Chap 018

International Business 8e

By Charles W.L. Hill

Chapter 18Global Human Resource Management

Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

What Is Human Resource Management?Human resource management (HRM) refers to the activities an organization carries out to utilize its human resources effectively These activities includedetermining the firm's human resource strategystaffingperformance evaluationmanagement developmentcompensationlabor relationsFirms need to ensure there is a fit between their human resources practices and strategy

What Is The Strategic Role Of HRM In International Firms?HRM can help the firm reduce the costs of value creation and add value by better serving customer needs more complex in an international business differences between countries in labor markets, culture, legal systems, economic systems, etc.HRM must also determine when to use expatriate managers - citizens of one country working abroadwho should be sent on foreign assignmentshow they should be compensatedhow they should be trainedhow they should be reoriented when they return home

What Is The Strategic Role Of HRM In International Firms?The Role of Human Resources in Shaping Organizational Architecture

What Is A Staffing Policy?A firms staffing policy is concerned with the selection of employees who have the skills required to perform a particular jobcan be a tool for developing an promoting the firms corporate culture - the organizations norms and value systema strong corporate culture can help the firm implement its strategy There are three main approaches to staffing policy within international businessesThe ethnocentric approachThe polycentric approachThe geocentric approach

What Is An Ethnocentric Staffing Policy?The ethnocentric approach to staffing fills key management positions with parent-country nationalsmakes sense for firms with an international strategy Firms that pursue an ethnocentric policy believe thatthere is a lack of qualified individuals in the host country to fill senior management positionsit is the best way to maintain a unified corporate culturevalue can be created by transferring core competencies to a foreign operation via parent country nationalsBut it limits advancement opportunities for host country nationalsit can lead to "cultural myopia"

What Is A Polycentric Staffing Policy?The polycentric approach recruits host country nationals to manage subsidiaries in their own country, and parent country nationals for positions at headquartersmakes sense for firms pursuing a localization strategycan minimize cultural myopiamay be less expensive to implement than an ethnocentric policyBut host country nationals have limited opportunities to gain experience outside their own country and so cannot progress beyond senior positions in their own subsidiariesa gap can form between host country managers and parent country managers

What Is A Geocentric Staffing Policy?The geocentric approach seeks the best people, regardless of nationality for key jobs consistent with building a strong unifying culture and informal management networkmakes sense for firms pursuing a global or transnational strategyenables the firm to make the best use of its human resourcesbuilds a cadre of international executives who feel at home working in a number of different culturesButcan be limited by immigration laws is costly to implement

Which Staffing Policy Is Best?Comparison of Staffing Approaches

What Is Expatriate Failure?Firms using an ethnocentric or geocentric staffing strategy will have expatriate managersExpatriate failure is the premature return of an expatriate manager to the home countryeach expatriate failure can cost between $250,000 and $1 millionbetween 16 and 40% of all American expatriates in developed countries fail and almost 70% of Americans assigned to developing countries fail

What Is The Rate Of Expatriate Failure?Expatriate Failure Rates

Why Do Expatriate Managers Fail?The main reasons for U.S. expatriate failure are the inability of an expatriate's spouse to adaptthe managers inability to adjustother family-related reasonsthe managers personal or emotional maturitythe managers inability to cope with larger overseas responsibilities The reason for European expatriate failure is the inability of the managers spouse to adjustThe main reasons for Japanese expatriate failure are the inability to cope with larger overseas responsibilitydifficulties with the new environmentpersonal or emotional problemsa lack of technical competencethe inability of spouse to adjust

How Can Firms Reduce Expatriate Failure?Firms can reduce expatriate failure through improved selection proceduresFour dimensions that predict expatriate success are Self-orientation - the expatriate's self-esteem, self-confidence, and mental well-beingOthers-orientation - the ability to interact effectively with host-country nationalsPerceptual ability - the ability to understand why people of other countries behave the way they doCultural toughness the ability to adjust to the posting

Why Is A Global Mindset Important?A global mindset may be the fundamental attribute of a global managercognitive complexitycosmopolitan outlookA global mindset is often acquired early in life froma family that is bicultural living in foreign countrieslearning foreign languages as a regular part of family life

