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Archives of Business Research – Vol. 11, No. 5

Publication Date: May 25, 2023

DOI:10.14738/abr.115.13713.

Olila, M., Maalu, J., & Muindi, F. (2023 Influence of Innovation Climate on Attraction and Retention of Human Capital Among Small

and Medium Enterprises in Kenya. Archives of Business Research, 11(5). 144-162.

Services for Science and Education – United Kingdom

Influence of Innovation Climate on Attraction and Retention of

Human Capital Among Small and Medium Enterprises in Kenya

Mbadi Olila

School of Business, University of Nairobi, Nairobi-Kenya

Jackson Maalu

Department of Business Administration,

School of Business, University of Nairobi, Nairobi- Kenya

Florence Muindi

Department of Business Administration,

School of Business, University of Nairobi, Nairobi-Kenya

ABSTRACT

Small and Medium Enterprises (SMEs) globally are currently operating in dynamic

and uncertain business environments, making it necessary to attract and retain

valuable human capital that can give them a competitive edge over peers. Most of

these enterprises lack resource advantages and suffer from liabilities of size and

newness, resulting in a big challenge in their attempts to compete favorably with

large established firms. The ability of an enterprise to create and sustain a healthy

and supportive innovation climate is consequential to its ability in attracting and

retaining valuable human capital. This research aimed to ascertain the influence of

innovation climate on attracting and retaining human capital among SMEs in Kenya.

The top 100 SMEs for the year 2019 formed the study sample. A response rate of

59% was achieved. The study utilized structured questionnaires to collect data

from founders of enterprises, and in their absence, the top management team was

engaged. The data analysis methods used included SPSS and partial least squares

structural equation modeling (PLS-SEM). This yielded results which established

that various dimensions of innovation climate, including organizational support for

innovation, organization structure, teamwork, leadership behaviour, and

manager's approval, have a significant and positive influence on the attraction and

retention of human capital among SMEs in Kenya. From these findings, it is

recommended that founders and top management teams of SMEs should put in

place a supportive and healthy innovation climate where human capital holders feel

comfortable working and growing their careers in the long run. Such measures are

instrumental in the attraction and retention of valuable human capital.

Keywords: Human Capital, Innovation Climate, Attraction and Retention, SMEs

INTRODUCTION

Organizations across the globe are currently grappling with various human resource

management (HRM) challenges, including the attraction and retention of valuable human

capital (Suseno & Pinnington, 2017). These entities face severe challenges in maintaining

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Olila, M., Maalu, J., & Muindi, F. (2023 Influence of Innovation Climate on Attraction and Retention of Human Capital Among Small and Medium

Enterprises in Kenya. Archives of Business Research, 11(5). 144-162.

URL: http://dx.doi.org/10.14738/abr.115.13713.

effective recruitment, selection, and retention of human capital. Skilled, experienced, and

knowledgeable employees are crucial in attaining a firm's competitive edge. This means they

are in high demand and can choose which organizations to work for (Michaels, Handfield-Jones

& Axelrod, 2001). Such employees play crucial roles in achieving enterprises' long-term success

through innovative products and processes (Ready, Hill & Conger, 2008). Organizations that

are to survive and flourish in the current competitive, volatile, and complex business

environments are thus tasked with the duty to develop their capacities in a way that attracts,

motivates and ultimately, retains skilled and competent workforce. This is due to the fact that

the effectiveness and long-term success of entities lie in the competitiveness of their human

resources (Holtom et al., 2005). Therefore, attracting and retaining human capital is a key

differentiating factor for organizations in the current dynamic business environments. Loss of

skilled and competent employees can severely impact an entity's overall performance,

sustainability, and image (Pilbeam & Corbridge, 2006).

The ability of an enterprise to adjust to complex and uncertain business environments is key to

attaining a competitive edge over peers. Several disruptive changes are taking place in the

business environments, making it necessary for organizations to adopt innovative practices to

survive and thrive (Eidizadeh, Salehzadeh, & Esfahani, 2017). Small and medium enterprises

worldwide are facing stiff competition from established firms, most of which have resource

advantages resulting in economies of scale (Prasanna et al. 2019). Most SMEs are flexible and

can therefore create a supportive and healthy innovation climate that they can leverage to

survive in the competitive and dynamic business markets. Majority of these enterprises are less

bureaucratic and can seamlessly adapt to the volatile business environment since they have

fewer layers of hierarchies. SMEs also have closer contact with their skilled and knowledgeable

employees than established firms (Dixit & Nanda, 2011). This encourages such employees to

participate in the growth of the enterprises since they are involved in making critical decisions,

thereby feeling valued and appreciated.

