Employee Treatment and Firm Innovation Performance

Abstract

The paper is a review of literature on the topic of employee treatment and firm innovation performance. A detailed analysis of scholarly sources published within the past fifteen years allows tracing the development of the research topic and the shifts in researchers’ interest in its various aspects. The paper offers an overview of the research topic in the context of existing literature. The key questions and problems that have been addressed to date are identified.

The analysis of the key theories utilized by the scholars is performed. The main concepts and their relationships, as well as the most viable frameworks, are discussed. The gaps in literature are identified, and the prospective research questions are suggested. The conclusion gives a summary of the major findings of the paper.

Introduction

Firm innovation has gained an essential position in the modern business world. The issue of innovation is most frequently analyzed in relation to organizational performance, employee motivation, and employee performance. It is evident that without an appropriate workplace environment, people will not feel inclined to do their best for the company. Hence, employee treatment is a crucial determinant of firm innovation performance. Employee treatment is considered to be one of the most effective examples of a powerful corporate social responsibility practice (Mao and Weathers, 2019).

The most recent research on the topic tends to view firm innovation as a “channel” through which employee treatment impacts firm value (Mao and Weathers, 2019, p. 2). Despite a common opinion that positive employee treatment has a beneficial effect on firm innovation, there also exists a contradictory view stating that positive employee treatment can hinder innovation.

On the one hand, favorable employee treatment has the potential to enhance innovation by creating a failure-tolerance corporate culture and an appealing work environment. Since innovative projects are commonly associated with risks, unclear outcomes, and losses before gains, job security is the factor that promotes employees’ intention to participate in innovation.

Organizations that manage to make their environment tolerant of failure are more likely to gain higher levels of employee motivation (Mao and Weathers, 2019). Another significant component of positive employee motivation is protection against exploitation, which results in workers’ eagerness to contribute ideas to projects without being afraid that they might be expropriated.

On the other hand, there is an opinion that positive employee treatment may serve as an obstacle to innovation. In such cases, workers may feel safe in their usual environment due to monetary incentives, which makes them unwilling to risk their placid position (Mao and Weathers, 2019). Hence, job security may function as a barrier to innovation due to making employees feel too happy with their environment to risk losing it.

The analysis of the effect of employee treatment on firm innovation performance would be incomplete if only the latest research was taken into consideration. Thus, the paper will offer an explanation of the evolution of the selected research topic over the past fifteen years. A systematic review of academic articles will allow identifying the place of the research topic in the context of existing literature, the key questions and problems associated with it, and the major concepts and association between them. Furthermore, a framework for the research problem will be suggested, along with the key elements of research.

A discussion of research gaps singled out from the reviewed articles will result in possible research questions. A conclusion section will contain an overview of the insights gained from the critical report.

Theoretical Background

The Research Topic in the Context of Existing Literature

It is crucial to differentiate between various factors influencing employees’ attitudes toward work and their eagerness to be involved in innovation. Scholarly papers published within the past fifteen years have been selected with this aim. The analysis of these studies will allow singling out the most typical, as well as the rarest, aspects of concern associated with the research topic. The review of literature will cover three periods: 2005-2009, 2010-2014, and 2015-2019.

In 2005-2009, innovation was largely viewed as being affected by process management, quality systems, conflict management, innovation investment, and leaders’ influence (De Jong and Den Hartog, 2007; Jung, Wu and Chow, 2008; Lööf and Heshmati, 2006; Pekovic and Galia, 2009; Salomo, Weise and Gemünden, 2007; Song, Dyer and Thieme, 2006).

Lööf and Heshmati’s (2006) study investigated the correlation between

1. innovation investment and innovation output and
2. innovation output on firm performance.

The scholars emphasized that new goods were “at the heart of economic growth” (Lööf and Heshmati, 2006, p. 317). The authors stated that there existed a positive correlation between research and development (R&D) and companies’ productivity levels.

However, Lööf and Heshmati (2006) also noticed a lack of statistically significant relationship between R&D and patents in the “longitudinal dimension” (p. 318). The researchers found that innovation output increased employment only for services, while profit growth and innovation intensity were not closely correlated.

