A study of formalisation of human resource management practices in msme [www.writekraft.com]

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A STUDY OF
FORMALISATION
OF HUMAN
RESOURCE
MANAGEMENT
PRACTICES IN
MSMES IN
(Regd. No. AAI-1261)
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GUJARAT
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ABSTRACT
The focus of this study was to investigate the presence of formalisation of
human resource management practices (HRMP) in the Micro, Small and
Medium Enterprises (MSME) in the state of Gujarat, India, and consequently
the effect of formalisation on organisational performance. MSMEs contribute
80% of global economic growth and are highest employment generators. To
keep the cost low, they follow unique human resource management (HRM)
practices. Despite these importance and scope of MSMEs, very few studies
have focussed on studying HR Practices and extent of formalisation of HRM in
these units. The assumption behind this study was that formalised HRMP
helps in getting better organisational performance (Nguyen and Bryant,
2004). The aim was to study the current HRMP among MSMEs in the state of
Gujarat .The effect of formalised HRMP on annual sales was studied separately
among MSMEs. The study was conducted on 223 MSMEs across 17 districts in
Gujarat. Along-with that, other relevant factor like demographic variations
and contextual factors was also studied to understand their effect on
formalisation of HRMP. Among the three contextual variables studied; namely
firm size, labour agreement and large firm association, it was found that
formalisation of HRM is dependent on organisation size and large firm
association, but no relation was found between formalisation and labour
union. It is argued that precarious employment, recruitment through labour
contractor and keeping more workers as contract worker to avoid legal
scrutiny is the cause for this. Also, the culture based control system prevalent
in small and medium firms in high context nations like India creates an
environment for non formalized HRM practices. This has its own advantages
and disadvantages. Since there are social control systems, the discipline
process is positive and maintained within the firm, however, the role of
government, legal and judiciary mechanism loses its relevance. Finally, results
of this study will provide information about ‘Formalised HRMP’ that has
positive association with organisational performance. This forms the base for
v recommendation to institutionalise and be focussed on building firm
capability in terms of human resources in all MSMEs and not take short term
decisions. This study provides a reference point for all MSMEs benefit in
future.
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CHAPTER 1
INTRODUCTION
1.1. Introduction
Developing a micro, small or medium sized organization is an arduous task and keeping it
afloat against the odds of competition, nurturing productivity, retaining talent and propelling it
to the next level requires investment in the human capital. Human capital encompasses the
skills, abilities and knowledge of the employees. Managing the human resources of MSMEs is
not the same as the large public sector units. A large number of smaller and medium units
termed as micro, small and medium enterprises (MSME) make up the major part of the
industrial sector in the country. The emergence of the MSMEs is the result of the continuous
experimentation and the development of the industrious persons paving the way for
developmental activities in the industrial world. Earlier, MSMEs were not considered
favourably, but were looked at sceptically for their role in reducing economy of the nation. The
current trend has given way to realizing their potential in the development of industry as well as
economy. With great potential for development, MSMEs today form the backbone of the
industrial enterprise system in any country. Most of these MSMEs proliferate as ancillary
industries to the large scale public and private sectors units that supply accessory materials or
manufacture a portion of the larger product designed by the larger industries.
MSMEs are credited with contributing to manufacturing sector’s output, industrial production,
exports and employment. Further, the MSMEs form an important link between the public and
private sectors increasing the inter-relationships thus developing dependence on these MSMEs
to a greater extent (Massey, 2003; Lewis et al. 2007). According to the Annual Report on
MSME 2012-2013 published by Micro, Small, and Medium Enterprises, Government of India,
a total of 44.77 million working MSMEs are found in India offering jobs for 101.259 million
people with 18343 crore gross output (MSME Annual Report 2012-
13). The MSMEs comprise 17% of India’s GDP that make up for 45% of the total
manufactured products and 40% of exports. In Gujarat alone, there are 2.178 million
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enterprises offering 4.773 million employments.
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Despite such critical role it plays in Indian economy, more than 50% of its labour is not
organized, 60% of labour is unskilled. This leads to exploitative relationships and the labour
is often poorly paid, and the managerial team is inadequate and lacks skills to manage the
labour which calls for a study that will provide a good preview of the growth oriented
equity and inclusion.
Since the MSME sector involves humongous human resources it makes it necessary to
enquire and understand the organization of the human resources in MSME organizations
and map the extent and efforts taken to formalize the HR system. This understanding would
help answer questions on how labour friendly are the HR practices of MSMEs. How is this
informality within the sector organized and the order in the chaos that the MSME workforce
is known for.
This chapter mainly focuses on analysing the resource based view and institutional theory
of the HRM practices with special reference to MSMEs. This chapter is divided into five
main sections, which cover the definition of MSME and its role in different industrial
sector, MSME models available in Gujarat, the resource based view and the institutional
theory of the HRM practices.
1.2. Definition
The Ministry of MSME defines MSME as “any enterprises … engaged in production and
rendering services, subject to limiting factor of investment in plant and machinery and
equipment.” The classification of the enterprises based on manufacturing and service sector
is given in Table 1.1.
Table 1.1: Classification of MSMEs
Manufacturing Sector – investment in plant and machineries
Micro Enterprise Does not exceed Rupees 25 lakhs
Small Enterprise Between Rupees 25 lakhs and 5 crores
Medium Enterprise Between Rupees 5 crores and 10 crores
2

