Description:
<jats:p>While some researchers argue that a strong organizational identity guides strategy and provides shared understanding among employees, others argue that it restricts change and makes it difficult for organizations to respond to external environment. In this study, we demonstrate that an organizational identity which is strong enough to foster shared purpose and clarity of vision but still fluid enough not to become restrictive to change is the optimal condition for small organizations. Data collected from 162 small and medium manufacturing businesses in India demonstrates a curvilinear relationship between identity strength and performance, and this relationship is significantly influenced by participatory decision‐making. By utilizing data from a relatively underexplored context of Indian <jats:styled-content style="fixed-case">small and medium enterprise</jats:styled-content>s, this study attempts to fill a crucial gap in the <jats:styled-content style="fixed-case">HRM</jats:styled-content> literature. Implications for theory and <jats:styled-content style="fixed-case">HRM</jats:styled-content> practices are discussed.</jats:p>