma of whether to seek the opportunity for their company’s and/or their own personal gain or to behave ethically.

When entrepreneurs pursue certain opportuni- ties for increase productivity, or profits employees become consumed by the organizational goals and results in ethical implications (Dale, 2008).

Shane (2003) grouped certain characteristics under three main themes which influence individu- als to make different decisions even though they have same information and skills. These are core self-evaluation, aspects of personality and motives, and cognitive properties (Shane, 2003, p.96). Un- der core self-evaluation, Shane (2003) listed locus of control and self efficacy; these characteristics

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especially locus of control is mentioned frequently by other scholars as well such as; Longenecker et al., (2006), Trevino (1986) and Stead et al., (1990). Aspects of personality and motives expanded as extraversion, agreeableness, need for achievement, risk taking, and desire for independence. For the third theme, overconfidence, representativeness and intuition are mentioned as cognitive charac- teristics. (Shane, 2003).

From the existing literature on individual ethical decision making, when an entrepreneur’s behavior and the process of making that decision is investigated, we see that the person’s ethical judgment is shaped by the way they were raised, the way they rationalize contexts, motives they have to behave in certain way. These also shape their ethical ideology.

Therefore, when we examine an entrepreneur’s ethical decision making process, we know that their cognitive moral development has a signifi- cant impact on how and why decide one way or another. This is also true for their motives for that particular behavior.

Employees have higher tendencies to behave unethically when there is cultural erosion within organization (Danley et al., 1996). Similarly, Weaver & Trevino (2001) suggests that if em- ployees believe they are treated justly, they have lower tendency to behave unethically. Therefore, we can conclude that an entrepreneur’s influence on organisational culture which Romme et al. (2012) refers to as founder’s blueprints and their perception of justice have a significant influence on employees perception and practice of ethics.

However an entrepreneur’s decision is not only influenced by individual circumstances and but also a decision or a behavior is as a result of an interaction with external environment. The fol- lowing section looks into external environment originated factors that influence an entrepreneur’s decision making.

Entrepreneur, Organisation and the External Environment

In the preceding section we explored the moral psychology of entrepreneurs as individuals. This provided us an understanding of how their ethi- cal rationality is shaped and factors that effects their individuality when ethical decision making is required. The following section helps us to understand individual entrepreneurs within the context of organisations and in interaction with the external environment. We investigate how these contexts when combined with their individual ethical position, leads to an individual decision.

A competing model to the previously discussed Rest’s (1986) model is offered by Trevino (1986). Her model is based on person-situation interaction and it begins with an ethical dilemma proceeding to a cognitions stage. Moral judgments made in the cognitions stage which is proposed by Kohlberg’s CMD theory are moderated by individual factors including ego strength, field dependence and locus of control; and situational factors which include elements of immediate job context, organizational culture and characteristics of the work (Jones, 1991, p.368). Besides individual factors, Trevino (1986) also considered organizational factors as important influence on decision-making process of an entrepreneur.

Another important series of studies that were conducted to understand the way individual entre- preneurs perceive and deal with ethical problems is by Longenecker et al., (1989) who suggested that entrepreneurial behavior may have association with individualism and this is linked with entre- preneurial behavior (Longenecker, et al., 1989). According to their study, entrepreneurs show their strong need of control, they are autonomous thinkers who take independent actions in carrying out directions given by others and they often do not trust others (Hannafey, 2003). Longenecker et al, (1989) observed what was stated previously by Spence and Rutherfoord (2003), in smaller firms, entrepreneur’s personality and attitudes are

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extensively reflected on the management practices (Hannafey, 2003).

Ford & Richardson (1994) reviewed the empiri- cal literature on ethical decision-making covering the studies that have been done until 1992, and O’Fallon and Butterfield (2005) covered the period of 1996-2003. From these studies a list of factors that influence the ethical decision-making process are gathered (Ford and Richardson, 1994; O’Fallon and Butterfield, 2005). They divided these factors into two; individual and situational factors similar to Longenecker et al. (2006). They have deter- mined individual factors as; personal attributes; religion, nationality, gender, age, education and employment background, personality, beliefs and values. Under situational factors, there are three sub-categories; Referent groups, organizational factors and industrial factors. Referent groups are peer group influence, top management influ- ence, codes of conduct, type of ethical conduct. Organizational factors are organization effects, organization size and organizational level. Lastly, industry factors that are mentioned in these studies are industry type and business competitiveness.

In their longitudinal study findings, which examined ethical attitudes of small businesses and large corporations for three decades, Longenecker et al,(2006) stated the main influences on ethical perceptions and behaviors are multidimensional, made up of differences based on individuals, organizational settings and the interplay of these two (Longenecker et al., 2006). They stated that this claim is supported by previous research such as; Trevino’s (1986) ‘Person-Situation Interac- tionist Model’ which was mentioned previously. In their model, Longenecker et al., (2006) used Rest’s ‘Four Component Model’ (1986) and Kohlberg’s (1968) CMD to consider personal variables as Kohlberg’s (1968) CMD is one of the most important theories in the discussion of ethical decision-making (Longenecker et al., 2006; Loviscky et al., 2007).

Ford and Richardson (1994) and O’Fallon and Butterfield (2005) studies provide most of the fac- tors covered by the existing literature which show

the impact of individual factors, organizational factors or both. However, besides individual and organizational factors, as it was discussed through Lombardian doping game example, external factors such as competition and similar external environmental factors are also as important as much as individual and organizational ones when an individual decides how to behave.

In terms of external environment, it was found that besides personality, values and cultural orientation, environmental rewards and punish- ments, all contribute to ethical decision-making (Hegarty & Sims, 1978). In 1990, Stead et al., (1990) developed a model of ethical behavior to demonstrate the relationship between the factors that influence a decision-making process. In the initial stage, the relationship between individual factors and its influence in the development of an individual’s ethical philosophy and decision ideology is presented. This relationship reflects the influence of personality and background on a person’s ethical beliefs and how and when those beliefs are applied (Stead et al., 1990). It is very likely that the interaction of ethical philosophy and ethical decision ideology of an individual influences his/her decision-making. Many stud- ies including Frosyth’s (1980) Stead et al., (1990) and Allmon et al., (2000) confirmed ethical ideologies’ significant influence on individual decision-making.

Another factor in Stead et al., (1990)’s Model is ethical decision theory. When a person makes certain decisions, these are usually reinforced, mainly through rewards and punishments. Ethi- cal decision theory is a result of this cause and effect relationship of the ethical choices and the reinforcement. Also, when an individual enters into an organization, his/her ethical behavior is influenced by certain factors such as; the manage- rial philosophy and behavior within the organiza- tion; the reinforcement system adopted; and the job’s characteristics. As the experience at work with reinforcements and management’s influence combines, individual’s ethical decision-making is influenced by all these factors.

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According to Wu (2002) literature of decision- making models indicates how significantly the ethical decision-making process can be influenced by number of factors at one time (Wu, 2002). Table 1 is a collective presentation of individual, organizational and environmental factors that have discussed in the literature. In number of circum- stances, an entrepreneur’s individual factors may lead to ethical HR issues such as; discrimination, wrong employment policies and promotional practices.

Limitations of Ethical Decision Making

During the decision-making process, an entre- preneur acquires and processes information. This can be in the form of hard data (i.e. laws, stated corporate policies) or in the form of soft data (i.e. an individual’s self concept and peer group with a range of information in between these states). After acquiring and processing the information, in order to make a rational decision the manager synthesizes and analyses the information. During the selective perception process, the manager filters environmental factors that influence him/ her and the parameters of the situation which are the two information inputs in the process. Then a conceptual model is built which is repeated being affected by the individual attributes and mediated by the manager’s individual cognitive process. (Bommer et al., 1987).

Human-beings can process only a limited amount of information and as a result of this, perception of information; style of information processing and memory is affected.

Individual memory is affected in three ways:

1. Perception of information is selective; therefore the decision-maker may or may not choose the information that is most relevant to the situation.

2. Information processing is mainly done sequentially. Therefore, sequence in which information is processed may bias a person’s

judgment and limit the evaluation of inter- related elements.

3. The access to information which might be relevant to the problem is limited, as a result of limited memory capacity of human- beings. (Bommer et al., 1987,p275-276).

Table 1. Individual and situational factors influ- encing ethical decision-making process

Individual Factors Situational Factors

Age Environmental Factors

Aspect of Personality & Motives Cultural Environment

Attitudes Social

Beliefs Political Social Institu- tions

CMD /Ethical Judgment Government and Legal

Core Self Evaluation Organizational Factors

Education Background Opportunity

Ego Strength Multiple Stakeholders

Employment Background Organization Effects

Entrepreneurial Act Organization Size

Ethical Decision History Organizational Level

Ethical Decision Ideology Codes of Ethics

Ethical Philosophy Reinforcement Systems

Field Dependence Peer-Group Reference

Gender Top Management Influ- ence

Intentions Codes of Conduct

Job Satisfaction Type of Ethical Conduct

Knowledge Managerial Philosophy

Locus of Control Characteristics of the Job

Machiavellianism Industry Factors

Nationality Economic Conditions

Need For Achievement Business Competitive- ness

Past Reinforcement of Ethical Decisions

Industry Type

Personal Attributes Scarce Resources

Religion

Sex Roles

Social/Reputational Costs

Value Orientation

Work Experience

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Therefore, the decision-making process models discussed have the following serious limitation; decision-makers cannot construct an internal representation or model of the situation since they cannot comprehend all the probabilities, alterna- tives, consequences, values and the evaluation of these (Bommer et al., 1987).

These limitations may show themselves as negative human resource practices such as; mis- determined training programmes, or downsizing decisions which raises questions on ethicality of the decisions made.

Solutions and Recommendations

Existing literature suggests that when we attempt to understand an entrepreneur’s decisions, we cannot focus only on one of the influencers and ignore the complexity of the decision making pro- cess. That would merely provide us a one faceted understanding which would not be an accurate depiction of how the process takes place in practice. Due to nature, humans are complex beings and complexity and multi-faceted structures are com- mon when we examine interpersonal relationships at work, competition in the market and the like. This is also true for decision making processes. Therefore, when entrepreneurs are examined, it is crucial that all the factors presented in this chapter and possibly others that emerge depending on the context are all taken into consideration.

FUTURE RESEARCH DIRECTIONS

Especially in small businesses, the influence of the entrepreneur is highly and in most of the cases, explicitly dominant. Thus, when we examine hu- man resources within SMEs context, it is always promising to include an understanding of an entrepreneurial perspective. Due to their scale, in SMEs employees’ cognitive and decision making processes are also promising to investigate the extent of each factor’s as well as entrepreneur’s

influence on traditional human resources prac- tices. This will contribute to gradual emergence of new research fields as conducted research will uncover new factors influencing decision making processes, thus practices.

A phenomenon can only be understood fully, if it is examined in its original context with as- sociated agents. Previously suggested complexity in humanity makes it a requirement that we use variety of tools, multi-level analysis and acknowl- edge the multi-dimensional structures. Therefore, while conducting future research an interdisciplin- ary lens is highly promising in providing new momenta to our existing knowledge.

CONCLUSION

Rather than exploring entrepreneurial ethics in the field of human resources by examining rel- evant issues, this chapter provides an alternative viewpoint focusing on entrepreneurial decision making process which assists us to interpret the reasoning behind issues that may emerge within the field of HR. This chapter acknowledges that every decision that is made in practice has a process to complete before it exhibits itself in action or behavior. Furthermore, regardless of the field or issues examined, when a decision has to be made, a moral judgement is existent in the decision maker’s mind, either overt or covert. The chapter also acknowledges that human resources related problems may emerge when the long term and short term strategies of an organisation are dependent on an individual entrepreneur. Therefore, entrepreneurial ethical decision mak- ing process discussed in this chapter provides a different angle to academics in the particular field and a theoretical understanding to practitioners to evaluate their decision making process with an awareness of factors influence their moral judg- ments. In the long run this awareness, if leads to positive development can result in more effective employee/employer relationships in SMEs.

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KEY TERMS AND DEFINITIONS

Business Ethics: Deals with the moral issues that emerge when we apply the concept of ethics to the business environment and practices.

Entrepreneur: Risk taking individual; that forms, organizes and operates a business.

Ethical Decision: Is the one which is both legal and morally acceptable to the larger community.

Ethics: Character traits; human conduct of how human beings essentially supposed to behave.

Morality: It deals both with welfare of self and others.

Power: It is the ultimate requirement for a manager to run a business. It can be in monetary, psychological, sociological or knowhow forms.

SMEs: Small and medium sized enterprises.

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Chapter 16

DOI: 10.4018/978-1-4666-4731-2.ch016

Innovation Strategies in SME: Global Perspective

ABSTRACT

Small and Medium Enterprises (SMEs) play a vital role in a country’s economic development. The current trend of economic growth and rapid industrial development has made many countries open up their economies to the world. In conjunction, governments the world over are devoting and designing SME development plans to assist the SMEs in meeting new business challenges in the competitive global business environment. The focus of this chapter is identifying and analyzing innovation strategies in SMEs, drivers of innovation in SMEs from global perspective, and understanding the need of effective HRM to drive innovation. This will help in getting an idea about the competitiveness facing SMEs in the global business environment since challenges of SMEs in a globalized market together with economic turmoil is the reality. Further, two mini-cases reflecting SME innovation strategies are provided for better understanding.

INTRODUCTION

It is apparent that small and medium enterprises (SMEs) play a vital role in the economic devel- opment of a country. The governments all over the world are devoting and designing the SME development plans to assist the SMEs to meet the new business challenges in the competitive global business environment. There is no doubt that economic activities are moving in the direction of globalization. The system of production and distribution is evolving worldwide. The important role that international trade plays in connecting countries around the world is clear. Globalization

creates new structures and new relationships, with the result that business decisions and actions in one part of the world have significant consequences in other places. Underlying and reinforcing these globalization trends is the rapidly changing tech- nological environment, particularly in information processing, and telecommunications. Changes in telecommunications and data processing capa- bilities make it possible to coordinate research, marketing and production operation around the world. Almost instantaneous communications make it possible to trade financial instruments twenty-four hours a day, and thus more return- sensitive are location of resources within firms, industries and countries.

Neeta Baporikar Ministry of Higher Education, CAS – Salalah, Oman

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The growth of global markets stimulates competition and forces governments to adopt market-oriented policies, both domestically and internationally. Modern technologies have greatly reduced the cost of information and the capabilities to participate in the global economy. In fact, there is ample evidence that SMEs has not only flourished in domestic economies, but that their international presence has grown as well. An overview of SME participation in the global economy reveals at least three lines of activity: trade, technology, and investment. The most commonly discussed topic in SMEs international literature is their role as exporters from their domestic jurisdictions to foreign customers. The opportunities and chal- lenges facing SMEs in this role are well known. The second most prominent issue in the literature is SMEs and technology, and particularly SME supplier connections with larger Multi National Enterprise (MNEs) in local markets. If small firms face higher barriers to entry in international operations than large firms, and have a more dif- ficult time protecting their property rights, how can small firms become international players? When SMEs invest abroad, they generally seek help from larger corporations. Gomes-Casseres (1997) examines the use of strategic alliances by SMEs. He asks three questions:

1. When do small firms use alliances to do business abroad?

2. How do small businesses use alliances? 3. What effect do alliances have on firm’s

competitive performance?

Internationalization of the production and distribution of goods and services, and the asso- ciated trade and capital flows, has accelerated in most countries during the past 15 to 20 years. This process has been loosely described as “globaliza- tion”. However, it has been broadly accepted as a set of activities associated with the multinational or direct foreign investing firm which integrates its activities across national borders to maximize the profits or interests of the group. More simply, it can

be the broader opening up of national economies to the international marketplace (EPAC, 1995a; 1995b). It is believed that globalization is actually not a new phenomenon since international trade, foreign direct investment and associated movement of capital, management and labor has been going on for centuries. If globalization is defined as being the broader opening up of national economies to the international marketplace, then it has implica- tions for small firms as well as large. Increased participation of small firms in the international marketplace can be seen as an important part of globalization.

Central Bank of Malaysia (2003) findings based on case studies done on 10 year or more SMEs shows that the key success factors in the globalize space environment are:

• Sound management capability and integrity.

• Sound business cultures and entrepreneur- ial spirit.

• Prudent financial management. • High quality products and services. • Effective program for human resource

development. • Strong support from financial institutions

(in terms of lending and advisory services). • Strong marketing strategies (including

good network with suppliers). • Continuously looking for opportunities to

expand.

Similar findings are there in SMEs related studies and research undertaken in India.

OVERVIEW OF SMALL AND MEDIUM ENTERPRISES (SMES)

According to Small and Medium Industries De- velopment Corporation (SMIDEC), an enterprise is considered as an SME in each of the representa- tive sectors based on the annual sales turnover or number of full time employees. SMEs are divided

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into two sectors; manufacturing, manufacturing related services and agriculture industries; and services (Including ICT) and primary agriculture. Specific criteria to a particular industry may be laid down which is then adopted by all commer- cial banks, ministries and government agencies at federal and state levels. However, it is noted that during the past 7 years, the definitions of SMEs have changed frequently world over. The frequent changes in the definition of SMEs have also af- fected the formulation of long-term strategy for SMEs development.

Definition of SMEs

Schools are divided when it comes to defining SME. Each school has their own way of defining SME and even country to country this definition varies. A brief review of country wise definition is done to get an understanding. Small and me- dium enterprises (also SMEs, small and medium businesses, SMBs, and variations thereof) are companies whose headcount or turnover falls below certain limits. The abbreviation SME oc- curs commonly in the European Union and in international organizations, such as the World Bank, the United Nations and the WTO. The term small and medium businesses or SMBs is predominantly used in the USA.

EU Member States traditionally have their own definition of what constitutes an SME, for example the traditional definition in Germany had a limit of 250 employees, while, for example, in Belgium it could have been 100. But now the EU has started to standardize the concept. Its current definition categorizes companies with fewer than 10 employees as “micro”, those with fewer than 50 employees as “small”, and those with fewer than 250 as “medium”. By contrast, in the United States, when small business is defined by the number of employees, it often refers to those with fewer than 100 employees, while medium-sized business often refers to those with fewer than 500 employees.

Both the US and the EU generally use the same threshold of fewer than 10 employees for small offices (SOHO).In most economies, smaller enterprises are much greater in number. In the EU, SMEs comprise approximately 99% of all firms and employ between them about 65 million people. In many sectors, SMEs are also responsible for driving innovation and competition. Globally SMEs account for 99% of business numbers and 40% to 50% of GDP.

In South Africa the term SMME, for Small, Medium and Micro Enterprises, is used. Elsewhere in Africa, MSME is used, for Micro, Small and Medium Enterprises.

Breaking down the SME definition, Industry Canada defines a small business as one that has fewer than 100 employees (if the business is a goods-producing business) or fewer than 50 employees (if the business is a service-based business). A firm that has more employees than these cut-offs but fewer than 500 employees is classified as a medium-sized business.

Definition for SMEs is often considered to be an obstacle for business studies and market research. Definitions in use today define thresholds in terms of employment, turnover and assets. They also incorporate a reasonable amount of flexibility around year-to-year changes in these measures so that a business qualifying as an SME in one year can have a reasonable expectation of remaining an SME in the next. The thresholds themselves, however, vary substantially between countries. As the SME thresholds dictate to some extent the provision of government support, countries in which manufacturing and labour-intensive in- dustries are prioritized politically tend to opt for more relaxed thresholds. Furthermore, defining a SME is itself a challenging task, as every country has own definition for a SME. For instance in a country like India as per the Micro, Small and Medium Enterprises Development Act 2006, enterprises are broadly classified into micro units, small units, medium units & large units depend- ing on the investment in plant and machinery. In

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India, the Micro and Small Enterprises (MSEs) sector plays a pivotal role in the overall industrial economy of the country. It is estimated that in terms of value, the sector accounts for about 39% of the manufacturing output and around 33% of the total export of the country. In India, SMEs’ contribution to GDP is nearly 30%. Moreover, in recent years the MSE sector has consistently registered higher growth rate compared to the overall industrial sector. The major advantage of the sector is its employment potential at low capital cost. As per available statistics, this sector employs an estimated 31 million persons spread over 12.8 million enterprises and the labour intensity in the MSE sector is estimated to be almost 4 times higher than the large enterprises. However, compare that to the EU where it is based on the parameters of employment, turnover and asset size, and OECD on employment and sales turnover has totally different criteria for establishment.

With various definitions by various countries, sometimes it becomes a difficult task for an indi- vidual to understand importance of a SME. One may not know the important role that SME plays in developing any particular sector, economy of any country, alleviating poverty, increasing employ- ment, and, above all providing various items of daily use at an affordable cost. Within the last few years many developed and developing countries have realized the importance of the sector. Fast decision making due to less staff and more control of an entrepreneur, availability of raw material at your door step, as many SME’s have been started in the area where availability of raw material is not a hindrance, innovative products which cater to the needs of a particular region and its vicinity, are certain key factors making SME’s significant.

Furthermore, economic factors which con- stitutes to the development of the sectors are as follows:

• Addition of output of goods and services to economy.

• Low capital cost for establishment.

• Reduction in income disparities. • Admirable propagation ground for entre-

preneurial talent.

Year 2009 is a year to be remembered during the 21st century. The world has seen worst financial crisis in times gone by, making many developed and developing economies to recreate a new policy in terms of managing crisis. In addition to that, increasing mercury of mother Earth has led to change in climatic conditions across the globe, inducing, whole Diasporas to re think about what worst perhaps come, and how by adapting some arduous measures, if applied, can give a better environment to our future generations to live in. SME’s at their end, with innovative ideas helped to mitigate the situation.

Global Business Environment and Challenges for SMEs

Several of the existing literature, including Saleh & Ndubisi (2006); Samad (2007); Abu Bakar et al. (2006); Aris (2006); Harvie (2004); Wang (2003); Stuti (2005); Wafa et al. (2005); Ritchie & Brindley (2000); Decker et al. (2006); Foon (2006); and SMIDEC (2007), emphasize various chal- lenges facing SMEs in a globalized environment, for example from difficulty in facing recession, barrier from global sourcing, low productivity, lack of managerial capabilities, lack of financing, difficulty in accessing management and technol- ogy, heavy regulatory burden and others. In the other study, Teoh & Chong (2008) found the bar- riers to entrepreneurship namely lack of access to credit and lack of access to formal business and social networks. Besides, SMEs are dealing with intensified global challenges, new emerg- ing technologies in ICT and production process as well as increasing factor costs, which affect the export competitiveness. SMEs are classified into three different categories according to their capability and their success walking through the challenges. Firstly, SMEs that is viable or able

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to become internationally competitive may gain the benefit from the regionalization (McMahon, 2001). Secondly, SMEs those are less adaptable to the globalization pressure. They are unlikely to survive in the present situation without making fast move to improve productivity, to conform to international standards, to train and employ skill management and professional staff to face competitions. Lastly, SMEs that are protected by the government from the globalization effect (Samad, 2007).

Economic downturn has been a constant challenge facing SMEs. Since the year 2007, the world economy experienced several unfavorable events such as boiling oil prices followed by sub- prime credit crunch in the USA, which leads to a financial distress to the financial market. Most nations are currently showing a diminishing eco- nomic growth and increasing costs of production, which indicates that recession is unavoidable. The common aftermaths of a recession are lower expenditures by consumers, lower demand for products and services, lower productions and job cuts. SMEs, small in nature, are affected in larger degree especially those involved with trading and supplying products or services to other businesses. Lower cash flows and limited financing are the major challenges faced by the SMEs during this bearish period. Other challenges include – tendency of global sourcing, lack of state government support, complex relationship between multinational corporations (MNCs) and SMEs, intellectual property and bankruptcy issue, legal issues in global business, decision process and R&D landscape and branding SME products in the global market. However, evidence from regional economies suggests that SMEs came through the crisis better than large enterprises. The avoidance of a future crisis could, therefore, depend upon developing a competitive SME sector that is able to compete in both domestic and external markets. Harvie (2004) argues that the SME sector has a crucial role to play in the sustained recovery of the region arising from the

business opportunities created by the restructur- ing process itself, the movement towards closer regional economic integration, advances in infor- mation and communications technology (ICT) and more specifically the business opportunities arising from the Internet.

INNOVATION STRATEGY AND COMPETITIVENESS OF SMES IN THE GLOBAL BUSINESS ENVIRONMENT

Similar to the MNCs, SMEs are proven to play a significant role in the economic stability and growth of a nation. SMEs are an important segment of the any economy. Most SMEs require support or assistance from the government especially to be more competitive in the global business envi- ronment. The role of government is to encourage companies to move to higher levels and gain com- petitive advantage in the globalize space environ- ment (Samad, 2007). This is possible only when SMEs adopt innovation strategies. The purpose of this chapter then is to explore how small and medium-sized enterprises (SMEs) can enhance their competitiveness with innovation strategies that leverage their strengths and minimize their weaknesses relative to larger enterprises. These strategies can involve partnering with large en- terprises rather than competing against them. To achieve our purpose, we must first recognize that a single set of recommendations is not appropriate for all SMEs because their attributes and environ- ments vary considerably. Second, there is a wide range of innovation options that can serve dif- ferent purposes at different times. No one option is right for all SMEs, but innovation in products, processes, or services of varying type and degree can be appropriate for different SMEs in differ- ent industry sectors or product life cycle stages. Thirdly, we can’t discuss innovation for SMEs without recognizing that they differ significantly from large enterprises, and most of the exist-

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ing research on innovation was developed from studying the latter. Lastly, given all of the above qualifiers, we explore SME innovation strategies that exploit a firm’s current capabilities and help them develop potentially valuable new ones. In doing, so we also identify the innovation drivers the understanding of which would propel more SMEs towards innovation and excellence and the relevance of adopting effective HRM approach.

Generalizations about SMEs and Innovation are Difficult to Make

SMEs vary in their interest and approach to in- novation because of differences in their sources of capital. Senior managers of privately held firms (i.e., most SMEs) have much greater discretion in strategic pursuits than do those in publicly held firms (Nooteboom, 1994). Public stockholders focus mainly on return on invested capital, which narrows senior management’s range of acceptable strategies (including innovation). Private capital providers (personal, family, friends, and local banks) do not have a similarly limited focus, which allows more individual variation in behavior, i.e., preference for independence, informality, life-style (Gray, 2002). Personality and emotions are allowed to play a larger role in decisions made in privately held SMEs. Research suggests that the age and tenure of an SME CEO are negatively related to his or her interest in innovation (Khan and Mat- tapichetwattana, 1989). Research also suggests that only 20% of SMEs are interested in growth through acquisitions, geographical expansion or innovation (Nooteboom, 1994). However, with SMEs accounting for 99.7% of all firms in the U.S., this represents a large number of entities (U.S. Census Bureau, 2003).

Our focus in this chapter is mainly on estab- lished small owner-managed businesses, mostly, but not exclusively, in mature industries. These businesses consume the majority of their owner managers’ time. They are the primary source of income for owner-managers and an extension of

their personality and family; their personal lives overlap with their business interests (Carland et al., 1984; Gray, 2002; Blumentritt and Danis, 2006). Although they value growth and profitability, it is not their major or sole preoccupation. Such firms are to be distinguished from entrepreneurial start- ups, especially those that are heavily science-based and knowledge intensive. These firms are headed by entrepreneurs who are primarily motivated by opportunities for growth and profitability through innovation in new products, processes, and mar- kets. These entrepreneurs are already seeking opportunities wherever they can find them.

They don’t need our help to stimulate their interest in innovation, although they might benefit from the guidance that we provide to owner-man- agers of established businesses. SME innovation behavior varies by industry sector. Chemical and machinery industries are capital intensive, thereby making SMEs in these industries very cautious about innovations that require large capital in- vestments. Thus, it is understandable that half of the innovation in the chemical and machinery industries is incremental (Huang et al., 2002). Similarly, customers in food, textiles, and furniture tend to be conservative, thereby leading firms to be cautious about their innovation initiatives (March-Chorda et al., 2002). Although innovation tends to be incremental in textiles and food, it is more radical in optics, ceramics, and chemicals. Similarly, textile, lumber, wood and paper mills, printing and publishing, and construction firms rely heavily on equipment suppliers for process innovation (Pavitt, 1984). The type of innovation that SMEs pursue also depends on whether their industry is emerging (where radical innovation is more likely) or is mature (where incremental innovation is more likely) (Nooteboom, 1994). Apparel is highly seasonal and fashion oriented, which prompts shorter and inexpensive innova- tion efforts. In contrast, computers and electron- ics have high product obsolescence rates; which mean higher and more continuous investment in incremental innovation (March-Chorda et al.,

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2002). Wright et al. (2005) suggest that the hostil- ity of the environment influences innovativeness. Firms operating in highly competitive (hostile) markets are likely to be more successful innova- tors by increasing the number of new product introductions through incremental innovation in order to meet customer needs. The study suggests that the resources of firms embedded in highly competitive markets would be better spent on incremental innovations rather than radical ones because of the cut-throat nature of the environ- ment. In contrast, Khan and Mattapichetwattana (1989) found that environmental hostility lessened SME innovativeness. Few of the available SME studies focus on U.S. firms, and it is likely that countries differ significantly in institutional fac- tors (e.g., government subsidies and support to SMEs) that will affect their approach and interest in innovation (Siu et al., 2006). Government plays a much more prominent role in the economies of most European and Asian countries.

The type of customers that SMEs serve also influences the type of innovation they undertake. SMEs that sell consumer products generally serve a larger number of customers directly or through distributors than do SMEs that sell products or services directly to other businesses. They also must devote more time and attention to market research and advertising and generally have more difficulty getting timely and accurate feedback from their customers. SMEs that sell products to other firms, such as equipment, components, or instrumentation, generally have fewer customers than those that sell consumer products. Pavitt (1984) referred to such firms as specialized equip- ment suppliers. Ashton et al. (2003) advise SMEs to consider segmenting their markets to identify small customers that lack the technical resources needed to effectively install, use, or maintain op- erations that are essential to their business. Also, high-end specialty customers may value the SMEs services more than low-end customers.

Types of Innovation Suitable for SMEs

SMEs can introduce process innovation to enhance the capability of their production processes or their supply chain operations (e.g., increase reliability or reduce cost). These innovations are developed for their own use; in-house engineering is used to customize them to suit specific applications. SMEs also can introduce product innovations into existing or new markets. Product innovation can include the introduction of new functions, enhanced performance, or added features to exist- ing products. Innovation of this type is generally incremental. The underlying technology can be new to the firm, but is unlikely to be “new to the world”. Radical innovations are relatively rare events, of course, and enhance product perfor- mance significantly or even create new product categories or industries. Innovative technology can be “pushed” by technical staff or “pulled” by customers. In the former case, products may differ significantly from the firm’s or its competitors’ existing products (Salavou, 2005). There is the risk that technical staff will push too far ahead of customers and lead to a product failure. Products with “pushed” technology may require customers to change behavior or perception significantly before they are accepted and used. In the case of technology “pull”, “lead-users” can be a significant source of innovative ideas (von Hippel, 1988). Lead-users are firms or individuals that are on the very edge of the target market. They are gen- erally very highly-specialized and sophisticated, requiring different innovations than the average customer. In fact, lead-users are so advanced that they often modify existing or develop new products to meet their own needs. Thus, they can work collaboratively with the firm’s technical staff to fix shortcomings of existing products and to design new products to meet their needs (von Hippel et al., 1999). However, caution should be taken when using input from customers as they can only suggest innovative ideas from what they’ve

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experienced. It is more important for firms to ask customers what outcomes they value instead of just looking for solutions (Ulwick, 2002). In addition, taking ideas from lead-users can be dangerous as lead users are often a step above common users and may suggest ideas that are only considered valuable to those in lead-markets, thus making them harder to sell to common users.

Marketing innovation includes the use of new channels of distribution and new advertising ap- proaches for selling current or new products. SMEs can expand their revenues by selling their current products in new regional or international markets or by expanding their existing product lines into new segments of existing markets (Branzei and Vertinsky, 2006). This kind of innovation, “ap- plication innovation” involves applying existing technology for new uses in new markets (Moore, 2004). Business model innovation involves cre- ation of a value proposition that offers to satisfy the same or different customer needs in new ways by performing a function, solving a problem, or creating an experience through the sale or lease of a product and/or service. The value proposition may be targeted to a select set of customers whose needs are best met by the product or service. Inno- vation of this kind may or may not require product innovation. If it does, it is more likely to be a re- configuration of existing technology that results in a product or service that is better suited to the needs of a set of customers that a larger company overlooks. Christensen and Bower (1996) indicate that large companies often dismiss innovations of this type (which they call “disruptive”) because their existing customers don’t value them or the emerging market is too small to interest them. Chesbrough and Rosenbloom (2002) indicate that business model innovation, besides a new value proposition and targeted customers, also requires articulation of a value chain to produce the new product or service, and a plan to establish and maintain a competitive advantage over potential competitors.

Moore (2004) suggests that different types of innovation are important at different points in a product’s life cycle. For example, Moore suggests that niche strategies are useful for firms that offer leading–edge technology to early adopters. He also suggests that business model innovation is useful after mainstream products have commoditized. SMEs can offer customers customized products perhaps supplemented with services. The same SME is unlikely to be nimble enough to modify its strategy to match the evolution of life cycle stages, especially at its opposite ends. SMEs at the front-end of the life cycle are likely to be science- based firms (Pavitt, 1984), and if successful, they might grow with their industry and become large companies (e.g., electronics and software). SMEs that focus on the middle or end of the life cycle may be specialized equipment suppliers.

SME Strengths and Weaknesses and Required Capabilities for Innovation

Yap et al. (2005) suggest that SMEs have smaller top management teams, which means less func- tional diversity in experience. Moreover, owner- managed SMEs often favor placing family mem- bers in senior management positions over hiring outside professional managers, which can lead to poor management decisions and generational transition problems (Crosetto, 2004). They also have less developed HRM practices (i.e., they are at a disadvantage for reaching the labor pool, which leads to poor recruiting, etc.) and less access to materials and financial resources. The main reason why SMEs may be weak in technical or marketing capability is the number and quality of their professional personnel. Assuming an SME can attract appropriate personnel, there is the question of senior management’s motivation to invest resources in their continued development through training, provision of research journals, travel to conferences, and giving them challenging assignments. SMEs often have limited financial resources to invest in innovations that are expensive

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to develop, require long development cycles, and long payback periods. They also cannot spread R&D expenses over large sales volumes nor spread the risk of failure across multiple projects. This tends to make them more cautious about innovation than larger enterprises. There is a strong correla- tion between R&D expenditure and innovation success in SMEs. Such expenditures are often underestimated in SMEs because investments are less in “R” and more in “D”, such as in design and engineering tools (CAD), prototypes, customiza- tion, etc. Further, SMEs often have an inadequate knowledge of their competitors and their products. They need to scan their environment regularly to learn what their competitors are doing (Woodcock et al., 2000; Camp, 1989; Frost, 2003). They also need to compensate for their lack of resources by partnering or networking with customers, suppliers or even competitors (Freel, forthcoming; Vossen, 1998). A firm with strong marketing skills and weak technical skills can partner with a firm with a reverse set of strengths and weaknesses (Huang et al., 2002). There is some evidence that SMEs draw upon a greater variety of sources for infor- mation and ideas than do larger firms (Bommer and Jalajas, 2004). Firms vary in their ability and interest in partnering. Rothwell and Dodgson (1991) suggest that SMEs may prefer to partner with other SMEs rather than with larger firms because the latter’s culture is often bureaucratic, has a longer payback horizon, and increases the risk of intellectual property loss.

