does job security help innovation in small firms?: commitment-based human resource practice and...

The Journal of Small Business Innovation 2014 17(2), pp. 43-60

Does Job Security Help Innovation in Small Firms?: Commitment-Based Human Resource Practice and Innovation in Software Firms in Seoul, Koreaby Namji Jung*

The primary goal of this study is to elaborate and test of how commitment-based HR practices affect the innovative capacity of firms. While a remarkable wealth of knowledge has been accumulated on what accounts for small firm innovation including various internal and external factors, a void still remains in our understanding on how a firm’s human resource management efforts make a difference. This study attempts to fill this hole in the literature by empirically testing which human resource practices are positively related to the innovative capacity of entrepreneurial high technology firms. In particular, this research is interested in the effects of job security on the innovative capacity because retaining knowledgeable and skilled workers is critical, for an entrepreneurial firm’s success. In doing so, this study builds its theoretical framework on commitment-based human resource management. Using data from a survey of small-sized software development firms in Seoul conducted by Korea Internal Promotion Agency in 2004, this study performs a logistic regression to determine predictors of innovation in small software firms. The results show that the existence of high skilled workers (high human capital); and job security for managers (measured by the percentage of full time managers) and non-software technicians are highly correlated with innovation. Job security for software technicians is not significant. These results reflect the reality that under highly competitive markets and rapidly changing technological environments, the existence of committed managers who can identify new marketable products and the right time to launch them on the market might be more critical than technological prowess itself. However, other HR incentives such as high compensation (measured by annuated average wage), off-site training and prime office location, which are typically positively related to a large firm perform-ance, are not significantly related to innovation. This study contributes to the small firm innovation related literature by confirming that job security is positively related to the innovative capacity of a firm. This study also demonstrates how a contextualized approach helps understanding the specific conditions that govern the effects of HR practices.

Keywords : Entrepreneurial Small Firms, Commitment-Based Human Resource Practices, Job Security, Innovation, Software Industry

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* Visiting Research Fellow, Seoul National University(e-mail: [email protected])

44 THE JOURNAL OF SMALL BUSINESS INNOVATION

Ⅰ. IntroductionAn ability to continuously innovate is

critical for survival and success of firms (Damanpour, 1991) as well as for economic development at any geographical scale. The capacity to develop new products is all the more important to high-tech driven, small entrepreneurial firms, as their primary role in the economy is introducing new products to the market (cite those bad guys). Indeed, small entrepreneurial firms play significant roles as game changers in emerging tech-nology and product development.

Consequently, studies on small firms have investigated deeply to understand small firm innovation. A broad range of elements has been considered, including the effects of a CEO’s personality, skill stock, R&D inten-sity, networking intensity, geographical proxi-mity advantages, and employee union mem-bership (Bourgrain and Haudeville, 2002; Hutchinson and Quintas, 2008; De Jong and Vermeulen, 2006; Romijin and Albaladejo, 2002).

While these studies have deepened and widened our understanding of internal and external factors of innovation for small firms, a void still remains in our understanding of how human resource management (HRM) efforts contribute in the small firm context, with only a small body of research suggesting that human resource management (HRM) may affect the success of small and emerging firms (Burton and O’Reilly, 2004; Welbourne and Andrews, 1996).

This study aims to fill the gap in the literature by exploring what combinations of HRM practices have positive effects on product innovation in small firms. A partic-ular interest is paid to the effects of job security on innovative capacity. Retaining knowledgeable and skilled workers is crit-ical for improving firm performance. It is all the more true for small entrepreneurial firms whose main attribute distinguishing them from profit seeking small businesses is their ability to develop new products and introduce them to the market (Schumpeter, 1943; Barber, Wesson, Roberson, and Taylor,

1999; Jung, 2007). Tension arises because small firms have fewer financial and repu-tational resources to hire and retain skilled employees than do their larger counterparts. Facing this challenging environment, will job security still bring positive effects to innovative capacity of small entrepreneurial firms?

Delving into these areas, this study looks at entrepreneurial small software firms in a cluster setting in Seoul, South Korea. Consequentially, this study places its cen-tral interest in product innovation, as dis-tinct from process innovation or organiza-tional innovation. This study builds its the-oretical ground on strategic human resource management (SHRM) literature which ar-gues that employees are an important asset of, rather than a cost to, the firm. Indeed, knowledgeable and skilled employees are primary source from which firms derive their competitive advantage in rapidly chan-ging technology and knowledge environ-ment (Barney, 1991).

However, in applying SHRM principles to small entrepreneurial software firms in South Korea, a contextualized approach is required in order to bridge the chasm bet-ween theories and the case under observa-tion. Two sources of the chasm can be iden-tified: industry sectoral and institutional di-fferences. Most of the empirical evidence of SHRM has been collected from large es-tablished manufacturing firms albeit the li-terature is currently being diversifying. What works for large manufacturing firms might not work in the same way for small high- tech firms. Given that even among small firms the determinants of innovation vary across industry sectors (Freel, 2002), the chances that a seemingly same HR practice will bring dramatically different effects are highly likely.

In the same vein, one should consider differences in labor market dynamics and employment relations that are external to an individual firm’s authority. Firms’ HRM are not independent of social, political or institutional conditions surrounding them. Thus the causal mechanisms established in

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one region might dramatically change in another (Kim and Wright, 2010). Failing to understand these aspects and to reflect them in data analysis and the interpretation of findings will leave a greater room for errors.

In order to perform a context specific analysis, this study employs two strategies. Using an industry-sector based approach will partially reconcile the potential problem. In a sector like software development, where the production process is marked by a com-plex interaction of technology, employee talent and creativity and the organization’s rational decision making, a human resource practice may carry different meanings and implications than the same practices in ma-nufacturing or consumer service industries.

