Investors found to influence HR practices in SMEs
Small businesses that receive external investment adopt HR management practices that are influenced by the values of financial backers, reveals new research from Trinity Business School.
According to the study, undertaken by Francesca Di Pietro, Sinéad Monaghan and Martha O’Hagan-Luff, all of Trinity Business School, following external investment, firms take an operational, strategic or transformational approach to their HRM practices, depending on the type of investor and their logic.
The researchers found that firms that receive financing from angel investors – private investors, often with a high net worth – adopt an operational approach to HR management. This approach sees the SME focus on improving efficiency and internal functioning through human resources.
Meanwhile, the study revealed that SMEs backed by private equity firms adopt a strategic approach in which they seek to accelerate firm growth and a return on investment within a relatively short time period, thus driving strategic HR practices. The researchers found that Government Venture Capital also led firms to adopt a strategic approach to HR practices.
Finally, they found that small firms that received Corporate Venture Capital – in which a large company takes an equity stake in a small firm – depending on investment levels adopted either strategic HR practices, or transformational practices, leading to a fundamental redirection of the firm.
In undertaking the study, the researchers used data from the case study analysis of seven small founder-led Irish firms operating in the agrifood industry.
The findings of the study contribute to the development of a framework for how investor logic and values prompt changes to HR practices of small, entrepreneurial firms.
Sinéad Monaghan, associate professor of international business and global strategy, says: “Growth and funding for Irish SMEs is imperative, and human capital is integral to this process. Our study demonstrates the relationship between external financing and internal human resource management and provides insights for firms looking to further accelerate their growth trajectory.”
Francesca Di Pietro, assistant professor in business strategy at Trinity Business School, says: “Our research provides an insightful reference for small firms seeking external financing. Firms shall consider how the decision to take on investment will influence company’s internal dynamics, such as HR management, and find ways to maximize the value of their relationship with investors.”
Martha O’Hagan-Luff, assistant professor in finance at Trinity Business School, says: “The management of human capital is of crucial importance in growing firms. We provide a study of HR management in the context of Ireland’s most important indigenous sector, agrifood, in which firms can face unique funding challenges. Our study recognises that different types of external investors can have a profoundly different effect on firms’ HR management, providing important insights for the sector as a whole.”
The study, Entrepreneurial Finance and HRM Practices in Small Firms, published in British Journal of Management, can be accessed here.
