The effectiveness of MSMEs is closely tied to their human resources; however, HRM practices in small enterprises are often informal and underdeveloped. Owners often perform multiple roles, from operations to workforce supervision, resulting in limited specialisation and weak succession planning (Galanaki & Zografou 2023). This contrasts with larger organisations, where HR systems provide structure and continuity. The absence of structured HR practices in MSMEs frequently translates into low productivity, limited innovation and high vulnerability to external shocks (Sungwa, 2025).

Sustainable HR development refers to building long-term workforce capabilities that balance organisational growth with adaptability and resilience (Anlesinya & Susomrith, 2020; Martini et al., 2023). In the MSME context, this involves providing employees with training, enhancing entrepreneurial motivation and fostering learning networks (Bai et al., 2016a). However, existing studies highlight that MSMEs rarely invest systematically in training because of financial constraints and a lack of awareness of its long-term benefits (Bai et al., 2016b). Consequently, their workforce remains less competitive compared to enterprises in formalised sectors (Ahmed, 2021; Kotey & Folker, 2007).

This study draws on three complementary theoretical perspectives. Firstly, the resource-based view (RBV) emphasises human capital as a critical intangible resource that can provide sustained competitive advantage when it is valuable, rare, inimitable and non-substitutable (Barney, 1991; Kraaijenbrink et al., 2010; Newbert, 2007). For MSMEs, HR capabilities are particularly decisive because they often lack access to financial and technological capital.

Secondly, the knowledge-based view (KBV) extends RBV by conceptualising knowledge and learning as the most strategic resources of the firm (Grant, 1996; Nonaka, 2009). The MSMEs’ sustainability depends not only on access to resources but also on their ability to continuously learn, share knowledge and adapt to changing market conditions. Training and capacity-building programmes, therefore, serve as knowledge-transfer mechanisms essential to their survival.

Thirdly, the Ability, Motivation, Opportunity (AMO) framework provides a micro-foundational lens for HRM practices. According to AMO theory, organisational performance improves when employees are equipped with the ability (skills and training), motivation (incentives and entrepreneurial drive) and opportunity (supportive structures and networks) to contribute effectively (Appelbaum, 2000; Messersmith & Wales, 2013). This framework aligns well with the challenges of MSMEs, where limited resources demand targeted interventions that enhance each dimension of workforce potential (Harney & Alkhalaf, 2021).

By integrating these perspectives, this study positions HR development in MSMEs not merely as an operational issue but as a strategic imperative that determines enterprise sustainability. This theoretical grounding informs the proposed Grand Design Framework, which seeks to systematically strengthen HR capacity in small enterprises.

The study population consists of approximately 13 000 active MSMEs in Yogyakarta. A primary sample of 440 MSMEs was selected using convenience and snowball sampling. Each MSME was represented by one participant (the owner or manager) to ensure data consistency regarding high-level HRM decisions and business intent. The selection was based on the owners’ willingness to provide detailed information and their active operational status.

Data were collected using a multimethod strategy, combining primary and secondary sources.

Data analysis followed the interactive model by Miles and Huberman (1994), which involves iterative cycles of data reduction, data display and conclusion drawing or verification. To manage the multimethod nature of the study, the analysis was conducted as follows:

Data reduction and coding: All qualitative data comprising 418 retrieved open-ended questionnaires (95% response rate), transcripts from 30 interviews, notes from three FGDs, and 30 site observation records were systematically coded. We employed open coding to identify initial concepts from the broad sample (n = 440), followed by axial coding to link categories and selective coding to develop the four central HRD themes using the nuanced data from the deep-dive participants (n = 72).

Data display: The summarised findings were presented through narrative descriptions and visual models. Comparative matrices were used to contrast HRM practices across different enterprise scales, while the Grand Design Pyramid was developed to visualise the proposed phased HRD roadmap.

Triangulation and verification: To ensure credibility and reduce potential bias, triangulation was employed across all data sources. The broad patterns identified in the qualitative questionnaires were validated against the ‘lived experiences’ captured in interviews and the ‘on-site realities’ recorded during participatory observations at the 30 MSME locations.