By focusing on a specific industry sector, this paper can also bring out the regional characteristics of software development en-trepreneurial firms in Seoul and interpret the implication of their HRM practices. This is accomplished by building hypotheses on voices of practitioners from the field to identify what HR practices are adopted and considered important, rather than being gui-ded purely by existing theory. This is done by using both in-depth interview data and the results of descriptive statistics from sur-vey data. For example, guided by the in- depth interview data, I hypothesize that job security is an important HR practice. This approach is elaborated in the literature re-view and in the context of building hypo-theses. The contextualization also plays an important part in interpreting the results and drawing conclusions and implications from them.

The clarification of important definitions is in order. Small firms in this study are defined as organizations with less than 20 employees.1) The term software industry used in this study indicates varied sub-categories including system integration, packaged soft-ware, embedded software, mobile applica-

1) Definition of small firms depends on the country and how the study defines them. A small enterprise is typically defined as an enterprise which employs fewer than 50 persons.

tions, and digital content. This work requires not only computer coding but also cultural understanding and skills such as web de-sign and content development. The use of software can extend well beyond CD-ROMs or the internet, as it is backed up by rapid technological developments, such as post- computer, home automation, interactive tele-vision, and digital mobile broadcasting.

The rest of this paper is constructed as follows. In the sections below, I first discuss the void in the literature left because the HR practices of small-firms are significantly un-derstudied. Next, this paper reviews commit-ment-based HRM as a theoretical framework for the study and discusses how one can trans-late commitment-based HRM into a small firm setting and how to reflect local and re-gional conditions to understand why small en-trepreneurial software firms in Seoul adopt certain HR practices and what they mean. I also elaborate my hypotheses in this section. Data and methods for logistic analysis then follow. Findings from the analysis are further reported in results and their theoretical and practical implications are discussed in the conclusion and discussion section.

Ⅱ. Theories and Hypotheses

2.1 Knowledge Worker Mobility, Innovation, and Transaction- Based HRM

By the virtue of their small size, absence of bureaucracy, and less rigid decision-ma-king, small firms are often quicker than large firms to respond to new opportunities and threats (Carlsson, 1999). However, small size also comes with its own short-coming-a lack of internal resources. To make up for the shortage, small technology firms tend to ag-glomerate spatially with peer firms. Spatial agglomeration allows pooling technical ex-pertise and skilled labor and socializing the risk of venturing into new sectors (Porter, 1990). Agglomeration brings benefits that go beyond reducing the costs of doing business. Building on Granovetter’s embeddedness con-cept, scholars have argued that knowledge transfer and learning is embedded in social


relations which are inherently bound by dis-tance or physical space. While some sets of knowledge are easily codified and shared (explicit knowledge), there are always ele-ments of our knowledge that are not readily expressed and transferred (tacit knowledge). This tacit dimension of knowledge is best shared and transmitted through face-to-face interactions (Polanyi, 1958). Thus, the know-ledge-producing sources must be geographi-cally proximate in order for learning to occur (Storper, 1997; Capello and Faggian, 2005).

In this framework, job hopping among knowledge workers is a critical mechanism for spreading and sharing tacit knowledge. Mobile workers are carriers of tacit know-ledge and are willing to share what they know in a new work place when proper monetary compensation is offered. The mo-bility (job hopping) of knowledge workers is easier and better facilitated in a setting where geographical agglomeration reduces job search friction, such as getting infor-mation and traveling for job interviews. Thus, a cluster setting provides incentives for workers to pursue more industry- speci-fic knowledge (Freedman, 2008). An epi-tome of this practice is Silicon Valley.

However, what is less discussed is the end of the story: once those mobile workers are hired, then what happens inside the firm? Under what conditions will the newly hired workers make a helpful addition? What if knowledgeable and skilled workers depart the firm in search of better compensation or portfolio management before making any meaningful contribution to the firm? How does a departure affect the team dynamics in a small entrepreneurial firm the void left by one or two core employees is probably more pronounced than in larger organiza-tions? These are not merely hypothetical questions; they are actual dilemmas many entrepreneurial small firms face nowadays. Indeed, retaining skill and talent is critical for small entrepreneurial firms. In order to shed light on this black box, this paper borrows the theoretical framework from the commit-ment- based human resource practice liter-ature, which will be discussed further in the next section.

2.2 Commitment-Based HRM Commitment-based HRM (CHRM) is a

branch of strategic HRM (SHRM). This ap-proach holds that effective HRM systems can facilitate employee behaviors important to honing the competitive edge of a firm. Although the specific HR practices applied vary across studies, companies following a commitment-based approach implement prac-tices that collectively demonstrate a long- term investment in their employees (Tsui, Pearch, Porter, and Tripoli, 1997). Their ef-forts generally include employee selection practices focused on creating internal labor markets and assessing fit to the company rather than to specific job requirements; com-pensation practices that focus employee mo-tivation on ground and organizational perfor-mance indicators; and training programs and performance appraisals that emphasize long- term growth, team building, and the develop-ment of firm-specific knowledge (Arthur, 1992; Tsui et al., 1997).

The importance of SHRM lies in the fact that it considers employees an important as-set of, rather than a cost to, the firm. The conventional human resource management perspective views employees as a cost to the firm and strives to forge the firm’s com-petitive advantage by reducing labor cost. This approach has been prominent in the Fordist manufacturing production system, where the work process is broken down into minimal units in which workers can perform their tasks with minimal skill sets. This made workers easily replaceable at low cost. How-ever, many have contended that in the know-ledge-based economy, the role of a skilled and motivated workforce has become more prominent (Pfeffer, 1994). No longer a cost, knowledgeable and skilled employees are primary source from which firms derive their competitive advantage in rapidly changing technology and knowledge environment (Barney, 1991). It remains to be seen whether this per-spective is also beneficial for entrepreneurial small firms. Most of the wealth of knowledge accumulated on the effects of commitment- based human resource practices has come

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from studies focused on large and established firms. Many of the arguments are based on evidence from the manufacturing sector where firms compete primarily on quality and cost. What works for large firms in manufacturing industry might not carry an equally signi-ficant effect in small entrepreneurial firms, which have very different resource and or-ganization structures. The same sort of HR practices may lead to vastly different organi-zational outcomes, depending on the organi-zational practice in small entrepreneurial firms.

