Human resource management practices in manufacturing SMEs in Central Java, Indonesia

ABSTRACT

SMEs are major employers in Indonesian, yet little is known about human resource management (HRM) practices that they employ. This study focused on hiring, developing, and retaining employees in manufacturing SMEs in Central Java, Indonesia in comparison to the dominant discourse on HRM in SMEs. The study involved interviews with 13 owner-managers and 42 employees representing 13 SMEs. Findings suggest that HRM in these SMEs were not the coherent set of practices typically identified in ‘best practice’ literature, but practices that were characteristically informal and emergent. Cost and appropriateness were key considerations in making decisions regarding HRM adoption. Regarding attracting employees, ‘word-of-mouth’, employee referrals and ‘walk-ins’ were the preferred methods. Informal interviews and work samples were predominant ways of assessing skill levels of prospective employees. Training was usually informal, on-the-job and unstructured. Employees attended off-the-job training only when courses were free and such courses were usually provided by government institutions or major clients. Performance appraisal was rare, but when present it was typically informal and undocumented. Regarding retaining employees, owner-managers were intent on creating a harmonious, ‘family-like’ culture and providing work schedule flexibility. Factors such as labour market conditions, culture, labour law enforcement and the technology in use also contributed to the HRM investment decision and type of HRM adopted. Although the practices employed seemed informal, reactive and short-term oriented they could be justified as being congruent with the conditions and the characteristics of SMEs and were not necessarily ‘wrong’ or ‘inferior’.

Type of Paper: Empirical

 

Keywords: HRM; SME; Indonesia

1. Introduction

Human resources in every organisation whether small, medium or large plays an important role in achieving the organisation’s goals. According to the resource based view (RBV) of the firm, human resources are viewed as a potential source of sustained competitive advantage because of their value, rareness, inimitability, and non-suitability (Barney, 1991). The RBV helps to explain why organisations of different size have similar opportunities to succeed in the same industry and shifts the focus from external factors (e.g. market size, economies of scale, etc) to internal factors (e.g. human resources) (Barney, 1991). The effective management of human resources is important for ensuring the survival of every enterprise and it is a key factor in distinguishing succesful and unsuccessful organisations (Abduli, 2013). In SMEs, the topic of managing their human resources is even more relevant as they are relatively labour intensive (Flanagan & Deshpande, 1996) and each individual employee represents an essential part of the SME’s workforce, thus increasing the importance of HR decisions (Bacon, Ackers, Storey, & Coates, 1996).

One of the key debates within human resource management (HRM) is the distinction between the so-called best practice and the best-fit approaches. The universalistic or “best practices” (often referred to as Anglo-American) approach posits that the most-recognised practices or practices that have been shown to be the best have a positive impact whenever they are applied (Delery & Doty, 1996). Thus, by applying one or more practices, organisations will see performance improvement, in other words the practices directly and positively influences organisational performance (Colbert, 2004). Most enthusiasm for ‘best practice’ originates in the USA (Boxall & Purcell, 2000) and studies of best-practice has generated widespread interest. Huselid (1995) identified 13 high performance work practices (HPWPs) which was considered as a representation of sophisticated HRM. The practices includes information sharing, job analysis, promotion from within, attitude surveys, quality-of-work-life programmes, group incentives, training, grievance procedures, employment tests, individual performance based pay, formal appraisal, promotion on merit, and selective recruitment. Another influential set of definitions of best practice is often associated with Pfeffer’s (1998) seven practices, namely: (1) employment security, (2) selective hiring, (3) organising employees into self-managed teams, (4) high pay contingent on organisational performance , (5) extensive training, (6) egalitarianism or reduction of status differences, and (7) sharing information.

While there is empirical evidence to support the adoption of best practices (e.g. Alleyne, Doherty, & Greenidge, 2006; Gould-Williams & Mohamed, 2010;  Christensen Hughes, 2002; Rodriguez & Ventura, 2003), the universalistic approach has also been the subject of much criticism. For example, Legge (1978) asks for whom is a ‘best practice’ best, while other commentators claim that best practice is a form of advocacy and lacks a solid theoretical foundation (Boxall & Purcell, 2016; Martin-Alcazar, Romero-Fernandez, & Sanchez-Gardey, 2005). A number of researchers have thus opted for a ‘best fit’ or contingency approach, which suggests that HRM practices should be tailored to the organisation, based on a consideration of situational factors and specific context  (Boxall & Purcell, 2000). For example, Baird and Meshoulam (1988) argued that HRM practices should fit the organisation’s stage of development. They argued that it would be very common in the start-up phase for firms to apply informal and flexible styles of HRM practices.