Contd. Table 1.1: Classification of MSMEs
Service Sector- investment in equipment
Micro Enterprise Not more than Rupees 10 lakhs
Small Enterprise Between Rupees 10 lakhs and 2 crores
Medium Enterprise Between Rupees 2 crores and 5 crores
Source: www.dcmsme.gov.in/MSMED2006.pdf. Retrieved on 8 September 2013.
1.3. MSMEs in Gujarat
The state of Gujarat has achieved the status of pro-MSME, in particular, in textiles,
diamonds, jari, cloth printing, and electronics sectors. As MSMEs are placed in the list of
Concurrent Industries by the Constitution of India, the developmental programs are carried
out in collaboration with the rules and regulations and policies at the national level (Gujarat
MSME report, 2013). Table 1.2 presents the vital statistics of the MSMEs in India.
Table 1.2: Vital Statistics of MSMEs in India
Facts Numbers
Growth in number of MSMEs 39.1 million (2008) / 40.9 million
(2009) / 42.7 million (2010) / 44.7
million (2011) / 46.7 million (2012)
India’s rank in world Second with 48 million MSME
China is first with 50 million MSME
Employees Employed 69.5 million on 2009-10
Presence of
Urban 55%
MSME
Rural 45%
Source: http://www.financialexpress.com/news/-1000odd-msme-units-
downed-shutter- in-2-years- /1056714/1. Retrieved on 8 September 2013.
3

Gujarat has large number of MSMEs, second only to Tamil Nadu in the country. The most
wide spread type of MSME in Gujarat are the textile sector with 369 clusters, is also the
largest in India. The largest numbers of MSME are found in Surat district (75,000 units)
and Ahmedabad (47,000). Majority (85%) of them is micro units while there is a small
(14%) representation of small units too; medium units have a paltry representation (0.61%)
(Financial Express, 9 January, 2013).
Considered as the hub of MSMEs, Gujarat is one of the states to be represented in the
inaugural volume of Regional MSMER. Gujarat has number unique features in the MSMEs
within the organized sector and the order in the chaos that the MSME workforce is known
for. Gujarat state has a great ambition to become one of the important regions in the country
for collective socio-economic development of the country. The nature of industries in
Gujarat are diversified covering a great variety of industrial structure, comprising of over
800 large industries and about 4, 00,000 MSMEs with pioneering public approach
programmes. The state is projected as ‘Vibrant Gujarat’ from January 2013 and consists of
a large range of investors who are the back-bone of the industrial development in the state.
These unique characteristics motivated the investigation of MSMEs in Gujarat in the
present study with key focus of the investigation on the practice of human resource and its
management in these industries.
1.4. Research Gap
Businesses rely on the skills, knowledge, and abilities of employees to distinguish their
products and services in order to amplify the competitive advantage. The alignment of
business competitive strategy along with a strategically defined HR system not only can
bring new customers but also repeat customers (Ulrich and Brockbank, 2005; Cascio and
Boudreau, 2008). However, a greater understanding on the management of these human
resources in small and growing firms is needed to create a framework for handling the
challenges and issues associated with addressing the work environment of the employees. It
is believed that if ‘workers are managed well, then the worker will manage the company
well too’ is the key to success of the industry (Alleyene, Doherty and Greenidge, 2006).
The term Human resource management (HRM) means “the regulations and mechanisms
involved in bringing forward the human resource (HR) aspects of an administrative strategy
4