Ethical clearance to conduct this study was obtained from the Sekolah Tinggi Pembangunan Masyarakat Desa ‘APMD’ Yogyakarta Research Ethics Committee (Ref. No. [538/I/U/2025]). The study adhered to established ethical standards. Informed consent was obtained from all participants, ensuring they were aware of the study’s objectives, their rights (including the right to withdraw), and the use of their data. Confidentiality and anonymity were maintained by assigning pseudonyms and generalising identifiable information. All data were securely stored and accessible only to the research team.

Data collected from the qualitative open-ended questionnaires involving 440 active MSMEs in Yogyakarta provided an initial thematic map of the HRD landscape. While the study is grounded in a qualitative paradigm, this broad initial survey was essential to identify general characteristics and patterns across various business scales and sectors before proceeding to deep-dive interviews.

The results indicate that more than 50% of the MSME sample (212 out of 440) are not formally affiliated with any MSME community. Several MSMEs demonstrated multiple affiliations, such as the overlap between KaMU and Forkom (27 MSMEs) or Dekranas and Forkom (20 MSMEs). This lack of affiliation in over half of the sample provided a critical thematic foundation for the deep-dive interviews regarding the barriers to networking and external HRD support (Table 2).

Qualitative data analysis from in-depth interviews and FGDs revealed in-depth themes, providing context and reasons behind the quantitative data.

The results reveal that MSMEs in Yogyakarta are heavily dominated by ‘one-man show’ operations, where owners perform nearly all managerial and operational tasks. This organisational informality, while offering agility, severely limits succession planning and scalability. From an RBV perspective, this reliance on the owner signifies an underutilisation of human capital as a strategic resource. This is evidenced by the informal recruitment practices found in this study, where owners often prioritise ‘diligence’ over standardised professional tests or competencies. Unlike MSMEs in developed countries that adopt formalised HRM systems, Indonesian MSMEs remain trapped in a cycle of informality that erodes their long-term resilience and competitiveness.

This finding aligns with Messersmith and Wales (2011), who identified informal HRM as a pervasive constraint in MSMEs, but our study extends the argument by illustrating how such practices specifically erode resilience and competitiveness in the Indonesian MSME sector (Messersmith & Wales, 2011). Compared with MSMEs in developed contexts, where HR formalisation is linked to innovation and performance, Indonesian MSMEs remain trapped in an informality cycle that constrains their ability to professionalise and innovate (Burhan et al., 2020).

A significant finding of this study is the critical gap in workforce training, with 66% of MSMEs never having participated in formal programmes. Within the AMO framework, this represents a profound deficiency in the ability dimension. Many owners remain unaware of the strategic importance of training, focusing instead on immediate survival.

This lack of competency is exacerbated by weak community affiliation, with over half of the sampled MSMEs remaining unaffiliated with business associations. From the KBV, such isolation prevents MSMEs from accessing the knowledge-sharing platforms and networks essential for innovation and market intelligence (Grant, 1996). Participants expressed concerns regarding perceived costs and complicated procedures for joining communities, highlighting a structural barrier that keeps them from scaling beyond local markets.

Previous studies highlight similar challenges. Agrawal et al. (2023) observed that SMEs in South Asia often face growth constraints because of weak network affiliations. Conversely, research in Europe suggests that SMEs with strong cluster participation experience faster innovation and export readiness (Potinecke et al., 2009). Our findings confirm the former, while adding new evidence from Indonesia that weak networking is not only a missed opportunity but also a structural barrier that prevents MSMEs from scaling beyond local markets (Makedos, 2014). Within the AMO framework, this isolation further limits employees’ opportunity to contribute effectively through collaboration and innovation.

Taken together, the four thematic findings provide a comprehensive picture of the structural and strategic limitations faced by MSMEs in Yogyakarta. Across workforce characteristics, training, network integration and HR practices, the evidence suggests that MSMEs struggle not only with operational constraints but also with fundamental HRM deficits that undermine their long-term competitiveness.

From the perspective of the RBV, the underdevelopment of human capital prevents MSMEs from leveraging their workforce as a sustained source of competitive advantage. The KBV highlights how weak community affiliation limits opportunities for knowledge acquisition and transfer, reinforcing organisational isolation. In addition, the AMO framework illustrates how deficits across all three dimensions, for example, lack of ability because of training gaps, lack of motivation because of limited incentives, and lack of opportunity because of weak structures and networks collectively constrain employee contributions.

