Saturday, October 11, 2008

Should HRM practices in MNCs should be adapted to the local environment to be most effective?

Observation:

The world is becoming an increasingly smaller place to live in. There has been rapid progression in the arenas of transportation, faster communication channels and financial flows, all owing to advancements in technology. As companies spread their wings in the global scenario, there has been a tremendous boom in international trade and commerce. Markets that were once considered impregnable and safe are facing fierce competition and have become battle grounds where firms fight for market share against both local and foreign companies. Not surprisingly, nowadays a fairly good proportion of workforce in firms, regardless of their nationality, is located in foreign countries. As more companies go global, a new branch of human resource management called International HR management has emerged.

Edith Penrose (1959) shows the firm as an administrative organisation and a collection of productive resources. According to her, HR of a firm is a unique resource and cannot be replicated thereby gives firms a competitive advantage if used well.

With globalisation, Human Resource management has developed over the years from a mere welfare tradition in the past to a more strategic concept. This was introduced by the Harvard model of Human Resource Management developed by Beer et al. (1984), (Wall & Rees, 2001). By locating HR policy choices in a wider social and institutional perspective, it claimed that there existed more stake holders in an organisation other than the management (such as government, employee groups, community etc.), and that business strategy and management were only a part of the other situational factors such as the work force, labour market conditions, laws and societal values.

The evolution of MNC’s characterised by multiculturism and geographic dispersion, has embraced this view of placing organisational resources at the forefront of its global strategy. Bartlett and Ghoshal (2000) mention the change in definitions given by United Nations. In 1973, it defined such an enterprise as “one which controls assets, factories, mines, sales offices and the like in two or more countries.” By 1984, it defined them “As an enterprise in which the entities are so linked, by ownership or otherwise that one or more of them may be able to exercise a significant influence over the activities of the others, and, in particular, to share knowledge, resources, and responsibilities with others”.

In essence, the changing definition highlights the importance of strategic and organisational integration and, thereby, management integration of Human Resource practices located in different countries as the key differentiating characteristic of an MNC. (Bartlett & Ghoshal, 2000). It also alludes to the process of transfer of organisational practices across geographies as a key strategic item in MNC’s quest for global excellence.

Influences on transfer of Human Resource practices

Harzing & Ruysseveldt (2005) discuss the four influences which affect the nature and form of transfer of practices across borders. These are:

Country – of – origin effect: The country in which the multinational originates creates a distinctive national effect on the management style and on the nature of employment practices in general. “MNCs of different national origins behave in significantly different ways.” (Ferner, 1997 in Harzing & Ruysseveldt, 2005)

Dominance effect: Its has been argued by a number of authors that economic dominance of a country also influences the practices in other developing countries in that they try to follow the processes and practices adapted by the developed or dominant countries. According to Harzing & Ruysseveldt (2005), in terms of the dominance effect the transfer of practices could be two way, meaning from the developed home country to the MNC subsidiaries or from foreign origin to the MNC in the developing home country. Thus in the latter case it challenges the country of origin effect.

International integration: The third element of the framework is concerned with the extent to which MNCs are internationally integrated, defined as the generation of inter-unit linkages across borders (Harzing & Ruysseveldt, 2005). Globalisation has no doubt brought the world closer and it’s easier for companies to expand geographically. In order to reach economies of scale and compete, the MNCs tend to segment their operations based on countries or regions through global processes and operations in which they operate. This leads to strengthening of ties and operations between the international segments.

Host country effect: This relates to the difference in cultures and laws that exist in the host countries in which the MNCs operate. What is legal and ethical in one country may not be so in another. Various laws like employment laws regarding child labour, termination laws etc and cultural differences in work environments and social behaviour differ from region to region.

