MBA book international human resource management

INTERNATIONAL HUMAN RESOURCE MANAGEMENTSYLLABUS UNIT I HR and global business challenge - Meaning of HR- The differences betweendomestic and International Human Resources - The various p

International Human Resource Management

School of Distance Education Bharathiar University, Coimbatore - 641 046

MBA Second Year (International Business)

Paper No 2.1

Author: P.L Rao

Copyright © 2008, Bharathiar University

All Rights Reserved

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by EXCEL BOOKS PRIVATE LIMITED A-45, Naraina, Phase-I, New Delhi-110028

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SCHOOL OF DISTANCE EDUCATION

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Coimbatore-641046

Page No.

Unit I

Unit II

Unit III

Unit IV

Unit V

Lesson 10 Human Resource Practices and Programmes in Various Countries 193

CONTENTS

INTERNATIONAL HUMAN RESOURCE MANAGEMENT

SYLLABUS

UNIT I

HR and global business challenge - Meaning of HR- The differences betweendomestic and International Human Resources - The various perspectives andapproaches of International Human Resource Management

UNIT II

International HR Planning: - The role of cultural understanding - Culture and HRfunctions in a global subsidiary Recruitment and Selection - Staffing policies,approaches, Selection criteria - Relocation Performance management of internationalemployees -performance appraisal in a global context - Recent innovative methods

in HRM

UNIT III

Orienting and training employees for global assignments approaches to training Integrating business strategy with international training & development.Compensation - various approaches - factors affecting compensation systems -Benefits - The adjustments and incentives

-UNIT IV

International labor relations - key issues, various agreements International labourstandards, safety and fair treatment, repatriation: process, problems and solutions.MNC`S and HR Policies

UNIT V

Human Resources practices and programs adopted in USA, EUROPIEN Japan,China and Asian countries Laws related to immigration of people Internationalcontract Laws related to HR

UNIT I

1.6.2 Need for a Broader Perspective

1.6.3 More Involvement in Employee’s Personal Lives

1.6.4 Changes in Emphasis as the Workforce Mix of Expatriates and Locals Varies1.6.5 Risk Exposure

1.6.6 More External Influences

1.7 Expanding the Role of HRM in International Firms

1.0 AIMS AND OBJECTIVES

After studying this lesson, you will be able to:

 Know the concept of international HRM

 Describe the complexity of IHRM

 Discuss the role of HRM in international firms

1.1 INTRODUCTION

International dimensions of business and the globalisation of business have a significantimpact on human resource management Therefore, a study of the concept of internationalmanagement is necessary to understand the subject of international human resourcemanagement

International Human

Resource Management

The focus of international business is on international transactions, whereas

international management deals with managing such transactions within the boundary

setup by corporate strategy

Thus, when a company decides to enter a foreign market, that decision incorporatesplanning to establish the ways by which business functions–marketing, accounting, humanresource management, and so on–are to be managed in that distant location Managingthe various functions and coordinating them with the parent company’s overall strategy

is the task of international management.

The international dimension of management might follow the practice of its headquarters

or, the demand of the local market, or a combination of both There is no single dimensionthat is found to be the best Suffice it to say that many companies follow practices set bytheir headquarters for upstream activities (such as manufacturing) and respond according

to local practices for downstream activities (such as marketing)

With the recent advent of technological innovation and the emergence of the NewlyIndustrialized Countries (NICs), we are witnessing a convergence among nations interms of rates and preferences, financial systems, and organization design Thisconvergence, along with complementary developments, are forcing organizations to adhere

to “borderless” terms

The interesting aspect of working internationally is that we have to work with peoplewho have different cultural heritages Cultural differences should be taken into accountwhen communicating and interacting across nations and across cultures within nations.Although multinational companies are supranational in operations and strategy, peoplewithin them do not necessarily share the same cultural values and views on people andlife The multinational model is built on the premise that it is necessary to understandcultural differences, rather than trying to smooth them over or override them For example,companies like IBM may have a strong corporate culture, but one of the aspects that thework of Hofstede (1980a) demonstrated was that within IBM, there is wide culturalvariation across nations

Hofstede (1980a) was one of the first to attempt to develop a universal framework forunderstanding cultural differences in managers’ and employees’ values based on aworldwide survey, although not the only one

Hofstede’s work focuses on ‘value systems’ of national cultures which are represented

by four dimensions:

 Power distance: This is the extent to which inequalities among people are seen as

normal This dimension stretches from equal relations being seen as normal towide inequalities being viewed as normal

 Uncertainty avoidance: This refers to a preference for structured situations versus

unstructured situations This dimension runs from being comfortable with flexibilityand ambiguity to a need for extreme rigidity and situations with a high degree ofcertainty

 Individualism: This looks at whether individuals are used to acting as individuals

or as part of cohesive groups, which may be based on the family or the corporation.This dimension ranges from collectivism to individualism (Hui, 1990)

 Masculinity: Hofstede (1980a) distinguishes ‘hard values’ such as assertiveness

and competition, and the ‘soft’ of ‘feminine’ values of personal relations, quality oflife and about caring about others, where in a masculine society gender roledifferentiation is emphasized

HR and Global Business Challenge

Firms operating in international markets face different conditions and competitions

