Linking Hrm and Small Business Performance: An Examination of the Impact of Hrm Intensity on the Productivity and Financial Performance of Small Businesses

Abstract

In order to determine whether human resourcemanagement (HRM) is profitable for small organizations, a conceptual frameworkbased on human capital theory and bankruptcy prediction models is developed.Information is based on the operational and financial performance of 416units/organizations selected from the Belfirst data file for the period1999-2000. HRM intensity variables(training, selection, compensation, careers,performance management, and participation), and performance measures (voluntaryturnover, labor productivity, and financial performance) were tested. Resultsindicate that HRM intensity strongly influences productivity. Conversely, HRMintensity has a negative impact on voluntary turnover. It is alsofoundthat investments in HRM impact small firms' financial health.First,productivity is stimulated by investments in HRM; second, the shareof personnel costs/value added is lowered by increased productivity; and third,profitability, solvency, and liquidity are increased by a reduction inpersonnel costs/value added.The total effect of HRM intensity onprofitability is positive and can be explained by the impact of HRM intensityon operational performance outcomes (e.g., lower levels of dispute, betterquality, and more innovation). The findings illustrate how intensive HRM canprovide surplus value for small businesses. (NEE)

Keywords: Voluntary turnover, Human capital, Bankruptcy, Earnings, Human resource management, Firm performance, Firm management, Firm productivity