Prior studies of HRM practices in Indonesia have focused on large companies (e.g. Habir & Larasati, 1999; Hartono, 2010; Sitalaksmi & Zhu, 2010) and there is scant research and limited information on the HRM practices in Indonesian SMEs (Rachmi, 2013). This is problematic because SMEs in Indonesia are considerably smaller than those found in Europe and the USA. Consequently, the findings based on studies conducted in Europe and the USA do not necessarily represent the Indonesian case in regards to the organisation size and the business context (Barret & Mayson, 2007).

The number of SMEs in Indonesia has experienced significant growth over the past decades. In 2005 there were around 47 million SMEs and by 2013 the number had grown by 23% to 58 million SMEs, which provided employment for around 114 million people (Badan Pusat Statistik [BPS], 2013). The manufacturing sector has been the largest contributor to the GDP in Indonesia at 25% on average of the total GDP since the year 2000. Java Island has the biggest population of SMEs in Indonesia, around 62% of manufacturing SMEs are located here, and they account for more than 60% of employment in all manufacturing SMEs (BPS, 2014). As this sector makes a significant contribution to Indonesian GDP and provides jobs for many workers, it is important to know how HRM is practised in SMEs.

This study contributes to the literature on HRM practices in Indonesia in general and extends knowledge of HRM adoption in the SMEs, specifically manufacturing SMEs in Central Java, Indonesia. Overall, this paper seeks to answer the questions: (1) What are  common characteristics of HRM practices employed in manufacturing SMEs in Central Java, Indonesia and the key contingency factors shaping the practices? (2) What are the similarities and differences to the dominant discourse on HRM in SMEs?

2. Literature review

Most published work on HRM in SMEs reports studies conducted in countries such as United States, United Kingdom and Australia. There are also a few articles which examine this topic in countries such as Spain (e.g. Urbano & Yordanova, 2008) and Greece (e.g. Scholarios et al., 2008). However, there has been comparatively very few studies conducted in Asian SMEs (Cunningham & Rowley, 2010; Rachmi, 2013). Research on HRM in SMEs published in English-language journals suggests that smaller firms generally tend to employ a narrow range of informal HRM practices (e.g. Bacon & Hoque, 2005; Harney & Dundon, 2006; Kotey & Slade, 2005). In contrast, some researchers have found that high performance work practices (HPWS) or formal HRM practices were being adopted in smaller firms, especially in medium enterprises (e.g. Wiesner, McDonald, & Banham, 2007). Overall, literature on HRM in SMEs tends to be descriptive rather than analytical and often researchers do not account for societal level influences on HRM.

Research on recruitment in SMEs shows that SMEs tend to use ‘tried and trusted methods’, such as word of mouth or hiring employees from family, former employees, and acquaintance circles (Carroll, Marchington, Earnshaw, & Taylor, 1999). Several studies find that employee recruitment in SMEs typically involves methods that are convenient, inexpensive, and directly controllable by the organisation (Cardon & Stevens, 2004; Hornsby & Kuratko, 2003). However, as firms grow they tend to also use formal recruitment sources, such as advertising in newspapers, graduate recruitment and government and private agencies (Kotey & Slade, 2005). In regards to the selection process, small firms usually rely more on individual interviews, job ‘try outs’ or practical tests (Golhar & Deshpande, 1997; Kotey & Slade, 2005). SMEs tend to increase the use of a variety of the selection techniques, such as background checks from former employers as more employees are hired from outside the network of friends and family (Kotey & Slade, 2005).