Multinationals are characterised by an interdependence of resources and responsibilities

across all business units regardless of national boundaries These companies have to

cope with large flows of components, products, resources, people and information among

their subsidiaries, while simultaneously recognising the specialised resources and

capabilities of each This demands a complex process of coordination and cooperation

involving strong cross-unit integrating devices, a strong corporate identity and a well

developed worldwide management perspective Since they look for opportunities in every

country (markets, cheaper cost of capital, labour and raw materials) and react to threats

by various means, including speedy withdrawal of resources, they have to necessarily

deal with the national governments, which control entry and impose conditions on doing

business in their territories, often safeguarding the interests of local firms and consumers

Hence, the way multinationals do business requires high external focus and internal

responsiveness

National cultural traits also play a critical role in the conduct of business by influencing

customer preferences and the values, beliefs and behaviour of employees Thus, culture

affects both internal and external perspectives of management, including the cost of

doing business and its results

People play a key role in any type of business activity but their role has become very

critical in the new economy and service sector Multinationals have emanated mostly

from developed economies, which now control about 50% of world trade and 75% of

global GDP and dominate the service sector (60 to 80%) Therefore, how multinationals

manage their human resources (acquire, allocate, utilise and reward) becomes an important

field of study and analysis This area of study comes under the purview of IHRM

Since national cultures crucially influence these people, management processes, motivation

and decision-making, including negotiations and diplomacy–their study has also become

necessary to understand the subject of IHRM

The second approach to IHRM is the study of industrial relations and labour management

practices and policies in different countries Study of industrial relations in a country is

reflective of its state of society, historical evolution, power relationships between groups,

class struggle, political framework, prevailing labour laws and national approach to labour

management This is a very wide field and encompasses different approaches

Check Your Progress 1

What are the four dimensions of national culture as propounded by Hofstede?

1.2 DEVELOPING INTERNATIONAL HR STRATEGIES

Among the various factors that need to be addressed by a company’s international HRM

system for creating global strategies are:

 Building a global culture, which will encourage the managerial mindsets and attitudes

to develop an integrated, networked organisation to cope with global customers

and global transactions

 Developing the leadership and managerial capability and structure to support global

strategies and operations

International Human

Resource Management

 Gaining management interest and involvement in human resource management

 Ensuring optimum quality and depth of managerial personnel to serve globalcustomers

 Ensuring managers have the technical and managerial skills to work effectively atthe global level

 Increasing the extent and scope of managerial talent in the organisation

 Identifying the depth of managerial talent in the organisation

 Developing global and local approaches to training and development

 Ensuring management succession

 Sustaining and improving performance at all levels in all areas of the company

 Implementing global human resource systems for recruitment, performancemanagement, training and development, succession planning, remuneration andbenefits

 Establishing a total quality culture, and changing people’s attitudes to quality

 Linking HRM to strategic objectives

Types of International Employees

 Foreign parent expatriates are employees from the foreign parent headquarters

assigned to the venture, usually in upper management positions

 Host country nationals are employees directly recruited and employed by the venture

and are nationals of the host country They may occupy all levels in the organisation;however, initially they are usually not found in the upper management levels

 Third-country expatriates of the foreign parent are employees in the foreign parent

organisation who are nationals of neither the foreign parent country nor the hostparent country

 Third country expatriates of the new venture are employees recruited directly by

the venture who are nationals of neither the foreign parent(s) country nor the hostparent(s) country

Check Your Progress 2

Identify and mention the types of employees of an international firm

1.3 ISSUES IN IHRM

Before 1986, most written material on international HR focused on managing internationalassignments, usually from an American perspective Many current books and articlesare still written from a domestic point of view, but the literature is becoming considerablybroader in scope The quantity and quality of such material have increased dramatically

in the past five years The following topics have been most prevalent:

 Managing international assignments: This continues to be the most popular

topic Articles about the selection, training, compensation and repatriation ofexpatriate failures Many articles refer to expatriate managements as the majorconcern of HR managers in multinational corporations

HR and Global Business Challenge

 Employee and family adjustment: People’s adjustment to expatriate assignments

can be extremely challenging, regardless of the country For example, an American

family on an assignment in Indonesia went to a restaurant with their pet dog The

restaurant manager politely greeted them at the door, took their dog and, 30 minutes

later–much to the family’s horror—served it to them In America, a Chinese family

bought a can of what they believed—because of the picture on the label—to be

fried chicken They were surprised and disappointed to open it and learn the can

contained only the shortening used for cooking fried chicken

 Selecting the right person for a foreign assignment: This is critical for success.

Expatriates must be personally adaptable and their families capable of adjusting to

new and unusual challenges Orientation and training are enormously valuable in

helping expatriates and their families adjust to the new culture and learn a new

language Compensation plans for expatriates are usually complex and expensive

because of the taxes, allowances and premiums Repatriation can be traumatic

and difficult for returning executives, and the transition back home needs to be

planned as carefully as the move abroad

 Culture, communication and gauge: International HR professionals are expected

to understand the implications of cultural differences between countries and their

interplay with differing corporate cultures They are often responsible for seeing

that expatriates are trained to adapt to cultural differences and overcome cultural

shock Also, HR professionals play an important role in ‘cultural wrinkles’ in

international joint ventures, mergers and acquisitions

 Language and communication: These are also important in international HR

management Expatriate managers must learn the foreign language or rely on local

interpreters to communicate with the local workforce Parent company officials

may struggle to communicate with local managers in foreign subsidiaries Because

human resource professionals are often expected to foster international

communication, they must understand that effective communication involves more

than just speaking the same language To communicate effectively, individuals must

share the deeper meanings that are often embedded cultural norms and traditions

Check Your Progress 3

Mention any five issues in international human resource management

1.4 GLOBAL BUSINESS CHALLENGE

There are a number of unique problems that global companies face when trying to

implement consistent practices across their global HR networks These problems act as

barriers to effective Global HRM These are:

 Variations: The biggest challenge is also the most obvious: the worldwide variations

in social, political, and economic circumstances An HR practice that works in one

country may be unacceptable in another Fluctuations in currency, government

regulations, compensation expectations, job security, and learning styles are just a

few examples of the local variations a global HR professional faces Currently,

there is a European legislation that prohibits a company from sharing employment

records across geographical boundaries without the employee’s permission – a

potential threat to global staffing

International Human

Resource Management

 Perception of HR: Another global challenge is that the perceived value of HR

function varies across locations In one country, HR may be perceived as a truebusiness partner, working with high-level managers on critical strategic assessments

In other country but within the same company, HR may be viewed as a transactionalpersonnel department that handles administrative work

 Attitude and actions of headquarters toward HR: These help to determine how

seriously the HR function is viewed locally The position of the corporate chief HRofficer also sends signal to local units on the importance of the HR function

 Resistance to change: A third major challenge facing global HR practices is that

different locations have their own way of doing things and resisting change If an

HR initiative that is viewed as being imposed by the corporate management on thelocal HR staff, then it can be difficult to gain acceptance This is true regardless ofwhether it’s a US multinational ‘forcing’ initiatives on its local business or a Germancompany ‘forcing’ policies and practices on its international businesses

 Cultural differences in learning and teaching styles: These are subtle

differences For example, the entertaining instructional style often used in the USmight not find a receptive audience in Japan, where such an approach is notconsidered credible

The field of international Human Resource Management has been characterized bythree broad approaches.Early work in this field emphasizes cross-cultural managementapproach and examining human bahaviour within organizations from an internationalperspective A second approach developed from the comparative industrial relationsand HRM literature seeks to describe, compare and analyze HRM systems in variouscountries A third approach seeks to focus on aspects of HRM in multinational firms

1.5 MEANING OF IHRM

Before we offer a definition of international HRM, we will first define the general field

of HRM Typically, HRM refers to those activities undertaken by an organization toutilize its human resources effectively These activities would include at least the following:

 Human Resource Planning

 Staffing

 Performance Management

 Training and Development

 Compensation and Benefits

 Labour Relations (Industrial Relations)

An article by Morgan (1986) on the development of international HRM presents a model

of international HRM (shown in Figure 1.1) that consists of three dimensions:

1 The three broad human resource activities: Procurement, allocation, and

utilization (These three broad activities can be easily expanded into the six HRactivities listed above)

2 The three national or country categories involved in international HRM activities: The host-country where a subsidiary may be located, the home (parent)

country where the firm is headquartered, and ‘other’ countries that may be thesource of labour or finance

HR and Global Business Challenge

3 The three types of employees of an international firm: Host-country Nationals

(HCNs), Parent-Country Nationals (PCNs), and Third-Country Nationals (TCNs)

Thus, for example, IBM employs Australian citizens (HCNs) in its Australian

operations, often sends U.S citizens (PCNs) to Asia-Pacific countries on

assignments, and may send some of its Singapore employees on an assignment to

its Japanese operations (as TCNs)

Morgan defines international HRM as the interplay among these three

dimensions human resource activities, types of employees, and countries of operation We can see

that in broad terms, international HRM involves the same activities as domestic HRM

(e.g., procurement refers to HR planning and staffing); however, domestic HRM is

involved with employees within only a single national boundary.

Source: Adapted from P.V Morgan, 1986, International human resource management

Figure 1.1: Model of International HRM1.6 DIFFERENCE BETWEEN DOMESTIC AND

INTERNATIONAL HUMAN RESOURCE

The complexities of operating in different countries and employing different national

categories of workers are a key variable that differentiates domestic and international

HRM, rather than any major differences between HRM activities performed Many

firms underestimate the complexities involved in international operations, and there is

some evidence to suggest that business failures in the international arena may often be

linked to poor management of human resources

It is worthwhile examining in greater detail what is meant by the statement that

international HRM is more complex than domestic HRM Dowling (1988) has summarized

the literature on similarities and differences between international and domestic HRM

and argues that the complexity of international HR can be attributed to six factors that

differentiate international from domestic HRM These factors are as follows:

1 More HR activities;

2 The need for a broader perspective;

3 More involvement in employee’s personal lives;

4 Changes in emphasis as the workforce mix of expatriates and locals varies;

5 Risk exposure; and

6 More external influences

Human Resource Activities

Procure Allocation Utilize

Host Home Other

Host-Country Nationals (HCNs) Parent-Country Nationals (PCNs) Third-Country Nationals (TCNs) Type of Employees

Countries

International Human

Resource Management

1.6.1 More HR Activities

Expatriates are subject to international taxation, and often have both domestic

(i.e., parent-country) and host-country tax liabilities Therefore, tax equalization policiesmust be designed to ensure that there is no tax incentive or disincentive associated withany particular international assignment The administration of tax equalization policies iscomplicated on account of the wide variations in tax laws across host countries and bythe possible time lag between the completion of an expatriate assignment and thesettlement of domestic and international tax liabilities In recognition of these difficulties,many multinational firms retain the services of a major accounting firm for internationaltaxation advice