2.3 Commitment-Based HRM in the SME context

Translating CHRM into the context of high-technology entrepreneurial firms’ is a problematic task that has been discussed by previous studies. First, the core employees in high technology companies are highly skilled professionals who are distinctive from the ‘organizational men’ of the manufactu-ring era. Skilled and knowledgeable profe-ssionals value their autonomy over sharing and conforming to organizational values; they also regard their professional identity as more salient than commitment to the organiza-tion. Thus organizational efforts to increase their attachment to the firm might be atte-nuated (Friedson, 1986).

Second, as already discussed, the main di-fference between small ‘entrepreneurial’ firms and small business is that the latter seeks to introduce new product or services to the market. Existing literature on small firm in-novation also emphasizes rapid product de-velopment, which is inconsistent with a high-commitment work system that empha-sizes information sharing and teamwork.

While these arguments are partially valid, there are some signs that suggest that re- evaluation is needed. New empirical evidence suggests that small entrepreneurial firms ac-tively adopt human resource practices that are aligned with commitment-based HRM. For instance, Jung (2007) investigated soft-ware firms in Seoul and found that, instead

of hiring knowledge workers with industry specific skills, they strategically hire emplo-yees with more general skills, higher educa-tional background and good fit to the firm. Despite their small size and short existence, these firms show high self-reliability and on average, reinvest 30% of net profits into re-search and development.

In her study, survey data analyses and in- depth interviews showed that, in most cases, these small software developing firms uti-lize internal resources in the development of new technology. These digital content crea-tors handle most of the production process in-house and rely on internal labor pools. The firms interviewed stated that they rely on internal resources in order to keep novel ideas from their competitors. In order to es-tablish their internal labor pool, these firms rely on rigorous hiring standards. As a re-sult, about 12% of employees have a mas-ter’s degree, 82% have a bachelor’s, and 4% graduated from high school. Together with selective hiring, software firms also prac-tice incentive-based HR practices such as job security and high compensation. 94% of employees are full-time on average (much higher than the average rate of fulltime wor-kers around 30% from other studies). Com-pared to other DC firms in South Korea, software firms in Seoul pay higher wages (13.8K won in Seoul compared to 12.3K won in other parts in Korea). These findings are consistent with argument from studies on SME performance improvement have found that human capital including scientists and en-gineers is positively correlated with firm per-formance (Romijn and Albeladejo, 2002).

Why do these small entrepreneurial firms strive to cultivate internal capacity and long-term employment relations? Small en-trepreneurial firms operating in newly emer-ging technology and industry fields com-monly face unprecedentedly heightened uncer-tainty. Developing and introducing a mar-ketable new product in a constantly chang-ing technology and market environment is always associated with a high level of un-certainty and risk of failure. The fierce com-


petition and dynamically expanding market add another layer of uncertainty because un-der intense competition following already known formulas and generating similar pro-ducts is not the way to get ahead of others. Thus small entrepreneurial firms are pres-sured to explore outside of the box and push the envelope.

In such a turbulent knowledge environ-ment, untried and new combinations of ideas are important, and finding them requires ex-ploration, which often involves heuristic pro-cesses. Exploration of new knowledge re-quires that a firm have internal capacity, such as knowledge stock, and a social environment that allows, facilitates and motivates workers to engage in team work, idea sharing and creation new knowledge (March, 1991).

2.4 Commitment-Based HRM and a Small Entrepreneurial Firm’s Innovation

Indeed, the primary asset of a high-tech small firm is the knowledge of its talented and skilled employees. However, from the CHRM perspective, the level of human ca-pital of a firm is not something given in the organization but the results of strategic and rigorous hiring. In the hiring process, two aspects are considered important. One is to hire someone with ability to learn con-tinuously and adapt. For this, selecting can-didates with higher general knowledge in-stead of specific industry skills can be achi-eved by acquiring employees with high edu-cation attainment. Second is to find talented people who are a good fit to the organi-zation so that they will stay in the organi-zation longer. Education helps individuals improve their understanding of what they know, more accurately predict outcomes, bet-ter manage time and resources, and monitor results (Glaser, 1984). The survey data used for this study does not have indicators for how firms define the employees’ fit to the firm and how they reflect that perspective in the hiring process. Due to this data limi-tation, this study uses the high educational

attainment of employees as an indicator of rigorous hiring.

There is one more aspect to consider. In the newly emerging industry and rapidly changing technology sector, formal educa-tional attainment is not an exact measure of an individual’s capacity. Partly because the industry sector is young and even col-lege-level education generates only entry- level workers. Workers obtain much impor-tant information and knowledge through work experience. In the early stage of the soft-ware industry, the majority of workers with higher qualifications are self-taught through personal devotion to computer-related work and have developed their passions into ca-reers as software developers (Jung, 2007). Workers who have extensive work experi-ence in an industry will have greater ex-pertise and thus more relevant knowledge to bring to the exchange and combination process. In addition, more experienced wor-kers have the ability to locate knowledge needed for problem solving faster than would novices (Smith, Collins, and Clark, 2005). In this regard, work experience in the same or similar industry also contributes to the firm’s internal knowledge stock.

Hypothesis 1: Rigorous hiring practice that aim to procure high educa-tional attainment in combina-tion with experience will be positively related to innova-tive capacity of a firm.

Many studies in CHRM have shown that a certain set of HR practices induce an or-ganizational social environment by motiva-ting employee to contribute to a firm’s com-petitive advantage (Bowen and Ostroff, 2004; Collins and Clark, 2003) and act in the best interest of their firm rather than only in their individual interest (Rousseau, 1995; Tsui et al., 1995; Batt, 2002). The incentive-based HR practices that are known for enhancing motivation and commitment include incen-tive compensation, job training, work de-sign, and competitive pay (Huselid, 1995;

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Pfeffer, 1998).Extensive training and development pro-

grams can be an important knowledge ac-quisition mechanism. High-tech firms in-vest heavily in training and development, particularly in technological training and job- specific skills. When properly organized, trai-ning programs are important vehicles for promoting collaboration and knowledge ex-change (Lyles and Salk, 1996; Lane, Salk, and Lyles, 2001). Another strategy is to pay close to, or as much as, what large firms pay. Pay level is an important measure of the human resource incentives (Batt, 2002). Empirical results testing the effects of pay level and training are consistently show that they are positively related to the firm per-formance improvement.

