The Linkage of HRM and Knowledge-related Performance in China’s Technology-
Irene Hau-siu Chow
Department of Management
The Chinese University of Hong Kong
Shatin, N. T.
Tel: (852) 2609-7798
Fax: (852) 2603-6840
The Linkage of HRM and Knowledge-related Performance in China’s Technology-
This study examines the interaction effect of corporate culture and business strategy to
fully understand the role of HR practices in knowledge-related performance. The relationship
between the knowledge-driven HR practices, corporate culture and business strategy were tested
by using 132 firms in China’s high technology industry in the Pearl River Delta area. The
findings support that both capability and incentive systems are significant predictors of
knowledge-related performance. Significant interaction effect of HR- culture and HR-business
strategy in knowledge-related performance were observed. Innovation had no significant impact
on knowledge-related outcomes. The firm’s commitment to quality has been found to be an
important determinant of firm performance.
Keywords: knowledge-driven HR practices, corporate culture, business strategy, firm
Knowledge-intensive industry faces a dynamic and fiercely competitive environment. Products
in high technology industry are more complex, with shorter life cycle that needs constant
innovation in order to meet the changes in market conditions and customer expectations (George,
et al. 2001). Technological innovation becomes critical in responding to rapid changes and
innovation depends heavily on acquiring new knowledge in high-technology firms. Therefore
organization must fully exploit its resources and capabilities in order to remain competitive.
Leveraging intellectual capital as sustainable competitive advantage depends upon a firm’s
ability to exploit existing knowledge and to generate new knowledge. Human resource will be
crucial in meeting the challenges in the formalization of and access to experience, knowledge
and expertise that create new capacities, superior performance, and innovation (Beckman 1999).
Human resource practices can support and contribute to the creation, integration and utilization
HRM practices and knowledge- related outcomes are associated, but their link still misses some
important aspects of the interpretation and empirical support (Minbaeva 2005, p. 126). This
paper addresses this void by examining the impact of various HR practices that support
knowledge creation and utilization which in turn influence knowledge-related outcomes. The
corporate culture and business strategy could be considered as mediating link between HRM
practices and knowledge-related outcomes. The relationship between the knowledge-driven HR
practices, corporate culture and business strategy were investigated by using 132 firms in
China’s technology-intensive industry in the Pearl River Delta area. The results contribute to
advance our understanding of the complex relationships between HRM practices and operating
efficiency and the potential interaction effects of corporate culture and business strategy.
The following section starts with a brief review of the literature on knowledge-oriented HR
system, organizational culture and the contingency of business strategy on firm performance.
Based on the literature review, hypotheses regarding the role of HR practices and the interaction
effect of corporate culture and business strategy and their impact on firm performance are
developed, followed by a description of the empirical test and presentation of results. The paper
concludes with the discussion of the implications for managerial practices and direction for
LITERATURE REVIEW AND HYPOTHESES
Knowledge is a key success factor in high technology industry and through acquisition of new
knowledge can improve the firm’s innovative activities. The organizational learning literature
views the value of knowledge as a key resource and emphasizes the importance of a firm's ability
to assimilate, utilize, and leverage information to derive a competitive advantage (Grant 1996).
Such competitive advantage depends more on “people-embodied know-how” (Prehalad, 1983),
particularly in the knowledge based industry. Increasingly, competitive advantage is seen to be
derived from human as opposed to physical capital. Capability as a source of competitive
advantage is derived from the resource-based view (Barney 1991; Wernerfelt, 984). HR
capabilities serve as a firm's ability to combine, develop, and exploit its resources to create a
competitive advantage. Cabrera and Bonache (1999) presented a theoretical framework for the
alignment of organizational culture and business strategy by integrating knowledge from
strategic HRM and specific design of HR practices.
