The formalization of HRM function denotes the degree to which HRM function is systemized and institutionalized. Indicators of the formalization of HRM function include “the extent to which a stated policy is in place, regular and written-up procedures exist, and a specialist designs and executes the HR systems” (Singh & Vohra, 2009, p. 95; also see Nguyen & Bryant, 2004; Štangl Šušnjar et al., 2016). Formalization of HRM function could lead an organization to develop appropriate HRM structures to effectively manage human resources, which could ultimately result in favourable organizational outcomes (Dekker et al., 2013; Li & Rees, 2021; Lozano-Reina & Sánchez Marín, 2019; Sánchez-Marín et al., 2019).

Concerning the formalization of HRM in SMEs, previous studies such as Štangl Šušnjar et al. (2016) and Çetinel et al. (2008) show that SMEs with a dedicated HRM department/unit are very rare. Line managers (such as chief executive/owner-managers or other department managers) are responsible for managing human resources in SMEs when neither an HRM department nor an HR manager is present (Çetinel et al., 2008; Štangl Šušnjar et al., 2016). Even in SMEs with an HR manager, Štangl Šušnjar et al. (2016) showed that decisions regarding training and financial rewards were usually taken by the line managers. However, Singh and Vohra (2009) showed an inverse relationship between the extent of involvement of the owner-manager in managing human resources and the existence of a formal policy for HRM; de Kok et al. (2003) showed that the presence of an HRM department/unit or HR manager is related to the existence of more formal HRM practices. Furthermore, SMEs with HRM policies and practices perform at higher levels (Chandler & Mcevoy, 2000), and the chances of SMEs maintaining higher retention rates increase with the presence of HR managers (Heneman & Berkley, 1999).

The literature also provides evidence to suggest that the degree of formalization of HRM in SMEs is determined by several contingency factors (Çetinel et al., 2008; de Kok et al., 2003; Li & Rees, 2021; Singh & Vohra, 2009; Urbano & Yordanova, 2008). The number of employees engaged in the enterprise (Çetinel et al., 2008; Singh & Vohra, 2009; Urbano & Yordanova, 2008), its involvement in export trade (de Kok et al., 2003), and whether it is managed by non-family counterparts (de Kok et al., 2003; Molina-García et al., 2020; Sánchez-Marín et al., 2019) were all found to influence the degree of formalization of HRM as well as how SMEs are managed in general. For example, SMEs that are managed by non-family counterparts and are involved in export trade have more formalized practices than other SMEs (de Kok et al., 2003). Furthermore, SMEs that operate as franchise units or are owned by a larger firm have more formalized practices than other SMEs (de Kok et al., 2003; Urbano & Yordanova, 2008). In addition, the degree of formalization increases with the increase in employee strength, where the level of formalization is greater in medium-sized enterprises compared to small-sized enterprises (Çetinel et al., 2008; Singh & Vohra, 2009).

Human resource management practices include those practices carried out by an organization that aid in managing its people. According to Lado and Wilson (1994), HRM practices serve the purposes of attracting, developing, and maintaining (or disposing of) an organization’s human resources. When drawing on the resource-based view of the firm, the dynamic capabilities perspective, or human capital theory, the focus is on the practices that enhance employees’ capabilities, i.e., their knowledge, skills, and abilities (see Appelbaum & Kamal, 2000; Barney, 1991). When drawing on the AMO model, the focus is on ability-, motivation-, and opportunity-enhancing practices (Jiang et al., 2012). Lepak et al. (2006) suggested conceptualizing HRM practices into one of these three primary areas. Accordingly, typical ability-enhancing practices include recruitment, selection, and training; typical motivation-enhancing practices include performance-based pay and job security; typical opportunity-enhancing practices include work teams and employee involvement (Jiang et al., 2012; Lepak et al., 2006). However, as there is no single agreed list of HRM practices (Sánchez-Marín et al., 2019), they cannot be grouped into distinct categories (Kellner et al., 2019). For example, previous research has classified performance appraisal as being an ability-enhancing practice (e.g., Sarikwal & Gupta, 2013), a motivation-enhancing practice (e.g., Tian et al., 2016), and an opportunity-enhancing practice (e.g., Raidén et al., 2006). Therefore, Kellner et al. (2019) argue that a prescriptive course of action to group practices into distinct categories of ability-enhancing, motivation-enhancing, and opportunity-enhancing remains elusive. When considering the popularity of applying HRM practices, Boselie et al. (2005) identified “training and development”, “compensation and performance management”, and “recruitment and selection” as being the top three practices in order of popularity. In the context of SMEs, the literature implies the importance of operationalizing HRM practices in a way that is SME-friendly (i.e., Sels et al., 2006; Štangl Šušnjar et al., 2016). HRM practices in operation and the extent of HRM intensity in an SME reflect the operational needs of the enterprise and the rational concerns in running the business (Barrett & Mayson, 2007; Ogunyomi & Bruning, 2016). Most HRM practices used by SMEs address the attraction, motivation, and retention of employees (Barrett & Mayson, 2007; Cassell et al., 2002; Sels et al., 2006; Štangl Šušnjar et al., 2016). Attraction practices such as planning for human resources and staffing (recruitment, selection, and hiring), motivation practices such as performance measurement, and retention practices such as training are identified as being the main sources of SME performance (Appelbaum & Kamal, 2000; Brand & Croonen, 2010; Ogunyomi & Bruning, 2016; Štangl Šušnjar et al., 2016). Accordingly, the present study investigated three HRM practices commonly used by SMEs, namely planning for workforce needs and staffing (recruitment, selection, and orientation), performance measurement, and training.