For small firms, location may play an im-portant role in attracting and maintaining knowledge workers. A ‘prime location, such as the downtown San Francisco or Manhat-tan in New York City, not only provides many amenities that appeal to young wor-kers and satisfy their diverse cultural and life style preferences, but also provides name value. People associate their identity with the symbolic image of the place. Huber (2011) reports that individuals and firms ben-efit from being related to Cambridge as the global ‘brand’ associated with Cambridge in-dicates excellence in science and technology. The globally visible brand name may elicit better respect or a more positive image to-wards a firm and individuals working for a firm in a prime location. Equally, prime urban locations or industry clusters also bring bene-fits to workers through a larger and diverse labor market. Agglomeration either of firms in similar industries or in diverse urban in-dustry sectors allows workers to enjoy the benefit of higher job access, which in turn helps them to gain more skills and maintain their career portfolio. Therefore, firms, in particular small start-ups, are more con-scious about their locations than large corpo-rations where the firm itself carries signi-ficant name value.

Hypothesis 2: Firms with extensive train-ing, competitive compensa-tion, and good location will be more innovative.

The existence of knowledge stock itself does not automatically produce grants the creation of new ideas, new knowledge and technology. While the knowledge stock it-self is an important raw material for new idea development, knowledge exchange and combination are critical processes in gene-rating new knowledge. In the contemporary technological environment where conver-gence is emphasized more than ever before, innovation is rarely the work of genius; ra-ther it is a profoundly social process.

Such knowledge exchange, combination, and learning require longer-term relation-ships among organizational members. How-ever, small software development firms often face difficulties retaining skilled employees in the volatile labor market. Thus retaining key organizational members not only allows the firm to better use its human capital, it also reduces the significant costs associated with replacing employees. To cope with the shortage of well-trained and experienced wor-kers and the competition among firms over skilled workers, firms adopt a few strate-gies. One way to retain firm-specific wor-kers is providing job security by hiring them fulltime (Jung, 2007). This strategy is con-sonant with the commitment-based HR prac-tice where job security is satisfaction with the work and trust between employees and employers (Huselid, 1995; Pfeffer, 1998).

Despite the popular attention to job se-curity as a practice to increase employees’ attachment to the firm, the reality of the effect remains uncertain. Some studies find no significant effects of job security on firm performance. For instance, Chow and Gong (2010) tested the effect of retention on firm performance improvement in high-tech firms and found no significant effect of retention. They provide two explanations for this re-sult. First, because Chinese high-tech firms also provide a high level of job security, the effects of retention might be reduced.


Second, the commitment provided through retention guarantees ironically might reduce the motivation of workers to work hard to enhance firm performance. The adoption of CHRM will not automatically lead to posi-tive organizational outcomes unless emplo-yees are conditioned to trust management. Thus if employees perceive that the man-agement’s commitment to job security is not trustworthy, they may not provide innova-tive ideas because they fear the possibility that enhanced productivity will lead to a reduction of the workforce. In this context, depending on the national and regional em-ployment-relations, employees might not in-terpret job security a sign of genuine com-mitment to employees when the tradition of centralized planning has required the firms to provide long-term job security.

This brings us to a question of how CHRM, especially job security, is accepted in soft-ware industry in South Korea. Korean em-ployment relations are traditionally charac-terized by low trust-based employment re-lations in general, especially in manufactur-ing sectors. Under this condition, any com-mitment will be devalued since as the mu-tual trust between workers and managers is weak. The lack of trust in employees hin-ders companies from fully implementing pro-gressive work arrangements, such as com-mitment-based human resource practices (Kim and Wright, 2010).

However, unlike this traditional employ-ment relationship in South Korea, the one de-veloped in the software industry seems very distinctive as can be seen in Jung’s interview data: employers treat knowledge employees as an important asset to the firm instead of a cost, as they are the source of knowledge and new ideas which is critical for new product development.

At the employees’ end, under a liberalized labor market in knowledge-based and high- tech industry sectors, where the long-term em-ployment provision no longer exists, workers are under constant pressure to change jobs as a way to manage their career portfolio and to obtain necessary skills. Here, a secure job with various benefit and compensations is probably positively received by employees.

Job security also allows workers to explore without fear of appearing irresponsible and to suggest more ideas, which is again beneficial for the firm. This study, following existing studies (Batt, 2002) will measure the effect of job security by the proportion of fulltime wor-kers in firms.

Hypothesis 3: Providing job security will be positively related to the innovative capacity of a firm.

Lastly, it is possible to assume that em-ploying all of these commitment-based HR practice will have synergic effect and will be positively related to the innovative ca-pacity of a firm.

Hypothesis 4: The combination of selective hiring, incentive-based HR prac-tice, and job security will be positively related to the inno-vative capacity of a firm.

Ⅲ. Data and Methods

3.1 SamplesSamples are drawn from a national sur-

vey2) of software firms conducted by the Korea IT Industry Promotion Agency (KIPA) a subsidiary organization of the Ministry of Information and Communication (as of 2004), in 2004. For the purpose of this analysis, I chose 353 firms located within six digital content clusters in Seoul, Korea. I used this data because the survey contains informa-tion about the characteristics and HR practi-ces of digital content creators in Seoul3) that coincided nicely with my study goal. The KIPA survey4) data analysis included 358

2) KIPA is a subsidiary organization of Ministry of Information and Communication (as of 2004).

