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Small and Medium Enterprise (SME) sector is considered to be the backbone o f Japanese
economy. Its importance is often highlighted by the large share o f the economy it occupies,
whether in terms o f number o f companies, total number o f employees, value o f shipments or
GDP. However, since last two decades many SMEs have gone out o f businesses while firm entry
rate is showing downward trend. According to some business advocates, one o f the reasons fo r
high rate o f business failures in SMEs is due to its less attention to the human side o f their
businesses. Therefore, the broad objective o f this study is to examine the role o f Human
Resource Management (HRM) practices in SMEs in Japan. Specifically, this study attempts to
examine the relationship between H RM practices and labor productivity in manufacturing SMEs
in Japan. Further, it aims to examine the mediating link o f HR outcomes in between HRM
practices and labour productivity. A structured questionnaire was developed and sent to 436
SMEs in Aichi Prefecture and 144 firm s responded to the questionnaire resulting in 32 percent
response rate. Based on the data analysis it was found that there is a strong positive relationship
between H RM practices and labour productivity mediated by HR outcomes in manufacturing
SMEs in Japan.