Creating Knowledge-oriented HR System
There is considerable interest in studying the role of knowledge-driven HRM practices that
contribute to sustained competitive advantage through developing firm specific competencies
and acquiring organizational knowledge which in turn improves the firm’s ability to innovate
(Keegan and Turner 2001). The kinds of HRM practices organizations could employ to enhance
knowledge-related outcomes are
1. Acquisition of capabilities, recruiting the right people, having the balanced skill sets,
create effective innovation teams
2. Performance management, encouraging risk taking,
3. Reward systems- motivating people to achieve productivity, innovation, and profitability
4. Career management, empowering people, continuous education and development
The core HR practices, i.e., staffing, training and development, reward and performance
management may facilitate the diffusion of knowledge and innovation. Organizations identify
the needed skills and knowledge through staffing process of acquiring, developing and retaining
human capital. Training or self-development programs can be an important knowledge
acquisition mechanism. When properly organized, training programs are important vehicles for
promoting collaboration and knowledge exchange (Lyles and Salk 1996; Lane et al 2001).
Comprehensive training to develop unique or firm-specific skills, socialization programs, job
enrichment, and cross-functional career paths encourage employees to build knowledge. Skill-
based pay systems and developmental performance appraisals may be used to facilitate the
development of firm-specific knowledge and competencies (Snell et al. 1999).
In addition, HRM practices may influence individual performance by providing incentives that
elicit desirable behaviors. Performance-based pay and internal promotion systems provide
incentives to secure commitment from knowledge workers. Employees' willingness to share
knowledge with others is crucial in determining the contribution HR practices to managing
knowledge (Currie and Kerrin, 2003). The extensive use of training, performance management,
performance-based compensation and internal communication contribute to knowledge transfer
(Minbaeva, et al., 2003). Thus capability and incentives are regarded as being conducive to
knowledge creation and utilization.
There are a number of theoretical and empirical studies linking HRM to firm
performance. The current literature shows that HRM practices, in the form of high performance /
high involvement work practices, are associated with positive performance outcomes
(Appelbaum et al, 2000; Berg, 1999; Levering & Moskowitz, 1993), and higher financial success
(Bae and Lawler, 2000; Huselid, 1995; Lawler et al, 1995). The accumulated research evidence
shows that effective human resource management can have substantial impact on firm
Laursen and Foss (2003) investigated the link between HR practices and innovation performance.
They identified two major categories, that is capability to innovate and internal /external training.
Investment in capability to innovate can be developed through interdisciplinary work groups/
quality circles, planned job rotation, delegation responsibility, and performance –related pay.
Managing human resources to achieve better knowledge-related outcomes focuses on retaining
people, building their expertise through on-going learning process, fostering a supportive culture
for sharing knowledge, establishing mechanisms for distribution of benefits arising from the
utilization of this expertise (Collins & Smith, 2006; Kamoche & Muller 1998).
Previous studies showed that HRM practices applied as a coherent system had greater effect on
organizational outcomes than the sum of the individual effects from each practice separately
(Huselid 1995; MacDuffie, 1995). Huselid (1995) and Delaney & Huselid (1996) bundled set of
HRM practices into two main categories: employees’ abilities and employees’ motivation. This
is consistent with the literature of the role of HRM practices in the organizational absorptive
capacity. The ability to assimilate /apply the knowledge and motivation incentives are two key
aspects of the firm’s absorptive capability (Cohen & Levinthal, 1990).
Innovation depends heavily on knowledge. Performance-based pay provides incentive to acquire
and share knowledge. Incentives aim at promoting knowledge acquisition /sharing are
increasingly prevalent ingredient in the innovation process. Hensen at al’s (1999) study shows
that knowledge use and sharing are embedded in appraisal and reward system. We need to have a
system in place that motivate and reward knowledge creation and sharing (Bartol& Srivastava,
2002). Therefore, it is hypothesized that a significant and positive relation exists between HRM
and innovation performance.
Hypothesis 1: The more extensive use of HRM practices (capability and incentive) is
positively associated with knowledge –related outcome
Fostering a Culture for Creativity and Innovation
A firm’s future abilities are strongly influenced by its knowledge assets and its collective
learning. Organization with highly capable and motivated employees will not be effective in
recognize new knowledge, assimilate it and apply it if the unit is not successful in building a
supportive learning environment. The personal nature of knowledge increases the need for
motivation in sharing and utilizing it (Alvesson, 2000). Culture is the most critical factor that
influences knowledge creation, sharing and use (DeLong & Fahey, 2000). Innovation must be
supported by organizational culture which encourages participation, questioning conventional
wisdom, innovation and risk taking. Thus, organizations should provide continuous learning
opportunities to share learning.
