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Unformatted text preview: See discussions, stats, and author profiles for this publication at: Human Resource Management Practices and Innovation ARTICLE in SSRN ELECTRONIC JOURNAL · SEPTEMBER 2012 DOI: 10.2139/ssrn.2149464 CITATIONS READS 3 1,069 2 AUTHORS: Nicolai J. Foss Keld Laursen Copenhagen Business School Copenhagen Business School 284 PUBLICATIONS 8,685 CITATIONS 71 PUBLICATIONS 3,909 CITATIONS SEE PROFILE All in-text references underlined in blue are linked to publications on ResearchGate, letting you access and read them immediately. SEE PROFILE Available from: Keld Laursen Retrieved on: 10 March 2016 HUMAN RESOURCE MANAGEMENT PRACTICES AND INNOVATION Keld Laursen Department of Organizational Economics and Innovation Copenhagen Business School; Kilevej 14a 2000 Frederiksberg; Denmark [email protected] and Center for Service Innovation—Department of Strategy and Management Norwegian School of Economics and Business Administration Breiviksveien 40, N-5045 Bergen; Norway Nicolai J. Foss Department of Strategic Management and Globalization Copenhagen Business School; Kilevej 14, 2nd floor 2000 Frederiksberg; Denmark [email protected] and Center for Service Innovation—Department of Strategy and Management Norwegian School of Economics and Business Administration Breiviksveien 40, N-5045 Bergen; Norway September 24, 2012 Abstract: This chapter surveys, organizes, and critically discusses the literature on the role of human resource practices for explaining innovation outcomes. We specifically put an emphasis on what is often called “new” or “modern” HRM practices—practices that imply high levels of delegation of decisions, extensive lateral and vertical communication channels, and the use of reward systems. We discuss how individual practices influence innovation, and how the clustering of specific practices matters for innovation while drawing attention to the notion of complementarities between practices. Moreover, we discuss various possible moderators and mediators of the HRM/innovation link, such as the type of knowledge involved (tacit/codified), knowledge sharing, social capital, and network effects. We argue—despite substantial progress made in the pertinent literature—that the precise causal mechanisms underlying the HRM/innovation links remain poorly understood. Against this backdrop we suggest avenues for future research. Keywords: HRM practices, complementarities, delegation, knowledge sharing, incentives, innovation performance. Prepared for the Handbook of Innovation Management, edited by Mark Dodgson, David Gann and Nelson Phillips Oxford University Press, 2013. INTRODUCTION Human capital is a key, and by all accounts increasingly important, part of the resource-base of firms. Human resources have been called the “key ingredient to organizational success and failure” (Baron and Kreps, 1999), including success and failure in company innovation performance. It is important to understand why and how human capital encourages innovation, and what deployment of human resource management (HRM) practices inside the firm can produce desired levels of innovation performance. Individual employees, founders, or executives may directly give rise to superior innovation performance (Felin and Hesterly, 2007), as in the cases of “innovative genius” (Glynn, 1996) and “stars” (Lacetera, Cockburn & Henderson, 2004) among. Such human capital is substantially above-normal in innovative capacity, whether this is innate (personified, perhaps, by Bill Gates or Steve Jobs) or acquired through training efforts. University researchers that create entrepreneurial start-ups exemplify the direct link between human capital and innovation performance. Superior innovation performance may also be the result of the “capabilities” stemming from the interactions within a firm’s human capital pool (Lepak and Snell, 2002). The organizational set-up of the firm, notably its human resource management practices, also matter to the contribution of human capital to innovation performance, and it this effect that we mainly address in this chapter. Thus, management deploys training arrangements, makes decisions on reward structures, sets up teams, allocates decision-rights and so on, and these arrangements have implications for the contribution of human capital to innovation. The influence of these practices may be modelled both in terms of mediator (human capital mediates the influence from HR practices to innovation performance) and moderator (practices weaken or reinforce the link from human capital to innovation performance) models.1 1 In general, a moderator is a variable that affects the direction and/or strength of the relation between an independent and a dependent variable. A mediator variable is a variable which represents a mechanism through which the focal Extant research suggests multiple mechanisms through which such HRM practices influence the relationships between human capital and innovation. Employee