Human Resource Management Practices and Firm Innovation: An Empirical Study in Sri Lankan SMEs

Abstract

In the modern business world, organisations are confronting a severe competitive and unceasingly changing condition. In this context, innovation has gained significant popularity in management and entrepreneurship literature as vital in reaping competitive advantage. Thus, organisational practitioners are in the quest to better encourage and organise innovation within their firms to warrant sustainable competitive advantage. However, how to promote innovation within organisations remains obscure and paradoxical. The past literature shows that human resource management practices are the antecedents of firm innovation. Therefore, studies are investigating the role of human resource management in facilitating firm innovation. Nevertheless, empirical evidence remains inconsistent, and theory is fragmented. Notably, the link between human resource management and innovation in Sri Lanka echoes several unresolved aspects. Since scant empirical research has addressed those relationships in developing country contexts, this study explicitly investigates the relationship between human resource management practices and firm innovation in Sri Lankan SMEs. Data were marshalled through a self-reported questionnaire with 214 Sri Lankan SMEs. As a caveat, the reliability and validity of the variables were confirmed. The hypotheses were tested with statistical software, PLS-SEM (Partial Least Squares Structural Equation Modeling). The study revealed that recruitment and selection, training and development, and performance appraisal significantly impact firm innovation. However, compensation and reward systems positively impact product innovation, not process innovation, and this study found a negative impact of compensation and reward systems on administrative innovation. The study contributed to the extant human resource management and innovation literature in many ways discussed at the end of the paper. On an equal footing, practical implications for HR managers, practitioners and employees were lucidly discussed. The present becomes a springboard for future scholarly works.