What Is Training And Management Development?After selecting a manager for a position, training and development programs should be implementedTraining focuses upon preparing the manager for a specific jobManagement development is concerned with developing the skills of the manager over his or her career with the firmgives the manager a skill set and reinforces organizational culture Historically, most firms focus more on training than on management development

Why Is Training Important For Expatriate Managers?Training can reduce expatriate failureCultural training - fosters an appreciation for the host country's cultureLanguage training - an exclusive reliance on English diminishes an expatriate's ability to interact with host country nationalsPractical training - helps the expatriate and her family ease themselves into day-to-day life in the host countryBut, studies show only about 30% of managers sent on one- to five-year expatriate assignments received training before their departure

What Happens When Expatriates Return Home?Training and development should include preparing and developing expatriate managers for reentry into their home country organization need good programs for re-integrating expatriates back into work life within their home country organization and for utilizing the knowledge they acquired while abroad

Why Is Management Development Important To Firm Strategy?Management development programs increase the overall skill levels of managers through ongoing management educationrotations of managers through jobs within the firm to give them varied experiencesManagement development can be a strategic tool to build a strong unifying culture and informal management network, both of which are supportive of a transnational and global strategy

How Should Expatriates Be Evaluated?Evaluating expatriates can be especially complex typically, both host nation managers and home office managers evaluate the performance of expatriate managersBut, both types of managers are subject to unintentional biashome country managers tend to rely on hard data when evaluating expatriateshost country managers can be biased towards their own frame of reference

How Can Performance Appraisal Bias Be Reduced?To reduce bias in performance appraisalmore weight should be given to an on-site manager's appraisal than to an off-site manager's appraisala former expatriate who has served in the same location should be involved in the process home office managers should be consulted before an on-site manager completes a formal termination evaluation

What Are The Key Issues In Compensating Expatriates?Two key issues on compensationHow to adjust compensation to reflect differences in economic circumstances and compensation practicesHow to pay expatriate managers

How Should National Differences In Compensation Be Treated?Currently, there are substantial differences in executive compensation across countriesa top U.S. executive made an average of $525,923 in the 2005-2006 period, compared to $237,697 in Japan, and $158,146 in TaiwanQuestion: Should pay be equalized across countries?Many firms have recently moved toward a compensation structure that is based on global standardsespecially important in firms with a geocentric staffing policyBut, most firms still set pay according to the prevailing standards in each country

How Should Expatriates Be Paid?Most firms use the balance sheet approach - equalizes purchasing power across countries so employees have the same living standard in their foreign posting as at homeA compensation package has five components Base salary - normally in the same range as the base salary for a similar position in the home countrycan be paid either in the home currency or in the local currencyForeign service premium - extra pay the expatriate receives for working outside his country of origingenerally offered as an incentive to accept foreign assignments

How Should Expatriates Be Paid?Various allowances - hardship, housing, cost-of-living, education Tax differentials - may have to pay income tax to both the home country and the host-country governments if the host country does not have a reciprocal tax treaty with the expatriates home country company usually covers extra tax assessmentsBenefits many firms provide the same level of medical and pension benefits abroad that employees receive at home

Why Are International Labor Relations Important? Question: Can organized labor limit the choices available to an international business?Labor unions can limit a firm's ability to pursue a transnational or global strategyHRM needs to foster harmony and minimize conflict between management and organized labor

What Are The Concerns Of Organized Labor?Organized labor is concerned that Multinationals can counter union bargaining power by threatening to move production to another countryMultinationals will farm out only low-skilled jobs to foreign plants making it easier to switch production locations Multinationals will import employment practices and contractual agreements from their home countries and reduce the influence of unions

How Does Organized Labor Respond To MNC Power?Organized labor has responded to the increased bargaining power of multinational corporations byTrying to set-up their own international organizationsLobbying for national legislation to restrict multinationalsTrying to achieve regulation of multinationals through international organizations such as the United NationsSo far, these efforts have had only limited success

How Are MNCs Responding To Organized Labor?Many firms are centralizing labor relations to enhance the bargaining power of the multinational vis--vis organized laborin the past, labor relations were usually decentralized to individual subsidiariesThe way in which work is organized within a plant can be a major source of competitive advantage so it is important for management to have a good relationship with labor

Review QuestionThe three types of staffing approaches forinternational firms include all of the followingexcept

a) Transnationalb) Ethnocentricc) Geocentricd) Polycentric

Review QuestionFirms using _______ fill all key managementpositions with parent-country nationals.

