Is human resource management profitable for small firms?

The impact of high performance work systems on labour productivity and profit of small and medium sized enterprises. Previous versions of this paper have been presented at the 2005 conference of the Dutch HRM Network on HRM and performance (held on 4 and 5 November of that year) and the invited workshop 'Entrepreneurship from the employee's perspective' at the Max Planck Institute of Economics in Jena (Februari 2006). The paper presented at the Mack Planck Institute has been published as EIM Scales Paper N200520. The research presented in this paper focuses on the effectiveness of a high performance work system. This system is comprised of practices in the areas of extensiveness of staffing, performance based pay, pay level, job rotation, training and participation. In particular, this study focuses on the effects of such a system on the performance of small and medium-sized enterprises. Results of our study, among small and medium size enterprises in the Netherlands, show that firms with such a system have higher labour productivity, are more innovative and generate higher profits. These results suggest that high performance work systems are not only relevant in large corporations, but may also benefit small firms.