Unit 1

International management encounters many problems above those faced by a domestic organization.

Geographic distance and a lack of close, day-to-day relationships with headquarters represent a major challenge to multinationals.

"It is essential, therefore, that special attention is given to the staffing practices of overseas units"

Many challenges exist when staffing a business that functions globally.  

Differences in cultures provide many opportunities for establishing a diverse workforce.  

If the parent company is located in the U.S and separate offices are being established in other areas of the world, the HR Manager will be responsible for making sure that the goals and timeline to reach those goals are met.

Depending on the type of business, the HR Manager will need to establish a way for the policies and philosophy of the company to be consistent in all branches, regardless of location.  

The easiest, but probably the most costly, solution is for the HR Manager to place home-country employees in the foreign locations in an effort to establish a program to meet the needs of the parent company.  

Geographic differences will present issues for

communication, time zone differences, language difference and more.

“ Staffing is the process of acquiring , deploying and retaining a workforce of sufficient quantity and quality to create positive impacts on the organization's effectiveness ”

General staffing policy on key positions at headquarters and subsidiaries

Constraints placed by host government

Staff availability

• First, the company can send employees from its home country, which are referred to as expatriates, expats or home country nationals.

• Second, it can recruit host country nationals (natives of the host country),

• Third, it can hire third country nationals who are natives of a country other than the home country or the host country.

• One of the challenges is staffing the operation. Most times bringing employees from one country to another is expensive for many reasons. First, the initial cost of airfare, living expenses and transportation in the host country. The second expense incurred with bringing expatriates in to the international operation is the training involved in making sure the people going to the host country are familiar with, laws, rules, culture, and expectations in the new country. There are also expenses incurred of the expatriate is not fluent in the host countries language.

The main challenge with hiring host-country employees is their lack of understanding about how the organization functions at home and what the goals are. There may be challenges when having a person from the host county come to train the individual, and then leaving to allow this person to run the operation with a short amount of training from the organizations superiors.

One of the challenges in hiring a third-country national is the training and cost to relocate the individual. Though many of these hires are smart choices because of culture and language there are still costs incurred in relocation and also in training.

When international expansion of the company is in its infancy, management is heavily relying on local staff, as it is extremely respondent to local customs and concerns.

As the company′s international presence grows, home-country managers are frequently expatriated to stabilize operational activities (particularly in less developed countries). At later stages of internationalization, different companies use different staffing strategies; however, most employ some combination of host-country, home-country, and third-country nationals in the top management team"

Ethnocentric policy Polycentric policy Geocentric policy Regiocentric policy

The ethnocentric staffing policy refers to the strategy of a multinational company to employ managers for key positions from the parent headquarters instead of employing local staff

Strategic decisions are made at headquarters

Limited subsidiary autonomy

Key positions in domestic and foreign operations are held by headquarters’ personnel

PCNs manage subsidiaries

To ensure new subsidiary complies with overall corporate objectives and policies

Has the required level of competence Overcomes lack of qualified managers

in host nation Unified culture Helps transfer core competencies (and

skills back)

Limits the promotion opportunities of HCNs, leading to reduced productivity and increased turnover among the HCNs

Longer time for PCNs to adapt to host countries, leading to errors and poor decisions being made

High cost Produces resentment in host country Can lead to cultural myopia

• The expatriate′s technical and business expertise.• Ability to transfer the headquarters′ culture to the foreign

operation (infusing central beliefs throughout the organization).

• Political understanding of the headquarters′ organization.• Effective communication between headquarters and the

subsidiary.• Lack of qualified host country nationals (HCNs).• Greater ability of expatriates to transfer know-how from

the parent to the subsidiary.• Measure of control over the subsidiary.• Career and promotion opportunities for PCNs.• Personnel development.• No need of well-developed international internal labor

market.• Rapid substitution of expatriates possible.

• Parent country nationals continue to experience difficulties to adjust to international assignments.

• The adaptation of expatriates is uncertain.• Complicated personnel planning procedures.• The private life of expatriates is severely affected.• Difficulties in constant mentoring during the stay abroad.• This approach to staffing limits the promotion and career

opportunities of local managers, which may lead to low moral and increased turnover.

• PCNs are not always sensitive to the needs and expectations of their host country subordinates.

• Tensions between the expatriate executives and the HCNs (caused by philosophical issues such as the clash of cultures and also by some fairly hard issues such as the often substantial income gap).