Several studies show the important role of training in improving SME performance, but formal training is less likely to be provided in these organisations (Kotey & Folker, 2007; Storey, 2004). Informal, on-the-job training is widely used in SMEs (Gilbert & Jones, 2000; Kotey & Sheridan, 2001). According to Cardon and Stevens (2004), employees in SMEs are less likely to have access to structured  and firm-sponsored training than the workers in large firms. In regards to performance appraisal, informal and ongoing performance appraisal is more likely to occur in SMEs than formal appraisal due to the frequent opportunities for interaction between owner-managers and employees and appraisal is often used for monitoring rather than development purposes (Gilbert & Jones, 2000). Even though there is very little research on performance management in SMEs (Cardon & Stevens, 2004), research in Australian SMEs showed that rating scales were a popular method in appraisal (Kotey & Slade, 2005) and there was also a tendency to use the peer and self appraisal methods in SMEs (e.g. Kotey & Slade, 2005; Wiesner et al., 2007).

Regarding compensation in SMEs, pay structure is likely to differ between small and large organisations because smaller organisations tend to have few managerial levels and flat organisational structures and tend to treat employees in an egalitarian way regarding compensation and rewards (Graham, Murray, & Amuso, 2002). Benefits in SMEs also differ from those in larger organisations, with benefits in SMEs tending to be more modest (Cardon & Stevens, 2004). Therefore, it is important to view compensation practices in SMEs from a total reward perspective (Parus, 1999), where compensation should not only focus on monetary rewards in the form of base pay and incentives, but also include intangible benefits, such as psychological rewards, learning opportunities, and recognition (Graham et al., 2002; Heneman, Tansky, & Camp, 2000).

As noted, research on HRM in Indonesian SMEs is very sparse. There were only three published studies that examined HRM practices in Indonesian SMEs. However, only one study published findings based on empirical data (Rahmi, 2013), one study was a conceptual paper (Tarmidi, 1999) and the other paper (Chandrakumara, 2013) was based on desk research which also combined literature on general HRM practices in Indonesia’s and Korea’s enterprises, not only in SMEs. Other organisation studies in Indonesian SMEs mostly focused on knowledge management or organisation learning (e.g. Sampe, 2012; Setyanti & Farida, 2016; Suryaningrum, 2012). The study by Rahmi (2013) in medium-sized textile companies revealed that some formal HRM practices have been introduced in those organisations. However, the informal practices were still used to avoid complexity and higher costs, especially if the SMEs were still focused on survival, rather than paying attention to adopting innovative HR practices (Rachmi, 2013). Her study also indicated that the ownership structure determined the degree of HRM adoption and the formality of HRM practices in SMEs. She asserted that most family businesses were reluctant to change how they manage their business, including HRM practices because the owners perceived that such practices would decrease their power and authority (Rachmi, 2013). Medium-size limited liability enterprises applied both formal and informal recruitment processes (e.g. newspaper advertising and word of mouth), but in family-owned medium enterprises, word of mouth was the most popular method for employee recruitment. The use of formal performance appraisal, the existence of unions, and compliance with government regulations regarding rewards and benefits were apparent in medium limited liability company, but not in the family businesses.

3. Data Collection

Data was collected via in-depth interviews with 13 owner-managers and 42 employees from thirteen manufacturing SMEs in Central Java, Indonesia. Potential SMEs were contacted using information from The Indonesia Ministry of Industry, The Indonesia Ministry of Cooperative, SME databases and personal networks (i.e. colleagues or colleagues’ acquaintances). For the purpose of this research, two main criteria were used to select SMEs: number of employees and age of the organisation. According to The Indonesia Central Bureau Statistic or Badan Pusat Statistik (BPS), SMEs are firms with 5-99 employees. However, to ensure the SME had an adequate number of employees from which to recruit participants, the researchers set a criterion of a minimum of 10 employees.  Furthermore, two additional criteria were added:  (1) the SME must have been operating for at least three years to ensure that the SMEs were stable enough in doing their business due to a high propensity of SMEs in Indonesia to fail during their first two years (Cressy, 2006; Wibowo, 2008), and (2) located in Central Java.

Each firm was visited by one of the team members. The participants were interviewed and taken through a semi-structured interview schedule that included questions designed to get participants to elaborate on the practices that the firm employed to attract, develop, and retain their workers. Each interview lasted between 45 and 60 minutes and was recorded. The interviews were conducted in Bahasa Indonesia and later transcribed then translated by a professional translator.

The data was analysed by using content analysis (Weber, 1985) and classified the textual interview data into three broad categories: (a) hiring employees to the organisation, (b) developing the employees, and (c) retaining the employees.

