To improve the performance, the SMEs need to realize their full potential and seize any opportunities to upgrade them to become more competitive. To remain competitive, SMEs have to shift towards higher value added activities, and adopt best industry business practices that will help them to prepare and recover from natural disasters, where SMEs are particularly vulnerable. This is in line with the theme of “Transformation to the New Economic Model”, which has enormous implications for SMEs (NSDC, 2010). SMEs need to change their mindset to transform themselves to support the Malaysian strategies to become a high-income, developed country by 2020. This transformation requires SMEs to develop their organizational resources and capabilities that will move them to become more competitive, innovative, and with a technologically strong SME sector. These organizational resources and capabilities are more devoted to realize high performance and high value-added SMEs, which are equipped with strong technical and innovation capabilities as well as personal and business skills to comprehend new job opportunities, and better market access. Unfortunately, empirical studies on the impact of organizational resources and capabilities of SMEs to the issue of their performance, particularly in the Malaysian context have been less than encouraging. Therefore, empirical work is needed to overcome this shortcoming.
Over the past decade, the literature clearly shows that HRM practices influence organizational performance, but very little is known about what goes on in the “black box” between HRM practices and performance. That is, the lack of precision studies of how HRM practices produce value to the organization. This indicates a vital message from the previous findings, that by purely investigating the direct relationship between HRM practices and performance, would reveal a partial overview of performance (Theriou & Chatzoglou, 2008; Wiklund & Shepherd, 2005). To date, there is very little research that explains the processes through which HRM practices (Becker, Huselid, Pickus, & Spratt, 1997) impact the primary intermediate variables that ultimately influence the performance of an organization. Thus, this paper investigates the relationship between HRM practices and organizational performance, and the influence of organizational innovative capability on organizational performance. Generally, the aim of this paper is to rectify this gap by developing a framework that provides a better understanding of how human resource management (HRM) practices influence the success or failure in the development of Malaysian SMEs. Specifically, to explore the degree to which the relationship between HRM practices and organizational performance is mediated by organizational innovative capability. In order to meet this objective, the next section will explain the relationship between the HRM practices, organizational innovative capability and organizational performance. Then, this paper will discuss the role of organizational innovative capability as a mediator between HRM Practices and organizational performance of SMEs. Finally, this paper will end up with the proposed framework and conclusion. add comment