Micro, Small and Medium Enterprises (MSMEs) are the backbone of the economy due to their dominant numbers, significant contribution to GDP, and very high employment rate, making the quality of human resources within them a direct determinant of business performance and sustainability. Competent human resources make MSMEs more productive, innovative, and adaptive to change, enabling them to compete and survive in the long term (Vuong and Nguyen, 2022; Shet, 2025; Nechita et al., 2025; Tripathi et al., 2025).

MSMEs contribute more than 60% of Indonesia’s Gross Domestic Product (GDP) and represent around 99% of business units, making them the main driver of national economic growth. This sector also absorbs around 97% of the workforce and accounts for more than half of total investment, indicating that the economic sustainability of many households and regions is highly dependent on the strength of MSMEs (Munandar et al., 2025; Achmad and Wiratmadja, 2025; Alexandro, 2025).

Various studies show that the quality of human resources has a positive and significant influence on the growth, productivity, and competitiveness of MSMEs in various regions in Indonesia. Human resources with adequate business knowledge, technical skills, and managerial abilities are able to manage finances, production, marketing, and services more effectively, so that businesses can grow, not just survive (Ángeles López-Cabarcos et al., 2022; Engidaw et al., 2025; Hafeez et al., 2025).

Competent human resources play a role in product innovation, service quality improvement, the utilization of digital technologies (including the internet), and operational efficiency, all of which enhance the competitiveness of MSMEs in an increasingly competitive market. Human resources with an adaptive attitude, discipline, and high commitment also help MSMEs respond to changes in the business environment, crises, and new opportunities, thereby ensuring business sustainability (Jabbour Al Maalouf et al., 2025; Larios-Francia and Ferasso, 2023).

Empirical research shows that improving human resource quality significantly contributes to SME performance, as seen in productivity, increased sales, and business growth. Through good human resource management proper recruitment, continuous training, soft skills development, and the creation of a collaborative work culture at MSMEs can build more professional and sustainable organizations (Lo et al., 2024; Lukito et al., 2025; Menzies et al., 2025).

MSMEs face various challenges in managing their human resources, including budget constraints, limited training and development, and the absence of a structured performance management system. These challenges often result in suboptimal productivity, service quality, and competitiveness for MSMEs (Meurs et al., 2025; Ndiaye et al., 2018; Phan Thi Hang, 2024).

Due to resource constraints, many MSMEs have limited capital, making it difficult to offer competitive salaries, facilities, and adequate HR programs. Business owners’ limited time and energy also mean that HR functions are performed informally, without precise workforce planning, organisational structures, or work regulations (Probohudono et al., 2025; Ridwan Maksum et al., 2020).

In employee recruitment and retention, MSMEs often struggle to attract and retain qualified talent because they cannot compete with larger companies on salaries, career paths, and benefits. As a result, turnover rates are relatively high, and key positions are often filled by people who are not fully competent, disrupting operational stability (Siraj and Hágen, 2023; Surya et al., 2021).

Beyond internal training, MSMEs also have limited access to formal training, particularly in modern technology and management, due to costs, distance, and limited information. Existing training is often not sustainable, not tailored to specific business needs, and rarely includes mentoring or coaching, thereby impacting human resource competency less than optimally (Yahaya and Nadarajah, 2023; Zare et al., 2025; Garengo et al., 2022).

This lack of training results in many MSMEs lacking performance evaluation systems, performance indicators (KPIs), or precise feedback mechanisms for employees. Unstructured task allocation, unwritten work rules, and weak work discipline make it difficult to measure performance and link it to rewards or development (Medina et al., 2023; Nayem and Uddin, 2024).

Among the most significant challenges are managerial competency, financial literacy, and digital literacy among MSME owners and employees, which hinder technology adoption and business innovation. Resistance to change and the adoption of new technologies also often emerge, slowing digital transformation and performance improvement through modern HR systems (Ammirato et al., 2023; Hulu and Fahmi, 2025; Ammirato et al., 2023).

High employee performance is crucial because it directly determines the achievement of MSME goals (sales, profits, customer satisfaction) and serves as a key source of competitiveness that competitors are hard-pressed to imitate. The better the individual and team performance, the greater the MSME’s ability to survive, grow, and win market competition. Several relationships exist between employee performance and the achievement of MSME goals and competitiveness, including the relationship between employee performance and MSME goals, employee performance as a driver of competitiveness, the role of competence and motivation, work relationships, productivity, and the sustainability of MSMEs themselves (Christina et al., 2025; Deepa et al., 2024).

Employee performance is a tangible, measurable result of work that directly contributes to MSME productivity, quality, and service targets. Research on various MSMEs shows that improved human resource performance correlates with increased sales, cost efficiency, and more consistent achievement of organisational goals. Therefore, MSME competitiveness is primarily determined by employees’ ability to produce high-quality products, provide satisfactory service, and foster continuous innovation. A high-performing workforce makes processes more efficient, responds more quickly to market needs, and creates added value that differentiates MSMEs from competitors (Deepa et al., 2024; Aslam et al., 2023; Omidi and Dal Zotto, 2022).