Most of the previous studies that investigated HRM intensity limited themselves to listing the HRM practices present and used descriptive techniques to present their findings (e.g., Nguyen & Bryant, 2004; Sels et al., 2006; Singh & Vohra, 2009; Štangl Šušnjar et al., 2016). However, a few studies went beyond merely investigating the presence of HRM practices to investigate the extent of HRM intensity (e.g., Brand & Croonen, 2010; Çetinel et al., 2008; Marescaux et al., 2012). These studies emphasized the importance of implementing HRM practices in view of the employees’ capabilities and expectations, as well as the interests of the organization. This is in line with the arguments of Edgar and Geare (2005) who stated that the way HRM practices are used is more important than their mere presence. The literature further suggests that significant differences exist between larger firms and SMEs with respect to how HRM practices are adopted, and not with respect to what HRM practices are adopted (Nguyen & Bryant, 2004, p. 601), and this involves the extent of HRM intensity. However, multiple previous studies demonstrated that HRM intensity in SMEs is less professional and less intensive in nature compared to their larger counterparts (Brand & Croonen, 2010; de Kok et al., 2003; Kotey & Slade, 2005; Sels et al., 2006).

The study was conducted in medium-sized enterprises in Sri Lanka. Following the guidelines of the United Nations Industrial Development Organization (UNIDO) (2004), enterprises with a number of employees ranging from 50 to 249 were considered as medium-sized enterprises. In the Sri Lankan context, irrespective of the size of the enterprise, all businesses operating in the country adhere to government-stipulated labour laws and standards. In addition, some SMEs even provide food, accommodation, and year-end bonuses, and operate schemes for employee recognition, such as Employee of the Month awards, with the intention of attracting and retaining employees in Sri Lanka (Wickramasinghe & Mahmood, 2017, p. 403). Contingency theory (Delery & Doty, 1996) provides the theoretical underpinning to the notion that HRM intensity in SMEs could be influenced by various contingencies, such as the location and age of the business. For example, most of the medium-sized and large enterprises were identified as operating in urban areas of Sri Lanka, unlike the micro enterprises (Department of Census and Statistics, 2015). Moreover, the number of years the business has been in operation is important for SMEs when adopting standard business practices in Sri Lanka, where enterprises which have been operating for seven years or more have more strategic planning compared to enterprises which have been operating for less than seven years (Wijetunge, 2014). Furthermore, the literature suggests that family-owned businesses do not generally have business plans and apply less formalized practices, and remarkable differences exist in the way HRM is applied compared to non-family businesses (Reid et al., 2002; de Kok et al., 2003, p. 6). In addition, SMEs engaged in export trade, with franchise agreements, or SMEs that cooperate with larger firms in business operations show remarkable differences in managing human resources compared to their respective counterparts (de Kok et al., 2003; Urbano & Yordanova, 2008). Therefore, the following criteria were used in the study to identify medium-sized enterprises:

The sample was composed of medium-sized enterprises operating in the western province, the main business hub of the country, using convenient and snowball sampling methods. The study was designed to capture the experiences of line managers (non-HR managers). Hence, potential respondents were line managers in lower (supervisor) to middle-level managerial job positions, with subordinates reporting to them. In addition, potential respondents were considered as those who had at least three years’ experience in the present workplace since their capacity to make an accurate assessment of HRM intensity is important. For each enterprise, a maximum of half of the individuals who fulfilled the sample selection criteria were invited to participate in the survey. Participation was voluntary and anonymous. The survey was distributed cross 30 medium-sized enterprises and a total of 181 responses was received.

The formalization of HRM function was measured on a six-item scale developed for the study. This scale intended to capture whether the respondents agreed with the level of formalization, and the items were measured on a five-point Likert scale that ranged from strongly agree (5) to strongly disagree (1), as shown in Table 1. HRM intensity was measured on a ten-item scale developed for the study. This scale intended to capture the actual level of use rather than the respondents’ feelings, such as satisfaction or importance. Hence, the items were measured on a three-point Likert scale that ranged from highly used (3), to used to some extent (2), and not used at all (1), as shown in Table 2. All Likert-scales (such as three-, five-, seven-, and nine-point scales) are recognized as valid and reliable depending on what is being measured (see Brown, 2010; Jacoby & Matell, 1971; Vagias, 2006). The item measures developed for the present study were pre-tested with a sample of appropriate personnel to ensure content and face validity. The item measures of internal consistency reliability, factor structure, convergent validity, discriminant validity, and construct reliability were ensured during the data analysis, as described in the next section. Regarding the control variables, as described in the section on the sample, the study controlled for seven contingency variables at the sample selection stage.

Factor analysis was performed on the two scales, i.e., the formalization of HRM function and HRM intensity, for appropriate internal consistency reliability, factor structure, convergent validity, discriminant validity, and construct reliability (CR) to identify any issues with multicollinearity and response bias. Convergent validity was measured using the average variance extracted (AVE) and discriminant validity was measured using the square root of AVE. As detailed in the results section, the factor analysis for the formalization of HRM function yielded one factor (the independent variable) and the factor analysis for HRM intensity yielded three factors (the dependent variables). The intention of the study was to test the effect of the independent variable on all three dependent variables instead of running three separate models using a simple regression analysis. Hence, a multivariate general linear model was used for testing the hypotheses, and the results were interpreted accordingly (IBM SPSS Statistics, 2020). As already explained in the sample and measures sections, the study controlled for seven contingency variables at the sample selection stage, and none were controlled for at the data analysis stage.