Although only a small proportion of SMEs engage in innovation activities, those that do so appear to have a higher yield for their effort, especially in number of new patents issued (Noot- eboom, 1994). This underestimates the yield, however, because many SMEs don’t have the legal resources to file for patents, would rather rely on trade secrets, have minimal codification, or stay enough ahead of competitors to allow for an imitation lag. SMEs often carry out the new product development (NPD) process less com- pletely or thoroughly than do larger companies

(Woodcock et al., 2000). Most SMEs do not use the entire thirteen new products development “stage-gates” recommended by Cooper (1999). Chorda et al. (2002) found that 54% of Spanish firms use nine or less of Cooper’s recommended thirteen stage-gates. Huang et al. (2002) found that Australian SMEs undertook market-related activities less frequently than technical activities, and this distinguished successful from unsuccess- ful new products. Lindman (2002) suggests that SMEs that have close relationships with a limited number of customers may be able to forgo mar- keting steps because there is less need for market research. SMEs in the Finnish metal working industry (most with less than ten customers) do market research and learn about their customer’s needs by working closely with them. SMEs with a formal written product development strategy are likely to complete more NPD stages with higher quality (Huang et al., 2002).

SMEs have fewer employees, each with mul- tiple roles (Yap et al., 2005), but they may be able to form cross-functional teams more easily than large enterprises because their professional specialization is less complete. Employees of SMEs interact more often with their counterparts and may have shared or swapped tasks with them. This gives team members a clearer idea of their respective contributions to the NPD process. The downside of less specialization is difficulty in keeping up with the latest knowledge in a given specialty. Assuming that senior management has a clear idea of what it wants its cross-functional teams to do, there is less risk of disconnect between levels due to bureaucracy, delays, and miscom- munication. SMEs also vary in how much they focus on learning (Salavou, 2005). Most SMEs don’t focus on learning, but even if they do, they vary in how much they codify their learning so that it can be used for developing similar products (Mosey, 2005). Many SMEs don’t recognize the value of data, have minimal archives and don’t learn from experience (Woodcock et al., 2000). Uncodified or tacit knowledge has benefits and

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shortcomings for SMEs. On the one hand, it is harder to identify what a firm is doing wrong if it has not codified its NPD process. Similarly, tacit knowledge plays a role in how SMEs learn from other firms. They are more influenced by being in direct contact with people (suppliers, customers) whom they know well and trust (Lindman, 2002). On the other hand, tacit knowledge is difficult to imitate so other firms cannot easily appropri- ate an SME’s intellectual property (Kogut and Zander, 1992).

Dynamic capabilities are the specific knowl- edge and skills that firms learn in order to carry out specific activities, including formation of effective cross-functional teams and conducting an effective NPD process (Eisenhardt and Martin, 2000). They differ from “core competencies” (Prahalad and Hamel, 1990) in that they need not be rare or inimitable. For example, best practices in NPD can be learned and easily transferred between firms. Core competencies rely on lever- age across NPD projects within a single firm for competitive advantage, but conditions may change too rapidly for this to happen. Instead, dynamic capabilities allow existing sets of knowledge and skills to be recombined and emergent requisite skills to be developed to meet new opportunities. The dynamic capabilities of particular concern are those that accelerate internal learning (e.g., degree of codification and learning routines) and networking capability (e.g., highly trained personnel who know what to look for and where). The choice of NPD projects feeds on itself to strengthen current dynamic capabilities or develop new ones (Branzei and Vertinsky, 2006). As part of a strategy to develop dynamic capabilities for NPD (e.g., technical, market, collaborative skills), SMEs need to carefully consider the types of NPD projects they undertake and the customers they serve (Mosey, 2005).

WHAT INNOVATION STRATEGIES SHOULD SMES PURSUE?

Based on the review and analysis above, we can recommend specific focus areas for innovation in which SMEs can apply their inherent advantages and mitigate the influence of their shortcomings. We postulate that SMEs need to pursue innovation strategies that do not rely on scale in production or marketing (Nooteboom, 1994). Product cus- tomization and customer intimacy are ways to do this, especially in delivery of industrial services. Scale should be sought by geographical expansion to similar (“narrow but deep”) product markets, not by product-line diversification (Simon, 1996). Large firms have more resources, but SMEs have behavioral flexibility. SMEs need to play to their strengths. SMEs should cultivate relationships with a small number of captive customers (Lind- man, 2002). Intimacy helps make up for lack of resources for market research. This relationship can be characterized as “relational” rather than “transactional” (Siu et al., 2006). It is even sug- gested that firms can “outsource” innovation to customers by giving them tools to articulate their needs, which can then be given back to the firm for actual development and production (Thomke and von Hippel, 2002). There is a paradox in customer closeness and a risk, however, in that firm that work closely with only a few customers begins to depend mainly on their own internal resources for ideas rather than seek new information from the outside. Nevertheless, this level of customer intimacy is especially appropriate for SMEs that pursue industrial services to complement the sale of their products.

Nooteboom (1994) suggests that SMEs pursue product innovation strategies in emerging markets and marketing innovation strategies in mature niche markets. Moore (2004) also suggests that business model innovation is a very effective strategy in mature markets with products in late life cycle stages. As we indicated earlier, we will focus little attention on SMEs in emerging markets,

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other than to indicate that these SMEs are better at quickly forming unique technology/market/ product combinations that exploit new technol- ogy than they are at conducting fundamental research (which large firms do better). SMEs in mature niche markets should pursue price inelas- tic customers who still want products that larger companies have dropped or ignore. Pavitt (1984) indicated that the specialized equipment suppliers he studied tended not to diversify technologically either vertically or otherwise. His explanation was that their current market was stable enough not to require them to moderate sales volatility through diversification. Ledwith (2000) found similar results in a sample of Irish electronics firms. Cooper (1999) and Meyer and Roberts (1986) advised such firms not to diversify into new markets because they don’t have the resources for it. If SMEs don’t diversify in this way, then what paths of growth remain for them? They can add new customers in their current market by offering them variations of existing products, take market share from competitors, or seek new revenue op- portunities from existing customers by offering them a more complete solution to their needs (Simon, 1996). Any of these options are possible, but we are going to focus mainly on the last one.

The possibilities for the last option include tak- ing over activities in the value chain that either the customer or another supplier currently performs. For example, Flinchbaugh Engineering, a small employee-owned company in Pennsylvania, now operates transfer lines for customers such as Cat- erpillar, SKF and Siemens that previously owned these lines (Anonymous, 2006). It has mastered lean manufacturing practices so well that it can operate these lines more efficiently than its custom- ers. Fine (1998) discusses how Johnson Controls and Lear continued to acquire suppliers that first made up car seats and eventually the entire car interior including door panels and dashboards. These companies now have much more leverage over their customers, the automobile companies. Few SMEs have the resources to pursue such an

acquisition strategy, but it illustrates the point. Another option for SMEs is to perform industrial services that their customers currently perform or propose new services that will help them operate more efficiently. The most well-known industrial services are maintenance and provision of spare parts. We will provide a much longer list of such services in the next section of the report. If SMEs are allowed to work closely with their customers, they might be able to propose new services to perform by observing “points of pain” (Gustafsson and Johnson, 2003) that perplex and frustrate their customers when they use their product or other firm’s products. Lastly, new service revenue op- portunities can be generated by thinking beyond the sale of the product and about its installation, operation and disposal. Gustafsson and Johnson (2003) suggest viewing “products as services waiting to happen”.

The next section enfolds what drives innova- tion in successful SMEs. The discussion helps to develop a clear understanding of the emerging drivers of innovation from a global perspective. It will also help other SMEs to chalk out a clear path in globalized world.

Innovation is one of the principal challenges to the management of SMEs. Innovation is criti- cal to enable SMEs to compete in domestic and global markets. The importance of innovation for SMEs and startup firms is highlighted by vari- ous researchers who argued that due to resource shortcomings, scale diseconomies and question- able reputation, innovation is the key competitive advantage for SMEs. Large firms have the where- withal (large scale of production and capacity, infrastructure in marketing, finance and R & D) to exploit new technology. On the other hand, the argument in favor of small firms is that they have flexibility in adjusting employees in innovation related projects and a less complex management structure in implementing new projects. SMEs are well-known for their creativity and new product development capabilities. This applies in particular to SMEs that have the ability to innovate effectively

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and develop new products more rapidly than larger firms. Indeed, there is little doubt that SMEs are capable of effective innovation. However, many SMEs still fail to see the opportunities and advan- tages that are open to them, such as the flexibility of customizing products to the requirements of the consumer (O’Regan et. al., 2006). Devenport and Bibby (1999) state that SMEs increasingly need to develop their innovation capabilities beyond that of technological innovation. This need comes from increased agility in larger organizations, which enables them to erode traditional SME niche markets. Furthermore, increased international- ization has encouraged some SMEs to operate in more competitive global markets where continual improvement is prerequisite to innovation, as distinct from solely technological development. Thus people, process and product dimensions are included (Tidd et al., 2001). Porter and Stern (1999), stress that such innovation involves much more than just science and technology.

Bessant and Francis (1998) suggest that ef- fective innovation must involve all areas of an SME with the potential to impact every discipline and process. Innovation can be transformational, radical or incremental depending on the effect and nature of the change. Afuah (1998) suggest that innovations do not have to be breakthroughs or paradigm shifts, though organizations should strive for the larger innovation. Although there are a number of studies on continual improvement in SMEs (Gunasekaran et. al., 1996; Bessant and Caffyn 1997; Bessant and Francis 1999), there is a relative paucity of in depth studies of innova- tion implementation (Humphreys, McAdam, Leckey, 2005) and strategies applied by SME entrepreneurs to attain innovation advantage. It cannot be assumed that innovation implementa- tion principles in large organizations are directly transferable to SMEs.

Thus there is a need for the studies on how in- novation is implemented and what are the strategies adopted by SMEs? However, every organization undergoes a unique process / activity before it

innovates. It means that if we want to study the innovation strategies used by an organization, we have to study every organization case by case as a unique entity. Quantitative methodologies of studying the innovation have only given limited insight into what happens when people innovate (Lowe, 1995). Govindarajan and Trimble (2005) say that management of innovation is a rich and complex problem. Statistical studies can point only to a few broad directions. They can tell us some- thing about which management decisions co-relate with success, but little about why. Truly under- standing what works and why, requires a multi- year, qualitative, interpretive study. The study of innovation resembles history or psychology more than finance or economics. Furthermore, little existing research based knowledge emphasizes the very early stage of managing innovations. This leaves the terrain uncharted. A unique research agenda, in an academically unexplored region required an unconventional research methodology to get the desired outcome of understanding the underlying strategies of innovation.

Operationally, SMEs for this research were defied as organizations which are involved in manufacturing and / trading activity with an- nual turnover of more than Indian Rs. 10 Crores (around US $ 200,000) and less than Indian Rs. 100 Crores (around US $ 20,000,000) and have an employee strength of more than 30 and less than 500. For the purpose of the research, 10 outperforming organizations irrespective of their industry were selected based on the available data with Mahratta Chamber of Commerce Industries & Agriculture, Pune, India (MCCIA). The criteria of selection for the outperformance were their survival, growth and innovation orientation. The survival criterion meant that the organizations should have at least survived through the decade of 2000 to 2010 or they should have been older than that. The growth criterion was divided into three sub-sections: financial growth, production / service category growth and human resource growth. Innovation orientation meant the SMEs

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should have proved more innovation oriented than the competing organizations in the region. (Num- ber of patents applied, number of large customers served, number of innovation activities carried out, process innovation initiated etc.). Permission for full access for observation and consultation was taken from all organizations and complete confi- dentiality of all captured information was assured. 10 studied organizations include: engineering, auto components, machine and machine tools manufacturing, submersible pumps, corrugated box manufacturing, forging and castings, plastic manufacturing and farm related products.

The approach adopted is Grounded Theory (Glaser, B. & Strauss, A. 1967); hence, the re- search is based on the grounded inquiry approach. So it relies heavily on the observation, informal discussions, notes made during the process. The researcher carefully observed everything relevant to the innovation process in the organizations. Various stakeholders of SMEs were part of the informal discussions as they are all key process owners, to understand the underlying patterns and innovation imperatives. A constant comparison of inter and intra organizational emergent im- peratives was also done throughout the study. To better understand the context of research, various websites, annual reports, product catalogs and other relevant material pertaining to SMEs was also studied. To capture the data, a special sheet was developed. The sheet had space for notes taking, memos making, coding, and analysis for emergent categories. The sheet was exten- sively used throughout the process. It also had some handy things like operational definitions. The complete study work was carried out from May 2012 to December 2012. The strategies are presented below in Table 1. They are observed strategies used by outperforming Indian SMEs to gain innovation advantage and are present across all SMEs, maybe with varying degree.

Effective HRM: A Prerequisite

Now more than ever, a strategic approach to fos- tering innovation is needed to achieve the core objectives of SME policy. As countries emerge from the downturn, and with other sources of growth declining in importance and global chal- lenges mounting, innovation needs to be har- nessed more effectively. If policies to promote innovation are to be effective, they need to take account of the ways in which innovation takes place today. To transform ideas and inventions into innovation requires a range of activities, including organizational changes, firm-level training, testing, marketing and design. Hence, effective human resource management (HRM) is crucial as it is human beings who are the basis of innovation and it is human who is at the core of innovation process. While firms can access factors of production across the globe, local knowledge and capabilities, including proximity to research and education institutions, continue to matter for innovation. Co-patenting is more frequent with inventors in the same region than in other domestic or foreign regions. Some regions have become global leaders in knowledge-intensive industries, while others have built on traditional industries to develop new and innovative activities.

Effective HRM in the broad sense is essential. People generate the ideas and knowledge, that power innovation, and they apply this knowledge to result in technologies, products and services in the workplace and as consumers. Innovation requires the input of innovative individuals. Individuals learn within a frame of reference. (Cavagnoli, Do- natella, 2011). Building an institutional capacity for breakthrough innovation requires cultivating people with a talent for innovation and establishing structures to provide them appropriate training and enable them to share their knowledge. (Farrington, et al. 2011). Commercializing breakthrough inno- vation is a chronic challenge in mature industrial companies. While breakthroughs do occur, their project paths are frequently described as serendipi-

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Table 1. Observed strategies and discussion

Observed Strategy Discussion

Customer Centered Technology Rather Than Market Centered Technology

Outperforming SMEs had this unique but distinctive characteristic of focusing on a very basic technology which is centered on customer requirement rather than technology which is prevalent in the market. This helped SMEs stay close to customer and away from costs associated with ‘technology fusses going around in the market. Across the organizations, the key technology decision driver seemed to be customer (internal as well as external) centered. Technology, for the context, is far broadly defined than its literal meaning. It is always better to use the technology which adds value and which is ‘easy to use’ for its employees and customers.

Indigenous Technology SMEs need to trust/focus on indigenous technology rather than technology which is adopted from outside. This creates a strong sense of co-creation which is customary when it comes to development of the technology required for the organizational growth. Examples are numerous where SMEs machines, instruments, and software which are found to be made by the organizations for their own purpose in collaboration with local/domestic manufacturers. This is not limited to machines. Testing equipments and other supporting tools are also co-created many times. Rationale for this is interesting - the entrepreneurs have deep confidence and trust in the technological competence of their employees/workers and further they believed that co-creation helps them to create a machine which is developed to meet and perform under local conditions. It also enables significant cost reduction by co-creating the technology and the technology which is indigenously developed is not only low on cost, but, is equally or more sustainable.

Keeping Innovations Open The world may be talking about open innovation only after the release of the path breaking book on open innovation by Chesbrough (2003). All major aspects of open innovation can be traced back to more than 40 years in SMEs sector. It is quite surprising to find that the awareness about intellectual property rights and their impact was very low and this ignorance promoted open innovations. Most of the co- creations when kept open once they designed has resulted in significant multiplication and lot of other organizations have benefited from this type of openness of innovation. There is hardly any doubt that open innovation phenomenon is very active in SMEs. The matter of concern is the low awareness about the importance of intellectual property.

Capture Process and Implement The Voice Of Stakeholders (Vos)

SMEs generally do not have resources like research and development departments and human resources which can spearhead innovation activity. These scarcities of resources force SMEs to look at alternative source of innovation. Hence it is necessary that SMEs effectively use Voice of Stakeholders (VoS) for innovation. Voice of Customer (VoC) was always given priority as an innovation input as many of the SMEs work customer or job specification basis. The key stakeholders identified in SMEs are not only vendors, customers and employees, but also other stakeholders like universities and policy institutions. SME management is also aware of the importance of this opportunity and almost all organizations have mechanisms (formal as well as informal) in place to capture process and to implement these ideas.

Empowerment at Various Levels

Getting ideas from stakeholders is the key success driver for SMEs. What differentiates these SMEs from other organizations is the amount of empowerment given to these stakeholders. Along with empowerment, the management needs to possess the virtue of honesty as it has to accept ideas, implement them and bear the consequences. Hence, throughout the process, the top management needs strong integrity.

Practice of Co-Creation Co-creation is a buzz word in contemporary innovation literature. There are various researches which suggest that co-creation with customers has helped organizations earn value and obtain competitive advantage. Effectively when used co-creation brings the competitive advantage. This co-creation is not limited to the customer – vendor development. Co-creation is in its totality. SMEs not only co-create products with customers, but also set a path, breaking process of co-creating beyond customers, with all the stakeholders like vendors, employees and customers. This ensures that they become more competitive and dynamic as organizations – which are the need of globalized era.

Top Management Involvement

Innovation has to flow from the top. It has to be a board room activity and not confined to laboratories. For various reasons maybe from personal learning.to cost control, one thing is clear that the top management involvement significantly contributes to the development of innovation.

Purposeful Innovation When laboratories start innovation activity they may have a larger goal in place, but the path of every experiment is not always clear. They use trial and error methods to evolve a product. SMEs, with their limited resource capabilities, cannot afford to run such uncertain methods. They need to work on a different model - which is ‘Object Oriented’ or ‘Innovation for Purpose’. Every innovation initiative objectives/purpose could vary depending on the inputs/motivation for innovation. Example: It can be for reducing cost and inventory to increasing customer satisfaction. Quantification and accountability is also strong when the innovations are purposeful in nature.

continued on following page

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Observed Strategy Discussion

Incremental Innovations Over Radical Innovations

There is a school of thought which believes that if innovations are not radical, they are not innovations. The researcher appreciates that radical innovations have the power to transform organizational perfor- mance and to create substantial value which leads the organization to a level which is above competition. There are numerous examples of radical innovations which have transformed organizations like Apple, 3M and GE. However, SMEs’ is altogether a different case. They need to use small and incremental innovations / enhancements to reduce the risk involved in the whole process. Obvious question comes; do they get the desired results typically expected from an innovation project? The simple answer is ‘yes, but in the longer run.’ One needs to look at this from the context of risk which they reduce by doing incremental innovations. Such innovations have been successfully used by SMEs as a tool to keep the innovation ball rolling even under difficult conditions. These innovations are easy to ideate, execute and show returns quickly. As Govindrajan and Trimble (2005) suggest, continuous process innovations have a small expense, length of each experiment is small and ambiguity of results is least. Thus, SMEs benefit from these incremental innovations in the longer run.

Active Knowledge Manage- ment

Knowledge Management (KM) may sound like a fuzzy management technique to most of the entrepre- neurs of SMEs, but, in reality, all outperforming SMEs have basic knowledge management practices in place. There are number of researches which suggest that strong knowledge management practices serve as a strong base for good innovation practices. Every organization in the growth process generates knowledge from its day to day experience, interactions and process execution. However, not all SMEs effectively work to utilize the generated knowledge, which they need to do.

Emotional Process Imple- mentation

Quality management practices and innovations complement each other. There are various researches which suggest that good process implementation creates the right foundation for innovation. Organiza- tions like Toyota, GE, and Motorola have successfully used good process management practices as a launch pad for innovations. However, there is a caveat here raised by the researched entrepreneurs who suggest that mere soulless process implementation adversely affect the idea generation process. Entrepre- neurs in SMEs need to manage the equilibrium between process control, and innovations really well to get the maximum advantage of both processes and innovations.

Robust Combination of Product-Process-Technology

It is observed that the expertise of entrepreneurs on product quality is very strong. They are also very well connected with the processes and the technology of the organization. It is evident that the entrepre- neurs had a profound know-how of the product from its first raw material stage to its final stage and this helps significantly to work on raw material innovations. These raw material innovations give noticeable competitive advantage. It is clearly evident that SMEs have a complete knowledge of the product, process and technology. In most of the cases, SMEs success could be attributed to this ability to know product, process and technology well and make most out of the same. Here again, technology has to be taken from the perspective of basic customer centered technology.

Lean and Transparent Structure

SMEs generally scale to a level from a startup to significant innovation leadership. It is apparent that such SMEs follow open, transparent and lean structures which promoted free communication across the organizational hierarchies. Across these, people have complete freedom to innovate and share the same with the top management. Though the reward system for the innovation can vary from organization to organization, SMEs are more open to accept innovations from all the employees. It can also be concluded that the person who is working on the process, can be made the most reliable source of innovation for that process, by getting right the empowerment. Product and Process innovations cannot be executed from management offices; they have to be driven from the shop- floor. SMEs advantage of having lean organi- zation structures promotes innovations. Though it would be difficult in the context of large organizations to apply such a structure, the outcome of the research strongly indicates that lean organization structures relate positively with innovations. Hence, it is vital that an organization structure should promote idea flows (good/bad/ugly) and, then, have its own mechanism to filter and selectively execute and reward the idea.

Outsourcing and In-House Balance

Intense outsourcing has been a prevailing phenomenon in globalized world and SMEs are no exception, though they are very selective in the outsourcing done usual criteria being: the processes which are usu- ally non-value adding, the process should not be critical for the product or the organization etc. SMEs want to keep their key processes confidential as they consider them to be the key success factor. Thus, en- trepreneurs considerably balance between in house competencies with regional competencies while taking outsourcing decisions. This ability to strike the right balance helps SMEs to significantly gain competitive advantages of scale and cost along with maintaining their core competence in critical products/processes.

Nurtured Human Resource Human resource employed in SMEs is usually nurtured over a period of time and SMEs rarely hire from competitor organizations. This helps to create a long term and loyal human resource.

Table 1. Continued

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tous, rule-breaking, and led by mavericks. None of these descriptors implies that breakthroughs occur within a system designed to nurture, encourage, or manage them. All imply that they occur in a system designed for other objectives. (Farrington, et al. 2011). Innovation requires a wide variety of skills, as well as the capacity to learn, adapt or retrain, particularly following the introduction of radically new products and processes. Empower- ing people to innovate relies not only on broad and relevant education, but also on the development of wide-ranging skills that complement formal education. Opportunities to use and leverage these skills throughout the economy and society are vital. Indeed, large established companies are designed primarily for operational excellence and current customer satisfaction; objectives that tend to create environments that are inimical to the long cycle time and high risks of breakthrough innovation (Farrington, et al. 2011).

A firm’s efficiency is also dependent upon the abilities and how-know of the human capital of its employees. This human capital consists of education and training provided to employees. Educated workers are not only more productive, but they have more learning and innovative abili- ties (Batra and Tan, 2003). Formal education is the basis for forming human capital, and policy makers should ensure that education systems help learners to adapt to the changing nature of innovation from the start. This requires curricula and pedagogies that equip students with the ca- pacity to learn and apply new skills throughout their lives. Emphasis needs to be placed on skills such as critical thinking, creativity, communica- tion, user orientation and teamwork, in addition to domain-specific and linguistic skills. Despite the unprecedented rise in educational attainment, these skills are rare. Improving teacher quality is important for enhancing outcomes; this might include better initial selection of teachers, ongo- ing evaluation to identify areas for improvement, and recognizing and rewarding effective teaching. Universities, colleges and vocational training cen-

tres are essential nodes in the innovation system, both producing and attracting the human capital needed for innovation. These institutions act as essential bridges between players – businesses, governments and countries – in broader and more open systems of innovation. They also contribute to the local quality of life and thus can help to attract the highly skilled from around the globe. World-class institutions can be the anchor for clusters of innovative activity.

The major policy challenge is to recognize the essential role of universities in the innovation en- terprise rather view them, as is all too commonly the case, simply as providers of essential public goods. This requires a greater focus of policy makers on ensuring independence, competition, excellence, entrepreneurial spirit and flexibility in universities. Vocational education and train- ing also play an important role in innovation, by helping firms make incremental changes to production processes and adopt technologies, and by lifting the overall capacity to innovate. Policies need to connect this training to the world of work, including by engaging employers and workers in curriculum development. The acquisition of skills is a lifelong process; it does not end with formal education. Schools lay a base for lifelong learn- ing, but ongoing skills acquisition needs to be encouraged. This involves recognizing all forms of learning and making them visible, including through qualification systems. Rewarding lifelong learning and making it attractive may help to enhance participation in the innovation process.

Entrepreneurs and SMEs play a particularly important role in innovation by helping to turn ideas into commercial applications. In the work- place, individuals learn within the organizational systems of rewards. Organizational innovation depends heavily on this frame of reference for fostering and maintaining the innovative capacities of the firm (Cavagnoli, Donatella, 2011). Firms less than five years old accounted for nearly all of the increase in employment in the US private business sector from 1980 to 2005. Success in

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entrepreneurship often comes with practice, hence the importance of experimentation, entry and exits. Yet, only a small part of the population receives entrepreneurial education. Women can also play a larger role in the innovation process. Although more women than men now obtain tertiary degrees, their participation in science and engineering, as well as in entrepreneurship, lags behind. Social and labour market policies, such as tax and benefit systems, workplace practices and policies relating to childcare, can give women an incentive to enter the labour force. Specific barriers to women’s involvement in science and innovation include workplace practices (e.g. non- transparent hiring and promotion) in scientific institutions. The low participation of women – and other underrepresented groups – in certain parts of the innovation process limits diversity, which is essential for innovation to flourish. However, as habits can lead to innovation, habits can also hinder innovation (Cavagnoli, Donatella, 2011). Internationally mobile talent contributes to the creation and diffusion of knowledge, particularly tacit knowledge. To encourage this circulation of knowledge, governments should invest in public research to build absorptive capacity, open labour markets to foreign students for further training, and ensure that the tax regime does not penalize mobile skilled workers. Cross-border higher edu- cation should continue to be promoted as a means to build international networks of knowledge.

The organizational structures and employment policies that shape the workplace are essential for determining how human capital translates into innovation and productivity. Those SMEs which have more capable workers are likely to be more efficient (Hewitt and Wield, 1992; Lucas, 1993). Employee involvement and effective labour management relations and practices help foster creativity and innovation and raise productivity. Though government do not play a direct role, it is important to foster the conditions for learning in organizations and to ensure that work place policies are conducive to innovation and to mobil-

ity. People participate in innovation not only by creating, diffusing or adapting technologies in the workplace, but also as consumers. A critical mass of users and consumers can support and encourage innovation and the competitive process. They have opportunities to influence the design, methods of supply, introduction and uptake of new products and services directly and they need to have the skills to make decisions on innovative products. Consumer policy regimes and consumer educa- tion should improve the functioning of markets by helping them to be active participants in the innovation process.

Mini-Cases

The first “mini-case” illustrates how a supplier of a commodity product changed its business model to provide a complete service thereby satisfy- ing previously unmet, indeed unvoiced, needs of its existing customers. Additionally the data accumulated from having a greater knowledge of, customers’ behavior enables the company to continually add value and build barriers against, competitors.

Mini-Case 1: Greif Packaging, a supplier of metal drums for shipping bulk chemicals, many of which are toxic, realized that they had no real competitive position and profit margins were thin. An internal entrepreneur decided to listen carefully to customers. He saw there were unmet needs and new sources of value to be accessed. Customers did not want to buy and own steel drums, they wanted to move toxic chemicals efficiently and safely; they did not want to deal with all of the details such as finding a licensed trucker, filling in the government forms, washing, cleaning and refurbishing the drums, etc. To meet its customers’ actual needs, Greif converted its business model to being a “trip leasing” com- pany for specialty chemicals – the FedEx® of problem chemicals. Now Greif solves the

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total trip problem for its customers – drum supply, cleaning, refurbishing, regulatory compliance, transportation, and tracking. It built a new web application and became an “(Internet-enabled company”. Although Greif sub-contracts out most support func- tions, it captures the value in the supply chain and builds long-lasting client relationships. Moreover, it buys support services in volume, and its database of trip costing enables the company to accurately quote on “trips” and to provide customized and traceable service. This shift has significantly improved Greif’s profit margins and cash flow, which it can direct to further innovations. The business model also builds barriers against competi- tors (Source: Warren and Susman, 2004).

Additionally, services can help to establish “customer lock-in”. Customers, by foregoing certain tasks, increase their dependence on their suppliers. Switching costs therefore are increased. The company may also innovate with entirely new services. The latest information technology standards and infrastructure can be used to provide services that were not even conceived by customers until their providers innovate. For example, using advanced data collection and data mining tools, coupled with real-time data collection over the Internet may provide a whole new level of product and service reliability. The second “mini-case” provides an example.

Mini-Case 2: Taprogge GmbH, a family owned business headquartered in Germany, has over 90% of the world-wide market for cleaning condensers and heat-exchangers in power plants. The company has a strong patent position covering its unique invention of using “scrubbing sponge balls” which are randomly circulated through the condenser tubes to remove scale build-up. Initially, Taprogge supplied the equipment together with sponge balls tailored for particular water quality. The balls wear out, so the company

has an ongoing revenue stream once the equipment has been installed. Recently the company has moved towards a “total service” business model starting with the installation of the plant and taking responsibility for its operation. The latest equipment has a number of embedded sensors that monitor the performance and relay the data over the Internet back to a central office.

Analysis of these data enable the company to predict possible performance deterioration and ship parts followed, if needed, by a qualified service engineer. Shutdown of a central power plant may have an enormous economic impact. Taprogge’s service model is therefore highly valued by customers who are willing to pay for the reliability and security that the company provides. The responsibility for down-time now shifts from user to supplier, which implies that Taprogge must be able to support its claims and be willing to enter into contracts that may contain significant penalty clauses for failure to perform. The company’s most valuable asset is a complex database covering all operating parameters of every installation. This is now enhanced by its on-line monitoring systems that give it real-time access to customers’ systems. These data enable Taprogge to a) predict the behavior of a system in most if not all locations and environments (“wa- ter is not just water”), b) design new products, systems and services more effectively, c) provide fast turn-around service or even on-line help that reduces service time and costs. This strategy is particularly important when the product is custom- ized. Again we see the power of using information Technology innovatively to create added-value for customers while building barriers to competitors. The service business model improves customer relationships. As mentioned above, the company prides itself on reputation and reliability. It now embodies customer contact on a regular basis by using remote monitoring that gives a basis for pre-emptive actions and regular interaction with all customers either from the local office

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or from the German HQ. The importance of this cannot be overemphasized. Two major advantages thereby accrue – better service at lower cost and the ability to detect problems early. Customers initiated most of the new products by coming to the company with an unrelated water problem, and knowing that it will do its utmost to solve the problem. In this way the company has built the reputation as the “problem-solvers” in the sector and this capability is promoted. (Source: www. taprogge.com)

Recommendations

Based on our observations, we are neither advo- cating a “best” innovation process to follow, nor even that should a single process be followed within an organization. Rather, we are asserting that, regardless of what process is followed, the chances of achieving a successful innovation can be increased by adopting a framework wherein:

1. All agree to march to a single, reasonable drumbeat. Not only is the alignment of goals and expectations critical, but so is reaching agreement on what reasonable goals and expectation would be.

2. Don’t shoot the messenger! Communication will not flow freely if fear of reprisal is pres- ent at any level of the organization.

3. Face adversity. It makes the organization stronger. Obstacles can often serve as the impetus for innovation. The lack of support from the parent company was seen by some as a restrictor, but by others as a source of motivation.

4. Maintain low profile. Sometimes, innovation needs to take place “under the radar” to give an idea a chance to grow and mature before it is subjected to evaluation and judgment.

5. Rules are meant to be broken. The use of uniform or company-wide metrics makes some innovation efforts look less success- ful than they really are – sometimes new

products and new ways of doing things also require a different set of metrics.

6. Travel on the road less traveled. If the in- novation effort needs to have a significant impact on the brand, it needs to be either disruptive or iconic in nature, or both. It may also need to be as different from “business as usual” that it needs to circumvent the usual innovation process.

7. An ounce of prevention is worth a pound of cure. It’s best to understand when an inno- vation is different enough that it’s tough to bet on. Reducing or managing expectations upfront means a greater chance of being pleasantly surprised by (and recognized for) great success.

8. A square peg won’t fit into a round hole. By understanding from the start the alignment issues between a business and a promising opportunity, it is possible that a business opportunity that does not fit the company’s strategic objectives can be spun off and al- lowed to build slowly on its own. If it proves to be successful enough, it can provide not only money for its parent, but also such an influx of executive talent and manufacturing process innovation that the parent is able to adopt some of the innovations and/or buy back the spin-off.

9. The ugly duckling or the swan. It’s important to avoid “false positive.” Take into account the possibility of error in judgment in the early stages of assessing an innovation opportunity. Innovation efforts that don’t measure up on internal evaluations might succeed if they are allowed to go outside and possibly find another business model or a different market. It’s important to provide an alternative path.

10. Last but not the least; develop an environment that supports the growth and dissemination of innovative technologies for and by SMEs to take advantage of the knowledge-based economy.

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The goal is to flag areas that might require attention, and ultimately identify the “lynchpin” drivers whose successful management could de- termine the success or failure of the innovation. By answering these questions derived from the experiences of innovative efforts across the globe, SME innovators can swiftly identify potential problem areas before an initiative begins, and begin thinking about how those issues might be addressed. One might argue there is not always sufficient information or time to answer questions such as these, particularly prior to the beginning of an innovation effort. But the simplicity of this framework is its strength. It requires few re- sources, and only a cursory review of what might be involved in undertaking an innovation effort. Moreover, the knowledge gained from applying this framework is worth much more that the small amount of time required doing it – especially in cases where the framework’s application exposes problems that could be corrected early in the process much less expensively and more easily that they could be corrected later. And in worst- case scenarios, the knowledge gained from the application of the framework could illuminate certain failure – and that, too, is better understood before significant resources are committed to a project. It is hoped that this frame work, for all its simplicity, will be a useful tool for innovators, and especially help SMEs drive innovation in a meaningful way.

FUTURE RESEARCH DIRECTIONS

Fierce competition in the global market has made innovation and differentiation a necessity for every company. Innovation is considered to be a source of competitive advantage and economic growth, and worthy of study under the conditions of increased global competition, technological change, fast-changing market situations and continuous customer/client demand for quality services (Damanpour & Schneider 2006). While

there has been much work on SMEs polices and planning, strategic management, technology strategy, new product development or marketing which mostly aim at understanding the working or causes or rationale of SME development, this chapter is aimed at the market with an emphasis on innovative strategies which are adopted by SMEs through effective HRM which makes SMEs central to the economic development both regional and global. The focus herein is Indian SMEs and based on the limitation of the current research, the study provides few suggestions for future research. First, future research could be conducted region based; sector based so that comparative and best practices lessons could be drawn. A survey-based research in order to measure the competitiveness of SMEs in facing the global challenges would give finer and precise findings. SMEs registered in with government portals might be used as the sampling frame. Separate and comparative stud- ies on SMEs listed in manufacturing activities and service sector could be undertaken. Second, the other data collection method such as in depth interview with the owners or managers of SMEs could also be employed in order to obtain more accurate information pertaining to SMEs innova- tion approaches, issues and challenges. Another area of interest, innovation and sustainable de- velopment in SMEs could focus on the study of SME stakeholders as engines for innovation and additional challenges of innovation in hybrid companies could be undertaken.

