The Impact of Selected HR Practices on Service Firm Performance in Asia

Dr Connie Zheng
School of Management
RMIT University
Email: connie.zheng@rmit.edu.au

Professor David Lamond

Economics and Management School
Wuhan University
Peoples Republic of China
Email: daplamond@bigpond.com

Associate Professor Booi Kam

School of Management
RMIT University
Email: booi.kam@rmit.edu.au

This paper is submitted to the 6th Asia Academy of Management Conference focusing on the
New Faces of Asian Management, Taipei, Taiwan, December 14-16, 2008.

The Impact of Selected HR Practices on Service Firm Performance in Asia

ABSTRACT
Using 281 service multinational companies (MNCs) operating in six Asian countries, namely
Indonesia, Malaysia, Philippines, Singapore, Taiwan and Thailand, we examine various HR
practices used by these service companies. Multiple regression results indicate that more
formalised HR practices were likely to be taken up by financial institutions than other type of
service companies.

Selected HR practices examined significantly related to employee

retention, though on the reverse effect. Employees skill training and development contribute
to service firm growth and quality service delivery.

Implications of these results are

discussed.
Key words: HRM, performance, service industry, multinational companies, Asia
INTRODUCTION
Research on human resource management (HRM) largely originated in the manufacturing
sector [for example, Arthur (1994) in steel mills; MacDuffie (1995) in automobile industry],
investigating the impact of high performance or high commitment HRM practices on
firm performance (Huselid, Jackson & Schuler, 1997; Wood, 1999). In recent years, as the
service sector proportion of national economies in both developed and developing countries
has increased, the focus has shifted to address the need to pursue high quality services, via a
set of sophisticated high cost and high skill employment strategies (Francis & D'AnnunzioGreen, 2005, p. 71).

The service sector is rather heterogeneous, comprising financial

companies, retailing operation, transport operations and of course, the tourism and hospitality
industries (Hoque, 1999, p. 419). Still, the majority of studies in the services area to date
have tended to examine HRM practices only in the tourism and hospitality industries in a
specific country. For instance, Hoque (1999) looked at HRM and performance in the UK
hotel industry. Tsaur and Lin (2004) examined the role of HRM practices in promoting

service quality in tourist hotels in Taiwan. In a departure from this narrow focus, Little and
Dean (2006) evaluated the link between service quality and employee commitment in an
Australian out-sourced call centre. It is therefore important to compare, within and between
groups, different HRM functions in a range of other service industries, apart from the
hospitality group. Rees (1995) used two cases, New Bank and Hotel Co., to compare
different effects of various HRM functions in quality management between financial service
and hospitality firms. As already noted, however, few studies examine the pattern of HRM
practices in a range of different service multinational companies (MNCs), in particular in the
Asian context. Our current research intends to fill this gap.
Managing human resources involves a complex process of designing policies, practices and
procedures of organisations for recruiting, motivating, developing and retaining employees
(Schneider, 1994, p. 64). While there are many skill sets that are transferable between
industries, different industries also require different skill sets (car manufacturing versus
insurance, for example). It is reasonable to assume, therefore, that different approaches may
be necessary to attract, retain and motivate employees with these different skill sets. Indeed,
differences in HRM practices between different sectors have been identified (Datta, Guthrie
& Wright, 2005), and it is now widely accepted that not all companies are inclined to adopt a
full set of the high-performance high commitment HRM practices. Instead, organisations are
more likely to make strategic choices by taking up some HRM practices and rejecting the
others (Subramony, 2006; Zheng, O'Neill & Morrison, 2007). Nonetheless, limited research
attention has been paid to industry differences and how they might moderate the degree of
adoption and value placed on particular HRM practices (Datta et al., 2005).