High-tech companies, differ from manufacturing or service companies, particularly with regard
to their people management practices. Their people are engaged in the creation and assimilation
of new knowledge. Knowledge workers enjoy a highly informal, egalitarian working
environment, in which they are granted significant autonomy, trust and ample resources to
facilitate knowledge creation processes. Personal growth and achievement are important to this
type of worker. These characteristics pose particular challenges for managing knowledge
Furthermore, the sharing of knowledge is critical to facilitate and sustain processes of knowledge
creation. Organizational culture that promotes knowledge sharing is featured as informality,
richness of communication, and openness to transfer of learning and knowledge absorption
(McDermott & O’Dell 2001). Inter-disciplinary teamwork, active self-development programs
and a climate for learning are conducive to knowledge exchange and collaboration.
Knowledge-intensive organizations must develop and sustain an organizational culture that
supports knowledge creation and innovation (Storey and Quintas, 2001). Vital to this will be
creation of a supportive environment that will facilitate trust and sharing, exchange, creativity
and innovation activities. Supportive culture for cooperation reduces competition among
employees and increases their willingness to share the critical information with each other
(Szulansk, 1996). Denison and Mishra (1995) found support for the effects of organizational
culture on firm performance. Chan, et al.’s (2004) study also revealed that organizational culture
had direct impact on firm performance.
Hypothesis 2: Corporate culture, particularly sharing/ learning culture, is associated
with knowledge-related outcome
The Moderating Effects of Corporate Culture
Wallach (1983) identified three types of corporate cultures: bureaucratic, innovative and
supportive cultures. Bureaucratic culture is characterized as hierarchical and compartmentalized.
There are clear lines of authorities. The work is organized and systematic. Bureaucratic
organization is power oriented, regulated, procedural and hierarchical. It is not suitable to attract
and retain creative and ambitious people. The explicit rules and regulations are likely to inhibit
idea generation and constrain employees in using various sources of knowledge for developing
new products and services. Innovative culture is exciting and dynamic. It provides a creative
place to work, filled with challenge and risk. Supportive culture is described as trusting,
encouraging, relationship-oriented and collaborative. It provides an open, harmonious and warm
place to work. People are friendly, and helpful to each other. It is reasonably expected that a
supportive culture provides a vital environment for strengthening the relationship between HR
practices and firm performance.
A supportive organizational culture is needed for HR practices to result in advantage-creating
capabilities. Human Resource capability and organizational culture are likely to reinforce each
other and enhance firm performance. Chan et al. (2004) found organizational culture moderated
the impact of HR practices on firm performance. Creating a supportive culture together with the
appropriate HR system could be utilized to shape the willingness of workers to share their
knowledge. Thus, it is logical to posit the interaction effects of HR practice and organizational
culture on firm performance.
Hypothesis 3: The matching of human resource system and corporate culture will
enhance firm performance
Hypothesis 3.1 Incentive system matching with supportive corporate culture is positively
related with higher level of firm performance
The Contingency of Business Strategies
The strategic perspective of HRM examines the fit between various HRM practices and the
company’s business strategies (Delery 1998). Considerable emphasis has been put on the
importance of integrating HR practices and strategy for firm performance (Bird and Beechler
1995; Martell, Gupta, and Carroll 1996). Schuler and Jackson (1987) investigated the
relationship between HR and business strategy designated different types of employee behavior
and HRM systems that are best suited to innovative and quality enhancing strategies. Innovative
strategies focus on offering something new and different. The appropriate HR practices include
selecting highly skills, creative individuals, granting more discretion with minimal control; long-
term focus and greater commitment. HR practices for quality enhancing strategy include high
levels of participation, feedback and cooperative teamwork. Obviously people management
becomes an integral part of corporate strategy in producing high performance. Thus, HR can
proactively add strategic value by providing innovative products and services and improving
Hypothesis 4: Quality enhancing and innovation strategy are positively associated with
Previous studies found that the organization’s strategy moderated the effect of HR practices on
performance (Hitt et al 2001; Huselid 1995). Similarly, Youndt, et al. (1996) found that business
strategy and HRM practices interaction was an important factor in organizational effectiveness.
