The role of contextual factors in shaping HRM formality in SMEs
| DOI | https://doi.org/10.1108/ER-08-2020-0386 |
| Published date | 04 October 2022 |
| Date | 04 October 2022 |
| Pages | 345-365 |
| Subject Matter | HR & organizational behaviour,Industrial/labour relations,Employment law |
| Author | Muhammad Burhan,Omar Abou Hamdan,Hussain Tariq,Zahid Hameed,Rana Muhammad Naeem |
The role of contextual factors in
shaping HRM formality in SMEs
Muhammad Burhan
Huddersfield Business School, University of Huddersfield, Huddersfield, UK
Omar Abou Hamdan
Coventry Business School, Coventry University, Coventry, UK
Hussain Tariq
Department of Management and Marketing, KFUPM Business School,
King Fahd University of Petroleum and Minerals, Dharan, Saudi Arabia and
Interdisciplinary Research Center for Finance and Digital Economy (IRC-FDE),
King Fahd University of Petroleum and Minerals, Dharan, Saudi Arabia
Zahid Hameed
Department of Business Administration, Prince Muhammad Bin Fahd University,
Al Khobar, Saudi Arabia, and
Rana Muhammad Naeem
Department of Management Sciences, The Islamia University of Bahawalpur,
Bahawalpur, Pakistan
Abstract
Purpose –This study examines the influence of contextual factors (e.g. age and ownership type) on HRM
formality (including the underlying functions of recruitment, selection, training and development, performance
appraisal and compensation) in SMEs.
Design/methodology/approach –Data were collected through a quantitative survey of 300 owners/
managers of services, manufacturing and trade SMEs in Pakistan.
Findings –Firm age, association with a larger parent entity, existence of a strategic business plan and the
presence of a human resource information system (HRIS) are positively related with higher HRM formality.
Firm size, family ownership and exporting characteristics had no association with formality.
Practical implications –This study suggests a highly influential role for contextual factors in shaping HRM
practices in Pakistani SMEs. Since the lack of a strategic approach towards human resource development is
directly linked to the inferior performance of SMEs in Pakistan, this study provides an understanding of the
contextual institutional setting that shapes the nature of HRM practices. The findings inform both SME
owners/managers and policy makers.
Originality/value –Institutional influences on HRM systems have attracted attention but organisational
factors are less often studied. Studies mostly relate to Western contexts and lack perspectives from SMEs. The
findings of this empirical investigationhighlight the importance of context specific research given the different
nature of institutional settings.
Keywords SMEs, Pakistan, HRM formality, Determinants
Paper type Research paper
Introduction
Small and medium sized enterprises (SMEs) are recognised as a key driver of growth and
prosperity particularly in developing and transitional economies (Burhan et al., 2020;
Khalique et al., 2011). The economic and social gains include promoting communal ties,
providing employment for locals, employing indigenous technology, dynamic allocation of
resources (due to scarce capital) and balanced income distribution (Karadag, 2016).
The economy of Pakistan is an explicit reflection of its SME sector (Afraz et al., 2014)
considering that it accounts for more than 90% of total economic activity. According to the
HRM formality
in SMEs
345
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0142-5455.htm
Received 19 August 2020
Revised 2 March 2021
31 January 2022
28 May 2022
Accepted 30 August 2022
Employee Relations: The
International Journal
Vol. 45 No. 2, 2023
pp. 345-365
© Emerald Publishing Limited
0142-5455
DOI 10.1108/ER-08-2020-0386
most recent statistics available for SMEs in Pakistan, their contribution towards employment
is around 80%, over 30% to the national GDP and 25% in export earnings (PBS, 2016).
However, the SME sector in Pakistan is challenged by a variety of entrenched cross-
cutting issues and shortcomings which cap its potential to stimulate and strengthen national
economic progression. These include a lack of business information infrastructures, over-
regulation, confined exposure to global markets and, most of all, the lack of a strategic
approach towards human resource development (Akhtar and Shah, 2018;Khawaja, 2006;
Rohra and Panhwar, 2009). Moreover, the failure rate of SMEs in Pakistan is around 90% and
lack of training, institutional pressures and informal management practices are considered as
key determinants of their failure (Ullah et al., 2011). In addition, the paradigm shift from
traditional economies to knowledge-based economies suggests that the ability of firms to
survive and compete in national and foreign markets is increasingly dependent on human
capital and innovation (Huang and Wu, 2010).
Given that sustained competitive advantage is now linked to the sophistication of HRM
practices (Sheehan, 2014;Smallbone et al., 2012), the institutional influences responsible for
shaping HRM practices have begun to receive attention. Institutional theory has been used to
demonstrate theinfluence of contextualfactors(e.g. age, ownershiptype, strategicorientation)in
shaping formal HRM systems (Edwards and Ram, 2006;Harney and Nolan, 2014;Wood and
Lane, 2012). Moreover,the influence of suchfactors can be magnifiedfor SMEs due to resource
poverty and limited experience(Cardon and Stevens, 2004;Wu et al., 2014).
Understanding HRM theory and practice in Pakistan is complex. Many SMEs
(predominantly in the services sector) have restructured their personnel departments into
human resource departments but the effects of this change on firm behaviour are not yet
known (Khan et al., 2014). Moreover, due to conventional cultural barriers and a lack of HR
champions in firms, many have introduced HRM functions in instalments. Despite
appreciating the significance of human resource management (structured training and
compensation in particular) in larger organizations, SMEs in Pakistan remain characterized
by informal HRM practices (Memon et al., 2010).
Despite their economic significance, the literature on HRM in SMEs is underrepresented
(Botero and Litchfield, 2013;Harney and Nolan, 2014;Newman and Sheikh, 2014). Although there
is considerable research with large firms in western contexts (Budhwar and Debrah, 2009;
Ramdani et al., 2014), large organizations differ in various ways (e.g. business strategies, the
influence of institutional factors and availability of resources) such that the nature of HRM
practices is often not comparable (Sheehan, 2014;Storey, 2002;Wiesner and Innes, 2010).
Furthermore, the literature lacks representation of SMEs from developing economies (Budhwar
and Singh, 2007;Chaudhry, 2013) including Pakistan (Ahmad and Allen, 2015;Burhan et al., 2020).
The aim of this empirical investigation is to unfurl the influence of organisational contextual
factors (e.g. age of the firm, ownership type) on HRM practices (HRM formality) in SMEs in
Pakistan. The rationale is threefold. First, Pakistan as a developing country has been
underexplored with regards to organisational management research (Burhan et al., 2021;Syed
and Ozbilgin, 2015) and in the case of HRM, empirical research is also limited (Burhan et al., 2020;
Ali, 2013). The available literature predominantly addresses HR related issues in large
organisations and little is known about SMEs in Pakistan (Ahmad and Allen, 2015;Saher and
Mayrhofer, 2014). Second, prior research in mostly western settings shows mixed results (e.g. De
Kok andUhlaner, 2001;Newman and Sheikh, 2014;Urbano and Yordanova, 2008).As such, this
study addresses calls for context specific research in HRM (Budhwar and Debrah, 2009;
Nankervis et al., 2016). Third, since Pakistani SMEs are characterised by a lack of formal HR
policies and practices that limit their economic potential, understanding the role of
organizational contextual factors in shaping the nature of HRM practices is vital. In addition,
this study employs a comprehensive survey that includes the use of indigenous HR practices (in
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