Elaine Farndale & Jaap Paauwe (2007) outline Boxall and Purcell’s, (2003) three primary goals of HR strategy. The first two defined as labour productivity and organisational flexibility represent the goals related to the competitive environment, while the third goal of social legitimacy addresses the institutional and cultural pressures. According to them, the competitive forces create cross-border equity and comparability, and alignment of systems internationally to facilitate an internal labour market. However, this standardisation can lead to conflict between company practices and local prevailing conditions in terms of national cultural phenomena and institutions Boxall and Purcell, 2003 in Elaine Farndale & Jaap Paauwe, 2007). (Farndale & Paauwe, 2007)

While most studies have conceived transfer of practices as implementation, typically examining the extent to which practices in foreign subsidiaries resemble those of MNC headquarters (Rosenzweig and Nohria, 1994; in Bjorkman & Lervik, 2007), Bjorkman in his paper proposed a three dimensional model for assessing whether transfer is accomplished: by assessing to what degree practices are (1) implemented, (2) internalised and (3) integrated in the recipient unit (Björkman & Lervik, 2007).

He explains, while a subsidiary with little autonomy may be forced into implementing headquarters HR practices, its recipients cannot be pressured to internalise the practice. On the contrary, such a standardized strategy may be counterproductive when it comes to internalisation of the practices because organisational members may view the implementation of the practices as having been forced upon the unit (Kostova and Roth, 2002 in Bjorkman & Lervik, 2007). The extent of adaptation of HR practices required is thus largely related to the extent of difference that exists between the parent and host country in terms of national regulations, institutions and culture, as well as corporate strategic choice (Taylor et al., 1996 in Farndale & Jaap Paauwe, 2007). It is evident from the above that, since external factors such as culture, legislation and socio-political environment which affect an organisation internationally differ from region to region the management practices cannot be standardized.

Challenges for Multinational Human Resource policy integration

One of the key challenges to attain social legitimacy is balancing national cultures of different regions with the organisational culture and strategy. Until recently, the dominance of American management theory led to the belief that "one size fits all," that a good manager in the U.S. will also be a good manager in other countries, and that effective U.S. management practices will be effective anywhere. This view is now being supplemented with the knowledge that managerial attitudes, values, behaviours, and efficacy differ across national cultures (Newman & Nollen, 1996).

National culture is defined as the values, beliefs and assumptions learned in early childhood that distinguish one group of people from another (Beck and Moore 1985, Hofstede 1991 in, Newman, Karen L., Nollen, Stanley D., 1996). We use Hofstede's (1993) cultural variables to investigate the relationship between national culture and various structural aspects of HR strategy (Newman & Nollen, 1996). The latter mainly includes compensation practices, selection, staffing, knowledge transfer and performance management. He constructs indices of four cultural dimensions that capture the essence of the differences between national cultures and have been widely accepted as a basis for comparison of cultural groups.

Hofstede's four cultural dimensions (Hofstede 1980, 1991)

Power Distance: Low Power Distance is associated with social egalitarianism and as Power Distance increases, status inequality and distance in social relationships also increase.

Uncertainty Avoidance: Low Uncertainty Avoidance is associated with tolerance of ambiguity and minimized structuring of relationships; high Uncertainity Avoidance leads to elaboration of rules and structures.

Masculinity-Femininity: The Masculine polar type stresses results and the importance of material things, while its counterpart type stresses the importance of feelings and relationships.

Individualism-Collectivism: Individualism stresses and tolerates individual uniqueness, while collectivism defines individuals through their social, group characteristics.

Many authors have researched and found that these values and beliefs which form the national culture get embedded in the systems and practices of a society and economy and consequently affects the HR practices followed by organisations in these regions.

Compensation practices: Boyd (2001) in his paper finds national culture to be associated with the centralization, degree of collective bargaining, and most dimensions of the pay structure (Black, 2001). For example, Gomez and Sanchez propose that providing rewards, which are often symbolic but communicate respect and appreciation, will be particularly helpful in building social capital in largely collectivist cultures found in Latin America. They argue that this communicates a sense of the employee being part of the in-group, which is very important in such cultures. While the higher individualism in the USA, coupled with high materialism, leads most US firms to focus on material individual rewards such as bonuses, stock options and merit raises (Taylor, 2007)

External factors like labour costs, labour demand and supply, competitors’ strategies also influence MNCs’ international compensation strategy. In that the MNC will provide competitive compensation as not to lose valuable employees or talent to competitors (Harzing & Ruysseveldt, 2005). Some companies become international in order to utilise the low labour costs in a particular country. In doing this, the pay structures between the host country and home country would differ even if the work profile of an individual remains the same. This promotes unrest and dissatisfaction between employees, consequently leading to employee turnover.