HR practices paired up with appropriate business strategies as discussed in the previous section
will have a positive effect on firm performance. Therefore, the interaction effect of HR practices
and business strategies leading to different levels knowledge-related performance are
Hypothesis 5.1: The interaction of quality enhancing strategy with capability and
incentive system will enhance operating efficiency.
Hypothesis 5.2: The interaction of innovation strategy with capability and incentive
system will enhance operating efficiency.
Sample and Procedures
The sample consisted of 132 firms from electronic and communication facilities, computer and
software industries in Guangdong China. The average length of establishment was 9.4 years,
ranging from 1 to 35 years in operation. In terms of ownership, 22% were state-owned and
collectively-owned, 57.6% were Hong Kong and Taiwan firms in China, the rest (20.5%) were
foreign invested and joint-ventures. The average number of employees per firm was 1126 with a
range of 50 to 21000. On average, the HR department had 19.7 persons. Turnover rate for
employees was 14.24%. The questionnaire (constructed in Chinese) was designed based on a
combination of previous research and the variables identified in the literature review.
Questionnaires were sent to the person responsible for the company’s HRM by e-mail, and
follow-up calls were made. The respondents were middle (67.4%) or top management (18.6%) of
the firm and the rest were front line managers.
HR practices were measured by 6 items, covering staffing, training and development,
performance appraisal, performance- based pay, information sharing and participation. These
items were pre-tested with practicing managers to verify the usefulness. Each item was assessed
by a 5-anchored Likert scales, with 1 being inappropriate characteristic, 5 being the most
appropriate characteristic of HR strategies for managerial and professionals in this organization.
The respondents were asked to mark the number that best indicated the degree to which each
statement described HRM practices employed by their organization.
The impact will be stronger when HRM practices are applied as a system of mutually reinforcing
practices. Following the current practice, HRM practices form a set of distinct but interrelated
activities that are directed at attracting, developing and motivating a firm’s human resources. The
grouping of HRM practices is identified theoretically and then verified through factor analysis.
Results of factor analysis indicated the existence of two groups of HRM practices under
capability and incentives regarded as being conducive to knowledge enhancing. The resulting
two factors accounted for 59% of the variance explained. Examples of capability include ‘the
annual training budget as a percentage of total payrolls,’ and ‘the proportion of vacancies filled
by internal sources for key positions.’ An example of incentives includes ‘linking performance
outcome to compensation, training opportunity and promotion.’
Corporate culture was measured by 18 items using a 5-point scale ranging from 1 (strongly
disagree) to 5 (strongly agree). These items were factor analyzed to form three cultures,
bureaucratic, sharing and competitive, accounted for 60.55% of the total variance explained. An
example of bureaucratic culture is ‘following explicit rules /regulations, orderly operations
procedure.” An example of competitive culture is ‘employees display extremely high level of
competitiveness.’ An example of sharing culture is ‘emphasis on learning process, exchange and
sharing learning outcomes.’ The alpha coefficients for bureaucratic, sharing and competitive
culture were .89, .86, and .89 respectively.
Business Strategies included innovation and quality enhancement. The argument for focusing on
these two strategies is the HR practices contribute more to technology-intensive firm by pursuing
quality and innovation strategies. Following Schuler & Jackson (1987) and Huang (2001), ten
items were adopted for the present study. Respondents were asked to rate each item on a 5-point
scale ranging from 1 (strongly disagree) to 5 (strongly agree). These items were factor analyzed
using principal factor with varimax rotation method. The factor structure of business strategy
accounted for 61.74% of the total variance explained. An example of quality enhancing strategy
is ‘the company has very strict quality management procedures.’ An example of innovative
strategy is ‘the company is usually the first to introduce new products or services in the market.’
The alpha coefficients for quality and innovation were .87 and .79 respectively.