1.6.2 Need for a Broader Perspective

HR managers working in an international environment face the problem of designingand administering programmes for more than one national group of employees(e.g., PCN, HCN, and TCN employees who may work together in Zurich at the Europeanregional headquarters of a U.S.-based multinational) They need to take a broader view

of issues For example, a broader, more international perspective on expatriate benefitswould endorse the view that all expatriate employees, regardless of nationality, shouldreceive a foreign service or expatriate premium when working in a foreign location Yetsome multinationals, which routinely pay such premiums to their PCN employees oninternational assignment (even if the assignments are to desirable locations), are reluctant

to pay premiums to foreign nationals assigned to the home country of firm Firms following

such a policy often use the term inpatriate to describe foreign nationals assigned to the

home country of the firm Such a policy confirms the common perception of many HCNand TCN employees that PCN employees are given preferential treatment

1.6.3 More Involvement in Employee’s Personal Lives

A greater degree of involvement in the employee’s personal lives is necessary for theselection, training, and effective management of both PCN and TCN employees The

HR department or professional needs to ensure that the expatriate employee understandshousing arrangements, health care, and all other aspects of the compensation packageprovided for the assignment (cost-of-living allowances, premiums, taxes, etc.) Manymultinationals have an “International HR Services” section that coordinates administration

of the above programmes and provides services for PCNs and TCNs such as handlingtheir banking, investments, homes while on assignment, coordinating homes visits, andfinal repatriation

1.6.4 Changes in Emphasis as the Workforce Mix of Expatriates and Locals Varies

As the need for PCNs and TCNs declines and more trained locals become available,resources previously allocated to areas such as expatriate taxation, relocation, andorientation are transferred to activities such as local staff selection, training, andmanagement development The latter activity may require establishment of a programme

to bring high-potential local staff to corporate headquarters for developmental assignments

HR and Global Business Challenge

per failure to the parent firm may be as high as three times the domestic salary plus

relocation expenses, depending on currency exchange rates and location of assignments

Indirect costs such as loss of market share and damage to international customer

relationships may be considerable (Zeira and Banai, 1984)

Terrorism is another aspect of risk exposure relevant to international HRM Most major

multinationals must now consider this factor when planning international meetings and

assignments; it is estimated that firms spend 1 to 2% of their revenues on protection

against terrorism The HR department also may need to devise emergency evacuation

procedures for highly volatile assignment locations The invasion of Kuwait and the

ensuring Gulf War in 1991 is an example of a situation in which employees unexpectedly

and very rapidly came to risk

1.6.6 More External Influences

Major external factors that influence international HRM are the type of government, the

state of the economy, and the generally accepted practices of doing business in each of

the various host countries in which the multinational operates A host government can,

for example, dictate hiring procedures, as is the case in Malaysia During the 1970s, the

Malaysian government introduced a requirement that foreign firms comply with an

extensive set of affirmative action rules designed to provide additional employment

opportunities for the indigenous Malays who constitute the majority of the population but

tend to be under-represented in business and professional employment groups relative to

Chinese Malays and Indian Malays

In addition to complexity, there are four other variables that moderate differences between

domestic and international HRM These variables are discussed below:

(i) Cultural Environment: Anyone travelling abroad, either as a tourist or

businessperson, experiences situations that demonstrate cultural differences in

language, food, dress, hygiene, and attitude to time While the traveller can perceive

these differences as novel, even enjoyable, for people required to live and work in

a new country, such differences can prove difficult They experience culture

shock—a phenomenon experienced by people who move across cultures The

new environment requires many adjustments in a relatively short period of time,

challenging people’s frames of reference to such an extent that their sense of self,

especially in terms of nationality, comes into question People, in effect, experience

a shock reaction to new cultural experiences that cause psychological disorientation

because they misunderstand or do not recognize important cues Culture shock

can lead to negative feelings about the host country and its people and a longing to

return home

Activities such as hiring, promoting, rewarding, and dismissal will be determined by

the practices of the host country and often are based on a value system peculiar to that

country’s culture A firm may decide to head a new international operation with an

expatriate general manager but appoint as the HR department manager a local—a

person who is familiar with the host country’s HR practices This practice can cause

problems, though, for the expatriate general manager, as happened to an Australian

who was in charge of a new mining venture in Indonesia The local manager

responsible for recruitment could not understand why the Australian was upset to

find that he had hired most of his extended family rather than staff with the required

technical competence The Indonesian was simply ensuring that his duty to his family

was fulfilled—since he was in a position to employ most of them, he was obligated to

do so The Australian, however, interpreted the Indonesian’s actions as nepotism, a

negative practice according to his own value system (Dowling et al., 1989).

