A Literature Review on the Impact of Investment in Human Capital on Economic Success: How do Human Resources Practices affect Organisational Performance?

Master's Thesis, 2004

139 Pages, Grade: 1,0 (A)



1 Introduction

2 Theoretical Background
2.1 How is Human Capital Conceptualised in the Management Literature?
2.2 The Human Capital Project
2.3 The Story so Far: Theoretical Perspectives on Human Resources Management
2.3.1 Current State of Research on HR Practices and Firm Performance
2.3.2 Four Theoretical Perspectives Explaining why Human Resources Practices matter for Organisational Performance
2.3.3 Multi-Level Model Linking HR Systems to Organisational Performance
2.4 Methodological Issues
2.5 Research Questions

3 Method

4 Results
4.1 Strategic HRM
4.1.1 HR Orientation
4.1.2 HRM Effectiveness and Business Strategy
4.1.3 Best Practice and Strategic Fit Models of HRM
4.1.4 High Involvement Work Practices in South Korean Culture
4.1.5 Quality Enhancer Strategy: Total Quality Management
4.1.6 Total Quality Management and Downsizing
4.1.7 Labour Market Flexibility
4.1.8 Role of HRM and Perception of Top Management
4.1.9 Presence of an HR Executive on the Board and Growth rate
4.1.10 HRM Practices and Work Climate
4.1.11 Synthesis of Findings on Strategic HRM and Contingency Variables
4.2 Human Resources Development
4.2.1 Training Effectiveness: Horizontal and Vertical Transfer
4.2.2 Financial Analysis of HRD
4.2.3 Company and Individual Returns to Investment in Education
4.2.4 Alignment of Training with Corporate Strategy
4.2.5 Alignment of Training with Strategy and Training Transfer
4.2.6 Transfer of Training back to the Job
4.2.7 Investment in Training
4.2.8 Synthesis of Research on Human Resources Development
4.3 Technology and HR Practices
4.3.1 Human Resources Strategy for the ICT-Driven Business Context
4.3.2 The Influence of HR Specialist Involvement on Information System Success
4.3.3 The Impact of Work Practices and Technology on Productivity
4.3.4 The Interrelationship of Technological Change and Human Resources practices on Labour Productivity and Firm Performance
4.3.5 Synthesis of Results on Technology and HR practices
4.4 Diverse Workforces and Flexible Working Conditions
4.4.1 Diversity, Business Strategy and Organisational Performance
4.4.2 Team Racial Composition, Member Attitudes and Team Performance
4.4.3 Quality of Work Life and Business Performance
4.4.4 Historical and Theoretical Context of the ‘Win-Win’ Paradigm of Economic Performance
4.4.5 Coverage and Effectiveness of Family-Responsive Workplace Policies
4.4.6 Synthesis of Result on Diversity and Flexibility
4.5 Methodological Issues in the HR-Performance Relationship
4.5.1 Reliability of HR Measures: Sources of Measurement Error
4.5.2 Single or Multiple Raters and Rater Bias
4.5.3 Multiple Raters and Level of Empirical Analysis
4.5.4 Reliability Estimates at Lower Levels of Empirical Analysis
4.5.5 Measurement Error in Cross-sectional and Longitudinal Data
4.5.6 Synthesis of Methodological Issues

5 Discussion
5.1 Interpretation of the Results with Reference to the Research Questions
5.2 Causational Relationships and Enabling Factors
5.3 Evaluation of Methodological Issues
5.4 Limitations of the Current Research and Suggested Future Directions
5.5 Implications for HR Directors and Corporate Strategy
5.6 Conclusion

6 Abstract

7 References

8 Appendices

9 Declaration

1 Introduction

Human Capital refers to the know-how, capabilities, skills and expertise of the members of an organisation (Dzinkowski, 2000). A Google search of Human Capital reveals scores of consulting companies that promise to develop, measure and manage the Human Capital of their clients’ organisations. It seems that Human Capital is even more relevant to members of the business community in 2004 than it was upon its initial conception over forty years ago. Becker, 1992 Nobel Prize winner for economics, pioneered the debate about Human Capital in the 1960s, concentrating on Human Capital largely in terms of investments in on-the-job training and education. Why then, are organisations showing a heightened interest in promoting and managing human capital?

Theory and research suggest that Human Capital influences organisational performance both indirectly and directly, making the topic of relevance to anyone who has a vested interest in understanding what makes a firm perform. Practices that enhance Human Capital can affect organisational performance indirectly by shaping the skills, attitudes and behaviours of employees. The collective interaction of employee skills, attitudes and behaviours determines the performance of the organisation (Ostroff & Bowen, 2000). Human Capital can also have a direct impact on organisational performance by creating structural and operational efficiencies (Ostroff & Bowen, 2000).

A recent Accenture survey[1] revealed that although business executives firmly believe that people are their most important asset, most executives are at a loss to prove that investments in people lead to improved business results. This quest for empirical evidence is complicated by the fact that Human Capital is an intangible asset that is not easily captured in financial statements but is nevertheless incorporated into market value. In 1995 IBM bought Lotus for US$3.5 billion – 14 times its book value, signalling that marketplaces put important value on intangible assets, such as Human Capital, when estimating the likely success of a business (Rylatt, 2003).

Indicators for measuring the levels of Human Capital within an organisation include reputation of company employees with head-hunters, years of experience in the profession, employee satisfaction, proportion of employees making suggestions that are implemented and value added per employee (Dzinkowski, 2000). But these indicators are insufficient since they do not place an estimate on the bottom-line value of Human Capital. The challenge that researchers of human capital have is to demonstrate empirically that investments in Human Capital affect a company’s growth and value to its shareholders. Champions of Human Capital in organisations, such as Human Resources directors, are in need of this empirical evidence to justify to board members, CEOs and ultimately shareholders why financial investments aimed at enhancing Human Capital should be increased or at least maintained. Support through concrete figures is particularly vital to gain credibility in firms where shareholder value is still the dominant mentality over and above a more pluralistic and exclusive stakeholder approach. Objective measures are also crucial in organisations that follow a ‘hard’ approach to HRM where top management manage the organisation rationally and utilise employees as a vehicle through which to achieve business objectives (The Michigan Model, Fombrun, Tichy & Devanna, 1984 cited in Pinnington & Edwards, 2000) as opposed to a ‘soft’ approach which considers the needs of employees and focuses efforts on fostering employee commitment to the organisation (The Harvard Model, Beer, Spector, Lawrence, Mills & Walton, 1984; Guest, 1987; both cited in Pinnington & Edwards, 2000). The Accenture Institute for High Business Performance has addressed this problem by developing a Human Capital Development Framework that measures Human Capital process, capabilities, key performance drivers and business results to arrive at an assessment of the key variables that influence the relationship between a company’s Human Capital assets and its financial performance (Cantrell & Thomas, 2003).