communication networks, as partly shaped by organizational structure, may influence innovation (Tsai, 2001). Motivational research demonstrates that the kind of creative behaviours that underlie successful innovation is stimulated by some kind of rewards but reduced by others (Ryan and Deci, 2000). Managerial styles, the use of feedback, the setting of goals, the use of teams and projects, have all been argued to influence creativity and innovative behaviours. Organizational practices related to the sourcing, deployment, and upgrading of human capital have been identified in various literatures as influencing innovation performance at the level of firms (Henderson and Cockburn, 1994; Galunic and Rjordan, 1998), networks and industries (Kogut, 2000), and regional or national innovation performance (Almeida and Kogut, 1999; Furman et al., 2002). These practices are important constituent components of “innovation” or “dynamic capabilities” (Teece, 2007). A significant part of such practices are those organizational practices that relate to the attraction, selection, training, assessment, and rewarding of employees. They also include organizational practices that may not conventionally be seen as HRM, such as quality circles, extensive delegation of decision rights, management information systems, and formal and informal communication practices in the firm (see Chapter by Phillips). In this chapter we survey, organize, and discuss the literature on the \role of organizational practices for explaining innovation outcomes. We discuss how individual practices influence innovation, and how the clustering of specific practices matters for innovation outcomes (cf. Ennen and Richter, 2010). Relatedly, we discuss various possible mediators of the HRM/innovation link, such as knowledge sharing, social capital and network effects. We argue that the causal mechanisms underlying the HRM/innovation links are still ill-understood, calling for further research. independent variable is able to (indirectly) influence the dependent variable. See Baron and Kenny (1986) for a detailed exposition. 2 Organizing the Literature The literature on the relation between HRM practices and innovation performances is vast and not easily identifiable, as relevant papers are not necessarily published in HRM journals and may primarily focus on other issues. There is a choice to be made regarding whether research on, say, the impact of monetary incentives on creativity should be included. We specifically put an emphasis on what is often called “new” or “modern” HRM practices (also often called “High-Performance Work Practices”) (Laursen and Foss, 2003; Teece, 2007; Colombo and Delmastro, 2008) and its relation to innovation performance. We argue that the literature on HRM practices and innovation can be split into five basic sub-literatures (although inevitably there is some overlap). These are shown diagrammatically in Figure 1. Link I represents a stream of literature that considers the relationship between HRM practices and firm-level financial performance, using innovation as a theoretical link between these variables. Link II denotes a stream of literature that considers the direct link between HRM practices and innovation, while Link III considers a subsequent literature that in addition to this direct link considers mediating and moderating factors of the HRMinnovation relationship. Link VI comprises a small body of literature that has looked not only at the HRM-innovation relationship, but also at antecedents to HRM practices that lead to innovative outcomes. We will discuss these literatures, but first we will identify the most important HRM practices considered in the innovation-related literature. ---Insert Figure 1 here--HRM Practices The notion of “modern HRM practices” has become an increasingly used way of referring to high levels of delegation of decisions, extensive lateral and vertical communication channels, high reward systems, often linked to multiple performance indicators, and other practices that either individually or in various bundles are deployed to achieve high levels of organizational 3 performance (Ichniowski et al., 1997; Zenger and Hesterly, 1997; Colombo and Delmastro, 2002; Teece, 2007; Colombo and Delmastro, 2008). In this context, Guthrie (2001: 181) states that: “The common theme in this literature is an emphasis on utilizing a system of management practices giving employees skills, information, motivation, and latitude and resulting in a workforce that is a source of competitive advantage.” Following Foss, Laursen and Pedersen (2011) we posit that the HRM practices considered in the literature involve: a) delegation of responsibility, such as team production; b) knowledge incentives, such as profit sharing, individual incentives and incentives for knowledge sharing; c) internal communication, encouraged for instance by practices related to knowledge sharing or job rotation; d) employee training, both internal and external; and