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Small and medium enterprises play a key role not only in the economy of developed countries but for developing countries as well. The SME sector is not much formalized as the larger corporate size organizations. SMEs are considered as backbone for economy as in case of Pakistan. There are numerous problems which hinder the growth of this particular sector. SMEs performances suffer badly due to the several structural & managerial problems faced by the organization working in this particular sector. In Pakistan about ____of total businesses are working under the head of small and medium sizes enterprises and it is quite unfortunate that these businesses contribute _______ percent of total GDP. Currently, government has taken several important initiatives for boosting the performance of SMEs working in Pakistan. Establishment of SAMEDA (Small and Medium Enterprises development Authority), SMEs banks and business incubation centers are some of the key initiatives for the development of this particular sector. It is also pertinent to mention here that only government institutions are not enough for the development of this sector. Entrepreneurs, owner managers and other concerned entities must work side by side with the government for research and development in this particular sector.
Most of the SMEs work with the objective to increase the productivity, organizational effectiveness, sustained competitive advantage and good rate of return on investment. However, these objectives can't be attained by using traditional and informal business practices. Land, labor, capital and entrepreneur are the four major factor of production. Research shows that labor i.e. human resource or the employees of any organization are the key resource for achieving the objective of any firms, whether it works in SME sector or otherwise (_________).
In SMEs, marketing and finance related issues arises at the beginning stage of firm's life, however issues related to human resource management begins with the firm growth. From the preliminary interviews from the entrepreneurs & owner managers of SMEs, it seems that they are using different informal or ad hoc practices for managing their workforce. There is not a single concrete study having purpose to identify the formal practices of SMEs working in Pakistan. Research on HRM sophistication and firm's performance in garment sector has already been conducted e.g.(Rauf, J. Van Riemsdijk, & Looise, 2008) have studied the impact of HRM sophistication and firm's performance in Pakistan's context . The results of this research describe the positive association in both of these variables. Research shows that the level of adoption of human resource practices increases with the increase in the size of firms however there are also certain constraints which are faced by the SMEs that hinder the process of adoption of formal human resource practices. In order to develop the human resource management system; time, cost and expertise are the key factors which compels firms to adopt the informal or ad hoc HRM system (McPherson, 2008).
The purpose of this study is to investigate the feasible Human Resource model for SME's that are currently working in Pakistan. SAMEDA's definition of Small & Medium Enterprises (as approved in SME Policy 2007) will be used in this research which means an entity having up to 250 Employees and paid up capital up to 25 million and there annual turnover to the figure of 250 million. This research will be for applied purpose based on the inductive method to conduct the descriptive study. Pragmatic analysis (combination of quantitative and qualitative data) will be used to determine the level of formality of human resource management system in the small and medium enterprises. This study will also help to determine the feasible model of human resource management system (by considering the constraints faced by SMEs) that can be a positive contributor towards the performance of the small and medium size enterprises. This study will be conducted in the pharmaceutical sector of Pakistan whereas current size of pharmaceutical industry of Pakistan is $1.5 billion and net export is $700 million, this sector also provides direct employment to about 95,000 professionals and creates 225,000 indirect jobs (Ahmad, 2010). Thus findings of this study will help both policy makers and owner mangers in adoption of such managerial practices that are critical for managing their workforce for achievement of firm's objectives.
Lack of formal human resource management system can cause several managerial issues in the growth phase of small firms (Barrett & Meyer, 2010). No doubt, the Scope of SME's has ignited the research and development in the field of Human Resource Management in context of the small and medium size firms ( Kok & Uhlaner, 2001) before that, this sector was ignored by the researchers of HRM, who considered it as a second class citizen ( Tansky & Heneman, 2003). However, a number of researchers have stressed on further research in the field of HRM system especially in the developing countries. This study will explore the human resource management practices of the small and medium enterprises working in the country. This research will also focus on the level of formality of human resource management system and its impact on the performance of small and medium enterprises faced by SMEs. Moreover, this research will also consider the constraints faced by the SMEs that compel them for the adoption of ad hoc and informal human resource practices. The major research questions are inscribed in the next section.
This research is going to answer the main research question using below mentioned sub questions.
"What type of human resource management practices will lead to better firm's performance working in SME sector?"
