The Effects of Human Resource Management Practices onFirm Productivity –Evidence from Finland1
May 9, 2009
Derek C. Jones*, Panu Kalmi**, Takao Kato*** and Mikko Mäkinen*** Dept. of Economics, Hamilton College, Clinton, NY 13323, djones@hamilton.edu;** Dept. of Economics, Helsinki School of Economics, PO Box 1210, 00101 Helsinki,Finland and Helsinki Center for Economic Research, kalmi@hse.fi andmikko.makinen@hse.fi*** Dept. of Economics, Colgate University, Clinton, NY 13346, kato@mail.colgate.edu
Extended abstract: Evidence from the around the world suggests that human resource
management (HRM) practices, such as increased employee participation in decision
making and compensation systems that relate employee compensation to firm or groupperformance, have become increasingly common (e.g. for the US, Blasi and Kruse 2006;
Freeman et al, 2009; for the UK, Pendleton and Robinson, 2008; for Japan, Kato 2006,
and for Finland, Kalmi and Kauhanen, 2008). Accompanying these trends there has been
an outpouring of research that investigates the impact of HRM practices for enterprise
performance. And there is an enormous variation in the specific methods used and thefocus of that literature. Thus some literature examines varying combinations of HRM
practices --e.g. Freeman et al construct indices based on 8 practices while other studies
focus on one practice, such as stock options—e.g. Sesil et al 2002. While most studies
use firm level analysis (e.g. Robinson and Pendleton, 2008) others are case studies (e.g.
Bartel et al 2004). Nevertheless, there does seem to be an emerging consensus that there
is a positive association between packages of HRM and business performance. Howeverfor various reasons such conclusions may be premature—many studies have at least one
potentially serious problem that might give pause before accepting conclusions.
For one thing, often the underlying data used in firm level studies are not representative.
Some studies do not use objective performance measures (e.g. WERS). Some studies do
not conduct their empirical analysis that is derived from a strong conceptual framework(ad hoc regressions rather then a production function). Several studies do not distinguishthe impact on performance of practices that were only recently adopted. Finally manystudies have a large potential for measurement error either because there is a failure toinclude all relevant HRM practices and omitted HRM practices cannot be assumed to betime invariant. Also other factors which are likely to have implications for enterprise
performance and which cannot be assumed to be unchanging during the study period may
have been neglected, notably changes in ICT (which has found to be important by1

We are grateful to the Finnish Work Environment Fund (Työsuojelurahasto) and the Finnish Funding
Agency for Technology and Innovation (TEKES) for financial support. All support from the ResearchInstitute of the Finnish Economy (ETLA) is gratefully acknowledged. The usual disclaimer applies.

Brynjolfsson and Hitt, 2000), ownership by families and foreigners (e.g. Bloom and vanReenen, 2007). In this paper we respond to all of these potential problems.
The central aim of this paper is to present the first empirical evidence on the nature andeffects of human resource practices (HRM) in the Finnish manufacturing sector.
Especially, we examine the effects of employee involvement EI and financial
participation FP practices on firm productivity. In the analysis, we use a new survey data
set on a range of HRM practices during 2002-2005 that is broader than in most studies.
Specifically we include several components in the indices of EI and FP practices. This
breadth of coverage will enable us to construct a greater range of HRM indices than havebeen used in other work. We are also able to take special note of policies that wererecently introduced—(while literature points to it being best to view HRM policies asinvestments, few studies take the age of the plan into account.) Importantly, our data are
based on a representative random sample of the manufacturing firms in Finland who had
50 or more employees in 2005. The survey includes data on HRM practices andemployee participation of 398 firms, which is 38% of the firms in the population. An
important feature of the survey data set is that it can be linked to data on firms’ financialstatements. Together these combined data constitute an unusual panel that allows us toanalyze the effects on firm productivity of HR practices separately and in combination infor the population of the Finnish manufacturing firms.
Furthermore, we also look at whether the inclusion of information on ICT practices thatprevious work has been found to be important in affecting business performance, affects
the impact of HRM practices on enterprise productivity. In addition, we investigate
whether the impact of HRM practices are modified once several control variables foundto be important in previous work, notably competition, family and foreign ownership, aretaken into account. Novel to the literature, we also control for possible measurement
errors in variables in our novel HRM survey data set (following Bloom and van Reenen,2007).
Based on our preliminary production function estimates we find that firm productivity: (i)is enhanced by some individual practices, notably decision-making consultative
committees and profit sharing schemes, but other individual practices have no statisticallysignificant effects; (ii) is positively associated with indices of EI or FP practices
considered alone; (iii) is positively combinations of FP and EI; (iv) is positively
associated with ICT and foreign ownership.
JEL Codes: M54, J53, L23Keywords: new workplace practices; HRM; employee participation; productivity