07-05-2014, 04:09 PM
Innovative Human Resource Management and Corporate Performance in the Context of Economic Liberalization in India
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Abstract
The Indian economy was forced to adopt a structural adjustment program in the beginning of
1991. The structural adjustment program or liberalization initiated the process of the opening
up of an otherwise closed economy of India. Liberalization created a hyper-competitive
environment and to respond to this turbulence, Indian organizations adopted innovative
changes in their HRM practices. Current research shows that HRM practices are important for
enhanced corporate performance but little has been reported on the effect of HRM practices
and corporate performance in the context of economic liberalization of India. This paper tried
to understand the role of innovative HRM practices and specifically questions how HRM
practices, like the role of HR department, recruitment, retraining & redeployment,
performance appraisal and compensation enhance corporate performance during the change
process. A multiple-respondent survey of 69 Indian organizations was undertaken to study the
impact of innovative SHRM practices on firm performance. The survey found that the
innovative recruitment and compensation practices have a positive significant relationship
with firm performance. It was observed that recruitment, role of the HR department and
compensation practices seem to be significantly changing within the Indian firms in the
context of India’s economic liberalization. The synergy between innovative HRM practices
was not significant in enhancing corporate performance during the liberalization process.
INTRODUCTION
In the last 20 years research has shown that the strategic use of human resource management
(HRM) is likely to be one of the most important determinants of organizational performance.
Researchers have build evidence that links HRM practices with corporate performance
(Schuler and MacMillan, 1984; Schuler and Jackson, 1987, 2005; Purcell, 1995; Storey, 1992;
Arthur, 1994; Huselid & Becker, 1996; Ichniowski, Shaw & Prennushi, 1997; Dyer and
Reeves, 1995; Huselid, 1995; Delaney & Huselid, 1996; Purcell, 1995; Delery, 1998; Pfeffer,
1998; Wright and Snell, 1998; Gratton et al, 1999; Guest et. al., 2003; Truss, 2001, Wright et
al., 2005, Paauwe, 2004; Paauwe and Boselie, 2005). Drawing on this extensive body of
research on strategic human resource management (SHRM), this paper examines the effects
of SHRM practices on firm performance during significant macro-environment changes. This
research focuses on three issues; first, in contrast to most SHRM research, which has occurred
largely within the context of industrialized Western economies, the present study focuses on
these issues from the point of view of an emerging economy.
BACKGROUND: THE CHANGING INDIAN CONTEXT
India witnessed a spurt of corporate activity following a policy of economic liberalization
beginning in 1991. India’s liberalization and economic restructuring program was triggered
by a serious balance of payments crises when its foreign exchange reserves touched their all
time low to a mere billion dollars. IMF and the World Bank agreed to help India avert the
crisis with structural adjustment loans. The ensuing liberalization included a process of
macro-economic stabilization (devaluation of the rupee, reducing fiscal deficit, reducing
government expenditure, reduction of some subsidies, controlling inflation), phased
deregulation and elimination of license regime to bring in competition, opening of economy
to foreign and private investment, rationalization of tax structure, healthier functioning of
capital markets, increase functioning autonomy of PSUs and implementation of safety nets for
those hurt by structural adjustment program. The opening of Indian economy witnessed an
inflow of foreign capital with an increasing number of multinational firms commencing
operations (Gopinath, 1998). This was the initial phase of liberalization.
METHOD
Data
The unit of observation for this study was compiled from data from academic journals and
business press in India (Business India, Business Today, Business World, Economic Times,
News Abstract from CMIE and Vanscom Database, 1993-2002). These sources generated a
sample size of 194 organizations that included large, medium and small sized organizations
both from the private and the public sector that underwent a change process.
The top-management of these 194 organizations was contacted through email and a letter of
invitation to participate in the study. The letter of invitation provided a brief description
about the study, a commitment to share the findings and a complete anonymity of the
respondents and the firms. 60 organizations declined for reasons of company policy, paucity
of time, unavailability of senior level personnel. 85% of these 134 firms belonged to the top
500 list of companies as compiled by The Economic Times and The Business Today.
Independent Variable
Table 1 includes information on the HRM practice measures included in the empirical model.
Following an extensive literature survey and taking into account the proposed definition of
innovative HRM practices, this study considered the role of HRM department, recruitment,
retraining and redeployment, performance appraisal and compensation and reward practices
as the most important variables. Boselie et. al’s. (2005) meta-analysis of 104 articles found
that training and development, contingent pay and reward schemes, performance management
(including appraisal) and careful recruitment and selection were the top-four HRM practice-
level categories used by different researchers. These are seen to reflect the main objectives of
most conceptualisations of a ‘strategic’ HRM programme (Batt, 2000: 587) namely, to
identify and recruit strong performers, provide them with the abilities and confidence to work
effectively, monitor their progress towards the required performance targets, and reward them
well for meeting or exceeding them.
DISCUSSION AND CONCLUSION
Studies of liberalization and de-regulation in an emerging context are rare. Within this
context, this study examined the relationship between innovative HRM practices during the
liberalization of one of the world’s most populous emerging markets. A model, rooted in
conventional Western practices, found support and is largely consistent with results obtained
in studies of HRM-firm performance conducted in different cultural and institutional
environment. A contribution of the present study is to corroborate these results in the context
of India’s economic liberalization. The data analyzed were perceptive and measured HRM
practices within the organization in 2002 and also “5 years earlier” by a multi-rater
respondent survey in a country undergoing marco-economic change process, so these results
are highly relevant. The study contributes and adds to the general theme of HRM-firm
performance within an emerging market. The study adds to the literature of universalistic or
the “best practice” perspective that certain independent-dependent variable relationships hold
across whole populations of organizations – that is, some HR practices are better or more
important than others (Colbert, 2004; Miles and Snow, 1984; Pfeffer, 1998) and these
strategic (in this study “innovative”) HR practices consistently lead to higher organizational
performance, more dependent on the environment (Delery and Doty, 1996).