4. Findings

The participants consisted of 37 males (10 owner-managers and 27 employee participants) and 18 females (3 owner-managers and 15 employee participants). The age of the participants ranged from 19 to 60 years. Regarding formal education, seven owner-managers had completed secondary education (i.e. high school certificate) and six were university graduates. As for employee participants, the data showed that eight participants graduated from primary school, twenty-eight participants had achieved the secondary level of education (junior and high school), and only six participants had a tertiary qualification (diploma/bachelor/master degree). The average tenure of the employee participants was 8 years. Nine organisations had operated for more than ten years, and four SMEs had been operating between five and ten years.  Regarding the annual revenue of the SMEs, seven SMEs had annual revenue that ranged from more than Rp 1 billion to Rp 5 billion, three SMEs had revenue of Rp 500 million to Rp 1 billion, one SME had revenue of more than Rp 5 billion per year, and two SMEs did not provide revenue information. In regards to form of the business, eleven organisations were family businesses, and two organisations were medium limited liability enterprises.  To maintain anonymity, the researchers used initials to identify the organisation’s name. Table 1 provides information about the SMEs’ products and their location.

Table 1: Identification code, products and location of the SMEs

Identification code	The SME products	Location
AK	Glass handicraft products	Sukoharjo
PT	Copper stamp Batik*(for national and export market)	Sukoharjo
BX	Copper stamp Batik	Solo
SY	Copper stamp and hand-drawn Batik	Solo
NG	Towel products	Klaten
TD	Traditional healthy drink	Ungaran
JK	Cigarette	Kudus
SK	Ship equipment	Tegal
PK	Component for heavy industry	Tegal
KM	Fire extinguisher and ship equipment	Tegal
PB	Components for heavy industry and automotive components	Tegal
SS	Printed Batik fabric	Pekalongan
KL	Fire extinguisher	Tegal

 

 

 

 

 

 

 

 

 

 

 

1.     Hiring employees

Word of mouth (WOM), employee referrals, and unsolicited requests for employment (i.e. ‘walk-ins’) were the most frequently mentioned recruitment methods. Only one manager from a medium limited liability company reported that his organisation also used a local newspaper to advertise a vacancy, in addition to aforementioned methods. The predominant reason for searching was to replace employees who left the organisation. The owner‑managers employed informal methods of recruitment because such methods were convenient and more cost-effective when compared to posting the vacancy in the local newspaper. The following narratives illustrate the informal recruitment practices:

“I usually start by telling friends or my employees; I don’t use media because I only search for a few employees, so it is better to use sources only from friends and employees” (Owner, AK).

“I knew about the job vacancy from my friend who worked here” (Employee 4, KM).

The majority of the owner‑managers recruited employees from the surrounding neighbourhood. The owner-managers believed that by recruiting from the local community, they contributed to employment creation and provided jobs for minority groups (e.g. people with little formal education, women).

“To be honest, I prefer to hire people from around here; I accommodate people who need a job…I also accommodate the school dropouts and housewives. Our jobs are quite flexible, so these mothers can have additional income while they are taking care of children”(Owner, NG).

Regarding the selection processs, it was evident that these owner-managers used interviews and skill demonstration (i.e. work samples) to make the hiring decision. Only one Pty. Ltd SME conducted a more extensive selection process, including a medical examination for their future employees.  Psychological assessments were not commonly used in these SMEs. The owner-managers usually assessed applicants using short interviews. Through the interviews, the owner-managers would acquire information regarding the employees’ current skills and previous work experience. In addition to interviews, the majority of owner-managers required potential employees to complete a skill demonstration and a probation period. The owner-managers described the practical tests were a more informative way of identifying the skill level of a prospective employees.

“If I see their work is ok during the probation period, then they can continue working here” (Owner, SY)

Even though recruiting suitably skilled and experienced employees would be advantageous, the owner-managers in this study were willing to recruit and train new, inexperienced employees. They seemed to put more weight on general employability and personal characteristics (e.g. adaptability, agreeableness, honesty, and willingness to learn). However, these owner-managers tended to use their ‘gut feelings’ information obtained from other people to decide whether to hire the applicant, rather than use sophisticated psychological tests. As one owner-manager put it,

“the important thing is honesty (for new employees) and whether they are comfortable here; if it is about skill, it can be learnt. I also find that it is more beneficial for me to get a new employee from my employee’s reference because I would have some prior information regarding the person” (Owner, BX).