An ethnocentric staffing policy A geocentric staffing policy A polycentric staffing policy A transcentric staffing policy

Review QuestionWhen a firm wants to pursue a transnationalstrategy, a _________ approach to staffing makessense.

a) Ethnocentric b) Geocentric c) Polycentric d) Transcentric

Review QuestionThe most common reason for expatriatefailure is

a) The managers inability to adjust b) The managers emotional or personal maturity c) The inability of the spouse to adjust d) The managers lack of technical competence

Review QuestionWhich of the following does not help predictsuccess in a foreign positing?

a) Others-orientation b) Cultural toughness c) Perceptual ability d) Technical expertise

Review QuestionWhich of the following is not a response by labor tothe increased bargaining power of multinationals?

a) Establishing global unions b) Setting-up their own international organizations c) Lobbying for national legislation to restrict multinationals d) Trying to achieve regulation of multinationals through international organization such as the United Nations

Welcome to International Business, Eighth Edition, by Charles W.L. Hill.

Chapter 18: Global Human Resource Management

Youve just been assigned responsibility for staffing your companys new facility in China. The facility will not only be responsible for manufacturing and assembling your product, it will also be an export center for the entire region. Should you hire local managers to run the facility? Should you bring in your own people? Should you try to have both local managers and managers from the headquarters? How will you deal with the labor force in China?The answers to these questions are all part of a companys human resource strategy. Human resource management, or HRM, refers to the activities an organization carries out to utilize its human resources effectively. It includes activities like determining the overall human resource strategy, how a firm should be staffed, how managers will be evaluated, how management development will be achieved, what compensation packages will look like, and how the firm will manage its relationship with labor. As companies have become more dependent on foreign markets both as a source of revenues and as a source of low cost labor and materials, human resource strategy has become increasingly important for firms. What is the link between strategy and HRM? Its critical that a firms human resource strategy be congruent with the firms strategy. Remember that a firms strategy is implemented through its organization, and if the right organization isnt there, the strategy wont work. For example, a firm pursuing a localization strategy need to be sure that local managers are involved in decision making. Similarly, a firm with a transnational strategy need to have the means to transfer and disseminate information throughout the firm.

Human resource management tends to be more complex in international companies as compared to domestic companies because of differences in labor markets, culture, legal systems, economic systems, and so on. If firms bring in their own managers to a foreign location, the firm has to deal with issues related to expatriates, or citizens of one country who is working abroad.

Here you can see the role of human resources in shaping organizational architecture.

What is a staffing policy?A firms staffing policy involves the selection of employees who fit the needs of a specific job, and who will be effective at promoting the firms corporate culture. General Electric, for example, hires people who not only have the skills necessary for a particular job, but who also have behavioral styles, beliefs, and value systems that fit with the companys corporate culture. There are three main approaches to staffing in an international firm, the ethnocentric approach, the polycentric approach, and the geocentric approach. Lets talk about each one.

Firms with an ethnocentric approach to staffing fill key management positions with parent country nationals. In the past, this approach was very popular. Companies like Proctor & Gamble, Phillips, and Matsushita for example, all had ethnocentric approaches to staffing. Why follow an ethnocentric approach to staffing? Well, there are three main reasons. Sometimes firms bring in parent country nationals because they believe that theres a lack of qualified individuals in the host country. Second, firms often choose an ethnocentric approach because they feel its the best way to maintain a unified corporate culture. Many Japanese companies transfer managers to foreign operations for this reason.Third, a firm may see an ethnocentric approach to staffing as being the best way to create value. They do it by transferring core competencies via managers from the parent company. What are the disadvantages of ethnocentric staffing? There are two main disadvantages. First, it limits opportunities for advancement for host country nationals. If local managers dont think theres room for advancement, they wont be motivated to go the extra mile for the firm. Second, an ethnocentric approach can lead to cultural myopia where a firm doesnt really understand host country cultural differences and what they mean for marketing and management.