which comprises of human resource designing, job profiling, employment, selection,
alignment, reward, presentation evaluation, preparation and growth, and inter-
relationship amongst the employees” (Dessler, 2007). HRM includes rules, processes, and a
systematic approach with appropriate systems that stimulate the positive behaviour of the
workers towards the company (Noe, et.al, 2007; Absar, Nimalatythasan and Jilani, 2010).
The inter-relationship between the MSMEs and HRM has been studied by several
researchers who have noted that there are several deficits in the understanding of the
concept of HRM in the working of the MSMEs. It has been suggested that the increasing
importance of the MSMEs puts emphasis on the study of HRM in these industries and to
adopt newer techniques for the study (Hassan, 2008).
In contrast to above, comparatively, greater extent of the existing literature on management of
human resources is on large organisations or companies with greater proportion of investment
capital. Further, the results obtained from studies on HRM in large sectors are not comparable
to the conditions present in the smaller industrial units, making it difficult to generalize the
mode of HRM practices in MSMEs (Storey 2002). In spite of the pivotal role played by the
MSMEs in the financial position of the country, the quality of HRM in the MSMEs and the
attitudes of MSMEs towards HRM has been neglected, and it has been observed that the
management of workers in MSMEs is reported as despicable (Wilkinson 1999; Chandler and
McEvoy, 2000; Heneman et al. 2000; Katz et al. 2000). Therefore, as mentioned by Brand and
Bax (2002), research on HRM in SMEs’ context is ‘justified because these companies are
comparatively labour-based and often think about their HRM problems as crucial’. Along with
the fact that many SMEs arise and close as quickly as possible and thus are profitable subjects
for studying the ‘causal relationships between HRM and SMEs’ (Katz et al. 2000).
In specific, there have been very few studies in this field with focussed attention on state
wide aggregation of practices.
The research was interesting and important also because of limitations pertaining to the topic of
research on HRM concept in the MSME industries (de Kok and Uhlaner 2001). The concepts
that are specifically related to the human resources in the SMEs employ hypothesis related to
particular topics that limit the extent of research in this area leading to a lack in analytical and
descriptive research (Heneman et al. 2000). This has made researchers refrain or have limited
scope for study on this topic. There is also the lack of empirical studies that
5

could be statistically confirmed and the information that is available has been conducted
with limited sample size or importance given only to larger organizations (Bayo-Moriones
and Merino-Diaz de Cerio 2001). Further, studies on human resource is essential in SME
and MSMEs mainly due to the proportion of importance it achieves due to de-motivation,
attrition and high turn-over rates in these organizations as the vision and mission of SMEs
in India are frequently spearheaded by the owners, which does not get translated as goals of
the employees (Sengupta and Sengupta, 2014).
Luc Sels et al. (2004) have studied the link between HRM and small businesses and identified
certain aspects of the study. They have made efforts to investigate the effects of HRM and
firm performance. It was noticed by them that the works on this topic were available only
for large companies. Their work primarily looked into the HRM and its impact on smaller
companies. They further succeeded in developing a conceptual framework “linking HRM
to financial performance that fits small businesses”.
HRM is a recent phenomenon in MSMEs in India and many questions about good HRM
structure remain unanswered. MSME owner- managers might be using different practices
to manage their people but there is dearth of studies wherein researchers has tried to collate
these practices under the concept of HRM. Research on HRM formalisation and
organisational performance in small businesses has addressed questions like which HRM
practices, why these and what impact these have on the HRM system and organisational
performance (Nguyen and Bryant, 2004). Research reveals that when firm size increases
informality becomes apparent. In such a situation, entrepreneurs make some effort to gain
required sophistication in management practices to recruit, motivate and retain best talent,
to achieve organisational objectives optimistically.
As mentioned above, HRM formalisation has an impact on firm performance and as firm
size increases there is requirement of more formal practices. For gaining better performance
owner managers of poor performing firms may attempt to achieve that certain level of
HRM formalisation which in turn leads them to successful category of MSMEs.
Considering all the above discussions, this proposed study will investigate HRM practices
in MSMEs. Investigation and evaluation of HRM formalisation and its association with
MSME’s performance is an interesting and challenging job especially when investigating
this for MSMEs of any developing country where the research is in a nascent stage.
6

