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    literature Review chapter will have a review on literature and

    related models to the research problem. In this chapter we will

    introduce the concepts of HRM Practices in Indian SMEs,

    Approaches in Studying Human Resource Practices, Human Resource

    Practices and Its Dimensions, Operational Performance and Its

    Dimensions, Defining Firm Performance, Defining Moderating Variables,

    Research Model, Construct Measurement in order to give a clear idea about

    the research area.

    Then the problem area will be next discussed to provide a deeper

    understanding about the research area for readers. The problem

    discussion ends with a research gaps and specific research questions.


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    2.1 HRM Practices in Indian SMEs

    Kamble (2005) in his study found that the SMEs solely banked on

    advertisement as a source of recruitment and observed that there is no HR

    planning, promotion training and development programme for employees in a

    majority of firms under study.

    Panda (2000) made a study on hotel industries under small scale sector and

    concluded that most of the small and medium noted units are in dark about HR

    planning policies and labour practices pursued by the study units were heart


    The study by Jothi (2004) has identified that small units made recruitment

    through their own network of friends and relatives; majority do not spend a pie

    on training and development aspect; there is no HR policy at all; there is no

    linkage between performance and reward.

    Eresi (2001) explored that SSI units are hardly putting in place human

    resources management policy and wages determination and promotional

    decisions were utter confusing and arbitrary.

    Budhwar and Boyne (2004) conducted a survey of 137 top personnel specialists

    from Indian firms having 200 or more employees in six industries in the

    manufacturing sector. The study aimed at comparing HR practices in Indian

    public and private sector organizations. HR practices in private sector

    organizations were anticipated to be significantly different from those existing in

    public sector organizations.

    Singh (2003) investigate the relationship between strategic HR orientation of a

    firm and its performance. HR practices related to manpower planning,

    recruitment and selection, evaluation, compensation, employee training and

    staffing. The study was cross sectional in nature and the data was collected

    from HR heads through questionnaires. The results have shown that the firms

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    with an emphasis on strategic HR orientation performed significantly better

    than those with lower emphasis.

    There is not much work in Indian context in this area. Reviewing above

    mentioned researches reveal that, researchers have recently focused on Indian

    context and tried to see applicability of emerging theories in India. Thereby it

    shows that, shift is taking place in the pattern of HRM practices in Indian

    organizations from traditional administrative type to a more strategic and

    proactive type.

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    2.2 Approaches in Studying Human Resource


    The relationship between HRM practices and organizational performance

    has been the subject of significant empirical examination. Jackson, Schuler

    and Rivero (1989) examined the effects of HRM systems on organizational

    financial performance through a behavioral approach. They found that it is

    essential for organizational viability that HRM systems provide the

    capabilities for firms to acquire, develop, motivate and retain employees who

    will enhance organizational effectiveness. In explaining the significance of

    human resources to firm performance, the majority of work in HRM has

    adopted the resource-based view of the firm (Barney, 1991, Delery, 1998).

    According to this view an organization can gain a competitive advantage

    from the human resources it possesses. However, the organization does not

    actually gain a competitive advantage from the HRM policies, per se, but

    from the human resources that the organization attracts and retains

    (Delery, 1998). These theoretical arguments point to the performance

    potential of a universal approach to HR focus on capital enhancement.

    However, apart from the theoretical arguments, there were also empirical

    evidences supporting a positive relationship between universal approach to

    HRM practices and firm performance. Arthur (1994) adopted a contingency

    approach to this intra-industry examination of the HRM practices of thirty

    U.S. steel minimills. In addition to the impact of HRM practices on firm

    performance, the contingency approach is concern with the congruence or

    fit between various policies and practices adopted by organizations. Arthur

    employed an empirical taxonomy identifying two types of HRM systems (i.e.

    control and commitment) to test the extent to which the specific

    combination of practices utilized by organizations could predict differences

    in organizational performance. His findings indicate that minimills using the

    commitment systems of HRM had higher productivity, lower scrap rates,

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    and lower turnover than those minimills using control systems. Huselid

    (1995) examined the effects of the use of thirteen HRM practices on firm

    performance. Two measures of HRM practices were identified. The first of

    these were designated “employee skills and organizational structures”; with

    practices enhancing skills, abilities, and role performance, and the second

    was labeled “employee motivation”, with practices targeted at evaluating and

    reinforcing desired employee behaviors. His findings indicated when these

    two measures were regressed on productivity individually, both measures

    were positive and significant, but when they were entered simultaneously,

    only the motivation measure remained significant. Most of the foregoing

    studies have as their goal to verify the relationship between HRM practices

    and organizational performance. However, different approaches to these

    examinations have emerged. The following section provides a critical review

    of the various approaches taken in the area of HRM, and the assumptions

    made under each approach. Previous research in HRM has used one of the

    following three ways to examine the effectiveness of HRM practices on firm

    performance: universalistic, contingency or configurational approach (Delery

    & Doty, 1996).

    2.2.1 Universalistic Perspective

    Universalistic perspective is the simplest form of theoretical model in the

    HRM literature. Universalistic perspective seeks for “best practices”.

    Researches in the universalistic perspective are micro analytical in nature

    and posit that some HRM practices are always better than others are and

    that all organizations should adopt these practices. Huselid (1995) work

    reflected the “universalistic” approach to HRM. This perspective assumes

    that there are certain “best” HRM practices that contribute to increased

    financial performance regardless of the strategic goals of organizations.

    Further, a universalistic approach to HRM research assumes that HRM

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    practices contribute to worker motivation (and thereby increased

    productivity) as well as increased efficiency (Ichniowski, Kochan, Levine,

    Olson & Strauss, 1997). While other authors concurred with these

    assumptions (Osterman, 1994; Pfeffer, 1994), different studies have utilized

    various assortments of these HRM practices, and there has been little work

    that provides a definitive description as to which HRM practices should be

    included in a “best practice” system. Huselid (1995), for instance, utilized

    thirteen HRM practices. Pfeffer (1994) however, advocated the use of sixteen

    management practices to achieve higher productivity and profits. In another

    work, Delery and Doty (1996) identified seven practices that are consistently

    considered to be strategic in nature. Practices identified were internal career

    opportunities, formal training system, appraisal measures, profit sharing,

    employment security, voice mechanism and job definition. Tzafrir(2006)

    explores that, Universalistic perspective of HRMP contribute to enhanced

    organizational performance. Firms exhibited higher organizational

    performance when they treated their employees as assets and invested in

    their abilities, enhanced their power in the decision making process and

    used them as the main source for new employment. Katou, A. A. and

    Budhwar, P. S. (2007), investigated that human resource management

    (HRM) policies have an impact on organizational performance in the Greek

    manufacturing firms.

    The research is based on a sample of 178 firms. The “universalistic model”

    of HRM is adopted to conduct the investigation.