3) Such as employment status, interfirm network, routes for information exchange, and employee education. For a complete set of categories of questions, refer to Appendix A.

4) The KIPA survey was conducted based on firms (not establishments). The questionnaire questions are listed in Appendix A.

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small- to medium-sized digital industry re-lated firms. Using a random sampling meth-od, 3,187 firms were selected as a sample population for Seoul, a figure that represents 38% of the total population of firms in Seoul. Among those 3,187 surveys sent to the se-lected firms, 443 surveys were returned pro-perly. Of unreturned surveys, 1,086 were re-turned with notations that the firms had closed or with markings that indicated a de-livery failure. Another 452 firms declined to participate in the survey. Another 103 sur-vey attempts failed for unknown reasons. Additionally, the remaining surveys failed due to a mailing address error. Among these 443 responses, 358 responses fell within the boundaries of the six digital content industry clusters in Seoul.

3.2 Dealing with Missing ValuesThis study uses a combination of list wise

deletion and the multiple missing data im-putation techniques. There has been an in-creasing acknowledgment of the importance of dealing with missing values because there may be valuable information in the data that are missing. As most statistical procedures rely on complete-data methods of analysis, keeping the missing values will likely cause a biased result. Deleting records with miss-ing values (list wise deletion) has been a common practice for dealing with missing values. It is simple and can be a robust me-thod, if the deletion of cases does not sig-nificantly lower the sample size. In certain cases, deleting cases will decrease sample size, which will in turn decrease the power of the analysis. In this study, among the 358 respondents, five cases had many miss-ing values in variables that I included in my analysis. I sought any common characte-ristics among these five cases and found that these firms are not closely correlated in terms of such firm characteristics as age, size, number of employees, and percentage of R&D investments. Therefore, I ruled out the possibility that there was a pattern to the missing data among these five cases. After eliminating the five cases, the pattern of missing data became much simpler; mi-

ssing values were concentrated in one vari-able (average wage).

From this point, I used the multiple impu-tation (MI) method embedded in the SPSS. First, the SPSS MI method determines whe-ther the manner in which missing data are distributed (missingness) is random or not: the process determined that the missingness of the data was not random. It suggests that deletion of the remaining cases will skew the analysis. Therefore, I used multiple mis-sing value imputation to generate a likely estimate of missing values drawing from the predictive distribution of missing values gi-ven the observed data. Other techniques for missing data imputation have serious short-comings. For instance, the mean value substitution will bias the variance and cova-riance toward zero. The multiple missing value imputation method yielded imputa-tions for the five sets of missing value.

3.3 Variables3.3.1 Dependent Variable: Innovativeness

(Own software development)The outcome variable is the firm’s prod-

uct innovation capacity. It is measured by their having developed a commercial soft-ware product. As discusses at the beginning of this paper, there are different types of innovation including product innovation, pro-cess innovation and organizational innova-tion. This paper pays attention to product innovation.

Product innovation can be explained as an introduction of a new product or a quali-tative change in an existing product (Ettlie, Bridges, and O’keefe, 1984; Smith, Collins, and Clark, 2005). Developing an initial pro-duct with commercial value is a critical thre-shold for entrepreneurial firms in determi-ning their survival and success because many start-ups pass the first one or two years without successfully developing their own software product. Given that average of firms used in this research is 1.37 years old, ha-ving developed their own software product is a corner stone of salient performance. In that sense, operational definition of product


innovation as having developed their own commercial software product seems appro-priate.

This variable is calculated from the sur-vey question that asks whether the firm has developed its own software. If the answer is yes then to be put in as 1 and no is 0. This variable shows a dyadic distribution which helps to use this binary variable for the logistic regression.

3.3.2 Independent VariableThe effect of human resource practices

is in many cases tested in a form of index to capture the synergic effects of various CHRM. The use of additive indexes rests on the assumption that high-involvement practices are additive in relation to perform-ance and different practices can be sub-stituted for one another to obtain similar ef-fects (Delery, 1998). However, as a prelimi-nary study that grounds its theory on liter-ature built on large corporation’s context, this research tests the effect of individual practice. This way, although it would not tell us exactly which kind of CHRM is posi-tively related to innovation, we would know the effect of individual practice. For the same reason, the job security variable was separately entered into the model.

Main effectsRigorous hiringFor the purpose of this research, I defined

a stock of organizational internal knowledge and skill as the combination of years of in-dustry experience and education of core wor-kers. This paper considers that experience and education together comprise a “stock” because they represent the amount of knowl-edge in a firm at a certain point in time (Batt, 2002; Smith, Collins, and Clark, 2005). The survey question asks the respondents to report the number of entry-level, mid-dle-level, and high-level workers among the entire pool of full time workers.

In this survey, the definition of high skilled workers is equivalent to the follo-wing categories: 1) a person with a doctoral

degree or a person with a master’s degree and more than 6 years of experience after the degree was obtained, 2) a person with bachelor’s degree and more than 9 years of experience after the degree, 3) a person with a community college diploma and more than 12 years of experience after the degree, and 4) a person with high school graduation and more than 15 years of experience after graduation. By this definition, the skill level already contains both the level of educa-tional attainment and skill dexterity. Adding educational attainment level will cause auto- correlation thus eliminated. The percentage of high skilled workers is calculated by taking the proportion of the respondents’ report of the number of high skilled wor-kers from the firm’s full time workers.

The percentage of entry-level workers and middle level workers are not significantly correlated with the response variable. These two groups, as an aggregate, serve as the reference level. Since the measure of skill is a combination of both of the educational attainment and professional experience, se-parate educational attainment variables are again not included in the model to avoid multicollinearity.

HR Incentives∙ Compensation In this survey, compensation is inclusive

of the annual base pay (wage) and any other types of compensations and benefits inclu-ding stock options, health insurance, scho-larship, and clothing and food expenses. Thus, this variable captures diverse types of compensations from that are typical to small start-ups (for instance, stock options) and more mature firms (for instance, retirement funds, scholarships and other benefits). The Compensation variable is calculated by ta-king a natural logarithm of the median annual wage of a firm.

