Human resource practices in Indian SMEs--an exploratory study.

AuthorAgarwal, Upasna A.
PositionSmall and medium-sized enterprises


SME's occupy an important place in the economy of most countries. Globally considered as the nurseries for entrepreneurship and innovation, SMEs produce a diverse range of products to meet the needs of the local and global markets and the national and international value chains (Marlow, Patton & Ram, 2013). SMEs also contribute significantly to the nations' gross domestic product (GDP) and provide employment to a large number of people. It is forecasted that the future will be dominated by SMEs in terms of job creation, innovation and new patterns of work (Atkinson, 2007).

Demonstrating the importance of SMEs, it is cautioned that failure of SME's could lead to a situation of unemployment and the consequent social tensions (Saini & Budhwar, 2008).In recent times increasing market-related competition along with reduction of 'governmental patronage' (Frumkin& AndreClark, 2000;) has resulted in additional pressures on SME's to demonstrate effectiveness, efficiency, accountability and meet performance requirements (Salamon, 2002; Anheier & Seibel, 2001).

The role of human resources in enhancing firm efficiency and effectiveness (Guo et al., 2011) is well established. According to the resource based view of management (Barney, 1992), irrespective of the firm size, employees are a strategically important, indispensable resource to achieving an organization's objective. Despite the critical role the human resource practices play in enhancing organizational efficiency, mainstream management has focused on investing the role of HRP in larger firms research, ignoring them in SME sector (Purcell & Kinnie, 2007). Commenting on the paucity of research of HR policies and practices in SME's, Huselid (2003: 297) wrote, "We actually know very little about the science and practice of HR in (small firms)".

Given the uniqueness and importance of SMEs to national economies and local communities as source of employment, wealth and other social and relational benefits, examining the state of HRP within small firms is crucial and will enhance our understanding of managing the sector effectively (Barrett and Mayson 2007; Baron 2003). The objective of this paper is to explore the human resource policies and practices in the Indian SMEs.

Literature Review

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 built the evidence that links HRM practices with corporate performance (Wright, Snell & Dyer, 2005). Likewise, the well managed human resource practices can have a significant impact in performance of small firms. However lack of emphasis on human resources in SMEs has been found to be one of the main reasons for business failures (McEvoy, 1984). A recent study by Puplampu (2005) suggested that human resource efficiency and performance were the most significant reasons of any SME to be unsuccessful.

The deficiency of systematic HRM research in SMEs may be a consequence of the two assumptions. First, that the small firms are essentially the same as the large firms but on a smaller scale (Welsh & White, 1981) and that what is good for the large firm is good for the small firms too (Hendry et al, 1995). Thus, the large firms are often considered as the 'model' that small firms should seek to emulate. Secondly, the success of SMEs largely depends upon the enthusiasm, competency, resources and commitment of a single person (owner) around whom the enterprise revolves. Since the owners often involve themselves in doing manual work and taking responsibility for employment matters including the determination of pay (Wilkinson, 1999), people issues are often taken for granted and managed informally (Matlay, 1999).

However, a brief look at the literature on small businesses reveals a variety of factors associated with being small that are likely to impact directly upon HRM policies and practices (e.g. the informality of relationships; limited resources, etc.). SMEs lack formal processes and much of the day to day tasks are carried out informally. There are no formal people practices and the working culture is relaxed and friendly with strong focus on relationships. Employees in SMEs are described as "the invisible workforce" (Curran,2000) and good human resource management is in reality a "bleak house" (Sisson, 2005). These organizations are neither found to be involved in engaging in developing employees nor very forthright in spending in outsourcing HR activities. Research suggests that such brand image of SMEs makes them an unattractive destination for well qualified employees.

Not only has there been lack of formal polices in examining people practices in SMEs, research interest has also been limited. Table 1 provides a summary of the function wise extant literature and gaps of HR practices. As is indicated, there is deficiency of systematic HRM research in SMEs, a practice which has been bemoaned for long. In the Indian context the field is almost barren. Given the uniqueness of the SME sector as well as its potential role in the national development, this research examines the existence of HR practices and policies in Indian SMEs. This research also endeavors to examine the indigenous ways of people management practices in Indian SMEs.


Given the exploratory nature of the research, a semi-structured, in-depth qualitative approach was chosen to examine the human resource practices in SMEs. The procedure is akin to the grounded theory perspective which suggests that theory should evolve from the data rather than applying a priori or potentially biasing theoretical models and frameworks to interpret the data (Glaser, 1992; Glaser & Strauss 1967; Krippendorff, 2012).

State of the art of existing HR policies and practices were explored by interviewing owners of eight small and medium enterprise firms situated in the western industrial belt of India. Manufacturing enterprises with an investment above Rs 25 lakhs up to Rs 10 crores and service enterprises with an investment above Rs 10 lakhs up to Rs 5 crores form the sample of the study. These SMEs were from different sectors -electronics component (one organization), textile and garment (one organization), auto ancillary (two organization), IT (one organization), financial services (one organization) and renewable energy (one organization) (Table 2). The employee strength of these organizations ranged from 9 to 200 employees. The turnover of the firms ranged from Rs. 1.2mn to Rs. 500mn. These firms were small and medium enough to ensure that relationships between the owner and all employees were direct.


Interview questions were chosen based on the review of literature on SMEs. Semi-structured interviews addressing the study's research questions were taken. As noted by Allen, Poteet and Burroughs (1997), respondents' answers might be based on beliefs and opinions rather than real behaviors or practices. For this reason, respondents were probed, as deemed necessary, for further explanation and examples that added breadth and depth to their answers. Participants were assured of confidentiality of all information provided. With permission, each interview lasted for about three-four hours in each organization. Interviews were digitally recorded and then transcribed.

Direct quotes have been used to support the discussion. It was assumed that the more frequently a particular category of obligation was cited, the more salient it was overall in the minds of respondents, and thus the more prominent the people practice (Krippendorf, 2012). The key points of the interview were taken down verbatim during the course of discussion and consistent with 24-hour rule by Eisenhardt and Bourgeois (1988), discourse was transcribed immediately after interviews.

We present here the results obtained from the content analysis of various interviews conducted with the SMEs in India. Since there is paucity of research literature on SME's, we have combined sections on specific HR functions and as well as insights obtained from the study.

Recruitment & Selection

Employee's relationship with the organization commences with the recruitment process (Rousseau, 2001). Studies examining the role of recruitment and selection in small-firm suggest that twenty-five percent of small businesses view a lack of qualified workers as a threat not only to their plans to grow and expand, but more importantly as a threat to their very survival. Despite its importance, recruiting is often quite problematic for small organizations (Gupta & Tannenbaum, 1989) due to limited financial and material resources (Freeman, 1984), lack of legitimacy as an employer-of-choice (Heneman & Berkley 1999), and the high number of jobs where employees typically perform multiple roles with unclear boundaries and job responsibilities (May, Korczynski & Frenkel, 2002). Several studies (Deshpande & Golhar, 1994; Heneman & Berkley 1999) indicate that recruiting in small ventures primarily involves use of sources that are convenient, inexpensive, and directly controllable by the company, such as direct applicants, personal and employee referrals, and newspaper ads (Heneman & Berkley, 1999).

The findings of this study corroborated with extant literature. Most SME owners we met were disapproving of the formal approaches to recruitment such as using the job centers or advertising in newspapers. They...

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