Firms that follow a polycentric approach to staffing recruit host country nationals to manage subsidiaries in their own countries, while parent country nationals fill key slots at headquarters. Youve probably already guessed that an advantage of this approach is that it avoids the cultural myopia that can be a problem with the ethnocentric approach. This of course, would be especially beneficial to a company following a localization strategy. A polycentric approach can also be less expensive to implement because it avoids the cost of expatriate managers. However, a key drawback of the polycentric approach is that it creates a gap between the home country and host country operations. This gap can make it difficult to transfer core competencies, or achieve experience curve or location economies.Firms that follow a polycentric approach often have a hard time shifting to new strategies. Unilever found this out when it tried to shift to a transnational strategy. The companys subsidiaries had been operating more or less autonomously and resisted pressure to give up that sovereignty. In addition, another drawback with a polycentric staffing policy is that host country nationals, because they only have limited opportunities to gain experience outside their own countries, have difficulty progressing beyond senior positions within their own subsidiary.

Between the extremes of the ethnocentric approach and the polycentric approach is the geocentric approach where the best people, regardless of their nationality, are sought for key jobs throughout the organization. This approach allows firms to build a unifying corporate culture, and so makes sense for companies pursuing transnational or global standardization strategies.Keep in mind though, that a firm might not be able to pursue this strategy if immigration policies limit their ability to hire certain individuals.In the U.S. for example, extensive documentation is needed to hire a foreigner rather than a local citizen. Why choose the geocentric approach? Well, it allows the firm to use its human resources effectively, and it helps the firm build a cadre of international managers who feel comfortable working in a number of different cultures. These managers can be the first step to building a strong corporate culture. A geocentric staffing policy can also help firms reduce cultural myopia and be more responsive to local markets.Keep in mind though, that a geocentric strategy can be costly and difficult because of the training and relocation costs involved.

Here you can see a comparison of the three approaches to staffing.

Firms that decide to use expatiate managers, or citizens of one country who are working on another country, need to think about how they can help the managers be successful. Expatriate failure, or the premature return of an expatriate, is common. Studies show that between 16 and 40 percent of American expatriates on assignment in other developed countries come home early. About 70 percent fail to complete their assignments in developing countries! The cost of failure is high it can be as much as $1 million per employee!

Here you can see the failure rates of expatriates. Youll notice that U.S.-based firms have a much higher expatriate failure rate than firms from either Europe or Japan.

What are the reasons for expatriate failure in U.S. firms?One study that tried to answer this question showed that for American firms, the main reasons for expatriate failure include the inability of a spouse to adapt to a foreign culture, the inability of the manager to adjust, other family related reasons, the managers personal or emotional maturity level, and the managers inability to cope with larger overseas responsibilities. In Europe, only one reason consistently explains expatriate failure -- the inability of the managers spouse to adapt to a new environment. For Japanese firms, the main reasons for expatriate failure were the managers inability to cope with larger overseas responsibilities, difficulties with the new environment, personal or emotional problems of the manager, the expatriates lack of technical competence, and the inability of the spouse to adjust. Royal Dutch/Shell has tried to address some of the concerns revealed by this study. The company surveyed its expatriates to determine their concerns, and then implemented various programs designed to respond to the concerns. You can read more about Royal Dutch/Shells survey and response in the Management Focus in your text.

One way to reduce expatriate failure is to improve the selection process. Mendenhall and Oddou identified four dimensions that predict expatriate success, self-orientation, others-orientation, perceptual ability, and cultural toughness. Self-orientation attributes strengthen the expatriates self-esteem, self-confidence, and mental well-being. As youve probably guessed, expatriates that have high self-esteem, self-confidence, and mental well-being are most likely to succeed in foreign assignments.Others-orientation refers to how the attributes of this dimension enhance the expatriates ability to interact effectively with host country nationals. The better an expatriate can interact with host country nationals, the more likely she is to be successful.Perceptual ability refers to the ability to understand why people of other countries behave the way they do. Expatriates that dont have this ability tend to run into problems. Finally, cultural toughness refers to the fact that how well an expatriate adjusts to a particular posting tends to be related to the country of assignment. Countries that are perceived to be more similar to an expatriates home country are usually easier to adapt to. Many Americans for example, find it relatively easy to adapt to working in Britain, but not to working in India.

What do you need to be a good global manager? Well, some experts believe that a global mindset is the fundamental attribute of a global manager. This mindset is often acquired early in life from a bicultural family, living in a foreign country, or learning a foreign language as a regular part family life.Recall from the Opening Case that AstraZeneca promotes the notion of a global mindset by encouraging its managers to accept foreign postings and to be comfortable working with people from different countries and cultures.