• Expatriates are very expensive in relation to HCNs.• Legal regulations of the host country.• Government restrictions.• Repatriation.• High failure rate.

Each subsidiary is a distinct national entity with some decision-making autonomy

HCNs manage subsidiaries who are seldom promoted to HQ positions

PCNs rarely transferred to subsidiary positions. Host-country nationals manage subsidiaries Parent company nationals hold key

headquarter positions Best suited to multi-domestic businesses

Employment of HCNs eliminates language barriers, reduces the need for cultural awareness training programs

Employment of HCNs allows a multinational company to take a lower profile in sensitive political situations

Employment of HCNs is less expensive Employment of HCNs gives continuity to the

management of foreign subsidiaries (lower turnover of key managers)

Alleviates cultural myopia. Inexpensive to implement Helps transfer core competencies

Difficult to bridge the gap between HCN subsidiary managers and PCN managers at headquarters (language barriers, conflicting national loyalties, cultural differences)

HCN managers have limited opportunities to gain experience outside their own country

PCN managers have limited opportunities to gain international experience

Resource allocation and strategic decision making will be constrained when headquarter is filled only by PCNs who have limited exposure to international assignment

A global approach - worldwide integration

View that each part of the organization makes

a unique contribution

Best suited to Global and trans-national

businesses

Nationality is ignored in favor of ability: Best person for the job

Color of passport does not matter when it comes to

rewards, promotion and development.

Ability of the firm to develop an international executive team

Overcomes the federation drawback of the polycentric approach

Support cooperation and resource sharing across units

Enables the firm to make best use of its human resources

Equips executives to work in a number of cultures

Helps build strong unifying culture and informal management network

Host government may use immigration controls in order to increase HCNs employment

Expensive to implement due to increased training and relocation costs

Large numbers of PCNs, HCNs, and TCNs need to be sent across borders

Reduced independence of subsidiary management

National immigration policies may limit implementation

Expensive to implement due to training and relocation

Compensation structure can be a problem.

Reflects a regional strategy and structure;

Regional autonomy in decision making;

Staff move within the designated region, rather than globally;

Allow interaction between executives transferred to regional headquarters from subsidiaries in the region and PCNs posted to the regional headquarters

Provide some sensitivity to local conditions

Help the firm to move from a purely ethnocentric or polycentric approach to a geocentric approach

Constrain the firm from taking a global stance

Staff’s career advancement still limited to regional headquarters, and not the parent country headquarters

Reasons for International Assignments

Types of International Assignments

Expatriate and Non-expatriates – their roles

Position filling Skills gap, launch of new endeavor,

technology transfer Management developmentTraining and development purposes,

assisting in developing common corporate values Organizational developmentNeed for control, transfer of knowledge, competence, procedures and practices

Short term: up to 3 months Troubleshooting Project supervision A stopgap until a permanent arrangement

is found Extended: up to 1 year

May involve similar activities as short-term assignments

Long term: varies from 1 to 5 years The traditional expatriate assignment

Commuter assignments Rotational assignments Contractual assignments Virtual assignments

Some of these arrangements assist in overcoming the high cost of international assignments but are not always effective substitutes for the traditional expatriate assignment.

Agent of direct control Agent of socialization Network builder Boundary spanner Language node Transfer of competence and knowledge

People who travel internationally yet are not considered expatriates as they do not relocate to another country Road warriors, globetrotters, frequent fliers

Much of international business involves visits to foreign locations, e.g. Sales staff attending trade fairs Periodic visits to foreign operations

A Glamorous life Excitement and thrills of conducting

business deals in foreign locations Life style (top hotels, duty-free shopping,

business class travel) General exotic nature

Home and family issues

- Frequent absences

Work arrangements Domestic side of position still has to be attended to

Travel logistics waiting in airports, etc.

Health concerns Poor diet, lack of sleep, etc.

Expatriate: citizens of one country working in another Expatriate failure: premature return of the

expatriate manager to his/her home country Cost of failure is high: estimate = 3X the expatriate’s

annual salary plus the cost of relocation (impacted by currency exchange rates and assignment location)

Inpatriates: expatriates who are citizens of a foreign country working in the home country of their multinational employer

US multinationals Inability of spouse to adjust Manager’s inability to adjust Other family problems Manager’s personal or emotional

immaturity Inability to cope with larger overseas

responsibilities European multinationals

Inability of spouse to adjust

Japanese Firms Inability to cope with larger overseas

responsibilities Difficulties with the new environment Personal or emotional problems Lack of technical competence Inability of spouse to adjust.

