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RELATIONSHIP BETWEEN HUMAN RESOURCE PRACTICES AND INNOVATION ACTIVITY IN MALAYSIAN SMES Mohd Khairuddin Hashim Juhary Ali Dzulhilmi Ahmad Fawzi Faculty of Business Management Universiti Utara Malaysia ABSTRACT The New Millennium is said to be the era of globalization, trade liberation and stiff competition. This is mainly due to changing economic, social, political and technological environment facing by all nations and regions. Issues relating to opportunity and threats of globalization, trade liberalization, WTO, AFTA are deliberated at numerous international meetings and dialogues. At the societal level, changes in values, work attitude and life styles, new skills and training requirement, changing demographic patterns of the work force increase the complexity of business and trade environment. These global changes have forced the SMEs the need for innovation. The SMEs need innovation as a mean to create their competitive advantages to compete successfully. Against these background, this study examines the relationship between human resource practices and innovation activity of SMEs. Findings of the study indicate significant positive relationship between human resource practices and the innovation activity of the SMEs. Keywords : Human Resource, Innovation, Smal and Medium Enterprise.

I. INTRODUCTION The small and medium enterprises (SMEs) play an important role in providing linkages to export-oriented industries in Malaysian economy. The SMEs are expected to contribute significantly in terms of value added and labour absorption in economic growth, particularly in the manufacturing sector, as driver of growth It is estimated that there are 18270 (SMIDEC 2004) SMEs of which 76% are small enterprises and 24% are medium enterprises. As such the numbers of small and medium industries are expected to be around 20,000 and is said to dominate the manufacturing sector in Malaysia Malaysia is moving forward to achieve the industrialized nation by year 2020. Continuous economic, social, technological and business strategies had been long formulated and implemented in the Malaysian Master Plans . Human resource and technological development and product innovation in competitive business environment are crucial factors that are given attention. In the quest to attain the status of a “developed nation” by the year 2020, greater emphasis is given to the retraining and skills upgrading of the workforce in the SMEs This is necessary not only to increase the knowledge and skill intensity of the SMEs, but also to equip them with specialized and up-to-date skills as production techniques become increasingly automated and complex. Jurnal Manajemen & Bisnis Sriwijaya Vol. 3 No 6 Desember 2005

MOHD KHAIRUDDIN HASHIM, Dkk

Innovation is the life-blood of a business organization. Business organizations need innovation to create as well as maintain their competitive advantages. Companies which try to stand still will not survive. To survive in current competitive global business environment, companies need a regular stream of innovations to succeed. (Hellriegel, 2001; Simon, 1997; Drucker, 1985; and Porter, 1980). Notwithstanding the tremendous interest on innovation in the organisations, the studies on innovation in small and medium-sized enterprises are still very limited in focus (Sayles, 1974). A few of the studies examined the types and characteristics of innovative small firms, the elative strengths and weaknesses of small firms in innovation, the role of innovators in product innovation in small firms, and the innovation evaluation programs (Khan and Manopchetwattana,1989; Upton, Seaman and Sexton, 1989; Caird, 1994; Vossen, 1998). It was also found that although the literature suggests different approaches and levels of analysis being adopted in innovation research. very few studies have attempted to highlight the important of organizational factors to innovation, particularly for the small and medium-sized enterprises (Johannessen, Oslen, and Lumpkin (2001). In view of the importance of innovation and the lack of information concerning its nature, more research is obviously needed in this area. One particularly important research area would be to examine the relationship between human resource practices and innovation activity in small businesses, specifically in the Malaysian context. The information on the relationship between human resource practices and innovation activity is not only important to SMEs, but also would be of great value to owners/managers of small businesses striving to become more innovative and competitive. For this purpose, this paper is presented as follows. The following Section Two highlights the relevant literature. Next, Section Three describes and explains the research methodology adopted in the study. Section Four presents the results of the study. Finally, Section Five discusses the results as well as provides the conclusion of the study.