Recommendation of this study will be very important for poor performing and or
unsuccessful MSMEs. This study will add to scientific knowledge on HRM and MSME
performance by providing empirical finding for HRM formalisation and its association with
organisational performance. This issue is highly recommended in a number of latest studies
as critical for future investigation especially in MSMEs (Huselid and Becker, 2000; Zheng,
et. al., 2006). Moreover, it will also contribute to existing knowledge on HRM and MSME
performance in a different institutional and cultural context as this study will be conducted
in the state of Gujarat, India.
1.5. Theoretical Framework
The theory of strategic human resource management (SHRM) has been developed by many
researchers (Delery, 1998) to make it a veritable strategic design (Ulrich, 1998). Multiple
theoretical frameworks based on the behavioural perspective, resource view, and
institutional concept and human capital view have been established to reflect on the
problems of the HRM. These theories have founded on two important conclusions: (1)
human capital referring to the skills, behaviours, and interaction of the employees holds a
pivotal position, which becomes the fundamental necessity for strategy formulation as well
as mode to implement the strategy and (2) The conviction that HR practices of an
organization contributes to the development of strategic capability of its human resources.
Both these theories when combined will produce a stronger theoretical foundation that
would propel the organization to develop an effective way to manage as well as utilize the
resources efficiently. This study believes on the two concepts described above and
therefore, an effort has made to describe and delineate the operational capabilities of these
views. Both the theories are analysed in this study as a perspective to conduct SHRM
research. As this study is not bound by developing a new theory, the existing concepts are
researched from the different angles.
1.6. HRM Practices and Resource-Based Theory
The resource-based theory on the HRM practices has its origins in the economic theory given
by Penrose in 1959 and early strategy theory by Andrew (1980). If a company has to stay in
position for a long time, it must have good endowment of resources, with products being
7

different from those of their rivals and products that are unique, inimitable and with longer
life and quality which cannot be substituted (Collis and Montgomery, 1995; Rangonne,
1999). Resources haves been classified into many types within an organization based on
certain criteria and some are enlisted as follows:
Type: “financial (accounting), physical infrastructure (machinery), human (workers),
technological (technical aspects), organizational (control and administration)” (Azzone et
al., 1996).
Tangibles: human, physical, and financial; intangibles: profile, company, knowledge and
patents (Collis and Montgomery, 1995).
Skills: “assets and skills” or “competencies”. The assets are again grouped into “legal
assets” comprising “contacts, license and brand names” and “non-legal assets” comprising
“reputation, network and database”. The competencies include knowledge, skill,
management qualities, learning-abilities and quality (Hall 1992), “Competence and
potentiality” (Sanchez et al., 1995; Rangone, 1999).
Resource-based view assumes that individual firms are distinct and contain varied
resources. This model is based on the view that firms develop unique competencies
available in the human capital resources within their control in order to establish sustainable
competitive advantages (Teece, 1980; Barney, 1991; Wernerfelt, 1984). Followers of
resource-based view emphasise that competitive advantage arises from sound resource
base. Role of managers is clearly identified to play a crucial role in choosing the right
resource (employees), developing them and deploying them according to the needs of the
business goals, which goes beyond the operating environment (Colbert, 2004). A similar
view was held by Wright and McMahan (1992), where they defined SHRM as “the pattern
of planned human resource deployments and activities intended to enable an organization to
achieve its goals.” Most of the resource-based theories consider only critical or important
resources that have a competitive edge for the progress and development. Nevertheless, the
resources must be tested in order to determine their competitiveness. Prahalad and Hammel
(1994) proposed some tests to investigate the strength of competitiveness:
8

 Test for superior quality of the products. 

 Test for degree of imitation in the product.


 Test to measure the longevity of the product. 

 Test for determining the degree of substitutability of the product. 
In an effort to theorise the HRM system based on resource perspective, a quantitative and
positivistic approach is not relevant as each organization is considered unique and complex
(Pugin, 2014).
1.7. HRM practices and Institutional theory
Contrary to the strategic and economic legacy of the resource-based view, institutional theory
embraces a sociological view. According to this theory, organizations are considered as social
entities, which react to the environmental pressure to achieve legitimacy and affirm survival.
Best practices of HRM from one organization is copied to the other resulting in wide spread
HRM policies and practices that is beneficial to all the organizations (Tolbert and Zucker 1983).
On the other hand, Croucher, Wood, Brewster and Brookes (2012) relate to the institutional
theory as a postulation that support the awareness about the diffusion and divergence or
convergence of HRM practices of the organizations all over the world.
The HRM system involves people with innovative ideas who can strategically plan and
productive workers who can shoulder the responsibilities of the progress of the company in
an effective manner (Noe, et. al, 2007). Good HRM practices include well developed
recruitment of personnel, plans for induction, training, and progress, programming for these
areas, introducing a system for rewards and benefits linked to good performance of the
work force which overall increases the performance of the company (Omolo, et al., 2013).
Studies by various researchers have supported the concept of HRM practice to profitable
results for the company like development of innovative products, achieving greater
customer satisfaction and profit (Dooney, 2005).
Researchers have established the facts that the small business entities have a different form of
HRM compared to the larger companies with respect to the type and amount of resources, the
numbers of workers, and staff with training for HR (Barber, et.al, 1999). Thus the type of
design and schemes involved in the HRM practices in the smaller firms has been found to be
tough to explain (Cardon and Stevens, 2004; Tocher and Rutherford, 2009). The problems
9

