The influence of HRM practices, organizational culture, and innovation capability on SME performance in developing economies

Small and medium-sized enterprises (SMEs) in developing economies play crucial roles in driving economic growth, creating employment opportunities, and promoting regional competitiveness. However, their sustainability often faces challenges due to limited resources, external pressures, and weak innovation capabilities. This study examines how human resource management (HRM) practices, organizational culture, and innovation capability interact to influence the performance of processing industry SMEs in Malang city, Indonesia. A quantitative approach with data collected from 160 SMEs and analyzed through PLS-SEM was used. This study finds that HRM practices have significant positive effects on SME performance ( β = 0.400 ; p < 0.005 ) and innovation capability ( β = 0.405 ; p < 0.005 ). Organizational culture does not directly influence SME performance ( β = -0.117 ; p > 0.05 ) but significantly enhances innovation capability ( β = 0.216 ; p < 0.005 ), which in turn positively affects performance ( β = 0.357 ; p < 0.05 ). Moreover, innovation capability significantly mediates the relationships between HRM practices and SME performance ( β = 0.145 ; p < 0.05 ) and between organizational culture and SME performance ( β = 0.077 ; p < 0.05 ). These findings indicate that HRM practices directly enhance performance, whereas organizational culture contributes indirectly by fostering innovation that strengthens competitiveness. The study contributes theoretically by integrating HRM, organizational culture, and innovation capability into a unified model while offering practical insights that highlight innovation capability as a strategic mechanism for improving competitiveness and sustaining performance among SMEs in the processing industry sector.