II. LITERATURE REVIEW Human resource management has been recognized as one of the contributing factors for economic growth and for social and political and technological development of many nations. In the era of globalization, economic liberation and fast growing ICT architecture and infrastructure , it is realized that strengthening the national competitive advantage is the main concern of the industrial and business players. . For the newly emerging, newly industrialized and fast growing economy like Malaysia, the human resource development, i.e. innovation is found to be an important agenda in business for economic growth and sustainable development in the competitive environment of the New Economy. Businesses of all sorts adopt some form of human resource management. However, the adoption of specific human resource practices vary among firms. As a good business practice, human resource management incorporates those activities that supply and coordinate the human resources of an organisation. According to Dunn (1985), human resource management is a comprehensive approach to management of people at work and it seeks to achieve integration and coordination with overall planning and other managerial functions. Past conceptual and empirical works generally agreed on the importance of certain human resource

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Jurnal Manajemen & Bisnis Sriwijaya Vol. 3 No 6 Desember 2005

RELATIONSHIP BETWEEN HUMAN RESOURCE PRACTICES AND INNOVATION ACTIVITY IN MALAYSIAN SMES

practices in the determination of employee and organizational performance irrespective of size, sector and external environment (Harel and Tzafrir, 1999). Drawing on the universalistic or “best practices” approach, past researchers posited that some human resource practices are always better than others and at the same time, recommended that all organizations should adopt these best practices. The proponents of the universalistic perspective believed that greater use of the best human resource practices will help organizations to increase their effectiveness (Osterman, 1994; Pfeffer, 1994; Delery and Doty, 1996), A number of recent studies have consistently identified six essential human resource management practices as crucial to organizational effectiveness (Osterman, 1994; Pfeffer, 1994; Delery and Doty, 1996; Harel and Tzafrir, 1999). These six practices include: (1) recruitment; (2) selection; (3) compensation; (4) employee participation; (5) training; and (6) performance appraisal. A number of research attempts have been made to address the issue concerning the factors that make organization innovative. With regard to this, the review of the literature on innovation indicates that some past studies have been able to identify several organizational and environmental factors that can stimulate innovations in business organizations. Among the three important organizational factors that can influence the level of innovation in organizations are organizational structure, human resource practices and organisation culture (Martins and Terblanche, 2003; Mavondo and Farrell, 2003; Robbins and Coulter, 1999; Roffe, 1999; Michie and Sheehan, 1999; Ahmed, 1998; Ozsomer et. al, 1997; Utterback, 1979; and Pierce and Delbecq, 1977). The studies by Galia and Legros (2003), Roffe (1999), Michie and Sheehan (1999), and Holbrook and Hughes (2003 suggested that good human resource practices have significant impact on the innovation performance of organizations. According to the findings of these studies, the organizations that focused on human resource practices such as training and development, sharing skills, extensive recruitment and selection, employment security, incentive reward systems, and innovative work practices produced not only the highest level of productivity but also enhanced their innovative activities. The increase importance of innovation to organizations is also reflected by the tremendous increases in the literature that address the role and nature of innovation (Johannessen et. al, 2001). Over the years, different authors and researchers have offered various definitions of innovation. Kanter (1985), Young (1994) and Drazin and Schoonhoven (1996) referred to innovation as a means to create and maintain sustainable competitive advantages. On the other hand, Drucker (1985) and Covin and Miles (2003) considered innovation as a fundamental component of entrepreneurship. Johannessen et. al (2001) referred to innovation as newness and used six different types of innovation activity to measure innovation as newness. These six areas of innovation activity are new products, new services, new methods of production, opening new markets, new sources of supply, and new ways of organizing.


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III. RESEARCH METHODOLOGY In this study, a small and medium-sized enterprise (SME) was defined as a firm with an annual turnover of less than RM25 million and as one which is actively managed by its owner/s. Based on this criteria, 210 SMEs were selected from the listing obtained from the Small and Medium Industries Development Corporation (SMIDEC). 3.1. Survey Questionnaires Using a structured questionnaire, the data were collected through personal interviews with the Managing Directors, Chief Executive Officers, and Senior Managers of the 24 selected firms (22.9%) , out of 220 SMEs identified. The structured survey questionnaires adopted in this study consisted of 55 questions in four sections. The first and second sections of the questionnaire which consisted of 32 items were used to obtain the general information concerning the background of the respondents (13 items) and the firms characteristics (19 items). The remaining 19 questions in sections three and four of the questionnaire were designed to capture the respondents assessments of their firms human resource practices (11 items) and innovation activity (8 items), respectively. Among the sample items in section three were: commitment to training and development, sharing of skills, degree of job security, selection and recruiting of creative people. Finally, the items used in section four of the questionnaire to measure the innovation activity of the firms included; improved products, improved services, new products, new services, opening new markets, new sources of supply, new methods of production and new ways of organizing. The 46 items constructed to answer 19 questions (in sections 3 and 4) were adapted from the earlier works on innovation served as a basis for querying the human resource practices and innovation activity as reported by each of the respondent. The respondents were asked to rate each item on a five-point scale as follows: ranging from (1) strongly agree to (5) strongly disagree (for human resource practices) and ranging from (1) a little to (5) a lot (for innovation activity). The questionnaire was tested prior to the interviews held with the respondents. The coefficient alpha scores of the measures ranged from 0.75 to 0.83.