Performance measures. Knowledge related outcomes are measured by productivity, research and
development capability, products and services quality, and market shares. R&D activities are
often undertaken to add new knowledge to the existing knowledge base of an organization.
Maintaining a strong R&D program allows them to attract and keep talented scientists. Past
studies have used R&D spending as a measure of a firm's input into innovative activities. The
number of products on the market indicates firm success in developing and introducing new
products (DeCarolis & Deeds, 1999; Shan et al., 1994; Smith et al., 2005). These items were
measured on a 5-point Likert scale ranging from 1 (very low) to 5 (very high). Responses were
averaged to yield a composite index reflecting the organization’s operating efficiency. The alpha
coefficients were .82.
Control variables. Since firms with superior resources will be able to formulate and implement
unique and innovative strategies, firm age, firm size and ownership types are controlled for the
prediction of organizational performance. Firm age is related to firm survival and mortality rates.
Firm size was measured by number of full-time employees. Natural logarithmic transformation
was used to normalize the distributions and made it more consistent with existing literature.
Ownership structure is another characteristic that can influence HRM and performance function.
State-owned firms tend to be more embedded in institutional constrains and therefore less
flexible in adopting innovative HR practices. In terms of ownership structure, Hong Kong and
Taiwan firms were used as base for comparison; three dummy variables were created to
represent state-owned, collective, and foreign-invested /joint ventures.
Table 1 presents the descriptive statistics and correlations among the variables. As Table 1
indicates, most of the study's predictions are supported by the significant correlations observed
among the variables with many of the correlations being quite large (p<.001). It is observed that
significant positive correlation exists among HR practices, corporate culture and business
strategy measures and these measures were all significantly correlated with operative efficiency.
Years of operation and firm size had no significant correlation with any of the HR practices and
business strategy measures. In terms of ownership types, Hong Kong and Taiwan firms showed
negative correlation with HR practices, corporate culture and business strategy measures while
foreign direct invested and joint venture firms showed positive correlation with these measures.
Insert Table 1 about here
To test the hypotheses, hierarchical multiple regression analysis were conducted to examine the
relative effects of HR practices, corporate culture, business strategy and their interaction on
knowledge- related outcome. Regression results are given in Table 2. First, I entered the control
variables, i.e., company age, size (number of employees), and type of ownership. Controls were
not statistically significant in the regression equation as indicated in Table 2. Next, I examined
the increase in adjusted R2, the unique amount of variance explained by each block of variables.
When the two HR factors were entered, the overall model was statistically significant (F=11.40,
p<.001; ∆R2=.32, p<.001). The effect of HR on knowledge-related outcome was positive and
highly significant. As hypothesized, H1 was supported. The measures of corporate culture on the
whole added significant effect on operation efficiency, particularly the effect of competitive
culture. As expected, H2 was confirmed.
Insert Table 2 about here
In testing the interaction effects, the mean-centered variables were used for the main and
interaction terms in the regression analysis, as recommended by Aiken and West (1991). The
significant positive interaction effect between incentives and sharing culture was observed. H3.1
was supported. It should be noted that there was no significant interaction effect for incentive *
bureaucratic and incentive * competitive. Figure 1 displays the significant interaction terms.
Under low incentive level, low sharing culture is more efficient as shown in Figure 1. High
sharing culture works better under high incentive system.
Insert Figure 1 about here
The same tests were carried out for business strategies. Regression results for business strategy
are given in the last two columns of Table 2. When two business strategy variables were entered
in the regression, significant result was observed (∆R2 =.04, p<.05; and F = 9.76, p<.001).
Quality enhancement strategy is statistically significant. H4 was confirmed. When the interaction
terms were entered, the interaction term between incentives and quality was significant but
negative. The interaction between incentive and innovation was marginally significant (β=.15,
The significant interaction effect of HR practices and business strategy on performance is shown
graphically in Figure 2. Low quality strategy is likely to benefit in operating efficiency,
particularly for high incentive level, as indicated in Figure 2. It makes no difference for high
quality strategy in achieving operating efficiency under any level of incentives.