Human Capital has evolved into a particularly pertinent subject for knowledge and technology-based societies, such as those found in Western Europe, North America and South East Asia. For companies to gain desired productivity increases from the introduction of advanced and complex technologies, they require a workforce with the necessary skills and knowledge to use them. Thus the value of formal education, technical schooling and on the job training has increased in societies where significant economic growth has been achieved through major advances in technical knowledge (Becker, 2002). This is not to say that Human Capital is not important for developing countries and emerging economies. On the contrary, returns to education, particularly for elementary schooling have been found to be even higher in developing countries (Jones, 2001).

Companies realised from the 1990s onwards that the Human Capital within their organisations could be utilised as source of competitive advantage that adds economic value to the firm. In today’s knowledge economy, the people that make up an organisation are seen as wealth and capability generators who can profoundly affect market appeal, reputation and performance (Rylatt, 2003). The potential economic significance of HRM has been increased by strategically fitting HRM practices with business strategy. HR communicates the strategic direction of the organisation to employees and defines and transmits organisational culture that supports organisational objectives by signalling the desired corresponding employee attitudes, behaviours, motivational and affective responses (Ostroff & Bowen, 2000).

The research question posed in this thesis takes on the challenge to find empirical evidence that investment in human capital has a positive impact on intermediate as well as accounting and share-value economic (bottom-line) indicators of organisational performance, both directly and indirectly. This literature review summarises, integrates and evaluates research published between 1998 and 2003 pertaining to the impact of Human Resources on indicators of employee and firm performance. The articles reviewed here are not exclusive to organisational/industrial psychology but also contribute to the discourse taking place in the domains of business administration and economics. This thesis is, therefore, of interest to academics and professionals working in the domains of organisational/ industrial psychology, business administration, economics, human resources, management consulting and strategy.

2 Theoretical Background

2.1 How is Human Capital Conceptualised in the Management Literature?

Edvinnson, St Onge, Armstrong and Petrash (1997, cited in Dzinkowski, 2000) discuss Human Capital as a sub-component of intellectual capital in their ‘value platform’ model of intellectual capital management. The term intellectual capital is often used synonymously with intellectual property, intellectual assets and knowledge assets. Dzinowski (2000) refers to intellectual capital as the total stock or knowledge-base equity that a company possesses. Know-how, education, vocational qualifications, work-related knowledge and competencies, entrepreneurial activity, innovativeness, proactive and reactive abilities and changeability are included within the scope of Human Capital in Edvinnson et al.’s (1997, cited in Dzinkowski, 2000) model. The model positions Human Capital as a building block for organisational (structural) capital. Human capital and organisational capital interact to generate customer capital and value is created by the interaction of the three sub-components of intellectual capital.

According to Dzinkowski (2000), the practices for managing Human Capital tend to have been drawn from the field of HRM management, indicating the conceptual similarity between Human Capital and Human Resources. Management practices include building an inventory of employee competencies, scanning the environment and determining competencies which need to be developed or acquired to meet strategic objectives, developing a system to deliver knowledge, skills or intellectual upgrade, as needed and developing evaluation and reward systems tied to the acquisition and application of competency that aligns with the organisation’s strategic objectives.

Rylatt (2003) discusses Human Capital as a type of know-how, on par with, rather than a subcomponent of, intellectual capital as well as customer and relationship capital. Rylatt defines Human Capital as a measure of the current know-how of people under the organisation’s control. Indicators of Human Capital include but are not limited to: average years of service, employee satisfaction, hours and monetary investment into training employees, expert turnover, level and type of education, literacy levels, staff morale (percentage of employees which indicate concern with existing culture and climate and staff turnover), succession planning (percentage of key positions with at least one fully qualified person ready to over into a leadership position) and so on. High levels of enthusiasm and commitment in the workplace are indicative that the Human Capital is working in the favour of the organisation (Rylatt, 2003).

For Ostroff and Bowen (2000), HR practices represent investments in Human Capital. An organisations Human Resources policies and practices can increase the Human Capital by increasing the collective knowledge and skills of the organisation (Ostroff & Bowen, 2000). Human Capital can be increased through recruiting by selecting those employees who demonstrate high ability and the potential to develop their abilities further. Once employees join the organisation their current levels of knowledge and skills can be enhanced through formal and informal training and development activities. Feedback on performance through formal appraisal systems enables employees and supervisors to identify areas for improvement and to set realistic, individually specific developmental goals, which facilitate further skill acquisition. Changes in work design, such as increasing an employee's responsibilities, shifting from individual to team-based work can provide an opportunity for employees to increase their technical and interpersonal knowledge and skills. Skill-based pay reinforces an employee’s efforts in building their skills by providing a source of external motivation. Companies that are characterised by functional flexibility, where employees have the opportunity to be transferred to a different function, department or subsidiary, enable employees to develop in their changed work settings whilst retaining their general and company specific expertise within the organisation.

The Accenture Institute for High Performance Business (Thomas, Cheese & Benton, 2003) makes a distinction between Human Capital processes and Human Capital capabilities. Human Capital processes consist of practices that lead to robust and effective human capital capabilities and include core HR processes e.g. competency management and performance appraisal as well as broader Human Capital processes such as learning and knowledge management.

To summarise Human Capital has been conceptualised in a variety of ways in the management literature. It has been conceptualised as a sub-component of intellectual capital managed by traditional HRM practices; a type of know-how; employee knowledge and skills that are enhanced through HR practices and as a combination of core HR practices in combination with learning and knowledge management.

2.2 The Human Capital Project

This literature review forms part of a larger academic collaboration to investigate the impact of Human Capital on economic indicators of firm success. For the purposes of this research project Human Capital is operationalised by measuring ‘soft’ psychological factors, such as Human Resources, participation, learning organisations, job satisfaction (see Table 2 for full list of psychological variables). Human Capital, as operationalised by psychological ‘soft facts’ is an important theoretical construct because it is hypothesised to predict economic indicators of organisational performance or ‘hard facts’ both directly and indirectly.

Figure 1

Human Capital Project Model

illustration not visible in this excerpt

The indirect relationship between soft psychological factors and hard economic indicators is mediated or moderated by performance-related behaviours, such as employee performance, turnover and absenteeism (see Table 2 for full list of performance-related variables). Economic indicators are rarely reported in psychological research, thus it is necessary to also investigate performance related behaviours, which are more often discussed within the context of psychological variables. The Human Capital project hypothesises the model shown in Figure 1 to describe the relationship between psychological factors, performance–related behaviours and economic indicators.

Human Resources is the psychological variables used to operationalise Human Capital in this thesis. None of the perspectives in the management literature explicitly treat Human Capital and Human Resources as synonymous concepts. However, the assertion that core HRM practices are included in Human Capital processes (Thomas, Cheese & Benton, 2003) or that HRM practices can be used to measure Human Capital is compatible with operationalisation of Human Capital through Human Resources variables and supports the assumption made in this thesis that there is a conceptual similarity between the two constructs. The operationalisation of Human Capital in this thesis contrasts somewhat with Ostroff and Bowen (2000) who theorise that HR practices affect the organisation’s level of Human Capital by enhancing the knowledge and skills of employees. In their model, Human Capital is operationalised by the cognitive and methodological outcomes of investing in HR, which increase knowledge and skills, rather than by the HR practices and processes themselves. The operationalisation used here is useful because the issue of Human Resources is of practical relevance to organisations and Human Resources are measured anyway as part of the normal functioning of an HR department.