∙ Off site trainingOngoing training may indicate a firm’s

commitment to development and continuous growth of employees (Batt, 2002). This study

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measures whether the firm provides off site training at the firm’s expense. For small firms, holding internal training program might not be cost-efficient or the best way to ex-pose their employees to new knowledge and skills. This off site training can be a proxy for extensive training. This is a dummy variable.

∙ Prime office locationConsistent with my argument, I measure

prime location by looking at whether the firm is located in the famous high-technology industry cluster, namely Teheran Valley. As there is officially designated spatial boun-dary of Teheran Valley, this study uses Gang-nam District as a rough geographical area for Teheran Valley. Thus, software devel-opment firms located in Gangnam District are considered to be located in prime area.

∙ Job securityJob security is the probability that an in-

dividual will keep his/her job. Job security is difficult to measure directly. Contingent jobs are structured to last only a limited period which is associated with high inse-curity. Conversely, full time hiring indicates that the position is important, and thus secure. Following Batt (2002), I measure job security by the percentage of the core workforce that was permanent and full-time, as opposed to part-time or contingent.

The full time workers in this survey are defined as those who work for the firm on regular basis under employment contracts that last longer than one year or who works for the firm longer than one month and re-ceive wage instead of part time compensa-tion but without an employment contract. The respondents report the number of full time workers for management, sales, tech-nicians (or software programmers), and per-sonnel in non-software related areas. The percentage of full time managers, techni-cians, and non-software personnel are com-puted based on the respondents’ answers. The percentage of full time sales people serves as the reference group.

ControlsFirms’ characteristicsFirms’ characteristics are measured with se-

veral criteria including age, number of wor-kers, the amount of total sales. The firm age variable is the natural logarithm of age. The total sales variable is also transformed into a natural logarithm variable. The number of workers includes both full time and part time workers.

Market segmentsDepending on a firm’s main product, labor

requirements and HR practices might differ. For instance, firms in lower end software development or system integration operate on relatively standardized knowledge com-pared to new software development for cut-ting edge mobile phone operations or online social networks. Firms developing new services and software programs need to draw new knowledge and skill sets from broad range of area and sometimes need to make connec-tion among disciplines previously unrelated.

Three market segments are considered: em-bedded software, packaged software, and sys-tem integration. Embedded software includes various SW embedded in various applications for electronic appliances, mobile phone, com-munication and networking, storage, automo-bile, transportation, industrial automation, media/ broadcasting, entertainment, and medical appli-ances etc. Packaged software referes to system SW, new SW development related SW, applica-tions. Digital content includes educational con-tent, daily life, culture, and information, ga-ming, digital publication, and digitalized images. The system integration and management serves as the reference level.

Consumer segmentsRespondents were asked to provide the

proportion of consumer segment where their software products sales occur. Two consu-mer segments are considered in the modeling including corporate and public sectors. Indi-viduals and other segments serve as the refer-ence level. Many firms in Seoul report that their products are mostly geared towards for corporate customers (58%) and public sector customers (30%).

NAMJI JUNG 55

Table 2Results of Logistic Regression

Models Model 1 Model 2 Model 3 Model 4

Variables B P Odd Ratio B P Odd

Ratio B P Odd Ratio B P Odd

RatioLnFirm AgeLnTotal SalesCorporationsDigital ContentEmbedded SoftwarePackaged Software%High SkilledCompensationOffsite TrainingPrime location

1.503**

-0.299*

0.0050.038

-0.017*

-0.013*

0.036

0.0000.08

0.3870.1550.04

0.0180.074

4.4940.7421.0051.0390.9830.9871.037

1.507**

-0.3490.0060.034

-0.016*

-0.013*

0.253-0.448-0.85

00.0570.3310.1880.06

0.017

0.7640.4280.358

4.5110.7051.0061.0340.9850.987

1.2880.6390.427

1.514**

-0.2940.0070.031

-0.019*

-0.016*

0.0000.0910.2980.2340.0270.007

4.5430.7451.0071.0310.9820.984

1.496**

-0.3270.0060.035

-0.021*

-0.018*

0.051*

-0.661-0.615-1.042

0.0010.0940.3790.1830.0230.0040.0390.4920.2860.287

404640.7211.0061.0350.98

0.9821.0520.5160.5410.353

% Fulltime Technicians% Fulltime Managers% Fulltime nonSW

0.0280.0520.033

0.0520.0570.065

1.0291.0541.034

0.0250.062*

0.042*

0.090.0250.028

1.0261.0641.043

Intercept 2.208 0.062 9.099 2.438 0.418 11.446 -0.108 0.948 0.897 2.354 0.504 10.524

N = 222, †P < 0.1 level (2-tailed), *P < 0.05 level (2-tailed), **P < 0.01 level (2-tailed).

Ⅳ. RESULTS: What Distinguishes the More Innovative Firms in the Software Industry in Seoul?

Table 1 provides the means, standard de-viations, and ‘pairwise’ correlations of vari-ables. The responding firms’ average age is 1.37 years. 95% of responding firms are currently located in Gangnam District, the prime location for high-tech entrepreneurs. They also answered that approximately 13% of their employees are highly skilled5). Sur-veyed software firms hire almost 60% of their software technicians, 16% of manag-ers, and 10% of non-software technicians full time. One quarter of responding firms practice off-site training for their employ-ees at the firm’s expense.

Table 2 reports the results of logistic re-gression analyses in which a firm’s inno-vative capacity is the dependent variable. Model 1 shows the effect of the firm’s internal knowledge stock measured by the percentage

of high skilled employees (Hypothesis 1). Internal knowledge stock alone is marginally

significant (p < .10). This suggests that it is possible to predict that firms practicing selective hiring are likely more innovative in the context of software developing firms located in Seoul. Thus Model 1 supports the hypotheses 1 that the combination of educational attainment and job experience will be positively related to the innovative capacity of a firm.

