A theory of the firm's demand for HRM practices

Abstract

Empirical data are presented that reveal a large variation in the pattern of HRM practice adoption across firms. The paper then develops an economics-based theory that explains this pattern. The model broadens the HRM concept; models the linkage between HRM practices and firm performance (the ‘black box’); generates an HRM input demand function and demand curve; formalizes the concept of strategic HRM; suggests a new empirical tool for HRM research; generates new hypotheses and insights on the nature of the HRM–firm performance relationship; suggests that existing theories of the HRM–firm performance relationship are seriously mis-specified; and posits that on theoretical grounds the effect of more HRM on firm performance in long-run competitive equilibrium is not positive but zero.

Keywords:

• economics of personnel
• human resource management theory
• strategic human resource management

Acknowledgements

The author wishes to thank Brian Becker and Peter Boxall for helpful comments on an earlier draft of this paper.

Notes

1. Note that if a different dependent variable is used, such as productivity, the HRM coefficient may be positive yet here is another mis-specification since productivity can increase, yet the large expenditure cost on HRM necessary to accomplish this may well outweigh the productivity revenue gain, causing profit to do down.

2. When making cross-firm comparisons it is necessary to standardize for firm size, implying dollars of profit should be replaced by a relative measure, such as rate of return on capital. The sign and size of the regression coefficient on the HRM variable differs according to the exact specification of the performance variable.