2.3 The Story so Far: Theoretical Perspectives on Human Resources Management

The purpose of the following section is to provide an explanation of contemporary theoretical perspectives on HR and employee and firm performance and the mechanisms through which HR practices impact upon performance. The intention is to provide the reader with the pre-requisite prior knowledge so that s/he is able to place the research reviewed here into a theoretical context, making the salience and relevance of recent research apparent.

2.3.1 Current State of Research on HR Practices and Firm Performance

The assumption common to research into the HR-firm performance link is that adoption of technically superior HR practices are believed to result in more productive, motivated, satisfied and committed employees which promotes a more effective organisation (Ostroff & Bowen, 2000). This assumption is based on multi-level premises, which have largely been inadequately addressed up until now (Ostroff & Bowen, 2000).

In their summary of research in the field, Ostroff and Bowen (2000) complain of a macro-micro split with little regard given to the integration of other levels of abstraction. Micro-level research has looked at the effect of Human Resources practices on individual-level variables such as ability, motivation, performance and attitudes. Macro-level research, has attempted to deepen understanding of organisational contextual variables such as structure, strategy, culture and effectiveness.

However, micro-level research has neglected to embed these variables into the organisational contexts in which they occur (Owen & Bowen, 2000). Traditional research has gathered data from within one firm, and has made organisational-level inferences based on data collected from an exclusively individual. More recent studies have begun utilising organisational level research paradigms but in some cases they are just as problematic as the individual-level research designs, often failing to include the human processes that occur in parallel (Arthur, 1992; Huselid, 1995, Ichniowski, Shaw & Prennushi, 1997, MacDuffie, 1995, all cited in Ostroff & Bowen, 2000). A few researchers have adopted a multi-level perspective, examining the collective influence of individual attitudes and behaviours and their relationships to measures of firm effectiveness (Ostroff, 1992; Ryan, Schmit & Johnson, 1996, Schneider & Bowen, 1985, all cited in Ostroff & Bowen, 2000).

To conclude their survey of the research to date on the HR-organisational performance, Ostroff and Bowen (2000, p. 212) state that, The growing body of evidence from individual-level, organisational-level and multi-level approaches begins to support some of the implicit linkages between HR practices, employee attitude, behaviours and organisational performance.” Despite this promising remark, Ostroff and Bowen (2000) still identify the need for a model that integrates individual, organisational and cross-level approaches into a cohesive multi-level framework that can conceptually build linkages among HR practices, employee attributes and multiple measures of organisational performance. Ostroff and Bowen present their Multi-level Model in Figure 2 in order to satisfy this need.

Model Overview

The Multi-level Model (Ostroff & Bowen, 2000) is comprised of three multi-level premises. The organisational-level premise assumes a direct relationship between HR practices and organisational performance by increasing operating efficiency via practices that stimulate a flexible and/or control and monitoring-oriented work climate. The individual-level premise states that HR practices influence individual attributes, such as knowledge, skills, motivation, satisfaction and commitment to the organisation (Ostroff & Bowen, 2000). Table 2 specifies which HR practices promote which kinds of changes in employee attributes and work processes (adapted from Ostroff & Bowen, 2000). HR practices shape employee attributes through perceptions of what the organisation is like (psychological climate) and mutual expectations about the exchange between employee and employers (psychological contracts) at the individual level. HR practices foster coordination and interactions among individuals by creating shared perceptions (organisational climate) and expectations (normative contracts) across individuals (Ostroff & Bowen, 2000). Thus the inter-level premise proposes that attitudes, behaviours and Human Capital collectively influence organisational effectiveness through organisational climate and normative contracts at the organisational level.

In terms of contextual variables, the HR system should exhibit internal consistency and external fit with key organisational and contextual variables such as business strategy so that it can facilitate in the creation of a work climate that directs employees to realise the organisation’s strategy.

Ostroff and Bowen (2000) identify three types of contributions that Human Resources make to organisational performance. Firstly, Human Resources that are intended to enhance employee flexibility and that have a monitoring and control function effect organisational performance directly by improving operational efficiency. Human Resources contribute to human capital development through selection and training which has an effect on organisational performance. Thirdly, Human Resources serve as a signalling and messaging function. The selection and combination of Human Resources practices sends out a signal to employees through work climates and normative contracts about the beliefs, attitudes and behaviours that employees are expected to hold or demonstrate in order for the organisation to achieve its strategic goals.

To summarise, research in this area began on the micro-level and macro-level designs were introduced later. Both research paradigms are problematic, micro-level research tends to neglect organisational context and macro-level research does not afford sufficient attention to human processes. Only a few researchers have adopted a multi-level perspective, which looks at individual and organisational variables and the relationships between them. Based on pre-1998 literature it is difficult to draw many conclusions. For this reason, the most recent literature (1998-2003) is reviewed here to see if we can more decisively and confidently reach conclusions about the HR-organisational performance relationship.

2.3.2 Four Theoretical Perspectives Explaining why Human Resources Practices matter for Organisational Performance

Ostroff and Bowen (2000) discuss the four major theoretical perspectives available in the literature for explaining why and how Human Resources affect organisational performance: the resource-based view and the universalistic, configural and contingency approaches. These four perspectives form the theoretical background for the empirical research that currently exists into the relationship between HR practices and organisational performance.

Resource-based View

According to the resource-based view, HR practices, such as training, are an investment in Human Capital that contribute to firm performance because they ensure that employees have the necessary skills and abilities required to achieve organisational goals. HR practices also elicit valuable behaviours. Reward and incentive systems motivate employees to apply their newly honed skills and encourage employees to improve their work processes by working more efficiently and effectively (Ostroff & Bowen, 2000). Human Resources provide a firm with a sustained competitive advantage to the extent that they are hard to duplicate, have no direct substitutes and enable companies to pursue opportunities (Richard & Johnson, 2001). HRM enhances the firm’s competitive position by creating a synergy between enhanced human capital and the elicitation of valuable behaviours from employees that are superior to those of its competitors and thus contribute to firm economic value (Richard & Johnson, 2001). The value contributed by HRM, and by training in particular, is fundamental, since it strengthens the development of the company’s Human Resources into a valuable and unique source (Valle, Martin, Romero & Dolan, 2000; Richard & Johnson, 2001).

Universalistic Approach

The universalistic approach asserts that some HR practices are appropriate for all firms. Numerous studies have revealed positive, significant correlations between plant or firm performance and various individual practices, such as training, staffing practices, compensation systems, labour relations, teams and quality of work life (Ostroff & Bowen, 2000). Examining the relationship between individual practices and organisational performance assumes that the effects of HR are additive (Ichniowski, 1997, Shaw & Prennushi, 1997, cited in Ostroff & Bowen, 2000). Ostroff and Bowen regard this as an incomplete assumption that leads to erroneous conclusions, arguing that HR practices are interrelated and interact to achieve their effects on organisational performance.