What is the level of HR formality of SMEs working in Pakistan?
What type of formal human resource practices lead to the better performance of the SMEs?
Do the SMEs that adopt formal HRM system perform better than those who used ad hoc or informal human resource system?
What are the major resource constraints that are being faced by Pakistani SMEs whilst adoption of formal HRM system?
Organization of the Thesis
Small and Medium enterprises play a significant role in the development of GDP and economic growth not only in developed country but in developing countries as well, research shows that in Pakistan about 3.2 million businesses are operational in which 3 million are small and medium size enterprises which employee 70% of the labor force in services, trade and manufacturing sector ( McCartney, 2011). Small and medium enterprises can play a contributing role in the economy like Pakistan ( Naqvi, 2011) however small enterprises pay less attention to modern theories, manufacturing procedures and latest operations trends, these organizations still follow the traditional methods ( Li, Li , & Dalgic, 2004) and resultantly they fail to perform up to the mark as compared to other large corporations (Wilkinson, 1999).
According to the research that was conducted in Australia, small organizations are less likely to adopt the procedures of HRD practices including recruitment, selection and the formal training as compared to the medium and larger size firms ( Bartam, 2005). Marketing and Finance related issues begins at the early stage of the firm life, however, Lack of human resource management can cause several managerial issues in the growth phase of small firms (Barrett & Meyer, 2010). The Scope of SME's has ignited the research and development in the field of Human Resource Management in context of the small and medium size firms ( Kok & Uhlaner, 2001) before that, this sector was ignored by the researchers of HRM, who considered it as a second class citizen ( Tansky & Heneman, 2003).
The Major Problems which are currently in the Human Resource System of Small and even medium size companies are lack of motivated employees and high turnover rate of contributing employees ( Mazzarol, 2003). Research that was conducted in Malaysian SME's Indicates that there is significant relationship exist between formal HR practices on the job satisfaction of the employees as compared to those organizations where the formal human resource department does not exist (Osman & Et al, 2011). HRM practices varies with the size of the firms, as the firm move towards growth phase, the practices tends to be more formalized as compared to the such organization which exist only in the startup phase (Kotey & Sheridan, 2004). As in large corporations, small and medium size business can also adopted the model of knowledge management as in critical success factors (CSF), Human Resource management have the prime importance (Wong, 2005) in the adoption process of knowledge Management. Study conducted by Khan, (2010) in Pakistan's oil and gas industries indicates that Manager can use the HRM practices as the tool for superior Performance and a success tool for competitive advantage. Innovative HRM practices have a positive impact on the performance of the small and medium size organizations ( Zheng, 'Neill, & Morrison, 2009).
Pakistan's and SMEs
SMEs play an important role in the economic growth of the developed and developing countries, as they provide the employment opportunities and help to achieve the fair and equitable wealth distribution by economic activities. SMEs also play the pivotal role to develop the entrepreneurial culture by skill development and help to maintain a sustainable growth rate which imparts the self-sufficiency. In case of Pakistan, nearly 90 percent of all the businesses consist of small and medium enterprises that employ approximately 80 percent of the non-agricultural workforce with 40 percent contribution in GDP (Small and Medium Enterprises Development Authority). In spite of above mentioned facts, Pakistani's SMEs are facing the financial and other resource constraints. Furthermore, lack of technical up-gradation, marketing and human resource training and development are also the major reasons that hurdle the development of this particular sector. According to the policy makers, Pakistan has the great potential for the development of SME sector but unfortunately, the impetus of endeavors was for the large scale industrialization (SME sector).
Small and Medium Development Authority (SAMEDA) is the premier government agency which was established for the development of small and medium enterprises working in Pakistan. It is not only act as an advisory body for the government but also help to address the issues faced by all other stake holders, working for the development of SME sector. Government of Pakistan has also recognized the importance of SME sector and approved the SME policy to implement the measures for the development of this sector. (Ministry of Industries, 2007). SME policy addresses the issues of human resource management like inadequate education and poor training & development infrastructure.
SMEs working in Pakistan are facing many managerial issues, as evident from the above discussion. The scientific research will help the SMEs to adopt the practices that create a best fit in the given resources. The available knowledge of human resource management in SME is fragmented; practices are different between the large corporates and small enterprises (Andersen, 2003). This study will not only provide the scientific reason to adopt the formal HRM principles but also help the practitioner to adopt such practices that can play a contributing role for the achievement of objective of their businesses.
