Assignment 1: HRM in an MNE

Assignment 1: HRM in an MNE


Mukaosolu Okpe

Strayer University

Professor Janine Przybyl


Abstract

The complexities of operating in different countries andemploying different national category of workers are key variableto differentiate domestic and international HRM. This researchexplores these differences and the variables moderate thedifferences between domestic HRM and IHRM. It is also observedthat the exact balance of a firm’s HRM standardization-localization choice is based on factors of influence such asstrategy, structure, firm size and maturity. During the research,several recent surveys of global executives have identified theability to maintain a common corporate culture as one of theirgreatest challenges. By establishing cultural hubs, companies canharness cultural capabilities that reside in different geographiclocations and across functions and groups. The subsidiary rolespecifies the position of a particular unit in relation to therest of the organization and defines what is expected of it interms of contribution to the efficiency of the whole MNE.

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Domestic and International HRM

The field of international HRM has been characterized by three

broad approaches namely:

i. Cross-cultural management

ii. Description, comparison and analysis of HRM systems in

various countries

iii. Role of HRM in international firms

But the basic HR activities remain the same both in domestic andinternational human resource management. These activitiesinclude:

1. Human resource planning2. Staffing (recruitment, selection, placement)3. Performance management4. Training and development5. Compensation (remuneration) and benefits6. Industrial relations

Domestic HRM takes some of the flavour of IHRM as it deals moreand more with a multicultural workforce thereby managingworkforce diversity which is also a beneficial practice of IHRM.

Morgan’s model shows the distinct activities of IHRM which are:

1. The broad human resource activities of procurement,allocation and utilization

2. The national or country categories involved in IHRMactivities

3. The three categories of employees in an international firm

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The complexities of operating in different countries andemploying different national category of workers are key variableto differentiate domestic and international HRM. Dowling gave sixfactors that contribute to this complexity.

a. More HR activitiesb. The need for a broader perspectivec. More involvement in employees’ personal livesd. Changes in emphasis as the workforce mix of expatriates and

locals variese. Risk exposuref. Broader external influences

Many firms underestimate the complexities involved ininternational operations, and there has been consistent evidenceto suggest that business failures in the international arena areoften linked to poor management of human resources. Fourvariables moderate the differences between domestic HRM and IHRM.They are:

i.The cultural environment: An important characteristic of cultureis that it is so subtle a process that one is not alwaysconscious of its effect on values, attitudes and behaviours.Because international business involves the interaction andmovement of people across national boundaries, anappreciation of cultural differences and when thesedifferences are important is essential.

ii. The industry (or industries) with which the multinational is primarily involved:This is important because patterns of internationalcompetition vary widely from one industry to another. At oneend of the continuum of international competition is themulti-domestic industry, one in which competition in eachcountry is essentially independent of competition in othercountries. At the other end of the continuum is the globalindustry, one in which a firm’s competitive position in one

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country is significantly influenced by its position in othercountries.

iii. The extent of reliance of the multinational on its home-country domestic market:For many firms, a small home market is one of the keydrivers for seeking new international markets. The demandsof a large domestic market present a challenge to theglobalization efforts of many US firms.

iv. The attitudes of senior management: It is likely that if seniormanagement does not have a strong international orientation,the importance of international operations may beunderemphasized in terms of corporate goals and objectiveswhich consequently leads to the wrong assumption that thereis a great deal of transferability between domestic andinternational HRM practices.

Standardization of HR practices

Expatriates are frequently used to oversee the successfulimplementation of appropriate work practices. At some point MNEsreplace expatriates with local staff with the expectation thatthese work practices will continue as planned. However, thisdepends on the receptivity of the local workforce to adhere tocorporate norms of behavior, effectiveness of expatriates asagents of socialization and whether cost considerations have ledthe multinational to localize management prematurely. The aim ofglobal standardization of HRM practices is to reach consistency,transparency and an alignment of a geographically fragmentedworkforce around common principles and objectives.

