Fostering organizational innovation in SMEs through employee-driven innovation: The role of IB-HRM practices and empowering leadership

Abstract

In the contemporary dynamic and complex business environment, innovation is a key driver of firms' growth, adaptability, and competitiveness. This is particularly crucial for small and medium-sized enterprises (SMEs), which contribute significantly to global economies but face unique challenges in fostering innovation. With limited resources, SMEs rely heavily on their employees to drive innovation, underlining the need to understand the key factors that stimulate employee innovativeness. This study investigates how innovation-based human resource management (IB-HRM) practices, in conjunction with empowering leadership, foster innovative behaviors among employees in SMEs, thereby enhancing organizational innovation performance. Using a time-lagged, multi-source research design, we collected data from 619 employees and 147 SME managers/owners across three time periods. The results reveal that IB-HRM practices and empowering leadership positively and indirectly impact employees' innovative behaviors in SMEs through a supportive organizational climate for innovation. Moreover, the results indicate a significant positive relationship between innovative behaviors and organizational innovation performance, including product, process, administrative/managerial innovations, and innovation outputs (e.g., patents, copyrights). These findings deepen the theoretical understanding of the structural factors driving employee innovation in SMEs and provide empirical validation for the employee-driven innovation in SMEs.