(ii) Industry Type: Porter (1986) suggests that the industry (or industries if the firm is

a conglomerate) in which a multinational firm is involved is of considerable importancebecause patterns of international competition vary widely from one industry to

another At one end of the continuum of international competition is the multidomestic

industry, one in which competition in each country is essentially independent of

competition in other countries; traditional examples include retailing, distribution,

and insurance At the other end of the continuum is the global industry, one in

which a firm’s competitive position in one country is significantly influenced by itsposition in other countries; examples include commercial aircraft, semiconductors,and copiers

The role of the HRM function in multidomestic and global industries can be analyzedusing Porter’s value-chain model In Porter’s (1985) model, HRM is seen as one

of four support activities for the five primary activities of the firm Since humanresources are involved in each of the primary and support additives, the HRMfunction is seen as cutting across the entire value chain of a firm If the firm is in amultidomestic industry, the role of the HR department will most likely be moredomestic in structure and orientation The main role for the HRM function would

be to support the primary activities of the firm in each domestic market to achieve

a competitive advantage through either cost/efficiency or product/servicedifferentiation (Schelur 1984)

Lanrent (1986) proposes that a truly international conception of human resourcemanagement would require the following steps:

1 An explicit recognition by the parent organization that its own peculiar ways

of managing human resources reflect some assumptions and values of itshome culture

2 An explicit recognition by the parent organization that its peculiar ways areneither universally better nor worse than others but are different and likely toexhibit strengths and weaknesses, particularly abroad

3 An explicit recognition by the parent organization that its foreign subsidiariesmay have other preferred ways of managing people that are neither intrinsicallybetter nor worse, but could possibly be more effective locally

4 A willingness from the headquarters to not only acknowledge culturaldifferences, but also to take active steps in order to make them discussableand therefore usable

5 The building of a genuine belief by all involved that more creative and effectiveways of managing people could be developed as a result of cross-culturallearning

HR and Global Business Challenge

(iii) Reliance of the Multinational on its Home-Country Domestic Market: A

pervasive but often ignored factor that influences the behaviour of multinationals

and resultant HR practices is the extent of reliance of the multinational on its

home-country domestic market

The United Nations Conference on Trade and Development (UNCTAD) in its

annual survey of foreign direct investment calculates what it refers to as an “index

of transnationality,” which is an average of ratios of foreign assets to total assets,

foreign sales to total sales, and foreign employment to total employment

(The Economist 1997) Based on this index of transnationality, the most

foreign-oriented multinational is Nestle, with 87% of assets, 98% of sales, and 97% of

employees located outside of Switzerland The top ten multinationals are as follows:

There is not a single U.S firm in the top fifteen multinationals listed—CocaCola

and McDonald’s are ranked 31st and 42nd, respectively The reason is as obvious

as it is important—the size of the domestic market for U.S firms A very large

domestic market influences all aspects of how a multinational organizes its activities

Thus, multinationals from small advanced economies like Switzerland (population

7 million), Belgium (10 million), Sweden (9 million), and the Netherlands (15 million)

are in a quite different position to U.S multinationals based in the largest single

national market in the world with over 250 million people

(iv) Attitudes of Senior Management to International Operations: It is likely that if

senior managements do not have a strong international orientation, the importance

of international operations may be underemphasized in terms of corporate goals

and objectives In such situations, managers may tend to focus on domestic issues

and minimized differences and international HRM practices This failure to recognize

differences in managing human resources in foreign environments, frequently results

in major difficulties in international operations (Desatink and Bennett, 1978) The

challenge for the corporate HR manager is to work with top management in fostering

the desire “global mindset.”

Check Your Progress 4

What are the factors that differentiate international HRM with that of domestic

HRM?

Bhatt et al (1988) examined the role of HR staffs and managers in the strategic planning

of multinational firms The study concluded that HR involvement at the corporate leveltended to be informal, limited in scope, and heavily dependent upon the competence andpersonal characteristics of the senior HR manager The HR manager played a majorrole separate from that of the department or functional area Staffing was the main area

in which the HR managers were involved in strategy formulation; other traditional HRareas (e.g., compensation and evaluation of manager performance) were viewed asgeneral management concerns and not primarily HR related At the SBU level, the HRdepartment was more involved in strategic planning; its role was more established andthe emphasis was on how HR staff could help implement a strategy As Doz and Prahalad(1986) point out, a HR system can be strong only if it receives extensive support andinvolvement from senior management

It is difficult to advocate international HRM policies if one is not fully appreciative of theimportance of the firm’s international operations to its overall profitability andcompetitiveness, and aware as well of the special demands placed on the HR function

by the complex global environment The need for a global perspective applies to both theindividual HR manager and the HR department To accomplish this goal, Reynolds (1992)suggests that HR managers be transferred from headquarters to international operations,not into subsidiary HR departments but into other line positions that will broaden theirperspectives Moving HR staff from the subsidiaries into headquarters is another way ofencouraging headquarters HR staff to appreciate the international operations of the firmand to develop policies and activities to support staff throughout the entire global network.Smaller firms with limited resources may find it impossible to finance staff transfers fordevelopment purposes, but they may be able to identify other ways to globally orientate

HR staff, such as an annual visit to key foreign subsidiaries Larger multinationals schedulefrequent meetings of corporate and subsidiary HR managers as a way to foster corporateidentity and to ensure greater consistency in global HR practices (Brandt, 1991)

1.8 LET US SUM UP

The interesting aspect of working internationally is that we have to work with peoplewho have different cultural heritages Multinationals are characterised by aninterdependence of resources and responsibilities across all business units regardless ofnational boundaries These companies have to cope with large flows of components,products, resources, people and information among their subsidiaries, while simultaneouslyrecognising the specialised resources and capabilities of each Therefore, howmultinationals manage their human resources (acquire, allocate, utilise and reward)becomes an important field of study and analysis This area of study comes under thepurview of IHRM

There are a number of unique problems that global companies face when trying toimplement consistent practices across their global HR networks These problems act asbarriers to effective Global HRM These are:

 Variations

 Perception of HR

 Attitude and actions of headquarters toward HR

HR and Global Business Challenge

 Resistance to change

 Cultural differences in learning and teaching styles

Morgan defines international HRM as the interplay among these three dimensions-human

resource activities, types of employees, and countries of operation The complexities of

operating in different countries and employing different national categories of

workers are a key variable that differentiates domestic and international HRM.