The exact balance of a firm’s HRM standardization-localizationchoice is based on factors of influence such as strategy,structure, firm size and maturity. The strength of corporateculture plays an important role in standardization.

The factors of standardization of IHRM activities are that

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i.the organization will eventually have a transnationalcorporate strategy

ii. which is supported by a corresponding organizationalstructure that is

iii. re-inforced by a shared worldwide corporate culture.

A good example is Schering AG, a German pharmaceutical companywho attempted to globally standardize compensation practices. TheSchering example not only shows that the implementation ispossible, but at the same time, it also makes it clear that localadaptations and exceptions to the standards are often needed.Therefore all these factors are dependent upon each other.

Corporate Culture

Corporate culture is variously defined, but essentially it refersto a process of socializing people so that they come to share acommon set of values and beliefs that then shape their behaviorand perspectives. It is often referred to as ‘our way of doingthings’. Cultural control may be a contentious issue for some –evidence of multinational imperialism where corporate culture issuperimposed upon national cultures in subsidiary operations. Theemphasis is on developing voluntary adherence to corporatebehavioral norms and expectations through a process ofinternalization of corporate values and beliefs.

Reinforcing a company’s value system can be done through:

i.Recruitment and selection: Firms should hire or ‘buy’ peoplewho appear to hold similar values

ii. Training and development programs, reward systems andpromotion. Such reinforcement is considered to lead to morecommitted and productive employees who evince appropriatebehavior and therefore reduce the need for formal controlmechanisms.

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iii. Placement of staff. Some global firms have become evenmore systematic in their efforts to achieve control by wayof shared corporate culture.

Globalization of Corporate Culture

For more than a decade, multinational companies have beenencouraged to create a strong global corporate culture. Indeed,several recent surveys of global executives have identified theability to maintain a common corporate culture as one of theirgreatest challenges. As companies expand globally, corporateculture often lags behind; it frequently remains tooheadquarters-centric to pull together far-flung operations, or itdisintegrates under the turmoil of globalization. There two keybarriers companies face when they do not have an effective globalcorporate culture:

i.One barrier is a headquarters-centric mindset: Companiesoften approach the process of developing a global culture asa one-way process dominated by corporate headquarters,exemplified by common terms such as “cultural transfer” “and“culture dissemination.” Also, core values often originateat corporate headquarters and fail to reflect andincorporate diverse cultural influences.

ii. A second barrier is thinking about global culture alonga linear continuum ranging from “weak” to “strong.” Such anapproach is too simplistic to capture complex culturalpatterns in multinationals, which may have “islands” ofstrong culture distributed across their far-flungoperations.

Creating a global corporate culture requires breaking away from aheadquarters-centric mind-set, drawing on cultural capabilitiesthat exist across the global operations and incorporating diversecultural values. Global culture cannot emanate from a single

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corporate center nor can it be disseminated by a single groupsuch as the human resource function. Therefore, companies shouldidentify and establish multiple cultural hubs around the globe,thereby incorporating a diverse set of organizational entitiesand employees into the process of maintaining a strong globalorganizational culture.

By establishing cultural hubs, companies can harness culturalcapabilities that reside in different geographic locations andacross functions and groups. Most companies already have culturalhubs in place, but they go unrecognized and underutilized. Toidentify a company’s cultural hubs, executives should look forlocales where at least one of the core cultural values is shared,practiced and appropriately localized and where there ispotential for the values to be shared across organizationalboundaries.

The Role of the Subsidiary

The subsidiary role specifies the position of a particular unitin relation to the rest of the organization and defines what isexpected of it in terms of contribution to the efficiency of thewhole MNE. Subsidiary role can differ related to subsidiaryfunction, power and resource relationships, initiative taking,host country environment, the predisposition of top managementand the active championing of subsidiary managers.