Insert Figure 2 about here
DISCUSSION AND CONCLUSION
The present study assesses the direct link between HR practices and firm performance and tests
the interaction effect of organizational culture and HR practices on firm performance; examines
the contingent relationship between business strategy and HR by evaluating the moderating
effect of business strategy. HR practices had highly significant impact in predicting operating
efficiency as indicated by ∆R2 =.32 (p<.001). HR may influence knowledge–related outcomes by
shaping the skills and attitudes of individuals. Thus the findings support that both capability and
incentive systems are significant predictors of knowledge-related performance, which is
consistent with other studies that investment in employees’ ability and motivation contribute to
higher knowledge-related performance (Cohen & Levinthal, 1990). Corporate culture also shows
direct effect as indicated by the significant ∆R2 and F value. The study further explored the
interacting effect of HR and culture to fully understand the role of HR practices in knowledge-
related performance. The results show significant interaction effects with sharing culture on
performance. The negative non- significant interaction effect between incentives and
bureaucratic was observed. The interaction effect of incentive system and competitive culture
became non-significant. Perhaps fierce competition creates barriers for resource and knowledge
Results from the present study showed that the traditional control system, that is, bureaucratic
culture, did not significantly benefit firm performance. The results support that sharing culture
and reward system promote knowledge-related performance (Hensen at al. 1999). From the
practical perspective, results from this study offers significant implications for human resource
professionals in designing HR systems. Incentives under appropriate cultural environment
provide a strong management tool to reward employees. Manager can better develop reward
systems and motivational schemes for their employees. It is desirable that HR systems should
base on collaboration to support the development of exchange programs and group-based
rewards in knowledge-intensive organizations.
The current literature suggests that building a supportive sharing corporate culture, captured as
informality, openness, enhance knowledge sharing and absorption. It is important to create a
sharing culture that supports HR activities and business strategy to enhance firm performance.
Despite the highly significant effect of incentives in enhancing operating efficiency, the present
study did not find any support for a combination of human resource capabilities and an
appropriate culture or business strategy give firms an advantage in achieving high performance.
In terms of business strategy, innovation had no significant impact on knowledge-related
outcomes. Quality enhancement strategy is statistically significant. The firm’s commitment to
quality has been found to be an important determinant of firm performance. When the interaction
term between quality and incentives entered the regression equation, the β coefficient became
significant but negative. Low quality strategy has substantial increase in operating efficiency as
incentive level increases, while high quality strategy remains at the same level of efficiency as
shown in Figure 2.
The results provide some research guided insights to design of HRM systems. It is important to
link HR to specific business strategy and creating the appropriate culture that is necessary to
execute these business strategies more effectively to gain competitive advantage (Barney, 1986).
The implications of HR practices for management of knowledge and innovation is profound.
Deployment of HRM practice to increase employee motivation, absorbing capacity has a positive
impact on knowledge-related performance. It also highlights the need to align HRM with
business strategy of the firm to enhance performance
Despite the fact that our results are encouraging, they should be interpreted with caution because
of the study's limitations. The data were assessed using perceptual, self-reported measures.
Subjective measure of firm performance was widely used in the literature (Bae & Lawler 2000;
Delaney & Huselid 1996; Harael & Tzafrir 1999). In the absence of objective data, self-reported
measures constitute an acceptable substitute and are equally reliable. Prior research by Dollinger
and Golden (1992) showed that organizational performance rated by self-reported measures was
positively correlated with objective performance indicators.
In addition to self-reported perceptual measures of performance outcomes, the potential problem
of common method variance cannot be avoided if all variables are collected from the same
respondent in the same survey. Following Podsakoff and Organ (2003), I checked for presence of
common method bias by conducting Harman’s one factor test in our data. A principal
components factor analysis with an unrotated solution shows that no single factor accounted for a
majority of the covariance in the variables. Common method variance is unlikely to be a serious
problem. Causality is difficulty to establish using cross-sectional data. Future research should
collect data from multiple sources to minimize the risk of common method variance. More
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Figure 1 The interaction between Incentives and Sharing
Figure 2 The interaction between Incentives and Quality