CONCLUSION

In the nutshell, the chapter has given an overview of challenges and competitiveness of SMEs in a global business environment and the need for effec- tive HRM. Strategic innovation is ‘a fundamental reconceptualization of what the business is all about that, in turn, leads to a dramatically different way of playing the game in an existing business’ (Markides 1998). Similarly, innovation is all about

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commercialization, whether as the first mover or the follower/imitator. The difference between these two strategies is all about being ‘first to the market’ or taking a ‘wait-and-see’ approach. Many scholars (e.g., Deshpandé et al. 1993; Capon et al. 1998; Deshpandé & Farley 2002, 2004) describe the first strategy as innovativeness. Though Meybodi (2003) suggests that to stay ahead of competition firms must develop competencies to innovate, and introduce new products to the market quickly, it was observed that surprising number of success- ful innovations have resulted from a wait-and-see approach. As argued by Smith (2006), there are four circumstances when the follower/imitator strategy has attractions. There circumstances are: free rider effects, imitation costs, scope economies and learning effects. Further more ‘organizations do not select a particular culture-typically it just emerges over time’ (Smith 2006).

To conclude, the innovative performance of a SME depends to a large extent on how different actors interact to each other as elements of a col- lective system of knowledge (new and existing) as well as the technologies used. These actors are primarily governance mechanisms (e.g., cor- porate, political and network); institutions (e.g., industrial, science and technology, financial; edu- cational) and the people within them. Although this chapter does not reflect the empirical study of SMEs, it at least contributes an important study by adding more literature regarding SMEs from globalization perspective. The chapter uncovers various emergent recommendations related to strategies followed by SME entrepreneurs to attain innovation advantage. These strategies are largely dominated by constant shortage of resources which SMEs often encounter. These outcomes also re- flect an interesting phenomenon which suggests that product innovation is an important source of innovation, but not the only source. SMEs work under limited facilities for product development and innovate on various other avenues which, in turn, result in a competitive advantage. This in

turn successfully differentiates the organization in the marketplace. The outcomes reinforce the power of focused alternate stream of innovations to attain competitive advantage. They also empha- size the important role played by the very basic, but, largely neglected managerial aspects like the organization structure, process implementation, and top management involvement in the innova- tion process. The research presented here is one of the first grounded inquiry attempts to study the innovation strategies applied by SMEs and cuts across different innovation domains to identify innovation strategies adopted by SMEs.

Note: Both the mini-cases which form the part of the chapter are based on secondary data and are compiled from published sources. They are intended to reflect and illustrate the approach and innovation strategies adopted by the SMEs.

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ADDITIONAL READING

Audretsch, D. B. (1995). Innovation and industry evolution. Cambridge, MA: MIT Press.

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KEY TERMS AND DEFINITIONS

Challenges: Something that by its nature or character serves as a call to make special effort, a demand to explain, justify, or difficulty in a un- dertaking that is stimulating to one engaged in it.

Competitiveness: The act of competing for some honor, or advantage. Rivalry between two or more persons or groups for an object desired in common, usually resulting in a victor and a loser but not necessarily involving the destruction of the latter. The need for global competitiveness is much important for any industry to sustain in this competitive world and this helps the company to retain its old customers as well to obtain new customers, maintaining the profit level and also

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to be a leader in the market. Aspiring to be a market leader or to be globally competitive helps a company to grow. It also helps the company in introducing new products to the world. E.g.: Apple came up with the iPad and they were first to target the people with the new product and thus were able to get advantage, Similarly Google acquired Motorola mobility holdings to become strong in the cell phone segment too. When firm competes with each other it does not benefit them alone but a wide range of customers too.

Globalization: Globalization is the tendency of businesses, technologies, or philosophies to spread throughout the world, or the process of mak- ing this happen. The global economy is sometimes referred to as globality, characterized as a totally interconnected marketplace, unhampered by time zones or national boundaries. The proliferation of McDonald’s restaurants around the world is an example of globalization.

Innovation: To introduce something new; make changes in anything established, to alter. Innovation in an enterprise involves using re- sources or technology in new ways to create a more efficient organization and improve align- ment between technology initiatives and business

goals. Many companies try to institutionalize the process of innovation by creating innovation teams from diverse segments of the company. Other firms rely on individual employees to flourish in an environment where innovation is encouraged.

Perspective: Is a way of regarding situations or topics or a mental view or the state of one’s ideas; prospective means concerned with or related to the future and judging their relative importance. It includes the proper or accurate point of view or the ability to see with objectivity so as to try to get some perspective on issues for better solutions.

Small and Medium Enterprises (SMEs): Is a term for segmenting businesses and other orga- nizations that are somewhere between the “small office-home office” size and the larger enterprise. Country to country this term may vary, but it is usually based on the criteria of investment, number of employees and turnover, etc.

Strategies: Strategy is the science or art of combining and employing the means of war in planning and directing large military movements and operations. It refers to use of moves and tactics or the science or art of a course of action to plan, method, or series of maneuvers or stratagems for obtaining a specific goal or result.

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Chapter 17

Hierarchies and Holdings: Implications of SME Entrepreneurship for Enhanced HRM in Hospital Management

ABSTRACT

This chapter proposes that key features of New Public Management (NPM) in complex public service organisations, such as teaching hospitals, are less new than a reversal to Weberian hierarchy, Fordist concern with throughput rather than quality, Taylorist standardised performance criteria, and Foucauldian surveillance. While this judgement is severe, it illustrates that such management models combined with market or quasi-market criteria have been dysfunctional in the UK in near trebling administrative costs, demotivating health professionals, and in the view of their professional associations, risk destroying the principles of a national health service. It proposes that those concerned to counter this could draw on more plural modes of management in public sector institutions such as holding companies as a model for reforms in hospital organisation, which could enable a degree of relative autonomy for individual services and units similar to that typical of small- to medium-sized firms. It distinguishes organisational logic as the basis for economic efficiency from operational logic as the basis for social efficiency in terms of psychological wellbeing of both health professionals and patients. It submits that doctors as managers of staff in different services and units need relative autonomy for effective implementation of Human Resource Management (HRM) practices at operational levels to be able to enhance purposeful engagement and vocational commitment to health as public service as well to enable psychological con- tracting into change. Informed by a case study within a socio-cognitive approach in a major European teaching hospital, it then draws implications concerning the merits of a holding company model for hospital organisation.

Teresa Carla Oliveira University of Coimbra, Portugal

Stuart Holland University of Coimbra, Portugal

João Fontes da Costa Instituto Politécnico de Coimbra, Portugal

Francisco Edinaldo Lira de Carvalho University of Coimbra, Portugal

DOI: 10.4018/978-1-4666-4731-2.ch017

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Services should be autonomous to the maximum possible degree… This would be an organisation which is a holding in the sense that there are various enterprises within an overall management framework (Felício, Couto, & Caiado, 2012).

INTRODUCTION

As illustrated by Felício, Couto and Caiado (2012) it is characteristic of successful small and medium firms that their entrepreneurship combines a high degree of self-direction, autonomy, openness to innovation and purposeful engagement. By con- trast, a stereotypical perception of public sector institutions is that they offer jobs-for-life, reinforce vested interests without concern for performance, are hierarchical, bureaucratic, inflexible and in- hibit innovation (e.g. Friedman, 1980; Lindbeck and Snower; 1988; Le Grand, 1997).This chapter claims that this case is overdrawn and, in key cases, false. It illustrates flexibility and innova- tion in public sector companies and institutions, some of which started as small and medium firms but then became global giants. It also draws on evidence from state holding companies which have allowed a high degree of autonomy to man- agement at operational levels similar to that of entrepreneurial SMEs. It recognises that large firms and small firms clearly differ in key regards. The bigger a firm - or institution - the greater is the need for structured organisation, but also the risk of inertial Weberian hierarchy and bureau- cracy (Legge, 2005). Smaller firms and start-ups driven by inspired entrepreneurs may have greater flexibility and scope for innovation, such as Steve Jobs and Steven Wozniak who founded Apple, yet not initially develop a sustainable business model while others such as Hewlett and Packard, started by the two of them in a garage, then may devolve so much that they lack sufficient coordination to sustain initial success (Waters & Nuttall, 2012).

Inversely, change such as New Public Manage- ment (NPM) in health services may presume to

be innovative, entrepreneurial and progressive without recognising that new layers of manage- ment introduced to monitor performance may re- inforce hierarchy and bureaucracy (Leys & Player, 2011; Oliveira, 2011 a, 2011b). Such NPM also may mirror the private sector in seeking a more entrepreneurial culture yet fail to allow relative operational autonomy for different services and units, while market based performance criteria, and the introduction of line managers to assess this, may de-motivate health professionals and encourage resistance to and attrition of an NPM model (Bolton, 2004, Warwick, 2012).

This chapter first considers such outcomes in British NPM health reforms and submits that their implicit logical has been regress to Fordist inflexibility, Weberian hierarchy and Foucauldian surveillance through neo-Taylorist performance criteria. Second, it relates this to attraction- selection-attrition (ASA) models (Schneider, 1983, 1987, 1990, 2008) and extends both the ASA model and how health professionals may initially be attracted to the case for NPM yet then be disillusioned by how its hierarchical logic dis- regards variable performance needs for different units and services to theories of breach of psy- chological contract (e.g. Rousseau, (1989, 1995, 1998; Rousseau & Parks, 1993) and frustration of purposeful engagement at work (Robertson & Cooper, 2010). Third, it contrasts such hierar- chical logic with holding companies in both the private and public sectors and the greater degree of relative autonomy that they allow for operating management. Fourth it develops the case that for distinguishing operational from organisational logics at different levels of management and illus- trates success in achieving this in a Scandinavian teaching hospital. Fifth, it suggests an ‘enhanced’ HRM model which would allow greater relative autonomy for managers of units and services within a major organisation such as a hospital much as may be the case for small or medium firms within a private sector holding company.

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The chapter then presents case study evidence from the introduction of NPM in a major European teaching hospital, and reactions to this derived from transcription and coding of a series of one- to-one semi-structured interviews with doctors as managers of units and services similar in size to small and medium firms. It evidences that these have different perceptions of what they need to prioritise in order to gain either social efficiency in terms of psychological wellbeing for patients, and for health employees in terms of purposeful engagement, or economic efficiency in terms of performance, including clinical care, training, research and innovation. It recognises that no large organisation such as a hospital can grant total rather than relative autonomy to different departments, units and services, but suggests that a holding company model can reconcile a coher- ent organisational logic with relative autonomy for diverse operational needs.

HIERARCHY AND NEW PUBLIC MANAGEMENT

Throughout the western world, not least with age- ing populations which themselves are evidence of success in both health systems and from innova- tive health technology, there has been increasing demand for health services at the same time as governments are seeking to reduce the costs of health provision (Pollock, 2004; Leys & Player, 2011). Implicit within this are different paradigms of health and hospital organisation, and different perceptions of outcomes from change manage- ment. Even before the financial crisis of 2008-9, with tensions between public and private claims on service delivery, there was a presumption that health provision as a public service financed from taxation no longer could be afforded without radical management reforms. There also was a perception within other European countries that the New Public Management reforms on market criteria in the British (and since devolution now

English) National Health Service (NHS) could provide a template for such change (Oliveira & Holland, 2007).

The UK NHS Reforms

From the 1980s, NPM in the then British NHS, before devolution to Scotland and Wales, was sup- posed to end bureaucratic public administration and gain new efficiencies through the introduction of market based performance criteria. Key claims for NPM were (1) that bringing in ‘professional managers’ from the private sector would end bureaucracy; (2) that ‘outsourcing’ to the private sector would offer a more competitive service; (3) that internal markets or ‘quasi-markets’ would increase both economic efficiency and quality and choice for the public; (4) that general prac- titioners would be empowered in countervailing bureaucracy by being able to ‘contract’ from hospitals, while (5) better financial control would be gained by devolving responsibility to Health Service Trusts for their own budgets (Pollock, 2004; Leys & Player, 2011).

Underlying this was what Seddon and O’Donovan (2011) have criticised as an ideo- logical import from economics of ‘public choice theory’ which itself was a misnomer in that it means introducing private choice and private market criteria into a public service. They criticise such theory on the basis that it is premised on a narrow model of human behaviour which assumed that public sector workers are solely self-interested agents rather than gaining fulfilment from pur- poseful engagement in what they do and from valuing what they may be able to do for others, as in health services. Such an approach has been modelled by Gomes, Yasin and Yasin (2010) and Yasin, Gomes and Miller (2011) in terms of stan- dardised criteria that they recommend should be adopted in health services including hospitals and primary care units. Among the criteria that they advocate should be adopted are both total quality control (TQC) and continuous improvement (CI).

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Yet Gomes, Yasin and Miller show little ap- preciation that when total quality control and continuous improvement were adopted in Japan after WW1, they were not demanded top-down from higher level management but learned base-up from operational levels, including empowerment of individual workers and groups, such as being able to ‘stop the line’ to prevent a fault going through or stop the machining of parts to prevent a lathe overheating (Womack, Jones & Roos, 1990; Moriguchi & Ono, 2004; Yamaguchi, 2004). Nor have Gomes et al. (2010) or Yasin et al. (2011) recognised that the commitment to kaizen style continuous improvement in Japan was a symbiosis between what western social theory has deemed both psychological and social contract in the sense that it assured core workers lifetime employment, and profit sharing, while kaizen in Japanese com- bined two words – the kai of improvement and the zen of mutual wellbeing (Oliveira, 2007). Nor has kaizen in these dual senses been widely recognised as central to human resource management.

Conflicting Rationalities

Apart from public choice theory, a shift from trust in health professionals’ commitment to a public service was influenced in the case of NPM reforms in the UK by an adviser to Tony Blair in the British Cabinet Office who submitted that they were ‘knaves’ defending their own vested interests (Le Grand, 1997). This paralleled the thesis of Lindbeck and Snower (1998) that ‘insiders’ were protected against competition by ‘outsiders’ for their jobs and that this should be redeemed by introducing ‘quasi markets’ into public health services by out-sourcing. Yet, like Gomes et al. (2010) or Yasin et al. (2011), Lindbeck and Snower displaced that both Japanese continuous improvement and much of the similar efficiency of German firms was based on insiders informally assured of jobs-for-life and therefore knowing that if they proposed improvements in operational

efficiency this would not make them or their col- leagues redundant (Oliveira & Holland, 2012).

Any health service that aims to be national, and socially inclusive, must be concerned with how to achieve volume delivery and either constrain or reduce costs. However, a widely overlooked outcome of NPM in the NHS in the UK was that it increased rather than decreased costs. Pollock (2004) has shown that, with the additional layers of middle and line management needed to moni- tor new performance criteria, administrative costs near trebled from 5% to 14% from the later 1980s to 2003. While the UK government belatedly recognised as much, and insisted that it would reduce the cost by efficiency gains, through NPM. it failed to do so. In 2010 administrative costs still were at 14% (Leys & Player, 2011).

There also have been conflicting rationalities between government demands for new perfor- mance criteria in the UK (English) National Health Service and resistance to these from health professionals persistently voiced by the British Medical Association, the Royal College of Nurses, the National Association of General Practitioners and the Royal College of Midwives including the claim that the undermining of trust, outsourcing, and insisting on ‘quasi market’ or market inspired performance criteria is ‘destroying’ the National Health Service (Warwick, 2012). These claims are the more dramatic since all four of these as- sociations have been among the most ‘moderate’ in postwar British history, (Pollock, 2004; Leys & Player, 2011).

A series of studies also has shown that health service workers in the UK - at all levels - have come to deeply resent the presumption that they only were self-interested suppliers of health as a commodity to be assessed by market criteria. Nurses have resented the implication that they were ‘doing a job for clients’ rather than committed to and valuing health care as a vocation (Bolton, 2004). Besides which, out-sourcing of routine op- erations to private practitioners not only cost more than in-house operations within the NHS but also

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undermined teaching and training and neglected increased risk to patients. As in the case of requir- ing an ophthalmic unit in the Radcliffe teaching hospital in Oxford to outsource routine cataract operations which meant that trainee surgeons could not learn from them, with the cost of outsourcing six times ‘in house’ costs. While also increasing risk to patients in that while the Radcliffe never performed a cataract operation on more than one eye, to avoid the risk of total blindness if there were an infection, the out-sourced private sector surgeons routinely did so to gain great economic efficiency (Monbiot, 2003).

Weberian Hierarchy

Weber’s (1947) paradigm of bureaucracy was pre-Fordist in delivering a standardised services rather than products in volume. But the parallels between the operational and organisational logic of his ‘ideal type’ of bureaucracy and that of Fordism mass production are extensive, and for largely the same reasons.

1. Weberian control is hierarchical, pyramidic and from top-down, as with Ford, (Lacey, 1987.)

2. The hierarchy assigns specialist functions at all levels of an organisation, including operational levels, as with Taylor (1911.)

3. Explicit rules and actions govern all decision making, and informal discretion is ‘out of order’ (as with both Ford and Taylor.)

4. Weberian rules require that service to cus- tomers or clients should not be personalised, nor take account of individual or group needs (as with Ford’s ‘any colour you like provided it is black’.)

In effect, bureaucracy is inflexible, just as Ford- ism was inflexible. Yet the best way of thinking now of what Weber meant by bureaucracy could be in terms of Veblen’s (1921) ‘technocracy’, echoed later by Galbraith (1967), in which officials are

less bureaucrats in the current pejorative sense than technical experts. An irony also of Weber’s identification of bureaucracy as an ‘ideal type’, in the sense of an archetype, was that, personally, he deplored it. He criticised its hierarchical power structure as oligarchic rather than democratic, and ‘soulless’ in its denial of individualism. In this regard he differed diametrically from Taylor (1911) in lamenting its:‘[s]pecialists without vi- sion, sensualists without heart; this nullity that imagines that it has attained a level of civilisation never before achieved’ (Weber, 1957, p. 182).

Weber claimed that ‘the big question’ was what alternative could ‘keep a proportion of mankind free from this parcelling out of the soul, from this supreme mastery of the bureaucratic way of life’ (Weber, ibid). In this regard he was ad- dressing what his contemporary Robert Michels (1915) identified as a tendency to an ‘iron law of oligarchy’ in organisations, or what Weber him- self called the ‘iron cages’ within bureaucracy, concluding pessimistically that they would ‘defeat democracy’ both in administration and in politics and government, with political parties becoming hierarchical in order to function effectively, while ministers came and went and bureaucracies stayed (Weber, 1957).

Weber’s presumption of soulless bureaucracies nonetheless needs qualification in the sense that Blau (1970) has challenged his not distinguishing bureaucracy as an institution from bureaucrats as a type. Few people consider nurses to be soulless. Many have seen them as angels. By contrast a programme for change management may well be soulless if this implies intensification of the labour process and Taylorist surveillance in a manner that reinforces Weberian hierarchy. The passive resistance to this in hospitals may simply take the form of high levels of absenteeism. Or, inversely, ‘presenteeism’ when people turn up for work who are not fit to do so and thereby may render a whole team or unit unfit for work through cross infections (Arnold, Cooper, & Robertson, 2005).

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Performance and Surveillance

Weber recognised that in bureaucracies explicit rules must govern decision making and that this required surveillance in the sense of performance appraisal. Surveillance was integral to Taylor’s (1911) time and motion studies and as a means of discipline also has been analysed by Foucault in his study translated into English as Discipline and Punish (1977) even if this misses his stress on surveillance itself in its edition in French as Surveiller et Punir. Taylor’s time and motion surveillance in many regards anticipated Fou- cault’s stress on discipline, since he claimed that workers ‘soldiered’ or shirked by using their tacit knowledge to disguise how long it actually took to do something and therefore designed tasks to be reduced to a minimum, which could be monitored, in order to prevent this (Taylor, 1911.)

Yet Taylor’s surveillance was the more formi- dable because while Weber lamented the need for it, and Foucault analysed it, Taylor intended it.

When he first tried to implement this as a manager, workers resented it. They were determined that it should not become a norm. Nor did Taylor initially gain much support from other managers since his claims for standardised performance criteria were a not necessarily welcome challenge to entrepre- neurs who valued their own discretion in how to manage. He also was an obsessive to the point of psychotic, since childhood, in daily measuring how much time he needed to spend in a bathroom, or to dress (Monin, Barry & Monin, 2003).

The variants of surveillance in relation to different modes of ownership and control, from Weber (1911, 1949) through Ford as an owner- entrepreneur who hired Taylor (Lacey, 1987) and to Sloan’s multi-divisional management model for General Motors (Sloan, 1964) are illustrated in Figure 1. In each case, as in NPM in health service reforms, the organisational logic was in- creased throughput. The operational logic, as in NPM reforms was surveillance. All three modes were both hierarchical and authoritarian.

Figure 1. Ford, Sloan, Weber and Surveillance Source: Own formulation

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Citing Fiske (2010), Gruenfeld and Tiedens (2010) and Tiedens et al., (2007), Halevy, Chou and Galinsky (2010) have remarked on an am- bivalence towards hierarchy combining explicit antagonism coupled with an implicit preference for hierarchical arrangements, and have sug- gested that this plausibly reflects a common recognition that power as a primary basis of hi- erarchical differentiation is ‘simultaneously the great corruptor and the great liberator’ ((Halevy, Chou and Galinsky, p. 45). Yet they nonetheless have claimed that hierarchy establishes a clear chain of command from the person with the most authority at a high level to those below.

Yet commands not only are authoritarian but a chain of command may be highly inflex- ible. There also are limits to the effectiveness of top-down hierarchy, ultra-division of labour and performance surveillance to a point at which they may initially reach an efficiency peak but beyond it ‘plateau’ as they did for Ford, General Motors and Chrysler when faced with competition in the US from Japanese and South Korean firms such as Toyota, Honda and Hyundai (Shepardson, 2009) which had achieved economies of scope rather than scale, and continuous improvement at operational levels (Womack, Jones & Roos, 1990; Quinn, 2009;). For the following reasons:

1. Intensifying the labour process to increase the volume of throughput and productivity per worker tends to reduces quality and may result in faults.

2. Authority can command compliance, but not creativity, and may invoke attrition through passive resistance by doing the least neces- sary to avoid dismissal, or what Taylor (1911) had aimed to eliminate in the first place.

3. Top-down operational design and surveil- lance is inflexible, defining but also thereby constraining operational practice.

4. Neither Fordist nor Weberian organisations allow self-directed change at operational levels and therefore tend to be inertial at operational levels.

5. A hierarchical Fordist or Weberian institu- tion cannot be a learning organisation rather than demand personnel and performance appraisal on what it has designated down.

6. Standardised performance criteria may inhibit innovative methods of motivating, and rewarding, continuous improvement in methods of work organisation.

ATTRACTION, ATTRITION AND PSYCHOLOGICAL CONTRACT

Attraction-Selection-Attrition

Hay (2002) has found that the best people in organisations are most likely to leave if they are dissatisfied with how their skills and talents are being developed which we suggest may be the case with NPM reforms in national health systems, and result in some of the most experienced and skilled health professionals ‘opting out’ for higher rewards, or more autonomy, in private health provisions. We suggest a relation of this also to Schneider’s ASA attraction-selection-attrition model (Schneider, 1983, 1987, 1990, 2008). Sch- neider developed this in the context of personnel selection and whether people initially attracted to an organisation, and selected by it, then would become disillusioned, and quit.

But we propose that the attraction-selection- attrition model also has relevance to what manage- ment model is selected in terms of health reforms. For example, it may be that health professionals recognise the need for change and initially support it in principle. But then find that there is a divorce between principle and practice, that demands for standardised performance criteria neglect the de- gree to which there are varying needs for effective performance at different operational levels (Guest, et al., 2011), and that their hierarchical top-down control model denies the relative autonomy needed for this. O’Reilly, Caldwell, Chatman, Lapiz and Self (2010) have cited a number of studies indi- cating that a crucial determinant of successfully

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implementing a new strategic initiative is whether lower level leaders support the change. Stagner (1969) reported that the degree of consensus among employees about a change strategy was an important determinant of subsequent profitability. Guth and Macmillan (1986) reported that when middle level leaders did not support the strategy, they were sometimes able to sabotage it. Perhaps most importantly, in a study of 196 managers across 20 organizations, Wooldridge and Floyd (1990) found that the more involved middle level leaders were in formulating their organization’s strategy, the more the organization’s performance improved as a result of it. Middle managers may not quit but may just ‘play along’ with the rheto- ric of change management, while disregarding it (Lok, 2010), which may outcome in attrition of the change management model.

Psychological Contract, HRM and Levels of Management

This also may prove to be the case with the con- cept of psychological contract and its implications for HRM (Guest & Bos-Nehles, 2012). Such a contract is notable in that no one writes it down rather than writes about it since, unlike an explicit contract of employment, it is assumed and implicit. Conway and Briner (2005) have drawn attention to the increased interest in such a contract since publication of the work of Denise Rousseau (1989) which involved four ‘shifts’ in focus.

1. The first was from mutual expectations as- suming reciprocal interests and trust to cases in which an implicit ‘promise’ or commit- ment was assumed to have been made by the employer.

2. The second, with this, was a shift from what might be assumed by employees in general to an individual’s perception of what such a promise or commitment might mean.

3. The third, implied by this, was a shift of domain from mutual needs or mutual benefit

to concern with an individual employee’s perception of it.

4. The fourth was a shift from mutual trust to a focus on cases of perceived violation of the presumed contract (Rousseau, 1989.)

As Conway and Briner (2005) have observed, Denise Rousseau’s change of focus (e.g. Rous- seau, 1989, 1995, 1998; Rousseau & Parks, 1993) influenced the direction of much research on psychological contract such as doctor-patient, student-teacher relationships where a patient or student implicitly assumes that the relationship is based on shared values and trust but then comes to believe these have been breached.

Yet a contract implies two or more parties. A contract, whether explicit or implicit, also is concerned with reciprocal obligations and how each of the parties regards this is relevant to whether it is functional or dysfunctional (Guest, 1998b). Herriot and Pemberton (1997) also have challenged Denise Rousseau’s (1989) one-sided perception of psychological contract:

First coined by Argyris (1960), the psychological contract may be defined as the perception of both parties to the employment relationship, organiza- tion and individual, of the obligations implied in the relationship .... This definition is the classic one of Argyris (1960) and Schein (1978), and differs from that espoused by Rousseau and Parks (1993). These latter authors maintain that the contract is only in the mind of the employee; they therefore have little to say about the contracting process (Herriot & Pemberton, 1997, p. 45.)

We therefore suggest the more inclusive definition of a psychological contract as implicit reciprocal values and trust and suggest that while these may initially have been assumed, it then may be found by both individuals and groups that this is not the case. As, for example, in the introduction of Taylorist performance criteria in NPM which was premised on distrust (Le Grand,

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1997), and displacing that health professionals may be purposefully engaged and committed to health as a public service, rather than a product, and gain fulfilment from this when they have the scope to initiate change at operational and group levels that can enhance the quality of such service.

This raises issues not only of breach of psycho- logical contract but at what level it can be achieved and reinforced, which also relates to organisational structures and levels and the role of HRM. For, in line Hannah, Lord and Pearce (2011), it is more likely that the smaller the group, as in an SME, the greater is the chance of addressing complex and diverse needs through high quality HRM, rather than standardizing performance criteria. In which it may be found in the case of a large organisation such as a hospital that it is the health professionals who are medical directors of units and services are the most appropriate managers to achieve and reinforce such a contract.

The Need for Diversity

Drawing on a case study from a three-year quan- titative and qualitative project on the influence of staff motivation, affect and well-being on patients’ experience of care in the NHS, funded by the UK Department of Health, Peccei, Maben, Robert, Adams and Murrells (2011) distinguished two main forms of patient care performance:

1. In-role performance of tasks that are con- sidered to be a normal part of employees’ job, with two main sub-sets: a. Relational performance concerning

interactive aspects of the job. b. Functional performance fulfilling key

job tasks. 2. Discretionary performance in the degree

to which employees engage in desirable behaviours that are not explicitly required by their job, again with two sub-sets:

a. Helping behaviours for patients that go beyond job requirements.

b. Continuous improvement for the well- being of patients.

Consistent with climate theory and research such as that of Schneider et al., (2002), and recog- nising that in large complex health organisations climate may vary across organisational sub-units, they considered both employee perceptions of the climate for patient care in the organisation as a whole and at the local level (i.e. in specific work units). One of their main findings, is that while a strong perceived climate for patient care at organisational levels will have a positive general effect, the local climate for discretionary patient care was vital for specific positive effect. This is consistent with our distinction between organisa- tional and operational logics, the need for health service delivery to avoid undue standardisation of performance criteria, and the case for relative autonomy at operational levels, which in turn suggests support for health services in large com- plex organisations such as a major hospital to be organised on a holding company model.

Levels, Engagement and Performance

This also is confirmed by findings from Truxillo, Cadiz, Rineer, Zamboni and Fraccaroli (2011) in an analysis of fitting the job and the work- ers to promote job fulfilment, engagement and performance. What they have found is that key motivational characteristics relate to tasks, in terms of autonomy, task variety, task significance and feedback on the job, as well as to knowledge and skills in terms of job complexity, problem solving and skill variety. None of these imply standardisation at operational levels in terms of performance criteria rather than diversity of the kind that is more typical of holding companies than of Weberian hierarchies.

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HOLDING COMPANIES

Private Sector Holdings and Conglomerates

Private sector holdings either can be financial investment vehicles, or operating companies, or both. They do not necessarily imply controlling shares or participation in management decision- making. In a conglomerate, a holding company may have a majority or minority stake in a number of other companies and may well intervene in their management decision-making but without standardisation of their performance criteria. For example, Warren Buffet’s highly successful Berkshire Hathaway is an American based con- glomerate that wholly owns companies such as Heinz yet also has significant minority holdings in American Express, M&T Bank, Proctor & Gamble and IBM among many other companies (Schroeder, 2010).

General Electric, Siemens, Philips, Honeywell and Hitachi are examples of operational holding companies concerned to assure effective per- formance, and can be ‘hands-on’ in seeking to assure this. By contrast, some financial holding companies simply are concerned with profits, and may seek them from mergers and acquisi- tions, including down-sizing to reduce costs, even though many to most of these fail (Rein, 2009; Siegenthaler, 2012).

The difference between a private sector holding company and a vertically managed corporation such as Ford or General Motors is that an opera- tional holding allows for more diversity. Its top management is concerned with performance and profitability for the holding as a whole but not necessarily for all of its operational holdings in the short term. It may foster innovation in an entirely new product or service while recognising that the growth rather than innovation phase of a product cycle may be indefinitely delayed (Vernon, 1966; Holland, 1987) and allow cross subsidisation of different activities (Chadha, 2009).

This is not to claim that a holding company formula in the private sector guarantees suc- cess. One of its most recent failures has been in Hewlett-Packard which for some time was regarded a paradigm of devolved management, yet then ‘lost the plot’. Or, as Waters and Nuttall (2012) have put it:

One of the arguments for conglomerates has always been that if one part of the business is losing money, others will be doing it better and help or even out perform them. H-P, however, is a conglomerate in which all the cylinders have stopped performing at once.

Yet for H-P this was in terms of profitability whereas it is near impossible for all cylinders in a hospital to stop performing at once, rather than that some may be functioning well, others less well and others badly, which in turn again implies a distinction between organisational and operational logics as well the need for lateral learning between units and services to gain from best practice, rather than only top down standardised performance.

Entrepreneurial Public Sector Holdings

Public sector holdings, like those in the private sector, either may be financial or operational. Sovereign wealth funds are financial holding companies. They are not centrally concerned with operational management of the firms or projects in which they invest, rather than with profitability and will reduce their holdings in operating com- panies if they cannot assure a sufficient rate of return, or are making losses. Thus Norway’s major sovereign wealth fund was reducing its European investments from over half to two fifths in 2012 (Reuters, 2012). Asia’s biggest sovereign wealth fund, the China Investment Corporation, made a loss on its private equity investments in 2011, has cut its holdings of private securities to a quarter from nearly half and is looking for longer term

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public rather than private sector investment outlets (Business News, 2012.)

Public sector holdings, like those in the private sector, can operate through either majority or mi- nority shareholdings. A range of these in Europe were surveyed by the contributors to Vernon’s Big Business and the State (Vernon, 1974). Leading examples cited were the German federal govern- ment’s holding company VIAG, the Italian Indus- trial Reconstruction Institute (IRI) and the Italian National Hydrocarbons Agency (ENI). A key role in these holdings is that while governments may require them to fulfil strategic remits, they have left operating management to the holdings. Both the IRI and ENI holdings are examples that have been highly successful whereas Italian companies with higher profile such as Olivetti have declined as major players in the Italian economy.

Thus, a financial sub-holding of the IRI group - Finmeccanica - has diversified long-term in aircraft, aerospace, automation, TGV trains, track and signalling, and turbines and power generation. In the 1960s it had some 30.000 employees and was scarcely breaking even (Holland, 1972). But by 2010 it had more than 70.000 of which some 10.000 are in the UK after its taking over much of what remained of the British engineering com- pany GEC, and the British helicopter company Westland. By 2011 Finmeccanica was the second largest industrial group in Italy and the largest Ital- ian industrial group in advanced technology. The company operates in more than 100 countries. The government retains what amounts to a controlling shareholding of 30% (Finmeccanica, 2011.)

ENI – From SME to Global Giant

The ENI national hydrocarbons agency started as a small company in a country that had neither oil nor gas, and was driven by the highly entrepreneurial Enrico Mattei. After World War II he was given the task of dismantling the Italian Petroleum Agency AGIP a state enterprise established by the prewar fascist regime. Unlike AGIP until then, which had

found next to nothing, ENI discovered methane gas in the Po Valley and this was piped to be available to some Italian industry. But whereas the methane gas proved to be limited, Mattei’s entrepreneurship was not. He used the technical staff of AGIP and then ENI to set up both a consulting company for intermediate and developing countries, and then an operating company in drilling, refining and petroleum retailing. Under his direction ENI negotiated important oil concessions in the Middle East as well as a significant trade agreement with the Soviet Union offering such countries 75% of the earnings from oil and gas. Such a formula meant that ENI rapidly became a major interna- tional player, challenging the global dominance of the ‘seven sisters’ of the US majors such as Esso and Anglo-Dutch Royal Shell despite Mat- tei’s premature death in a plane crash (Posner & Woolf, 1967; Firrao & Ubertalli, 2009.)

A key role in such success was that while the government either required or approved strategic initiatives by the IRI and ENI groups, such as Mattei’s diversification of AGIP, it left operational discretion to the management of ENI, IRI and their sub-holdings. There was no top down concern to standardise performance criteria. Managers of the holdings and of individual firms were free to determine their own performance criteria and the pay levels of employees, much like small or medium firm entrepreneurs. It is not surprising that the management model came to be known as Lo Stato Imprenditore – or The State as Entrepre- neur (Holland, 1972; Amoroso & Olsen, 1978.)

INSTITUTIONAL, ORGANISATIONAL AND OPERATIONAL LOGICS

We suggest that deepening analysis of the relation between private and public sector entrepreneurship can be informed by the concept of institutional logics and a distinction of operational from or- ganisational logics.