1.9 LESSON END ACTIVITY

What inter-country differences affect HRM? Give examples of how each may specifically

affect HRM

1.10 KEYWORDS

HRM: A process of bringing people and organisations together so that the goals of each

one is met, effectively and efficiently

IHRM: It is the process of procuring, allocating and effectively utilising human resources

in a multinational corporation

International corporation: A domestic firm that builds on its existing capabilities to

penetrate overseas markets

Multinational corporations: A more complex form that usually has fully autonomous

units operating in multiple countries

Global corporation: It has corporate units in a number of countries that are integrated

to operate as one organisation worldwide

1.11 QUESTIONS FOR DISCUSSION

1 What is International HRM? What are the issues involved in it?

2 What are the barriers to effective global HRM?

3 Define International HRM

4 Explain the International HRM model by a programme

5 “India is seen to be more attractive than China for Foreign Direct Investment”

Substantiate this statement

6 What are the various steps required for a truly international conception of HRM?

Check Your Progress: Model Answers

CYP 1

Hofstede’s four dimension of National Culture: Hofstede’s work focuses on

‘value systems’ of national cultures which are represented by four dimensions:

 Power distance: This is the extent to which inequalities among people are

seen as normal This dimension stretches from equal relations being seen as

normal to wide inequalities being viewed as normal

 Uncertainty avoidance: This refers to a preference for structured situations

versus unstructured situations This dimension runs from being comfortable

Contd

International Human

Resource Management

with flexibility and ambiguity to a need for extreme rigidity and situations with

a high degree of certainty

 Individualism: This looks at whether individuals are used to acting as

individuals or as part of cohesive groups, which may be based on the family

or the corporation This dimension ranges from collectivism to individualism(Hui, 1990)

 Masculinity: Hofstede (1980a) distinguishes ‘hard values’ such as

assertiveness and competition, and the ‘soft’ of ‘feminine’ values of personalrelations, quality of life and about caring about others, where in a masculinesociety gender role differentiation is emphasized

CYP 2 Types of Employees of an International Firm:

(i) Host-country nationals(ii) Parent-country nationals(iii) Third-country nationals

CYP 3 Issues in IHRM:

(i) Managing international assignments(ii) Employee and family adjustment(iii) Selecting the right person for a foreign assignment(iv) Culture, communication and gauge

(v) Language and communication

CYP 4

The complexity of international HR can be attributed to six factors that differentiateinternational HRM from domestic HRM These factors are as follows:

1 More HR activities;

2 The need for a broader perspective;

3 More involvement in employee’s personal lives;

4 Changes in emphasis as the workforce mix of expatriates and locals varies;

5 Risk exposure; and

6 More external influences

1.12 SUGGESTED READINGS

P L Rao, International Human Resource Management, Excel Books, New Delhi, 2008.

Briscoi, Schuler and Claus, International Human Resource Management, Routledge, 2008.

Breuester, Sparrow and Vernon, International Human Resource Management (3rd edition).

P.J Dowling and D.E Welch, International Human Resource Management, Thomson,

London, 2004

2.2 International Human Resource Management Approaches

2.3 The Path to Global Status

2.3.1 Export

2.4 Initial Division Structure (Early Stages of Internationalization)

2.5 International Division

2.6 Global Product/Area Division

2.6.1 Global Product Division

2.6.2 Global Area Division

2.6.3 Global Matrix Structure

2.7 New Types of Multinational Structures

2.7.1 Heterarchy

2.7.2 Transnational

2.7.3 Networked Firm

2.7.4 Keiretsu

2.7.5 Control and Coordination

2.8 Role of Human Resource

2.9 Strategies for International Organisations

2.9.1 Perlmutter’s Model

2.9.2 Bartlett and Ghoshal’s Model

2.10 Implications for Human Resource Management Policy

2.11 An Integrated Strategic Framework

2.12 Flexible Organisation: The EU Model

2.13 Context of Management and Organizations in Europe

International Human

Resource Management

2.0 AIMS AND OBJECTIVES

After studying this lesson, you will be able to:

 Distinguish between four types of international management approaches

 Describe mode of operation used in the various foreign markets

 Appreciate the strategic importance of the overseas operations

2.1 INTRODUCTION

The Human Resource (HR) functions do not operate in a vacuum As with other areas

of the organisation, the shift from a domestic to a global focus affects the HR activities

As a consequence, HR activities are determined by, and influence, various organizationalfactors, such as:

 Stage of internationalization;

 Mode of operation used in the various foreign markets;

 Method of control and coordination; and

 Strategic importance of the overseas operations to total corporate profitability

To a certain extent, how the internationalizing firm copes with the HR demands of itsvarious foreign operations determines its ability to execute its chosen expansion strategies.Indeed, personnel policies should lead rather than follow international operation decisions(Svard, 1982) yet one could argue that most companies take the opposite approach—that is, follow market-driven strategies

