Human Capital Development as the Strategy of Improving Organizational Performance: Empirical Evidence from Indonesian SMEs

Abstract

This study aims to verify whether human capital can mediate the relationship between HRM practices and organizational performance. The respondents of this study consisted of 65 Jambi batik entrepreneurs who were drawn randomly. The data collected were analyzed using the SEM method with the PLS approach. The results of data analysis show that (1) training has a positive and significant effect on human capital, (2) training has a positive and significant effect on organizational performance, (3) human capital has a positive and significant effect on organizational performance, (4) human capital mediates the relationship between training and organizational performance, (5) compensation has a positive and significant effect on human capital, (6) compensation has a positive and significant effect on organizational performance, and (7) human capital mediates the relationship between compensation and organizational performance. This finding has implications for the theory of the relationship between HRM practices and organizational performance. These findings further clarify how HRM practices affect organizational performance. Based on these findings, Jambi batik entrepreneurs are advised to improve organizational performance through the application of HRM practices that can increase human capital. Future researchers are advised to use other variables as mediators.