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Studies of institutional logics have included the concept of trust in early thrift institutions (Haveman & Hayagreeva, 1997); the transition to market logics in health care organisations (Scott, Ruef, Mendel & Caronna, 2000); similar pressures for market logics in colleges and universities (Gumport, 2000); institutional logics in con- sumer research (Moorman, 2002), mutual funds (Lounsbury, 2002, 2007), equity markets (Zajac & Westphal, 2004), craft industries (Thornton, 2002), accounting, architecture and publishing (Thornton & Ocasio, 1999; Thornton, Jones and Kury, 2005) and occupational prestige (Zhou, 2005.)

Institutions, Power and Logics

Yet institutional logics can be either explicit or implicit, either inovative or defensive or destruc- tive, such as the alleged higher professionalism in mutual funds (Lounsbury, 2002, 2007) which displaced sensing of risk by computer programmes designed ‘to remove human error’ and thereby, on narrowed parameters, paved the path to the subprime crisis (Mandelbrot & Taleb, 2006; Roubini, 2007; Tett, 2009.)

Thus the concept of institutional logic has force but we also suggest that it can be enhanced by a distinction between organisational and operational logics. The concept of organisational logic is not new. For instance John D. Rockefeller III, who had some reason to know from his experience of Standard Oil, claimed that ‘An organization is a system, with a logic of its own’, stressing especially the weight of tradition and inertia, (Rockefeller, 1973, p. 72) which can be deemed inertial insti- tutional logic, as in a hierarchy,

What we also suggest is that a distinction of institutional from organisational and operational logics is relevant to analysis not only of hierarchy and surveillance, as in Figure 1, but also to the introduction of NPM in health systems. Thus a National Health System is an institution, a hos- pital is an organisation but that services or units within a hospital have their own explicit or implicit

operational logics which are not standardised and whose efficiency, and fulfilment health profes- sionals in terms of motivation and behaviour, may be constrained by insistence on standardised performance criteria.

Operational Logics and Learning Organisations

We also propose that a distinction between opera- tional and organisational logics can redress what has emerged as some disillusion with the concept of ‘learning organisations’ and facilitate organi- sational learning. For example, Legge (2005) has claimed that the very concept of a learning organisation is fraught with both with practical and conceptual difficulties and cites Weick and Westley (1996) as observing that:

Organising and learning are essentially antitheti- cal processes which means the phrase ‘organi- sational learning’ qualifies as an oxymoron. To learn is to … increase variety. To organise is to forget and reduce variety (Weick & Westley, 1996, p. 440, cit. Legge, 2005, p. 20.)

Questioning whether senior management can possibly have knowledge of a whole organisation Legge (ibid) further claims that the concept of organisational learning is a misnomer since it is people that learn and to suggest that organisations do so is to reify what is a human attribute. What we suggest is that organisational learning can be based on changes in operational logic and that one of the most notable examples of this was change management in the Karolinska teaching hospital in Stockholm.

The Karolinska Case

The context was insistence of an incoming Con- servative government in Sweden in the early 1990s to reduce hospital costs by 15%. The general manager of Karolinska, Jan Lindsten, brought in

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consultants to assess economic efficiency at all levels and then cut wasted capacity and wasted time in an entrepreneurial manner. He identified that one of the key reasons for delay in surgery was operational - a lack of anesthetists - and employed more in a new unit that was on call at any time. He also avoided operational waste in gaining a reduction of under-utilisation of operating the- atres by re-organising them into routine and fast, slower intermediate and complex surgery. The outcome was reduction of waiting lists in some cases, such as for hip operations, from months to weeks, and even days. With the further outcome that since patients in the Stockholm area opted to be treated at Karolinska, this increased its patient flow by 20% and also its revenues since the gov- ernment paid hospitals on the basis of the number of patients treated (Kaplinsky, 1995; Oliveira & Holland, 2007.)

Lindsten also gained support for this by opera- tional job re-design and re-designation for senior nurses to put them in charge of to enable ‘patient path planning’ with the principle of ‘one day’ appointments for diagnosis. The one day prin- ciple was that all relevant medical staff had to be available for cross referrals, including at least one consultant in any specialisation. The implicit logic of the change was in ‘enhanced’ HRM in the sense of gaining a leaner and more efficient utilization of human resources but also to transform senior nurses into the managers of such patient path planning. Its explicit logic initially was resisted by doctors who disliked the implication that their time would be ‘managed’ by senior nurses until it was made plain to them that the saving in time also would be saving it for themselves, either to reduce workload and improve work-life balance or for research. Senior nurses also were at the appropriate operational level to know what was needed to ensure more effective patient path flow (Kaplinsky, 1995). They were managing both physical and human resources to achieve greater economic efficiency ex ante at operational levels rather than only ex post performance evaluation.

What Lindsten achieved at Karolinska was equiva- lent to what recently has been conceptualised as ‘boundary spanning’ between different units and services of an organisation (Scott, 1981; Mørk, Hoholm, Maaninen-Olsson & Aanestad, 2012.)

LEVELS, ENGAGEMENT AND THE ROLE OF HRM

Grant and Hofmann (2011) have found that role re-definition and re-designation at operational levels, such as was undertaken by Lindsten at Karolinska in giving senior nurses responsibil- ity for patient path planning, yields consistently positive outcomes. Robertson and Cooper (2010) have found that a eudaimonic sense of purpose- ful engagement at work, rather than just ‘doing a job’ not only improves the quality of a service but also enhances both the hedonic wellbeing of employees and of clients, with measurable health gains. Pinder and McLean (2010) have claimed that self-assessment rather than performance assessment tends to be stronger for people who consider their work to be a vocation than for those who view their work merely as a job.

Schaufeli and Salanova (2011) have found that purposeful engagement is higher when it is a team- level experience at operational levels. Maslach (2011) has found that in whatever way engage- ment is assessed, level counts and it is enhanced when there is a good team working environment but that, when not matched by work-life balance, may result in burnout and absenteeism either from ill health or exhaustion and depression. Whitman, van Rooy, and Viswesvaran (2010) have found that the relation between personal fulfilment and performance is stronger when both not only are assessed but also enhanced at operational levels. In a four country study on lifelong learning Oliveira (2003) found that most learning is informal rather than formal, including on-the-job learning rather than formal training. In a wide ranging analysis of team learning and performance in both the private

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and public sectors, van Woerkom and van Engen (2009) found that teams in health care learned more than teams in any other service area. Tucker, Nembhardand Edmondson, (2007) nonetheless have found that team learning depends on the type of team, which can differ significantly within a major institution such as a hospital.

HRM, Levels and Perception

Guest (1998a, 1999, 2003, 2004, 2011) and others (e.g., Guest & Bos-Nehles, 2012; Guest, Paauwe & Wright 2013), along with Bowen and Ostroff (2004), have found that the links between HRM and performance are complex, with managers’ perceptions of these varying at different levels. Complexity also has been stressed by Hannah, Lord and Pearce (2011), who relate this to Argyris and Schön’s distinction of double from single loop learning (Argyris & Schön, 1974, 1978, 1996). What they submit is that the group is the basis of learning and that groups will be diverse in what they prioritise and what they know at varying levels of consciousness is important for effective service delivery.

Bowen and Ostroff (2004), with Guest and Bos-Nehles (2012) and Guest, Paauwe and Wright (2013), have set out the case for an organisational climate enabling a strengthening of the effective- ness of HR systems. Yet have recognised that limited understanding of this is gained by collect- ing information on HR practices without paying sufficient attention to how they are perceived and are - or are not – enacted by managers. They also stress the need to identify individual level operational climates to HRM outcomes. Guest and Bos-Nehles (2012) have observed that although research across organisations has found variance in both perceptions of HRM and its effectiveness, there has been less attention to variance within them, which an issue that the case study reported later in this chapter seeks to address.

Nishii, Lepak and Schneider (2008) have submitted that perceptions of HRM practices by

employees have consequences for performance at unit levels and that (1) where the perception is that such practices are motivated by concern for enhancing both service quality and employee wellbeing this was positively related to employee attitudes whereas (2), there was a negative relation when the perception was that such practices were focused on reducing costs and increasing output in terms only of productivity. They further found that these positive and negative attitudes tend to become shared within units of a service organiza- tion which implies the case for relative autonomy in how the managers of such units should operate HR practices.

Nishii, Lepak and Schneider (2008) therefore are concerned with employee perceptions of HRM. Bowen and Ostroff (2004), Guest and Bos-Nehles (2012) and Guest, Paauwe and Wright (2013) share this yet also are concerned understand managers’ roles in effective HRM implementation. Not least, to gain a better understanding of how to achieve effective HR implementation in the context of the introduction of new public management there is a need to look not only at what is being demanded in terms of new performance criteria but whether these help or hinder health professionals in im- proving performance.

We suggest, with Robertson and Cooper (2010), and in line with Legge (2005), that this relates not only to leadership at different levels but also to the scope and limits of concepts such as organisational learning. For what govern- ments intend organisations - such as hospitals, universities, courts or local authorities - to learn top down within the context of NPM is similar to single loop learning. But this may fail to gain double-loop learning up from diversity and com- plexity at operational levels (Argyris & Schön, 1974, 1978, 1996). While, also, such double-loop learning could imply allowing a degree of rela- tive autonomy to leaders at group and unit levels rather than seeking to impose a single top-down HRM design.

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Limits to Line Management

One of the main reasons for the near trebling of administrative costs following the introduction of New Public Management in the British (then Eng- lish) NHS was the introduction of line managers to monitor the performance of health professionals. In a case study of line manager involvement in the English NHS, Currie and Proctor (2001) judged that line managers can be positive contributors to change when they have discretion in implementing human resource practices within their own work groups. Inversely, supporting the case for limits to line management, Brewster & Söderstrom (1994) suggest that top-down hierarchical pressure to per- form leads to feelings of incompetence among line managers and a reluctance to take responsibility for devolved HRM activities when these include performance evaluation. Harris (2007) and Har- ris, Doughty and Kirk(2002) have found that line managers disliked performance evaluation due to this undermining trust at operational levels.

Redman (2001) has found a strong dislike of surveillance and performance appraisal by line managers. Renwick (2003) has reported feelings amongst line managers of being ‘dumped upon’ to assess performance by criteria that bore limited relation to their experience of group practice at operational levels, which has been paralleled in findings by Maxwell and Watson (2006) and Watson, Maxwell and Farquharson (2007) De Jong, Leenders and Thijssen (1999) have found that because line managers are under pressure to achieve short-term performance targets there thereby is a tendency for them to displace longer- term issues and initiatives. McGuire, Stoner and Mylona (2008) also have found negative reactions from line managers when they are called on to monitor performance.

Whittaker and Marchington (2003) found that line managers’ main concern is that a lack of higher level support can detract from overall effectiveness and suggest, as have Hailey et al. (2005) that line managers’ competence may be

limited from a lack of training. But what may be the case is that the concept of a line manager rather than of a line or unit leader is misplaced. For the ethos of a line manager is performance assessment rather than performance improvement, and especially where the improvement could be both in terms of economic efficiency and social efficiency, for example, in health in enhancing the wellbeing of both patients and health service employees. Whereas, in the case of health services, the best assessors of what and how employees may be able to contribute to both economic and social efficiency in delivery to the public may be medical professionals directing individual units and services.

Thomas and Dunkerley (1999) have claimed that two dominant discourses have underlain the restructuring of public sector organisations – what they deem a ‘New Right’ ideology of free markets, consumer sovereignty, and individualism, and a ‘Post-Modern’ emphasis on change, discontinu- ity and flexibility. They recognise that both dis- courses are centrally critical of bureaucracy. But they suggest that whether middle management either is a problem or is a solution depends on whether it has sufficient autonomy to be able to take initiatives and to be entrepreneurial. This is relevant to devolved HRM within complex public service organisations.

THE CASE STUDY

Research Context

The case study was in a Portuguese university teaching hospital with over 4000 employees (in- cluding 1040 doctors, 1640 nurses and 1650 auxiliary staff) that in 2009 was reorganized by statute from 42 disparate units to 7 management areas and 2 autonomous services. While the hospital itself was a large organization, each of the 7 management areas and the 2 autonomous services was equivalent to a medium sized firm

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while several of the formerly disparate units were equivalent in size to small firms. The 2 autono- mous services had been created in the first place by highly self-directed medical professionals comparable to founder-entrepreneurs of an SME and retained their autonomy in terms of finance and administration after the re-organization. The doctors in charge of the management areas and autonomous services were senior in terms of professional status but middle rather than top managers in terms of organisational hierarchy.

By 2013 the hospital was facing a major inte- gration of its services with others in the region. In addition, the government wanted some hospitals to close small research units on the grounds of diseconomies of scale and to concentrate research funding in larger units. This was within the na- tional context that the government, in May 2011, introduced a range of new criteria to monitor the performance of health professionals (Diário da República, 2011) much on the lines of NPM in health and hospital reforms in the UK.

As modelled in Figure 2, these included criteria of which the central four were obligatory and the outer three optional if the hospital was not a teach- ing hospital, but obligatory for those which were.

Rationale and Methodology

This case study seeks to gain a more comprehensive understanding from a managers’ point of view of what they perceive is important to gain for higher performance and in particular to gain information from them of (1) what does or does not work in for different groups and their operational needs; (2) what workplace environment is important both for higher performance and for purposeful engagement at work and (3) whether NPM style performance indicators aid or abet understand achievement of this.

The research setting was useful for exploring the degree to which initial attraction of some doctors as managers to the case for organisational change to increase economic efficiency was qualified by their concern that standardized performance criteria could not allow for diverse priorities in different operational units and services. As also their concern that preoccupation with quantita- tive performance criteria and intensification of the labour process could contradict qualitative dimensions performance such as purposeful engagement at work and lead to attrition, such as burnout and absenteeism.

The methodology of the case study was a grounded theory approach. As argued by Glaser and Strauss (1967) and since developed by others (Symon & Cassel, 1998, 2006; Shah & Corley, 2006), such a socio-cognitive approach, combined with coding of transcripts of semi-structured interviews, allows for evidence based iterative approximation to understandings of doctors’ perceptions of the scope and limits of HRM in specific organisational and operational contexts.

Figure 3 draws on the previous conceptual framework and outlines the main criteria which were assessed in the case study. It distinguishes different levels of management and two main groups of criteria relevant to a functional psycho- logical contract: (1) psychological wellbeing and social efficiency and (2) performance in terms of economic efficiency.

Figure 2. NPM Performance Criteria Source: Derived from Diário da República, 2011

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Psychological Wellbeing and Social Effi- ciency: Identified by values, beliefs and personal- ity (VBP) in terms of (1) eudaimonic dimensions such as purposeful engagement, individual or team autonomy and personal development, where the purposeful engagement sub-dimensions relate to learning, self-knowledge, sharing knowledge, self-efficacy, team awareness and mutual respect; plus (2) hedonic dimensions such as fulfilment and positive affect in relation to work-life balance.

Performance and Economic Efficiency: Iden- tified in terms of knowledge, abilities and skills (KAS) related to (1) research, such as published articles or conference presentations, (2) training, whether internal or external, (3) clinical care assessed by both the number and quality of con- sultations and (4) innovation in methods of work organisation.

Both main sets of criteria took account of or- ganisational and operational context, individual preferences and characteristics, as well as flex- ibility, availability and accessibility.

Data Collection and Analysis

Data collection was by audio-taped fully tran- scribed individual semi-structured interviews in a normal work setting averaging 45 minutes with 12 senior doctors who are managing directors of services and units. The units and management areas of the doctors are identified in Table 1.

The main issues addressed with doctors in the interviews were: (1) the challenge for them, as health professionals, of also being managers of units and services; (2) whether the aims of or- ganisational reforms required by the government were fulfilled in practice; (3) the degree to which

Figure 3. Conceptual Framework for Assessing Psychological Well-Being and Performance in Hospitals Add Social Efficiency and Economic Efficiency Source: Own Formulation

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‘NPM’ performance criteria enhanced or hindered operational efficiency; (4) whether they had or needed a degree of relative autonomy for HRM practices at operational levels; (5) to identify which criteria they would prioritise for both per- formance and employee and patient wellbeing and, (6) how highly they valued purposeful en- gagement (eudaimonic wellbeing) and voca- tional fulfilment (hedonic wllbeing) by those health professionals whom they managed.

The managers’ discourse was analysed by a coding system using MAXqda 11 based the conceptual framework as modeled in Figure 3. Examples of the discourse in relation to percep- tions of economic (in)efficiency concerning performance, as well and social (in)efficiency concerning eudaimonic and hedonic dimensions of psychological wellbeing are given in what now follows.

EXAMPLES OF INDIVIDUAL DISCOURSE IN RELATION TO THE MAIN CRITERIA OF FIGURE 3

Economic Efficiency

Top-Down Reorganisation

Understandably a senior administrator was enthu- siastic about the reorganisation and the manner in which this enabled fortnightly meetings of the heads of only seven services or management areas.

These Management Areas meet every other week with the Council of Administration (Manage- ment Board) in a manner which enables an ongo- ing overview of the hospital. This is very positive.

Now, for example, we are able to contract with the management areas, in meetings with the service directors. With this, we are beginning to see what really can be done not only in terms of personalising services, but including them such a way we can integrate better.

This also was recognised by some of the medical directors of the former services and units, such as that:

Clearly it helps... There is no doubt that this is useful. Not having to talk with 42 services rather than with 6 or 7 people helps a lot.

But that this does not of itself resolve the ques- tion or responsibility since at unit level:

There is a doctor, a clinical director for each area, an administrator each of this or that service, a chief nurse or technical head. Which of them actually is responsible for the unit?

Economic Efficiency and Mergers

It also was recognised by medical directors that there was a case for the merger of the three hos- pitals in the local area:

It makes sense to merge when you have a hospital near to another one of which is short of beds and the other has spare capacity.

Economic Inefficiency and Bureaucracy

But medical directors also were emphatic that the reorganisation of a hospital into fewer units did not redress whether such reorganisation still was bureaucratic to a degree which inhibited either eco- nomic efficiency. As one medical director put it:

The bureaucracy and time wasting claimed to be needed for cost control is unbelievable. If I need even a simple item like a cover for an examination table I can need fourteen different signatures for approval even before the order is made.

Economic Inefficiency and Costs

Central control of costs can raise them because the people concerned have no idea of what is needed for clinical safety. For example, I am obliged to order new surgical instruments when practice has shown that their sterilisation can mean their re-use without patient risk.

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Overestimation of Technical Progress

But medical directors also stressed that no proper estimates were made of technical progress in equipment in relation to the quality of service to patients.

Some technical progress is revolutionary, such as a lithotripter for dissolving kidney stones which removes the need for invasive surgery and also time in the hospital. But in other cases the costs of equipment may double but their clinical gains are marginal - as little as 5 per cent - and when such an increase is not needed for quality diagnosis or quality patient care and means less money for other more basic purchases..

Wrong Reliance on Bulk Purchasing

Some elementary principles are ignored, such as bulk purchasing or not realising that a drug company is simply re-pricing and rebranding a product rather than offering something that has clinical value

Social Efficiency

It was recognised by medical directors that top- down overview was needed not only of one hos- pital but of several hospitals in a region, not only to avoid duplication of effort and resources but also to achieve higher levels of social efficiency in services within health areas.

Demography is variable and there is a deserti- fication in some areas. If there is not an overview of what different hospitals are doing, no one knows well what is being done where. There is duplica- tion between adjacent hospitals … while in others there is out-contracting of services which could be internalised.

Social Inefficiency, Waiting Lists and Bottlenecks

Yet there was lament at the failure to address waiting lists and bottlenecks.

If there is a waiting list, this is a bottleneck for whichever hospital since patients are waiting for diagnosis x or y, despite there being people who are prepared to diagnose them on a Saturday or a Sunday. Yet the proposal that they could do so was made three years ago without any response to date.

Productivity Criteria Inhibiting Patient Well-Being

The director of a service put the case, consistent with Weberian hierarchy and Fordist and Taylorist concern only with productivity that this could inhibit patient well-being:

All the thinking still is top-down and dominated by how many patients we treat. But the outcome is dysfunctional. A report is written in radiology that a woman needs a mastectomy. She then is passed down as on a production line to surgery without ever meeting the surgeon who will perform the operation. No time is allowed for counselling her because this would raise costs. Yet her psy- chological well-being is vital to her chances of a good recovery.

Table 1. Management Areas of the Interviewees

Managers Gender Unit Management Áreas

1 F Gynacology Maternity

2 M Renal Medicine II

3 M Immunology Medicine I

4 M Obstetrics Maternity

5 F Radiotherapy Diagnostics

6 M Radiology Diagnostics

7 M Gastroenterology Medicine I

8 M Rehabilitation Diagnostics

9 F Pathology Diagnostics

10 F Human Reproduction

Maternity

11 M Ophthalmology Autonomous Ophthal

12 M Cardiology Autonomous Cardio-Thoraxic

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Absenteeism and Burn Out

In one of the interviews, a manager with extensive HRM experience volunteered that a key problems for the hospital was absenteeism on such a scale that the government had not addressed this and that no one wanted to measure it.

Another medical director of a unit volunteered that many staff could not operate at their potential levels of clinical efficiency, talking of:

A ‘total burn out’, aggravated by the new focus on productivity in terms of the number of patients treated, with people who then neither have the patience for nor are disposed to do anything more’.

Lack of Autonomous Decision Making and HRM

Medical directors also deplored that centralised decision-making was reducing autonomy in decision-making.

What is needed is delegation of competences and responsibilities in areas such as contracting personnel, and to give rewards and incentives.

Eudaimonic Engagement and Hedonic Fulfilment

Commitment and Performance Appraisal

The same medical director also volunteered that more criteria for performance appraisal did not address such problems. What did was motivation and group identity.

All evaluations are subjective…. What interests me is not only whether a job is well done and on time. I am interested in the degree to which people are committed to excellent performance by the service.

And, in a critique of the limits of top-down performance appraisal consistent with the thesis that there are limits to a hierarchical model as a paradigm for health.

People are not machines. People are much more complex than machines. It is different in manag- ing a factory where the machines are supposed to produce 50 vases by the end of the day and, if they do not do so, someone has to be responsible for that. A hospital is different. It is dealing with people…

Lack of Psychological Contract

Another medical director when being introduced to the concept of psychological contract responded immediately that this was what was missing in performance evaluation, was needed, and what he was trying to achieve in relation to his own unit and team working.

What is absolutely fundamental is to give people positive and serious encouragement in terms of terms of their mission, of which incen- tives are part. To give them responsibility both to produce and to communicate… to speak with them, to show them…

The Case for Exclusivity

One of the most interesting outcomes of the interviews with medical directors of units was that psychological contract with a hospital could be enhanced by exclusivity. As one of them put it of competition between the public and private sectors and the difficulty in such a context of ‘serving two masters’:

Someone cannot be a Colgate manager in the morning and an Oréal manager in the afternoon. People should be in one place and work in one place only. The people with real responsibilities, the directors of services, should have exclusive contracts.

Exclusivity and Continuous Improvement

The point also was raised that exclusivity was vital for effective continuous improvement through

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operational learning and being able to retain such learning to ensure that operational units were on the frontier of both process and product innova- tion in their area.

We must incorporate new technologies and techniques if we are going to be up to date. For instance the knowledge cycle in radiology is five years. Five years from now knowledge will be entirely different.

Values and Rewards

There was a common theme in the discourse of doctors that, within recognised limits of their operational budgets, they should be able to reward in terms of pay.

There also was a common theme that pay was an important factor in motivation but not the only motivator. As a top administrator commented:

Some of the consultants in the hospital are paid more than the President of the Republic. Money in itself is not important to them. They never need to think about it because they have enough already.

Also, as a senior medical director put it in terms of pay and motivation:

It is obvious that a doctor may earn less in the public than in the private sector. But this is not because it means a higher level of fulfilment. What I try to raise is awareness that one does not need two homes with two swimming pools and beach house with a boat and suchlike, rather than a normal house or apartment and a place in the country, perhaps with a swimming pool, and maybe on the coast with a boat, yet then be content with that.

Coded Discourse

Figures 4 through to 10 illustrate the outcomes from discourse analysis of the priorities attributed by heads of management areas and autonomous services in terms of the two main domains of Figure 3 - psychological wellbeing in terms of social efficiency and performance in terms of economic efficiency.

Figure 4 shows perceptions of the same im- portance by integrated areas of management, where the outstanding contrast in terms of self- knowledge and self-efficacy is in the autonomous units, both directed by men.

Figure 4. Eudaimonic engagement by management areas

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Figure 5 reports findings on hedonic fulfilment by management areas. The managers of autono- mous units give equal importance to fulfilment with patients and with teams, while fulfilment in gterms of satisfaction with superiors only is priority for Maternity. It also is striking that sat- isfaction with patients, rather than fulfilment for them, is not a main issue in either the Medicine or Diagnostics integrated areas, while for Diagnostics team fulfilment is important.

Figure 6 summarises findings on the relative importance of hedonic fulfilment and eudai- monic engagement by management areas. Strik- ingly, for the autonomous units they are equal, whereas for the integrated management areas eudaimonic engagement was more important than hedonic fulfilment.

Figure 7 indicates the priority given to team and individual autonomy by Areas of Manage- ment. Team autonomy well exceeds individual autonomy in Diagnostics, just does so for Medi- cine, equals it for Maternity and is lower only in the two autonomous units. This is not surprising in that the leaders of both units are highly self- directed individuals, much in the manner of en- trepreneurs in small and medium firms and were

founders of these units after persuading the gov- ernment to finance them.

Figure 8 reports priorities in terms of perfor- mance by management areas. Clinical care ranks highest for Maternity. Training and scientific research ranks highest for Medicine as does or- ganisational innovation. The low ranking of or- ganisational innovation for the autonomous units suggests that they already have achieved what they need, or what their directors perceive that they need, since they both are highly self-direct- ed and entrepreneurial. Their low ranking of priority in scientific research suggests that, since already at the top of their professions, they do not need academic recognition.

Figures 9 and 10 show the degrees of concern with flexibility in terms of finance, functions and time for the integrated management areas and the two autonomous units. In the integrated manage- ment areas, flexible time, availability and acces- sibility is most important for maternity, which is unsurprising in that while a birth may need to be induced, a child may come at any time of day or night. The same near self-evident outcome obtains for diagnostics, which includes accident and emergencies.

Figure 5. Hedonic fulfilment by management areas

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Flexibility in terms of time for the two au- tonomous units is more important for cardiology than ophthalmology which again is less than surprising in the case of heart attacks. Func- tional flexibility is more important for the latter. But the striking outcome of Figure 10 is that fi- nancial flexibility is unimportant for either, for

which the reason is that, being already autono- mous, they both are self-financing.

Several of the above findings are of interest in relation to the conceptual framework of this chapter and that of Figure 3, not least in the de- gree to which they demonstrate that eudaimonic purposeful engagement in and commitment to

Figure 6. Hedonic fulfilment and eudaimonic engagement by management areas

Figure 7. Individual and team autonomy by areas of management

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health as a service ranks high throughout despite it being dismissed by key architects of NPM and the advocates of public choice theory. We now turn to this in the discussion of findings and the scope and limits of the research.

Discussion of Findings

One of the main findings from the case study is that what doctors as managers of units and services prioritised is not captured by the criteria which the

health reforms required in 2011 by the Portuguese government required as obligatory (Figure 2). Other than for professional attitude which could in principle include eudaimonic purposeful engage- ment at work, the government’s criteria were not concerned with hedonic fulfilment or wellbeing at work. By contrast concern with flexibility in terms of working time, job function and finance, which is typical of post Fordist models of work organisation, flexibility did not feature in the required criteria.

Figure 8. Performance by management areas

Figure 9. Flexibility in integrated management areas

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The main findings from analysis of the dis- course of the medical directors of services and units are as follows.

1. The reorganisation of the hospital into seven management areas has facilitated dialogue ‘at the top’ but not as yet achieved the claim of a senior administrator that this facilitates first, second and third tier coordination at middle and lower operational levels (Figure 3).

2. It is recognised by medical directors of services and units that strategic coordina- tion is desirable, and that this should not be limited to a hospital itself but should extend to hospital and health services within an area or region to avoid duplication of effort and under-utilisation of resources.

3. There was recognition of the organisational imperative for economic efficiency but a strongly held view that that implementation of social efficiency through HRM practices should as much as possible be devolved to and decided at operational levels within services and units, which is consistent with the distinction of organisational from opera- tional logics.

4. Medical directors of the integrated service areas related this to the need for HRM de- cisions concerning pay, bonuses and other rewards to be devolved to unit level.

The directors of the autonomous units did not need this since they already had relative autonomy in these regards.

5. There also was a common view that top- down performance evaluation did not address either issues of burn-out and stress, nor the need to avoid attrition of well trained and highly skilled personnel, or their leaving for the private sector, which is a confirmation of the case for greater relative autonomy in HRM practices.

6. The concept of psychological contract was new to those interviewed yet, when suggested in only its two words, gained a response from the director of a unit with 120 employees, and without the need for further elaboration, or any reference to its literature, that ‘Yes, that’s what missing’, while it was he who suggested the case for a holding company model as cited in the quotation from him at the outset of this chapter.

Figure 10. Flexibility in autonomous management areas

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Implications of the Findings

The findings from the case study indicate that initial support for change management is being undermined by the government’s insisting on standardised HRM performance criteria which do not reflect diversity needed by medical directors for effective patient care. Also that, while this model can assess output in terms of performance, it discounts psychological well-being and pur- poseful engagement in work. Where there were common rationalities in the findings these were that performance clearly needed to be monitored in terms of economic efficiency but that vertical imposition top-down of performance criteria was counter-productive and high in terms of op- portunity cost.

A striking example of the limits of standardised criteria concerning productivity was given by manager 4 (M Obstetrics), who had been among those who earlier had been prepared to recognise the need for change management yet, by the time of the introduction of the new performance criteria, had entirely changed his mind. One of the cases which he took was the claim of the government that caesarean operations, for which doctors were paid substantially more than for a natural birth, should be reduced to not more than 35% and that awards would be granted to those hospitals that managed to do so, which had just occurred for another in the region that had reduced them from 50% to 35%.

As he put it, this was entirely wrong-headed because it took no account of context. His own unit happened already to have achieved a level of not more than 35% caesareans, but was recognised as the lead unit in the region and therefore had to deal with many cases referred to it by others hospitals where complications could imply premature births many of which also would be safer by a caesarean rather than drug induced delivery. His unit’s 35% score therefore was a greater achievement in terms of quality of clinical care than that for a hospital

with more routine cases, while the latter probably should be set a target of less than 35%.

In terms of organisational theory and HRM, the findings support the case that New Public Management may regress to and reinforce We- berian top-down hierarchy rather than progress beyond it; may intensify Taylorist performance and Foucauldian surveillance at the cost of eudai- monic commitment and hedonic wellbeing, and thereby increase economic efficiency at the cost of social efficiency in terms of the wellbeing of both health professionals and patients.

The findings in Figures 4 to 10 support the case of Hannah, Lord and Pearce (2011) in distinguish- ing static and dynamic complex processes, and that of Bowen and Ostroff (2004) that we gain a limited picture by collecting information on HRM policies without paying sufficient attention to the how they are, or are not, enacted. They support the case of Guest (2011) that there is a needto recognise not only organisational but also unit and individual level climates and cultures and that of Nishii, Lepak and Schneider (2008) have found that positive or negative perceptions of HRM practices by employees have consequences for performance at unit levels.

We suggest that they also support an exten- sion of Schneider’s (1983, 1987, 1990, 2008) ASA attraction, selection and attrition model from personnel selection to what management model is selected in terms of health reforms, and also our earlier distinction of operational from organisational logics in the context of institutional logics. For a national health service such as that in Portugal is an institution, while a hospital is an organisation and the units and services within it at operational. We submit that these distinc- tions, with those between economic and social efficiency, merit further attention in research into the effects of NPM change management in health services, as does the distinction between hierarchical and holding company model of or- ganisation in which there could be a high degree of devolution of responsibility for performance

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assessment at unit level, and recognition of both the common and diverse needs of the individual units for purposeful engagement at work.

Scope and Limits of the Findings

The limits of the specific findings from the case study may be fractal, but with wider implications in suggesting that the presumption of NPM in its paradigm model in the UK, and already critiqued by others, is wrong in assuming that health profes- sionals are concerned only with their own interests rather than the welfare of society.

This chapter is primarily concerned with models of organisation and HRM and the degree to which NPM in health systems could learn up from the degree to which a holding company model could permit the kind of autonomy typical of SME entrepreneurship. It suggests that the findings in this regard are strong. A limit of the findings is that they only concern the coded discourse of percep- tions of NPM and what criteria are important for middle doctors as managers of services and units. This is being complemented now by coding of the discourse of the senior administrators of integrated service areas and junior doctors and nurses. Its data base includes analysis of the discourse of men and women as managers of different units and services and needs complementing by analysis of whether there are significance differences between them. gender differences cannot be neglected and also is being followed through in relation inter alia to the . There also is a risk of stereotype of ‘think manager–think male’ rather than ‘think female’ of Gartzia, et al (2012).

Implications for Further Research

The findings suggest that research for rethink- ing new public management in health can and should draw on holding company models and the degree to which these can enable the directors of services and unit to gain some of the autonomy of small and medium firm entrepreneurs within

an overall strategic management framework. The success of public sector holding companies, and public enterprise, such as outlined earlier, has been underestimated within management studies in general and debates on the scope and limits of New Public Management and should be further explored. The potential for such a holding company formula, allowing relative autonomy at operational levels rather than hierarchical models of new public management merits further research not only in terms of performance criteria but also extended roles for HRM at operational levels, with the implication that these should be devolved to health professionals such as directors or units and services. While there is a high opportunity cost in time for such middle to senior health professionals there also is a case for further research into the degree to which they would welcome management workshops on the scope and limits of both NPM and HRM, as we have found from their attending them as an outcome of the case study.

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KEY TERMS AND DEFINITIONS

Enhanced HRM: Devolution of HRM roles to managers of services and units rather than imposing a standardised top-down template for performance and rewards.

Entrepreneurship: Undertaking something, associated with innovative thinking and practice.

Eudaimonic: Psychological dimensions of wellbeing, such as purposeful engagement, relative autonomy and personal development.

Hedonic: Psychological dimensions of wellbe- ing, such as positive affect and vocational fulfil- ment in effective delivery of something of both personal and social value.

Hierarchy: Top-down pyramidic management structures.

Holdings: Majority or minority shareholdings in public sector or private companies allowing relative operational autonomy.

Levels: Institutional, organisational and op- erational such as a National Health Service as an institution, a hospital as an organisation and its units or services as operational.

New Public Management: Reforms based on public choice theory with intensified performance criteria embodying market or quasi-market values.

Organisational and Operational Logics: Implicit or explicit rationales concerning organisa- tion and operational performance.

Performance: Economic efficiency in terms of productivity and costs.

Psychological Contract: Reciprocal values and trust.

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Chapter 18

DOI: 10.4018/978-1-4666-4731-2.ch018

HRM Evolution in SMEs: Recruitment and Selection Case

ABSTRACT

The enormous business competitiveness at a global scale and the constant search for sources of competi- tive advantage have led several scholars and practitioners to implement their studies to pay attention to the potential of HRM in the success of companies. Portugal, like others European countries, is not set apart from the question of HRM. However, it is rare and recent to find empirical literature on practice of HRM in Portugal, and even more scarce to find literature that focuses on SMEs. This study clarifies the situation of SMEs in the Portuguese context, serving as a basis for discussion on HRM in SMEs in an international context. This chapter looks to understand the role of recruitment and selection on Human Resource Management (HRM) at Small and Medium Enterprises (SMEs) in Portugal, as well as contribute to a better knowledge of this area, still little studied. More particularly, it aims to understand the level of implementation of recruitment and selection. Data was collected by questionnaire from 512 small and medium enterprises in Portugal, and from these, 3 hypotheses were formulated and tested using the SPSS program. From this study, the authors conclude that HRM is not yet a reality in SMEs. Recruitment and selection are the HRM practices more commonly used in SMEs, but in an informal way.

