This paper examines the effects of human resource (HR) policies on firm innovation. Specifically, I argue that firms who implement policies to stimulate job autonomy and performance-based pay will be more likely to innovate, as proxied by investments in R&D. In addition, I contend that the institutional (i.e., labour regulations) and competitive (i.e., pressure from imports) contexts in which a firm operates will affect the relationship between HR policies and innovation, albeit in different ways. These hypotheses are tested using a dataset of more than 900 firms across a heterogenous set of 12 countries, majority of which are emerging markets. I find strong empirical backing for the role of both job autonomy and performance-based pay policies in stimulating firm innovation, and partial support for the moderating effects of institutional and competitive contexts of this relationship.
Innovation performance rests on a firm’s ability to create, maintain, protect and utilize knowledge (Cohen and Levinthal, 1990; Daneels, 2002; Inderts, 2009; Maksimov et al., 2017; Kafouros et al., 2021), and its success is often a reflection of the macro-external environment in which the firm operates (Von Zedtwitz and Gassmann, 2002; Aw et al., 2011; Heij et al., 2020). Among its many determinants, Human Resource (HR) management is particularly important for innovation (Lee and Kelley, 2008; Brenton and Levin, 2012) as human capital remains an indispensable ingredient in this process (O’Conner and McDermott, 2004; Loon et al., 2020). HR policies have the potential to create and sustain a suitable infrastructure for the development of the new products, technologies and organizational routines by stimulating employees to be creative, collaborative, independent and ambitious (Beugelsdijk, 2008; Lau and Ngo, 2004; Shipton et al., 2006). Yet, despite these innate opportunities, we still lack sufficient knowledge on how and when internal HR policies are able to successfully stimulate a firm’s ability to innovate (Andreeva et al., 2017; Park et al., 2019).
4. Discussion and conclusions
This work was motivated by two important rationales. First, to move beyond single-country studies and generalize the importance of HR policies for a key strategic area of firm performance, i.e., innovation (Lederman, 2010; McCann and Oxley, 2012) and second, to investigate how contextual conditions affect the relationship between HR policies and firm innovation. Remarkably, both of these questions remain unanswered by HR and innovation management scholars alike, and this attempt seeks to integrate these two rich yet unconnected streams of literature. In addition, given the significance variance in terms of economic and institutional environments around the world, I also sought to take advantage of this heterogeneity and achieve better generalizability regarding the effects of HR policies on innovation by testing these relationships in a trully international setting.
To this end, I developed theoretical arguments that focus on two central themes of HR policies, namely performance-based pay (PBP) and job-autonomy (JA). These arguments postulate that both of these factors will positively influence a firm’s ability to innovate. Furthermore, using elements from institutional theory I argued that the economic and institutional environment in which these firms are active will have an impact on the efficiency of these HR policies in spurring firm innovation. The empirical setting of this study has employed a dataset of more than 900 firms across 12 countries, most of them emerging markets. The seven variables (each measuring management policies) introduced to the PCA loaded up to two components that were tested in a probit model to analyze their impact on innovation, measured by R&D investments. The results support these theoretical conjectures. Specifically, firms granting more autonomy for workers, giving performance feedback regularly and assessing bonuses and promotions based on the individual’s performance are more likely to engage in R&D (and patenting) and thus are more innovative than those not applying any of these HR policies. Moreover, import competition moderates negatively (i.e., weakens) the effects of PBP on innovation and positively (i.e., strengthens) the effects of JA on innovation. In turn, the quality of labour regulations in place moderates positively (i.e., strengthens) the effects of JA on innovation.