mediating effect of technological innovation on the...

InternationalJournalofBusinessandTehnopreneurshipVolume8No1,Feb2018[77‐94]

MediatingEffectofTechnologicalInnovationontheRelationshipbetweenHRM,andPerformanceinSelectedSMEsinMalaysia

NuritaJuhdi*andJunaidahHashim

DepartmentofBusinessAdministration,KulliyyahofEconomicsandManagementSciences,International

IslamicUniversityMalaysia,KualaLumpur,Malaysia.

ABSTRACTThe study is toexamine the relationshipbetweenHumanResourceManagement (HRM),technological innovation and firm performance among small and medium enterprises(SMEs) inMalaysia.Themediatingeffectof technological innovationon therelationshipbetween HRM and firm performance was alsomeasured. Data was collected by usingsurveytechniqueto165SMEsthatparticipated inthestudy.Thecorrelationtests inthisstudy indicated that all the variables are significantly related. The technologicalinnovationwas found giving partialmediating effectwhich signifies the importance ofinculcatingthespiritoftechnologicalinnovationamongSMEs(R2=.402,F=19.338,p<.01).The test also showed that technological innovation (ß=.328, p=.000) as the strongestpredictor for firm performance and outweighed the explanatory power of the HRMpractices.The findingsalsoprovidesupporttoresource‐basedtheoryandhumancapitaltheory.Keywords:TechnologicalInnovation,HRM,FirmPerformance,SME.

1. INTRODUCTION 1.1 BackgroundoftheStudyChanges inmarkets and the competitive strategies of large organisations have increased thepressureonSMEsto focuson innovation, innovationcapabilitiesand innovationmanagement(McAdam, McConvery & Armstrong, 2004). Accelerating technological and scientificdevelopments and ever shortening product lifecycles generate a particular innovationimperative as well as opportunities for SMEs (Keizer, Dijkstra and Halman, 2002; O’Regan,Ghobadian & Sims, 2005). Studies to date suggest that the SME sector in general stilldemonstratesaninnovationmanagementdeficit(O’Reganetal.,2005;Musteen&Ahsan,2013)orfindsinnovationmanagementachallenge(Bessant,Lamming,Noke&Phillips,2005).Avastamount of research has proved the positive relationship between Human ResourceManagement (HRM) and a given firm performance (Huselid, 1995; Schuler & Jackson, 1987;Saridakis, Lai & Cooper, 2017). Research has also been done on the relationship betweentechnologicalinnovationandfirmperformance(Foster,1986;Hill&Rothaermel,2003;Tripsas&Gavetty,2000;Gërguri‐Rashiti,Ramadani,Abazi‐Alili,Dana&Ratten,2017).Despitethat,theeffectofHRMontechnologicalinnovationisstillunderstudied.Thus,theobjectiveofthisstudyistoexaminethecontributionofHRMpracticestotechnologicalinnovationofSMEsinMalaysia.Atthesametime,thisstudyaimstoexaminethemediatingeffectsoftechnologicalinnovationonfirms’performance. *CorrespondingAuthor:Email:[email protected]

NuritaJuhdiandJunaidahHashim/MediatingEffectofTechnologicalInnovation…

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1.2 MalaysianSMEsandInnovativeness

TheMalaysianEconomicCensus2016recordedatotalof907,065SMEsoperatinginMalaysiarepresenting 98.5 percent of total business establishments. The results showed that 89.2percent of the establishments were in the services sector, 5.3 percent in the manufacturingsectorand4.3percent intheconstructionsector.MalaysianSMEscontributiontothecountrygrossdomesticproduct(GDP)hasincreasedfrom32.5percentin2011to36.6percentin2016(SMEAnnualReport2016/2017,2017).Innovation is a key to both increasing productivity through process improvement and thecreation of new, higher value, products and services. To ensure the competitiveness ofMalaysian SMEs, Malaysian government has launched SME Master plan 2012‐2020 whichfocusesonanewbeginning inSMEdevelopment;a freshapproach tobringSMEs to thenextlevelbyacceleratinggrowththroughproductivitygainsandinnovation.ThetargetisforSMEstoachieveanaverageGDPgrowthof8.7percentperannumintheperiodfrom2012to2020.TheMalaysiangovernmentrecognisesthatSMEsmaybeunabletoexploitnewproductsduetothe limited organizational and marketing capabilities, thus Technology CommercialisationPlatform(TCP)hasbeenincludedintheMasterPlan.TCPaimstoprovideanationalnetworkofprivately‐managed platforms to promote innovative ideas and breakthroughs from proof‐of‐conceptallthewaytothecommercialisationstage.ThegovernmenthasintroducedInnovationCertificationforEnterpriseRatingandTransformation(1‐InnoCERT)asanefforttoencourageinnovationwithinSMEs.Itisacertificationprogrammeusedtorecogniseandcertifyinnovativeenterprises and SMEs and to encourage entrepreneurs to venture into high technology andinnovation‐driven industries (SMEAnnualReport 2016/2017, 2017). Emphasiswas given oninnovation for the SMEs and the constraint they face, this study is believed tobring valuablecontribution not only to the Malaysian SMEs but also to other SMEs elsewhere. As thecompetition in many markets intensifies and world economies continue to falter, firms arebecomingmorereliantoninnovationeffortsforbasicsurvival.

