Back to Basics – HRM and Innovation in Developing Countries

Development economics has failed to provide a policy framework that effectively initiated the catching up process in the developing world. As a consequence, technological innovation as driver behind growth and development has received increasing attention. This paper attempts to uncover the relationship between adept Human Resource Management and innovation generation in developing countries. I present a consistent theoretical framework that allows for the derivation of four key proposition about the effect of a Corporate Culture that encourages exploration, Rewarding Long-Term Success, excessive Termination and employee Empowerment on firm-level innovation generation. I then proceed to empirically test theoretical predictions, combining data form the World Bank Enterprise Survey and the Innovation Follow Up Survey for more than 23,000 enterprises in 18 developing countries. Empirical findings for product innovation perfectly mirror theoretical predictions. Estimation results suggest a strong and significant, positive relationship between my measures for Corporate Culture, Rewarding Long-Term Success and Empowerment and firm-level product innovation generation. An inverse relationship is identified for Termination and my product innovation measure. I further identify a strong, positive and significant relationship between Corporate Culture and process innovation generation. An inverse relationship is established for Rewarding Long-Term Success, while no relationship is identified for my Termination and Empowerment measures.