2.  Developing employees

On‑the‑job training was the most common method in training new employees or existing employees who had to acquire new skills. The trainers were usually the owners themselves, or senior employees. The approach to employee training is illustrated in the following comments:

“In one division, usually there are seniors, foreman, or a supervisor. They are the ones who teach new employees or their co-workers.  Sometimes, I also teach my employees by myself “(Owner, AK).

“When I started working here, I tried to do the task given and somebody trained me, the trainer was my co-worker” (Employee 1, NG).

Besides on-the-job training, two owner‑managers reported that they had participated in formal training and had also sent their employees to off‑the‑job training provided by other institutions (e.g. local government institutions or their major clients). These training courses were free of charge, and some of the training providers also issued certificates to the participants, which were very useful for the SMEs and the employees. The following narrative illustrates this kind of training:

“There are also formal training courses offered by The Ministry of Industry and the city government. These training courses are free of charge and usually are conducted annually” (Owner, SK).

“We do not have internal training courses because there are training courses from The Ministry of Industry and our major clients every year. They are free of charge” (Manager, PK).

None of the owner‑managers reported sending their employees to employer-sponsored off‑the‑job training. Additionally, none of the owner‑managers viewed training as a vehicle for employee career development in the organisation. The sole purpose of training was skill acquisition relating to the employee’s current job.

In regards to the performance appraisal, the interviews revealed that appraisal was conducted informally in most of these SMEs. Only one SME reported the use of an appraisal form to review employees’ performance on a regular basis. However, the result of the appraisal was not necessarily connected to the employee’s career or development. For a majority of these SMEs, monitoring employees’ performance involved informal direct observation on the results of their work efforts and behaviours that reflected work attitudes (e.g. attendance, loyalty, and obedience). The owner or a trusted employee of the owner observed employee performance on a daily basis. The owner-managers explained that they knew exactly which employees performed better than others from their daily interactions with the workers. In a few cases, the results of the informal appraisal were used as the basis to give incentives for employees.

“I’m here almost every day, so I notice my employees’ performance…if I am not around, I have my brother to supervise the employees”(Owner, AK)

“Our individual performance assessment is somehow ignored. If we want to make a decision regarding layoff, we usually prioritise the ‘loyal’ ones (employees with long tenure) to stay”(Manager, PK)

“Bapak (the boss) is always around here and observes us, so he knows every employee’s performance” (Employee 1, AK)

3.     Retaining employees

In regards to retaining employees, the common types of financial rewards and benefits that were reported are outlined below. In addition, factors such as work schedule flexibility and a harmonious working environment, were the most frequently mentioned factors when the owner-managers described their approaches to retaining employees and when the employee participants described things that made them stay with their current organisations.

1.   Common types of financial rewards and benefit

The majority of owner-managers reported that they paid the workers on a weekly basis. Only two out of thirteen SMEs reported giving the payment on monthly basis. Besides the wages, the majority of the owner-managers stated that they also provided employees with some allowances (e.g. meal allowance or attendance based allowance). These SMEs tried to pay employees based on the minimum wage although the owner-managers admitted that it was not always easy because the rate of the minimum wage increases every year and they could not always make pay adjustments due to the fluctuating business conditions. In several cases, there were SMEs that paid their employees below the minimum wage. The rate of payment was usually based on seniority or tenure and the type of tasks performed. However, not all employees were satisfied with their current compensation and benefits, especially because of the inability of the organisations to register employees for the mandatory health care and workers social security program (BPJS kesehatan and BPJS ketenagakerjaan). Out of thirteen SMEs, only one SME registered its employees to both the health care and workers social security program, two SMEs covered their employees only for the health care program, and one SME registered its employees only for the workers social security program. Other employers treated sick or injured employees on a case-by-case manner, some employers usually gave reimbursement to cover some medical expenses and two employers had an agreement with a local clinic to send the sick employees to the assigned clinic.

2.   Flexible working arrangements

Both owner-managers and employees reported that their organisation offered flexibility for employees to adjust work hours to suit individual circumstances or when approving employee leave requests. They commented that as long as the requests were communicated and the employee fulfilled their work responsibilities, then there was no reason for not being flexible. Furthermore, the owner-managers commented that providing non-financial benefits such as flexible work hours would make the job more appealing.

