Small firms created more than six million new jobs in the United States in the 1980s. During the same period, Fortune 500 firms reduced employment by more than a million (Holt 1993). In recent years, small firms have accounted for nearly 90 percent of the net new jobs added in the U.S. (Mathis and Jackson 1991). Since small firms employ nearly half of the American workforce (Holley and Wolters 1987), their success is critical for the economy. To be successful in a global market, a small firm needs a highly motivated, skilled and satisfied workforce that can produce quality goods at low costs (Holt 1993). However, to develop such a workforce, a firm has to implement an appropriate human resource management (HRM) strategy.
Unlike large businesses, published research further indicates that recruiting, motivating, and retaining employees is one of the biggest problems for small firms (Hornsby and Kuratko 1990, Mathis and Jackson 1991, Gatewood and Field 1987, Verser 1987). These findings are substantiated by a recent study (Hess 1987) which reports that small firms ranked personnel management as the second most important management activity (next to general management). However, in practice, other functional areas such as finance, production, and marketing usually get preference over personnel management (McEvoy 1984). Even textbooks on small business management pay considerably more attention to finance, marketing, and planning than personnel management (Hess 1987). Also, researchers report that managers of small firms lack training in formal personnel management practices and they do not consider the use of generally accepted HRM practices as essential for improving productivity (Amba-Rao and Pendse 1985, McEvoy 1984). This lack of understanding of HRM issues and their importance in the operation of a successful business has impacted many small firms. Inadequate and inefficient management of human resources of firms have often resulted in low productivity, and high dissatisfaction and turnover among the employees (Mathis and Jackson 1991). At least one study has found HRM practices to be the leading cause of small firms' failures (McEvoy 1984).
However, there is no consensus among researchers regarding the role of HRM in the success of small firms. A study suggesting that training in personnel management is not as critical as training in finance or marketing for small business owners has added to the confusion regarding the importance of HRM practices in small firms (Curran 1988). To resolve this issue, a comparative study of small and large firms is undertaken.
A good HRM program will recruit, select, motivate, and retain employees who have the required workforce characteristics (Deshpande, Golhar, and Stamm 1993; Saha 1989). A majority of the published research investigating HRM issues in small businesses is conceptual and has concentrated on diverse HRM topics. Maurer and Fay (1986) examined the legal issues involved in employee selection methods used in small business. Gatewood and Field (1987) proposed a model selection program for small business. Fairfield-Sonn (1987) developed a strategic process model to guide the establishment of small business training and development programs. Curran (1988) suggested various training strategies for small business. Fowler and Murlis (1989) proposed compensation systems for small companies. Cosgrove and Dinerman (1982) addressed industrial relations issues in small firms. Holley and Wolters (1987) examined employment-at-will issues in small businesses. Finney (1987) and Smith (1991) addressed personnel challenges faced by HRM managers of small firms and proposed strategies for effective HRM.
On the other hand, some empirical work has also been reported in the literature that examines specific aspects of HRM. McEvoy (1984) studied personnel practices of 84 small businesses near a large midwestern metropolitan area and found that small businesses lacked creative staffing practices. …