The second equation, Model 2, tests the effects of incentive-based HR practices in-cluding off site training, wage, and the prime location (Hypothesis 2). None of these practi-ces are statistically significant. Thus Model 2 does not support the hypothesis 2 which states that this combination of incentive- based HR practice will be positively related to the innovative capacity of a firm.

Model 3 tests a set of variables measur-ing job security represented by the percent-age of full time technicians, full time man-agers, and full time non-software develop-ing technicians (Hypothesis 3). All these

three variables are marginally significant (p < .10) and partially support hypothesis 3

5) For the definition of high-skilled employees, see the explanation for the rigorous hiring variable in page 52.


that job security will be positively related to the innovative capacity of a firm.

Finally in model 4, knowledge stock, in-centive-based HR practices and job security related variables are put together (Hypothe-sis 4). In this model, the percentage of high skilled workers is significant as well as the percentage of full time managers and full time non software technicians. The percent-age of full time technicians is marginally significant. All three incentive-based HR practice variables are not significant. Thus this model partially supports the Hypo the-sis 4 that the combination of selective hi-ring, incentive-based HR practice, and job security will be positively related to the in-novative capacity of a firm.

V. Discussions and ConclusionsThe primary goal of this study was to

elaborate and test how commitment-based HR practices affect innovative capacity of small entrepreneurial firms. While there has been a substantial growth in the literature focusing on small firm innovation, the ef-fect of human resource practices has not been empirically tested. In particular, this research is interested in the effects of job security on innovative capacity because re-taining knowledgeable and skilled workers is critical for entrepreneurial firm’s success.

Logistic regressions results show that the rigorous hiring (measured by the percent-age of high skilled employees) is an im-portant predictor of innovative capacity of software developing firms in Seoul. This finding is in line with much of research in small firm innovation and commitment- based HR practices in high-tech fields that the existence of highly skilled employees is positively related to firm performance. From an organizational perspective, hiring well-educate and experienced employees is beneficial because experts have larger know-ledge bases and a better understanding of how to apply their knowledge than those of novice (Glaser, 1984) thus it is highly likely that their contribution to a new product de-velopment will be larger than novice.

The results also show that job security for managers (measured by the percentage of full time managers) and non-software technicians are highly correlated with inno-vative capacity of a firm. The significant effect of job security is consonant with the argument found in in-depth interviews with HR personnel in software firms in Seoul (Refer to page 8) that providing secure em-ployment is a strategy to retain skilled core employees in order to protect their on-going projects from derailing. These results also reflect the reality that under highly competi-tive markets and a rapidly changing techno-logical environment, the existence of de-voted managers who can identify new mar-ketable products and the right time to launch them on the market might be more critical than technological understanding itself.

Interesting comparison can be made bet-ween findings of this research and Chow and Gong’s research (2010) where no signi-ficant effect of retention to innovation found in high tech firms in China. The authors argued that because Chinese high-tech firms already provide high levels of job security, the effect of retention might be reduced. Unlike the situation in China, the labor mar-ket in high tech industries in Korea has been liberalized and secure employment is no longer institutionally supported. Thus fre-quent job churning has become a common practice for high-tech sector employees. Software firms in Seoul are challenged by a severe shortage of skilled employees and a quick turnover (in other words, high mo-bility). Under this condition, job security can be perceived as an extra favor from the employer thus delivering significant effects on firm performance (product innovation).

As such, a contextualized understanding on why a similar HR practice carries grea-tly different outcomes strengthens the val-idity of the findings in this research. High-lighting the contingent nature of the causal mechanism between HR practices and firm performance makes it clear that local in-stitutional or labor market conditions, while they are external to an individual firm’s in-

NAMJI JUNG 57

dependent decisions, can be powerful in de-termining the consequences of HR prac-tices. In other words, the contextualization provides that the phenomena found in soft-ware industry in Seoul are not something peculiar; rather the same outcome can be replicated when similar external conditions are met. In summary, job security will have much stronger and positive effects under a more trust-based employer-employee rela-tions regime and when the external labor market is volatile and competitive for buy-ers (employers).

In recent discussion on small firm in-novation, it has been contended that a sta-ble internal knowledge and skill pool is critical for a small entrepreneurial firm’s innovation. However, little has been known empirically about the relationship between a stable internal labor pool and innovative capacity. In this sense, this finding partially confirms the conjecture by showing that a firm providing secure employment practi-ces is likely to increase its innovative capacity.

This paper contributes to three different but related areas. First, it speaks to the small firm innovation literature by expand-ing the theoretical framework to a firm’s internal human resource practices which has received little attention. Importantly, this study provides preliminary evidence on the significance of internal organization, in particular the role of internal labor pools and job security, in innovation. These find-ings also help expand further the know-ledge accumulated in the area of human re-source practices for large and established organizations into studies on small and de-veloping firms.

Second, finding of this research also car-ry important implication both for business practices and policy measures to help small firm innovation. Confirming the positive re-lationship between job security and in-novative capacity of small entrepreneurial firms provides insights as follows: the lead-ers of creative industry firms, in particular the software industry, should carefully choose

between exploitation and exploration in ma-naging their creative workers and creative capacity, because these practices may shape the firms competitive advantage.

There are some policy implications too. Many localities have focused on attracting creative individuals to their localities and regions in order to create diversity and depth within the local creative pool. How-ever, this focus on individual creative peo-ple disguises the important role that already existing creative industry firms might carry in economic development. Existing firms can be an important source both of new jobs and, by changing their human resource practices, job stability.

This study also contributes to the litera-ture by providing contextualized strategies to interpreting localized phenomena in re-lation to the more universal theory of hu-man resource practice and innovation. By employing industry-sector based approach and first-hand information from the field, this research shows that institutional or cul-tural conditions may moderate the effecti-veness of seemingly similar human resource practice. Focused on one specific industry sector in a region, Seoul, South Korea, it was possible to rely on local knowledge and information in interpreting why certain HR practices do not have effects while oth-ers are positively related to innovation. Once we understand the external conditions that modify the effect of same HR practi-ces, then it is possible to construct environ-ment that will bring out positive implica-tions when a certain set of HR practices are applied.