2. THEORETICALFRAMEWORK Resource‐basedtheorysuggeststhatafirm’sresourcesareextremelyimportant forthefirm’sdevelopmentandthathumancapitalisakeyresourceofafirm(Galbreath,2005;Davis&Davis,2017).Thefunctionofthisresourcedependsontheemployees’abilityandenthusiasm,andonefficient human resource management (Mumford, 2000). In HRM practice, training of theemployees,motivationandeffectiveappraisalandcontrolareimportantissues(Huselid,1995,Schuler&Jackson,1999). First,theemployeecanrapidlyacquirenewknowledgeandfurtherdevelop innovation competencies through training (Chi, Bassock, Lewis, Reitman & Glaser,1989). Second, employees motivation has direct influence on technological innovation (Liu,Gong, Zhou&Huang,2017) though thereare, as is inevitable, different results fromdifferentresearchers(Amabile,Hennessey&Grossman,1986;Baer,1997;Eisenberger&Cameron,1996;Hennessey & Amabile, 1998; Redmond, Mumford & Teach, 1993). Thirdly, technologicalinnovationisaprocessaccompaniedwithhighriskthusitisnecessarytouseeffectivecontrolstoreduceriskandenhanceefficiency(LiY,ZhaoY&Liu,2006).Investment inhumancapitalby firmsstarts fromtherecruitmentandselectionprocess. Theeffortsandtimeinvestedisimperativetoensuretherightcandidatesareselected.Thisactivityneed to be continued by other human resource (HR) related activities in order to promoteemployeesperformance.Human capital theory is another theory that is relevant to the present study. According tohuman capital theory, greater investments in employees are expected to result in improved

International Journal of Business and Tehnopreneurship Volume 8 No 1, Feb 2018 [77-94]

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performance to firms via superior skills and knowledge (Lepak & Snell, 1999). Spending oneducation, and training, are considered as investments in human capital because employeesneed their knowledge, skill, and abilities, and those capital cannot be separated from theemployeeslikehowotherfinancialandphysicalassets(Becker,2009).Theinvestmentswilladdvaluetotheemployeesbyincreasingtheirknowledgethroughouttheirlifetime(Becker,2009).Theyworkbyaccessing,creating,andusingthenewacquiredinformation,whichconsequentlyadd value to the firms (Tymon & Stumpf, 2003). Knowledge and skill are shown to benefitinnovationbyincreasingopportunityrecognitionandproblemsolving,whilelimitingtheabilityofcompetitorstoduplicateit.2.2InnovationInnovativenessandinnovationhavebeendefinedinmanywaysdependingonthecontextofthestudy. In the present study, we refer an innovation as the implementation of a new orsignificantlyimprovedproduct(goodorservice),orprocess,anewmarketingmethod,oraneworganisational method in business practices, workplace organisation or external relations(Gunday, Ulusoy, Kilic & Alpkan, 2011). At a general level, there have been variousclassifications of innovation types in large firms such as innovation in products, services,processes and organisation. Product innovation may include new product offerings orimprovements inexistingproductswhichappear tobe themostcommon formof innovation.Technologicalinnovationinitswidestsenseissomechangeinthewaytechnologyrelatestoitsuses. This includes introduction of new products ideas into production process, radicalimprovementinthecompany’stechnologyandfrequentlyrenewalofequipment.Organizational supports such as organisational policies and practices are argued to beimportantforinnovation.Forinstance,definitionsofinnovationsuchas“…afirm’stendencytoengageinandsupportnewideas,experimentation,andcreativityforthedevelopmentofnewprocesses”byLumpkin&Dess(1996)emphasizedtheimportanceoforganizationalsupportforinnovation (Das& Joshi 2007). In this regards, authors argue thatHRMpractices as part oforganisationalsupportarenecessaryfortechnologicalinnovationinfirms.2.3HRMPracticesandPerformanceHRM iswidelydefined in the literature (Daniels,2006;Huselid,1995)but for thepurposeofthis discussion HRM is defined as a set of practices used to manage the workforce of anorganisation. It reflect attempts by the management to create a work environment thatemphasises employee development through practices such as training, participation andcommunication, and the importanceofhaving innovative, flexible, committedemployeeswhoarevaluableresources(Beer,Spector,Lawrence,QuinandWalton,1984;Guest,1989;Walton,1985).A significant body of research has suggested specific HRM practices which are expected topromote inimitable attributes in human resources that can help an organisation to obtain acompetitive advantage and enhance its performance (e.g. Ahmad & Schroeder, 2003; Frits &MacDuffie,1996;Guest,1997;Guest,Michie,ConwayandSheeman,2003;Huselid,1995;Michie& Sheehan, 2001, Saridakis et al., 2017). Certain HRM practices may have differentconsequences.However,DelaneyandHuselid(1996)arguedthatresearchersstilldonotknowhow HRM practices affect organisational outcomes. Becker and Huselid (1998) and Huselid(1995)asserted thatHRMpractices affectorganisationalperformance through their effectonemployeedevelopmentandbehaviour.