e) recruitment and retention, such as internal promotion policies). It can be noted that the first three classes of practices include the practices that are typically included as “modern” HRM practices in the literature (Teece, 2007), while the latter two classes in a stylized fashion can be considered more traditional HRM practices. Table 1 provides an overview of our taxonomy and describes the results of a number of representative papers from various parts of the literature. ---Insert Table 1 Here --The early literature was concerned with various “stand-alone” HRM practices and their effect on organizational performance (e.g. Gerhart and Milkovich, 1990; Terpstra and Rozell, 1993). Most of the empirically-based literature since the mid-1990s has focused on the effects of complementary practices, rather than the effect of individual practices (see the recent overview of the general complementarities literature by Ennen and Richter, 2010). The idea of complementarities in our context implies that the introduction of one HRM practice increases the returns to doing more of other HRM practices related to innovation output. Note that although the notion of “internal fit” is arguably less precise than the idea of complementarity, this notion is often used in the HRM 4 literature in a similar fashion to that of complementarity (see e.g., Baird and Meshoulam, 1988; Arthur, 1994). Ideas on “systems” or “bundles” of HRM practices (see, Subramony, 2009) operate with a similar logic. The empirical literature on organizational complementarities suggests two approaches: an interaction and a systems approach (cf. Ennen and Richter, 2010). The interaction approach (e.g., Capelli and Neumark, 2001) examines the effect of a few organizational practices, and in contrast, the systems approach (e.g., Ichniowski et al., 1997; Laursen and Foss, 2003) looks at the relative performance outcomes of entire sets of variables. Given the sheer number of individual practices considered in the literature, the systems approach is dominant, even if it only confers an indirect test of complementarity. Link I: The Role of Innovation Link I represents a large literature stream that has considered innovation mainly in an indirect fashion. This large body of literature (including for instance, Huselid, 1995; Ichniowski et al., 1997; Ichniowski and Shaw, 1999; Datta et al., 2005) considers HRM Practices as explanatory factors (typically complementary) in determining dependent variables such as productivity and profitability. In a typical statement Huselid (1995: 638) notes the … theoretical literature clearly suggests that the behavior of employees within firms has important implications for organizational performance and that human resource management practices can affect individual employee performance through their influence over employees’ skills and motivation through organizational structures that allow employees to improve how their jobs are performed. It should be noted, however, that improving “how … jobs are performed,” in this case may refer to incremental process innovations that are not included in the remit of innovation management as described in this book 5 Research within this literature has typically been published in management journals, but some highly influential studies have been published in economics journals (in particular, Ichniowski et al., 1997). As mentioned above this literature has considered the direct effect of (complementary) HRM practices on economic performance, but also moderated relationships between these variables, for example, by the type of manufacturing strategy pursued by the respondent’s firm (Youndt et al., 1996) or its industry affiliation (Datta et al., 2005). The majority of contributions under this heading adopts a cross-sectional approach, and hypothesizes empirical links between a set of complementary HRM practices and economic performance. There is also research based on panel data within this stream. While initial evidence suggested that these organizational practices (Capelli and Neumark, 2001) had little effect on economic performance such as productivity, more recent panel data evidence has tended to confirm the findings from the studies based on crosssectional evidence in that a set of complementary HRM practices have in general been found to have positive influences on economic performance, including productivity and profitability (Van Reenen and Caroli, 2001; Kato and Morishima, 2002; Janod and Saint-Martin, 2004; Colombo et al., 2007). Given this body of literature is only indirectly concerned with innovation management, we will not go in depth with this literature (see, Colombo et al., 2012 for an in-depth review of this literature). Link II: The Direct Link between HRM and innovation Link II refers to literature that has established a direct theoretical and empirical link between HRM practices and innovation outcomes, typically in the form of product or process innovation. Until the 2000s, the innovation literature