Once a manager has been selected for a job, its time for training and management development. Training refers to preparing the manager for a specific job, while management development focuses on developing the skills of the manager over the course of his career at the firm. In the past, firms have emphasized training over management development, but recently there has been a realization that management development can be an essential component in a firms overall strategy. Lets look more closely at both of these.

Recall that the inability of both the manager, and the managers spouse to adjust to the new environment were among the most common reasons for expatriate failure. We know that cultural training, language training, and practical training all can help reduce this type of failure. Yet, at least one study found that only about a third of managers sent on longer term foreign assignments received this type of training! Most managers received no training at all!Cultural training is designed to develop an appreciation for the host country culture that should help the manager deal with host country nationals. Given that spouses and other family members also have difficulty adapting to new cultures, the entire family should receive cultural training prior to going on an assignment.You may be wondering whether, given that English is the world language of business, its important to get language training. The answer is yes! Relying exclusively on English limits a managers ability to interact with host country nationals. Knowing even a little of the local language can help a manager build rapport with local employees. Practical training helps the manager and her family ease into the daily life of the new country. Having a support network of other expatriates can help with this process.

So far, weve focused on how to be sure an expatriate is successful in his foreign assignment. Now, suppose hes successfully completed his assignment and its time to come home. Once a manager has successfully completed a foreign assignment, a new set of challenges begin. The repatriation process can be just as difficult as going on the assignment in the first place!Sometimes, managers that have had lots of responsibility and autonomy while on assignment will return only to find that they have no clear position waiting for them, or a position that doesnt really utilize the new skills theyve developed. One study showed that between 60 and 70 percent of repatriated employees had no idea what their position would be when they returned home!Firms have to prepare expatriates for their reentry into their home country. Firms that dont have a program in place that re-integrates employees into the home country organization may not be able to capitalize on the knowledge the expatriate gained while on assignment. Monsanto has developed a repatriation program designed to avoid these problems. You can learn more about Monsantos program in the Management Focus in your text.

In contrast to management training, recall that management development focused on increasing the overall skill levels of managers through management education and the rotation of managers through various positions in the firm. The goal is to develop managers with experience in a variety of areas. L.M. Ericsson, the Swedish telecommunications firm, transfers people back and forth between headquarters and subsidiaries as part of its management development program.Management development can be used as a strategic tool to build a strong, unifying culture, and an informal management network. Both of these support a transnational or global standardization strategy.

Imagine youve been posted to a foreign subsidiary, and its time for your performance appraisal. Who should conduct your appraisal? Your colleagues at the subsidiary or your boss back home? What should it be based on? The performance of the subsidiary or the firm as a whole? The answer is, it depends! Usually, two groups evaluate expatriate managers, host country managers and home country managers. Unfortunately, both groups can be biased! Home country managers tend to rely on hard data when they evaluate expatriates. If a home country manager doesnt really know whats going on in the subsidiary, she may just look at numbers like profitability or market share which may not give a good picture of what the subsidiary has actually accomplished. Think for a moment of how a change in exchange rates might affect a units profit!Host country managers can be biased toward their own frame of reference. Cultural differences for example, may affect how they interpret a managers style, and could result in a negative evaluation. Problems with the evaluation process are so bad, that one study found that 56 percent of the managers surveyed thought that a foreign assignment could be either detrimental or immaterial to a managers career!

How can a firm do a better job with performance appraisal? Many managers believe that more weight should be given to an on-site managers appraisal than to an off-site managers appraisal. In addition, including a former expatriate who has worked in the same location in the process could minimize bias. Finally, if an on-site manager is responsible for evaluation, the home office should be consulted prior to completing a termination evaluation.

Another area of human resources that generates a lot of discussion is compensation. How much should a manager be paid? Should an American working in China be paid the same amount as his Chinese colleague in a similar position, or should he be paid what hed make at home in a similar position? Should the Chinese manager make what the American gets paid?

In the U.S., the average CEO makes $2.25 million, but in Taiwan, a CEO makes less than $250,000! Is that fair?In 2003, McDonalds revamped its compensation and performance appraisal systems to create a system that is perceived by employees as being more equitable across borders. To achieve this, McDonalds instituted performance and compensation guidelines, yet left room for local managers to customize the program. You can learn more about McDonalds new program in the Management Focus in your text.