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2.4HRMPracticesandInnovationCentral to the discussion of effective people management in innovating companies is themanagementofcreativityandinnovationpotentialwithinindividuals(Mumford,Scott,Gaddis& Strange, 2002), and the required supporting mechanisms, systems and context variables.Relatively fewstudiesaddressed innovation‐relatedpeoplemanagementpractices in theSMEcontext because HR practices are still considered emerging rather than fully developed andrelatively little focus has actually been placed on people management practices in the SMEcontext (Reid,Morrow, Kelly andMcCartan, 2002). However, those studies are in agreementthat people management practices for innovation and organisational variables supportingcreativityandinnovationarelikelytoapplytoallorganisationalcontexts(Amabileetal.,1996;Bommer&Jalajas,2002).According to Scarbrough (2003), there are three aspects of HRM activity which are seen asparticularly important in shaping the flowof people and their impact on the development ofinnovations: selection methods, compensation strategies, and career systems. Selection ofindividuals with both appropriate skills and attitudes has been identified as an importantinfluence on the development of the project teamswhich are often an integral feature of theinnovation process. The influence of HRM on SMEs innovation which Abdullah, Wahab &Shamsuddin(2010)foundintheirstudythat57percentofvarianceininnovationinSMEshasbeen explained by HRM practices. However, among the HRM practices, only recruitment,selectionandjobsecurityaresignificantpredictorsofinnovation(Abdullahetal.,2010).Accordingtohumancapitaltheory,itisimperativetoproperlycompensateindividualsforskillsand knowledge that contribute to innovation. For firms seeking innovation, compensationshould be designed specifically to engender creativity, problem solving, and risk taking (Fox,2009).AstudybyTakeuchi,Osono&Shimizu(2008)madeaninterestingobservationonthisissue at Toyota. Toyota really does invest heavily in people and the ideas that flow fromeveryoneandasaresult,shopfloorworkersandmanagersalikeenablethecompanytokeepgetting better. However, Toyota actually does not do many of the things associated withsuccessfulenterprises.Forinstance,intermsofcompensation,dividendsarelow–from1995to2006, theyaveragedonly20percentofearnings(Takeuchietal.,2008).Theirexecutivesarenotonhugewages,andtherearefewrapidrisestothetopofthecompany:twoyearsago,theaverageageofthecompany’sexecutivevice‐presidentswas61. Nevertheless, it isanattitudewhich is, in part at least, is fostered by good HRM practices which in turn yield beneficialinnovatoryeffects.Scarbrough(2003)consideredcareersystemsasrewards,control,appraisalandpromotion.Heargued that career systems are important to reward the individualistic acquisition ofknowledge, topromote the sharingof knowledge amongwider communities of practice.Thispractice encourages sharing of ideas and knowledge which leads to innovation. HRM isconsidered as key element of successful innovation since human element is involved in thewhole innovationprocess.Thisperspective isrooted incontingentperspectiveofHRMwhereeffectiveHRMpracticesarethosethatareconsistentwithorganizationalaspectsandstrategies.Infact,studiesontherelationshipbetweenHRMpracticesandinnovationshowedthatgoodHRpracticeshavesignificanteffectoninnovationperformanceoforganizations(Jimenez‐Jimenez&Sanz‐Valle,2005).2.5TechnologicalInnovationasaMediator SeveralpreviousstudieshaveexaminedthedirectrelationshipbetweenHRMpracticesonfirmperformance(Huselid,1995;Schuler&Jackson,1987;Saridakisetal.,2017).Paststudieshaveproventhepositiverelationshipbetweenthetwoconstructs.Inaddition,paststudiesalsohaveexaminedtherelationshipbetweentechnologicalinnovationandfirmperformance(Abdullahet


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al., 2010; Foster, 1986; Hill & Rothaermel, 2003; Mumford, 2000; Tripsas & Gavetty, 2000;Gërguri‐Rashitietal.,2017).Thus,wearguedthattechnologicalinnovationasaresultofHRMpracticeswouldinfluencefirmperformance.Theultimatemotivationforfirmstoinnovateistogainbenefitssuchascompetitiveadvantageand improved performance. The growth and firm performance of SMEs can be measured invariousways,forexampleusingemployment,assets,marketshare,physicaloutputorvariousmeasuresofprofitability(Dobbs&Hamilton,2007).Researchershaveusedabsolute,relative,subjectiveorobjectivemeasuresintheiranalysisoffirmperformance.Itisdifficulttoselectasinglebestmeasure for firmperformance, sinceperformance indicators suchasemployment,incomegrowthandprofitabilitydonot alwaysevolve in the samedirection (Freel&Robson,2004).Basedontheabovereview,thefollowinghypothesesaredeveloped:

H1:ThereisapositiverelationshipbetweenHRMpracticesandfirmperformance.H2:ThereisapositiverelationshipbetweenHRMpracticesandtechnologicalinnovation.H3:Thereisapositiverelationshipbetweentechnologicalinnovationandfirmperformance.H4:TechnologicalinnovationmediatestherelationshipbetweenHRMpracticesandfirm

performance.