Another finding by Lööf and Heshmati (2006) was the existence of a close relationship between the profit level and innovation for services. At the same time, scholars admitted that the effect of innovation might have been inflated since they had not included observations with negative profit in their research.

Conflict management and its relation to innovation was the focus of Song, Dyer, and Thieme’s (2006) study. Scholars remarked that conflicts of both constructive and destructive nature could have different effects on innovation depending on the conflict-mitigating strategy selected. Such strategies, according to the authors, include accommodating, forcing, compromising, integrating, and avoiding (Song, Dyer and Thieme, 2006).

Researchers found that cooperative conflict-managing strategies were related to positive company outcomes. Specifically, accommodating and integrating approaches were positively correlated with constructive conflict. Further, Song, Dyer, and Thieme (2006) detected a connection between positive conflict management and organizational performance. Particularly, a steady positive link between innovation performance and constructive conflict was found. At the same time, scholars reported a secure negative connection between innovation performance and destructive conflict.

The issue of leaders’ effect on firm innovation was the topic of interest in De Jong and Den Hartog’s (2007) and Jung, Wu, and Chow’s (2008) articles. De Jong and Den Hartog (2007) focused on the general ways in which leaders affected employees’ innovative behavior. Meanwhile, Jung, Wu, and Chow (2008) investigated a specific leadership style – transformational – and its impact on firm innovation. In their study, De Jong and Den Hartog (2007) found that leaders could impact workers’ innovative behavior in two ways.

The first one was by leaders’ acting in a way that encouraged the development and utilization of new ideas among employees. The generation of ideas could be manifested through exploring new opportunities, establishing performance gaps, or creating solutions to problems (De Jong and Den Hartog, 2007). The second approach was the daily behaviors practiced by the leaders, such as problem solving, planning, monitoring, motivating, delegating, supporting, and rewarding. Scholars concluded that leaders had a crucial effect on employees’ willingness to participate in innovation processes.

Jung, Wu, and Chow’s (2008) research investigated the influence of transformational leadership employed by chief executive officers (CEOs) on firm innovation. The authors argued that transformational leaders possessed the ability to stimulate employees intellectually, which promoted innovative thinking and led to new technology and knowledge. As a result, according to Jung, Wu, and Chow (2008), firm innovation was more likely to prosper under the leaders who preferred the transformational type.

Salomo, Weise, and Gemünden (2007) found that innovation performance enhanced with the proficient project and risk planning, as well as with highly organized process management activities. The study by Pekovic and Galia (2009) focused on the effect of quality systems on innovation performance. Scholars found that a highly well-established quality system was needed to gain significant innovation performance.

It is viable to conclude that in the period of 2005-2009, employee treatment was not given much attention in regard to firm innovation performance. Some scholars, such as De Jong and Den Hartog (2007) and Jung, Wu, and Chow (2008) analyzed the problem of innovation from the point of view of leaders’ effect on employees’ attitudes toward innovation.

However, neither employee treatment nor employee motivation functioned as the key concepts of research in the selected period, the main focus having been given to leadership, management, and quality systems.

In 2010-2014, scholars’ interests in the research topic shifted, and they started paying more attention to the role of employees in firm performance (Bae, Kang and Wang, 2011; Edmans, 2011; Sauermann and Cohen, 2010). However, many research studies still did not involve the analysis of employee treatment and its effect on firm innovation.

Instead, within the stated period, researchers scrutinized the influence of promotional activities on innovation performance (Arvanitis, Donzé and Sydow, 2010) and the effect of companies’ ownership structure on innovation (Choi, Lee and Williams, 2011; Choi, Park and Hong, 2012). Finally, some studies were concerned with the role of stock liquidity in innovation (Fang, Tian and Tice, 2014) and the impact of employee performance and innovation on firm performance and total quality management (TQM) (Sadikoglu and Zehir, 2010).

Bae, Kang, and Wang (2011) analyzed employee treatment in relation to firm leverage. Scholars found that fair treatment of workers led to enhanced financing policies in organizations. Specifically, the authors noted that companies’ capital structure decisions were to a great extent affected by their non-financial stakeholders, including employees, customers, and suppliers.