Strategists - representing interests of the MNE’s headquarters

Daily Managers - run operations, to build local capabilities and gain international management experience

Ambassadors - representing headquarter’s interests in the subsidiaries and representing the interests of the subsidiaries when interacting with headquarters

Trainers - for their replacements

Expatriate Failure and Selection

(1) premature (earlier than expected) return(2) unmet business objectives(3) unfulfilled career development objectives

Using the relatively easy-to-observe measure of premature return, studies in the 1980s reported that 76% of US MNEs have more than 10% expatriates failures, and 41% and 24% of European and Japanese MNEs, respectively, have a comparable number of failure cases

Reduce expatriate failure rates by improving selection procedures

An executive’s domestic performance does not (necessarily) equate his/her overseas performance potential

Employees need to be selected not solely on technical expertise but also on cross-cultural fluency

Self-Orientation Possessing high self-esteem, self-confidence and mental

well-being

Others-Orientation Ability to develop relationships with host-country nationals Willingness to communicate

Perceptual Ability The ability to understand why people of other countries

behave the way they do Being nonjudgmental and being flexible in management

style

Cultural Toughness Relationship between country of assignment and the

expatriate’s adjustment to it

Base Salary Same range as a similar position in the

home country Foreign service premium

Extra pay for work outside country of origin Allowances

Hardship, housing, cost-of-living and education allowances

Taxation Firm pays expatriate’s income tax in the

host country Benefits

Level of medical and pension benefits identical overseas

CompensationBenefits

CompensationBenefits

Employment andTaxation Laws

Organization’s Compensation Policy

Competitors

Standard of LivingPolitical and Social

Environment

Allowances Economic Conditions

Expatriate costs may pose a multiple-fold expense in relation to employees who are not sent as expatriates to foreign destinations, and are usually significantly higher than the compensation accorded to HCNs and TCNs

• a Chinese manager with 15 years experience costs less than USD 70,000 per annum, while

• a US expatriate manager with corresponding expertise would cost his or her organization USD 300,000 per year

Base Salary The base salary is usually the main component

in international compensation, and is the main benchmark used for other elements in an expatriate compensation package, such as bonuses and benefits

The base salary is either paid in the expatriate’s home or parent country currency, or in the currency of the expatriate’s host country

Hardship Premium For expatriate’s (usually PCNs, TCNs) who

will encounter “hardships” caused by the transfer to a foreign location, determining the appropriate level of payment can be difficult

Factors determining the hardship premium, usually expressed

in terms of an expatriate’s base pay, are typically: Assignment Actual hardship Tax consequences Length of assignment

Allowances: There are many types of allowances in an international compensation package: Cost of Living Allowance – Payment made to the

expatriate with a view to compensating for differences in expenditure between the home or parent country and the host country. Factors such as inflation differentials and the price level need to be considered. Often, the cost of living allowance is difficult to determine

Housing Allowance – Payment made to the expatriate with a view to ensuring that he or she can maintain their home-country living standard in the host country. Alternatively, an organization may provide housing facilities on a mandatory or optional basis. Also, support services may be provided to the expatriate, for example, by helping sell or rent the expatriate’s house in the home country

Home Leave Allowance – Payment made to the expatriate with a view to facilitating their visit back to the home country, once or twice a year. Home leave enables the expatriate to renew business, family and social ties, and thus avoid adjustment problems subsequent to repatriation

Relocation Allowance – Payment made with a view to enable the relocation of the expatriate to the assignment location. Includes moving, shipping, storage costs, subsidies for purchase of appliances and (possibly) an automobile

Education Allowance – Payment made with a view to supporting the education of the expatriate’s children, i.e. tuition, language class, school enrollment fees, books and supplies, transportation to educational establishment, room and boarding, school uniforms etc. Problems regarding the level of education required and adequacy of schools in the host country, and transportation to other localities may pose significant problems for organizations

Miscellaneous Allowances – Depending on the level of seniority of the expatriate, payments to him or her for club memberships, sport associations, maintenance of household staff etc. may be rendered

In addition, the organization may render financial assistance to the spouse for her or his loss of income as a result of the transfer of the expatriate

Benefits – Support rendered to an expatriate in addition to the allowances provided. There are several types of benefits, more prominent examples being:

Social Security Benefits (home country or host country?)

