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We investigate the strategies, [human resources] HR attributes and their synergies that are associated with superior performance in service [small and medium enterprises] SMEs using data from the UK Tourism Hospitality and Leisure (THL) sector. A major advantage of our analysis is that our sample includes information also on very small firms which makes results representative of the industry but also sheds light on a very little investigated area related to the nature of HRM and its link with performance of micro businesses. Our results suggest that high-performing SMEs in the THL sector are managed by more experienced entrepreneurs. Moreover, they employ a combination of technological and know-how firm differentiation strategies together with a highly skilled workforce, and/or a combination of (product) differentiation strategies based on quality of service and personal attention to customers, and a generous compensation package and attention to employees' development.

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This paper presents empirical evidence of the relationship between human resources practices and the effectiveness of a firm to capitalise on investment in knowledge as measured by the returns to innovation and business development expenditure. The empirical design is based on exploiting a natural experiment provided by a policy intervention that offers human resources-related support to small and medium sized enterprises in the UK tourism, hospitality and leisure sector. Our findings suggest that businesses that receive support on the area of staff training and development, in [human resources] HR planning and in staff recruitment and retention generate 100%, 86% and 134% more revenue per pound spent on innovation and business development compared to firms that do not receive such services. Thus, in contrast to existing empirical studies in the field, this evidence supports a strong causal link between human resources and knowledge processes and sheds some light on the 'black box' that describes the strategic logic between human resource management and firm performance.

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