The article did not investigate the effect of employee treatment on firm innovation, but it might be assumed that since employees were acknowledged to be a crucial determinant of firms’ success, they could also boost innovation performance. The study by Edmans (2011), which focused on the association between employee satisfaction and stock returns, confirmed such a suggestion.

Edmans (2011) noted that organizations whose employees felt satisfied with their working conditions demonstrated higher announcement and investment returns. Furthermore, the scholar noted that human capital was rather crucial for innovation (Edmans, 2011). Hence, according to the study, employee satisfaction functioned as an important factor capable of increasing firm innovation and stock returns.

Sauermann and Cohen (2010) investigated the link between employee motivation and firm innovation. Scholars emphasized that innovation performance highly depended on both the financial and non-financial motives of the workers in R&D departments. The authors noted that employee treatment had a crucial impact on innovation, but various motives had different effects.

Specifically, incentives related to independence, intellectual challenge, and financial rewards had a strong positive influence on innovative output (Sauermann and Cohen, 2010). Meanwhile, motives associated with responsibility and job security were reported to have a negative relation with innovation output. Researchers concluded that innovation was affected by the character of effort rather than its quantity.

In their study, Arvanitis, Donzé, and Sydow (2010) investigated the effect of technology policy on firm innovation based on the example of a Swiss agency titled Commission of Technology and Innovation (CTI). Scholars noted that the CTI supported R&D, which led to significantly higher innovation performance in the companies that received such support.

Another interesting finding made by Arvanitis, Donzé, and Sydow (2010) was that subsidized organizations were considerably more innovative than non-subsidized ones. That measure specifically concerned the sphere of new product development. Still, the researchers admitted that the success of policies differed depending on whether it was implemented and evaluated at a micro- or macroeconomic level.

Another topic of interest highlighted in the 2010-2014 publications was concerned with the impact of firm ownership structure on innovation. Choi, Lee, and Williams (2011) evaluated firm innovation performance from the point of ownership perspective. Scholars found that the level of patent registration was most prominently affected by foreign ownership and by the company’s affiliation within a business group.

Meanwhile, the effect of state and institutional property on innovation was less strong, though still positive (Choi, Lee and Williams, 2011). The study by Choi, Park, and Hong (2012) made a particular emphasis on technological innovation and its dependence on the organizations’ ownership structure. Scholars found that ownership concentration did not have a considerable influence on technological innovation performance.

However, as Choi, Park, and Hong (2012) remarked, some types of ownership, such as foreign and institutional, had a positive impact on firm innovation. Researchers emphasized the significance of managers’ recognition of ownership structures’ impact on innovation capabilities of organizations. Choi, Park, and Hong (2012) noticed that policymakers had to acknowledge the role of ownership types on innovation performance and take it into consideration when implementing reforms.

Fang, Tian, and Tice (2014) investigated the effect of stock liquidity on innovation. Scholars found that liquidity growth led to a reduction in future innovation. Scholars singled out two ways of how liquidity hindered innovation: elevated exposure to hostile takeovers and increased prevalence of institutional investors that did not supervise activities or collect data efficiently. Fang, Tian, and Tice (2014) concluded that there existed a strong negative association between firm innovation performance and stock liquidity.

Finally, Sadikoglu and Zehir (2010) analyzed the influence of innovation and employee performance on TQM and organizational performance. The TQM factors included in the study were employee management, training, information and analysis, leadership, process management, customer focus, supplier management, and continuous improvement.

The performance measures employed by the scholars were employee performance, firm performance, and innovation performance. Sadikoglu and Zehir (2010) found that innovation performance and employee performance had a moderate impact on the association between organizational performance and TQM practices.

During 2010-2014, research studies became focused on employee performance and firm innovation more than in 2005-2009. However, only a few articles incorporated the analysis of both of the key terms. The majority of the studies were concentrated on the investigation of promotional activities, ownership structure, stock liquidity, and other factors influencing either firm innovation performance or employee motivation. Still, a shift in scholarly interests was noticeable, and it became even more evident in the next five-year period.

The transformation of the research topic into what it currently is largely occurred in 2015-2019. During these five years, researchers started to focus on the concepts of employee treatment and firm innovation. Furthermore, the most recent studies tended to combine both of these concepts and look for relationships between them (Chen et al., 2016; Liu et al., 2017; Mao and Weathers, 2019).