exist in the employment of the staff and in programming a well-planned HRM regimen in
case of SMEs (Williamson, Cable, and Aldrich, 2002; Cardon and Stevens, 2004). It has
been suggested by Rutherford, Buller, and McMullen (2003) that it is essential to reform
the concepts and strategies of HRM in the companies (Hargis and Bradley III, 2011).
Past literature suggests that implementing HRM practices in small companies will
positively affect the performance of the workers which in turn would provide thrust to the
progress and profits of the company.HRM in such companies can improve the authenticity
of these companies, improve the skill of the employees, thus enhancing the quality of work
and increase the competition among the smaller companies (Williamson, Cable, and
Aldrich, 2002). Therefore it is noted that by increasing the genuineness of the company, it
is possible to position the company in a better rank in the industrial market, which implies
better value for their shares and stocks. On the whole it is seen that “organizations with
collective efforts and team work based on cohesion, teamwork, and morale often enjoy
greater employee commitment and retention” (Cameron and Quinn, 1999).
Stiff competitions and greater challenges initiate the smaller companies to employ good HRM
practices. The result can yield better benefits and affect employees by motivating and
encouraging them to perform well thereby chalking out a progressive path for the companies
(Williamson et al., 2002). By employing such measures the companies get the advantages of
good labour-intensive workforce that improves outcome. Investing in technology by the
company, improving the quality of resources and re-planning the means and mechanisms of
work-culture are some of the ways to improve the HRM that would ensure the progress of the
company (Bloom and Van Reenen, 2007; Patel and Cordon, 2010).
From the review of literature, it is evident that management of the human resources in the
companies, be it large or small companies affects the overall well-being of the employees,
along with comprehensive development of the person, team and the firm by enhancing
performance at each level. Thus, the concept of HRM must be considered along with the
context of performance of the firm, as well as the effect of the progress of the firm on its
workforce (Michie and West, 2004). Companies must improve their HRM practices by
providing adequate training, evaluation methods and good administrative mechanisms.
Attempts to empirically explore the link between HRM and firm performance are numerous.
In any company, the managers are the chief architects of the functional aspects of the
company engaged in planning the structure, schemes and processes. The plans, positioning
10

and administrative insights should take workers into account while determining the business
goals for the company (Ordiz-Fuertes and Fernandez- Sanchez, 2003). Several researchers
have emphasized that the attributes of the administration get modified with time, and in line
with the opinion of the managers and their sense of understanding. Hence it is seen that the
opinion of the managers of their staff has an immense effect on the administration and
functioning of the company. Looking in to the role of the managers in the opinion building
of the workers, Creed and Miles (1996) have considered the level of ‘trust or mistrust’
shown by managers’ actions, gets an interactive response from the workers. The opinion
formed by the managers with respect to their staff is of utmost importance in the
functioning of the company and affects its functionality. Shore and his co-workers (2004)
have deduced that the managers’ views on the employees make tremendous impact on their
interaction with the employees. Tzafrir (2005) and Delery and Doty (1996) enumerated
some common HR regulations detected in most companies as “influenced by the degree of
managerial trust in employees” are (1) effect of monetary packages, (2) role of employees
in decision-making,(3) work force availability in the company and (4) skill development.
1.8. Research Aim and Objectives
The aim of this research is to extend the concept of de Kok and Uhlaner (2001) to
investigate the effect of formalisation of human resource management practices (HRM) on
organisational performance with special reference to MSMEs based in Gujarat.
The main objectives of this study are
To identify the antecedents of formalisation of HRM practices in MSMEs.
To examine few of the antecedents and their effect on formalisation of HRM
practices in MSMEs
To investigate the impact of formalisation of HRM practices on MSMEs, especially in
Gujarat.
To explore if there is any correlation between the formalisation of HRM and
organisational performance.