Configural Approach

The configural approach postulates that HR practices should be considered as systems and those systems that are comprised of internally consistent, coherent and well-integrated practices produce synergies that lead to better financial results (Arther, 1992, MacDuffie, 1995, Huselid, 1995, Pfeffer, 1994, cited in Valle et al., 2000; Ichniowski, Kochan, Levine, Olson & Strauss, 2000). This approach proposes that the total effect of several HR practices is more complicated than mere aggregation of individual effects, with mutually reinforcing practices offering performance advantages (Delery & Doty, 1996, Dunlop & Weil, 1996, Ichniowski et al., 1997, MacDuffie, 1995, Milgrom & Roberts, 1995, Pil & Macduffie, 1996,all cited in Ostroff & Bowen, 2000). Ichniowski and Shaw (1995, cited in Ichniowski et al., 2000) also reported in an intra-industry study, that systems made up of different work practices had a larger effect on economic performance than individual work practices. However, researchers are far from in agreement over which practices are included in the bundle of best practices, and there is considerable discrepancy over the role of pay, variable pay in particular. Researchers often select their bundle of practices in an ad hoc matter rather than allowing bundles to emerge from the data.

So-called high-performance and high-involvement work practices, such as TQM, (Easton & Jarrell, 2000; Hendricks & Singhal, 2000) tend to fall under the domain of the configural approach. High-performance and high-involvement systems are similar in that are both characterised by employee participation and empowerment which are achieved through HR practices such as team-based work design, expanded job duties, extensive training and unit performance-based pay (Ostroff & Bowen, 2000). The variable success of TQM programmes tends to hinge on variability in the levels of employee involvement and empowerment (Ichniowski et al., 2000). A comparison of high involvement HR systems with traditional HRM systems, characterised by low participation, limited training and highly specialised jobs, reveals favourable organisational outcomes including greater stability and predictability of a firm’s Human Resources and better coordination and control (Shaffer, Snape & Cheung, 1999).

Contingency Approach

The contingency approach states that contextual variables, such as business strategy, technology and market dynamism mediate/moderate the relationship between HR practices and organisational performance (Schuler & Jackson, 1987a). Business strategy remains the prime contingency variable that has been empirically investigated, giving rise to the strategic fit model of HRM (Richard & Johnson, 2001). Advocates of the strategic fit model argue that simply adopting HRM practices is not enough, the organisation’s HR policies need to show ‘external fit’ with the organisational context, specifically business strategy (Huselid, 1995 cited in Huselid & Becker, 2000). Most studies position strategic fit as an interaction effect between HRM policies and business strategy in regression models used to predict variation in organisational performance.

Studies testing the strategic fit model have tended to use Miles and Snow’s (1984, cited in Valle, Martin, Romero and Dolan, 2000) typology or analyser, defender or prospector or Porter’s (1985, cited in McMillan and Tampoe, 2000) competitive strategy types of ‘cost leadership’ and ‘differentiation’. According to Porter (1985, cited in McMillan & Tampoe, 2000), there are only two effective ways of competing in a market, either by having the lowest product cost (cost-leadership) or by having products which are differentiated in ways that are valued by customers (differentiation). Mintzberg (1994, cited in Smith & Dowling, 2001) distinguished between three forms of business strategy: intended, deliberate and emergent. The distinction between innovative-prospector strategy, quality-enhancer and cost-defender strategy is an example of another typology of generic business strategies (Schuler & Jackson, 1987a). One of the primary problems is that diverse typologies are used to classify generic business strategy making comparisons between results difficult.

Firms can use multiple strategies simultaneously such as acquisition or development of expertise and cost-leadership or differentiation, which suggests that they are not necessarily mutually exclusive. However, Sonnenfield and Periperl (1988, cited in Bae & Lawler, 2000) maintained in their work that each firm should exhibit one primary business strategy. Different business strategies emphasise different organisational performance criteria and there is often a trade-off between performance indicators (Mayhoney, 1988, cited in Ostroff & Bowen, 2000), such as losing sight of customers during efforts to operate efficiently and produce a low-cost product or service (Ostroff & Bowen, 2000). Paradoxically, strategies that seem to be in competition with one another can be complementary (Cameron, 1986, cited in Ostroff & Bowen, 2000). For example, cost-defender firms may predominantly utilise HR practices that promote a control and monitoring-oriented but they might also value a stable work climate and so use practices that promote coordination, communication and citizenship. Ostroff and Bowen (2000) state that different patterns of HR practices lead to different performance outcomes but identifying the most appropriate HR systems for different strategies is a research question that remains unanswered.

2.3.3 Multi-Level Model Linking HR Systems to Organisational Performance

Framework for the Literature Review

Now we turn, in more detail, to Ostroff and Bowen’s (2000) Multi-Level Model in Figure 2, which explains the structural relationships between Human Resources and organisational performance variables. The model identifies individual, organisational and cross-level variables and proposes the mechanisms through which these variables interact and reciprocally influence one another. This comprehensive model serves as an excellent framework in which to place the recent literature on the HR-Organisational performance link. The model serves as a tool to guide the processes of evaluating and integrating the current literature. Findings can be discussed with reference to the assertions posed by the model, enabling analysis of recent research within the scope of a comprehensive multi-level model.

Figure 2

Multilevel Model Linking HR Systems and Firm Performance

illustration not visible in this excerpt

Effect of HR on Employee Attributes

The Multi-level Model (Ostroff & Bowen, 2000) addresses the indirect effect of HR on firm performance through the influence on employee attributes such as abilities, attitudes and motivation. Based on a review of the vast research conducted in this areas, Ostroff and Bowen (2000) predict which HR practices should have a direct impact on different employee attributes; such as knowledge and skills (Human Capital), attitudes (satisfaction, organisational identification and commitment, motivation) as well as workforce flexibility and control and monitoring. This impact is moderated by cognitive and perceptual processes, which manifest as contracts and climates on the individual and collective levels. Table 2 provides an overview of which HR practices foster which employee attributes and work processes.

In order for employees to exhibit desired productivity-enhancing behaviours that are aligned with the strategic goals of the organisation they need to posses the pre-requisite skills and competencies (Wright et al, 1994, cited in Ostroff & Bowen, 2000). Individual level research has found significant positive relationships between skills or cognitive abilities with job performance (Hunter & Hunter, 1984, Schmidt, Hunter, Pearlman & Shane, 1979, cited in Ostroff & Bowen, 2000). The theoretical extrapolation of these findings, that the total knowledge and skills of the workforce are positively related to organisational performance, is yet to be explicitly tested.