Some of the articles from the period had a focus of investigation similar to those published earlier. For instance, Liu et al. (2017) and Song, Wei, and Wang (2015) analyzed the effect of ownership structures on innovation performance, which was investigated by Choi, Lee, and Williams in 2011 and Choi, Park, and Hong in 2012. Chen, Podolski, and Veeraraghavan (2015) scrutinized the link between management and innovation, which makes the study close to those conducted by De Jong and Den Hartog (2007) and Jung, Wu, and Chow (2008).

Other topics of interest in the selected period were concerned with employee retention (Kundu and Gahlawat, 2016) and employment relationships (Bornay-Barrachina, López-Cabrales and Valle-Cabrera, 2016).

It is crucial to note that over a decade, research in the firm ownership dimension and its impact on innovation altered. If 2011 and 2012 studies focused on foreign versus domestic ownership, research by Song, Wei, and Wang (2015) paid attention to the state-owned and non-state-owned companies, as well as the managerial ownership. Scholars found that innovation performance was higher in non-state-owned organizations than in state-owned ones due to the differences in market orientation (Song, Wei and Wang, 2015).

Liu et al. (2017) also found that privately owned firms were more likely to engage in innovative processes than state-owned ones. At the same time, Song, Wei, and Wang (2015) noted that if top managers were permitted to have a fraction in the company’s ownership stake, they were more likely to foster market orientation and increase innovation performance. Finally, a high ratio of major owners over minor ones was reported to improve the link between market orientation and firm innovation.

Chen, Podolski, and Veeraraghavan’s (2015) study investigated the impact of managerial ability on innovation success. Researchers found a positive connection between managerial ability and innovative output. Also, the authors reported that older managers and CEOs demonstrated a weaker tendency for innovation because they preferred living a quiet life to engaging in risky and unknown affairs. Further, Chen, Podolski, and Veeraraghavan (2015) remarked that equity holders demonstrated better managerial abilities and converted innovative ideas into new products more eagerly.

Hence, researchers emphasized the significance of managerial skills in the process of gaining innovative success. Bornay-Barrachina, López-Cabrales, and Valle-Cabrera (2016) analyzed human resource management’s impact on innovation. The scholars evaluated the influence of employment relations, human capital, and social capital on innovation. The authors found that there was no direct correlation between employment relationships and innovation. However, they detected a positive influence of social capital on human capital, which had the potential to affect innovation in a positive way (Bornay-Barrachina, López-Cabrales and Valle-Cabrera, 2016).

In their article, Kundu and Gahlawat (2016) aimed at determining the connection between retention practices and firm innovation performance. The scholars found that such retention practice as development and empowerment had a positive effect on firm innovation. Meanwhile, no link between supportive organizational culture and innovation was determined (Kundu and Gahlawat, 2016).

The authors emphasized the role of retention practices in cultivating companies’ sustainable competitive advantage. Kundu and Gahlawat (2016) concluded that by creating a positive working atmosphere and keeping employees within the organization, managers were more likely to encourage workers to participate in innovative processes.

Chen et al. (2016) investigated the impact of employee treatment on corporate innovation performance. The authors found that organizations with better employee treatment schemes were more likely to generate more patents through enhancing workers’ satisfaction and improving teamwork. Moreover, such patents were reported to be not only more numerous but also of higher quality (Chen et al., 2016). The scholars noted that good employee treatment produced positive changes in firms due to the fact that satisfied employees were stimulated to generate intellectual property.

Although Chen et al. (2016) did not find a positive correlation between employee treatment and job security and reverse causality, the study’s main findings, which involved innovation, made a significant contribution to the understanding of the selected research topic.

One of the aspects investigated in Liu et al.’s (2017) article was the effect of human resource systems on employee creativity. The scholars emphasized the role of creativity in innovation performance. Liu et al. (2017) noted that positive conditions for employee creativity were likely to enhance firm innovation, which meant that the human resource management system was a crucial determinant of both good employee treatment and firm innovation performance.

Finally, the most recent study dedicated to the research topic was conducted by Mao and Weathers (2019), who analyzed the influence of employee treatment on firm innovation. The scholars found both beneficial and unfavorable effects of employee treatment on company innovation performance.