INTRODUCTION

Micro, small and medium enterprises (SMEs) play a central role in the global economy. They constitute an important source of entrepreneurial skills, innovation and employment. The world business community is made up mainly of SMEs. For example, SMEs in the enlarged European Union are around 23 million and provide approxi-

mately 75 million companies and 90% of the total enterprises. The economic and social crisis that has sparked crossed several public debates about the importance of SMEs for the Portuguese busi- ness. During recent years, millions of euros were spent in European funds for SMEs modernization. Programs like SMEs training or QI-SMEs are a few examples. For decades, SMEs were seen as companies with disqualified manpower, mainly

Pedro Ribeiro Novo Melo University of Minho, Portugal

Carolina Feliciana Machado University of Minho, Portugal

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with a family organization and rudimentary fun- damentals of management.

Today, in part due to the economic crises that have plagued the world, this image tends to change. Indeed, extinguishing mediocre compa- nies, this crisis contributes to the development of innovative and creative organizations, which remain in the global market. The search for com- petitive factors has led businessmen to invest in their employees training, as well as in quality processes, encouraging the formalization of all critical business processes. Areas such as market- ing or human resources (HR), once overlooked by businessmen have, now, gained importance in the business world.

Insert in a very dynamic and demanding global economy, SMEs, in order to adapt and survive, face the need for deep and constant changes, as well as increase competitiveness and efficiency of their main components. As a vital part of an organization, HR can’t be away from these changes, needing mechanisms, processes and practices that make them more productive, motivated and committed.

As a result of these challenges, human resource management (HRM) policies and practices appear, in order to convert HR in strategic ones or being in line with corporate strategies. It emerges the discussion of a strategic HRM, and a strategic integration with business policies. It is relevant to say that the approach of HRM impact on or- ganizational performance, so far reported in the literature, has been based in large companies researches. Few studies address the idiosyncra- sies of small businesses. Indeed, studies of HRM in SMEs focus on HRM practices used in large companies, but adapted to the size, resources and culture of small businesses.

Nowadays, HRM is gaining visibility in SMEs. There is a change of mentality within businesses reflected in the increasing use of recruitment and selection (R&S), investment in training and development and greater relevance in the evalua- tion of employee performance. In what concerns

Portugal, the role of HRM has gone through an evolutionary process, like in other countries, which has been described and analyzed by some academics. However, little or nothing is known about the HR function, as mentioned Cabral- Cardoso (2006). HRM studies are rare and those that exist are associated with large enterprises. The choice of the subject and its relevance in part is linked to the low investment in SMEs management research. Although organizations are smaller in size, it is interesting to note that HRM in SMEs can be informal and less sophisticated or complex and highly structured, allowing the researcher to contact a wide variety of situations.

This study aims to contribute to a better un- derstanding of R&S in SMEs, something over- looked by the main studies, serving, mainly, as a starting point for future research focusing on specific HRM aspects in SMEs. It also intends to establish a benchmark of action in what concerns R&S practices that will enable researchers and practitioners, with better conditions for the devel- opment of a HRM model in SMEs. Specifically, it aims to: (a) Identify the key studies; (b) Build an explanatory model; (c) and, define modes of action, for R&S in SMEs.

HRM IN SMEs

HRM concept appears in the US, in the 80’s, as- suming as a distinct concept in philosophy and approach to managing people in organizations (Cabral-Cardoso, 1999). Following the changes of paradigm in the business world, it appears associated with a shift to a strategy based on the commitment of workers, characterized by a new approach in terms of quality, flexibility, strength-of-work, enhanced teamwork, R&S, and thoughtful and strong investment in training and development (Cabral-Cardoso, 2004).

SMEs, an important source of entrepreneurial skills, innovation and employment, have long been

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the focus of government attention because of its potential to generate income and employment.

Globalization has reduced the capacity of growth and job creation of Western Europe and North America’s economies (Audretsch and Thurik, 2001). Wilkinson (1999) states that the future trend, in terms of job creation and new types of employment, will be dominated by SMEs, which can improve the economy and act as the main source of innovation. Innovation policies in SMEs can be a stimulus to organizations growth and competitiveness. However, these companies heterogeneity makes it difficult to implement innovation policies for them. The role of SMEs in the economy of nations is quite high, which requires awareness on business leaders, govern- ments and managers to the constant improvement of management models applied to this type of organizations. One of the least-studied areas of management in SMEs is HRM area. As stated by Wilkinson (1999) more recently we can face a substantial increase in the number of studies on SMEs, but even these are based mainly on finance, marketing and operational management features. So, it is important to analyze organizational HR, allowing them having a more pressing role in busi- ness policies of SMEs, as a factor for innovation and competitive advantage.

SMEs Definition

There is no agreed definition on SMEs (Storey, 1994). (See Table 1.) There are several criteria used as the number of employees, volume of sales and the resources or energy used (Cunningham and Rowley, 2007). One of the most popular defini- tions among researchers is based on the number of workers. However, this definition has some disad- vantages such as, being dependent on the business sector and the non-specification of the employees worked hours. An important point in the definition of SMEs is the comparison between small and large companies. This comparison appears in a variety of organizational contexts. There are several authors

who identify some specific components in SMEs in relation to other companies (for example, Cas- sel et al., 2002; Wilkinson, 1999; Storey, 1994). Storey (1994) presents some conjectures about the difference between small and large companies. One of them is the vast probability of evolution and change in small companies. Small firms that become larger pass through a number of stages of change that influence the role, management style and organizational structure. The author argues that key dimensions, when SMEs differ from large companies, are uncertainty, innovation and business development.

A number of problems emerged when it was assumed that small companies are the same as large companies (Cassel et al., 2002). According to the authors the traditional view which defend that these organizations should be managed by the same way that large organizations, but on a smaller scale, fail to create an understanding of the unique and distinctive processes and prac- tices, and its impact on SMEs. Size of company is often used to distinguish between a small and a big company. The European Commission defines SMEs, as enterprises that employ fewer than 250 persons and whose annual turnover does not exceed 50 million or total annual balance not exceed 43 million euros (European, 2006).

Table 1. SMEs definition

Category Members Annual Turnover

Overall Balance

Medium enterprise

More than 250

More or equal at 50 millions of euros

More or equal at 43 millions of euros

Small enterprise

More than 50 More or equal at 10 millions of euros

More or equal at 10 millions of euros

Micro enterprise

More than 10 More or equal at 2 millions of euros

More or equal at 2 millions of euros

Source: European (2006)

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The debate about a definition of SMEs seems to be useless unless the company size is a variable that influences performance. In practice, the size of the company seems to be a discrete and con- tinuous variable (Storey, 1994). Although con- sidered a major factor, firm size is not sufficient to explain the main models of industrial relations. A variety of factors such as internal and external influences (for example, property characteristics, sector characteristics, technology and economic indicators) explain behaviors (MacMahon, 1996). Small organizations are open systems where changes in the external environment have a sig- nificant impact on the internal dynamics (Mac- Mahon, 1996), the motivations and actions (Storey, 1994). All organizations exist in an en- vironment from which get the resources they need to survive and in which they put the results of this action (Cunha et al., 2007). However, SMEs by their limited capacity in the collection of re- sources and the difficulty in competing with the other companies’ products require a strong con- gruence between the external environment and its internal dynamics. External forces tend to have greater impact on small organizations than in large organizations.

Informality usually characterizes SMEs, especially on their work relations. According to Storey (1994) research on companies indicate that small organizations are better prepared to oper- ate in a more informal and flexible environment than larger companies. Organizational structure of SMEs allows informality in employment rela- tions and management practices. This is because the manager is in the operational area, which facilitates an open and informal communication.

Having an important role in the global econ- omy, the extent of growth of SMEs is very large. The difference between growth and consolidation of the company is in the way some small com- panies look for consolidation as out of business, while others look at it as an opportunity to grow (Fraza, 1998). The author notes that for many fast-growing SMEs, the main problem is to find and retain high quality employees.

According to Cassel et al. (2002), SMEs can be divided into two groups: those that operate independently in small businesses and those who belong to a large organization. There is evidence to show that the second group uses more formal procedures about the specifics of human relations (Cassel et al., 2002). An SME that belongs to a large organization incorporates a more developed organizational culture and more formalized man- agement practices, because it has resources and know-how that other SMEs usually do not.

The risk of many definitions of SMEs is a perspective that there is homogeneity in the sector and that all small companies have similar charac- teristics (Wilkinson, 1999). More recently there has appeared the notion that SMEs are complex, diverse and influenced by multiple factors and that a simple categorization does not necessarily incorporates the diversity of experiences of SMEs (Kotey and Sheridan, 2004).

Characteristics of HRM in SMEs

HRM in SMEs was, until recently, low recognized. To this contributed a little research and studies about SMEs (Reid and Adams, 2001). Recently, however, research on practices of HRM in SMEs increased considerably (Kok and Uhlaner, 2001). A possible explanation for this phenomenon is the important source of information and material of studies about SMEs that provides management researchers, with the development of new theo- retical approaches (Cassel et al., 2002). Several authors have suggested in their studies that HR can be a source of competitive advantage (for example, Barney and Wright, 1998; Cunningham and Rowley, 2007). HRM have an important role in implementing practices that benefit employees both in performance and motivation. In most cases, HRM practices benefit the modernization and advancement of SMEs. A research in the US proved that poor emphasis on HR in SMEs was one of the reasons for businesses failure in the studied companies (McEvoy, 1984).

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SMEs have difficulty in implementing poli- cies and practices of HRM. A study by Heneman and Berkley (1999) confirmed that in 117 small companies, only 15 had a HR department. One reason for this is the difficulty in recruiting and retaining employees due to limited financial resources and reluctance to lead at great cost or prohibitive practices. As noted Cardons and Stevens (2004), in SMEs, where resources are limited, the probability of having a department with HRM professionals is very small.

Two aspects influence the definition of HRM in SMEs: informality in small companies vs. formality in large companies and HRM practices of large companies adapted to small businesses. The majority of small companies use informal HRM practices. The definition of HRM in SMEs involves a comparison with HRM in large compa- nies, with most HRM studies developed in large companies. The application of HRM practices in small companies usually includes practices used in large companies, but adapted to the size, resources and culture of SMEs. Employment relations in SMEs can be complex, contradictory and infor- mal, rather than harmonious or autocratic (Ram, 1991). Opposite to large organizations, in SMEs employees tend to develop a number of different works (Kok and Uhlaner, 2001).

HRM practices in SMEs are frequently defined as informal. There are contextual variables that predict whether or not HRM practices exist in firms and their level of formality, namely, firm size, strategy, technology and structure (Jackson et al., 1989). Until 1970, the major HRM research focused on the development of effective HRM practices in large organizations, studies that linked HRM practices and performance of HR (Kok and Uhlaner, 2001). Recently, studies examine the impact of more formal HRM practices on performance at the organizational level (for ex- ample, MacDuffie, 1995; Huselid et al., 1995). These authors research, analyze the impact of innovative HRM practices when integrated with

organizational policies. They defend the “best practices” model (Kok and Uhlaner, 2001).

Overall, firm size is related to the incidence of HRM in the planning and the level of formalization of HRM (for example Kotey and Sheridan, 2004; Kok and Uhlaner, 2001). Although companies size influence HRM practices, isn’t clearly the only important factor, given the variation in these HRM formalization practices. A study conducted by Kok and Uhlaner (2001) proved the importance of company size as an indication of a formal de- velopment of HRM. Moreover, SMEs varies their HRM practices. Another important conclusion is that the main influence of HRM practices is the evaluation of resources rather than the expecta- tions of stakeholders, that is, investment and HR planning are positively associated with labor productivity (Koch et al., 1996).

Several studies about SMEs assumed them as informally organized and with informal HRM practices. But these characteristics are not unanimous, with many exceptions to this model / standard. Apart from the variable size of the company there are other contextual factors that may influence HRM practices (Kok and Uhlaner, 2001). Looking through informal and formal mechanisms, through which SMEs manage their workers, will provide a better theoretical perspec- tive and empirical practices of SMEs (Cardon and Stevens, 2004).

SMEs along the years have been sidelined from major studies on HRM. Departed from the principle that HRM practices developed in large companies would fit in small companies. But this perspective is not quite correct. SMEs have a specific characteristic that does not allow an adjustment of practices and policies of large companies. It is true that SMEs with links to a large company are better able to implement some HRM practices (Kok and Uhlaner, 2001), but this is because they share political and organiza- tional resources. Barber et al. (1999) suggested that using only the existing models of HRM for

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SMEs is not significant. HRM practices of large companies haven’t had positive results (for ex- ample the authors report that recruitment in large companies is more formal and bureaucratic than in SMEs). Instead, researchers should focus on specific theories and practical strategies for SMEs and focus on the multiple company and workers characteristics (Cardon and Stevens, 2004). Ac- cording to these authors there is not necessarily one correct way to HRM that SMEs can adopt. For the authors, researchers should explore the interaction between HRM practices and other factors, and their influence on individual and organizational performance. Barney and Wright (1998) suggest that the major challenge for HRM is to develop systems of practices that create synergistic effects with the aim to develop independent sets of best practices.

SMEs are usually associated with family businesses. This relationship isn’t always easily communion. Family perspective is depreciative in nature, that is, family businesses are seen as dysfunctional and low capacity for innovation and growth. For Ram and Holliday (1993) SMEs are saturated with the ideology of family. The concept of family is crucial to understand the totality of social relations in SMEs, but is much more complex and contested than is commonly portrayed. For Wilkinson (1999) family style is actually a form of authoritarianism with few challenges to the company manager. Flexibility is more similar to instability where there are few procedures or systems to develop the work. Fa- miliar communication is seen as a resource and as a constraint to management through flexibility. Family businesses have additional problems due to family links in existing employees. This point causes problems in business management. As relate Holland and Boulton (1984), the relation- ship between company management and family increases the complexity of organizational and management problems. Family business manag- ers should consider their position in relation to the family as well as their role in business. The

specifics of family business, as well the limited organizational capacity don’t allow fast develop- ment in the implementation of HRM policies and practices (Reid and Adams, 2001).

Recruitment and Selection in SMEs

Recruitment is, perhaps, the most discussed topic of HRM in the context of SMEs (Cardon and Ste- vens, 2004). Although the majority of SMEs don’t have a HR department, they have recruitment and HR policies (Cardon and Stevens, 2004). A large number of SMEs stated that recruitment has been put into practice with great attention, as a way to ensure they find the “right” person, using informal dissemination and methods of recruitment by word/opinion (Carroll et al., 1999). Recruitment is problematic for SMEs due to limited budget and material resources, lack of legitimacy as an employer and also the large number of functions that requires the employee to perform various roles with responsibilities not very explicit (Cardon and Stevens, 2004).

Empirical evidence suggests that SMEs have enormous difficulties in attracting employees with the knowledge they need (Carroll et al., 1999). So the main challenge of recruitment in SMEs is, indeed, attract and select candidates in the absence of an HR professional or manager experienced in this area.

The quality of manpower on the market, in- cluding lack of basic competencies, particularly in younger people (Carroll et al., 1999) makes very difficult the task of recruiting in SMEs. The search for experienced employees with specific skills is critical for SMEs because they usually have lack resources, or incentives aren’t attractive enough.

There are theoretical and empirical evidence that shows the recruitment process in large com- panies is different for small companies (Tanova, 2003).

Articles about recruitment usually recommend a systematic procedure comprises four steps: an assessment of the need to occupy the open va-

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cancy, a functional analysis, a conducting of job description and characteristics required of the applicant (Carroll et al., 1999). SMEs do not have this type of proceeding. There isn’t a formality in the recruitment process. As stated by Barber et al. (1999) recruitment in large companies are more formal, bureaucratic and more resources are used than in small companies. Small companies use external recruitment, such as employment agencies or educational institutions (Deshpande et al., 1994).

Despite recognizing the importance of HRM for SMEs, there is little research on the selection of employees (Barrett and Mayson, 2006). SMEs are companies with low material, financial and HR, which makes it difficult the application of HRM practices, at least formal practices. Gener- ally speaking, R&S are applied to SMEs, but in a different way from the more formal and procedural perspective used by large companies (Cassel et al., 2002).

The notion of “adaptation” is a recurrent topic in the literature of R&S in SMEs (Carroll et al., 1999). SMEs seek an employee to match the function and not by qualifications or profes- sional skills. As refer Carroll et al. (1999) in SMEs individual selection interviews empha- size the “adaptation” (fitting in), relegating, to a secondary level, qualifications or registration of professional experience. Another relevant aspect in the selection process in SMEs is that “good” workers aren’t selected because they can be seen as a threat to the owner independence (Kotey and Slade, 2005). This question is usually discussed in small family businesses, which are controlled by managers / owners with low skills, whose ones see qualified HR as a threat to their authority and competence. In recent years, with increased training and competitiveness of businesses, this problem tends to disappear.

The Case of HRM in Portuguese SMEs

As in other European countries, Portugal has its own peculiarities in people management. Despite this, studies of HRM in Portugal are rare. Ac- cording to Caetano and Vala (2007), available data on HRM in Portugal are scarce and results from activities carried out by the organism APG (Portuguese Association of Human Resources Managers and Technicians). Portuguese business environment is composed essentially of SMEs, which play an important role because they create richness and employment (Duarte, 2002). This reality limits the development of HRM in Portugal (Cabral-Cardoso, 2006). The economy structural conditions mainly composed of SMEs and fam- ily run businesses without a personnel function does not seem to be a favorable environment for the growth of HRM in Portugal. When we try to identify if organizations have an HR manager, the size seems to be a crucial factor. At least 73% of all HR directors are placed in medium and large firms (Cabral-Cardoso, 2004).

Portugal has been experiencing a transition over three decades. The country lived through a 20th- century totalitarian regime, which had the ideal key “proudly alone” (Cunha, 2005). According to Cabral-Cardoso (2006), Portugal until 1960 can be described as a poor society, largely agrarian, ruled by a political elite from a small number of well-established families. After the phase of political and social turbulence experienced in the 60’s and 70’s, Portugal lived through profound changes in management and managers. During these three decades, Portugal has experienced profound changes in their society and its business community. Regarding the role and status of HR managers, in recent decades there hasn´t been major changes (Cabral-Cardoso, 2004).

Another study by Cabral-Cardoso (2004) iden- tified two barriers to the implementation of the HRM function in Portugal. The first barrier is the “lack” credibility of a HR manager in organiza-

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tions; the second is structural and relates the size and type of organizational structure in Portugal. These barriers stem from the low status of HRM function and the common view in public opinion that management can be performed by anyone provided that gain some experience in the orga- nization. This is reflected in the structure of the Portuguese economy, composed mainly by SMEs and family businesses without the distinction of the function of personnel manager.

Despite all these constraints and limitations to the development of HRM in Portugal, there has been progress in the implementation of practices that boost and valorize HR in organizations. Organizations are beginning to include in its organizational structure a HR department, which allows more centralized management practices, the greater credibility of HR managers, vision of the manager as an expert in the area of people management (Cabral-Cardoso, 2006) and also better strategic integrated, more influence at the top and HR policies aligned with the business core (Cabral-Cardoso, 2004).

METHODOLOGY

This research focuses SMEs in Portugal. To analyse HRM in Portuguese SMEs, particularly, R&S, it was used a survey questionnaire, sent by email, for a total of 512 companies.

Goals Definition

The enormous business competitiveness in the world and constant search for sources of competi- tive advantage has originated many academic and professional studies to address on the potential of HRM in business success. Since the vast major- ity of Portuguese companies are SMEs and this area stands a little neglected by academics and practitioners, becomes relevant to analyse people management developed in Portuguese companies.

This study aims to contribute to a better under- standing of the real situation of HRM in Portuguese SMEs, particularly, the practice of R&S.

So, we try to:

• Identify the main characteristics of R&S in SMEs.

• Examine the relationship between HRM and strategy.

• Assess the implementation level of R&S in SMEs.

Sample

Sampling and in particular the sampling proce- dures applies in various areas of knowledge and constitute, often, the only way to get information about a particular reality that know what matters. Based on the extent of the study, SMEs at national level and the object of the study, R&S, the sample was selected from a convenience perspective, from a database (target population) on the market.

The target population of the study was “the 1000th best SMEs ” Issue 284, December 2009, from Exam magazine. The Exam magazine pub- lishes every year a list of 1,000th’s best SMEs at national level.

After collecting companies contact details, it was found that there are a limited number of avail- able emails. Further, a vast number of companies didn’t have any website. These limitations reduced our sample to 512 companies.

Variables and Data Collection

The next step was to build an instrument to facili- tate data collection for research, applied to a vast number of respondents. It was chosen the survey questionnaire. Then, variables to be analysed were defined, namely:

• Organization and strategy. • R&S.

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• Training and development. • Performance appraisal. • Compensation.

Surveys collected corresponded at 10.1% of all companies. Although low these values are within acceptable limits for this type and area surveys. There isn´t a value acceptable response rate for this type of study. It is true that the higher the better, for a systematic analysis of data (Roth and Bevier, 1998). One-third research of SMEs on scientific journals, between 1991 and 1995, had a response rate below 25% (Dennis, 2003).

Sample Characterization

After surveys collection, it appears that 62% of companies belong, respectively, to manufacturing sector (32%) and wholesale trade/retail (30%). The remaining percentage is divided 7% in building construction, 6% in transport sector, 4% in com- munications, and electricity and gas. Finally, 2% belongs to electromechanical sector, engineer- ing, health, audit and agriculture, fisheries and agroforestry. We didn’t find companies in the extractive industries and banking.

About the number of employees for each organization, we find that most of the surveyed companies have less than 250 employees (72%). Organizations with more than 250 employees ac- count for 14% of the sample, 12% have less than 50 employees, and only 2% of firms have fewer than 10 employees. Thus, according the Portuguese National Institute of Statistics, 72% of companies are considered medium-sized organizations, rep- resenting, companies with less than 50 employees (small organizations), and 16% of the sample.

It also appears that most respondents are HR responsible of these companies (74%), 12% are general directors or managers, 6% belong the quality department, 4% the administrative area and 2% are commercial managers and accountants.

In what concerns academic qualifications, the great majority of respondents (75%) have a

graduate degree. The lowest level of educational attainment represents 12% of the sample, (second- ary level). This value has great relevance for the study, as seems to anticipate the nonexistence of HRM in some companies.

RESULTS AND DISCUSSION

This study attempted to understand the exist- ing level of formalization, collecting a group of elements that allow us to define the reality of SMEs and understand what are the strengths and limitations of R&S of HR in small organizations. It is expected to contribute to the construction of scientific knowledge about HRM in SMEs in Portugal, especially the practice of R&S.

World business competitiveness and constant demand for sources of competitive advantage has led many academic and professional studies to understand the potential of HRM in business success. Since the large majority of Portuguese companies are SMEs and this area is, still, a little neglected by academics and practitioners, it is important to analyse HRM and its specific features. A question/problem arises:

Is there R&S, truly strategic, structured and conceptualized or just informal and disconnected from core business?

Several authors contribute to the achievement of a possible answer to the problem. Cassel et al. (2002) reported that the approach to HRM of SMEs is fragmented and more reactive than proactive, holistic and systemic. Cardon and Stevens (2004) report that owners of companies are more con- cerned with their systems of telephone networks or the Internet platform than with the culture and practices of HR managers. Cabral-Cardoso (2004) states that the use of the designation HRM in Portuguese firms means strategic integration, that is, greater influence at the head of companies and HR practices more aligned with the core business.

Commonly used in SMEs, R&S practices are developed from an informal perspective being

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more structured and formalized in large compa- nies. Relating those who have a recruitment plan in place with the number of employees, the as- sociation isn’t significant (R Pearson correlation of 0.48 at a significance level of 0.742): there isn’t evidence that the greater the number of employ- ees, the greater use of a recruitment plan. About recruitment tools used, they are well defined for operational employees (placement of ads: 68%; personal contacts: 76%, spontaneous contacts: 80%), contrary to top managers (placement of ads: 22%, employment agencies: 10%; personal contacts: 30%). Few in SMEs, top management is mainly composed by the administrator and shareholders. For reasons of family surroundings, top manager’s recruitment is perpetuated in the company administrator family. Concerning selec- tion, SMEs use mostly individual interview and trial period, inexpensive methods for companies, as they need few human and financial resources. In the future, the picture doesn’t change consider- ably, as individual interview and trial period will continue to be the most widely used selection methods.

Outsourcing is widely used by SMEs. It al- lows reducing the costs and the need for a more complex organizational structure. We tried to find some evidence between dimension and the use of outsourcing related to R&S (Table 2). There isn’t evidence from outsourcing activities related to R&S and company size.

In order to check if there is any link between firm size and greater or lesser use of R&S, we used statistical test Eta, a measure that allows

observing the association between variables. ETA2 represents the proportion of variation in the de- pendent variable that is explained by the indepen- dent variable (Pestana and Gageiro, 2000).

Calculating Eta for all previous points we verified that there is an association relationship between the variables “R&S plan in the company” and “number of employees of the company” - Eta equal to 0.241; ETA2 equal to 6%.

The association is weak (Pestana and Gageiro, 2000) because only between 0.6% and 15% of the variation is due to firm size.

HRM debate in SMEs arises inevitably as- sociated with the degree of formalization of practices. The new interest in HR as strategic for the organization tries to establish a HR framework with an important role in organization wealth creation, directly contributing to the implemen- tation of operational and strategic goals (Becker and Gerhart, 1996).

Many variables, like size, environment and strategy, influence HR practices in SMEs (Kok and Uhlaner, 2001). Crossing the variables “overall business strategy” and “role of HR Manager”, it can be observed that respondents, who define HRM totally related to overall business strategy, identify HR manager as a business partner. With the purpose of testing correlation between compa- nies that define HR manager as a strategic partner and the level of implementation of the main HRM practices, was used Spearman correlation coef- ficient, which resulted in a negative association in R&S. There is an association relation between the variables “strategic partner” and “R&S” - S = - 0.271, with a significance level of 0.18;

Results aren’t conclusive because correlations are very weak with a significance level much higher than 0.05 (Pestana and Gageiro, 2000).

Planning recruitment is a crucial phase for the company strategy. A poor recruitment or lack of planning can cause several operational and finan- cial losses for the company. Financial because there was an investment in an employee who isn’t a company added value and operational because

Table 2. Comparison between external recruitment and selection with company dimension

Company Dimension Recruitment and Selection

Less than 25 employees 0 percent

Less than 50 employees 2 percent

Less than 250 employees 22 percent

More than 250 employees 6 percent

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company may need HR and didn’t anticipate recruitment need to successfully fulfil deadlines. According to Gomez-Mejia et al. (1995) HR plan- ning is used by an organization to ensure the right number and type of people need in future. Its non- existence may lead to huge losses for companies. In our research only 34% of respondents have a recruitment plan against 66% who don’t have. From these 34%, only 4% have a plan longer than five years and 2% from four to five years. Most respondents have a short-term plan (12% less or equal to one year and 16% from one to three years). One of the HRM practices characteristics in SMEs is that they are informal, ad hoc and disintegrated from business (for example Cardon and Stevens, 2004; Barrett and Mayson, 2007). Our results demonstrate these characteristics, as most companies do not have an HR planning, working in an ad hoc way.

HR managers have a great involvement in more traditional practices such as R&S (84%), perfor- mance evaluation (66%), training and development (needs diagnosis, 72%; training activities planning, 68%; training design, program design and content, 64%; and training process evaluation, 80%), and health and safety at work (84%).

Companies have a number of different re- cruiting tools, which allow business access to a diverse audience. Requirements in the search for a top management employee are not the same as for an operational employee, which is, usually, simpler. So, it seems interesting to analyse the different types of tools used for top management, personal supervision, department directors and operational employees. The most used tool for top management is personal contacts (30%). References (34%), placement of advertisements (40%) and spontaneous applications (80%) are the most used recruitment tools, respectively, for personal supervision, department directors, and operational staff. Top management need employ- ees with great management skills, crucial for the company survival, reason why is necessary to find the best HR. For business becomes more reliable

recruit through personal contacts (30%), as well as considering references (26%). An interesting finding is that research in schools/universities, first considered a privileged toll to this audience, is one of the lesser used (4%). It may indicate the need for employees with business proven track. About supervision, commonly used tools are references (34%) and personal contacts (32%). Companies look employees with proven experience and trust, reason why they seek them through their personal contacts and references in business market or from closed people. Recruitment of department direc- tors makes use of placing ads (40%), references (36%) and personal contacts (34%). The place- ment of advertisements for directors recruitment seems to be a common practice in companies, at least seen the numerous advertisements placed in newspapers and Internet for its signature. Fi- nally, operational employees make a wide use of spontaneous applications (80%), personal contacts (76%) and references (72%). Recruitment through spontaneous application seems to show a turning point in the recruitment of SMEs. Increasingly, companies are focusing on placing links on their recruitment websites, which help companies acquire a database that can be used at any time. According to the literature, recruitment in SMEs is informal, without a strategic perspective. A large number of SMEs stated that recruitment has been put into practice with great attention, in order to find the “right” person, and through the informal dissemination and methods of recruitment by word / opinion (Carroll et al., 1999). This reality seems to be present in the surveyed companies, which place great emphasis on personal contacts and references.

As recruitment, selection plays an important role in finding the best employees. (See Table 3.) According to Anthony et al. (1993) and Carrel et al. (1995) selection is a process of choosing in- dividuals who have the skills needed to perform a particular function. For the best possible selec- tion, companies use various selection methods. Among the proposed selection methods, most

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SMEs use individual interviews and experience period in the groups of employees, but with slightly different values. The individual interview and the experience period are used, respectively, for top management (36% and 26%), supervision (44% and 36%), department directors (52% and 46%) and employees in general (90% and 82%). Less used selection methods in SMEs are hand- writing analysis, tests of integrity/honesty and tests for drugs use.

In what concerns liable selection methods (See Table 4) to be used in the future, the outlook isn’t very different from that currently used. Changes are the increased importance of structured forms and knowledge tests. Companies will use more individualized interviews (86%: sum of moder- ate, high and very high probability), knowledge tests (70%) and structured forms (68%). Selection methods with little impact on SMEs will be use of drugs tests (52%: sum of “no” and “limited” probability), handwriting analysis (48%) and integrity/honesty tests (32%).

Cassel et al. (2002) suggest that there is con- siderable diversity in how HRM practices are implemented in SMEs and their relative success. SMEs have lower material, financial and HR, which limits the implementation of HR practices. Despite their diversity and limitations, several authors claim the existence of conditions for HR practices implementation.

Some HRM practices, like R&S, are more used than others. (See Table 5.) These practices have few implications in terms of resources, which facilitates its implementation. Despite known limitations, collected data show that 90% of the companies have an HR department.

Although only 33% of companies consider employees as very important in long-term plan- ning, 66% didn’t have a recruitment plan, 16% consider HR manager as a specialist administra- tive, 76% use personal contacts in employees hiring and 18% consider inappropriate selection, we can conclude that there is some form of HRM, even more informal or with more or less impact, in the analysed SMEs.

CONCLUSION

R&S practices are commonly used in SMEs. Research data prove it, with 84% of surveyed firms using R&S. Although critic in company strategy, only 34% of respondents reported hav- ing a recruitment plan, with the other 66% saying there is no HR planning. Regarding recruitment tools used, these just seem to be well defined for operational-level employees. In selection, SMEs utilize, mostly, individual interview and trial period employees. Selection methods less used are handwriting analysis, tests of integrity/ honesty, and drug use tests. A major problem of

Table 3. Recruitment Tools (percent)

Top Management Supervision Department Directors Operational Staff

Ads 22 28 40 68

Employment Agencies 10 18 18 42

Schools/Universities 4 10 24 54

Personal Contacts 30 32 34 76

References 26 34 36 72

Spontaneous applications 10 12 16 80

Internet 8 12 18 48

Newsletter 2 6 6 20

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SMEs is to compete with large companies on the attractiveness and labor conditions. So, employee retention becomes a challenge, and a commitment, to business owners in order to use incentives and improved labor conditions. Outsourcing is an un- common practice in SMEs, only used in training and development.

Although respondents understand the impor- tance of HRM for their companies, its implemen- tation on the ground is not very evident. R&S practices seem to be more developed. In sum, HRM in Portuguese SMEs is informally devel- oped, without a business strategic integration.

Study Limitations

This research have faced limitations, some were overcome, others not. One of them refers the lack of theoretical studies on HRM in SMEs in Portugal. At national level, studies are rare. An- other one refers the reduced number of surveys received (only 10.1% affirmative answers), which conditioned the entire empirical analysis. We can’t present absolute truths, as the small number of surveys doesn’t allow us to extend the findings to all Portuguese SMEs.

Table 4. Selection Methods (percent)

Top Management Supervision Department Directors Operational Staff

Structured forms 6 14 20 38

Individual interview 36 44 52 90

Knowledge tests 2 6 6 14

Tests of specific knowl- edge

6 12 10 16

Tests about use of drugs 4 4 0 6

Personality tests 10 12 14 16

Integrity/honesty tests 0 4 6 4

Handwriting analysis 0 2 4 10

Experience period 26 36 46 82

Table 5. HRM Practices Used in Future (percent)

Without application Applies without HR involvement

Applies with HR involvement

Recruitment and Selection 6 10 84 *

Performance assessment 18 16 66 *

Job description 26 34 40 *

Career plans 46 * 22 32

Performance bonus 24 32 44 *

Staff plan 24 32 44 *

Safety and health at work 4 12 84 *

Competencies Management 20 22 52 *

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Recommendations for Future Research

About future lines of research, it would be in- teresting to approach other areas not studied, as organizational change or labor relations. Another area of analysis would be to understand the role of quality processes in HRM implementation. SMEs are increasingly focusing on quality certification processes and procedures. One of the areas inter- vened is HRM, which implies the formalization of some procedures. It is important to understand what are the steps given.

Another line of research would analyze the main HRM practices in SMEs and its relation to company’s business.

Finally, it would be interesting to deeper this study, finding alternative methodology to collect more empirical data.

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Chapter 19

DOI: 10.4018/978-1-4666-4731-2.ch019

ABSTRACT

To be successful exporters, SMEs have to penetrate foreign markets rapidly, at low cost, maintaining control of core technologies and products, while adapting product features to local customer requirements and preferences. Entrepreneurs have to find and evaluate potential partners, overcoming differences in business cultures and their ignorance of foreign accounting rules. Internationalization has deep and relevant implications in effective human resources management. In fact, the expansion of the firms allows the creation of new job opportunities both in the home country and abroad. This process could be seen as a solution, or better as mitigation, for the current problem of unemployment that our society has to face in this period of crisis. SMEs need to be supported in their expansion abroad. In Italy, public and private agencies provide services to achieve this. The aim of this chapter is to analyze how they operate, what services they provide, and how much they support enterprises. As a case study, the authors examine services provided by Chinese agencies because China is one of the most active countries in international markets. Italian and Chinese agencies are compared focusing on the existing standard services provided and their customization according to specific domain needs. Finally, the authors present a global view of today’s scenario to define future directions of current internationalized services.