It is our

contention that attracting, developing and retaining the talents in the service sector that can
provide a positive link between the organisation and customers requires a different HRM

focus. With this in mind, our first research question as what is the key HRM focus for
service firms?
Theoretically, Korczynski (2002) provides a prescriptive account of best practice HRM in the
service industry. In his new service management school view, the soft side of HRM
practices that emphasise empowerment and teamwork is regarded as a combination of
developing service culture and harmonising the relationship between employer, employees
and customers. Other writers (Hoque, 1999; Lucas, 2002; Worsfold, 1999; Francis and
DAnnunzio-Gree, 2005) tend to dispute the existence of the soft side of HRM approaches
in the service sector. Instead, contingent and well calculating hard HRM approaches are
more often adopted by service firms in their utilisation of human resources (Lucas, 2002).
The hospitality industry, in particular, has historically been dominated by images of poor
working conditions, and underdeveloped HRM practices, which largely focus on cost control,
instead of employee commitment. Arguments in these two camps have been largely limited
to the hospitality industry, not going beyond other service providers in the industry. Legge
(1995) pointed out that in general, an organisation choosing to compete in a labour intensive,
high volume, low cost industry is likely to adopt HRM policies that treat employees as a
variable input or a cost to minimise. On the other hand, an organisation competing in the
knowledge-based, high skilled high cost industry, such as financial services, is likely to adopt
HRM policies that treat employees as an asset that enable the organisation to create addedvalue.
In reality, in view of the continuing shortage of talent and high employee turnover in the
service sector in Asia, it remains unclear how multinational companies (MNCs) operating in
the region select their HRM practices.

According to Mark DeCocinis, Regional Vice

President (Asia Pacific) of the Ritz-Carlton Hotel Group (a multinational hospitality business

with 59 hotels worldwide), the secret of success in the service business is that services come
only from people (cited in Yeung, 2006, p. 268). From this perspective, customer satisfaction
comes from employee satisfaction, and employee satisfaction is generated from three key HR
functions: 1) selection of the right people using innovative recruitment channels; 2) provision
of relevant and effective orientation and on-job training; and 3) encouragement of employee
participation and engagement (Yeung, 2006). This set of HRM practices seems to fall into the
soft side of HRM approaches. Little and Dean (2006) provided similar evidence in the call
centre examined. They confirmed the interface of employee commitment and delivery of
service quality from call centres via a number of HRM practices. These HRM practices
included training, development of interpersonal and problem-solving skills, and provision of
resources to support employees. From the limited group of studies conducted so far, it
appears that the success of service businesses is reliant on the delivery of quality customer
service, which in turn depends on employee commitment and satisfaction. The focus of
HRM on recruitment, training and skill development, as well as resource support is the key to
enhance employee commitment and satisfaction, which in turn increase the service capacity
and ultimately better overall firm performance (Little & Dean, 2006; Tsaur et al., 2004).
In this paper, we report on our investigation of these four identified areas of HRM practices
recruitment, training, support resources and skill development in 281 multinational service
companies in six Asian countries, namely Indonesia, Malaysia, Philippines, Singapore,
Taiwan and Thailand. Our intention was two-fold.

First, we wanted to map out the

recruitment methods used, the training and skill development approaches adopted, and the
support resources provided by service firms in Asia. Second, we wanted to examine how
these HRM practices relate to employee retention, the capacity for delivering quality services
and maintaining harmonised relations between employer, employee and customers, as well as
to the overall growth potential of the service firms in Asia.

RESEARCH METHODS
Data source and sample
The data were sourced from the multi-national research project conducted by the first author
under the auspices of the Asia Pacific Economic Cooperation (APEC) (see Stahl & Zheng,
2002). We split the entire sample of 529 manufacturing and service companies, and focus
here only on 281 service firms in the sample. The survey questionnaires in, English, were
completed by chief executive officers, financial controllers and human resource managers in
the host country of MNCs. A translated version of the survey questionnaire in Chinese was
distributed to MNCs in Taiwan. The back translation was verified and the returned survey
questionnaires were coded by the first author whose native language is Chinese, to ensure
consistency and accuracy of the responses.
The profile of companies included in this study is shown in Table 1.