Mao and Weathers (2019) noticed that job security and a failure-tolerant atmosphere enhanced motivation for innovation. Meanwhile, employee treatment could also play a bad role if employees enjoyed their state of affairs and were afraid to risk their good position. Thus, Mao and Weathers (2019) emphasized the influence of employee treatment on innovation but admitted that it could be not only beneficial but also destructive.

The Key Questions and Problems that Have Been Addressed to Date

The review of literature allows making some conclusions as to what questions and problems have received scholars’ attention in relation to the research topic. First of all, it is necessary to single out the problem of employee treatment as one of the core aspects of the present study.

Employee treatment and employee motivation were the aims of investigation in the studies by many scholars, including Bae, Kang, and Wang (2011), Bornay-Barrachina, López-Cabrales, and Valle-Cabrera (2016), Chen et al. (2016), Kundu and Gahlawat (2016), Liu et al. (2017), Mao and Weathers (2019), and Sauermann and Cohen (2010). Each of these articles investigated employee treatment, and some of them also included an analysis of the relationships between employee treatment and firm innovation.

The second most popular problem addressed by researchers was that of company ownership structure as a determinant of successful firm innovation performance. Such scholars as Choi, Lee, and Williams (2011), Choi, Park, and Hong (2012), Liu et al. (2017), and Song, Wei, and Wang (2015) included the analysis of ownership structure’s effect on firm innovation. Researchers agreed that the type of ownership had a significant influence on employees’ and companies’ willingness to participate in innovative projects.

Leaders’ impact on employees’ innovative behavior was analyzed in several scholarly researches, including the ones by Chen, Podolski, and Veeraraghavan (2015), De Jong and Den Hartog (2007), and Jung, Wu, and Chow (2008). The scholars found that leaders’ and managers’ impact on employees’ innovation preferences should not be underestimated. Depending on leaders’ communication and relationships with the workers, the latter could either easily agree to engage in new projects or refuse to do so.

Other questions singled out from the reviewed articles concerned the effect of various activities and processes on innovation performance. Some studies investigated process or conflict management as the determinants of innovation performance success (Salomo, Weise and Gemünden, 2007; Song, Dryer and Thieme, 2006).

Stock market and stock liquidity were investigated by Edmans (2011) and Fang, Tian, and Tice (2014), respectively, with the aim of establishing these factors’ influence on employee satisfaction and firm innovation. Pekovic and Galia (2009) and Sadikoglu and Zehir (2010) analyzed the impact of quality systems on innovation performance. Finally, there was also the analysis of technology policy (Arvanitis, Donzé and Sydow, 2010) and the link between innovation and performance (Lööf and Heshmati, 2006).

The variety of questions addressed by researchers signifies that the concept of firm innovation is a multifaceted one. At the same time, however, it seems that due to the existence of so many problems, it is not easy to single out the factor having the most powerful effect on firm innovation. Hence, narrowing down the scope of research to employee treatment as a determinant of firm innovation seems to be a relevant decision.

The Key Theories

The theory that was used most frequently by the authors of the analyzed studies researchers was the agency theory (Chen, Podolski and Veeraraghavan, 2015; Choi, Lee and Williams, 2011; Choi, Park and Hong, 2012; Song, Wei and Wang, 2015). The agency theory was introduced by Jensen and Meckling in 1976 (Chen, Podolski and Veeraraghavan, 2015).

This approach concentrates on control issues related to conflicts of interest between managers and shareholders. In the innovation context, the agency theory posits that top executives are motivated to refuse from risky innovative ideas in favor of those that promise immediate profit (Chen, Podolski and Veeraraghavan, 2015). The agency theory allows analyzing the economic stimuli of the company’s owners and managers (Song, Wei and Wang, 2015).

The core principle underlying the agency theory is that agency problems emerge because of conflicting interests and objectives between the owners and managers. Furthermore, the risk preferences of these two groups of actors also have a great influence on the development of the situation. As Choi, Park, and Hong (2012) note, the split of corporate ownership and control is most likely to lead to agency complications.