Despite this positive finding, this study, like many others, has shortcomings. Other HR incentives such as high compensation (measured by annuated average wage), off- site training and prime office location, which are typically positively related to a large firm performance, are not significantly re-lated to innovation. This paper assumes that, from the psychological contract perspec-tive, the strong presence of large corpora-tions offering competitive wages may mean


that employees in small entrepreneurial firms do not perceive the high wage as a favor from their employers. Instead, they might perceive the high wage as a norm unless the wage level is substantially higher than that of large corporations. The prime office location is not significant either. I assume that it is because most firms (95%) are lo-cated in the same area thus reduced discrete effects. For emergent or rapidly changing industry sectors, off-site training may have marginal benefit as cutting edge informa-tion and knowledge are being generated through the heuristic process of new prod-uct development.

Nevertheless, findings from this study es-tablish the importance of stable internal la-bor pools and employee attachment to the firm, which has been neglected in small firm literature.

Received : 2014. 05. 16.Revised : 2014. 05. 29.

Accepted : 2014. 06. 10.

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* 서울대학교 농생명과학대학 농촌경제과 지역정보체계연구실 초빙연구원(e-mail: [email protected])

The Journal of Small Business Innovation 2014 17(2), pp. 43-60

일자리 안정성과 벤처기업의 혁신역량에 관한 연구: 서울시 소프트웨어 벤처기업 사례연구

정남지*

본 논문은 초기기업의 성장단계에서 가장 중요한 이슈 중의 하나인 내부 인력의 확보 및 유지가 기업의 혁신성과에 미치는 영향에 대한 실증적 연구를 수행하는 것을 목적으로 한다. 초기기업 내 우수인력의 유지와 혁신역량간의 관계에 대해서는 많은 정황적 증거가 제시 되었으나, 그 인과관계를 체계적으로 입증하는 실증 연구는 미비한 상태이다.

이에 본 연구는 2004년 소프트웨어진흥원에서 실시한 소프트웨어 분야 관련기업에 대한 설문조사 데이터를 바탕으로, 로지스틱 회귀분석을 통해 혁신역량이 뛰어난 기업과 그렇지 않은 기업을 구분하는 중요한 예측변수들을 추정하였다. 이때 초기기업의 제품혁신 역량을 종속변수로 하였으며, 이는 상업적으로 판매 가능한 기업의 자체적 소프트웨어 개발 여부로 판단하였다. 기업 내 지식기반(숙련된 소프트웨어분야 전문가의 비율), 내부 우수인력 유지를 위한 다양한 인력정책(일자리의 안정성, 직업교육, 임금수준 등)을 독립변수로 하였다. 일자리의 안정성은 기업 내 직종별 정규직의 비율로 측정하였다. 기업의 규모, 매출액, 소프트웨어 내 세부 업종(디지털콘텐츠, 패키지 소프트웨어, 시스템 통합 등), 주요시장의 종류(민간분야, 공공분야) 등을 제어변수로 설정하였다.

로지스틱 회귀분석 결과 기업 내 숙련된 전문가의 비율이 높을수록, 정규직 경영진의 비율이 높을수록 기업의 혁신역량이 높은 것으로 나타났다. 그러나 임금수준, 직업교육, 정규직 소프트웨어 개발자의 비율 등은 통계적으로 유의하지 않게 나타났다. 현장에서 실시한 심층면접조사 자료를 통해 볼 때, 정규직 소프트웨어 개발자가 아닌 경영진의 역할이 더 중요하게 부각되는 이유는 기술적 진보와 시장경쟁이 심한 소프트웨어 분야에서 ‘우수한 기술’뿐 아니라 어떤 상품을 어느 시점에 개발해서 시장에 내어 놓을 것인가를 판단할 수 있는 경영적 관점에서의 판단이 중요하게 작용하는 것을 반영한 것으로 해석된다.

주제어 : 일자리 안정성, 기업 인사정책, 벤처기업, 혁신 역량

NAMJI JUNG 61

Table 1Descriptive Statistics and Pairwise Correlations

Variables N Mean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 13 14

1. Innovativeness 222 0.88 0.33 1

2. LnFirm Age 222 1.37 0.60 .219** 1

3. LnTotal Sales 222 7.04 1.61 -.038 .403** 1

4. Packaged Software 222 39.66 43.81 -.142* -.015 -.002 1

5. Embedded Software 222 7.51 24.38 -.081 .016 .113 -.227** 1

6. Digital Content 222 7.04 23.13 .096 -.107 -.070 .044 .042 1

7. Corporations 222 58.96 37.81 -.011 -.161* .038 .028 .103 -.087 1

8. % High Skilled 222 12.61 17.94 .121 -.007 .005 -.095 .027 -.103 .018 1

9. Log of Average Wage 213 3.18 0.29 .041 .047 -.125 -.032 -.085 -.209** .011 .372** 1

10. Offsite Training 222 0.25 0.43 .054 .069 .074 .004 .044 -.009 -.145* .038 .87 1

11. Kangnam Area 222 0.95 0.23 .033 .042 .248** -.057 -.041 -.005 .106 .043 -.037 -.047 1

12. % Fulltime Technicians 222 59.92 24.29 .038 .035 .144* -.090 .038 -.016 .013 .303** .035 -.004 .109 1

13. % Fulltime Managers 222 15.52 14.28 .064 -.029 -.071 .023 -.039 .171* -.079 -.208** -.054 -.028 -.103 -.424** 1

14. % Fulltime nonsoftward 222 9.99 19.56 -.005 .029 -.040 .145* -.008 -.031 .026 -.177** -.052 .001 -.041 -.523** -.259** 1

N = 222, *P < 0.05 level (2-tailed), **P < 0.01 level (2-tailed).

does job security help innovation in small firms?: commitment-based human resource practice and...

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