1.9. Brief Explanation of Base Research Paper
de Kok and Uhlaner (2001) in their paper titled Organization Context and Human Resource
Management in the Small Firm derives and then tests a descriptive model based on some
organizational contextual variables. They have done the study as pilot on sixteen small Dutch
firms to do a preliminary test of the model and left the detailing as future research study.
They have divided the paper in two parts. They first solely tries to develop a rationale about
their proposed linkages between various theories like resource based approach, institutional
theory , transaction cost economics, behavioral theory and other concepts from strategic
management. The second part of the paper contains the results of the study. The study was
done in two steps, first as qualitative and then quantitatively.
The goal of this paper is to understand the role of organizational contextual variables like
company size, strategy, technology, culture and environment in the variation in practices of
HRM amongst small firms. They have derived HRM practices from the various definitions
of formalization. They have drawn linkages of the contextual variables from the various
theories as stated above viz., resource based approach, transaction cost economies etc.
Formalisation has been indicated as a subjective term with no specific definition. It is
shown as amalgamation of various HRM practices. They have taken formalization as their
dependent variable. They have therefore stated the objective of their study as to study the
reason behind the variation in the formal HRM practices in small businesses. The model
which they have formulated contains four contextual independent variables, viz. Collective
labour agreement; company size, large firm associate and growth strategy, which they have
derived from the study of the various above stated theories. They intend to show how they
influence the degree of formalization of HRM practices in small business. Three latent
variables, (i) requirement from/ expectations from external stakeholders, (ii) resources and
(iii) perceived value of HRM practices has been taken to build a rationale to link
independent variables with dependent variable, i.e. Formalisation of HRM practices.
They have studied 16 Dutch firms with 10-41 employees of minimum 5 years of age, with
series of semi structured interviews. In the first part of the study, they have done qualitative
analysis and have sorted the answers according to the various HRM practices. They have
found wide variation in their results. In the second quantitative part, wherever there is
presence of dichotomous variables in both independent and dependent variables, Fisher’s
Exact Test was used. Phi coefficient is then used to test the direction of relationship. In
other ordinal variables Pearson Product Moment Correlation Coefficient is used.

For the first hypothesis, Collective labour agreement showed no effect on formalization of
HRM practices. Whereas, a positive correlation was found with company size and
formalization. Large firm association shows partial strong correlation with training
programme in formalized HRM practices. And finally, weak but consistent relationship was
found amongst growth strategy and formalization.
de Kok and Uhlaner finally concluded that company size is an important factor in
formalization of HRM practices. Second, they have found wide variation amongst HRM
practices in small businesses. Third, there is a lack of interrelationship between various
dimensions of HRM practices. They have also found that resource plays a important factor
in this aspect. And finally, no competitive strategy influences the choice of HRM practices.
They conclude by emphasizing the need of formalized HRM practices which in turn are
beneficial for small organizations.
1.10. Research Framework
The objectives of this study has motivated to formulate a research framework (Fig. 1.1) that
attempts to find a link between the organisation size, labour agreement, large firm
association and the formalisation of the HRM practises of MSMEs. Past literature has
shown that organisation performance is correlated with the HRM practices adopted by the
MSMEs. Therefore, this study has attempted to find such a correlation in the MSMEs of
Gujarat, as it is a hub of MSMEs.
Figure 1.1: Research framework

1.11. Research Hypothesis
The impact of formalisation of the HRM practices was studied with respect to organisation
size, labour agreement and large firm association. Based on these views, following
hypotheses were put forward:
H1: Organisation size is positively related to formalisation of human resource management
practices
H2: Labour agreement is positively related to formalisation of human resource management
practices.
H3: Large firm association is positively related to formalisation of human resource
management practices.
H4: Organisation size, labour agreement and large firm association together is positively
related with formalisation of human resource management practices
H5: Formalisation of HRM practice is positively related with organisational performance.
The research model created based on the hypotheses is illustrated in Figure 1.2.
Along-with that, by keeping formalisation of HRM as mediator and organisational
performance as dependent variable, three other hypothesis were formulated from
independent variables. These hypotheses were included in the main model and have been
explored to see any further existent relationships. Also, three more hypotheses, from
hypothesis 7 to hypothesis 9, were also formulated from demographic details to examine
their effect on organisational performance keeping formalisation of HRM as mediator.
These hypotheses were not included in the main model and have been explored to see any
further existent relationships.
14

H6a: Formalisation of HRM practices mediates the relationship of organisation size and
H6b: Formalisation of HRM practices mediates the relationship of labour agreement and
H6c: Formalisation of HRM practices mediates the relationship of large firm organisation
and organisational performance.
H7: Formalisation of HRM practices mediates the relationship of age of the organisation
and organisational performance
H8: Formalisation of HRM practices mediates the relationship of number of permanent
employees and organisational performance.
H9: Formalisation of HRM practices mediates the relationship of type of business and
15

Figure 1.3 to 1.8 contains the pictorial depiction of the proposed hypotheses from H6a to
H9. As the research progressed, efforts were taken to probe any other possible relationship
within the studied variables.
Figure 1.3. Hypothesis 6a depicting Formalisation of HRM practices mediates
the relationship of organisation size and organisational performance.

