Abstract
Although human capital has been widely recognized as a valuable asset that helps firms to develop core competences to achieve competitive advantage, little is known about how HR (human resource) practices enhance employee capabilities in small and medium-sized enterprises (SMEs). Building upon the resource-based view of HRM (human resources management) and the proactivity literature, we explore the effects of the HR system as an integration of bundles of HR practices on employee capability and how employee proactivity helps explain this relationship in the SME context. Using survey data collected from 213 employees working in service SMEs in New Zealand, we applied partial least squares structural equation modelling (PLS-SEM) to test our hypothesis. The results show that the HR system in SMEs facilitates employee proactivity with this, in turn, enhancing employee job capability. Our findings suggest that the HR system, as a source of human capital, is important for SMEs to exploit. Specifically, our findings validate the notion that the HR system is beneficial to employee capability through facilitating a proactivity mechanism in the SME context. These findings yield both theoretical and managerial implications, which are discussed.