3. METHODOLOGY 3.1 MeasurementThere are threemain constructs involved in this study namely HRM practices, technologicalinnovationand firmperformance.BasedonpaststudiesonHRMand innovation(Abdullahetal., 2010; Li et al., 2006; Scarbrough, 2003), this studymeasure HRM practices in fourmainactivities:recruitmentandselection,training,appraisalandcompensation.The instrument of this studywas adaptedmainly from Li et al. (2006). However, items forrecruitment and selection were self‐developed by the researchers. Three items were used;emphasizingoninnovativecharacteristicsofjobcandidates;testingtheinnovativecapabilityofcandidates; and increasing efforts to recruit innovative applicants. Measures of employeetrainingweredevelopedbasedontheresearchbySnellandLau(1994).Employeetrainingwasmeasured by three items: increasing more investment in employee training in the last fiveyears; emphasizing professional training for employees; and encouraging employee learningthroughsystematiccoursesandlearningbydoing.Responsesweremadeonaseven‐pointscalerangingfrom1‐stronglydisagreeto7‐stronglyagree.Inordertostudytheinfluenceofappraisalonfirms’technologicalinnovation,processappraisaland outcome appraisal were measured. For process appraisal, the measurable items weremainly taken from the research by Prowse (1995) and Xu andWang (1997). The items are:permitting the employees tomakemistakes during the innovation process; a high degree oftrust between leaders and subordinates; and building benign relationships betweencollaborators.Responsesweremadeonaseven‐pointscalerangingfrom1‐stronglydisagreeto7‐stronglyagree.For themeasuresofoutcomeappraisalandcontrol, itemsaremainly takenfromtheresearchofHitt,Hoskisson,Johnson&Moesel(1996).Theyare:highrequirementontheReturnon Investment (ROI) to the innovation;cashcurrencybeingabundant through theinnovation; and high increasing speed of net assets through the innovation. Responsesweremadeonaseven‐pointscalerangingfrom1‐stronglydisagreeto7‐stronglyagree.In terms of compensation, material incentive and non‐material incentive were included. Thethree items that measured material incentive are mainly based on the scales of Kuratko,Hornsby & Naffziger (1997). They are: increasing individual material fortune; increasing


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opportunity to gain an economic interest in the firm; and a guarantee of future income forfamilymembers.Responsesweremadeonaseven‐pointscalerangingfrom1‐stronglydisagreeto 7‐ strongly agree. For non‐material incentive, three itemswereused and they aremainlybasedonthescalesofKuratkoetal. (1997).Theyare,acquiringsocialacceptance,praiseandhonour; obtaining individual opportunity by accepting the challenge of the innovation; andprogressofpersonalinbusinessorwork.Responsesweremadeonaseven‐pointscalerangingfrom1‐stronglydisagreeto7‐stronglyagree.Items thatmeasure technological innovationweremainly taken from the scalesof a researchdonebyZahra,Neubaum&Huse(2000).Technologicalinnovationwasmeasuredbyfiveitems:frequentintroductionofnewproductideasintoproductionprocess;highprobabilityofsuccessfor new products being tested; spending shorter periods in new product research anddevelopment; radical improvement in the company’s technology; and frequent renewal ofequipment.Responsesweremadeonaseven‐pointscalerangingfrom1‐stronglydisagreeto7‐stronglyagree.Finally,afirm’sfinancialperformancewasmeasuredusingfouritemsbasedontheresearchofDaily and Johnson (1997). The items are: increasing rate of sales revenue; increasing rate ofprofit; increasing rate of net assetROI; and increasing rate ofmarket share. Responsesweremadeonaseven‐pointscalerangingfrom1‐stronglyreduced,to7‐stronglyincreased.3.2PopulationandSamplingProceduresAsmentionedearlier,98.5percentofestablishmentsinMalaysiaareSMEsandthemajority(i.e.76.5percent)wasmadeupofthemicro‐sizedenterprises.2.3percentwasmadeupofmediumestablishments(whichemployedmorethan100fulltimeemployees)andsmallestablishmentsmadeup21.3percent (employedbetween5and50 full timeemployees).For thesakeof thestudywhichaimedtoexaminetheHRMpractices,technologyinnovationandfirmperformance,all the respondents must qualify certain criteria –they must be the HR managers of theenterprise and the enterprises were chosen based on the definition set by SME CorporationMalaysia(SMECorp).TheactualdefinitionbySMECorpisbasedoneitheroneoftwocriteria(by number of employees or by annual sales turnover) and there are respective criteria fordifferent sectors as indicated in the definition (manufacturing related, agricultural related,services and ICT) (SME Corporation Malaysia, 2017). Given the difficulty in getting theresponses in termsof theannual sales turnover, this studyused the first criterion, i.e.by thenumber of employees. This is due to the practicality in data collection in obtaining fullcooperationbytherespondentstoparticipateinthestudy.Duetothesamereason, thesamplingprocedureused inthestudywasbasedonconveniencesampling.Mostofthepotentialrespondentsapproachedrefusedtoparticipateandinordertoaccomplishthedatacollectionprocess,theresearchersonlymanagedtoobtainresponsesfromthosewhowerewillingtocooperate.