Other internal factors which influence international compensation practices are the skill sets of employees, employee eligibility such as age, qualifications etc. Thus, though a large number of factors influence compensation structures internationally, an effective compensation strategy is one which is in line with the organisational strategy as well as helps in retaining current talent. However it remains a challenge due to the complex nature of an MNC to have a compensation strategy that will maintain equity amongst all its networks and yet, be within its economic capacity.

Knowledge transfer: As Kogut and Zander (1993) argue, the ability to access the knowledge existing throughout the MNC’s global network is what gives an international firm a competitive advantage over local firms. Creation and transfer of such knowledge largely depend on the ability and willingness of employees to undertake the complex organisational tasks of coordination and communication necessary to use knowledge for competitive advantage (Kogut and Zander, 1992; Nahapiet and Ghoshal, 1998; Storey and Quintas, 2001 in Sully Taylor, 2007). (Gomez & Sanchez, 2005) While companies have traditionally used formal mechanisms of coordination and control such as centralization, standardization, planning, formalized behavioral and output controls, many companies are increasingly resorting to informal mechanisms of control such as participation in committees and teams as well as decision making, and more broadly, control that emanates from an organisational culture of shared norms and values and the socialization of its employees to these values (Jaeger, 1983 & Martinez and Jarillo, 1991 in Gomez & Sanchez, 2005).

For MNCs who need to integrate its intellectual capital, knowledge transfer across its international boundaries is particularly important. This may be challenge due to the differences in social capital and the nature of knowledge – tacit or explicit, that exists in the different firms. When the international counterparts come together, it may be difficult for them to understand and learn from one another due to difference in work cultures, habits etc. Language is a major barrier in this regard. Hence an MNC may have to resort to different training programs or social channels to enable transfer of knowledge between its subsidiaries internationally.

Performance Management: One of the challenges in performance management as part of the MNCs international HRM portfolio is to balance the simultaneous needs for global consistency and for fit with local preferences (Harzing & Ruysseveldt, 2005). The cultural imperative is important because of its impact on acceptable, legitimate, and feasible practices and behaviors (Adler, 1991; Schuler et al., in press). All three components of the cultural imperative are important for MNCs to consider in decisions about: (a) what behaviors to address, (b) which performance measurement and management tools to use, and(c) which tools can be used within the local units (Schuler, Fulkerson, & Dowling, 1991).

US MNCs often use the same appraisal form for subsidiaries as on their domestic employees without translation from English. The use of English forms may neither be readily understood by local employees nor do they easily apply to all jobs in all situations. Even when the forms are translated, they still may not be readily understood by the domestic staff. Schuler, Fulkerson, Dowling (1991) provide an example of study conducted in 1985 at Pepsi-Cola International, where there was no shared value system or vocabulary for describing individual performance. Through the study, Pepsi developed a multinational vocabulary that was used to unite people from many different cultures and countries. For example, "Handling Business Complexity" might translate differently in China than it does in France. Though different in meaning, the outcome is the same: generating sales in the local environment. (Schuler, Fulkerson, & Dowling, 1991).

Performance appraisal in different countries can be interpreted as a signal of distrust or even an insult. (Adsit, London, Crom, & Jones, 1997) Discrimination analysis has shown implications for multinational corporations interpreting the meaning of employee-attitude survey results and managers analysing upward feedback results. He found Thailand, a country high in feminism, was high on items that reflect feminism (e.g., support for training and career development). Brazil was lowest on the set of items dealing with low power distance, low uncertainty avoidance and femininity, confirming Hofstede's findings.

Selection and staffing: Perlmutter (1969) described the three aspects of international orientation as Ethnocentric which is home oriented, Polycentric which is host country oriented, and Geocentric which is world oriented. As per this theory, in an Ethnocentric environment, the company would prefer to select its management from the home country, a polycentric focussed company would give preference of management to host country nationals believing that they would know the practices best in those regions and the geocentric based companies would include in their management anyone fitting the role irrespective of the nationality and could thus be a national not belonging to either the home country nor the host country (Harzing & Ruysseveldt, 2005).