Internationalization Services for Small and Medium Enterprises:

A Case Study

Enrico Buggea Politecnico di Milano, Italy

Roberto Castiglione Politecnico di Torino, Italy

Tania Cerquitelli Politecnico di Torino, Italy

Lorenzo Grosso Politecnico di Torino, Italy

Giacomo Rontini Politecnico di Milano, Italy

Arianna Scolari Politecnico di Milano, Italy

Lei Xiang Politecnico di Torino, Italy

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INTRODUCTION

In Italy SMEs (Small and Medium Enterprises) represent the 99% of the total national enterprises. However just 13% of them are active on interna- tional markets, although extending their business abroad should be undoubtedly better as shown later (Cliti, 2012). To give explanation to this trend the authors investigate customers (companies) needs, requirements and main issues in extending busi- ness abroad, comparing them with the services that are actually provided by agencies and banks. The comparison is focused on: (i) Existing services offered by agencies including public institutions, consulting agencies, private institutions and banks to support SMEs in extending their businesses abroad; (ii) Service customization and solutions for specific domains and sectors to help SMEs grow internationally.

This part is the core of the chapter and it is structured as follows. The first section is devoted to figure out the scenario of Italian SMEs and their role in the internationalization market; the second section analyses the agencies and services available, with a close eye on China, one of the most active countries in international markets in the last 30 years due to the opening on foreign markets and the growth of foreign direct invest- ments. The third section is about classification and main features of the considered type of services and the analysed agencies are evaluated according to this classification. The result of the comparison gives a global view of the actual scenario.

The end of the chapter includes final com- ments and suggestions in order to define possible directions of improvement and enhancement of actual services.

BACKGROUND

During the past decades SMEs have been the backbone of the Italian entrepreneurial system and have provided the main drive for its eco-

nomic development. Nevertheless their structural weaknesses, SMEs remain the platform on which the Italian economy should build new growth processes. To become the driving force behind the Italian production system, SMEs should necessarily undertake strategies to increase their degree of internationalization (Calcagnini & Favaretto, 2011).

The reason why internationalization is such a crucial topic is that among Italian SMEs the performance of those which directly export on foreign countries is much better in respect to ones only oriented on the Italian market (Libero quotidiano, 2012). About enterprises with 1-9 employees, the productivity of “internationalized” ones is 38.4% more than others, while it is 26.6% among enterprises with 10-19 employees and it rises at 34.5% in firms with 20-99 employees.

The globalization has stressed the competitive- ness or even the survival problems of small en- terprises, mainly because significant competitive factors, such as scale economies and technological research/innovation, are generally not very devel- oped within Italian SMEs (Cedrola et al., 2009). Small enterprises are too often focused on product and on use innovation (Von Hippel, 1988) rather than on intangible resources such as knowledge and information (Plechero & Rullani, 2007).

On this basis, it is clear that small sized com- panies face significant difficulties in the interna- tional competition (Ohmae, 1985) when focusing on domestic markets or on personalized products for the international markets.

It is imperative that all SMEs strive for re- positioning themselves in competitive terms. The entire nation is interested in supporting SMEs on their difficult path towards rebuilding and the role of banks in this context is fundamental. Banks are responsible for assuring the adequate credit flows to the firms that will be able to generate a new phase of investments, necessary to foster profound innovation in Italian production structure. Invest- ments, aimed at incorporating new technologies in the processes of SMEs, are necessary to fill

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the obvious productivity gap in their production factors with respect to larger firms, but also invest- ments to increase immaterial or intangible capital. This kind of factors such as human capital, social capital, the propensity to form networks, the ability to express one’s qualities and to adapt products to demand are not well managed by SMEs in terms of key strategy. It is nevertheless true that they appear to be fundamental elements so that the small size of these firms does not remain an insurmountable obstacle to their internationaliza- tion prospects (Calcagnini & Favaretto, 2011).

Nevertheless the reorganisation carried out by Italian manufacturing firms during the period 2003–2007, in the most recent economic crisis the Italian economy has still characterized by a production system highly skewed towards small- sized businesses. This phenomenon has two im- plications: (a) a large share of firms makes their production decisions based on domestic demand; (b) small-sized firms find competing internation- ally more difficult than larger firms. The combined effect of a compressed domestic demand and the increased competition in international markets explains the trends of the Italian GDP (Gross Domestic Product) growth rates during the crisis as discussed in (Calcagnini & Favaretto, 2011). It’s crucial that Italian SMEs, even in a trouble contest, aim in investing in growth and reach an appropriate size in competitive international mar- kets. For this reason a particular attention will be reserved for small and medium size enterprises, the living of the Italian industrial structure, ac- cording to (Castellaneta, 2011).

In conclusion the core of the Italian industry is a significant group of firms that are trying to react to the economic crisis since 1929. They aim to compensate for stagnant domestic demand by looking for new foreign markets or by expanding their existing ones. On the other hand the quest for growing foreign markets is a complex one because of the relatively small size of Italian businesses. To deal with this challenge the Italian industry needs increase the firms’ efforts to a more intensive use

of scientific and technological knowledge, more skilled workers as well as increased equity among their financial resources. Furthermore new busi- ness models require a general upgrading of the human capital; it means that business growth is also linked to training, listening and to the capa- bility of managing relationships.

Internationalization: How and for Whom

Italian SMEs Business Activities

The greatest part of Italian small and medium enterprises, especially those with less than 10 employees, are concentrated in the service sector (almost 76% of all SMEs), (Studi confcommercio, 2009) particularly in real estate, information tech- nology, research and other professional activities (25.2%) and retail trade (16.5%) (Studi confcom- mercio, 2009). Going up in size (from 10 to 249 employees) the share of SMEs in services (about 46%) decreases because the more widespread is the presence of medium-sized enterprises in the industrial sector. (Studi confcommercio, 2009)

SMEs Needs, Requirements and Issues in Extending Business Abroad

All companies aim to reach good results in ex- tending their business abroad. The achievement of the objective depends on three main factors: the products and their competitiveness in new markets, the fulfilment of new potential custom- ers’ needs and the capability of the company in making profits. The first two factors are strongly related to the product while the third one depends on several boundary condition like the penetration in foreign markets rapidly and at low cost.

Furthermore different business strategies can be evaluated by entrepreneurs; building new manufactures abroad requires lots of capitals and a complete reorganization of the enterprise, while spreading out technology and competences to

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foreign firms settled on the market, making profits on property rights, means losing the control on core technologies and products and it’s usually what SMEs want to prevent. The preferable way is founding foreign partners which deep know requirements and preferences of the local custom- ers, banking and tax legislation and can provide a distribution network. However, SMEs often do not have neither a dedicated export department nor resources to analyze in depth the market. In addition most of the time language is a barrier and entrepreneurs are not fully independent in finding and, most likely, evaluating potential partners.

Thus, it is clear that on one hand there is the requirement from SMEs of being supported in internationalization and on the other one there are a few Italian companies able to extend their busi- nesses abroad. Nevertheless in Italy both public and private agencies exist that provide services to help SMEs in extending their business abroad. In the following sections is developed an analysis on how they operate, what kind of services they provide, and how much they support enterprises.

The Benchmark Analysis

Benchmarking is the process of comparing one’s business processes and performance metrics to industry bests or best practices from other indus- tries and it is a fundamental and essential support for management to analyze the financial results of companies competing.

A benchmark analysis can compare results, trends of companies competing with each other, identifying key factors for success in the field of membership, to understand the dynamics of competition in the sector, identify the level of competition in a specific sector and support the strategic choices of enterprises. In this way, it is highly intuitive to locate the position of competi- tors and the drivers of sectors.

For example, the analysis allows:

• Identifying the most profitable competitors. • Investigating the trend of profitability of

competitors. • Comparing the cost structure. • Identifying the critical success factors for

operating in the area (size, leverage poli- cies, day credit, outsourcing, etc ...)

• Identify the products and / or most profit- able market segments.

• Identifying opportunities that the market can offer.

• Highlighting any waste company.

In this work we applied a top-down approach. After the identification of the active companies in helping SMEs, we set the criteria to classify the agencies and to evaluate their services. A survey about companies for measures and practises is set up and the “best practice” companies are visited to identify leading edge practices. Finally new and improved business practices are implemented.

Perform a Benchmarking

The target of the analysis is to underline the role that different existing agencies play to facilitate the internalization of small and medium com- panies. Among Italian agencies in our study we considered SACE (Sace, n.d.), Italian Chamber of Commerce (Italian Chamber of Commerce, n.d.), ICE (Ice, n.d.), Confindustria (Confindustria, n.d.), Assocamerestero (Assocamerestero, n.d.), Bank Intesa SanPaolo (Intesa Sanpaolo, n.d), while about Chinese ones Bank of China and Hongkong and Shangai Bank (HSBC) (HSBC, n.d.) are considered. For each one the provided services are evaluated to highlight their draw- backs, benefits and limits according to the set up criteria. This information is useful both to guide us in the research of information and during the agency comparison.

To analyse existing agencies we considered the following criteria:

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• Possibility offered to companies in finding counterparts both in Italy and in foreign countries.

• Efficiency in evaluating potential partners. • Effectiveness in helping companies to over-

come language and cultural limitations. • Ability in sharing abroad account-

ing knowledge (e.g. tax laws, banking legislation.)

• Introducing firms in participating in inter- national tenders and in engaging people locally.

• Each agency is analyzed singularly, focus- ing on the geographical widespread and the services offered.

Finally, a critical review is performed compar- ing the existing agencies with the chosen criteria and other additional ones, classifying them by sector covered, service type and evaluating their own main benefits and drawbacks. In addition an analysis of the Chinese agencies has been included in the evaluation, comparing them with the Italian ones. These results are presented through a table to have a global and final view of our benchmark- ing analysis.

THE ITALIAN AGENCIES

Italian Chambers of Commerce Abroad (CCIE)

CCIE - Camere di Commercio Italiane all’Estero (Italian Chamber of Commerce, n.d.) - is the as- sociation of the Italian Chambers of Commerce Abroad, established to evaluate and develop the Chambers activities, through increasing the level of interest and awareness on the network and its features among Italian and International institutions and business organizations. It is the association of Italian and local entrepreneurs and professionals, recognized by the Italian Govern- ment. In other words, it is the association of Italian

commercial chambers in the world. The CCIE are established and developed basically in countries with a considerable Italian presence. Nowadays there are 75 Chambers in 50 countries with 140 points of presence and over 24.000 member com- panies which 70% is about local firms interested in different forms of mutual exchange with Italy.

Products and Services Provided

CCIE represents the Chambers’ requirements and their service potentiality, seeking co-operative strategic alliances with public and private entities in order to foster knowledge and use of the Cham- bers network, as well as promoting Chambers’ activities. Italian enterprises are facilitated both in establishing contact with institutions and in accessing to co-financing programs promoted by the Ministry of Productive Activities and Unionca- mere Interchamber Fund and in establishing busi- ness relations, through an on-going information and communication action, a constant monitoring of the sector trends, as well as the publication of user friendly country profiles.

One of the most important issues entrepreneurs have to deal with developing internationaliza- tion projects is the lack of knowledge about how to approach new and not well-known markets. CCIE, in cooperation with territorial Chambers of Commerce, promotes training sessions and professional updating courses for managers and employees on management.

A huge amount of initiatives are organized about information and communication. Annual reports on sectorial business opportunity in host countries as well as “Business Atlas” (assocam- erestero.it), a practical and easy guide for eco- nomic and travel information in countries where Chambers operate, are edited and published. In addition a continuous collaboration with Italian press and media is active to establish relationships with Italian business communities in the world and to increase the visibility of Chambers’ activities, services and projects among SMEs.

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Summary

The main drawback of CCIE (Italian Chamber of Commerce, n.d.) is that it provides services only for SMEs operating in Italy or only in countries with Italian presence. Since CCIE is only a platform it does not include financial and insurance services. In particular it is an intermediary providing links, guides and information while direct operational support and tools are not provided.

On the other hand, CCIE provides a lot of publications regarding the development of foreign markets and studies regarding future scenario. The main benefit is that, in the database, enterprises are classified on the base of the industry sector with the indication of complete personal data of companies, e.g. location, owner, sector, contacts.

Intesa Sanpaolo

Intesa Sanpaolo (Intesa Sanpaolo, n.d.) is the banking group formed by the merger of Banca Intesa and Sanpaolo IMI and it is among the top banking groups in the euro zone, with a market capitalisation of 18.2 billion euro. Especially in Italy, it is the leader in all business areas (retail, corporate and wealth management) but, what is more, the international network of specialist that support enterprises is widespread 29 countries, in particular in areas where Italian companies are most active, as the Middle East, the North Africa, the United States, Russia, China and India.

Products and Services Provided

The services offered could be summarized in 3 macro classes: commercial banking, support to research and innovation in products and processes of companies (as the purchase of new technologies on the market), the improvement of the information systems and finally internationalization services.

About commercial banking, Intesa Sanpaolo offers specific services:

• Cash management, comprising domes- tic and international payment; SEPA payments; products supporting the opti- mization of cash flows and the manage- ment of liquidity (cash pooling and cash concentration.)

• Trade and export finance to support the in- ternationalization of companies, including into emerging markets.

• Factoring for efficient management of trade receivables (sale, administration and collection of receivables, and the recovery of bad debts.)

These services are offered with the support of three Intesa Sanpaolo Group companies, which are Leasint, Mediofactoring and Microcredito Italiano (www.group.intesasanpaolo.com) .

In particular, Leasint offers leasing for a wide range of activities as vehicles (private, commercial and industrial), aero-naval and railway means of transportation (yachts, planes, helicopters and trains), real estate (the acquisition and the con- struction of new buildings), equipment machinery and renewable energy sources.

Mediofactoring, improves corporate relation- ships with its clients and suppliers for the growth of their business, optimising the management of working capital, liquidity and developing specific solutions for companies operating in tourism, shipping, public healthcare, oil & gas and utility sectors.

Mediocredito Italiano, provides a specific fund- ing, called International+, in order to support the international expansion plans of SMEs.

Specific for SMEs, the agreement between In- tesa Sanpaolo and Piccola Industria Confindustria (Intesa Sanpaolo, n.d.) provides a new plafond of 10 billion for services and investments in different six areas: the development of “human capital” (education and employment), the growth in size (corporate finance transactions and streamlin- ing organizational), energy efficiency and eco-

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sustainability, internationalization, innovation, enterprise networks and other forms of alliances.

About the dedicated internationalization ser- vices, the international network in about thirty countries makes Intesa Sanpaolo a point of ref- erence for seeking out opportunities in markets abroad, providing support to customer trade trans- actions through International Trade Services (e.g. international cash management, international cash pooling for the optimal management of treasury flows, trade and structured export finance as let- ters of credit and finally international factoring, for converting export receivables on important volumes of goods and services into cash available to the customer).

Direct investments in new markets are sup- ported through financing provided locally, in- ternational guarantees, coordination with public institution and, through Banca IMI, the offer of M&A and structured finance services.

For SMEs, it is offered a service, called Trade Esplora, to increase knowledge of international markets.

The Internet Banking platform offers the access to web information about the foreign countries, regarding the political and institutional framework, rules, customs and tax, contractual obligations and a list of potential partners or suppliers. It also includes the Atlas of countries, which con- tains economic, tax and more specific business information on individual markets (field studies, regulations for the import / export, customs for- malities), related to 185 countries.

Summary

Intesa Sanpaolo (Intesa Sanpaolo, n.d.) offered, with a direct connection between companies, a complete range of financial and management services, being the Italian bank playing the most important role in international commerce. More- over, it gives support to important development projects as the construction of new branches, the creation of distribution networks and the acquisi- tion of brand names or of other companies.

SACE - Servizi Assicurativi per il Commercio Estero (Insurance Services for International Trade)

SACE S.p.A. - Servizi Assicurativi per il Com- mercio Estero (Sace, n.d.) is an Italian insurance and financial group active in export credit, credit insurance, investment protection, financial guar- antees, sureties and factoring.

The Group enhances the growth of over 25000 clients in more than 180 countries, providing more stable cash flows and transforming counterpart insolvency risks into development opportunities.

SACE is present in Italy with locations capable of independently managing the demand, assess- ment and issue process for insurance coverage for amount up to EUR 20 million. Bank branches, which have an agreement under the finance program dedicated to SME internationalization projects, are another important contact channel between businesses and the areas in which they operate. According to 2011 SACE Annual Re- port (Sace, n.d.) Russia is the first host country in SACE portfolio with a statement of EUR 5.2 billion, followed by Turkey, Saudi Arabia and Brazil. Other overseas markets with high potential are Asia, Sub-Saharan Africa, Central Europe and the Commonwealth of Independent States.

In 183 countries throughout the world, any- where a company decides to export or invest, it can count on managers who are experts in the local business environment and on analysts spe- cialized in assessing the risk profile of markets and counterparties.

Products and Services Provided

SACE Group provides a wide range of insurance and financial products and services for companies as well as for banks for their daily business in Italy and abroad.

The main Credit Insurance services against non-payment by customers are Supplier Credit Policy (SCPs) which protects single exports with deferred payments of over 24 months without

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amount limitations against both the pre-shipment risk and the non-payment by a foreign customer, Civil Works Policy which keeps the company in- demnified against the risks that could arise during the execution of civil works or plant engineering projects or during the credit period, due to politi- cal and/or commercial events through a maximum coverage indicated by the insured.

Credit Insurance covers contracts with a value up to EUR 500.000 and deferred payments of up to 36 months (SMEs).

Investment Protection helps Italian companies protect their foreign investment. The package includes services like Political Risk Insurance which protects overseas investment against politi- cal risk – such as nationalization, embargo or civil unrests – which may cause loss of the invested capital and Contractual Guarantees which en- able the company to bid for civil works, supply, service and maintenance contracts in Italy and abroad by guaranteeing to the public authority or private counterpart that the relative contract will be signed and all obligations will be met. In addition, advisory services aim to help identify the best growth opportunities abroad and to as- sist in the negotiation process with the foreign counterparties in order to close the deal, while Corporate Credit Risk allows the assessment of foreign buyer’s credit-worthiness in order to close the deal faster and with more safety.

Summary

The main benefits of SACE S.p.a. (Sace, n.d.) are high competitiveness for SMEs through the greater financial stability provided by the Credit Insurance (certainty that you will be paid) and the financial guarantees in respect of loans granted to the company by banks in order to support its internationalization plans or export business.

The main drawbacks are the lack of direct loan since, unlike other foreign agencies, SACE cannot distribute directly loans but it needs to be

intermediated by banks in order to finance Italian companies’ business; this represents a competitive drawback for the Italian companies that want to expand their business abroad, since the cost of intermediation has significantly increased after the crisis. Furthermore no support for specific sectors (Exim Bank provides special services for green business, medical sector exporters) is given as well as no coverage of currency fluctuation risk (unless Ksure.)

Chamber of Commerce

The Chamber of Commerce (Camera di Commer- cio, n.d.) is a public agency that provides services for enterprises of a specific reference territory in order to protect their interests. In Italy there is also an organization of all Chambers called Unioncamere.

The mission of the Chamber of Commerce is to foster the growth of the local economy and to enhance it through effective and targeted ini- tiatives, thus playing the role of spokesman for companies registered in. Thus Chamber of Com- merce has a role in promoting and stimulating the local entrepreneurial system.

Among the services, it provides some advices for enterprises which are going to begin an inter- nationalization program, extending their activity out of Italy. There are no limitations about the country in which Italian companies could extend their business. Since there is a good cooperation between European agencies, there are lots of information available about foreign enterprises and their economical and financial situation. In order to present business opportunities in less known countries, which could be good for Ital- ian companies, several Chambers of Commerce organize open meetings with enterprises and representatives of public and private institutions, e.g. a meeting has been organized in April 2012 by Emilia Chamber of Commerce to show Colombia’s business opportunities.

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On the other hand, problems come up when enterprises look for information about the eco- nomical situation and the growing-up businesses of possible counterparts in specific countries.

Products and Services Provided

Two different kinds of services can be distin- guished: free of charge services and fee ones. In particular Chambers of Commerce do not provide proper services for free but just information, e.g. about taxes, International contracts, transports and payments and insurances. Publications and news abroad are available on the websites of each Chamber of Commerce.

Several more useful opportunities are pur- chasing services, e.g. getting access to Kompass Extranets, a database of 2 million companies in 70 countries around the world where possible counterparts can be found, depending on the pur- pose of companies about creating an international consortium or a partnership in the development of specific projects or longer collaborations and joint ventures. According to EBR (European Busi- ness Register) requirements, registered companies have to show data about office holders, financial statements and acts.

Chambers of Commerce offer also services which are just partially free of charge, e.g. the Foreign Desk; it allows companies in looking for potential partners, in checking their credit- worthiness and in obtaining specific supports, as in logistic.

To obtain customized investments and insur- ance plans, Chambers of Commerce refer to other agencies as SIMEST and SACE.

Finally, assistance to participate in interna- tional tenders for companies operating in specific sectors (e.g. infrastructure, environment and edu- cation) is provided.

Summary

Chamber of Commerce (Camera di Commercio, n.d.) has on its website a list of a huge number of services useful for internationalization enterprises, not distinguishing between services provided for SME and for big companies. However, behind the name of the service there is always a link to another agency or there is a telephone number and an address about a place to refer to obtain further information and consulting.

In conclusion, it is not easy to get if the support for internationalization projects of enterprises is really efficient and useful.

ICE - Agency for the Promotion Abroad and Internationalization of Italian Companies

ICE (Ice, n.d.) is the government organization which promotes the internationalization of Italian companies. After the suppression of the old agency, it was established by Law December 22, 2011 n. 214 as an entity with legal personality under public law in line with the strategies of the Ministry for Economic Development (Garioni, 2011) that is the agency providing the internationalization of Italian enterprises is rising again and it is ICE.

While ICE provides information, support and advice to Italian companies to promote cooperation in industrial, agricultural, distribution and service sectors, to increase their presence in international markets, Italtrade (Italtrade, n.d.) is the portal of the agency addressed to foreign companies operating in international trade and interested in expanding their business in Italy.

The starting point of the internationalization is the selection of markets to which export the products. Choosing the most appropriate mode of entry in the target country is one of the most difficult decisions to face. Having connection worldwide, ICE helps companies to select the most

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attractive alternatives, taking into account both the explicit features of the markets and the risks to be faced and the obstacles to be overcome. It provides many services like recognition of busi- ness opportunities, events, and statistics that are specific to the selected country and a number of funding opportunities, embarking on a successful way of exports.

In addition to its Rome headquarters, ICE operates all around the globe, in about 87 coun- ties, from a large network of Trade Promotion Offices linked to Italian embassies and consul- ates and working closely with local authorities and businesses.

Products and Services Provided

The Agency operates to improve, facilitate and promote Italian economic and trade relations with foreign countries, with particular attention to the needs of small and medium sized enterprises, associations and groups. It works to develop the internationalization of Italian firms, and the sale of Italian goods and services in international mar- kets, and to promote the image of Italian products in the world.

Foreign counterparts can post a request or of- fer for goods or services destined to Italian firms. All forms submitted will be addressed to Italian companies through a database of business op- portunities in which requests and offers of foreign companies, divided by product sector and country, are kept for a period of three months.

ICE and Italtrade provide a wide range of facilities helping Italian and foreign businesses to connect with each other, most of them free of charge, e.g. identification of possible business partners, bilateral trade meetings with Italian companies, official participation in local fairs and exhibition and support to companies in overcom- ing language limitations until the final report on the results to the clients.

In performing its activities, the Agency works closely with the regions, chambers of commerce, industry, handicrafts and agriculture, business organizations and other public and private, un- der the guidance and strategic planning of an institutional cabin director for the promotion and internationalization of companies. ICE can help firms in knowing foreign markets, in fact, on the website, there is a huge collection of data on dif- ferent useful aspects, e.g. market guides, which contains information on the overall economics, the risk of the country, the commercial interchange, investment flows, customs, tax and corporate rules and an analysis of opportunities for Italian products with details of promising sectors in each market; in addition summary information on projects, funding for major international organizations ac- cording to the recipient country and by sector, to follow the “life cycle” and the stages of progress of each project are given.

The agency offers also on-site research and pre-selection of management, administrative and technical staff, with the aim to provide, if possible, a list of suitable candidates, including making the final choice.

Summary

The agency analysed, despite offering very use- ful services, suffers of many limitations. The main benefits are the provision to Italian and international companies of a huge collection of data and statistics on various aspects related to internationalization and the help to companies in finding its counterpart from the stage of selec- tion to the final choice through meetings, visits, fairs and seminars. Not negligible aspect is the gratuitousness of most of the services.

As far as drawbacks concern, ICE is influ- enced by all political decisions and governmental changes due to its connection with the Italian Government and it is not offering any kind of insurance and financial option.

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Confindustria

Confindustria (Confindustria, n.d.) is the main or- ganisation representing Italian manufacturing and services companies. A total of 149,288 companies of all sizes - employing a total of 5,516,975 work- ers - are voluntary members of the organisation. The fundamental value underlying Confindustria’s activities is the belief that free enterprise and free economic activity, within the framework of a market economy, are key factors for the growth and development of society as a whole.

Confindustria stands for the needs of Italy’s industrial system in dealing with the Parliament, the Government, the Unions, but also with the international organization. It has a predominant role in Italy with his eighteen regional sites, and ninety-nine local associations. For supporting Internationalization, Confindustria has direct cooperation with both Italian and international political institution and economic, social and cul- tural organisations, e.g. international community “Affari Internazionali”, Assafrica&Mediterraneo (Confindustria Assafrica & Mediterraneo, n.d.), Afrimeds Business Development Srl, Business Med, CDE – Centre for Development of Enter- prise.

Directly or indirectly, by this associations, Confindustria offers representation and commu- nication services.

Products and Services Provided

The main feature of Confindustria is that it does not offer any kind of service directly, but has a principal role as intermediaries and mentor. To promote internationalization among Italian com- panies that want to find counterpart in foreign countries, Confindustria has build the so-called “Business Partnership” by which members compa- nies can get in touch with members companies of the counterpart in foreign country. These agencies are located in different part of the world and divided by geographical criteria: Assafrica (Confindustria

Assafrica & Mediterraneo, n.d.), AfrimedsBD and CDE (for African, Mediterranean and Middle East countries), BusinessMED (Turkey, Algeria, Cyprus, Egypt, Jordan, Israel, Lebanon, Malta, Morocco, Palestine, Syria and Tunisia).

Confindustria addresses all the companies working in the area and supports them when facing difficulties and finding business partners. The reliability of its members is guarantee by the participation to the network. In fact Confindustria does not make any selection of counterpart, but ensure for them: one would assume that a com- pany joined in foreign agencies is a reliable one, and keep trust on it. Even for the operative part, Confindustria delegates to other specific institu- tion (e.g. SACE for credits and insurance).

The other important role played by this agency is as source of information. It keeps constant contact with Embassies, Entrepreneurial Asso- ciations, Chambers of Commerce, National and International Institutions both in Italy and in all the targeted Countries.

By the support of newsfax, newsletter and coun- try guides, Confindustria offers to his affiliates a constant updating on the political, economical and financial framework; it updates Agenda on fairs, exhibitions and relevant events and, in ad- diction, has a system of investment opportunities and tenders alerts; however these applications must be sent by the specific organization that provides them.

The agency fosters industrial and trade coop- eration in the countries of reference by support- ing projects, investment and the creation of joint ventures; it arranges vocational training courses for entrepreneurs, tailored to operate in the area countries.

All registered members can require specific supports concerning business regulation about rates and standards, technical barriers, customs legislation and regulation, free trade agreements, illegalities on unfair trade practices, distortions in import markets, international rules on intellectual property protection.

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Summary

The main benefits of the services provided by Confindustria are the reliability of institutional organizations (260 Federation and territorial association) which helps the specialization, the opportunity of targeted Markets researches, the availability of professional communities that make effective information flows, share knowledge, skills and experience, by direct contact and seri- ous studies of competence and the planning of periodic meetings and effective system of internal information.

Unfortunately there are no information about the quality of the services offered and the success of these among companies.

Comparison among Italian Agencies

All the Italian agencies examined have their strengths and weaknesses, and in relation to the needs of the firms they might be adequate or not. Finding a counterpart is a service provided by all agencies, but the effectiveness and the complete- ness of service vary a lot.

The main limitation is that most of agencies do not offer directly neither financial and management support nor insurance services, a part from the only bank taken into account, Intesa Sanpaolo. Some of them act just as an intermediary, being active not in the actual process of internationalization but only in the exchange of information between companies (e.g. CCIE, Chamber of Commerce, ICE, Confindustria), while others offer them straight connections (e.g. Intesa Sanpaolo, SACE).

A huge database of data is made available to companies as well as links to additional suitable facilities. Some agencies, e.g. CCIE, Intesa San- paolo, ICE, Confindustria, have peculiar aspects such as gratuitousness or support for specific sectors.

Finally ICE suffer because of its connection with government bodies, which could be a deal for the agency and for customers as well.

A summary of services provided by Italian agencies is shown in Table 1.

Table 1. Summary of services provided by Italian agencies

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THE CHINESE AGENCIES

Chinese Banks

This section analyses the services offered by the two main Chinese banks in helping SME (small and medium enterprises) doing international trade. They are Bank of China and Hongkong and Shanghai Bank. Then a comparison of their services with Italian banks’ relative services is discussed. During the comparison, some sugges- tions will also be put forward.

Bank of China

As the most internationalized and diversified bank in China, Bank of China provides full range of financial services in China’s mainland, Hong Kong, Macau and other 31 countries. It mainly operates the commercial banking business in- cluding corporate banking, personal banking and financial market business

Products and Services Provided

International Trade Settlement

Regarding International Trade Settlement, Bank of China offers issuance, advice, confirmation, import and examination of documents about letters of credit, like Intesa San Paolo Corporate in Italy.

International Trade Financing

Bank of China provides a kind of short-term fi- nancing, making advance payment on behalf of importer with valid certifications and commercial bills under import letter of credit (L/C) or inward collection. A written guarantee on shipping, is- sued by the bank which will bear joint liability, is presented by the importer to the carrier or its agent for picking up the goods in the case of arrival of cargo prior to the shipping documents. Shipping

Guarantee is commonly used under L/C with full set of documents of title to goods.

In trade finance, Bank of China allows a seller to obtain financing and to receive immediate funds in exchange for a sales document not drawn under a letter of credit. The bank will send the sales docu- ments to the buyer’s bank on behalf of the seller.

Furthermore loans are issued by Bank of China at the request of the beneficiary of L/C (exporter) to finance their purchase, production and shipment.

Information Services

Performing business information survey, the bank can provide a business information report upon the request of the customer by cooperation with external credit investigation companies, or get information such as the basic background, credit status, payment ability, bad record of relevant companies through domestic and overseas institu- tions of Bank of China.

To verify the bill of lading and to make enqui- ries about the ship’s route, statues and shipment of goods a marine survey is provided.

Since with the development of economic glo- balization, trade activities, especially international trade, are characterized by wide coverage, com- plicated procedures, and high level of difficulty in operation and frequent changes, consultancy service allows customers, which may encounter various difficulties when selecting trade counter- party, in determining settlement method, designing financing package and taking precautions against potential risks. Bank of China is a specialized bank offering trade finance services. Bank of China dedicates to help, based on customers’ operation features and specific requirements, customers with their trade problems with a package of consultant services.

Like Intesa Sanpaolo, Bank of China offers business information survey and consultancy service but in addition Bank of China offers an extra service about marine survey.

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The Hongkong and Shanghai Banking Corporation Limited (HSBC)

Operating in over 60 countries and territories, HSBC offers global connectivity and a strong local presence for clients with international advisory, financing and trading needs. HSBC (HSBC, n.d.) has high-quality research and analysis to investors around the world. With 600 staff in 22 developed countries, covers economics, currencies, equities, fixed income, and climate change.

Products and Services Provided

Advisory

HSBC’s Global Advisory business provides financial advice on a wide range of mergers and acquisitions and capital raising activities such as mergers, acquisitions, divestitures, joint ventures, financial restructurings, and equity and debt capital raisings.

Financing

HSBC provides solutions in the financing and investment in physical and financial assets and provides structures and coordinates almost any type or scale of corporate flow and even financing.

A specific kind of market, Debt Capital Mar- kets, allows getting money from different ways, helping companies to diversify their sources of funds and to gain access to a global network of in- stitutional investors, while Equity Capital Markets is used to raise equity capital for the companies.

Financing services for export are provided as well as ship broking and consultancy: having people on the spot in Hong Kong, London, Athens and Shanghai provides valuable intelligence and feedback on shipping markets demand, prices, and deal flows. Owners and charterers depend on HSBC information flow to keep up to date with market intelligence and developments.

Investing

From HSBC Global Asset Management Access, a wide range of equity, fixed income, liquidity and alternative investment products are available. The management can help to capture some of the exciting opportunities of the world’s faster- growing economies. In addition, liquidity funds are provided to achieve competitive investment returns as well as liquidity by investing in a di- versified portfolio.

Online Services

HSBC manages investments of companies and keep track of their cash flows with secure online services. A range of online tools that boost ef- ficiency and give flexibility to carry out trades or do business from anywhere in the world are also offered.

Research and Analysis

HSBC delivers high-quality research and analysis to investors around the world. With 600 staff in 22 developed countries, it covers economics, cur- rencies, equities and fixed income.

Securities Services

Corporate Trust and Loan Agency supports cus- tomers’ business with a wide and diverse range of trusts and loan products for debt capital, escrow, structured finance, project finance and Islamic finance. In particular Islamic securities services meet the Islamic securities services needs accord- ing to HSBC Amanah Securities Services. HSBC offers comprehensive, full-service solutions aimed at helping investment managers in accomplishing their financial goals while adhering to Shariah principles.

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To reduce the risk and to keep financial assets safe, servicing the associated portfolios, fund services and global custody services are offered.

Trading and Sales

HSBC bestows credit which is the trust which allows the bank to provide money to company, and the company does not need to reimburse immediately, but instead repay or return those money at a later date. A specific team, the Money Markets team, helps to meet short-term financial needs through cash loans and deposits, certificates of deposit and commercial paper.

To stimulate foreign exchange, emerging market opportunities are captured with foreign exchange (FX) knowledge, delivered from HSBC vantage points in fast-growing regions.

Transaction Banking

Client Access: Regardless of your organization’s size, location or internal structure, our suite of Client Access solutions offers a flexible range of options from basic connectivity to robust integration.

Trade and Supply Chain

Provides the service to introduce efficient chan- nels.

COMPARISON BETWEEN ITALIAN AND CHINESE ECONOMIES

Different Economic Background

First of all, here are some basic economic statistical graphs, to give a general idea of the differences between Italian and Chinese economic conditions:

• GDP: For Italy it is $2.2 trillion in 2011; for China it is $7.3 trillion in 2011. In Figure 1, it is showed that before 2000 GDP of Italy is higher than that of China, however, GDP of China nowadays is far above Italian.

• GDP Growth Rate: For Italy, from 1999 GDP growth rate was around 2%, and even became minus in 2009. For China, yearly GDP growth rate in last decade was around 10%. In Figure 2 it is clear that Italian GDP growth rate is always low, while China is during a rapid growing period.

• GDP Per Capita (Current US$): For Italy, it is $36115 in 2011. For China, It is $5429 in 2011. Thus, the Figure 3 indicates that though the Italian GDP is much less than Chinese nowadays, the GDP per capi- ta of Italy is about 7 times of Chinese, it implies higher consumption ability as well as higher production costs.