3.3PilotTestApilottestwasconductedbeforetheactualdatacollectionwasdone.30respondentswhometthecriteriaoftheintendedparticipantsforthestudywereaskedtofillupthequestionnaires.Thiswastoensuretheinternalconsistencyofalltheitemsintherespectivevariablesstudied.Table1showedthereliabilitycoefficientofallthestudiedvariablesbasedonthe30responses.Giventhefavourablevaluesofthecoefficientforallthevariables,theactualdatacollectionwasinitiated.


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Table1Reliabilitycoefficientofthevariables(N=30)

Variables Reliabilitycoefficient(Cronbach’salpha)Employeetraining .866Materialincentive .616Non‐materialincentive .781Processappraisalandcontrol .848Outcomeappraisalandcontrol .864Recruitmentandselection .872Technologicalinnovation .869Firmperformance .935

3.4DataCollection

Giventhestronginternalconsistencyofallitemsintherespectivevariables(refertoTable1);data collection was done without any changes to the items in the questionnaire. Thequestionnaireswereself‐administeredbytheresearchersandeachrespondentwaspersonallyapproached.A totalof500survey formsweredistributed inSelangorandKualaLumpurandfinally165surveyformswerereturned.SelangorandKualaLumpurwerechosenduetoseveralreasons.First,thestatistics(asreportedinEconomicCensus2016)indicatethatthetwostateshave the highest percentage in terms of number of establishments (19.8 percent and 14.7percent respectively) as compared to the other states in Malaysia. This is due to the activeeconomic activity and high population density in the states. Second, given the constraint intermsoftimeandeffort,itisperceivedascost‐effectivetojustconcentrateonthetwostates.

3.5DataAnalysisandReliabilityAnalysisAllitemswereanalysedusingprincipalcomponentanalysiswithanorthogonal(varimax)rotation.ThedetailitemsineachfactorwiththerespectivestatisticsaredepictedinTable2.

Table2Statisticsandprincipalcomponentloadingsofthevariables

Factors FactorLoadings

EigenValues

PercentageExplainedVariance

Cronbach’sAlpha

Factor1:FirmPerformance Increasingrateofsalesrevenue. .885 9.83 12.80 .915Increasingrateofprofit. .817 Increasing rate of net asset ROI (return oninvestment).

.778

Increasingrateofmarketshare. .761 Factor2:TechnologicalInnovation Radical improvement in the company'stechnology.

.789 2.17 12.75 .866

Spending shorter periods in new productresearchanddevelopment.

.771

Frequentlyrenewalofequipment. .717 High probability of success for newproductsbeingtested.

.646

Frequent introduction of new product ideasintoproductionprocess.

.604

Factor3:Incentives A guarantee of future income for familymembers.

.711 1.75 10.10 .760


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Factors FactorLoadings

EigenValues

PercentageExplainedVariance

Cronbach’sAlpha

Increasing opportunity to gain an economicinterestinthefirm.

.655

Increasingindividualmaterialfortune. .586 Obtainingindividualopportunitybyacceptingthechallengeoftheinnovation.

.568

Building benign relationships betweencollaborators.(originally was an item under ProcessAppraisalandControl)

.548

Progressofpersonalinbusinessorwork. .392 Factor4:RecruitmentandSelection Emphasizing on innovative characteristics ofjobcandidates.

.875 1.48 9.46 .892

Testing the innovative capability ofcandidates.

.832

Increasing efforts to recruit innovativeapplicants.

.776

Factor5:OutcomeAppraisalandControl Cash currency being abundant through theinnovation.

.796 1.34 9.01 .808

High increasing speed of net assets throughtheinnovation.

.747

High requirement on the ROI (return oninvestment)totheinnovation.

.669

Acquiring social acceptance, praise andhonour(originally was an item under Non‐MaterialIncentive)

.402

Factor6:EmployeeTraining Emphasizing professional training foremployees.

.722 1.13 8.21 .765

Encouraging employee learning throughsystematiccoursesandlearningbydoing.

.698

Increasing more investment in employeetraininginthelastfiveyears.

.655

Factor7:ProcessAppraisalandControl Permitting the employees to make mistakesduringtheinnovationprocess.

.753 1.05 7.10 .563

A high degree of trust between leaders andsubordinates.