Here financial

companies refer to those companies engaging in banking, insurance and other financial
advisory businesses. All other service companies cover a scattered range of business services
of wholesale, retail, transport, security, information technology and communication,
hospitality and consultancy. For a more meaningful comparison, we amalgamated all service
companies into two groups: financial institutions and all other service type company,
consistent with Rees (1995) case study. A significant proportion of Asian-bred MNCs were
represented in the sample (139 firms, 49%). These companies were largely owned by
Japanese, Singaporean and Taiwanese, whilst the parents of those non-Asian owned
companies (51%) were predominantly European, American and some from Australasia.
Variables and measurement
All variables included in this study and their measurements are displayed in Table 2. As
noted earlier, our intention is to identify the pattern of the key HRM practices such as

recruitment and training methods, skill development and resources used and the extent to
which the service firms in Asia have adopted these practices. Given the limited space of
words for this conference, we omitted the justification of selecting these variables for testing
(contact the first author for additional pages for this).
Statistical analysis
To compare differences between industry, country, and parent source of multinational
companies, t-tests were performed. The impact of HR practices on employee retention and
the impact of employee retention on firm performance were examined, using multiple
regression analysis. The results are presented next.
RESULTS
Table 3 provides the correlation between all the variables used together with their means and
standard deviation (SD).
The matrix shows that use of formal recruitment methods (e.g. media advertisement, face-toface interview) is significantly related to all three training methods used and various staff
skill development. It seems when firms pay attention to one area of HR practices, they tend
to also formalise all other areas of HR practices. In contrast, informal recruitment methods,
i.e. via word of mouth and employee referral, are negatively related to innovative methods
used (r = -0.28, p<0.01) but positively related to the use of external training mode (r = 0.16,
p<0.01). Similarly, the use of innovative recruitment methods (e.g. internet, school/graduate
fair, agencies) is also significantly related to the use of external training mode and skill
development. Surprisingly, the more firms made use of informal recruitment methods, the
less likely the firms would have a high employee turnover rate (r = -0.15, p<0.01), but the
greater use of innovative recruitment methods, on the other hand, led to a higher level of
turnover (r = 0.25, p<0.01). It seems that people who come through the innovative

recruitment channels may also be the very people often looking for other job opportunities, so
their turnover rate could be higher. Nevertheless, the use of innovative recruitment approach
is positively related to creating a greater impact on growth (r = 0.16, p<0.01), assuming when
companies are expanding, they would have to use some innovative recruitment methods to
source necessary staffing to drive business growth. This also suggests that they are effectively
managing the growth and the turnover that accompanies it.
Secondly, use of the on-the-job, off-the-job and external training is significantly related to
building more harmonised relationships between employer and employee but does not relate
to enhancing service capacity. To some extent, training methods used also impact on growth
and productivity. Externally run and off-the-job trainings were also more likely to be offered
by financial companies than other service type companies and non-Asian MNCs than Asian
owned companies.
Thirdly, provision of scholarships is also highly correlated to various employee skill
developments, which cover skills, such as management, interpersonal, planning, new
technology, self-management, multi-skilling, teamwork, literacy, numeracy and other jobrelated technical skills. Skills development positively relates to having a greater impact on
all performance indicators (growth, r = 0.41, p<0.01; productivity, r = 0.12, p<0.05; service
capacity, r = 0.25, p<0.01; and harmonised relationships, r = 0.20, p<0.01). Interestingly
however, more trained and skilled people are more marketable; employee turnover rate was
relatively higher in firms with provision of more scholarships and skill training and
development.
An independent sample t-test was conducted to compare HR practices used by different types
of service companies; and by Asian and non-Asian owned firms. There were no significant
differences in the use of formal and informal recruitment methods, resource support by

average training per person, and skill development. However, there were differences among
Asian and non-Asian firms in terms of their use of innovative recruitment methods, off-thejob training and provision of traineeships/apprenticeships. Non-Asian owned firms were
more inclined to use the innovative recruitment methods (M=2.99, SD=1.23, t(279)=1.67,
p=0.05), yet the magnitude of the differences in the means was very small (eta squared=.009
<0.01, very small effect) (Pallant, 2001, p. 181). This indicates that some Asian owned firms
are also using to some extent innovative recruitment methods.