IV. THE RESULTS 4.1. Characteristics of the Respondents The following Table 1 displays the personal characteristics of the 48 respondents that participated in the survey. As shown in Table 1 below, out of the 48 respondents, 20 were Chinese, 25 Malays, and three Indians. Forty of the respondents interviewed were male and the remaining eight were females. Of the 48 respondents, 39 were married, seven were single and two had remarried. The age of the respondents ranged from 27 to 60 years old. In terms of experience, the information gathered from the study indicated that the respondents had between one and 24 years of work experience. As far as their education is concerned, 15 had their school certificates, five had diploma, 20 obtained a bachelor’s degree and eight earned a master’s degree. 4



Table 1 Characteristics of the Respondents Frequency Percent Range Race: Malays Chinese Indian Others Sex: Male Female Age: Marital Status: Married Remarried Never Married Industry Experience: Highest Certificate or Degree: School Certificate Diploma Bachelor’s Degree Master Degree

25 20 3 -

52.1 41.7 6.2 -

40 8

83.3 16.7 27 – 60

39 2 7

81.3 4.1 14.6 1 - 24

15 5 20 8

31.3 10.4 41.6 16.7

4.2. Characteristics of the Sample Firms The following Table 2 summarizes the characteristics of the 48 firms that participated in the study. Out of the 48 firms, 15 firms served the international markets, 20 mainly focused on the national market, another 10 emphasized on the regional market and the remaining three locally. Forty six were private limited companies and two were partnership companies. The 48 firms had been in operations between three and 27 years. The number of products produced by the firms ranged from one product to 8,000 products. Their sales volume for the year 2002 ranged from 5 million ringgit to 25 million ringgit. The paid-up capital for the 48 firms ranged from 25,000 ringgit to 3 million. In terms of employment, the 48 firms employed between 12 and 250 employees.


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Table 2 Characteristics of the Sample Firms Frequency

Percent

15 20 10 3

40.6 28.1 21.8 9.4

Breadth of Operation: International National Regional Local Firm Age: Legal Form: Private Limited Public Limited Others No. of Products:

Range

3 - 27 46 2 -

93.8 6.2 1 – 8000 5mil– 25mil 25,000 – 3.1 mil 12 – 250

Volume of Sales Initial Paid-up Capital No. Employees

4.3. Human Resource Practices The responses to the five-point strongly agree/ strongly disagree questions on the 11 human resource practices gathered from the 48 respondents are condensed in the following Table 3. As presented in the following Table 3, the means scores of between 2.10 and 2.58 suggest broad agreement on the range of human resource practices used in the study. Table 4

Mean and Standard Deviation Scores of Human Resource Practices

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Human Resource Practices:

Mean

Std. Deviation

Rewarded for innovative Creativity and innovation training

2.48 2.40

1.052 .893

Encouraged skills sharing

2.17

.996

See all people as people

2.15

.967

Developed innovative capabilities.

2.10

.881

Strong technical training

2.40

.939

Recruited competent employees

2.65

1.021

Used numerous sources to secure good applicants.

2.42

.821

High job security

2.58

1.069



4.4. Innovation Activity This study also attempted to investigate the level of innovation activity in the 48 firms. To determine their innovativeness, a five point scale was developed to address the eight areas of innovative activity. The respondents were asked to indicate the level of innovation they have achieved in the eight areas. The results in Table 5 below provides the mean and standard deviation scores for the eight areas of innovative activity as reported by the 48 respondents. The high positive mean scores suggest that most of the firms had achieved high level of innovation activity measured in terms of improved products (4.00) improved services (3.96) to be followed by new products (3.65), new services (3.65), ways of organizing (3.62), new market (3.60), new methods of production (3.44), and new sources of supply (3.40). Table 5 Mean and Standard Deviation Scores of Innovation Activity Innovation Activity: Improved products. Improved services. New products. New services. New methods of production Open new markets. New sources of supply. New ways of organizing.