.741

AsforFactor3whichwaslabelled‘incentive’,theitemswereactuallyintendedtobeloadedintwo separate factors (namely material and non‐material incentives). However, the factoranalysisoutputindicatedthatallitemswerehighlyinter‐correlatedthattheywereallloadedasonefactor.Therewerealsoitemswhichwerecross‐loadedintheotherfactors,asindicatedinFactor3andFactor5.Giventhehighfactorloadingintherespectivefactorsandhighreliabilitycoefficient,itwasdecidedthattheitemsshouldremainintheloadedfactors.


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4. FINDINGS 4.1DemographicCharacteristicsofRespondents(ParticipatingEstablishments) Table3 indicatethatthemajorityparticipatingestablishments inthestudywere inconsumerproducts/retail and wholesale (19.4 percent) and followed by food and beverages (18.2percent). Non‐service categories such as manufacturing had 4.2 percent respondents andconstructionhad7.3percent.ItisalsoindicatedinTable3that80.6percentoftheestablishmentsareinprivatesectorandtheremainingareinpublicandgovernmentsectors(17.6percentand1.2percentrespectively).Intermsofnumberofemployees,6.1percentoftheestablishmentsemployed10employeesorless, followedbythoseemploying11to20employees(21.8percent)and21to50employees(4.8percent).

Table3Demographiccharacteristicsoftherespondents’establishments(N=165)

Industry Frequency Percentage

Advertising/PublicRelations 7 4.2Biotechnology/Biomedical 1 0.6Contractors/Construction 12 7.3Consumerproducts/Retail/Wholesale 32 19.4Consulting 9 5.5Education 10 6.1Engineering/Architecture 2 1.2Entertainment 2 1.2Finance/Banking/Accounting 1 0.6FoodandBeverages 30 18.2Insurance 1 0.6Industrialtech 2 1.2Manufacturing 7 4.2Medical/Healthservices 8 4.8Real‐estate 1 0.6Technology/Telecommunications/Informationtechnology 10 6.1Training 4 2.4Transportation 1 .6Travel/Hospitality 1 0.6Utilities 2 1.2Others 22 13.3

SectorPublic 29 17.6Private 133 80.6Government 2 1.2Didnotrespond 1 0.6

No.ofemployees1–10 74 44.811–20 36 21.821–50 28 17.051–100 8 4.8101–500 10 6.1Didnotrespond 4 2.4


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4.2 HypothesesTesting

Table4presentsthemeans,standarddeviations,andintercorrelationsofthestudyvariables.All the variables (HRM practices, technological innovation and firm performance) weresignificantly related to each other with positive correlations. The significant positivecorrelationsshowedsupporttothehypothesesforwardedinthestudy.H1whichhypothesizedpositiverelationshipbetweenHRMpracticesandfirmperformancewassupported.As indicated inTable4,alldimensionswhichmadeuptheHRMpractices(namelyincentives, recruitment and selection, outcome appraisal and control, training; and processappraisal and control) were correlated with firm performance with significant positiverelationships.InH2,HRMpracticesareexpectedtohavepositiverelationshipwithtechnologicalinnovation.Again,asshowninTable4,allthefivedimensionsofHRMpracticeswerepositivelycorrelatedwithtechnologicalinnovation.Inthethirdhypothesis(H3),technological innovationandfirmperformancearehypothesizedaspositivelycorrelated.ResultsinTable4supportthehypothesis.

Table4Descriptivestatisticsandintercorrelationsamongstudyvariables(N=165)

M SD 1 2 3 4 5 6 71 Incentives

4.88 0.96 1

2 Recruitmentandselection 4.88 1.31 .505**

1

3 Outcomeappraisalandcontrol 4.74 1.33 .495**.389*

*1

4 Training 4.86 1.30 .574**.496*

*.545*

*1

5 Processappraisalandcontrol 4.86 1.91 .269**.273*

*.320*

*.234*

*1

6 Technologicalinnovation 4.50 1.26 .456**.447*

*.549*

*.479*

*.226*

*1

7 Firmperformance 5.08 1.31 .502**.321*

*.529*

*.414*

*.219*

*.556*

*1

**Correlationissignificantatthe.01level(1‐tailed).

TotestH4whichhypothesizedthemediatingeffectof technological innovation,ahierarchicalregression analysis was used. It was found that the five dimensions of HRM practices weresignificantlyrelatedtobothfirmperformanceandtechnologicalinnovation.Firmperformanceandtechnologicalinnovationswerealsosignificantlycorrelatedandthus,theregressiontestonthemediatingeffectoftechnologicalinnovationcanbeconducted.Table5showsthefullresultsoftheregressionanalysis.


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Table5Summaryofhierarchicalregressionanalysisoffirmperformanceonpredictorvariables(N=165)

Modelno.