2.2 INTERNATIONAL HUMAN RESOURCE MANAGEMENT APPROACHES

The HRM uses four terms to describe Multi-National Corporations (MNCs) approaches

to managing and staffing their subsidiaries: ethnocentric, polycentric, regiocentric, and geocentric These terms are derived from the work of Perlmutter (1969) who

claimed that It was possible to identify among international executive three primaryattitudes—ethnocentric, polycentric, and geocentric—toward building a multinationalenterprise, based on top management assumptions upon which key product, functional,

an geographical decisions were made To demonstrate these three attitudes, Perlmutter(1969) used aspects of organizational design, such as decision-making, evaluation and

control, information flows, and complexity of organization He also included perpetuation,

which he defined as “recruiting, staffing, development.” A fourth attitude—regiocentric—

was added later (Heanan and Perlmutter, 1979)

It is important to briefly outline them here, since they have a bearing on our discussion ofthe organizational structure and control mechanisms that are typically adopted by firms

as their internationalization progresses The four approaches are:

1 Ethnocentric: Few foreign subsidiaries have any autonomy; strategic decisions

are made at headquarters Key positions at the domestic and foreign operationsare held by management personnel of headquarters In other words, subsidiariesare managed by expatriates from the home country (PCNs)

2 Polycentric: The MNC treats each subsidiary as a distinct national entity with

some decision-making autonomy Subsidiaries are usually managed by local nationals(HCNs) who are seldom promoted to positions at headquarters Likewise, ‘PNCs’are rarely transferred to foreign subsidiary operations

23 Perspectives and Approaches of IHRM

3 Geocentric: Here, the MNC takes a worldwide approach to its operations,

recognizing that each part (subsidiaries and headquarters) makes a unique

contribution with its unique competence It is accompanied by a worldwide integrated

business, and nationality is ignored in favour of ability For example, the chief

executive officer of the Swedish Multinational Electrolux claims that within this

global company there is no tradition to hire managing directors from Sweden, or

locally, but to find the person best suited for the job, that is, the colour of one’s

passport does not matter when it comes to rewards, promotion, and development

PCNs, HCNs, and TCNs can be found in key positions anywhere, including those

at the senior management level at headquarters and on the board of directors

4 Regiocentric: Reflects the geographic strategy and structure of the multinational.

Like the geocentric approach, it utilizes a wider pool of managers but in a limited

way Personnel may move outside their countries but only within the particular

geographic region Regional managers may not be promoted to headquarter positions

but enjoy a degree of regional autonomy in decision-making It may be seen as a

precursory step towards geocentrism

It should be stressed that the above categories refer to managerial attitudes that reflect

the socio-cultural environment in which the internationalizing firm is embedded These

attitudes also may reflect a general top management attitude However, the nature of

international business often forces adaptation upon implementation For instance, a firm

may adopt an ethnocentric approach to all its foreign operations, but a particular host

government may require the appointment of its own people in the key subsidiary positions;

so, for that market, a polycentric approach is mandatory, making a uniform approach

unachievable Likewise, businesses active in Russia found that Western companies tended

to maintain an ethnocentric approach to staffing despite attempts to “Russify” the local

operations (Thornhill, 1996) Also, the strategic importance of the foreign market, the

maturity of the operation, and the degree of cultural distance between the parent and

host country, influence the manner in which the firm approaches a particular staffing

decision In some cases, an MNC may use a combination of approaches—for example,

it may operate its European interests in a regiocentric manner and its Southeast Asian

interests in an ethnocentric way until there is greater confidence in operating in that

region of the world

Because of these operating realities, it is sometimes difficult to equate precisely managerial

attitudes towards international operations with the structural forms The environmental

contingencies facing the particular internationalizing firm influence its strategic position,

managerial mindset, organizational structure, and staffing approaches The four typologies–

international, global, multidomestic, and transnational–are useful illustrations of these

linkages

Check Your Progress 1

Distinguish between ethnocentric and polycentric approaches of international

management

2.3 THE PATH TO GLOBAL STATUS

In addition to the strategic imperatives, mindsets, and staffing approaches outlined above,

IHRM is affected by the way the internationalization process itself is managed Most

International Human

Resource Management

firms pass through several stages of organizational development as the nature and size

of their international activities grow As they go through these evolutionary stages, theirorganizational structures change, typically due to the strain imposed by growth andgeographical spread, the need for improved coordination and control across businessunits, and the constraints imposed by host-government regulations on ownership andequity Multinationals are not born overnight; the evolution from a domestic to a trulyglobal organization may involve a long and somewhat tortuous process with many anddiverse steps, as illustrated in Figure 2.1 Some firms may use licensing, subcontracting,

or other operation modes, instead of establishing their own foreign production or servicefacilities

Some firms are able to accelerate the process through acquisitions, thus leapfroggingover intermediate steps (i.e., move directly into foreign production through the purchase

of a foreign rather than initial exporting, followed by sales subsidiary Some firms can bedriven by external factors such as host-government action (e.g., forced into a joint venture)

or an offer to buy a company Others are formed expressly with the internationalmarket in mind In other words, the number of steps, or stages, along the path tomultinational status varies from firm to firm, as does the timeframe involved The followingsection examines the typical path from domestic to global organization and draws outkey HRM implications