Figure 1.5. Hypothesis 6c depicting Formalisation of HRM practices mediates
the relationship of large firm association and organisational performance.
Figure 1.6. Hypothesis 7 de picting Formalisation of HRM practices
med iates the relationship of age of organisation and organisational
performance.

Figure 1.7. Hypothesis 8 de picting Formalisation of HRM practices mediates the
relationship of number of permanent employees and organisational perfor mance.

1.12. Conclusion
Theorizing the concept of HRM practices were one of the goals of this study, though no
attempt was made to formulate new theories. Hence, based on the objectives of the study
this chapter mainly focused on the resource based view and institutional theory. The
resource based view pertains to the managing of the resources, in particular the human
resources. Human capital is an inimitable resource that cannot be copied or substituted,
therefore, provides a competitive edge. A HRM practice that addresses the issues of human
resource is essential to keep the workforce motivated and be productive. On the contrary,
from the literature, it has been observed that a large number of small business organizations
do not comply with these practices (Binks and Ennwe, 1996).
To explore further, in the present study, the MSMEs in Gujarat have been chosen as the subject
of the research as highlighted by many unique features, volume of MSMEs present in this state
and type of industrial sector it covers. Given the wide variety of these industries in Gujarat, it
becomes necessary that the strategies and policies put-forth in the management of human
resources or the employees, in other words, is imperative to be studied.
Keeping these in mind, this thesis continues in the later sections with literature review by
bringing in the studies of different authors. Thereafter, a research methodology was formed,
pilot study was done and then final data collection, analysis and interpretation were done.
Detailed descriptions of the results were put forward concluded by conclusion,
implications, limitations and future research directions.

CONCLUSIONS, IMPLICATIONS, LIMITATIONS
AND FUTURE RESEARCH DIRECTIONS
7.1 Conclusions
MSMEs referred to as the “engines of growth” by the Indian government is indeed a major
driver for the economy of the nation. They participate by contributing to the
decentralization of industries, use of indigenous resources, augmenting employment
opportunities, even distribution of income, foreign exchange earnings, link for existing
industries, entrepreneurial development and rural industrialization. Nevertheless, they are
constantly delimited by the competition from larger firms and from within their sector itself
as many of its counterparts produce low quality goods, and do not maintain the
internationally accepted specific standards. Resource based theory highlights the
importance of human capital to maintain competitive edge for individual firms. However,
adequate supply of human resource in itself is not guarantee for the sustained growth of an
organization. Management of the human resources through the formalization of HR
practices within an organization lays the foundation for achieving synergy, fit and
integration. Several factors like organization size, type of ownership, age, and large firm
association have shown to influence the implementation of formal HR practices in MSMEs.
In the present study, organization size, labour agreement and large firm association were
studied for a cause and effect relationship on formalization of human resource management
using regression analysis. It was found that R-squared value was 0.329 when they were tested
for total effect of the three variables on FHRMP. The result was positively contributing to firm
performance and formalized HRM but labour agreement alone did not. Further p values were
found to be significant, but r squares were slightly on the lower end. Suggesting only 33 percent
of the antecedent contributes to formalization. Therefore, further casual telephonic or casual
interviews with few MSME owners were conducted to analyse the reason added with secondary
literature support. The main reasons that became evident from this study was the resource
constraint, precarious working condition, owner’s decision, complicated legal
procedures and absence or less number of permanent employees became associated with
the extent of formalization of human resource management practices. Despite of that,
results showed presence of these variables contributed to organisational performance of
MSMEs thereby showing the importance of the formalization of HRM practices

Similarly, the combination of the factors also had a positive impact on the formalization of
HRM. The pivotal role played by formal HR practices was elucidated by using FHRM as
the mediator variable to understand the impact of other dependent variables on the
organization performance. It was found that Organization size, type of ownership, age, and
large firm association moderated the FHRM implementation which in turn influenced the
organization performance. The data from the study was collected from 17 districts of
Gujarat showing a fairly even distribution of the data across Gujarat. Therefore, this study
can be extrapolated to the state of Gujarat. Another important point noted was that during
the interactions with the respondents their was a tendency to use indigenous HR practices,
or rather to say, modified version of the larger firm they are associated with. Frugal
innovation on HR practices was quite prevalent. It was found that the leadership and
management communicate with their staff on personal basis thereby maintaining a good
rapport informally. This culture based control system, though informal ensures labour
engagement as well as performance. In short run this practice seems to be doing good, but
in course of time this informality may lead to breach of trust and perceived psychological
contract breach. Oral communication can easily be tweaked by mischievous employees and
likewise employer to exploit and manipulate people. Thus, it implies for a formalised
system to be in place. On the other hand, informal HRM practices (e.g., reliance on
informal evaluations in recruitment and selection; loose HR planning; ad hoc decision
making when determining training needs) were favoured by those employers who were not
highly achievement, planning, and goal oriented (Aycan, et. al, 2007). The authors
explained these as insecurity feeling amongst employers of losing control over employees.
Researching these HRM activities is a step towards a holistic understanding of the HRM
activities in MSMEs in developing economies like India. The findings showed significant
impact of organization size and large firm association on formalization of HRM practices.
Also, formalization has shown significant effect on organizational performance.
rippling effect on both employer and employee, thereby creating unstable and in-secured
employment for workers and lesser profit and more competition.
Finally, MSMEs demand adequate attention from government, thereby adopting SME
friendly rules and regulations. A serious food for thought for the government is about the
dismal performance of the organized sector, slow decline in employment expansion rate
and ‘jobless growth’ (Ghosh, 1994; Nagaraj, 2004) in India. An remarkable progress for
which government of India needs to be applauded is for the passing of Mahatma Gandhi
National Rural Employment Guarantee Act, 2005, providing 100 days of guaranteed work