Paid Vacations for expatriate and family Rest and Rehabilitation leave (especially for

expatriates based in “hardship” assignment locations)

Emergency Cases (severe illness, death)

There are two basic approaches used to determine an international compensation package:

The Going Rate Approach

The Balance Sheet Approach

Based on local market rates Relies on survey comparisons

Local nationals (HCNs) Expatriates of same nationality Expatriates of all nationalities

Compensation based on the selected survey comparison

Base pay and benefits may be supplemented by additional payments for low-pay countries

Example: Should a Pakistani bank operating in London use local British salaries, the salaries other Pakistani competitor banks in London or the average salary offered by all foreign banks operating in London as the reference point for the base salary offered

Equality with local nationals

Simplicity

Identification with host country

Equity amongst different nationalities

Variation between assignments for the same employee

Rivalry between expatriates of same nationality in getting assignments to some countries

Potential reentry problems in the home country

Based on the premise that employees on overseas assignments should have the same spending power as they would in their home country.

The home country is the standard for all payments.

The objective is to: Ensure cost effective mobility of people to

global assignments Ensure that expatriates neither gain nor lose

financially Minimize adjustments required of expatriates

The balance sheet approach is widely used by international organizations to determine the compensation package for expatriates:

Basic objective is the maintenance of home-country living standard, plus financial inducement

Home-country pay and benefits are the foundations of this approach

Adjustments to home package to balance additional expenditure in the host country

Financial incentives (expatriate / hardship premium) added to make the package attractive

The balance sheet approach to international compensation is a system designed to equalize the purchasing power of employees at comparable position levels living abroad and in the home country, and to provide incentives offset qualitative differences between assignment locations

BSA considers 4 types of outlays which are incurred by expatriates:

Goods and services – Outlays incurred in the home country for food, personal care, clothing, household furnishings, recreation, transportation & medical care

Housing – All major costs associated with housing in the host country

Income Taxes – Parent country & host country income tax expenditures

Reserve – Contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, etc.

Where costs of host country > costs of home country organization pays the expatriate to make up the difference

Allowances, paid by company

Reserve

$1,000

Goods and Services

$2,000

Housing $2,000

Taxes $2,000

Home Country Salary $7,000

Reserve

Goods and Services

$700

Housing

$1,000

Taxes

$1,500

Relocation Bonus

Equivalent Salary and Allowances, Host Country

$10,200

Equality between assignments & between expatriates of the same nationality

Facilitates expatriate reentry

Easy to communicate To employees

Can result in considerable disparities between expatriates of different nationalities & between expatriates & local nationals

Can be quite complex to administer (e.g. changing economic conditions, taxation)

Negotiation Localization Lump Sum Cafeteria Plan Regional Systems

Global compensation managers increasingly deal with two areas of focus. They must manage highly complex and

turbulent local details, while Concurrently building and maintaining a

unified, strategic pattern of compensation policies, practices and values.

Financial protection in terms of benefits, social security and living costs in the foreign location.

Opportunities for financial advancement through income and/or savings.

Issues such as housing, education of children and recreation to be addressed in the policy.

Career advancement and repatriation.

The area of international compensation is complex, primarily because multinationals must cater to three categories of employees:

PCNs, TCNs and HCNs Key Components: Base salary Foreign services inducement Hardship premium Allowances Benefits

An expatriate working in a U.S. branch may receive: Base pay: $1,400/mon Housing: up to $1,400/mon (Optional) Itemized reimbursement: $500/mon Discretionary expense (e.g., gifts & gratuity to

clients and partners): $1000/special holidays Benefits: Social security/Medicare (Optional) Health care: $200/mon paid by employer Unemployment coverage Workers comp

REPATRIATION

process of facilitating career anxietyexperienced by repatriates (returning

expatriates) psychological contract - informal understanding of

expected delivery of benefits in the future for current services

repatriates also experience a loss of status, spouse and children may also find it difficult to adjust back home

mentor - helps alleviate the “out-of-sight, out-of-mind” feeling by ensuring that the expatriate is not forgotten at headquarters and by helping secure a challenging position for the expatriate upon return

EXPATRIATION vs. INPATRIATION

Addressing the expatriation problem, one solution is inpatriation – relocating employees of a foreign subsidiary to the MNE’s headquarters for the purposes of

(1) filling skill shortages at headquarters and (2) developing a global mindset for such inpatriates.

Most inpatriates are expected to eventually return to their home country to replace expatriates. Unfortunately, many are ineffective.

Inpatriates, just like expatriates, have their fair share of problems and headaches.