Human Resource Practices and Firm Performance in China: The Moderating Roles of Regional Human Capital Quality and Firm Innovation Strategy

We conducted two studies to investigate the contingent role of regional human capital quality (i.e., the knowledge, skills, and abilities of the collective workforce in a region) in the relationship between firm-level human resource (HR) practices (i.e., practices focusing on employees' human capital development) and firm performance in China. Drawing upon human capital theory, we hypothesized that the human capital-enhancing HR practices and regional human capital quality have a substitutive effect on firm performance. Study 1 uses a World Bank survey of 9,125 firms in 30 provinces. We found that the human capital-enhancing HR practices relate more strongly to firm performance when regional human capital quality was lower than when it was higher. Study 2 used a sample of 203 firms across seven provinces. We found similar results. We further hypothesized and found that the substitutive effect of regional human capital quality was stronger when a firm adopted an innovation strategy. Our findings provide new evidence for the contingency perspective of strategic HR management and highlight the importance of matching HR practices with local labor quality conditions and the business strategy of the firm.