The magnitude of the

differences in the means for using off-the-job training and provision of traineeships and
apprenticeships were relatively higher (eta squared =.05 and .04 respectively), indicating that
more

of

off-the-job

training

(M=2.94,

SD=1.33,

t(279)=3.70,

p=0.000)

and

traineeships/apprenticeships (M=1.93, SD=0.77, t(279)=3.18, p=0.002) were provided by

non-Asian firms.
In terms of sector, financial firms were more likely to provide off-the-job training (M=2.94,
SD=1.32, t(279)=2.87, p=0.004) and provision of scholarships (M=1.84, SD=0.69,
t(279)=2.96, p=0.003; eta squared=.03 both). There were slightly differences in offering
external training and traineeships/apprenticeships between financial and other type of service
firms, but the magnitude of the differences is rather small (eta squared<.01 for both
variables).
The extent to which the four HR practices affect talent retention (proxied by employee
turnover rate); and the impact of HR practices as well as employee retention on service firm
performance (proxied by growth, service capacity and harmonised relationships) were
analysed using multiple regression as displayed in Table 4. The results from Model 1 indicate
that, taken together, the HR practices significantly contribute to employee retention [F (14,
266) = 3.073, p<0.01].

Similarly, all three service firm performance indicators are

significantly associated with HR practices and HR outcome, as the indicators for all three
models 2, 3 and 4 are significant (Table 4). In particular, Model 2 as a whole explains almost
20 percent (R2adjusted = .196) of the variance, suggesting that the combination of specific HR
practices and the effort invested in retaining talent make a large contribution to the service
firm growth [F (14, 266) = 5.543, p<0.01]. Although the variances of HR practices used to
explain service capacity and harmonised relationships were relatively small, Models 3 and 4
are still statistically significant.

Service capacity [F (14, 266) = 2.339, p<0.01] is

significantly impacted by skills development (=.275, p<0.01) and employee retention rate
(=.117, p<0.05). Harmonised relationships are moderately influenced by on-the-job training
(=.114, p<0.05) and again largely affected by the level of skill development (=.166,
p<0.01).
In terms of the effect of individual variables on employee retention, only three variables
(formal recruitment, innovative recruitment and provision of traineeships/apprenticeships)
significantly impact on employee turnover rate. However, as noted earlier, these practices are
positively related to employee turnover rate, suggesting that the more firms used formalised
and innovative methods and resources (eg. scholarship, traineeship) provided to support
employee skill development, the more likely it is that firms may lose some competent staff.
While this is much against the conventional idea of controlling employee turnover through
effective skill development and training commonly concluded from earlier studies (see
Ahmad & Bakar, 2003; Arthur, 1994; Huselid, 1995; (Shaw, Delery, Jenkins & Gupta, 1998),
there appears to be a reasonable explanation for this and we will come back to this point of
discussion later.
At the same time, employee turnover rate is moderately related to company growth (=.102,
p<0.05) and service capacity (=.117, p<0.05), while there are significant relationships

between skill development and all three performance indicators. Together, these results
highlight the importance of skill development and the retention of competent staff for their
positive impact on organisational performance.
DISCUSSION AND CONCLUSION
Examining the impact of HRM on service firm performance among multinational companies
in Asia, this study has shown that there were significant relationships between the strategic
selection of industry-specific HRM practices and organisational outcomes, consistent with the
argument from the best-fit model of HRM-performance linkages (Becker & Huselid, 2006;
Datta et al., 2005).

