High performance work systems and innovation in New Zealand SMEs: testing firm size and competitive environment effects

Abstract

While the links between High Performance Work Systems (HPWS) and performance are established, we extend this literature by (1) focusing on new products/services innovation and (2) testing relationships on SMEs (up to 250 employees). Specifically, we test a path model whereby HPWS influences human capital and ultimately innovation. Furthermore, to better understand potential resource differences within SMEs of different size, and the business environment context operated in, we also test (3) firm size and (4) competitive rivalry as moderators. Combining these factors, we test moderated mediation models and use a sample of 253 SMEs with time-lagged data. Findings show HPWS are positively related to a firm’s human capital and innovation, and the direct effect of HPWS is partially mediated by human capital. Moderation effects highlight that firm size is most important, with larger SMEs outperforming smaller SMEs only when they have high HPWS. Greater competitive rivalry in conjunction with HPWS (2-way) and for larger SMEs (3-way) produces the highest levels of human capital. Finally, a moderated mediation effect is found for firm size, showing that the indirect effect of HPWS on innovation (through human capital) strengthens as SMEs get larger. The implications for HPWS and SME innovation are discussed.