ABSTRACT. Attempts to explore empirically the link between HRM and firm performance are numerous. Yet, research on this link remains restricted to large companies. Little is known about the extent to which the existing results extend to small businesses. The purpose of the present study is to develop and test a conceptual framework linking HRM to financial performance that fits small businesses. The central question is whether the development of an intensive HRM is profitable for smaller organizations. For the development and optimization of the conceptual framework, we rely on human capital theory and bankruptcy prediction models. Using structural equation modeling, we study the mediating effect of voluntary turnover and productivity on the relationship between HRM intensity and one year lagged financial performance. The results show both productivity and profitability enhancing effects as well as a cost increasing impact of HRM intensity.
KEY WORDS: financial performance, HRM, productivity, small business management, voluntary turnover
JEL CLASSIFICATION: C39, M50, M51, M52, M533
Prior studies indicated that small business managers often face HR related management problems (Julien, 2001;McEvoy, 1984). Recruiting, motivating and retaining employees seems to be a major challenge for small firms (Gatewood and Field, 1987; Golhar and Deshpande, 1997; Hornsby and Kuratko, 1990). Studies by McEvoy (1984) and Marlow and Patton (1993) revealed effective management of human resources to be a good predictor of small business survival. Research by Dun and Bradstreet (2001), in turn, showed that managerial incompetence, especially in the field of HRM, is the main cause of failures in smaller firms. It is therefore not surprising that research on HRM in small businesses is recently receiving increased attention (e.g. Cassell et al., 2002; de Kok, 2003; Duberley and Walley, 1995; Golhar and Deshpande, 1997; Hornsby and Kuratko, 2003; Wagar, 1998)....
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