Mean 4.00 3.96 3.65 3.65 3.44 3.60 3.40 3.62

Std. Deviation .989 .771 1.158 .863 1.382 1.106 1.125 1.084

4.5. Relationship Between Human Resource Practices and Innovation Activity The following Table 6 and Table 7 provides the results of the correlations between the 11 human resource practices and the innovation activity of the 48 firms that participated in the study. As presented in Table 6 below, the results showed significant positive relationships between the 11 human resource practices (rewarded for innovative, creativity and innovation training, skills sharing, see people as people, developed innovation capabilities, recruited competent employees, various recruiting sources, various hiring procedures, continuous training and high job security) and improved services and new services only. However, the results of the correlations between the 11 human resource practices, improved products and new products were not significant.


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Table 6 Correlations Between Human Resource Practices and Innovation Activity Human Resource Practices (N=48): Rewarded for innovative Creativity and innovation training Skills sharing. See all people as people Developed innovation capabilities. Strong technical training Recruited competent employees. Various recruiting sources Various hiring procedures Continuous training High job security

Improved products .102 .169 .065 .178 .171 .137 .190 .262 .274 .171 .221

Improved services .316(*) .470(**) .323(*) .420(**) .275 .065 .181 342(*) 355(*) .242 .332(*)

New products .085 .015 .040 .010 .109 .025 .054 .110 .225 .102 .053

New services .372(**) .449(**) .326(*) .294(*) .314(*) .217 .315(*) .238 .328(*) .333(*) .163

* Correlation is significant at the 0.05 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed).

The results in Table 7 show that the correlations between the 11 human resource practices and innovation activity as measured in new methods of production, open new markets, new sources of supply, and new ways of organizing were not significant. Table 7 Correlations Between Human Resource Practices and Innovation Activity Human Resource Practices (N=48): Rewarded for innovative Creativity and innovation training Skills sharing. See all people as people Developed innovation capabilities. Strong technical training Recruited competent employees. Various recruiting sources Various hiring procedures Continuous training High job security

New methods of production .043 .040 .039 .063 .032 .136 .024 .023 .150 .080 .025

Open new markets .291(*) .204 .074 .203 .197 .051 .099 .049 .177 .180 .161

New sources of supply .272 .138 .060 .211 .107 .010 .014 .044 .086 .049 .214

New ways of organizing .100 .349(*) .158 .028 .025 .065 .084 .012 .003 .049 .046

* Correlation is significant at the 0.05 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed).

V. DISCUSSION AND CONCLUSION In this study, the organisational factor; human resource practices was examined to determine their relationships with the innovation activity of the 48 small and medium-sized enterprises (SMEs). 8



The correlation analyses of the data gathered by the study indicate some statistically significant relationships between human resource practices and innovation activity of the 48 firms interviewed. These findings add support to previous studies that suggested relationships existed between human resource practices and innovation activity in business organisations. This finding is consistent with the earlier observations made by Galia and Legros (2003), Robbins and Coulter (1999), Roffe (1999), Michie and Sheehan (1999), and Holbrook and Hughes. On the basis of the results of the study, several findings can be summarized. First, the empirical information resulted from this study suggest that human resource practices are positively related to the innovation activity in SMEs, particularly in improved services and new services. Second, in terms of the human resource practices adopted, the results of the study suggest that the 48 firms in the study followed the patterns of innovative firms as highlighted in the literature. Third, the findings of the study indicate that the 48 firms that participated in the study focused on human resource practices that fostered innovation. These findings offer the following managerial implications for SMEs in Malaysia. The findings of this study suggest a direction between human resource practices and innovation activity in SMEs. The positive relationships between human resource practices and innovation activity suggest that to be innovative, SMEs should strive to adopt those practices that are positively associated with innovation activity. Finally, this research is an attempt to empirically examine human resource practices that are positively related to the innovation activity of SMEs. The findings of the study present insights into organizational factors influencing innovation that may be used as the starting point for understanding innovation in Malaysian SMEs, as well as providing the direction for future research in this area of study.

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