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

This paper examines the influence of high performance work practices (HPWPs) and industrial relations (IR) on firm propensity for product and process innovation. The authors distinguish between two styles of workplace governance – democratic and autocratic – based on whether the management is willing to cooperate with workers’ representatives, and two styles of IR – participatory or advocatory – based on the extent of their influence. The estimates carried out indicate that HPWPs always have a significant and positive effect on both product and process innovation, while IR has a positive effect only in respect of product innovation, and provided the style is of participatory type. An interpretation of the IR effects could be that process innovation makes workers feel insecure about their jobs, while product innovation represents the path that can better protect workers’ prospects in an uncertain and unstable competitive environment. In respect of the style of IR, the effect is positive when workers’ representatives adopt a participatory role; the effect is instead cancelled out when employing an advocatory role. Participatory style IR is very likely to contribute to creating a positive attitude towards change, with workers willing to share the adjustment costs (such as learning new competencies), while advocatory style IR generates, in the minds of managers, a perception of the risk that investments in product innovation may turn into sunk costs for the firm through a likely appropriation of quasi-rent by workers (“hold-up problem”).