Various studies show that competence (knowledge, skills, and attitudes) and high work motivation improve employee performance, thereby strengthening MSME competitiveness. Training, development, good leadership, and a fair reward system have been shown to help employees work more effectively in supporting the business vision and strategy. Optimal employee performance drives productivity, reduces errors and waste, and increases customer satisfaction. This not only helps achieve short-term goals but also strengthens the reputation and long-term sustainability of MSMEs amidst intense competition (Akdeniz, 2023; Hendri, 2025).

The general objective of this study is to systematically examine how HR management practices in MSMEs relate to employee performance, based on previous research. This study aims to provide a comprehensive overview of HR management as an internal factor influencing employee performance in MSMEs. The systematic objective is to answer the research questions raised in this study. The research question is: 1. How do human resource management (HRM) practices influence employee performance in MSMEs? 2. How does the implementation of sustainable HRM affect employee performance in the context of MSMEs? 3. How does responsive HRM management to industrial changes (including the fourth industrial revolution) influence employee productivity in MSMEs? 4. What is the impact of the implementation of innovation-focused HRM on employee performance in MSMEs?

The SLR research “Human Resource Management and Its Impact on Employee Performance in MSMEs” has strong theoretical and practical significance, as it specifically examines the relationship between HR practices and performance in MSMEs, which remain relatively under-researched compared to large companies. The results serve as a reference for developing conceptual models and practical guidelines for HR management that are more suited to the characteristics of MSMEs in Indonesia and other developing countries.

This research uses a systematic literature review and PRISMA meta-analysis method to examine digital marketing strategies for expanding the market for creative products from MSMEs in Indonesia. The PRISMA method is a comprehensive, structured paper-review method for identifying the scientific position of the research being conducted. The PRISMA method is used in four stages: (1) identifying the research question (RQ), (2) identifying paper sources, (3) searching for papers that align with the RQ, and (4) analysing the search results.

Research on human resource (HRM) management and its impact on employee performance in MSMEs (Micro, Small, and Medium Enterprises) using a Systematic Literature Review (SLR) approach provides important insights into the relationship between HRM and employee performance. The results of this study, based on the research questions, provide insights into the influence of HRM practices on employee performance in MSMEs, the implementation of sustainable HRM and its impact on employee performance, the influence of HRM responsive to industry changes on employee productivity, and the impact of HRM focused on innovation on employee performance in MSMEs. The results and discussion of this study are presented in response to several research questions (RQs).

According to Egbuta (2022) and Aslam et al. (2023), HRM practices such as recruitment, training, and performance management can influence employee motivation and job satisfaction, thereby improving performance. If HRM aligns individual goals with organisational goals, employees are more engaged, which can increase productivity. Research (Ammirato et al., 2023; Yassin and Beckmann, 2025) highlights the importance of continuous employee development and recognition for their achievements in MSMEs. MSMEs rarely have the same structured systems as larger companies. However, if recognition and development opportunities are tailored to MSMEs, it will foster an environment of trust and mutual respect, increasing employee commitment and, in turn, their performance. Human resource management focuses on flexibility, skills development, and innovation management to achieve greater productivity and effectiveness at work. The impact of human resource management initiatives, such as work-life balance initiatives and ethical leadership, has the potential to increase job satisfaction, reduce stress, and improve employee performance, particularly in MSME environments with limited resources (Wuen et al., 2020; Deepa et al., 2024; Omidi and Dal Zotto, 2022).

Good human resource management practices significantly impact employee performance in MSMEs. Practices such as effective recruitment, ongoing training, recognition for achievement, and employee empowerment can increase motivation and job satisfaction, ultimately improving productivity and performance (Ammirato et al., 2023; Wuen et al., 2020; Deepa et al., 2024) (see Table 3).

Sustainable HR management is not just about employee administration; it also considers economic, social, and long-term sustainability. HR management not only provides a workforce but also maintains it as a strategic asset. Therefore, it requires care and treatment in the form of training, competency development, welfare, decent working conditions, supportive working conditions, and empowerment (Christina et al., 2025; Akdeniz, 2023; Omidi and Dal Zotto, 2022).

How does sustainable HR management affect employee performance? Several mechanisms by which HR management improves performance include increasing employee involvement and commitment. Sustainable HR management can increase employee engagement. When employees feel their well-being is taken care of and are treated fairly and humanely, they become motivated, loyal, and contribute to MSMEs. With good HR, employees feel cared for and appreciated, reducing the likelihood of resignation or burnout. This is especially important in MSMEs to prevent the loss of knowledge and competencies. Strategic HR management (training, development, performance management, HR planning) can strengthen the “dynamic capabilities” of MSMEs, which means MSMEs can be more agile, innovative, and competitive. A sustainable approach to HR instills social & ethical values—this not only builds internal loyalty, but also the long-term reputational value of MSMEs (Christina et al., 2025; Akdeniz, 2023; Omidi and Dal Zotto, 2022; Raja et al., 2025; Ilic et al., 2024) (see Table 4).

