HRM and innovation: the mediating role of market-sensing capability and the moderating role of national power distance

Abstract

This paper examines the mechanism through which HRM practices promote firms’ innovation and how this relationship differs across cultures. Based on a data-set of 3755 firms from 13 countries, this study finds that in most countries employee-oriented HRM practices that dedicate attention to employee needs and interests are positively related to firms’ market-sensing capability, which is the capability to continuously learn about their markets. Market-sensing capability is in turn significantly related to firms’ product and process innovation. Cross-country examination further reveals that in high power distance countries employee-oriented HRM practices have a stronger positive effect than in low power distance countries. This study highlights the importance of HRM in supporting the use organizations make of external knowledge, which is critical for organizational innovation. Bringing an external perspective, we complement existing literature that emphasizes the role of HRM in integrating internal knowledge. Our cross-cultural findings contribute to the understanding of cultural contingency in HRM theories.