HRM and Pakistan's SMEs
This era of globalization has open new horizon for businesses, however, for small and medium enterprises, this environment is highly challenging and uncertain. Pakistan's SMEs are also the affected of the recent economic crisis. As elsewhere, escalating inflation has also impact SMEs sector of Pakistan. Workforce working in SMEs is considered to play the pivotal role in the economic growth. In case of Pakistan, human resources working in SMEs sector are paid less with poor health care facilities. Annual growth in salary of workforce of SME sector is not competitive to the escalating inflation which creates a huge gap and makes them less productive. Slightly better compensation encourages employees to switch from one job to another which causes' high turnover rate (Rehman, 2011). This trend impacts the overall economic situation of a developing country.
It is therefore observed that retention is one of the major problems in small and medium size industries. Slightly better emoluments provide good reasons to an employee to switch over from one organisation to another organisation. Growth in salary in SME sector is far behind the growth in inflation which is a source of depression and made them less productive at their workplace. This situation has precipitated negative impact on the overall economy of Pakistan. How can we reverse the situation? Organisational ability to practice HR function and retain human capital is critical for future survival. Thus, HR policies and practices may provide solution to this problem.
In Pakistan SMEs have a significant contribution in the total GDP of Pakistan, according to SMEDA and Economic survey reports, the share in the annual GDP is 40% likewise SMEs generating significant employment opportunities for skilled workers and entrepreneurs. Small and medium scale firms represent nearly 90% of all the enterprises in Pakistan and employ 80% of the non-agricultural labour force. These figures indicate the potential and further growth in this sector.
Recently a study has been conducted to specifically investigate the way in which SMEs implement and practice HRM activities to ensure the organisation success. The results of the study revealed that the equation of theory and practice is not balanced in Pakistan.
Pakistani SMEs are far behind the philosophies and practices of HRM. The SMEs are not utilising their human resource strategically and coherently. Further, management ignores organisation's most valued assets, that is, the workforce. This ignorance causes the job dissatisfaction in employees and ultimately affects the organisational performance. However, employees perform the essential tasks within the organisation, and organisational human resource systems are designed to support and manage this human capital. But the bitter truth is that, SMEs owners are taking the HR system as an additional expense. A small sample survey from one of the industrial zone in Karachi reveals that HR functions are practices informally in organisations. They do not have HRM policy manual. They are reluctant to establish a separate, autonomous, and functional HR department which is responsible for performing HR practices. Why they have fear to do so?
Illiteracy and family-based conventional methods may be the obstacles to new contemporary approaches in business. However the new breed of entrepreneurs may bring radical changes in business operations through their formal education, adaptive and flexible behaviours. They are well equipped to meet the changes in business environment. Likewise, SMEs owners' outlook shall be changed when they realised the significance of the implementation of HR functions and consider them as an investment rather expense, which in return enhance the organisational performance. It is further observed that the existing HR structure in SMEs is fragile and still there is a room for improvement.
Several paths may have been followed to gain competitive advantage in SMEs but best HRM practices ensure the viability of improvement. HR practices such as recruitment, training, compensation and evaluation are the key factors for success. Therefore, it is clear that SMEs success is linked with HRM practices. Moreover, several researches provided evidence the positive relationship between HRM practices and the increase in economic productivity of organisation. I think the adoption of organisational strategies needs to be supported by specific forms of HRM practice.
The central role of HR practices in shaping organisational performance especially in SME sector should not been ignored in current economic scenario of Pakistan. However, affects of individual HR practices are also contingent on other HR practices and therefore require an approach to those practices working as a set or "bundle" rather than independently. What I mean by this is synergy.
SMEs owners and HR managers should focus on implementing HRM practices to enhance the organisational performance in terms of productivity and market share. Successful HR system also helps to integrate the other organisational functions in less time. This integration will open long term investment opportunities through organisational strategy. The last but not the least, appropriate strategies at national level may enable the SME sector to boost the national economy (Rehman, 2011).
Pharmaceutical Sector of Pakistan
HRM in pharmaceutical sector of Pakistan