A common practice in this regard within MNCs is expatriation which refers to transferring of managers across national borders for various reasons such as knowledge transfer, expertise or simply job requirements. Another such practice is inpatriation whereby managers from foreign counterparts are called to the centre in the home country. The choice between recruiting from host country, home country or a third country is dependent on the requirement and industry. For eg.: In a travel industry, the company would prefer to hire from host countries where local preferences are known while say in an industry where high management control is required like in the financial sector, the company would prefer home country nationals for it’s management. Applying the cultural dimensions proposed by Hofstede (1980, 2001) Harzing et al, 2005 discuss how it can affect the choice of parent country nationals or host country nationals. According to them MNCs from a national culture that scores high on uncertainty avoidance have a higher tendency to employ parent country nationals for managing their subsidiaries since in these cultures the preference is of being in control. Similarly direct control of subsidiary operations will be high if level of power distance is high since managers in head quarters may feel superior to the foreign subsidiaries. (Harzing & Ruysseveldt, 2005).

A major challenge here is resistance from employees to shift their base due to fear of uncertainty of adjustments, career growth and opportunities. Many factors that can be expected or taken for granted in one's home country simply may not exist in the host country. It is also likely that expatriate managers and their families will have some difficulty adjusting to a new culture, which, in turn, may impact on the managers’ work performance. This difficulty in cultural adjustment should be taken into account when assessing the speed with which an expatriate masters a new job (Davidson, Mendenhall, 1984 & Oddou 1988 in Schuler, et al., 1991).

Concluding remarks:

With the theories discussed above we have tried to understand the structures of MNCs, why and how Human Resource Management is critical to their operations in the global world. What affects its transfer of practices from the home country to its international counterparts, the challenges they face in doing so. With globalisation it is necessary for firms not only to achieve a competitive advantage but also sustain it. It is widely believed that though competitors can copy processes, products and practices, what remains unique to an organisation is its human capital. This cannot be replicated and is a major contributor to sustaining a competitive advantage if managed well. Though globalisation has brought the world closer together but the social, economic and political cultures will always differ and cannot be standardised, Human resource Management plays a critical role in trying to maintain equilibrium through different practices across national borders. There has been a lot of research and it’s evident that HRM needs to adapt to diversity in order to cater to the human element that exists and differs across borders. However to what extent it can justify in doing so is relative to every industry and needs to be researched into much further.

References:

1. Adsit, D. J., London, M., Crom, S., & Jones, D. (1997). Cross-cultural differences in upward ratings in a multinational company. The International Journal of Human Resource Management , 385-401.

2. Barlett, Ghoshal, & Birkinshaw. (2003). Transnational management: Text, Cases and Readings in cross border management. Singapore: McGraw - Hill.

3. Bartlett, C. A., & Ghoshal, S. (2000). Transnational Management (Third ed.). Singapore: The McGraw-hill Companies , Inc.

4. Björkman, I., & Lervik, J. E. (2007). Transferring HR practices within multinational corporations. Human Resource Management Journal , 17 (4), 320-335.

5. Black, B. (2001). National culture and industrial relations and pay structures. LABOUR: Review of Labour Economics & Industrial Relations , 15 (2), 257-277.

6. Farndale, E., & Paauwe, J. (2007). Uncovering competitive and institutional drivers of HRM practices in multinational corporations. HUMAN RESOURCE MANAGEMENT JOURNAL , 17 (4), 355-375.

7. Gomez, C., & Sanchez, J. I. (2005). Human resource control in MNCs: a study of the factors influencing the use of formal and informal control mechanisms. International Journal of Human Resource Management , 18847-1861.

8. Harzing, A. -W., & Ruysseveldt, J. V. (2005). International Human Resource Management (Second ed.). London: Sage Publications Ltd.

9. Newman, K. L., & Nollen, S. D. (1996). Culture and Congruence: The fit between management practices and national cutlure. Journal of Internationl Business Studies , 27 (4), 753-779.

10. Schuler, R. S., Fulkerson, J. R., & Dowling, P. J. (1991). Strategic Performance Measurement and Management in multinationa corporations. Human Resource Management , 30 (3), 365-392.

11. Taylor, S. (2007). Creating social capital in MNCs: the international human resource management challenge. Human Resource Management Journal , 17 (4), 336-354.

12. Wall, S., & Rees, B. (2001). Introduction to International Business (First ed.). Great Britain: Pearson Education Limited.

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