“Usually employees ask for leave of absence for family matters or when there is an activity in their neighbourhood. I am quite flexible with the leave request, if they come late or cannot come, they can replace the working hours later or add additional working hours” (Owner, AK)

“Usually employees ask for permission when there is “rewang”[1] or helping out, it has been our tradition here, so I do not mind as long as they achieve the work target “(Owner, NG)

3.   Creating “family-like” environment and treating employees with respect

Both owner-managers and employee participants described that the SMEs treated employees using “a big family” philosophy. The owner-managers perceived that by creating a friendly and family-like culture, employees would be satisfied and willing to stay longer with the organisation. These owner-managers did not want to be perceived as being distant by their employees as they were not reluctant to work together in the same area with their workers, eat lunch together or spend time with their workers. This situation was also portrayed in the physical set-up of the workplace. For example, machines and work tools were arranged in the same area and situated closely. Therefore, the workplace layout promoted interaction amongst employees or between employees and the owner-managers.

The owner-managers perceived that their communication style was a key factor when communicating with the employees. They believed that communicating with respect would increase employees’ trust in the owner and create a harmonious work environment. It seemed that these employers perceived themselves as “father or mother figure” to the employees, some employers often used the word “anak–anakini” (“these kids”) instead of using “karyawansaya” or “my employees” when addressing their employees who were younger than the owner-manager. These owner-managers also showed respect to employees who were older than them by using honorific language.

“I treat my employees as big family. I know I still cannot give the employees a big salary, but I think if I treat them well and with respect, they will also appreciate it. I think besides money, employees also look for peacefulness in their workplace”(Owner, AK).

“The way we communicate to our employees is important. We also need to show them our respect. Even though I am the leader here and maybe I have the right to be angry to my employees sometimes, I try to maintain my language. I am a Javanese; I am used to it. When I speak to older employees, I still use honorific language to them, even when I am actually angry at them. Therefore, even though the content of my message is not favourable to them, they would still feel they were respected” (Owner, PT).

5.  Discussion

This study contributes to knowledge on HRM practices in Indonesian SMEs by identifying characteristics of HRM adoption in the Indonesian SMEs through analysing interviews with owner managers and employees. When compared to the seven best practices of HRM proposed by Pfeffer (1998), it is obvious that the HRM practices employed in the sample SMEs fall well short of best practice prescriptions. For example, none of the SMEs could provide high pay, extensive training or use sophisticated methods for hiring employees.

The findings of the present study showed many similarities to the dominant discourse on HRM in SMEs reported in English-language journals, but with a few noteable differences. First, recruiting employees from government or private agencies was very uncommon, possibly due to financial reasons or because employment agencies are usually involved in sending workers abroad (i.e. being migrant workers). However, several studies reported in English-language journals confirm that recruiting from employment agencies is common in SMEs, especially when the firms grow (e.g. Kotey & Slade, 2005; Wiesner et al., 2007). Second, similar to Rachmi’s (2013) findings, the findings of the present study confirmed that peer and self-appraisal were not common methods of performance appraisal in Indonesian SMEs, even in the medium enterprise. This finding differs from Kotey and Slade (2005) and Wiesner et al. (2007) who found peer and self-appraisal were employed as performance appraisal methods in Australian SMEs, especially when the firms grow. The reason why peer and self-appraisal are not common in Indonesian SMEs or in-group collectivist countries is because peer evaluation requires monitoring of one’s colleagues, as a consequence it may disturb in-group harmony and relationships (Aycan, 2000). Similarly, self-appraisal, which emphasises ‘self’ and personal achievement, is not compatible with cultures where modesty and relationship are highly valued (Hempel, 2001).

Consistent with Lewis and Coetzer’s (2009) findings, cost and appropriateness seemed to be key criteria in making decisions regarding the HR adoption in the sample organisations. Cardon and Stevens (2004) noted reluctance among SMEs to adopt costly and restrictive practices, hence questioning the practicality or even necessity of best practice prescriptions.  Regarding cost, resource constrained owner-managers tended to adopt low-cost practices, such as word-of-mouth recruitment and sending employees to free of charge off-the-job training held by government institutions. With regard to appropriateness, the managers were intent on creating a family-like workplace culture and offering work schedule flexibility for employees. Intrinsic rewards are important in SMEs because such rewards can help to retain employees as SMEs often face financial resource constraints and are perceived as organisations that offer relatively less compensation and fringe benefits than large organisations (Cardon & Steven, 2004).