was characterized by relatively scant attention being paid to HRM practices and how they influence innovation performance (Laursen and Foss, 2003). The clear exception is some scholars’ interest in Japanese organization and how this connects to innovativeness (Aoki and Dore, 1994). Thus, Freeman (1988, p. 335) explicitly notes how in 6 “Japanese management, engineers and workers grew accustomed to thinking of the entire production process as a system and of thinking in an integrated way about product design and process design,” and he makes systematic reference to quality management, horizontal information flows, and other features of modern HRM practices. The concern with horizontal information flows in Project SAPPHO in the late 1960s demonstrates a long-standing awareness of the relation between HRM practices and innovation performance (Rothwell et al., 1974). Laursen and Foss (2003) supply a number of theoretical arguments for why HRM practices are favourable to innovative activity. One prominent characteristic of many HRM practices is that they increase decentralization by delegating problem-solving rights to the shop-floor. When implemented appropriately, these rights co-exist alongside access to relevant knowledge, much of which may be inherently tacit and thus requires decentralisation for its efficient use. Increased delegation may better allow for the discovery and utilization of local knowledge within the organization, especially when there are rewards in place that support such discovery (Hayek, 1945; Jensen and Meckling, 1992). The increased use of teams is an important component in the set of modern HRM practices. The use of teams also implies that better use can be made of local knowledge, leading to improvements in processes and perhaps also to minor product improvements (Laursen and Foss, 2003: 248). Teams have additional benefits, since they are often composed of different human resource inputs. This may imply that teams bring together knowledge that hitherto existed separately, potentially resulting in process improvements when teams are on the shop floor or “new combinations” that lead to novel products (Schumpeter, 1912/1934), especially when teams are in product development departments. Increased knowledge diffusion through job rotation, and increased information dissemination facilitated by IT, may also be expected to provide a positive contribution to innovation performance. Training may be a factor leading to a higher rate of process improvements and may also lead to product innovations. 7 The adoption of a single such practice may sometimes provide a contribution to innovative performance. The increasingly widespread practice of rewarding shop floor employees for putting forward suggestions for process improvements—such as by giving them a share of the cost savings —is likely to increase incremental innovation activity (Bohnet and Oberholzer-Gee, 2001), regardless of whether or not the firm has employed other organizational practices as well. However, HRM practices should be most conducive to innovation performance when adopted, not singly, but as a system of mutually reinforcing practices. The arguments in favour of this argument are as follows (Laursen and Foss, 2003: 249). The innovation pay-off from giving shop floor employees more problem-solving rights will likely depend on the level of training of such employees. The converse is also likely to hold: employees may invest more in upgrading their skills if they are also given extensive problem-solving rights, especially if they are provided intrinsic or extrinsic motivational encouragements. Rotation and job-related training may have complementary impacts on innovative activity. All these practices are likely to complement various incentive-based remuneration schemes—based on individual, team or firm performance—profit sharing arrangements, and promotion schemes. To the extent that implementing HRM practices is associated with extra effort or with disruption of changing routines, employees will usually demand compensation. From an agency theory perspective one would expect many HRM practices to work well, in both profits and innovation performance, only if accompanied with new, typically more incentive-based, remuneration schemes. Arguably the first paper to empirically establish the link between a system of HRM practices and innovative activity was Michie and Sheehan (1999). Using a sample of 480 UK firms drawn from the UK’s 1990 Workplace Industrial Relations Survey, the authors investigate the relationships between firms’ HRM practices and the level of R&D expenditure. The results suggest that what the authors term “low road” HRM practices—strict job-description, short term contracts, 8 etc.—are negatively related to investment in R&D and the adoption of advanced production equipment. In contrast, “High road” work practices (modern HRM practices) are positively correlated with investment in R&D and m...
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