Predictorvariablesentered p Standardizedbeta

R Adj.R2 F

1 Incentives .001 .293 .598 .338 17.719**Recruitmentandselection .893 .010

Outcomeappraisalandcontrol .000 .350Training .592 .046Processappraisalandcontrol .831 .015

2 Incentives .002 .256 .651 .402 19.338

**Recruitmentandselection .494 ‐.052Outcomeappraisalandcontrol .004 .236Training .963 .004Processappraisalandcontrol .831 .014Technologicalinnovation .000 .328

**Significantat.01level

AsdisplayedinModel1ofTable5,whenallthefiveHRMpracticesweresimultaneouslytestedas predictors for firm performance, only incentives and outcome appraisal and controlwerefoundtobesignificantpredictors(ß=.293,p=.001andß=.350,p=.000respectively).Allthefivevariablescontributed33.8percentofthevarianceinfirmperformance.

InModel2ofTable5,aftertheinclusionofthemediatorvariable(i.e.technologyinnovation),the R2 increased from 33.8 percent to 40.2 percent and the change in the F‐values wassignificant(from17.719to19.338)at.01level.Itshowsthattechnologicalinnovationhasgivensignificantcontribution inexplaining thevariance in firmperformance. Inorder todeterminewhethertechnologicalinnovationisapartialorfullmediator,theresultsinModel2ofTable5indicatedthatitonlyservesasapartialmediatorbetweenallthefiveHRMpracticesandfirmperformance.This isbecausetwoHRMpractices,whichare incentivesandoutcomeappraisalandcontrol,werestillsignificantpredictorstofirmperformance.Hence,H4issupportedwithtechnologicalinnovationservesasthepartialmediator.

However, despite the significant effects of incentives and outcome appraisal and control, thestandardized beta coefficient of the two HRM practices have decreased from .293 and .350(incentives and outcome appraisal and control respectively) to .256 and .236. The decreasesignified the reduction in their strength as the predictors for firm performance aftertechnologicalinnovationisincluded.AsshowninModel2ofTable5,technologicalinnovationhas the highest standardized beta coefficient (ß=.328, p=.000) which reflected its strongestpredictorforfirmperformanceaftertheotherfiveHRMpractices.5. DISCUSSION

TheobjectivesofthestudyweretoexaminetherelationshipbetweenHRMpracticesandfirmperformancemediatedby technological innovations. The results from thedata analysis showsupporttoallthehypothesesforwarded.AshypothesizedinH1,effectiveHRMpracticesindeedhave positive relationship with the performance of the SMEs as indicated in prior research(Huselid,1995;Schuler&Jackson,1987,Saridakisetal.,2017).Thefindingsalsoprovidestrongsupport to the human capital theorywhich suggested that employerswho are committed ininvestingtheirresourcesforemployees’skillsandtalentswillbereciprocatedwithhigherlevelof competencies and dedication which will result in better company performance. Theperformancecanbeinvariousformssuchashighersalesrevenues,increasedmarketshareandprofit.


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Wellmanagedhumancapitalisverypertinentinbusinessthatitisnotonlypositivelyaffectingthefirmperformancebutthetechnological innovationaswell.Thefindings indicatedpositiverelationshipbetweenHRMpractices and technological innovation revealed the importanceofgoodHRpolicies.ThefindingisinlinewiththefindingbyAbdullahetal.(2010)whichfoundthat57percentofvariance in innovationamongSMEs isexplainedbyHRM.Chiet al. (1989)foundthatwhenemployeesareprovidedwiththeopportunitytoacquireknowledgeandskills,theytendtobemoreinnovative.AspositedbyTakeuchietal.(2008)basedonhisobservationon Toyota’s business practices, the company is willing to make huge investments in itsemployeesrightfromthelowestlevelpositionstotopwiththeaimtosparkcreativethinkingand risk‐takingmentality.Thepractices are strongly supportedby the resource‐based theorywhichpromotestheideathatwhenemployeesarewelltrained,highlymotivatedwithattractiveincentivesandevaluatedfairly,theyarelikelytobemoreengagedandcommittedintheirjobs.Nevertheless, SMEs has one pertinent constraint, i.e. financial resources. In Malaysia, asindicated in theEconomicCensus(2016),72.8percentof theSMEsused internallygeneratedfundsforfinancing.Thefundingwasmainlyusedtobuyorrentvehicles,equipment,landandcomputer software. The census also showed that 79.8 percent of the financial resources aremainly used asworking capital and thus the budget allocated for research and development(R&D) such as innovation and human capital development is very restricted. Thus, given thelimited fund available for employees’ skill development and R&D, the SMEs are not likely toachieve innovation and creativity in any ways. It is plausible to see why SMEs in Malaysiaremainlesscompetitivethantheotherlargercounterpartsdespitetheirsubstantialsizewhichmakeup98.5percentofthetotalnumberofestablishmentsinMalaysia.Thesignificantrelationshipbetweentechnologicalinnovationandfirmperformanceyieldfromthestudyhasaddedmoresupporttotheideathatemployersmustemphasizetheneedtomaketheemployees innovative. Inanybusiness, regardlessofsizeandsector,allemployersaimatmaximizingprofitthroughincreasedsales,highermarketshareandreturnoninvestmentandonemajorcontributortoprofitistechnologicalinnovation.Similarfindingswerefoundinotherstudies by Foster (1986), Hill and Rothaermel (2003) and Tripsas and Gavetty (2000).Innovative minds require risk‐taking and thus, it makes employers in SMEs less willing tocommitduetotheuncertaintywhichmightleadtofailure.Employees’tendencytoexplorenewwaysof doing things and implementnew ideas arehighly influencedby the consequencesoftheir action by the employers. At this juncture, it is very important for employers to allowemployeestomakemistakesandtryoutnewwaysofdoingthings.Toreducethepossibilityofmakinglossesduetomistakes,propercontrolonemployeeperformancecanbedonebysettingstandardoperatingprocedures and keyperformance indicators coupledwithmonitoring andobservation.The finding of this study revealed that technological innovation acting as a partial mediatorbetweenHRMpracticesandfirmperformancefurthersignifytheimportanceofinculcatingthespirit of technological innovation among SMEs. The regression analysis conducted (refer toTable5)revealedtechnologicalinnovationasthestrongestpredictorforfirmperformanceandoutweighedtheexplanatorypoweroftheHRMpractices.Therefore,SMEsshouldnothesitatetoinvest their resources in upgrading the employees’ skills and competencies and they mustembark on the endeavour to research anddevelopment. There has to be effort in generatingideas in new products and production process which might require radical change andimprovementinthecompany’stechnologyandmethods.

