6. Conclusions
Our finding that younger firms, large firms, and high-tech services firms are most likely to adopt high performance HR systems fits with our findings that high-performance HR systems impact positively on firm performance. Our results indicate that firms that adopt a suite of high performance HR practices experience a lift in their profitability and productivity and in their market share relative to their rivals. Two individual HR practices appear particularly important: performance pay for most or all employees, and firm-specific (innovation-related) employee training.
In the face of these findings – which are consistent with recent findings in other countries – why does management in many firms fail to adopt high performance practices? Two potential explanations arise from our work.
First, high performance HR systems are more likely to have an impact on firm performance in some industries than in others. A low-tech firm with fixed coefficient technology operating in an undifferentiated commodity market may find little advantage in adopting potentially costly, HR practices that neither improve productivity nor quality. Conversely, a firm operating in a market in which individual flair drives both quality and output may find that choice of HR practices is central to performance.
Second, idiosyncratic ability of managers appears to be highly important. Old firms (which tend to have poorer HR practices) may be reliant on managers habituated in "old school" practices that are no longer appropriate in a technological economy and/or in a world in which employees expect to be treated as self-reliant contributors to the firm.
Smaller firms tend not to adopt high performance HR practices. One explanation is that they may not have the breadth of expertise to draw on in designing high performance systems. An alternative explanation is that the benefits of adopting such practices may not be as large for these firms as for larger firms. However, this explanation is not supported by our econometric results which indicate that small firms consistently benefit from adoption of high performance HR practices.
As well as firm size and age, idiosyncratic management capability appears important. In all our estimates, the instrumented practices have greater explanatory power than do the raw variables. Our choice of instruments is designed to isolate the portion of the individual HR practice or suite of practices that can be attributed to underlying management capability. In each case, our instruments are significant explanators of the practice. For instance, we can "explain" the adoption of performance pay (at a statistically significant level) by whether or not the firm has a formal planning process, and we consider it reasonable to maintain that the latter reflects underlying management capabilities within the firm. (A firm that does not plan formally for the future is, intuitively, likely to have poor overall management capabilities.) The fact that the instrumented component of each practice has significant ability to explain firm outcomes indicates that management capability is indeed important in determining relative performance across firms.
The data that we have used is a single snapshot of practices and performance, albeit across a large, representative sample of firms. Future linking of the data to dynamic measures of firm performance should enable us to test whether these idiosyncratic management factors are able to explain the subsequent financial performance and survivorship of firms.
Even without these dynamically linked data, our results are highly relevant to studying the impact of HR practices on firm performance. In earlier work, we demonstrated that a number of management practices – particularly HR and innovation related practices – are strongly associated with firm profitability, productivity and market share. The current paper extends this work to test whether these associative results stand once we control for a broad range of firm characteristics and management practices (our "general factors") and once we instrument HR practices with variables that reflect underlying management capability. The results indicate strongly that adoption of a suite of high performance HR practices (plus performance pay and employee training) impacts on three different measures of firm performance. This finding, derived from a large sample that is representative of an entire economy, provides evidence that human resource practices really do matter.
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