The model predicts that HR has a direct link to the development of Human Capital through recruiting, selection, performance appraisal and training activities. The Multi-level Model also addresses the debate on the relative merits of fostering general and specific Human Capital within a firm, proposing that investment in both general and specific Human Capital will have the greatest competitive advantage, reflected by superior firm performance. Investing in general Human Capital means that employees will posses skills that are transferable across technologies, affording the firm functional flexibility, which enables the firm to respond quickly to change by transferring employees within and between departments, as demand requires. Nurturing specific Human Capital enhances productivity since the firm develops unique skills in the workforce. These skills are not easily transferable to other firms so specific skill development also promotes organisational commitment and reduced turnover (Becker, 1964, cited in Ostroff & Bowen, 2000).

External Fit of the HR System with Strategy & Work Climate

The Multi-level model addresses how different business strategies couple with particular sets of HR practices to create a work climate that stimulates achieving different categories of effectiveness/organisational performance criteria. The necessary HR practices to promote collective perceptions that generate a desired work climate as well as the relevant organisational effectiveness criteria for three generic business strategies are presented in Table 1.

Strength of the HR System

A Strong HR system is one that creates a social structure leaving little ambiguity about the organisation’s goals and routines (work climate) and the expected exchange between employee and employer (contract) (Ostroff & Bowen, 2000). Thus, strength of the HR system will be associated with how effectively HR practices communicate the strategic focus of the organisation. A strong HR system unambiguously creates the foundations for a particular work climate to develop, which indicates the behaviours, skills and abilities most critical for performance and for achieving the organisation’s strategic objectives. The Multi-level Model predicts that strength is a function of visibility, clarity, acceptability, consistency, validity and intensity of the HR system.

Strong HR systems reduce variability in perceptions about the attitudes and behaviours valued by the organisation. This increased homogeneity in perception translates into shared meaning amongst the workforce, which is expressed through the work climate and normative contracts, which have a larger effect on behaviour and attitudes than individual attributes such as personality (Ostroff & Bowen, 2000). When the HR systems is weak, variability in perceptions about what the organisation is like and about the exchange relationships is greater. This heterogeneity inhibits the development of shared meanings and reduces the influential power of work climate and normative contracts on employee performance-related attitudes and behaviours. When the HR system is weak more personal discretion is used in the implementation of HR practices and individual attributes such as personality become more important antecedents of individual’s attitudes and behaviours (Ostroff & Bowen, 2000).

Table 1

illustration not visible in this excerpt

Note. Adapted from Ostroff & Bowen (2000).

Table 2

illustration not visible in this excerpt

Note. Adapted form Ostroff & Bowen (2000)

2.4 Methodological Issues

Ichniowksi, Kochan, Levine, Olson and Strauss (2000) review features of the research methods employed in studies on workplace innovations. This review of methodological issues serves as a framework for evaluating the studies that follow. It also familiarises the reader with the typical methodological issues that are frequently addressed in the literature on Human Resources and organisational performance.

Methodological problems can increase the probability of researchers committing type I and type II errors. A type I error is when the researcher falsely rejects the null hypothesis and finds a significant effect when there truly is none. A type II error is when the researcher falsely accepts the null hypothesis and does not find a significant effect when there truly is one. Ichniowski et al. (2000) make comparisons between the ‘ideal’ research design that could be achieved in an experimental study and the field studies that are actually being conducted.

- Validity

The ideal study would have high internal and external validity. However, one type of validity is often improved at the expense of the other and researchers often end up having to make a compromise. High internal validity is where explanations for an observed correlation, other than those being investigated, could be ruled out. High external validity means that the results can be generalised to infer the impact of HR practices if they were introduced outside of the sample studies. The ideal design for achieving high internal validity is an experimental design with random assignment of HR practices to ensure that the treatment and control groups do not differ in terms of other organisational characteristics affecting performance (Ichniowski et al., 2000). Thus the mean difference in performance between the two groups will on average reflect the impact of the HR practices in question. External validity of a research design could be enhanced by randomly assigning an HR system or programme to half of a sample of workplaces in a single industry or in a single firm whilst leaving the other half unaffected.

- Heterogeneity Bias

The benefit of random assignment in an experimental study is that HR practices are uncorrelated with other worker and organisational variables that affect performance. In field studies, where random assignment is not possible, omitted variables can be controlled for by keeping the study within a single industry or technology. Many studies measure and statistically control for other variables, particularly in longitudinal studies, that are hypothesised to affect performance and confound the effect of the work practices. This enables researchers to calculate the extent to which performance improvements are due to HR practices alone and they extent to which they can be explained by better management or better workers (Huselid & Becker, 2000a). It is more difficult to rule out the possibility of omitted variables in cross-sectional designs.

This brings us on to the issue of self-selection. Firms may adopt high performance and innovative work practices because they are in trouble or may not adopt them because they are unwilling to deviate from the existing practices which the attribute to their success (March, 1988 cited in Ichniowski et al., 2000). Self-selection can thus lead to either upwards or downwards bias of estimates of effect size. For example, companies that are under-performing at the time of adopting new work practices may report a downwards-biased effect size because of their pre-existing financial climate. In some industries early adopters will be high-performing firms whilst in other industries they will be poor-performers. Therefore upward and downward biases may cancel each other out on average. Studies that link past organisational performance with the decision to pursue strategic HRM can minimise the bias of estimates (Pil & MacDuffie, 2000; Dunlop & Weil, 2000; cited in Ichniowski et al., 2000).

- Response Bias

It is important to try to ascertain how the sample of respondents differs from non-respondents in a study. Many of the studies reviewed here conducted analysis to check the representativeness of the responding firms of the wider population, in virtually all cases no distinct characteristics were found. Since participation in research is done on a voluntary basis, it is possible that firms which experience above-average success with their workplace innovations are more likely to participate than those whose implementation of practices has been less successful (Ichniowski et al., 2000). Response bias is an even greater concern in longitudinal research. Researchers have to not only consider if the first wave of respondents represents a random sample of the population but there is also the added complication that attrition rates between data collection points might be influenced by performance since poorly performing firms almost always refrain from participating in the second wave of data collection (Ichniowski et al., 2000).

Response bias is even greater in studies that only use one respondent who may express idiosyncratic interpretations of the questions or may be well-informed about policies but may have limited knowledge about practices, as is the case with top managers (Huselid & Becker, 2000a)

- Measurement Issues

Measurement is a broad category with a whole host of potential methodological limitations that can increase measurement error. First of all differences in the units of observation can distort estimates of organisational performance. Lack of a sizeable financial outcome is still likely when a fairly effective innovative work practice affects only a small group of workers while performance is measured over a broader sample of workers (Ichniowski et al., 2000). Thus, researchers should be hesitant to accept the null hypothesis that HR practices have no effect on organisational performance when the unit of observation for the performance measure differs substantially from the treatment (HR variable) unit.

Many of the constructs central to the HR-firm performance relationship research are based on perceptual rather than objective measures. The error that arises from these subjective measures is exacerbated in longitudinal measurements of a practice to try and establish how the magnitude of adoption or effectiveness has changed, since it introduces further error with each measurement.