In addition, other factors such as labour market conditions, technology used in these SMEs, and weak labour law enforcement seemed to influence HRM investment decisions and the type of HRM adopted. All of the SMEs studied relied primarily on the local labour market where there was an abundant supply of labour. A static labour market provided a plausible explanation for the limited investment in HRM practices, especially for the recruitment and selection efforts in these SMEs. In addition, the technology used in the SMEs ranged from manual to semi-automated, which did not require the provision of extensive training. Even though there is comprehensive legislation regarding employment matters in Indonesia, there was a tendency for these SMEs to ignore legislative requirements or to perceive the legislation as a burden. Furthermore, there were no HR specialists in 11 of the 13 SMEs studied and the lack of owner-manager understanding of employment legislation and the lack of supervision by government officials in regard to  compliance with employment legislation also contributed to the limited investment in HRM practices in the SMEs.  Labour law enforcement in Indonesia is very limited due to resource constraints. For example, data from Factsheet on Labour Inspection of Indonesia (2016) revealed that by the end of 2016, the ratio of inspectors to companies in Indonesia was 1: 11,228. Moreover, current labour inspection services only reach 200,000 to 250,000 firms per year or only less than 1% of enterprises are inspected each year (Allen, 2016).

6. Limitations and implications
   1.     Limitations

This study has limitations that should be addressed in future research. The study set out to interview participants in both small and medium organisations; however small organisations and family businesses are over-represented in the sample in contrast to medium-size limited liability organisations where formal HRM practices are more likely to be adopted. This study involved only manufacturing SMEs in Central Java, Indonesia. Therefore the study was bounded with its context and was not intended to be generalised to the general population because of the subjective nature of the research (Creswell, 2013). However, by providing information of the study context, stipulating the number and the location of organisations represented in the study, and clearly specifying the criteria used in selecting the participants that contribute to the data, the study allows readers to make a decision about transferability, that is, to determine whether the findings can be transferred to other settings because of common characteristics (Erlandson et al., 1993).

2.     Research and practical implications

Findings of this research corroborate the importance of intrinsic rewards as a counter-balance to the limited extrinsic rewards that SMEs can offer and the relatively weak labour market power that SMEs have in relation to attracting and retaining employees. The findings further confirm that workers in the SMEs valued low conflict, polite interaction, and close working relationship. Future research should investigate whether the HR practices in the SMEs and the aforementioned widely shared values are salient for employees’ psychological attachment and retention in SMEs. This study was not intended to differentiate the HRM practices in family businesses and limited liability organisations, future research that analyses the differences should be conducted. This study involved labour intensive manufacturing enterprises, future studies could examine the HRM practices in service sector SMEs or knowledge-based SMEs (e.g. IT organisations) which have contingency factors that probably differ from SMEs in this current study.

Several studies have confirmed that an optimal level of formality is beneficial to organisational performance, therefore SMEs need to find a balance between introducing formal management practices and maintaining an informal culture in their organisations (e.g. Nguyent & Bryant, 2004; Rachmi, 2013). Thus, the priority now for SME owners is to be well-informed and keep up-to-date with labour laws and introduce more formalisation into their management practices, such as introducing written criteria for hiring and appraising performance.

7. Conclusion

The findings and discussion focused on the characteristics of SMEs and how these influence the adoption of HR policies and practices in those organisations. In addition, the effects on HRM policies and practices of other contingency factors such as culture, labour market conditions, technology used in the SMEs, and labour law enforcement were explored. In general, the practices that the owner-managers employed were informal, reactive, and short-term in outlook. However, the owner-managers justified their choice of practices as being congruent with the distinctive characteristics of SMEs and other important contingency factors and as such their choices were largely consistent with the recommendations of best fit theory.

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[*] Corresponding author:

E-mail: [email protected]

Affiliation: School of Business Edith Cowan University, Australia

[1] Rewang or helping out in Javanese tradition is a loosely coordinated and intermittently organised form of cooperative labour. Rewang can be used for vigorous tasks, such as preparing a wedding party, funeral,  preparing a field for planting or helping in the preparations for ritual festival (Hefner, 1990)