By situating these findings within multiple theoretical lenses, this study extends prior research on MSME HRD in two important ways. Firstly, it demonstrates how HR deficits in emerging economies are not simply resource-related but are structurally embedded, reflecting broader institutional and cultural conditions. Secondly, it introduces an integrative perspective that connects RBV, KBV, and AMO, offering a multidimensional understanding of why MSMEs in Indonesia struggle to scale despite their economic significance.

The Adaptive Tiered Grand Design proposed in this study is directly derived from the empirical findings as summarised in Table 5. Unlike generic HRD models that assume homogeneity, this framework recognises the heterogeneity of MSMEs and provides a phased, context-sensitive pathway for HRD. By integrating the dimensions of ability, motivation and opportunity with strategic resources and knowledge flows, the design ensures that MSMEs are not only able to address immediate capability gaps but also build long-term resilience.

This adaptive model contributes to the literature as a novel conceptual framework, highlighting how HRD in emerging economies must account for structural constraints, resource limitations and cultural contexts. It also advances practical implications by offering policymakers a scalable and sustainable blueprint for MSME development. As such, the Adaptive Tiered Grand Design positions HRD not as a peripheral intervention but as a foundational strategy for achieving sustainable MSMEs, aligned with national and global development agendas (Figure 2).

To address the complex and diverse HRM challenges among MSMEs in Yogyakarta City, this study proposes a tiered HRD Grand Design that is not only structured but also adaptive to business dynamics and business profiles. This Grand Design is designed as a progressive roadmap, guiding MSME entrepreneurs through a series of stages of HR capacity development, from the formation of entrepreneurial intent to proven business independence. The inherent flexibility in each level allows for tailored interventions, ensuring the relevance and effectiveness of the guidance. The proposed progressive development path is as follows:

This Grand Design is adaptive through a continuous curation mechanism at every level. If MSMEs are found to be eligible to be placed directly in the Basic, Intermediate, or Advanced clusters, even though they have never been included in the Embryonic and Pre-basic clusters, an integrated policy between sub-districts, districts and supervisory Organisasi Perangkat Daerah (OPDs) [Local Government Agency] is required to validate and adjust their guidance paths. This ensures that the Grand Design is not rigid, but rather responsive to the diverse potential and development of MSMEs. The main functions of this Grand Design are as a development guideline, control tool and basis for curation for OPDs, as well as a direction and goal for MSME actors. This is a strategic step to realise planned, orderly, focused, sustainable and responsible MSME development, particularly in terms of HRD.

The findings of this study have significant implications for policy design in strengthening HRD among MSMEs. The proposed Grand Design for Tiered HRD emphasises a phased and contextualised approach that addresses the heterogeneous capacities of MSMEs. This is particularly critical in the Indonesian context, where MSMEs constitute the backbone of the economy but remain structurally constrained in terms of workforce capabilities.

From an RBV perspective, the framework provides a pathway for transforming human capital into a strategic asset through systematic investment in training, succession planning and professionalisation. By embedding HR development into long-term business strategies, MSMEs can build rare and inimitable capabilities that serve as sources of sustained competitive advantage. Meanwhile, the KBV underpins the importance of strengthening MSMEs’ integration into networks, clusters and knowledge-sharing platforms. This ensures that HR development is not only internally driven but also enhanced by external knowledge flows and collective learning. Within the AMO framework, the tiered design addresses all three critical dimensions: upgrading ability through targeted training, enhancing motivation via recognition and incentive systems and expanding opportunity through institutional support and networking platforms.

Policy-wise, this framework calls for multilevel interventions. At the micro level, MSMEs should receive accessible training programmes tailored to their specific industry and growth stage. At the meso level, local governments and associations should facilitate cluster-based development, mentorship, and knowledge-sharing mechanisms to overcome isolation. At the macro level, national policies must align HRD for MSMEs with broader development agendas, such as digital transformation strategies, SDGs and Indonesia’s Vision 2045. Such alignment ensures that MSME HRD does not operate in isolation but contributes to national competitiveness.

This study contributes to the literature by extending previous research that often treated HRD in MSMEs as a homogeneous challenge (Mohiya et al., 2020; Park et al., 2020). By proposing a tiered and context-sensitive framework, our findings highlight the need for differentiated HRD policies in emerging economies, where institutional weaknesses and resource scarcity exacerbate capability gaps. This approach also resonates with global debates on inclusive development, underscoring that MSME HRD is not merely a business concern but a structural requirement for equitable and sustainable economic growth.