Intra-industry studies are useful because they reduce error that arises from confounding organisational and worker variable by reducing the variance in these variables. However, the generalisability of these studies to other industries is unclear. The extensive plant visits and multiple respondents that characterise this sub-set of studies makes them expense and intensive to conduct and researchers typically have to settle for smaller sample sizes. However, improving some methodological features and the expense of sample size is counter-productive because it increases the chance of falsely accepting the null hypothesis as it will be more difficult to detect the interaction effects of combining practices with a smaller sample. In cross-industry studies it is more difficult to identify whether the HR variables explain the greater variation in performance, or whether omitted confounding variables explain a greater proportion.

- Identifying Bundles

Identifying which bundles of HR practices are effective is complicated for several reasons. Bundles are difficult to measure and there is not one uniform approach for doing so. Some researchers rely on theory to identify indices of work place practices by using ad hoc indices or confirmatory factor analysis. However, these theory-driven methods are flawed in that they assume that HR practices are substitutes rather than complements (Ichniowski et al., 2000). A cluster analysis involves identifying if workplaces with different bundles form patterns within the data. Using multiple methods reveals whether different procedures reveal similar bundles of work practices that predict similar relationships with or effects performance (Ichniowski & Shaw, 1995, cited in Ichniowski et al., 2000).

- Longitudinal vs. Cross-sectional Designs

There is often a lag period from implementation of new HR practices or systems until the organisational benefits become measurable. In longitudinal research it is important to consider from when measures of performance should be taken (Ichniowski et al., 2000). More than two periods of measurement are needed to calculate the lag between implementation and financial benefit, which increases the attrition rate and the expense of the study. There is often even a decrease in financial performance immediately after implementation due to the costs of implementation and coordination (Huselid & Becker, 2000). The implementation of high performance or innovative work practices may be combined with the introduction of other organisational changes that may have their own performance effects and which have feedback effects on high performance work practices.

2.5 Research Questions

This literature review contributes to the general overarching research question investigated in the Human Capital Research project:

Does investment in Human Capital have an impact on economic indicators of firm performance?

More specifically, the focus of the literature review will be to address the following questions relating to the individual, organisational and inter-level relationships between Human Resources, employee performance and organisational performance:

1) Do Human Resources have a direct impact on organisational performance?

2) Do Human Resources have an indirect impact on organisational performance?

2a) Do contextual variables, e.g. business strategy, work climate, mediate/moderate the relationship between Human Resources and organisational performance?
2b) Do employee performance-related attitudes and behaviours mediate/moderate the relationship between Human Resources and organisational performance?

The aim of this literature review is to summarise, analyse, integrate and evaluate the current literature on Human Resources and organisational performance to be able to answer the research questions posed here.

3 Method

My contribution to the overall Human Capital project is to conduct a review of the literature of Human Resources and economic indicators of organisational performance. This review surveys literature found in PsychInfo and EconLit databases predominantly on Human Resources and the following economic indicators of organisational performance: earnings, productivity, return on assets, profitability and return on equity. Literature on Human Resources and employee performance also fell under the scope of this review although it was not the prime focus. Studies that measured employee performance at the group level, using absolute values or interval data rather than self-report or observation measures were included.

Generation of Key Words

The key words for the literature search were generated from interviews with German-speaking professors at LMU from organisational psychology, business or economics backgrounds. Table 3 displays the other variables investigated in the research project.

Table 3

Key Words used in Database Search

illustration not visible in this excerpt

Note. * = All variations of the term were included in the search results

Database Searches

A literature search using PsychInfo and EconLit databases was conducted for each economic indicator key word in list C combined with our list A keyword, Human Resources. Human Resource* was entered in the search criteria so that hits from any relevant variations of the term of Human Resource, such as Human Resource policy and Human Resource Development, were included in the search results. Searches were also conducted combining each economic indicator with personnel development, which was taken to be a synonym of human resources. It was also specified in the search criteria that we were only interested in studies published between 1998 and 2003. The search results listed how many ‘hits’ (pieces of literature) were found in PsychInfo and EconLit from the specified period of publication. The total number of hits, found in PsychInfo and EconLit, generated for each search are presented in the Table 4, as well as the number of hits allocated to the include-reviewed, include-not available and exclude categories. Twenty-six of the articles assigned to the include list were obtained and reviewed in this thesis. Seventeen articles on the include list could not be obtained. Five extra articles reviewed here were not generated as hits in the database search but were found whilst gathering other articles form the include list. These articles were judged to be of relevance to the literature review and were therefore included. Therefore 26 ‘include-review articles’ and 5 extra articles bring us to 31, the total number of reviewed articles.

Table 4

No. Hits per Search

illustration not visible in this excerpt

Note. Pers. Dev. = personnel development. Include-review = Articles were available and are included in

this review. Include-unavailable = articles were on include list but could not be obtained from journals

or on-line from any libraries in Bavaria.

Criteria Used to Include or Exclude Literature from the Review

The next step was to read through the abstracts for each key word search and assign each abstract to one of two categories, include or exclude. The allocation of abstracts to either include or exclude took place using the following guidelines. Journal articles and book chapters were included whilst books and dissertation abstracts were excluded. We were interested in looking at literature conducted in organisational (corporate, governmental and NGO) settings as well as military, health care and educational institutions. Studies that relied on student subjects were excluded as well as studies where the performance-related behaviour (list B) or economic indicator (list C) had been measured through self-report. Working papers and conference proceedings were excluded due to the difficulty associated with obtaining such documents.

The EconLit database tended to generate more hits but fewer that were relevant to the purpose and scope of the literature review in comparison with PsychInfo. EconLit generated many hits on macro-economic issues such as development, poverty, growth and labour market structure, which were excluded because the assigned purpose was to review literature on an organisational level of analysis. In PsychInfo the situation sometimes arose that an article was about a specific HR issue but had no connection to any economic indicators or to performance. In such cases these articles were excluded since the purpose of the literature review was to investigate the relationship between Human Resources and economic indicators of organisational performance and performance related-behaviours, not to summarise and evaluate the literature on HR in isolation.

Robbins (2001) was used to gain familiarity with the topics that fall under the domain of Human Resources. It also facilitated the process of allocating abstracts to the ‘include’ or ‘exclude’ lists. Articles that discussed selection, training and development, diversity, performance evaluation and industrial relations were deemed to fall under the scope of the literature review, at least in terms of psychological variables. Articles on other HR topics such as technology, strategic HRM and work design were also included.

An excel spreadsheet[2], referred to as the ‘evaluation table’, was created which contained information about the author, year of publication, the article source (journal volume or book title) and the relevant page numbers of each piece of literature included in the review. A column titled ‘comments’ was used to record the availability of each document in libraries or as an on-line journal. This table was updated on a regular basis to reflect current status during the process of ordering, photocopying, reading and summarising each article. The column titled ‘Hit No.’ enabled quick and easy retrieval of the abstract from the original hit results so that it could be cut and paste into a summary sheet, once the article had been read.

