Deciphering the black box of HPWS–innovation link: Modeling the mediatory role of internal social capital

Abstract

This study investigates the impact of High-Performance Work Systems (HPWS) on radical and incremental innovation in the services industry. Insights from the Social Exchange Theory (SET) and Ability-Motivation-Opportunity (AMO) Framework have been used to assess the role of social capital (SC) as a mediator between HPWS, radical innovation (RI), and incremental innovation (II). By using a simple random sampling technique, 328 responses were received from respondents in Pakistan's banking sector firms. For data analysis, structural equation modeling was applied. The results of the study show that HPWS is a significant driver of II, but not RI, in banking sector firms. Moreover, SC plays the role of mediator in the HPWS-innovation link. Outcomes of the study extend the understanding of the “black-box” (i.e., the transmission mechanism between systems of human resources(HR) practices and innovation). It also contributes to understanding HPWS, SC, II, and RI in the context of Pakistan's banking sector. This study expands on earlier research in the areas of HPWS, SC, and Innovation. It supports the view that internal SC enables RI and II. Prior studies indicated that HPWS drives innovations, yet there has been no clear explanation about the mechanism of this effect. By providing empirical evidence on the mediating role of SC, this study expands on existing literature. Empirical validation of an association between HPWS RI, and II contributes to theory by supporting the tenets of the AMO Framework. Unlike prior research that focused on short-term financial outcomes, this study used RI and II as alternate indicators of organizational performance. Our study expanded the literature into the services sector. Furthermore, we contributed to the methodology by conceptualizing HPWS as a high-order formative construct, resulting in significant model parsimony. Insights from our study are relevant to managers because it shows that HPWS implementation not only helps banks to attract, develop, and retain talent but also facilitates the development of SC, which is critical for enabling the innovation capability of the firm. Top managers need to consider internal SC in the design of HPWS because carefully designed HPWS drives SC. This enables idiosyncratic relationships among members of the organization. Thus, the firm gets a competitive advantage that is harder to be copied by competitors. First, data were collected from a single industry. It will be useful to know the effects of multiple industries in future research. Second, this study did not differentiate between different dimensions of SC, i.e., structural, cognitive, and relational. It will be interesting to see how these dimensions relate to HPWS and innovation in future research.