Therefore, scholars conclude that variances in ownership structure are crucial elements of understanding the outcome and settlement of agency problems in modern businesses. Choi, Lee, and Williams (2011) add that concentrated ownership is crucial for innovation since it enables effective mechanisms of monitoring. Overall, the agency theory helps to explain different motives and attitudes to innovation expressed by managers and owners at different levels.

The second most popular theory applied by researchers was the information processing theory. This approach presupposes that innovation processes are those leading to the reduction of uncertainty (Salomo, Weise and Gemünden, 2007). Also, according to this theory, innovation activities allow gathering and processing data more efficiently. As Song, Dyer, and Thieme (2006) mention, collecting comprehensive information, which becomes possible with the information processing theory, increases the level of firm development.

Other theories applied by the authors of articles under analysis include the trade-off theory (Bae, Kang and Wang, 2011), the resource dependence theory (Choi, Park and Hong, 2012), the leader-member exchange theory (De Jong and Den Hartog, 2007), human relations theories (Edmans, 2011), and information asymmetry theories (Fang, Tian and Tice, 2014).

Also, the Upper Echelons theory (Jung, Wu and Chow, 2008), the componential theory of creativity (Liu et al., 2017), the long-term incentive theory (Mao and Weathers, 2019), and the TQM theory (Sadikoglu and Zehir, 2010) were employed. Overall, the theory selected by the authors depends on their focus of the investigation.

The Key Concepts and Their Relationship

The overview of the selected research papers allows singling out the concepts analyzed by scholars most frequently in relation to employee treatment and firm innovation performance. It is crucial to note that the concepts ‘innovation’ and ‘innovation performance’ have been studied more often than ‘employee treatment.’

The concept ‘innovation’ was a part of Bornay-Barrachina, López-Cabrales, and Valle-Cabrera’s (2016), De Jong and Den Hartog’s (2007), Fang, Tian, and Tice’s (2014), Jung, Wu, and Chow’s (2008), Kundu and Gahlawat’s (2016), Liu et al.’s (2017), Lööf and Heshmati’s (2006), Pekovic and Galia’s (2009), and Sauermann and Cohen’s (2010) research. ‘Innovation performance’ was the key concept of Arvanitis, Donzé, and Sydow’s (2010), Choi, Lee, and Williams’s (2011), Choi, Park, and Hong’s (2012), Kundu and Gahlawat’s (2016), Salomo, Weise, and Gemünden’s (2007), and Song, Wei, and Wang’s (2015) studies.

Meanwhile, the concept ‘employee treatment,’ which is the second most important concept of the current study, was only used in three research articles, those by Bae, Kang, and Wang (2011), Chen et al. (2016), and Mao and Weathers (2019).

Some concepts with a close association to ‘employee treatment’ were analyzed by various scholars: ‘employment relationships’ (Bornay-Barrachina, López-Cabrales and Valle-Cabrera, 2016), ‘employee satisfaction’ (Chen et al. 2016), ‘employee behavior’ (De Jong and Den Hartog, 2007), ‘retention’ (Kundu and Gahlawat, 2016), and ‘supportive culture’ (Kundu and Gahlawat, 2016). The use of the two key concepts together was only traced in three studies: Bae, Kang, and Wang’s (2011), Chen et al.’s (2016), and Mao and Weathers’s (2019).

Several other concepts were a part of at least three research articles:

• ‘human capital’: Bornay-Barrachina, López-Cabrales, and Valle-Cabrera (2016), Edmans (2011), and Mao and Weathers (2019);
• ‘human resource management’: Bornay-Barrachina, López-Cabrales, and Valle-Cabrera (2016), Liu et al. (2017), and Chen, Podolski, and Veeraraghavan’s (2015);
• ‘patents’: Chen et al. (2016), Chen, Podolski, and Veeraraghavan (2015), and Mao and Weathers (2019);
• ‘performance’: Chen et al. (2016), Kundu and Gahlawat (2016), and Sadikoglu and Zehir (2010);
• ‘ownership structure’: Choi, Lee, and Williams (2011), Choi, Park, and Hong (2012), Song, Wei, and Wang (2015);
• ‘leadership’: De Jong and Den Hartog (2007), Jung, Wu, and Chow (2008), Sadikoglu and Zehir (2010).