per person in rural areas, the Social Security Act for Informal Workers (2007) for those
workers who are not covered by existing legislation and Small Enterprise Development
Programme (SEED) by ILO.
7.2 Implications
This study would emphasize on the need and benefit of formalised HR practices in any
MSME. Empirical results would make more sense to practitioners and researchers as well.
Since, here, the ultimate goal was to bring in organizational performance, it would be more
convincing to everybody, since the final result is what one would expect is performance.
This study would also help practitioners understand the effect of different environmental
and demographic factors studied here and act accordingly. The goal herein, is to help
practitioners achieve better performance. Also, for researchers they can explore these areas
in a more elaborate way or can take up other variables to see their effect. But, it is deduced
from this study that more understanding about the informality in the HRM processes in
these MSMEs needs to be explored. It would be wonderful to take up any good informal
practice and bring it in a formalised way for the benefit of society.
Labour contract needs stricter government interventions. It has to be improved by taking
care of both employee and employer, thereby creating a good work environment. The
imbalance needs more exploration and highlighting to sort the intricate problems. Across
industry, everybody should take the initiative.
This study calls for advocacy on reformation in labour laws by making it simple and more
user friendly. Complicated labour laws had given rise to precarious working condition
which is already showing adverse effect by giving rise to employment malpractice by
exploiting relationships, depriving employees their basic rights of even minimum wage and
social and safety provisions. They are all outsourced and kept on contract basis to get away
from legal or even basic duties. It has, in turn, increased manpower shortage. Individual
wealth maximization by employers should be curbed by government intervention. It is
necessary for both national and social well being both; otherwise this would lead to
disruption in the economic scenario of the country.
7.3 Limitations

Binding MSMEs in a structured questionnaire format only brings out the facts and figures
the researcher needs to know. Open, unstructured interview can bring out beautiful,
interesting and recipe of being highly successful. It could have a better learning had the
MSME owners allowed speaking their mind about the practices they undertake.
The research was confined to only one state in India. A more elaborate study would have
revealed a better picture to get an idea about India as a whole in this sector. A bigger picture
with respect to the state of Gujarat could have been done if only the nook and corner of very
MSME could have been reached. Data collection was also impossible in few areas where
MSME owners were not agreed to open up. Few industries like fisheries went untouched
because of geographical limitation. It otherwise, could have brought out interesting facts.
7.4 Future Research Directions
Future studies could develop a research design to study the various human resource practices
individually in a more detailed way and how they can influence the organisation and bring out
the best. As rightly stated by Paauwe and Boselie (2008), to get organizational performance in
real sense, HRM needs to be looked into a more holistic and balanced way. In other words, a

which brings in high performance. Tracking of the path that how these practices had
evolved will also give interesting insight and enrich the subject. Issues like employee
turnover, skill shortage, trapping various sources for skilled labour could be taken up for
the looming issues MSMEs are nowadays bogged down with. The research has missed out
on some more key variables like leadership values, informal control systems, etc. Future
research could look at that for further studies.
PAN ASIA study looking at integration of informal control systems can be taken up since it
would be then having a common platform of similar cultural background. Comparison and
contrast between large firm practices and small firm practices would be very interesting and
enriching for the literature and learning for practitioners. This research has tried to bring out
views on a new unexplored area to emphasize their importance in Gujarat and thereafter in
Indian MSME sector. These studies end here with the expectation of benefiting MSMEs in
their practice and bring more performance. Also, it opens up areas for further exploration
which needs to taken up for the overall benefit of practitioners and enriching knowledge of
academicians.

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