Responsiveness to industry changes in MSMEs means that MSMEs are not static but actively adapt their HR practices/principles to suit changes in the external environment, such as new technologies, market demands, competition, regulatory changes, consumer dynamics, and even crises. In preparing responsive MSMEs, several aspects must be considered: adjusting recruitment and selection strategies to recruit employees with relevant competencies (including digital, adaptive, and flexible), providing training/development of technical and non-technical skills so that employees can respond to new technologies, new procedures, and market demands, implementing adaptive performance management and reward/incentive systems to support innovation, flexibility, and efficiency, creating an organizational culture that is flexible, open to change, learning-oriented, and adaptive to external factors, and integrating HR practices with business strategy and the external environment (Ammirato et al., 2023; Deepa et al., 2024; Hendri, 2025).

How HR responsiveness affects employee productivity can be demonstrated by bridging HR responsiveness with productivity in MSMEs through skills improvement and adaptability, the organization’s ability to reconfigure work according to market needs, increasing employee motivation, engagement, and commitment, adapting to the market through innovation and rapid response to change, as well as HR retention and consistent performance (Deepa et al., 2024; Hendri, 2025).

Skills improvement and adaptability are achieved through training and development relevant to technology and industry demands. Employees acquire modern skills, enabling them to work more efficiently, quickly, and accurately. Studies show that HR training and development have a significant positive relationship with employee productivity. The organization’s ability to reconfigure work to meet market needs can be achieved through dynamic HR management, which enables it to adjust work structures, roles, and procedures to new demands, increasing flexibility and competitiveness while supporting productivity. Employee motivation, engagement, and commitment increase when employees feel they are given opportunities to develop, are valued, and are included in change, leading to greater motivation, loyalty, and discretionary effort and contributing to high productivity. Innovation and rapid response to change contribute to greater market adaptability. When human resources are managed to be innovative, flexible, and adaptive, MSMEs can adapt products/services and work methods to market changes, resulting in process efficiency, reduced waste, and optimal performance. Human resource retention and consistent performance are achieved by better managing human resources and responding to change, resulting in greater retention and reduced turnover (Ammirato et al., 2023; Deepa et al., 2024; Hendri, 2025; Yassin and Beckmann, 2025) (see Table 5).

Innovation-focused HR management means HR management practices are designed not only to hire and retain employees, but also to encourage creativity, innovation (both processes and products/services), learning, flexibility, and adaptation. Therefore, HR management is not merely administrative but an active strategy for developing innovative HR that becomes a competitive advantage, especially in MSMEs (Jotaba et al., 2022; Aslam et al., 2023).

HR management has a positive impact on employee performance in MSMEs in the form of increased productivity and efficiency, adaptability and continuous innovation, increased employee engagement, motivation, and commitment, better HR retention and stability, and a balance between efficiency and well-being (work-life balance, work flexibility) (Hendri, 2025; Yassin and Beckmann, 2025).

How innovation-oriented HR management changes employee behavior and output is carried out through several mechanisms: innovative HR practices, skills, and adaptability; opportunities and motivation can make employees more creative and effective. Innovative HR with high commitment and involvement have the potential to become deeply attached to the company, not just employees who come and go. Innovative HR who retain and stabilise the workforce are usually employees who have knowledge and skills that remain within the organisation so that quality and productivity are consistent (Jotaba et al., 2022; Aslam et al., 2023; Hendri, 2025; Yassin and Beckmann, 2025; Egbuta, 2022; Wuen et al., 2020) (see Table 6).

This study systematically examines human resource management (HRM) and its impact on employee performance in MSMEs, leading to several conclusions: effective HRM practices, sustainable HRM, responsiveness to industry changes, and a focus on innovation.

Sound HRM practices, such as effective recruitment, ongoing training, recognition for achievement, and employee empowerment, significantly influence motivation and job satisfaction, ultimately improving employee performance. Employees who feel valued and given development opportunities tend to be more productive and contribute to the success of MSMEs.

The implementation of sustainable HRM, which encompasses skills development, well-being, and a supportive work environment, plays a crucial role in increasing employee engagement and commitment. Sustainable HRM helps retain competent employees and reduce turnover, both of which are crucial for maintaining knowledge and skills in MSMEs.

MSMEs that are responsive to industry changes, such as the adoption of new technologies and market shifts, tend to be more adaptive and innovative. HRM that adapts recruitment, training, and development strategies to changing industry demands increases employee productivity and MSME competitiveness.

Human resource management that focuses on innovation, both in products and processes, encourages employee creativity and adaptability to change. MSMEs that support the development of new ideas and provide opportunities for innovation not only improve short-term performance but also build sustainable competitive advantage.

Overall, this study shows that effective human resource management has a significant impact on employee performance in MSMEs. Good, sustainable, responsive, and innovation-focused HR practices can increase MSME productivity, job satisfaction, and competitiveness in a competitive marketplace.