• Cost to Export (US$ Per Container): For Italy it is $1,245 in 2011. For, China it is $545. In Figure 4, it is obvious that consid- ering the cost of export, Italian is more than twice of Chinese. Thus, the overall cost for Chinese SME going abroad can be significantly lower than Italian. But, be- cause of the low level of technology devel- opment, the Chinese export goods are al- ways with less value-added, especially for SME family firms.

COMPARISON ITALIAN VS. CHINESE AGENCIES

Geographic Range

The ranges of most Italian and Chinese agencies are around 50 countries, except for those which aims at information providing, like ICE. The broadest one is SACE, whose services spread

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Figure 2. Italian and Chinese GDP growth rate. Focusing on the last decade, the average value of Chi- nese GDP growth rate is around 10% per year, while Italian one manage not to be below 0%. In other words, Chinese standard of living is getting better year by year, while the Italian one is the same or is getting a little bit worse. (GDP growth rate, n.d.)

Figure 1. Italian and Chinese GDP trend over last 50 years. The Chinese GDP overtook the Italian one in 2000, but it is impressive the increasing difference between the trends of the two countries in the last decade: while Italian trend barely grew up, the slope of Chinese one is steeper year by year (Gross National Income, n.d.)

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Figure 3. Italian and Chinese GDP per capita. Italian average value is about 7 times Chinese one. This datum is related to many aspects, e.g. the highest cost of Italian labour, which means higher production costs for companies operating in Italy (GDP per capita, n.d.)

Figure 4. Italian and Chinese cost to export. Italian cost to export is more than the double than Chinese one but the per cent effect on the final cost of goods is lower than expected since the value of products exported by Italian firms is usually higher in respect to the one of Chinese companies (Cost to export, n.d.)

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over all the countries in the world (over 180). For these two Chinese banks, Bank of China is 30 countries and HSBC is 60 countries. Compared with Intesa SanPaolo’s 30 countries and CCIE’s 50 countries, the difference is not too big. HSBC is mainly located in Hong Kong and Shanghai, the business centres of Asia; consequently this might be the reason why it is a little broader than others.

Logistic

From a logistic point of view, the services provided by Italian and Chinese agencies are very differ- ent. In particular, both Chinese agencies provide relevant services, while Italian agencies do not have those kind of service. The following are ship- ping logistic services of two Chinese banks. First, shipping Guarantee refers to a written guarantee, issued by the bank which will bear joint liability, and is presented by the importer to the carrier or its agent for picking up the goods in the case of arrival of cargo prior to the shipping documents. Shipping Guarantee is commonly used under let- ter of credit with full set of documents of title to goods. In addition, Ship broking and consultancy are the two main facets of the service. Having people on the spot in Hong Kong, London, Athens and Shanghai provides valuable intelligence and feedback on shipping markets demand, prices, and deal flows. Owners and charterers depend on our information flow to keep up to date with market intelligence and developments.

While Italian companies are focused on expor- tation mainly in Europe, on the other hand Chinese enterprises export products to Europe, North America, Japan and Australia: in other words, in China the shipping logistic services are of great significance. But, if Italian companies want to sell products to other countries outside Europe, like South and North America and Asia, a high quality shipping logistic service is, definitely, required.

Specific Sector Services

By considering specific sector services, HSBC does the best job. Compared with other agencies, its services are much more specified according to different business sectors. In Italy, the only mere example of this diversification is Mediofactoring, an Intesa SanPaolo corporate company, which has also developed specific sector services for companies operating in tourism, public healthcare, oil & gas and utility sectors.

On the other hand, taking Chinese industry sectors for example, clients operating in specific industry fields expect their advisers to align and distribute their products and services. Segmenting their talent and other resources on an industry/ sector-specific basis allows them to match their ex- pertise with business customers’ financial services and banking needs. What is more, the industry sector could be further specified, and it includes autos, building materials, chemicals, clean tech, consumer, healthcare, industrials, infrastructure, media, real estate, retail, telecommunications, transport, shipping services and offshore, etc. In addition, in each specified sector, there are more specified segments according to different kinds of products. For example, the resources and energy group’s specific sectors of specialization are: power and utilities; metals and mining.

According to this, we can see the services of HSBC are very detailed and specified. This ensures the professional of clients in each service. So, in our opinion, it is beneficial for Italian agencies to specify their services. At the beginning, the specified part can be some business field that Italian companies have great competitiveness, like fashionable dress, food, mechanical and etc. Then, if it is successful, they can broad it to other fields.

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Customized Services

In the services of HSBC, some specific require- ments of clients are taken into consideration. Take the religious custom for example, it has Islamic securities services, which aims at meeting Islamic securities services needs with HSBC Amanah Securities Services. It offers comprehensive, full-service solutions aimed at helping investment managers accomplish their financial goals while adhering to Shariah principles. This gives a hint that, regarding different clients, if possible, it is better to provide more customized services to each.

Final Comparison

The analysis of the data and services offered by Italian and Chinese agencies or banks highlights how the latter offer a more comprehensive and rich service to the firms while the former have a narrow view on the business environment. Italian agencies are not as complete as Chinese ones, in fact each of them neglect a particular service for example logistic, financing and insurance, language assistance or information sharing, thus offering a limited serve.

FUTURE RESEARCH DIRECTIONS

The following step, after the benchmark analysis, is a collection of information among small and medium enterprises which actuated international- ization policies in the past years about needs and issues found in dealing with unknown markets, counterparts, clients and so on. Performing a series of frontal interviews and questionnaires would help to figure out which services actually offered by agencies are useful and which ones are useless and to individuate the main lacks, according to them, which could make the internationalization process simple, efficient and flexible fulfilling the variety of requirements each company aims to satisfy.

The result of this process could be a feedback for traditional agencies such that they can improve the services offered but also a starting point for building a completely new platform, e.g. exploit- ing the latest web-based social and aggregation networks, in a user friendly perspective.

CONCLUSION

At the end of this benchmark analysis, a summary of the main services provided by agencies and then a comparison among them can be performed according to the evaluation criteria set up.

Financial services are just offered by banks analyzed, e.g. Italian Intesa Sanpaolo and Chinese Bank of China and HSB. About insurance services, in Italy they are provided by Intesa Sanpaolo and by Sace while Chambers of Commerce do not provide this kind of services but they refer to third parts, e.g. SACE.

A widely diffused service offered by Italian agencies, e.g. CCPIT, CCIE, Camera di Commer- cio di Torino, Confindustria and ICE, is about the opportunity for costumers to be part of a network of companies operating in the same sector but in different countries as well as the possibility to have access to a database of registered enterprises where it is possible to search a counterpart or other information regarding the economical background of the countries. The con of this last service is due to the fact it’s fee. Further information, e.g. basic countries information, market guides, statistical analysis, are offered on demand by CCIE, SACE, ICE, Confindustria, Camera di Commercio di Torino and CCPIT.

The chance for a company to obtain advices by experts at the proper windows, otherwise called advisory service, is provided by almost all the agencies with the exception of CCIE.

All Italian agencies, but Confindustria, publish on their showcases, on their web pages, public tenders announced by international institutions, e.g. UE.

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As far as logistic shipping assistance concerns, it is a peculiarity of Chinese HSBC and Bank of China while among Italian agencies Chamber of Commerce is the only one to propose a basic logistic assistance.

Finally security services are only offered by Intesa Sanpaolo among Italian providers while Bank of China offers guarantees about financial transfers and HSBC about goods transfers.

A considerable outcome is that Chinese banks provide a huge variety of specific services for specific sectors, while the majority of Italian agencies offer services tied for general sector; the exceptions are CCIE and Confindustria, providing a database organized in different sections accord- ing with business sectors.

Focusing on the circuit, which is in some cases direct in others indirect, for Italian Chambers of Commerce, CCIE and Confindustria is relevant to underline the almost totally absence of services directly provided, because they point to services given by other agencies. Furthermore services directly provided by the same agencies are basic

and the support they offer to companies is useful only at the very beginning and just finalized to give preliminary information; the service of in- surance promoted by SACE, as example, which seems to be directly provided by the agency, is, on the contrary, indirectly supported by banks.

Finally it is possible to classify the different agencies on the base of the kind of ownership.

Bank of China is one of the “Big Four” state- owned commercial banks of the People’s Republic of China and it was founded by the Government of the Republic of China; while HSBC is a British multinational private financial company head- quartered in London, but today it remains the largest bank in Hong Kong and one of the most important in China.

Regarding the Italian agencies, the majority are public owned with the exception of SACE, which was born as a public economic corporation and in 2004 it became Sace S.p.A.

In Table 2 is shown a summary of services provided by agencies.

Table 2. Summary of services provided by each agency, Italian as well as Chinese

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Growth Rate, G. D. P. (n.d.). Public data of Google, GDP growth rate. Retrieved from http:// www.google.it/publicdata/explore?ds=d5bnc ppjof8f9_&ctype=l&met_y=ny_gdp_mktp_ cd&hl=en_US&dl=en_US#!ctype=l&strail=fa lse&bcs=d&nselm=h&met_y=ny_gdp_mktp_ kd_zg&scale_y=lin&ind_y=false&rdim=regio n&idim=country:CHN:ITA&ifdim=region&tst art=657327600000&tend=1320015600000&hl =en_US&dl=en_US&ind=false

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GDP per Capita. (n.d.). Public data of Google, GDP per capita (current US$). Retrieved from http://www.google.it/publicdata/explore?ds=d5 bncppjof8f9_&ctype=l&met_y=ny_gdp_mktp_ cd&hl=en_US&dl=en_US#!ctype=l&strail=f alse&bcs=d&nselm=h&met_y=ny_gdp_pcap_ cd&scale_y=lin&ind_y=false&rdim=region& idim=country:CHN:ITA&ifdim=region&tstart =657327600000&tend=1320015600000&hl= en_US&dl=en_US&ind=false

HSBC. (n.d.). Hongkong and Shangai bank. Re- trieved from http://www.hsbc.com

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Intesa Sanpaolo. (n.d.). Banca intesa sanpaolo. Retrieved from http://www.intesasanpaolo.com

ISTAT. (2010). Rapporto annuale: La situazione del paese nel 2009. Retrieved from http://www3. istat.it/dati/catalogo/20100526_00/Avvio2009. pdf

Italian Chamber of Commerce. (n.d.). The portal of the Italian chambers of commerce, industry, handicraft and agriculture. Retrieved from http:// www.chamberofcommerce.it

Italtrade. (n.d.). The made in Italy official portal. Retrieved from http://www.italtrade.com

Libero Quotidiano. (2012). PMI: Global strategy, Italiane puntano su estero, 40% vuole aprire filiali. Libero quotidiano. Retrieved from http://www. liberoquotidiano.it/news/1055845/Pmi-Global- Strategy-italiane-puntano-su-estero-40-vuole- aprire-filiali.html

Majocchi, A., & Zucchella, A. (2003). Inter- nationalization and performance: Findings from a set of Italian SMEs. International Small Business Journal, 21(3), 249–268. doi:10.1177/02662426030213001.

Ohmae, K. (1985). Triad power: The coming shape of global competition. New York: Free Press.

Reuber, A. R., & Fischer, E. (1997). The influence of the management team’s international experience on the internationalization behaviors of SMEs. Journal of International Business Studies, 28(4), 807–825. doi:10.1057/palgrave.jibs.8490120.

Sace. (n.d.). Servizi asssicurativi per il commercio estero. Retrieved from http://www.sace.it

Sella, M. (n.d.). Gli istituti di credito e il fabbisogno finanziario delle PMI. In Camera di commercio Milano. Retrieved from http://www.mi.camcom.it/ gli-istituti-di-credito-e-il-fabbisogno-finanziario- delle-pmi

Studi Confcommercio. (2009). SMEs classifi- cation. In Le piccole e medie imprese in Italia. Retrieved from http://www.confcommerciovene- zia.it/public/comunicazione/materiale_news/ scheda_pmi_italia.pdf

Taylor, M., & Jack, R. (2012). Understanding the pace, scale and pattern of firm internationaliza- tion: An extension of the born global concept. International Small Business Journal. Retrieved from http://isb.sagepub.com

von Hippel, E. (1988). The sources of innovation. Oxford, UK: Oxford University Press. Retrieved from http://web.mit.edu/evhippel/www/sources. htm

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Chapter 20

DOI: 10.4018/978-1-4666-4731-2.ch020

Entrepreneurship Readiness in Turkey:

Profiles from Istanbul- Kayseri-Van Provinces

ABSTRACT

INTRODUCTION

In the literature, many definitions of entrepreneur- ship can be found describing business processes. Entrepreneurship is first used in middle age and derived from the word “entreprendere” and means one who does business. Later, the definition is broadened to the new meanings. Early this century;

risk taking, pursuing opportunities, innovation and the process of running a business was added to the definition of entrepreneurship (Öztürk, 2008). The role and importance of public administration in improving the entrepreneurship in Turkey is a multi-dimensional subject interacting with various variables (Öktem, Aydın and Ekinci 2007), and one can observe that some provinces are better than others in terms of potentials and prospects. So,

Leyla Tulunay Hacettepe University, Turkey

Semra Güney Hacettepe University, Turkey

M. Kemal Öktem Hacettepe University, Turkey

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what can be done and how can be done to support entrepreneurship requires a good deal of analysis.

Entrepreneur is defined as the one who dis- covers, evaluates, and exploits opportunities for creating goods and services (Shane and Venkata- raman, 2000).

The other three words derived from the ‘en- treprendere’ are ‘entrepreneurship entrepreneurial and entrepreneurial processes’. These concepts are related with each other. Entrepreneurs are the one’s who undertakes the projects for the conception of entrepreneurship. Entrepreneurship is what to entrepreneurs does. Entrepreneurial process is a continuous process which entrepreneur is in by creating new values as a result of new project (Wickham, 2001).

Entrepreneurship necessitates the presence of opportunities as well as enterprising individuals who wish to take advantage of them (Venkatara- man, 1997). Shane and Venkataraman (2000) suggest that entrepreneurship involves the study of (a) the sources of opportunities, (b) the processes of discovery, (c) evaluation and taking advantage of the opportunities as well as (d) the group of individuals who discover, evaluate and exploit these opportunities.

Entrepreneurship is widely defined as a process by which individuals pursue opportunities without regard to the alienable resources they currently control (Hart et al., 1995). It may also be defined as a human activity aimed at a long-term economic and social prosperity of an enterprise, and at fill- ing of market niches (Salka., 2006).

The entrepreneurial process is one in which the entrepreneurs acquire and develop resources, and where the new venture outcome is to a large extent determined by the nature of the resources the entrepreneurs are able to acquire (Arild, 2005).

In spite of the two major attempts in 1950s and 1980s to improve private sector contributions, most of Turkey’s output is produced by state- owned companies in Turkey (Kozan et al., 2006). However, SMEs represent more than 99 percent of the total number of Turkish enterprises in the manufacturing sector and provide 76.7 percent

to the total employment. They contribute to 10 percent of exports and constitute 26.5 percent of investment and 38 percent of value added in Tur- key (KOSGEB, 2005). Ozsoy, Oksoy, and Kozan (2001) found that Turkish small businesses have to rely on family sources rather than government loans or private institutions for financial support. The success of a small business depends on the initiatives of the individual entrepreneur to create a viable business. Therefore, discovering the fac- tors that motive the individual to go on entrepre- neurial career becomes important in stimulating entrepreneurship.

Theoretical Framework

The literature reviewed on entrepreneurship research reflects the multifaceted nature of this subject. For years; researchers have attempted to capture the uniqueness of an entrepreneur. Re- search on entrepreneurship has been conducted by academics from a wide array of disciplines having diverse perspectives on defining entrepreneurs. Scholars researching entrepreneurship represent the disciplines of psychology, economics, an- thropology, history, sociology and management (Dobransky, 2002).

According to Vesper (1980) this idea can be stated as the following: According to an economist, an entrepreneur is one who brings resources, labor, materials and other assets into combinations that make their value greater than before, and also one who introduces changes, innovations and a new order. According to a psychologist, such a person is typically driven by certain forces- need to obtain or attain something, to experiment, to accomplish or perhaps to escape authority of others. Accord- ing to a businessman, an entrepreneur appears as a threat, an aggressive competitor, whereas to another businessman the same entrepreneur may be an ally, a source of supply, a customer, or someone good to invest in. The same person is seen by a capitalist philosopher as one who creates wealth for others as well, who finds better ways

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to utilize resources and reduce waste, and who produces jobs others are glad to get.

Regardless of the background of the researcher studying entrepreneurship; there is agreement that personality is a key area in understanding entrepreneurs.

Role of Personality in Entrepreneurship

It is generally agreed by most researchers that an individual’s personality plays a considerable role in his or her becoming an entrepreneur. Personality characteristics of entrepreneurs have been researched extensively (Brockhaus, 1982; Brockhaus & Horwitz, 1986; Furnham, 1992; Gartner, 1989,1990; Hornaday, 1982; McClel- land, 1961,1987; McClelland, Atkinson, Clark, & Lowell, 1976; Miner, 1997; Stewart, Watson, Car- land, & Carland, 1999). A number of researchers support the study of entrepreneurial personality, and suggest that the personalities of entrepreneurs can be highly influential in the organizations they create (Ibrahim & Goodwin, 1986; Kets de Vr- ies, 1985). Some researchers concluded that only a few essential characteristics are responsible for one’s proclivity for entrepreneurship. These characteristics include achievement motivation, risk-taking propensity and innovation (Stewart, Watson, Carland, & Carland 1999).

In contrast, other researchers argue that there are several different types of entrepreneurs, each supporting a distinct list of characteristics (Hor- naday, 1982; Miner, 1997 and Vesper, 1980).

Early contributions to the study of personality related to entrepreneurs may be found in Mc- Clelland’s (1961) pioneering research on ‘need for achievement’. This study led to the develop- ment of a psychological motivation theory that ultimately became the foundation research in business management and entrepreneurship. This human motivational theory holds that people are motivated by three principal needs: (a) the need for achievement, (b) the need for affiliation, and (c) the need for power.

As simply stated by McClelland and Winter (1969), the Need for Achievement is the urge to improve. It means doing a job well and maintain- ing a certain self-imposed standard excellence. Individuals, who have a high need to achieve, seek challenging situations in which they can set moderately difficult goals that can be achieved realistically (McClelland, 1961). Achievement- motivated people prefer a moderate degree of risk because they believe that their skills and efforts will influence the outcome. Those who score high on need for achievement instruments are typically interested in receiving feedback on their accomplishments. They like assuming personal responsibility for solving problems that are in their control. People who are in need to achieve are often innovative; thus finding creative ways to make a new product or service. McClelland hypothesized that entrepreneurs display a higher need for achievement than those in other profes- sions, and concluded from his studies that indi- viduals exhibiting a higher need for achievement would be more inclined to choose entrepreneurial occupations.

McClelland maintained that individuals with a high need for achievement also have a moderate risk-taking propensity. Individuals with a moderate risk threshold tend to take calculated risks to start businesses that are in their control. Entrepreneurs have long been thought of as being risk takers, in comparison to other business persons, to such a high degree that the term ‘risk taking’ is often included in definitions of ‘entrepreneur.’ Brock- haus (1982) defined risk-taking propensity as the perceived probability of received the rewards associated with success of a proposed venture, which is required by an individual before he will subject himself to the consequences associated with failure; the alternative situation provides fewer rewards as well as less severe consequences than the proposed venture. Risk tolerance is de- scribed as one’s willingness to accept possible loss in order to realize future gain (Wonderlic, 1995).

Researchers (Timons, Smollen, & Dingee, 1985) support the argument that entrepreneurs

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take calculated risks. In addition, they assert that successful entrepreneurs convince others to share the risk with them, thereby minimizing their personal risk. Miner (1997) argues that the expert-idea-generator type of entrepreneur gener- ally avoids taking risks. However, this behavior tends to change when a stronger motive drives the entrepreneur to take risks. Research on char- acteristics of successful entrepreneurs suggest that, entrepreneurs may exhibit more risk taking propensity in the early stages of enterprise growth when there is less accumulated financial wealth at stake; and as the entrepreneur matures in venture experience, they better calculate risk and have the necessary skills to minimize its adverse effects. Risk taking is a major aspect in initiating one’s business venture.

Personal Characteristics of Entrepreneurs

Age: The period between ages 25 and 40 is the time when most entrepreneurs decide to start a new business venture (Brockhaus, 1982; Cooper, 1992; Furnham, 1992). New ventures may be initiated at this time because individuals have obtained sufficient experience and education. Also, they are young and have not incurred the responsi- bility of a family or other financial obligations (Furnham, 1992).

Bird (1989) suggests that there are three types of entrepreneurial careers, each related to a differ- ent age of actual inception. The three types are as follows: (a) Early 20s age group who begin their entrepreneurial careers within one year of gradua- tion; (b) Late 20s to early 30s age group, who are employed by someone else but anticipate starting a business; and (c) Mid 30s age group, who did not plan on selecting entrepreneurship as a career but started a business later in life. The latter type is the most frequent pattern followed in starting new business ventures. Overall, research on age indicates that it is better to start a business at a young age possibly because of their high energy

level and motivation related to youth and the resiliency to recover if the business fails.

Gender: Male entrepreneurs have been re- searched extensively. Traditionally, there have been fewer female entrepreneurs and because of their tendencies to operate smaller business, they have not been as visible (Bird, 1989). In addition, women had more difficult time acquir- ing proper funding to start new businesses, and fewer resources have been allotted for women’s businesses in comparison to men’s. However, the number of self-employed women has increased considerably over the past years.

Research on entrepreneurship has been conducted by academics from a wide array of disciplines having diverse perspectives on their definitions of entrepreneur. It is generally agreed, however, that an individual’s personality plays a considerable role in his or her becoming an entrepreneur.

The literature indicates that particular per- sonality characteristics have been associated with entrepreneurship (Brockhaus & Horwitz, 1986; Fasiska & Fasiska, 1987; Furnham, 1992, Gartner, 1989; Hornaday, 1992; Miner, 1997; Wonderlic, 1995).

There are different types of factors influencing the entrepreneurs’ decision on running their own business or not. These factors can be categorized in 4 groups; namely demographic, social, psychologi- cal and other factors. Demographic factors include age, marital status, gender and education. Family environment and cultural environment compose the social factors. Self-actualization and gain social status and need for achievement, affiliation, and power are listed in psychological factors. Taking over a family business and earning high profits are included in other factors.

Researches indicate that the entrepreneurs’ level of education is higher than that of the general public (Brockhaus, 1982; Gasse, 1982). The role of education of the entrepreneur has changed with the worldwide economic shift toward innovation and high technology.

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Entrepreneurship Readiness in Turkey

METHOD

The persons who set up their own business are assumed to be an entrepreneur in this study. Questionnaire was conducted to the participants face to face and it was guaranteed that the only owners of the ventures answered it. In the study, random samples of 195 persons/owners/manag- ers each of them are members of the chamber of commerce and industry of Istanbul, Kayseri and Van provinces and employed minimum 5 and maximum 500 people. Targeted provinces are located in different geographic areas of Turkey, each having different social-economic level of development. Participants received and filled a three part questionnaire, first part for getting an- swers of 25 questions about the factors influenced their decision on to set up a business; second part composed of 11 questions for describing one’s personality characteristics and the other for an- swering a few questions about their demographic features and their venture properties.

Reliability measures using “Cronbach alphas” were calculated for each part of the questionnaire. The reliability coefficient is 0.86 for first part of the questionnaire falling with factors influencing the entrepreneur decision on to set up a business and 0.75 for the second part falling with personal- ity characteristics.

With a response rate of 91.3%, study is based on 178 completed questionnaires: 79 entrepreneurs from Istanbul, 61 entrepreneurs from Kayseri and 38 from Van.

Data were gathered from 178 owner charac- teristics of gender (19,7% female; 80.3% male), age (34.3% younger that 30; 37.1% aged between 31-40 and 28.7% aged between 41-5),marital status (72.5% married and %25.8 single), place of birth (14.6% village, 5.6% town, 18.5% district, 30.9% city and 30.3% metropolis), place where entrepreneurs spent most of their life (1,7% vil- lage, 1.7% town, 6.2% district, 38.8% city and 51.7% metropolis), education (4.5% primary school degree, 7.9% secondary school degree,

41.6% high school degree, 5.6% vocational high school degree, 37.6% university degree and 2.8% graduates school/ doctoral degree), age when entrepreneurs set up their first business (74.7% aged under 30 and 25.3% aged between 31-40), entrepreneurs status (9.0% director, 1.7% owner, 1.7% marketing director, 87.6% manager) and business characteristics of year of business founda- tion (6.2% founded in 1981-1990, 24.7% founded in 1991-2000 and %69.1 founded after 2001), corporation type (15.7% joint-stock company, 52.8% limited company, 4.5% unlimited company and 27.0% partnership company), management (39.9% family members, 36.0% family members and professionals, 13.5% professionals and 10.7% others), size as measured by the number of em- ployees (24.7% employs 1-10 employee, 54.5% employs 11-50 employees, 10.1% employs 51- 100 employs and 10.7% employs more than 100 employee) represented industrial sectors (62.4% manufacturing and 37.6% services).

“Likert-type” 20 items were asked to the re- spondents to indicate their degree of agreement on each of the statement on a 5-point scale rang- ing from 1=Strongly Disagree, to 5= Strongly Agree. After the questionnaire was applied, the collected data were analyzed through a statistical software program. After analyzing the results 9 items were eliminated as most of the people are tend to be agreeing with these items naturally. A point is given to the each answer (Strongly Disagree holds for -2 point, Disagree holds for -1 point, Not decisive holds for 0 point, Agree holds for 1 point and Strongly Disagree holds for 2 points) and all of the answers points are added to get an entrepreneurial personality score (EPS) (Table 1). EPS is adopted from an existing scale used in Turkey before. EPS scores differences are analyzed in terms of provinces and some of the demographic features. Desire for to learn and problem solving skills got the highest mean in the items used to calculate entrepreneurial personal- ity scores.

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25 pre-identified factors were asked to the participants to indicate their degree of effective- ness in influencing the decision of set up a busi- ness on a 5-point scale ranging from 1= not ef- fective to 5= very effective. ‘To gain success and to be well known’ had got the highest mean score; whereas to follow family’s profession got the lowest mean score.

ANALYSIS AND RESULTS

80.3% of the participants are male and rest is female. Most part of the sample is composed of male participants. Analyzing the entrepreneurs according to gender in Turkey; labor force par- ticipation rate of women entrepreneurs is highly lower than the men’s. Also, research question- naire is conducted to the participants in industrial zones of the cities. Women entrepreneurs’ rate is low in industrial zones too. Consistent with Allen et al. (2007) and Minniti (2005), we found a significant difference between the numbers of men versus women entrepreneurs in Turkey. The number of men entrepreneurs is more than double of the number of women, particularly for the established entrepreneurs. The average male/ female ratio is 4.07, which is higher than the developing countries (1.26). Hence, the women participation in entrepreneurial activity in Turkey is almost a quarter of number of women in the other developing countries.

When comparing the entrepreneurs according to their place of birth, it could be concluded that most of them, immigrate to places more developed than their current place. Entrepreneurs’ educa- tional level is higher than it is expected. Most of the participants have got the high school or the university degree. The importance of education on entrepreneurship has been excessively men- tioned in the literature. The studies of Minniti and Bygrave (2004) and Minniti (2005), have shown that the influence of education on the likelihood to become an entrepreneur is not strictly linear.

Most of the entrepreneurs (74.7%) set up their own business before they are 30. Researchers (Hisrich, 1985; Bird, 1989) state that most of the entrepreneurs decide to set up business at the age of 25-40. Analyzing the age of entrepreneurs, early stage entrepreneurs are most frequently between 25 and 34 years-old. For Turkey, this finding is consistent with previous research that concludes early stage entrepreneurs are in the 25-34 age groups in the developing countries and in the 35- 44 age groups in the developed countries (Bosma et al., 2007).

Results show that 87.6% of the entrepreneurs are working at their own business as manager. This is due to their high level of energy and de- sire to control and manage their own business by themselves. All of the managers are also owners of their own enterprises.

%69.1 of the targeted enterprises was founded after 2001. It could be concluded that most of the enterprises are founded after 2001 economic crises in Turkey. They were several opportunities in the market; entrepreneurs took advantages of these opportunities. However, this issue should be examined in another survey in detail.

The literature indicates that particular person- ality characteristics have been associated with entrepreneurship (Brockhaus & Horwitz, 1986; Fasiska & Fasiska, 1987; Furnham, 1992, Gartner, 1989; Hornaday, 1992; Miner, 1997; Wonderlic,

Table 1. Mean and standard deviations of EPS according to provinces

Province Number Mean Std. Deviation

EPS Kayseri 61 11,08 4,97

Van 38 11,63 5,92

İstanbul 79 14,13 4,88

Total 178 12,55 5,31

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1995). Entrepreneurial Personality Scores (EPS) of the entrepreneurs are calculated according to entrepreneurs’ characteristics.

Most of the entrepreneurs targeted in this research stated that they have got the following characteristics respectively; diversifying produc- tion, orienting and directing their employees in accordance with the companies objectives, re- searchers, high communication skills, high self confidence, problem solving, pursuing opportu- nities, having long term objectives related with their work, focusing on work, affecting people, calm down when face with difficulties, risk taking.

Simple mean score (Table 1) showed that the total EPS, differ from city to city. F-tests of the means were performed, EPS (Table 2) varies from city to city (F=2.96, p=.001). According to the post hoc Table 3, there is a significant dif- ference between Istanbul-Kayseri and İstanbul- Van, whereas no meaningful difference between Van-Kayseri. As predicted, Istanbul has got the higher score than the other cities. On the other hand, other two cities have got similar scores, which is unexpected.

F-tests of the means were performed and no significant differences found between EPS with age, gender, marital status, place of birth, place of grown up, education level, ranking number amongst the one’s sisters/brother, age when they set up their first business and whether entrepre- neurs worked somewhere else before or not variables.

Simple mean score (Table 4) showed that the total Entrepreneurial Personality Scores (EPS), differ according to place where entrepreneurs spent most of their life. F-tests of the means were performed, EPS (Table 5) varies according to place where entrepreneurs spent most of their life (F=4.94, p=.004). According to the post hoc Table 6, there is significant difference between District- City and City-Metropolis.

As regards the factors influencing one’s deci- sion on setting up a business, self actualization has the highest score amongst the other. F-tests of the means were performed according to the factors. It found that there is a significant differ- ence between factors according to the cities. Means of factors are generally high for Istanbul accord- ing to the other two cities, which are expected. On the other hand ‘Job Creation’ factor is high for Van unlike the others.

DISCUSSION

There are a few important findings from this research. First, the results from entrepreneurial characteristics indicated that some personality characteristics are associated with entrepreneurs. Most of the entrepreneurs reported that they hold most of the listed characteristics. The literature indicates that particular personality characteris- tics have been associated with entrepreneurship (Brockhaus & Horwitz, 1986; Fasiska & Fasiska, 1987; Furnham, 1992, Gartner, 1989; Hornaday, 1992; Miner, 1997; Wonderlic, 1995) which is parallel with our research findings.

Istanbul is the most developed city in Turkey and it is the hearth of Turkish economy. In the scope of this information, it is normal that EPS of the entrepreneurs in Istanbul have got the high scores unlike two other cities.

Kayseri is another developed city in Turkey and has got a long time entrepreneurial skills and knowledge dating back to centuries ago. Habitants of Kayseri have got knowledge in entrepreneurship

Table 2. “Anova test” for EPS according to provinces

Sum of Squares

Df Mean Square

F Sig.

Between Groups

359,878 2 179,939 6,798 ,001

Within Groups

4632,166 175 26,470

Total 4992,045 177

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and trade. They are famous for their commercial intelligence in Turkey, and also, process of indus- trialization in Kayseri began in 1930. Where as industrialization process in Van began very late compared with the Kayseri and Istanbul. Kayseri is more developed and has higher levels than Van in socio economic, cultural, and sociological is- sues. It is unexpected that there are no significant difference in between Kayseri and Van EPS. After

analyzing the industrialization process of Van, this unexpected result partially could be explained.

First industrial zone in Van established in 1998 and other prompting activities for set up a business are widespread after 2000. Most of the enterprises are established (34.2% in 1998-200, 52.6% after 2001) after these dates. It could be concluded that entrepreneurs pursued those opportunities when running a business.

Table 3. Post-hoc table for EPS according to provinces

(I) Province (J) Province Mean Difference (I-J)

Std. Error Sig. 95% Confidence Inverval

Lower Bound Upper Bound Lower Bound Upper Bound Lower Bound

Kayseri Van -,54961 1,06325 ,606 -2,6480 1,5488

Istanbul -3,04462(*) ,87692 ,001 -4,7753 -1,3139

Van Kayseri ,54961 1,06325 ,606 -1,5488 2,6480

Istanbul -2,49500(*) 1,01569 ,015 -4,4996 -,4904

Istanbul Kayseri 3,04462(*) ,87692 ,001 1,3139 4,7753

Van 2,49500(*) 1,01569 ,015 ,4904 4,4996

* The mean difference is significant at the .05 level.

Table 5. “Anova Test” for EPS according to place of where the entrepreneurs spent most of their life

Sum of Squares Df Mean Square F Sig.

Between Groups 422,144 4 105,536 3,995 ,004

Within Groups 4569,901 173 26,416

Total 4992,045 177

Table 4. Mean and standard deviations of EPS according to place of where the entrepreneurs spent most of their life

Place of where the Entrepreneurs Spent

Most of their Life

Number Mean Std. Deviation

EPS Village 3 15,66 0,58

Town 3 15,00 3,46

District 11 14,82 5,34

City 69 10,70 5,38

Metropole 92 13,49 5,02

Total 178 12,55 5,31

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LIMITATIONS

As a field study, this research is not without limitations. First, it is only conducted in only 3 provinces of Turkey, each from different geo- graphical areas. Second, it is difficult to reach the founders of enterprises if they are not working in the enterprises. Third, enterprises in industrial zones are generally included due to the time and budget limitations. Despite the limitations, this research has important research implications. Research raises conceptual issues regarding the

entrepreneurial characteristics and factors influ- encing the entrepreneurial decision according the different geographic areas.

However, for the further studies, it can be sug- gested that some important factors which shapes an entrepreneurial personality such as need for achievement, locus of control, risk taking propen- sity, tolerance for ambiguity, innovativeness and self-confidence could be investigated. Addition- ally, it would be better making analysis by using current statistics of GEM TURKEY 2010 Report (Global Entrepreneurship Monitor).