Based on studies by Gupta and Govindarajan, MNE is seen as anetwork of capital, product and knowledge flows. The studiesattribute the highest importance to knowledge flows. The studiesdifferentiate between

1. The magnitude of knowledge flows, that is, the intensity ofthe subsidiary’s engagement in knowledge transfer, and

2. The directionality of transactions, which means whethersubsidiaries are knowledge providers or recipients.

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Low Outflow High Outflow

Low Inflow Local Innovator Global Innovator

High Inflow Implementer Integrated Player

Table 1.0 Gupta and Govindarajan’s four generic subsidiaryroles

Categories of Subsidiary Roles

Global Innovators: They provide significant knowledge for otherunits and have gained importance as MNEs move towards thetransnational model. This role is reflected in an IHRMorientation in which the parent firm develops HRM policies andpractices which are then transferred to its overseas affiliates.

Integrated Player: They also create knowledge but at the same timethey are recipient of knowledge flows. Thus, they representimportant knowledge node in the MNE network. This should besupported by a highly integrated HRM orientation. Thus, the HRMpractices and policies between headquarters and subsidiaries arevery similar, probably characterized by a high extent of globalstandardization and localized elements when this is needed.

Implementers: They rely heavily on knowledge from the parent orpeer subsidiaries and create a relatively small amount ofknowledge themselves. If the IHRM is export-oriented, that is,global HRM decisions are mainly made in the parent company, thenthe local subsidiaries are responsible for the implementationprocess at the local level.

Local Innovator: They engage in the creation of country/regionspecific knowledge in all key functional areas because they havecomplete local responsibility. The HRM systems in suchpolycentric firms only have weak ties with the headquarters. Asevery subsidiary operates independently from the parent company

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and from other subsidiaries this independence results in a numberof localized HRM policies and practices.

Growing Organizations Internationally

The integrated player subsidiary role will be most effective forfirms just starting to grow internationally. There is need forcountry specific knowledge but the support of a highly integratedHRM orientation is paramount. This role is the best because thenumber of steps, or stages, along the path to multinationalstatus varies from firm to firm, as does the time frame involved.The export stage is typically the initial stage for manufacturingfirms entering international operations. As such, it rarelyinvolves much organizational response until the level of exportsales reaches a critical point. As the firm develops expertise inforeign markets, agents and distributors are often replaced bydirect sales with the establishment of sales subsidiaries orbranch offices in the foreign market countries. This stage may beprompted by problems with foreign agents, more confidence in theinternational sales activity, the desire to have greater control,and/or the decision to give greater support to the exportingactivity, usually due to its increasing importance to the overallsuccess of the organization.

Localization of HRM Practices

The aim of realizing local responsiveness is to respect localcultural values, traditions, legislation or other institutionalconstraints such as government policy and/or education systemsregarding HRM and work practices. The cultural and institutionalenvironment, including features of the local entity such asoperation mode and subsidiary role, play an important role onlocalization.

The benefits of localization of IHRM activities are born out ofthe cultural and institutional environment and features of the

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local entity itself. There is evidence that cultures have animportant impact on work and HRM practises. Sparrow, for example,has identified cultural influences on reward behaviour such as‘different expectations of the manager-subordinate relationshipand their influence on performance management and motivationalprocesses’.

Factors driving localization include the cultural andinstitutional environment and features of the local entityitself.

The Cultural Environment: The significance of national culture isunderlined by the statement that most inhabitants of a countryshare the same mental program. Hall & Hall (1976) has been ableto identify two categories of culture which have an impact onbusiness operations and organizational performances. Suchcategories include the High Context Culture and the low contextculture.

According to Geert Hofstede theory, culture can be classifiedthrough different dimensions at a national level (Hofstede,1991). Such dimensions include power distance, masculinity-femininity, individual collectivism, long-term versus short-termorientation and uncertainty avoidance.