Each article from the include list, judged worthy of inclusion after an initial skim-reading in the library or on-line, was read thoroughly and summarised by filling out a ‘summary sheet’ on the computer. Not all articles on the include list were available in the library or as on-line journal articles. Thus, not all articles on the original include list are reviewed in this thesis. Some include articles were later reassigned to the exclude list if it became clear after closer reading that they were not relevant to the research question.

Whilst this Masters thesis reviews literature on a topic that overlaps between the psychological and economics domain it is important to stress that the analysis and evaluation of articles has been undertaken from a predominantly organisational psychology approach. This means that every effort has been expended to interpret any economics data presented in the articles reviewed but the analysis of economics functions is not intended as a primary purpose nor is it encompassed in the scope of this literature review.

4 Results

This literature review summarises the findings, conclusions and implications of 31 articles that discuss the relationship between Human Resources and Economic indicators. The literature has been clustered according to the independent variable, Human Resources, since the subject of this thesis is about the impact of HR on organisational performance. Table 5 provides an overview of the clusters that have been identified in the literature, indicating sub-topics included within the cluster and the number of articles reviewed per cluster.

In this thesis the terms organisational performance, firm performance and corporate performance are used somewhat interchangeably to match the names of the variables used in the studies reviewed. However, they are all have the same meaning here and refer to intermediate and bottom-line financial indicators of performance.

Table 5

No. Articles per HR cluster

illustration not visible in this excerpt

Each article within a cluster has been given a title that expresses the main topic of the study and has been subdivided, where appropriate, into:

- hypotheses/research question
- method
- results
- discussion, managerial implications and limitations.

4.1 Strategic HRM

The 10 studies that follow in this section are all related to strategic HRM practices, such as high-performance, innovative and high-involvement work practices, total quality management and bundles of best practices. Many of these studies also investigate the effect of various contingency variables, on the relationship between strategic HRM and various measures of firm performance. Contingency variables investigated include, work climate, business strategy, growth rate, size of the firm, presence of a senior HR executive and internal and external labour flexibility.

4.1.1 HR Orientation

Research Question

Lam and White (1998) hypothesised that a strong HR orientation is positively associated with firm performance. The term Human Resources orientation refers to the interaction of Human Resources Development, selection and competitive compensation policies, which enables the firm to use its employees as a sustainable competitive advantage through the attraction, retention and development of employees. Lam and White proposed a mechanism by which HR orientation has an impact on firm performance but did not formulate any hypotheses to explicitly test this mechanism. They proposed that HR orientation is has a positive effect on corporate performance by enhancing self-efficacy and commitment of the employees that are been identified as having relevant competencies sought by the organisation. A competitive level of compensation retains competent employees and increases their commitment to the company and they receive training in order to retain their superior level of competence and thus their competitive advantage by undergoing continual improvement. This development of employee competence through training increases employee self-efficacy as employees regard themselves as being competent enough to positively contribute to the organisation, which then reinforces commitment.


The authors measured the HR orientation of 120 firms from 14 different industries within manufacturing using a competitor analysis method. This each participating company rated their perception of the extent to which a competitor company was using effective selection, compensation and employee training practices. Analysis of the responses yielded an inter-rater reliability, Crombach’s α = 0.65, sufficiently high to be able to confidently say that where a firm was rated by two other firms in terms of its HR orientation that the two firms agreed sufficiently on the ratings.

Corporate performance, the dependent variable, used three measures, return on assets, growth in sales and growth in stock values for 1993. This data was derived from the COMPUSTAT database.


HR orientation was positively and significantly correlated with return on assets, r = 0.25, p > .05, but correlations with growth in sales and growth in stock values were insignificant. When controlling for research intensity, industry growth rate, debt divided by total assets, and market share, HR orientation was still a significant predictor of return on assets, ß = 4.11, p < .05, growth in sales, ß = 11.24, p < .001, and growth in stock value, ß = 28.50, p < .05. Together HR orientation and the control variables explained 26% of the variation in return on assets, R ² = .26, F = 5.21, p < .001, and 25% of the variation in growth in sales, R ² = .25, F = 4.86, p < .001 but overall model explained an insignificant amount of the variance in growth in stock value, R ² = .05, F = 1.49, p >.05. A t-test also found significant differences in return on assets, t (df not reported) = 2.11, p < .05, growth in sales, t (df not reported) = 2.46, p < .01, and growth in stock values, t (df not reported) = 28.50, p < .05, between HR orientated firms and ‘their competitors’. Means were not reported.

Discussion, Implications and Limitations

Lam and White (1998) concluded that those firms with a strong HR orientation, which emphasise recruitment, compensation and training and employee development displayed significant financial benefits. The authors regard these findings as a strong financial incentive for promoting HR cultures and heavily investing in their HR practices and expanding the role of HR executives. The findings suggest an additional strategic need of HR to help sustain the human advantage compared with competitors. However, the generalisability of the results is limited to manufacturing companies in the USA.

The authors suggest that HR directors should be included at the strategic level of decision-making allowing him/her to select alternative strategic alternatives so that HR strategies can be formulated to support organisational strategic choice. The profile of employees needed to support the strategy would then be known and positions filled, wage and salary agreed and necessary training requirements would be developed. However, these conclusions and implications seem somewhat exaggerated since in the univariate correlations only one of the measures of corporate performance was significantly correlated with HR orientation.

In terms of limitations, one assumes that the firms were divided into strong and weak HR orientation groups using a median-split method but exactly how the two groups were created for running the t-test is not reported. The mean scores for the three corporate performance measures for HR oriented firms and non-HR oriented firms were also not reported so the reader is not able to inspect the means and must trust that the HR orientated firms had the higher mean corporate performance scores.

Regardless of the advantages and disadvantages of this method, competitor assessment is a distinct feature of this study since the majority of studies measure HR using self-report measures from HR directors and senior company executives. The authors comment that competitor assessment provides a more objective assessment of the external reputation of the firm but does not rule out possible discrepancies between perceptions of HR orientation. Focus groups and case studies might be a better method of measuring HR orientation. Lam and White (1998) highlight that this ‘one-time view’ is a static approach and propose that similar future studies investigate the relationship between HR orientation and firm performance over time. They also suggest that performance could be analysed from the initiation of HR selection, compensation and development practices.

4.1.2 HRM Effectiveness and Business Strategy


Richard and Johnson (2001) looked at the relationship between strategic HRM effectiveness and intermediate and bottom-line measures of firm performance, employee productivity and return on equity respectively. Capital intensity strategy, the extent to which the firm invests physical assets and retains control over operations and quality, was investigated as a contingency business strategy variable. Thus authors hypothesised a positive significant interaction between HR effectiveness and capital intensity where organisational performance gains from SHRM effectiveness should be magnified in firms with high capital intensity.


The HR director of 73 banks in two US states provided a subjective measure of strategic HRM effectiveness, the extent to which the firms was building HR complexities through innovation such as team-based job designs, flexible workforces and employee empowerment. Capital intensity, productivity and ROE measures were obtained from the Sheshunoff Bank Search Database.