Table 6. Post-hoc table for EPS according to place of where the entrepreneurs spent most of their life

(I) Place of Where the

Entrepreneurs Spent Most of

Their Life

(J) Place of Where the

Entrepreneurs Spent Most of

Their Life

Mean Difference

(I-J)

Std. Error Sig. 95% Confidence Interval

Lower Bound

Upper Bound

Lower Bound

Upper Bound Lower Bound

Village Town ,66667 4,19648 ,874 -7,6162 8,9496

District ,84848 3,34763 ,800 -5,7590 7,4559

City 4,97101 3,03118 ,103 -1,0118 10,9539

Metropolis 2,17754 3,01535 ,471 -3,7741 8,1291

Town Village -,66667 4,19648 ,874 -8,9496 7,6162

District ,18182 3,34763 ,957 -6,4256 6,7893

City 4,30435 3,03118 ,157 -1,6785 10,2872

Metropolis 1,51087 3,01535 ,617 -4,4407 7,4625

District Village -,84848 3,34763 ,800 -7,4559 5,7590

Town -,18182 3,34763 ,957 -6,7893 6,4256

City 4,12253(*) 1,66861 ,014 ,8291 7,4160

Metropolis 1,32905 1,63968 ,419 -1,9073 4,5654

City Village -4,97101 3,03118 ,103 -10,9539 1,0118

Town -4,30435 3,03118 ,157 -10,2872 1,6785

District -4,12253(*) 1,66861 ,014 -7,4160 -,8291

Metropolis -2,79348(*) ,81851 ,001 -4,4090 -1,1779

Metropolis Village -2,17754 3,01535 ,471 -8,1291 3,7741

Town -1,51087 3,01535 ,617 -7,4625 4,4407

District -1,32905 1,63968 ,419 -4,5654 1,9073

City 2,79348(*) ,81851 ,001 1,1779 4,4090

* The mean difference is significant at the .05 level.

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IMPLICATIONS

Based upon the research findings, some of the suggestions proposed in the study are as follows: Each of the entrepreneurial characteristics and each factor influencing the one’s decision on set- ting up a business could be searched in detail to get new findings. Moreover, entrepreneurs from different geographic areas could be searched and according to findings and results, new strategies to develop the entrepreneurship in those areas could be determined. Findings of this research could be used in other researches taking into considerations of limitations.

According to research results; persons hav- ing entrepreneurship skills regardless of their geographic place set up their own business un- der appropriate circumstances. As a developing country, Turkish Government is making new investments especially in non-developed areas. Research showed that under appropriate circum- stances, people could run a business regardless of their place. Government may set the people hav- ing entrepreneur skills in non-developed parts of Turkey and create opportunities for these people to give them a chance for taking advantages of opportunities such as setting up their own business. Thus, reindustrialization of economy in different provinces would be activated resulting in higher socio-economic levels.

Research results indicate that socio-economic history of provinces does not have too much effect on the entrepreneurial decision under the same circumstances. There are no big differences in entrepreneurial personality scores of people liv- ing in cities with different socio-economic and cultural level. If the entrepreneurs pursue suitable opportunities, no matter where they live; there is a high chance that they will succeed in running their own business and contribute to the develop- ment of economy.

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About the Contributors

Carolina Feliciana Machado received her PhD degree in Management Sciences (Organizational and Politics Management/Human Resources Management) from the University of Minho in 1999, and Master degree in Management (Strategic Human Resource Management) from Technical University of Lisbon in 1994. Teaching in the Human Resources Management subjects since 1989 at University of Minho, she is since 2004 Associated Professor with experience and research interest areas in the field of Human Resource Management, International Human Resource Management, Training and Develop- ment, Management Change, and Knowledge Management. She is Head of Human Resources Manage- ment, Master and Head of Human Resources Management Work Group at University of Minho, as well as Chief Editor of the International Journal of Applied Management Sciences and Engineering (IJAMSE).

Pedro Manuel Ribeiro Novo de Melo is an Invited Professor at School of Economics and Manage- ment, University of Minho, and School of Management at the Polytechnic Institute of Cávado and Ave, where lectures courses of Organizational Behavior and Human Resource Management. He has a Master degree in Human Resource Management from the University of Minho. Presently, he is a PhD student in Business at University of Minho. His main areas of interest are organizational behavior, human resource practice and its relationship with the strategy, with special emphasis on SMEs. In recent years, he has focused his studies on the characterization and development of HRM in Portugal.

* * *

Neeta Baporikar, Professor (Strategic Management and Entrepreneurship), is currently on an aca- demic assignment with Sultanate of Oman, Ministry of Higher Education (MOHE), as Head, Scientific Research Department Salalah College of Applied Sciences. With more than a decade of experience in industry, consultancy and training, she made a lateral switch to research and academics in 1995. Dr. Baporikar holds D.Sc (Management Studies) USA, PhD in Management, University of Pune, India, with MBA (Distinction) and Law (Hons.) degrees. Apart from this, she is also an External Reviewer Oman Academic Accreditation Authority, Accredited Management Teacher, Qualified Trainer, Doctoral Guide, and Board Member of Academics and Advisory Committee in accredited B-Schools. Reviewer for international journals, she has to her credit several refereed research papers and authored books in the area of Entrepreneurship, Strategy, Management and Higher Education.

Josh Bendickson is a PhD candidate in the Rucks Department of Management at Louisiana State University. Josh has prior experience working in education, business development, and talent acquisi- tion. He currently teaches principles of management at LSU. With diverse research interests including strategy, international business, human resource management, and entrepreneurship, Josh has presented

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About the Contributors

manuscripts at various conferences over the past few years including but not limited to Academy of International Business, Academy of Management, Southern Management Association, United States Association for Small Business and Entrepreneurship, and the International Council for Small Business. In addition to these pursuits, Josh was recently published in the Journal of Management History.

Enrico Buggea was born in Novara, Italy, in 1989. He began his studies in Industrial Engineering at Politecnico di Milano in 2008 and obtained his bachelor degree in July 2011. Now he is attending MSc in Business Engineering in the same university. In October 2011, he joined Alta Scuola Politecnica, double degree program in partnership among the most prestigious technical institution in Italy, namely Politecnico di Milano and Politecnico di Torino. During his career, Dr. Buggea gained in international experience studying in Belgium, at Louvain School of Management; in Maryland, at James Clark En- gineering School attending courses in Master in Project Management; and at IESE Business School for short-term intensive courses.

Kenneth Cafferkey is Assistant Professor at the Graduate School of Business, Universiti Tun Abdul Razak, Kuala Lumpur. Kenneth received his PhD from the National University of Ireland, Galway. He previously held Postdoctoral positions at Dublin City University (DCU) and University College Dublin (UCD). Kenneth teaches and researches in the areas of high performance work systems, strategic human resource management, international human resource management, and human resource management in healthcare. He has presented his work at leading international conferences, including a plenary paper at the 2009 Industrial Relations Association Conference.

Burcu Özge Özaslan Çalışkan is an Assistant Professor of School of Transportation and Logistics at Istanbul University. She received her Ph.D. in 2011 from the University of Istanbul with a major in Human Resource Management. Previously, she earned her M.Sc. in Human Resource Management of School of Business Administration, Istanbul University in 2006, B.Sc in School of Business Admin- istration, Istanbul University in 2003. Professor Özaslan Çalişkan’s research interests lie primarily in occupational health and safety management, with additional interests in human resource management, organizational behaviour, labour relations, and logistics management.

Roberto Castiglione was born in Caltagirone, Italy, in 1989. He began his studies in Mechanical Engineering at the University of Catania in 2008 and obtained his bachelor degree in July 2011. During the three years, he was part of Scuola Superiore di Catania, a parallel path that provides worthy students with several cultural opportunities. In October 2011, he moved to Politecnico di Torino to continue his studies with a master degree in the same field. At the same time, he is part of Alta Scuola Politecnica, a project that gives students the opportunity to follow additional courses and the possibility to work on a long-term task. Currently, he is at INSA Lyon for his master project on system monitoring in collabora- tion with Brüel & Kjær Denmark.

Luis Varona Castillo is a Professor in the Department of Business Economics at the University CEU San Pablo (Spain). Ph.D. in Economics from the Universidad Pontificia Comillas-ICADE, has suggested an econometric model of the determinants of firm survival in the case of Spain, period 2004-2008. He completed a Master Portfolio Management Finance at the Instituto de Estudios Bursátiles-IEB (2011) and Master of ESADE Business School to Management Functions (2006). The main research areas are:

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About the Contributors

Business Economics with business creation, business survival, cluster of companies and local economic development; finance, valuation, portfolio management and financial markets. He also has experience in the development, monitoring and evaluation of development cooperation. He was a financial manager and business consultant. He is a partner in the firm Luvarconsultores SL., and collaborates with the company R&B Prop Traders SL., as Director of Research and Finance. Dr. Varona has a visiting academic at the University of Unisinos, The Wharton School and London School of Economics and Political Science.

Tania Cerquitelli has been an assistant professor at the Dipartimento di Automatica e Informatica of the Politecnico di Torino since October 2011. She got the master degree in Computer Engineering and the PhD degree from the Politecnico di Torino, Torino, Italy, and the master degree in Computer Science from the Universidad De Las Américas Puebla. Her research interests include the design of innovative algorithms to efficiently perform large-scale data mining, novel and efficient data mining techniques for sensor readings, and innovative algorithms to extract high-level abstraction of the mined knowledge (e.g., generalized association rules). She has been a teaching assistant in different databases and data mining courses at the Politecnico di Torino since academic year 2004-2005.

Anil Chandrakumara is the Director of Master of International Business Degree program of the Sydney Business School of the University of Wollongong, Australia. He holds a PhD from the Sheffield University Business School in the UK and his research interests lie in international organizational be- haviour and HRM and International business strategy, governance, and leadership. Anil has gained more than 23 years of experience in undergraduate and postgraduate level teaching, research, management consultancy, and governance in several universities and countries in the UK, Australia, and Sri Lanka. His work has been presented at conferences around the globe and published in a number of internation- ally refereed journals, conference proceedings, textbooks, monographs, and course manuals. He has been a professional and academic member of the Australia New Zealand Academy of Management and the Academy of Management, USA.

Luis Contente has a master’s degree in Industrial Engineering and Management from the Technical University of Lisbon (Instituto Superior Técnico) in Lisbon, Portugal.

João Fontes da Costa graduated in Sociology at the University of Coimbra and thereafter obtained a PhD in management at the same University. He is currently an Assistant Professor in Human Resource Management at Coimbra’s Polytechnic Institute and a researcher at the Coimbra Centre for Innovative Management (CCIM) in the Faculty of Economics of the University of Coimbra and also at the Centre for Health Studies and Research at the University of Coimbra (CEISUC). He also has over 15 years of experience as an HRM manager in national and multinational organizations.

Francisco Edinaldo Lira de Carvalho is a PhD Student in Management Science, Faculty of Econom- ics, University of Coimbra, and a Technical Consultant and Manager in Public Hospitals Brazilian, as well as a Teacher in the area of Public Administration and researcher in Human Resource Management, Strategic Management, and Health Systems.

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About the Contributors

Nil Selenay Erden is a Ph.D. candidate in Organizational Behavior at Marmara University, Turkey. She also received her Bachelor of Science in Organizational Behavior from Marmara University. She holds a business school degree from Istanbul University Faculty of Business Administration. Since 2010, she works as a research assistant in Istanbul University Faculty of Business Administration, at the Department of Organizational Behavior. Her research interests include investigating the impact of national culture on organizational culture, relationships between organizational characteristics and at- titudes towards job, sources of conflict in small-medium enterprises, enhancement of communication skills, and attributional style in organizational settings.

Pedro Jiménez Estevez is a full time Assistant Professor of Department of Business Administration of University of Castilla-La Mancha. Professor Jiménez holds a Spanish Degree and Ph.D. in Business Administration (University of Castilla-La Mancha). He has had different responsibilities as Head Mas- ter of Centre of University Studies of Talavera de la Reina, Dean of the Faculty of Social Sciences of Talavera de la Reina. Nowadays, he teaches some subjects in the Degree in Business Administration in the Faculty of Social Sciences, and he is also part of the staff of the Master in Strategy and Marketing at University of Castilla-La Mancha. Dr. Jiménez has researched different themes as politics of dividends, innovation, organizational knowledge, and human resources.

Maria Carmen Galang is Associate Professor at the Peter B. Gustavson School of Business, teaching primarily human resource management and cross-national management, and currently the Director of the PhD Program, Sardul S. Gill Graduate School, both at the University of Victoria. Born in the Philippines, she obtained her Bachelor of Science and Masters degrees from the University of the Philippines, and her PhD from the University of Illinois at Urbana-Champaign. Her work experience prior to academia includes the management of human resource departments in firms in the construction, insurance and garment manufacturing industries in the Philippines. She has published papers related to comparative and cross-cultural human resource management and power and politics in organizations in International Journal of Human Resource Management, Human Resource Management, Human Relations, among others. She has added as her current research interest acculturation of migrants.

Lorenzo Grosso is attending his Master of Science in Mechanical Engineering, enrolled in a double degree programme at Politecnico di Torino and Politecnico di Milano. During his career, Dr. Grosso gained in international experience, studying for one year in Sweden at Royal Institute of Technology, as well as in multidisciplinary skills, taking part in a variety of academic projects, social initiatives and internships. Lorenzo Grosso was born on October 1st, 1989 in Biella. He got his high school diploma in a Second Level College of Science in 2008 and his Bachelor of Engineering degree at Politecnico di Torino in 2011. He will earn his Master of Science in 2013.

Semra Güney is a full Professor at Hacettepe University Department of Business Administration, Ankara, Turkey. She graduated from Hacettepe University, Department of Business Administration. She obtained her doctorate at the same department. Her current research areas include leadership, entrepre- neurship, human resource management, social psychology, and business ethics. She has two published books titled Entrepreneurship and Family Business.

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About the Contributors

Santiago Gutiérrez-Broncano has been a full time Assistant Professor in the Department of Busi- ness Administration of the University of Castilla-La Mancha since 2010, and previously, he was IT at University Rey Juan Carlos. Professor Gutiérrez holds a Spanish Degree in Business Administration (University of Alcalá), a Master Degree in Organizational Development (IADE – Autonomous University of Madrid), and a Ph. D. in Business (San Pablo CEU-University). His main teaching areas are Human Resource Management and Strategy. He is also part of the staff of the Master in Strategy and Marketing at University of Castilla-La Mancha and other postgraduate programs in several universities. Currently, Dr. Gutiérrez´s research focuses on Innovative Practices of Human Resource Management and Family Businesses. He has worked in some projects of research and consultancy.

Brian Harney is a Lecturer in Strategy and HRM at Dublin City University Business School and a Deputy Director of the Leadership, Innovation and Knowledge (LInK) research centre. Brian’s research explores HRM in smaller firms and the relationship between strategy and HRM. Brian is the co-author of three books and has published in journals such as the Human Resource Management Journal and International Journal of Human Resource Management. Brian is an Academic Fellow of the Centre for International HRM, University of Cambridge, and facilitates on SME development programmes for Enterprise Ireland and as part of the EU PLATO network.

Stuart Holland currently is co-director of the Coimbra Centre for Innovative Management (CCIM) at the Faculty of Economics of the University of Coimbra and a member of the Centre for Health Stud- ies and Research at the University of Coimbra (CEISUC). He graduated in history and political theory and then gained a doctorate in economics at Oxford, has taught at Oxford, Sussex, Roskilde, and the European University Institute in Florence, been an adviser to several governments and international institutions and for some time was a member of the House of Commons. He has published over a dozen books on politics and political theory, regional theory and policy, economic theory, development eco- nomics, public enterprise and planning, economic integration and issues of global governance, as well as many papers and reports.

Xiang Lei was born in Chaohu, China, in 1988. He began his university study since 2006 in Hefei University of Technology in China, and in 2010, got his bachelor degree of Vehicle Engineering. After that, from 2010 to 2011, Xiang Lei worked as a Chassis Design Engineer of Dongfeng Motor Company in Wuhan, China. In September 2011, he got admission of Politecnico di Torino in Italy to pursue Mas- ter degree of Automotive Engineering. In the meantime, Xiang Lei was involved in ASP (Alta Scuola Politecnico) program, which is held by Politecnico di Milano and Politecnico di Torino together. He joined the ASP project named “Banking Business Customer Internationalization.”

Pamela John Liana is an Assistant Lecturer in Business Studies, based at the Open University of Tanzania in Morogoro Region Centre. Her primary teaching and research interests are in marketing and applied concept in SMEs management. She holds a first degree in Business Administration with option in Marketing and MSc Entrepreneurship Development both from Mzumbe University, Morogoro, Tanzania.

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About the Contributors

Eric Liguori is an entrepreneur, entrepreneurial advocate, researcher, and educator on faculty at California State University, Fresno. Dr. Liguori researches primarily on the topics of entrepreneurial self-efficacy, entrepreneurship education, and entrepreneurial ecosystems, though he often does work in other related areas. His record for scholarship includes over 20 peer and/or editorially reviewed pub- lications, including publications in the Journal of Small Business Management, Journal of Managerial Issues, Journal of Management History, and the Encyclopedia of New Venture Management.

Carlo Mari (Ph.D.) is an Associate Professor of Marketing at the Department of Economics, Uni- versity of Molise (Italy). He teaches undergraduate and graduate courses in marketing management and social marketing. His research interests include consumer behavior, qualitative research methods, family business, and marketing education. Prior to starting an academic career, he worked in automotive industry as an organizational analyst and assistant product manager. He published in international and Italian academic journals. He is currently a member of the Association of Consumer Research.

Olimpia Meglio (Ph.D.) is an Assistant Professor of Management at University of Sannio (Italy), where she teaches Service Management. She has also been visiting scholar at Copenhagen Business School and ESADE Business School. Her research interests revolve around Mergers and Acquisitions, performance construct measurement, process research methods, and intergenerational transition in family business. Her works appeared in international journals, such as Scandinavian Journal of Management, as well as in international and Italian handbooks.

Jeffrey Muldoon is a PhD candidate in the Rucks Department of Management at Louisiana State University. His research interests include organizational behavior and management history. His work has appeared in the Journal of Management History and Stress and Health. He has been educated at Gettysburg College and the University of Connecticut.

Felix Adamu Nandonde is a PhD student in the Department Management at International Business Centre, University of Aalborg, Denmark. During the writing of this chapter, he was in Tanzania and is an Assistant Lecturer in marketing in Department of Agricultural Economics and Agribusiness at Sokoine University of Agriculture, Tanzania. He holds a first degree in Business Administration with option in Marketing from Mzumbe University in Tanzania and MSc Food Marketing from the University of Newcastle upon Tyne. He has been widely involved in SMEs development, consultancy and training in Tanzania.

Lindsay Newport is a native of Baton Rouge, La. She is a two-time graduate of the Manship School of Mass Communication at Louisiana State University where she earned BA and MA degrees in ad- vertising and public affairs/political communication. Her areas of interest include marketing strategy, research methodology, and the intersection of the two. She currently resides in Richmond, Va. where she works as an analyst for The Martin Agency, a top-tier advertising agency that works with some of the world’s most well-known brands.

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About the Contributors

Gizem Öksüzoğlu-Güven is currently an assistant professor at University of Mediterranean Karpasia, Northern Cyprus, and she is the director of Entrepreneurship and Business Development Centre. Before taking on her current position, she worked as a lecturer at Brunel University, UK. She completed her PhD in Business Ethics from Brunel University where she studied on a full scholarship while working as a graduate teaching assistant during her studies. Before she started her PhD, she also worked as a part-time lecturer at Leeds University Business School for a short period. She also holds an MA in Human Resource Management from the University of Leeds, UK and she received her BBA in Business Administration from Eastern Mediterranean University, North Cyprus. She has memberships to the relevant professional bodies such as Higher Education Academy, UK and she takes on various responsibilities in number of academic journals. Her existing publications and current research interests are in business ethics, social responsibility, entrepreneurship, social identity, and research methods.

Mustafa Kemal Öktem is Lecturer at Hacettepe University, Faculty of Economics and Administrative Sciences, Department of Public Administration (Ankara/ Turkey), his B.Sc. is on Public Administration at Middle East Technical University, 1985; his M.Sc.is on “Human Resorces Planning in the Turkish Central Administration: Ministries” at Hacettepe University, Social Sciences Institute, 1990; and his Ph.D. is on “Importance of Organizational Culture on Information Technologies-Organizational Structure Interac- tion” at Hacettepe University Social Sciences Institute, 2002. He has published a number of articles in the Turkish Public Administration Journal and several other academic publications. His area of research interests include “public personnel issues,” “e-government,” “governance,” and “public service ethics.”

Teresa Carla Oliveira graduated in psychology at the University of Coimbra and thereafter gained a PhD in organizational psychology at the University of London. She is director of the Coimbra Centre for Innovative Management (CCIM) in the Faculty of Economics of the University of Coimbra where she teaches and directs programmes in organisational psychology and management. She is also a mem- ber of the Centre for Health Studies and Research at the University of Coimbra (CEISUC). She has undertaken a range of HRM case studies in the private, public and social sectors, including financial and health services. Her published articles have included: the role of intuition and power dynamics in personnel selection; tacit rules and implicit norms in managerial behaviour; performance indicators for purposeful engagement and employee wellbeing at work; critical assessments of the concepts of human and intellectual capital, and critiques of New Public Management.

Intan Osman is Associate Professor of Organization and Gender Studies at Women’s Development Research Centre (KANITA), previously a faculty member at the School of Management, Universiti Sains Malaysia (USM). She has taught and supervised students at the undergraduate, masters and PhD levels; was a short-term adult continuing education tutor, Faculty of Business and Management, Stirling, Scotland; and a visiting scholar at Taskent Technical College, Uzbekistan; Nihon Fukushi University, Nanzan University, Japan; Northern Sumatra University, Indonesia and summer instructor, Faculty of Management, University of Lethbridge, Canada, serving as Chair of the Burns Endowment Fund in Fall 2013. Her area of research includes Human Resource Effectiveness, Women in Microcredit & Homestay, Success Factors in SMEs, Leadership, and Violence against Women. Currently, Intan is collaborating in research on Work Study and Cooperative Education programmes with University of Lethbridge and University of Victoria, and heads USM’s community engagement project, Empowering Single Mothers through Entrepreneurship.

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About the Contributors

Pramila Rao is an Associate Professor of Human Resource Management (HRM) in Marymount University, Arlington, VA, since Aug 2005. She graduated from George Washington University, Wash- ington D.C., in May 2005 with a major in Human Resource Management and minor in International Business. Her dissertation titled “Executive Staffing Practices in US-Mexico joint ventures” is an in- ternational empirical research, which has been published as a book. Some of her subject research has been published in Employee Relations, Cross-Cultural Management, The Business Journal of Hispanic Research, International HRM Best Practices Series of Routledge, Journal of Indian Business Research, among others. She has authored two editions of a book published by McGraw Hill on 20 debatable HRM topics titled Taking Sides: The Clashing views of Human Resource Management. She is also the author of HRMex: Human Resource Management in Mexico: Perspectives for Scholars and Practitioners. Her subject research interest focuses on HRM practices in a cross-cultural context with special focus on Mexico and India.

Giacomo Rontini was born in Ravenna, Italy, in 1989. He received the Bachelor of Science in Elec- trical Engineering at Politecnico di Milano in 2007. Currently, he is attending the Master of Science in Electrical Engineering at Politecnico di Milano and, at meantime, he is attending ASP programme (Alta Scuola Politecnica), a double degree programme between Politecnico di Milano and Politecnico di Torino, in which he is developing the project “Banking Business Customer Internationalization.”

Mercedes Rubio Andrés is a full time Assistant Professor in the Department of Business of the San Pablo-CEU University. Professor Rubio holds a Spanish Degree in Business Administration (University of Alcalá), a Master Degree in Strategic Management (IADE – Autonomous University of Madrid) and a Ph. D. in Business (San Pablo CEU-University). His main teaching areas are Strategic Management and Human Resource. She is also part of the staff of the Master in Business Research at San Pablo-CEU University. Currently, Ph. D. Rubio´s research focuses on Management Innovative Teams and News practices of Human Resource. She has participated in several international conferences and published several papers in different journals.

Arianna Scolari participated as an author of this book chapter working as a member for a Multidis- ciplinary Project titled “Banking Business Customer Internationalization”: a definition of new ways of interaction among small-medium enterprises to create an environment that allows companies to access to services that facilitate their business extension abroad while pursuing her double degree from Po- litecnico di Milano and Politecnico di Torino at the Alta Scuola Politecnica. Arianna Scolari earned his Bachelor of Engineering degree in Management Engineering from Politecnico di Milano in 2011. While a graduate student at Politecnico di Milano it is expected that her Master of Science degree in Manage- ment Engineering will be conferred in October 2013. Ms. Scolari has been the recipient of honors and awards including the Alta Scuola Politecnica Scholarship and the Erasmus Scholarship received during her participation in the Erasmus program at Eindhoven University of Technology.

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About the Contributors

David Starr-Glass is a senior mentor with the International Programs of SUNY Empire State Col- lege, and is currently attached to their unit in Prague in the Czech Republic. He teaches a wide range of courses in business administration, including cross-cultural management and organizational behavior, and also serves as a supervisor for undergraduate dissertations. He has earned master’s degrees in business administration, organizational psychology, and online education. His research interests include cross- cultural aspects of organizational culture and human resource management, and he publishes regularly in both the business administration and distance education literature.

Pua Eng Teck is an associate professor attached to the Bank Rakyat School of Business & Entre- preneurship (BRSBE) and is Acting Director of Center for Executive Education (CEE) at Universiti Tun Abdul Razak. Dr Pua possesses unparallel diversified 23 years of working experience. He began as General Manager in engineering project management, was a Regional Sales Manager for Ohaus / Mettler Toledo group for over 9 years and spent 6 years as a Regional Marketing Manager for Rhodia/ Rhone-Poulenc, an international reputable specialties chemicals organization. Dr. Pua has a vast inter- national business and strategic marketing management skills-set pertaining to networking with dealers and distributors including managing SME’s sector. He has consulted, developed and executed numer- ous training programs for international companies including managing SMEs and resource planning in the area of internationalization business ventures. Key areas of focus include Entrepreneurship, Family Business Management, Small Business Management, and Cross-Cultural Management.

Leyla Tulunay is a teacher at a secondary school. She is graduated from Middle East Technical University, Department of Computer Education and Instructional Technology, 2003, and she obtained her M.Sc. Degree at Hacettepe University, Social Sciences Institute, Department of Business Admin- istration, Management Organization and Organizational Behavior Branch, 2010, and her thesis is on entrepreneurship and factors affecting the entrepreneurial behavior. Her research areas are entrepreneur- ship, educational psychology, and learning.

Mark Weaver is the Ben May Chair of Entrepreneurship in the Mitchell College of Business at the University of South Alabama. Dr. Weaver is a past president and fellow of both the United States As- sociation of Small Business and Entrepreneurship and the International Council of Small Business. His research interests include strategic alliances, entrepreneurship education, and local business climate, though he is widely published in many related areas.

João Zambujal-Oliveira has a Msc degree in Economics at New University of Lisbon (FE) and received a MBA in Management Science from the Technical University of Lisbon (ISEG). In 2007, he achieved his Ph.D. in Management Science from the Technical University of Lisbon (ISEG). Before coming to the Department of Engineering and Management at Technical University of Lisbon (IST), João Zambujal-Oliveira was hired as a systems engineer at banks, insurance companies and consulting firms, and as assistant professor of Management at University of Madeira in Funchal.

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502

Index

A ad hoc 2-4, 150, 387 Aguinaldo 50, 73

B Boundary Spanning 238, 240, 245-248, 250, 260,

262-264, 278, 354, 373 Business Ethics 111, 301-305, 312-314

C capita (GDP) 168 career expectations 134 Chinese Agencies 393, 397, 405, 407, 410-411 Cohesion (or Proximity) 299 Competitiveness 13, 28, 66, 73, 105, 123, 187, 225-

226, 239, 246, 253, 261, 263-264, 269, 272, 298-299, 309, 315, 318-319, 334, 338-340, 377-379, 383-385, 394-395, 400, 410

Conflict Management 148-149, 154, 159-160, 163, 165, 286

Contact Raising 393 Contextual Theory 32, 43 Core Competences 225, 238-239, 250, 264, 274, 278 Customized Services 411

D Diversification 87, 240, 250-252, 266, 278, 324-325,

352, 410 Diversity 69, 76, 84, 191, 212, 217, 289-290, 292-

293, 296-297, 299-300, 322, 331, 336, 340, 350-351, 355, 367, 380, 388

driving force 168, 170, 394

E Econometrics Analysis 200 economic development 17-18, 28-29, 33, 56, 69,

183-184, 186-188, 190, 195, 198-199, 201, 223, 267, 269, 272, 275-277, 315, 334, 394, 401

Enhanced HRM 238-240, 245, 248, 257-258, 260, 262, 265-266, 278, 342, 376

Entrepreneur-Founder 76, 78-85, 95 Entrepreneurial Orientation 68, 79-80, 82, 87, 89-

92, 94-95 Entrepreneurial Personality 415, 417, 419, 421,

423-425 Entrepreneurship in Turkey 415, 426 Entrepreneurship Readiness 415 Equal Opportunity 202, 205, 212, 221 Ethical Decision 301-303, 308-312, 314 Eudaimonic 354, 358-359, 361-365, 367, 376 European Union 59, 167-168, 180, 182, 240, 247,

257, 264, 273, 317, 377

F Factors Influencing the Entrepreneurship’ Decision

415 Familiness 98, 100, 110, 112 Family Business 69, 88, 96-112, 114-115, 119, 125,

127-128, 130-137, 142-147, 152, 154, 159-162, 164, 220, 237, 313, 382, 418

Family Human Capital 98-99, 101, 104-105, 112 Family Relationships 109, 131, 144-145 Family’s Involvement in the Business 97, 112 Financial Services 235, 405, 410-411 Foreign Counterpart 393

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Index

G Geographical Widespread 397 Globalization 53, 57, 91, 126, 159, 185, 267, 269,

271, 274-275, 277, 315-316, 319, 335, 341, 379, 394, 405

Greed 301-303, 373 Growth Pôles 244, 264, 278

H Hedonic 354, 358-359, 361, 363-365, 367, 376 Hierarchy 48, 175, 292, 305, 342-344, 346, 348,

353, 357, 360, 367, 370, 373, 375-376 Highly Skilled Jobs 195, 200 High Performance Work Practices 96, 112 Holdings 341-342, 351-352, 376 homogenous phenomenon 131 Hong Kong 86, 173, 257, 339, 405-406, 410, 412 HR professional 1, 7-11, 13, 16, 25, 382 Human Capital Uniqueness 28, 33, 40, 43 Human Capital Value 28-29, 33, 37-38, 43 Human Resource Management (HRM) 1, 53, 59,

74, 95, 113, 115, 117, 238, 281, 284, 327, 342, 377-378

Human Resources Department 165 Human Resources Functions 166

I Individualistic Orientation 73 Indulgent versus Restrain 73 Industrial Districts 238-243, 245-246, 248, 251-258,

260-261, 264-268, 273, 276-278 Innovation Trajectories 239-240, 244, 259-260, 262,

264, 278 Insurance 16, 168, 210, 213, 241, 398-404, 411-412 Interdisciplinary 92, 290, 300, 302, 311 intergenerational transitions 131-132, 136-138, 142 Internationalization 70, 316, 326, 393-404, 411,

413-414 Italian Traditional Agencies 393

J Job Analysis 118-119, 154-155, 159, 164, 166

L labour turnover 6, 17, 225, 227, 230, 232 life cycle 16-17, 45, 120, 149, 163, 258, 268, 319,

322, 324, 402 Logistic 401, 410-412 Long Term Orientation 73

M Malaysia 1-3, 8, 10-13, 15-18, 20, 22-23, 28-32, 35,

39-40, 42-43, 53, 173, 316, 335-337, 339-340 Masculinity 45, 48, 52, 56, 60, 73, 141 Morality 305, 314 Moral Psychology 301-302, 308 multi-authored account 132, 136, 142 multi-dimensional subject 415

N Nepotism 96, 99, 104, 112, 114-115, 117, 125, 153-

154, 156, 158, 160, 162, 166 Networking 40, 57, 64, 68, 83, 92, 236-237, 239,

246, 259-262, 279, 323-324 New Public Management 342-344, 355-356, 367-

368, 376

O occupational health 167-175, 177-181 Organisational and Operational Logics 350-353, 376 Organizational Commitment 21, 68, 81, 88, 96, 102-

104, 106, 109-112, 163-165 organizational outcomes 4, 6, 9, 14, 68, 97, 104, 165

P Payroll 54, 125, 202, 209, 214-215, 220-221 Philippines 1-3, 8, 10-13, 15-16, 20, 22-23, 244 Portugal 183, 185, 188, 196, 198-199, 238, 254,

261, 266, 269-271, 273-275, 278, 337, 342, 367, 370-371, 377-378, 383-385, 389

positive effect 1, 7, 10, 12-13, 17, 31, 114, 188, 194, 350

post hoc 421 Power Distance 45, 48, 52, 56, 60, 73 Process Approach 132, 142-143 Psychological Contract 217, 343, 348-350, 357, 361,

366, 370, 372, 376

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Index

R Regional Development 128, 183-184, 187, 191, 196-

198, 200, 239, 245, 248, 259-260, 263-266, 268-270, 277-278

Resource Based View 33, 37, 43, 64, 92, 112, 199, 220, 236

Resource Poverty 29, 43, 117 revenue opportunities 325

S scholarly journals 131 Self-Managing Team 283-284, 286, 300 smaller firms 18, 21, 28-29, 32, 42, 54, 58, 113, 116,

119, 124, 175, 205-206, 211, 240, 261, 308, 343

Start-ups 72, 183-184, 186-188, 190-196, 199-200, 219, 239-240, 245, 247-248, 252, 259, 263, 265, 320, 343

Strategic Configuration 74, 76-78, 80-83, 85, 95 Strategic Human Resource Management 1, 3-4, 7,

9, 12-13, 18, 23-24, 44-45, 68, 87, 92, 94-95, 107-108, 160, 201-202, 217-221, 295, 390

Strategic Orientation 8, 68, 74, 76, 78-80, 82, 85, 91, 94-95, 121-122

Succession 60, 97, 99-100, 105, 112, 131-135, 142, 144-147, 152, 159, 161, 164, 266, 373

Succession Plan 131-132 Synergism 75, 95

T Tacit Knowledge 40, 100, 143, 238-239, 243, 245,

248-251, 259-261, 264-267, 271, 278-279, 295, 323-324, 331, 347

theoretical framework 46, 280, 282, 302, 416 Training and Development 44-46, 49, 53-54, 57-58,

61, 63-64, 66, 68, 100, 120-121, 125-126, 129, 152, 157-158, 163, 202, 205, 210-213, 215, 221, 299, 378, 385, 387, 389

U Uncertainty-Avoidance 48, 52, 56, 60, 73 Universalistic Theory 31-32, 43

W Work Teams 280-284, 294-295, 297-300

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Title Page
Copyright Page
Advances in Human Resources Management and Organizational Development (AHRMOD) Book Series
Editorial Advisory Board and List of Reviewers
Table of Contents
Detailed Table of Contents
Preface
Introduction
The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
Human Capital in Malaysian SMEs
Effective Human Resources Management Practices in Small and Medium Enterprises
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
Managing Human Resources in Family Businesses
HRM Practices and Problems in Family-Owned SMEs
Intergenerational Transition in a Small Family Business
The Role of Human Resources Practices in Conflict Management
Occupational Health and Safety in SMEs
The Impact of the Entrepreneur’s Educational Level on the Employment Creation by New Small and Medium Enterprises
Placing SMEs at the Forefront of SHRM Literature
How SMEs in the Car Maintenance Services Industry Recruit Employees from the Dense Forest of Hopeless Unemployed Youths
The Rise, Decline, and Regeneration of Industrial Districts
Self-Managing Teams in Small and Medium Enterprises (SME)
Decision Making in SMEs
Innovation Strategies in SME
Hierarchies and Holdings
HRM Evolution in SMEs
Internationalization Services for Small and Medium Enterprises
Entrepreneurship Readiness in Turkey
Compilation of References
About the Contributors
Index