In particular, extensive skill development across all areas such as

managerial, interpersonal, teamwork and job-related technical skills has a greater impact on
service delivery, firm growth and harmonised relationships between employer, employee and
customers.
Contrarily, however, in Asia, it seems that persistent use of HR practices may not necessarily
yield good employee retention outcomes. In fact, employee turnover rates were higher in the
service organisations examined, despite their adoption of some formalised HR practices with
training resource supports. There are several explanations that could provide some insights
to this unusual phenomenon. First, given the continuing war for talent that is worldwide,
hyper competition for talents among service companies in Asia is likely. Certainly, skills
demands by service companies have been identified as stronger than manufacturing
companies in Asia (Zheng, Soosay & Hyland, 2008). As such, despite the effort companies
put into formalising HR practices, in particular training practices, the more trained and highly
skilled employees may well become very attractive to the competitors, who simply offer
better compensation packages to lure them away.

Job hopping by employees and

poaching by competitors were repeatedly reported as key challenges to human resource

management in Asia (Dowling, Welch & Schuler, 1999; Khatri, Fern & Budhwar, 2001).
Secondly, the cultural and social network may provide some explanations of higher employee
turnover despite the use of formalised HR practices. Turnover, generally in the range of 515%, is negatively related to informal recruitment. This suggests that personal networks for
internal or word of mouth referrals may serve as a buttress to keep down the turnover rate and
retain competent employees with the promise of longer term employment in the Asian service
industry. Supplement to this, most firms are in the small to medium range (mean = 1.67),
these results are not surprising. Employee commitment is the key factor driving small and
medium enterprise performance (Zheng et al., 2006). Hence, working on staff retention using
informal HR practices may have helped service firms in Asia to achieve business growth in
the short run.
Thirdly, despite the effort to keep employees, shortage of skills across all Asia or even
globally is still the key factor driving up the employee turnover rate. Using the same data set,
Stahl and Zheng (2002) found that skill shortages were more pronounced in more advanced
economies than in developing economies.

This is also due to the high proportion of the

service sectors in the advanced economies that has intensified the skill shortage. Indeed,
multinational companies operating in the more advanced economies such as Singapore and
Taiwan experienced a much higher level of employee turnover rate, despite their adoption of
formalised HRM practices (Zhu, Warner & Rowley, 2007).
Lastly, while the selection of four HR practices (recruitment, training, resource support and
skill development) was grounded in the limited literature examining HR and service industry
performance link, the list of variables may be too narrow to provide a synergistic effect of all
HR practices on firm performance (Becker & Huselid, 1999). There is a need to include other

HR measurements, for example, compensation and reward perhaps in the further testing. In
mentioning the list of HRM practices as a limitation of this study, it should also be noted that
the impact measures are based on the perceptions of the respondents, rather than on more
objective data such as dollar values of company growth and productivity improvements.
Future research efforts would properly benefit from being able to include such data.
Having said that, the results of our study are consistent with previous studies in
organisational HRM practices, for example, larger, older firms are more likely to utilize
formal recruitment methods (Barber, Wesson, Roberson & Taylor, 1999; Kaman, McCarthy,
Gulbro & Tucker, 2001). They tend to provide a range of training (on-job, off-job and
external), and to provide scholarships, traineeships/apprenticeships and skills development
opportunities. This is generally, however, not linked to parent source or firm type, although
Asian parent companies and non-financial services companies are more likely to use off-job
training, while non-Asian parent companies are more likely to use traineeships and
apprenticeships as part of their respective training packages.
In conclusion, the our study finds has produced the evidence that the selected HR practices,
in particular the development of various skills, contribute significantly to service firm growth
and their capacity for service delivery capacity; and that a higher level of employee turnover
rate, in fact leads to greater impact on is associated with growth and service delivery as well.
Two implications can be drawn from these results. One is that to drive service firm growth
and high quality service delivery, it is imperative that firms focus on skill training and
development, even though by simply practicing this, it may lead to high levels of turnover
rates among marketable employees, at least in the short term. Second, talent retention is
crucial for firm growth and delivery of quality service in the longer term. There is a greater

need to identify in the future other HR practices, besides skill training and development, to
better manage talent attraction and retention in the service industry in Asia.

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