6. IMPLICATIONSOFTHESTUDYThestudyfindingshavecontributedsignificantlytothebodyofknowledgeonSMEinnovationandgrowth in relation to theHRMpractices.As indicated in theearlier section,most studies


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donepreviouslyfocusedmoreonlargerfirmsandthuslimitedstudiesweredoneamongSMEsparticularly in Malaysia. The significant relationships among the variables (namely HRMpractices, technological innovation and firm performance) in line with the previous studiesdone in same area provided stronger support to the related theories. Resource‐based theorystated that firm’sresources inany forms(financial,humancapital, tangibleassets,etc.) is thekeytobusinesssuccess.ItiswellunderstoodthatSMEs(especiallyinMalaysia)havetooperateside by side with the larger counterparts and here comes the importance of juggling therestricted resourceswisely inorder tomakeprofit.The findingsof this studyare also in linewith the human capital theory which suggested that SMEs should implement good humancapitalmanagementthroughrecruitmentandselection,appraisalandcontrol,incentiveschemeandemployeetraining(Lepak&Snell,1999;Becker,2009).DespitethelimitedresourcesavailableforSMEs,theyhavetorethinkandreconsidertheneedtoallocatemoreresources foremployee traininganddevelopment.This is thepartwhen theemployershavetotakerisksandchangethenormalwaysofdoingthings.Theyhavetoadoptaradical way in organizing the limited resources in order to allow employees to acquire newknowledge.Atthisjuncture,itisalsopertinenttoselectonlytherightemployeeswhohavetheinnovativecharacteristicsbytestingtheirinnovativenessduringtheselectionstage.Itisalsoagoodideaforthemtoemployvariousselectionmethodssuchaspenandpapertests,interviewsand background check in order to gauge their potential and talents. Given the restrictedresources,SMEsshouldmakefulluseoftheincentivesprovidedbytheMalaysiangovernmentwhichserveasthelubricantsforbusinessoperation.ThegovernmenthasvariousschemesandprogramswhichareprovidedandformulatedthroughvariousministriessuchastheMinistryofHuman Resource, Ministry of International Trade and Industries, Ministry of Finance andMinistry of Science, Technology and Innovation. The SMEs have to take advantage of theseavenues and platforms to develop the skills and talent in innovation and at the same timegettingaccess tomore financial resourceswhicheventually lead to innovationandsuccess inbusiness.

7. LIMITATIONOFTHESTUDY

Thestudyhadseveral limitations.Firstmajorlimitationisinsampling.Therespondentswereidentifiedusingconveniencesamplingwhichmightresultinsamplingbias.Thisisbecausethesampletakenmaynotrepresenttheentirepopulation.Giventhesmallnumberofrespondentsinthestudy(i.e.165SMEsoutof907,065intotalestablishments),thefindingsandtheresultsmaynotreflecttherealityoftheentireSMEpopulationinMalaysiaandthus,inferencesmadefromthestudyresultsmustbemadewithcaution.Second,theR2yieldedfromthehierarchicalregressionsonHRMandtechnologicalinnovationwasonly40.2percent(refertoTable5)whichmeansthereareotherpredictorvariableswhichexplain the variance in firm performance. There are other variables which significantlycontributetofirmperformancesuchasfinancialresources,leadershipandmanagementstyle.8. FUTURERESEARCHDIRECTIONThe study findingsonlymanaged to indicate that technological innovation serves as apartialmediator between HRM and firm performance. The study confined its focus on examininginnovation from technology aspect only and possibly, HRMmight have meaningful effect onother types of innovations as well. Therefore, for future research, it might be good to studyotheraspectsofinnovations(asexpoundedearlierinthetext)suchasinnovationinmarketingmethods, business practices andmanagement initiativewhich have potential contribution tofirmperformance.


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