High performance work practices, industrial relations and firm propensity for innovation

This paper aims to examine the hypothesis of the influence of high performance work practices (HPWPs) and industrial relations on firm propensity for product and process innovation. The database used is constituted by a sample of 166 manufacturing firms located in the Lombardy region (Italy). The estimates carried out indicate that workplace governance that relies heavily on a unilateral and autocratic implementation of HPWPs has a positive and significant effect on both types of innovation. This effect becomes more pronounced – in terms of product innovation ‒ in the presence of „democratic‟ workplace governance style and workers‟ representatives exercising an amicable and soft role (in a participatory style) and limiting their actions around profit-sharing incentive schemes. The driving force exerted by workers‟ representatives in respect of product innovation can be explained by the idea that this innovation represents the path that can better protect workers‟ prospects in an uncertain and unstable competitive environment. The results also show that when workers‟ representatives perform an „advocatory‟ role, extending their influence to a wide range of issues (such as reorganization processes, employment levels, etc.), firm propensity for product innovation reduces. This outcome can be interpreted as a «hold-up problem», namely, a likely appropriation by workers of quasi-rent from investments in product innovation through increased bargaining power, with the subsequent risk that these investments turn into sunk costs for the firm. The fear of running into problems of this nature could therefore be the reason why, in these contexts, firms reduce their efforts towards product innovation. The sampling and cross-sectional nature of the data casts some doubt on the findings since they could be inconsistent due to selection bias, the endogenous character of the HPWPs and heteroskedasticity. The series of tests carried out nonetheless confirm the high reliability of the results obtained. Further tentative tests, although not fully satisfying, were pursued to control for firm fixed effects linked to the quality/competencies of the manager and/or owner, which may influence not only the workplace governance style, but also the role played by workers‟ representatives – and industrial relations as a consequence – hence rendering workplace governance style and industrial relations partially endogenous.