SMEs have been acknowledged as critical engines driving economic development among

various nations across the globe. These enterprises account for over 90% of entities operating

in both developed and emerging economies. They are responsible for creating employment

opportunities, capital formation, innovation, alleviating poverty, and contributing to Gross

Domestic Product (GDP)(Atieno, 2012; Muriithi, 2017). Nevertheless, despite these critical and

positive contributions, most SMEs operating in Kenya and other developing countries still

grapple with several hurdles that hamper their effectiveness, survivability, and long-term

sustainability. Such challenges include political instability, difficulties attracting and retaining

human capital, poor infrastructural facilities, limited access to credit facilities, rampant

corruption, lack of relevant managerial skills and knowledge, and inadequate access to crucial

business information (Muriithi, 2017). SMEs have received limited support from the

government, thereby hampering their contributions toward economic and social development.

These challenges have made most enterprises experience the missing middle phenomenon,

thereby becoming less attractive as potential employers to employees with valuable skills and

knowledge.

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Archives of Business Research (ABR) Vol. 11, Issue 5, May-2023

Services for Science and Education – United Kingdom

Innovation Climate

Every organization develops and maintains a unique workplace environment that influences

how employees think, feel, and behave. This implies that the business environment in which

enterprises operate has not only affected the business side of things, but also the mindset of

employees (Madueke & Emerole, 2017). Organizations need to create and maintain a workplace

environment that supports not only the production of innovative ideas but also the

implementation of the same (King et al., 2007). This point of view is asserted by Isaksen and

Akkermans (2011) who state that the key to organizational effectiveness is in creating an

environment that encourages employee creativity and innovative behavior. This brings about

the concept of an innovative organizational climate, which is defined by Ashraf and Khan (2013)

as a work environment that embraces innovation. This can be in the form of support from

leadership and the right attitudes of employees toward innovative activities.

Important to note is that the level of employee’s innovation depends on an organizational

innovation climate (Foss, Woll, & Moilanen, 2013). Employees may have the capacity to

innovate and may not do so in situations where the innovation climate is not healthy and

supportive. Therefore, organizations must be willing to create a workplace environment that

encourages innovation among employees through the availability of valuable resources and the

application of suitable tools and methods (Shalley & Gilson, 2004). Innovative workers need to

be assured that their employer will give them full support when generating and implementing

new but risky ideas. As noted by Alpkan et al. (2010), employees are more likely to embrace

risk-taking when they realize that the management team is tolerant of uncertainty and failures

that come with generations of new ideas. This is evidence by a study that reveals that

conservative and risk-averse firms are less likely to be creative and innovative since their

workers may not be confident in engaging in risky pursuits (Gupta, MacMillan & Surie, 2004).

Instead, they engage in entrepreneurial pursuits whose outcomes are unknown

Attraction and Retention of Human Capital

Enterprises that intend to achieve long-term competitiveness must do everything to acquire,

motivate, develop, and retain skilled and competent employees (Davis & Simpson, 2017). This

makes it necessary for such enterprises to implement effective and competitive human capital

attraction and retention strategies. First, this can be achieved by looking into various areas

within the organization in which the absence of employee commitment and discontentment can

arise. Then, management teams could develop practical initiatives to prevent their human

capital from being poached by competitors. For instance, valuable employees must be rewarded

while ensuring harmonious working and social relationships between them and management

(Cascio, 2003). Human capital retention issues are turning out as key workforce management

hurdles that both SMEs and established firms need to look keenly into. Long-term success can

only be achieved by firms that adapt their behaviors to the realities of the current business

environments in which sustainability depends on organizational employees' creativity and

innovativeness (Sinha & Sinha, 2012).

Enterprises with poor recruitment, selection, and retention practices will likely have low

productivity and high turnover rates. This can be attributed to employees who are mismatched

with their jobs and cannot stay long. In contrast, qualified workers who don't find the work

environment supportive and healthy also leave quickly (Branham, 2005). Therefore, firms must