Most international firms use a balance sheet approach to compensation. This method equalizes purchasing power across countries so that employees have the same standard of living as they had at home, plus a financial incentive for accepting the foreign assignment.Compensation packages are usually comprised of a base salary, a foreign service premium, various allowances, tax differentials, and benefits. Lets look at each of these beginning with base salary. Expatriate base salaries are generally set in a similar range as the base salaries for similar positions in the home country. However, expatriates are usually paid some sort of premium for taking on the foreign assignment ranging from 10 to 30 percent of the base salary.

In addition, to the base pay and foreign service premium, expatriates usually also receive some allowances. There are four types of allowances, hardship allowances, housing allowances, cost-of-living allowances, and education allowances. Hardship allowances are usually paid when the location of the assignment is particularly challenging and deficient by home country standards. Cost-of-living allowances are given so that the expatriate can have a similar standard of housing as he would have in the home country. So, if an expatriate is moving from Fargo, North Dakota to London, England, she wont have to live in a one room apartment! Finally, education allowances ensure that children receive adequate schooling.So that expatriates dont have to pay taxes in both the home country and the host country, firms will usually pick-up host country taxes if the countries involved dont have a reciprocal tax treaty. Finally, benefits packages are usually paid to make sure the expatriate has similar medical and pension benefits as he would get if he worked at home.

Remember that in addition to dealing with the challenges of staffing foreign operations at the management level, firms must also deal with the local labor force. The key issue here is the degree to which organized labor is able to limit the choices available to international companies. Sometimes, labor unions can actually limit a firms ability to follow a transnational or global standardization strategy. GM for example, was unable to consolidate its operations in the most efficient manner because labor unions objected to the proposed changes.

What concerns organized labor? A main concern for labor is that the MNE can essentially counter union bargaining power by threatening to move production to another country. Ford for example, threatened to move production elsewhere in Europe when British workers voiced their displeasure with their lot. Labor also worries that MNEs will only bring low-skilled tasks to foreign operations, and keep the high skilled tasks at home. If a company does this, its easier to switch production to another country.Another concern for labor is that MNEs will try to impose unfamiliar labor practices imported from other countries. Many Japanese companies have tried to bring their labor practices to foreign markets. In the U.S. for example, Japanese auto plants are not unionized.

Does labor have any bargaining power? Not much! Organized labor has tried to minimize the power of MNEs by setting up their own international organizations, by lobbying for national legislation to restrict MNEs, and by trying to get international organizations like the UN involved in regulating MNE behavior. So far, these efforts havent been very successful.

How do companies approach labor relations? In the past, companies usually delegated labor relations to individual subsidiaries. More recently, companies have been shifting to a centralized approach with the goal of increasing their bargaining power. Firms are realizing that how work is organized in a facility can be important to the firms competitive advantage. You might think for example, of the advantages Japanese companies have as a result of their approach to labor.

Now, lets see how well you understand the material in this chapter. Ill ask you a few questions. See if you can get them right. Ready?

The three types of staffing approaches for international firms include all of the following except

a) Transnationalb) Ethnocentricc) Geocentricd) Polycentric

The answer is a.

Firms using _______ fill all key management positions with parent-country nationals.

a) An ethnocentric staffing policy b) A geocentric staffing policy c) A polycentric staffing policy d) A transcentric staffing policy

The answer is a. When a firm wants to pursue a transnational strategy, a _________ approach to staffing makes sense.

a) Ethnocentric b) Geocentric c) Polycentric d) Transcentric

The answer is b.

The most common reason for expatriate failure is

a) The managers inability to adjust b) The managers emotional or personal maturity c) The inability of the spouse to adjust d) The managers lack of technical competence

The answer is c.

Which of the following does not help predict success in a foreign positing?

a) Others-orientation b) Cultural toughness c) Perceptual ability d) Technical expertise

The answer is d.

Which of the following is not a response by labor to the increased bargaining power of multinationals?

a) Establishing global unions b) Setting-up their own international organizations c) Lobbying for national legislation to restrict multinationals d) Trying to achieve regulations of multinationals through international organization such as the United Nations

The answer is a.