Some concepts were investigated only in one or sources, but their value should not be underestimated. These are ‘social capital,’ ‘ownership concentration,’ corporate governance,’ ‘corporate innovation,’ ‘employee creativity,’ ‘management,’ ‘corporate social responsibility,’ and others. The most valuable connection for the present study is that between the concepts ‘employee treatment’ and ‘firm innovation.’ However, such a link could only be noticed in several articles. Meanwhile, other significant associations exist between the concepts ‘innovation’ and ‘performance,’ ‘corporate social responsibility’ and ‘management,’ and ‘employee creativity’ and ‘product innovativeness.’

Framework

Past researchers framed their research problems in a variety of ways, depending on the main concepts of the study. For instance, in their analysis of the effect of the CEOs’ leadership style on firm innovation, Jung, Wu, and Chow (2008) utilized the framework proposed by Waldman and Yammarino in 1999, which guided the exploration of leadership impacts at various levels of a company.

When studying the link between innovation and performance, Lööf and Heshmati (2006) employed the Cobb–Douglas production function of the sensitivity analysis. Salomo, Weise, and Gemünden (2007) used the organizational information processing theory framework to analyze the effect of process management on product innovativeness. Some of the other frameworks utilized in the reviewed sources included the legal protection framework (Choi, Lee and Williams, 2011), the multivariate regression framework (Fang, Tian and Tice, 2014), and the change analysis framework (Chen et al., 2016).

However, the approach that could be borrowed from the research papers under analysis as the most suitable for the current research is the agency theory framework, which was utilized in Chen, Podolski, and Veeraraghavan’s (2015) and Song, Wei, and Wang’s (2015) articles. In accordance with the agency theory approach, it will be necessary to perform the monitoring and motivating activities when investigating the link between employee treatment and firm innovation performance. The best way to represent the framework is via the following chart:

The key variables in the chosen research are ‘employee treatment’ and ‘firm innovation performance.’ The independent variable is ‘employee treatment,’ which means that this factor does not change but is viewed as a determinant of the dependent variable. The dependent variable is ‘firm innovation performance,’ which means that the level of innovation in an organization is contingent on the level of employee treatment and motivation.

The association between the elements of the proposed conceptual framework can be explained in the following way. If employees are satisfied with the way their firm treats them, they will eagerly participate in innovative processes. On the contrary, if the level of motivation is too low, employees are not likely to enhance the firm innovation performance level.

Discussion

The critical review of literature allows identifying some research gaps in the scholarly studies published within the past fifteen years. First of all, too little attention is paid to the relationship between employee treatment and firm innovation performance. Although scholars have analyzed a variety of factors impacting firm innovation, not many of them have investigated the effect of employee treatment on innovation.

Since this question is highly significant, the present research will add to and expand on the seminal research works in the field of investigation. A study on employees’ perceptions of their managers’ and firm owners’ attitudes toward employees might be a viable solution to gaining a better understanding of the link between the key concepts of the proposed research study. Additionally, it may be useful to inquire about managers’ opinions on the connection between employee treatment and motivation and workers’ eagerness to participate in innovative processes.

The possible research questions to be answered in the suggested research study are the following:

1. Is there a positive relationship between good employee treatment and firm innovation performance?
2. Is there a negative relation between poor employee treatment and firm innovation performance?
3. Does the position/experience of an employee in the company affect one’s willingness to participate in innovative practices?
4. How can managers improve employees’ willingness to work on innovative projects?

Conclusion

The review of literature allows making several important conclusions on the topic. First of all, an evident evolution in research on the selected problem can be traced over the past fifteen years. In 2004-2009, the impact of employee treatment on innovation was not investigated. Instead, leaders’ influence, process management, innovation investment, and conflict management were analyzed as the determinants of firm innovation performance.

In 2010-2014, the role of employees in the process of innovation was given more prominence. However, the highest development of the relationship between employee treatment and firm innovation was achieved in 2015-2019, when scholars started scrutinizing these two concepts both separately and jointly. The suggested framework for the current study is the agency theory approach. The review of literature made it possible to single out several prospective research questions.

It is believed that by answering these questions, it will become possible to trace the mechanisms of the effect that employee treatment produces on firm innovation performance. The suggested research is highly significant since the level of innovation directly affects firms’ success and competitiveness, as well as employees’ benefits.

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