As noted by Trompenaars (1997), there are seven dimensions ofculture which is relevant to the relationships with employees orpersonnels in an organization. These seven dimensions areIndividualism vs. Collectivism (communitarians), Universalism vs.Particularism, Specific vs. Diffuse, Neutral vs. Emotional,Linear vs. Circular and internal vs. external control andAchievement vs. Ascription, Such dimensions are attributed as thefactors which can be useful for managing cultural diversities.

The Institutional Environment: Institutional settings shape the behaviorand expectations of subsidiaries. The institutional perspective

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indicates that institutional pressures may be powerful influenceson human resource practices. An example of institutional factorswhich can have HRM-related effects are the ‘scope of laborlegislation and its regency of codification which creates newcodes of conduct through issues such as sex discrimination, equalpay for equal work, and minimum wages.

The effect of the institutional environment on MNEs, asillustrated on figure 1.0, comprise of the country-of-origineffect, host country effect, home country effect and reversediffusion effect. The country-of-origin effect implies thatmultinationals are shaped by institutions existing in theircountry of origin and that they attempt to introduce theseparent-country-based HRM practices in their foreign subsidiaries.The host-country effect refers to the extent to which HRMpractices in subsidiaries are impacted by the host-countrycontext. A similar effect exists in the headquarters. Here, HRMactivities are influenced by the home-country environment. Thisis called the home-country effects. Reversed diffusion is thetransfer of practices from locations to the headquarters.

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Impact of the Cultural and Institutional Context on HRM Practices

HRM Practices Impact of thecultural context

Impact of theinstitutionalcontext

Recruitment and In societies Educational System:

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Selection low on ‘ingroupcollectivism’individualachievementsrepresentimportantselectioncriteria.

In societieshigh on ‘in-groupcollectivism’the emphasis inthe recruitingprocess is moreon team-relatedskills than onindividualcompetencies.

The reputation ofeducationalinstitutions such aspublic and privateuniversities variesin differentcountries. This isreflected in therecruiting processes(that is, HRmarketing) andselection criteriaof the firms inthose countries.

Training andDevelopment

In societieshigh on genderegalitarianismwomen have thesame chancesfor verticalcareeradvancement asmen.

In societieslow on genderegalitarianism

Education System:Education systemsdiffer betweendifferent countries(existence of a dualvocational trainingsystem, quality andreputation of highereducationinstitutions). Thishas an effect on thetraining needsperceived and

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female managersare rare.

fulfilled by MNEs.

Compensation In societieshigh onuncertaintyavoidanceemployees tendto be ratherrisk adverseand preferfixedcompensationpackages orseniority basedpay.

In societieslow onuncertaintyavoidanceemployees tendto be ratherrisk-taking andaccept highincomevariabilitythroughperformance-based pay.

Legislation andIndustrialRelations:Legislation such asthe regulation ofminimum wages orrespective unionagreements withrespect tocompensation have animpact on the firm’scompensation withrespect to pay mixand pay level.

Task Distribution Societies highon collectivismtend toemphasize group

Legislation andNorms: Legislationand respective normssupport gender-based

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work.

Societies highonindividualismrather thanattributeindividualresponsibilities in the worksystem.

division of labor toa differing extentin differentcountries. While insome countries thepercentage of femalemanagers isrespectively high,in other countriesit is not commonthat women work atall.

Works Cited

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1. Dowling, P. J., Festing, M., & Engle, A. D., Sr. (2013).

International human resource management (6thed.). United

Kingdom: Cengage Learning EMEA.

2. G. Hofstede, Culture and Organizations: Software of the Mind

(London: McGraw-Hill, 1991).

3. Bartlett, Ghoshal and Beamish, Transnational management.

4. M. Pudelko and A.-W. Harizing, ‘HRM Practices in

Subsidiaries of US, Japanese and German MNCs: Country-of-

origin, Localization or Dominance Effect’, Human Resource

Management, forthcoming.

5. Zhu and Dowling, ‘Staffing practices in transition’.

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Assignment 1: HRM in an MNE

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