There was an insignificant two-tailed correlation between Strategic HR effectiveness and productivity, r = .08, p >.05, and ROE, r =.14, p >.05. When total assets, holding company ownership, state and lifecycle were controlled, SHRM effectiveness was an insignificant predictor of productivity, ß = 0.08, p >.05, and ROE ß = 0.14, p >.05. However, a positive interaction effect between strategic HR effectiveness and capital intensity was found. The interaction explained 4% of the variation in productivity, although only at the 10% probability level, R ² = 0.04, ß = 1.91, p < .10. A greater percentage of the variation in ROE could be explained by the interaction between SHRM effectiveness and capital intensity strategy, R ² = 0.11, ß = 3.02, p < 0.01. Richard & Johnson (2001) refer to capital intensity as a significant moderator of the relationship between effective SHRM and ROE. The overall model was an insignificant predictor of productivity, R ² = .18, F = 1.64, p >.05 but a significant predictor of ROE, R ² = .28, F = 2.89, p <. 01.

Discussion, Implications and Limitations

No significant direct relationship between strategic HR effectiveness and productivity and ROE was found. Effectively implementing the kinds of work practices associated with effective strategic HRM, such as implementing teamwork, employee empowerment and participation schemes and work design can lead to short-term productivity decreases as these activities remove employees from their specific jobs and the productivity benefits may take some time to occur (Huselid & Becker, 1996, cited in Richard & Johnson, 2001). But when these programmes are implemented in parallel with a capital intensity strategy that meshes with effective HR implementation, firm performance, particularly bottom-line performance, is enhanced (Richard & Johnson, 2001).

The findings provide support for the contingency-based view of HRM, whereby effective HRM practices and capital intensity strategy jointly explain increased variation in firm performance, particularly ROE. The inclusion of contingency variables increases confidence in the causal relationship between HR effectiveness and bottom-line measures of firm performance. However, this causal attribution is somewhat premature considering multiple regression is unable to confirm the existence of a causal link.

The effectiveness of SHRM practices has proven to be a viable alternative independent variable to the number of practices adopted which has traditionally been used to investigate the effect of HR on firm performance. This implies that mangers should primarily focus on implementing effective HRM practices rather than implementing a large number of practices.

Richard and Johnson (2001) suggest that reliance on just one source for the SHRM effectiveness measure is a limitation of the study because there was no way of knowing whether other stakeholders agreed with the HR director’s ratings.

4.1.3 Best Practice and Strategic Fit Models of HRM

Shaffer, Snape and Cheung (1999) compared the best practice and strategic models of HRM as predictors of firm effectiveness. The study of Hong Kong multinational companies across all industries, consisted of two samples, a top-manager sample of 136 and a sample of 44 top mangers matched with the Human Resources manager from the same firm. The fact that this study applies these two models to a developed economy in South East Asian context is pertinent since the models were developed based on the findings from US companies. Walton (1995, cited in Shaffer, Snape & Cheung, 1999) purports that all firms need to adopt a bundle of high-performance work practices aimed at building a committed and empowered workforce to remain in existence. In the strategic model, simply adopting sophisticated HRM practices is not enough; they need to fit with the organisations HR policies and business strategy (Boxall, 1992 cited in Shaffer, Snape & Cheung, 1999).

Conceptual Model and Hypotheses

The best practice model (labelled A in Figure 3) tested the indirect relationship between HRM practices and firm effectiveness, as moderated by employee attitudes and behaviours. Model A also hypothesised that the strategic integration of the HRM function is a significant predictor of employee attitudes and behaviours. Strategic integration was predicted to have a positive impact on employee morale and inter-unit communication and a negative impact on employee turnover. The emphasis in this model was on general HR sophistication (measured by HR Practices) and recognition of the strategic importance of HRM, neither of which is seen to be contingent upon the pursuit of any particular business strategy.

The strategic fit model (labelled B in Figure Three) examined the degree of fit between HRM practices and competitive business strategy as a significant predictor of firm performance. The fit between (1) differentiation strategy and HRM developmental practice and (2) a cost leadership strategy and HRM performance management practices was hypothesised to have a positive impact on firm performance. A developmental HRM approach fits with a differentiation strategy, given the need for high quality, extra-role behaviours and good customer service, while the cost leader is more likely to emphasise efficient performance to specified objectives, which may be facilitated, by a performance HRM approach.

Figure 3

Best Practice and Strategic Fit Models of HRM

illustration not visible in this excerpt


HRM practice was measured by HR manager responses. A factor analysis of responses yielded two factors: developmental and performance management HR practices. Strategic integration, a construct in the best practice model, was defined as the extent to which top managers see HRM policies as being important to the success of the firm and as being linked to business strategies. Employee attitudes and behaviours were rated by top managers, as were the five scales of perceived firm effectiveness (see diagram above).

A strategic fit index was constructed to measure the fit between cost-leadership strategy and performance management HRM practices and the fit between differentiation strategy and developmental HRM practices.


The results provided at least some support for the ‘best practice’ model and for the indirect influence of HRM on firm effectiveness (Shaffer, Snape & Cheung, 1999). Employee attitudes and behaviours were found to be significant predictors of firm effectiveness. At least one of the attitude/behaviours was a significant predictor of each dimension of firm effectiveness, except for cost effectiveness. For example, inter-unit communication was significant predictor of firm efficiency in the matched sample, ß = 0.64, p < .05, and total effectiveness in the top manager, ß = 0.39, p =. 01, and matched samples, ß = 0.54, p < .01. Turnover was significantly predictor of resource acquisition effectiveness, ß = 0.34, p < .10, although, unexpectedly, in a positive rather than negative direction and only at a low level of significance.


[1] Accenture High Performance Workforce Study, 2002-2003, a survey of 311 CE0s, C00s and senior vice presidents, cited in Accenture (2003) Human Capital Development, Research Note Issue one, Nov 1, 2003.

[2] Refer to Table 2A in Appendices to view Evaluation Sheet

Excerpt out of 139 pages


A Literature Review on the Impact of Investment in Human Capital on Economic Success: How do Human Resources Practices affect Organisational Performance?
LMU Munich
1,0 (A)
Catalog Number
ISBN (eBook)
File size
1106 KB
The research question posed in this thesis takes on the challenge to find empirical evidence that investment in human capital has a positive impact on intermediate as well as accounting and share-value economic (bottom-line) indicators of organisational performance, both directly and indirectly. This thesis is, therefore, of interest to academics and professionals working in the domains of organisational/ industrial psychology, business administration, economics, human resources, and consulting.
Literature, Review, Impact, Investment, Human, Capital, Economic, Success, Human, Resources, Practices, Organisational, Performance
Quote paper
Gina Roberts (Author), 2004, A Literature Review on the Impact of Investment in Human Capital on Economic Success: How do Human Resources Practices affect Organisational Performance?, Munich, GRIN Verlag, https://www.grin.com/document/30666


  • No comments yet.
Look inside the ebook
Title: A Literature Review on the Impact of Investment in Human Capital on Economic Success: How do Human Resources Practices affect Organisational Performance?

Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free