Source: Dowling et al (2001) International Resource Management (p 34)

Figure 2.1: Stages of Internationalization2.3.1 Export

Exporting is typically the initial stage for firms entering international operations As such,

it rarely involves much organizational response until the level of export sales reaches acritical point Of course, simple exporting may be difficult for service companies (such

as legal firms) so that they may be forced to make an early step into foreign directinvestment operations (via a branch office, or joint venture) (Erramilli, 1997)

Exporting often tends to be handled by an intermediary (e.g., an export agent or foreigndistributor – usually a HCN, as local market knowledge is deemed critical) As exportssales increase, an export manager may be appointed to control foreign sales and activelyseek new markets This person is commonly from the domestic operations – that is, aPCN Further growth in exporting may lead to the establishment of an export department

at the same level as the domestic sales department as the firm becomes more committed

to, or more dependent on, its foreign export sales as Figure 2.2 shows

Exporting

Sales Subsidiary

Foreign Production

Network of Subsidiaries

Licensing Subcontracting

25 Perspectives and Approaches of IHRM

Figure 2.2: Export Department

At this stage, exporting is controlled from the domestic-based home office, through a

designated export manager The role of the HR department is unclear, as indicated by

the dotted arrow between these two functional areas in Figure 2.2 Though there are

HR activities involved (such as the selection of export staff), and perhaps training of the

foreign agency staff, these activities are handled by the marketing department, or

exporting staff, the HR department has little, if any, involvement with the development of

policies and procedures surrounding the HR aspects of the firm’s early international

activities (Welch, etc., 1997)

2.4 INITIAL DIVISION STRUCTURE (EARLY STAGES OF

INTERNATIONALIZATION)

As the firm develops expertise in foreign markets, agents and distributors are replaced

by direct sales with the establishment of branch offices in the foreign market countries

At this stage, the company creates an export division or function at the corporate home

office and the export division head directly reports to the CEO

As international sales increase further, local governments exert pressure on these growing

markets for setting up on-site manufacturing facilities This prompts the company to set

up a subsidiary and a branch office in the concerned foreign countries for economic

reasons, as well as to demonstrate to the local government that it wants to be a good

local citizen This new structural arrangement is shown in Figure 2.3 Each subsidiary is

responsible for operations within its own geographic area, and the subsidiary manager

reports directly to the export division head at the corporate office This arrangements is

useful because it takes a great deal of burden off the CEO for monitoring and supporting

the different subsidiaries in different foreign markets (Gupta, 2006)

In the beginning, PCNs are usually posted to important positions because the firm has

more confidence in them to implement proven home office human resource policies and

practices This is known as the ethnocentric approach The decision to use PCNs leads

into exportation of management issues and activities At this point the HR department

becomes actively involved in the personnel aspects of the firm’s international operations

Managing Director

Production

Manager

Finance Manager

Marketing/

Sales Manager

HR Manager

Domestic Sales

Export

International Human

Resource Management

Source: International HRM (2006) S.C Gupta (p 136)

Figure 2.3: Use of Subsidiaries during the Early Stages of Internationalization2.5 INTERNATIONAL DIVISION

For some firms, it is a short step from the establishment of a sales subsidiary to foreignproduction or service facility This step may be considered small if the firm already isassembling the product abroad to take advantage of cheap labour or to save shippingcosts or tariffs For some firms, though, the transition to foreign investment is a large,sometimes prohibitive, step For example, an Australian firm that was successfullyexporting mining equipment to Canada began to experience problems with after-salesservicing and delivery schedules The establishment of its own production facility wasconsidered too great a step, so the firm entered into a licensing agreement with a Canadianmanufacturer

Having made the decision to produce overseas, the firm may establish its own foreignproduction facilities, or enter into a joint venture with a local firm, or buy a local firm.Regardless of the method of establishment, foreign production/service operations tend

to trigger the creation of a separate international division in which all international activitiesare grouped, as Figure 2.4 illustrates (Thornhill, 1996)

With the spread of international activities, the firm establishes what has been referred to

as “miniature replicas” (the foreign subsidiaries are structured to mirror that of the domesticorganization) The subsidiary managers report to the head of the international division,and there may be some informal reporting directly to the various functional heads Forexample, as shown in Figure 2.4, there may be contact regarding staffing issues betweenthe HR managers in the two subsidiaries and the HR manager at corporate headquarters

Chief Executive Officer

V.P International operations

Egypt

Home office departments

Overseas subsidiaries

27 Perspectives and Approaches of IHRM

Source: Dowling et al (2001 International Resource Management p 38)

Figure 2.4: International Division

Many firms at this stage of internationalization are concerned about maintaining control

of the newly established subsidiary, and will place PCNs in all key position in the subsidiary

However, some firms decide that local employment conditions require local handling and

place an HCN in charge of the subsidiary HR function, thus making an exception to the

overall ethnocentric approach; others may place HCNs in several key positions, including

HRM, to comply with host-government directives

The role of corporate HR staff is primarily concerned with expatriate management

though there will be some monitoring of the subsidiary HR function—formally through

the head of the International Division Pucik (1985) suggests that initially, corporate HR

activities are confined to supervising the selection of staff for the new international

division Expatriate managers perform a major role: identifying employees who can direct

the daily operations of the foreign subsidiaries, supervising transfer of managerial and

technical know-how, communicating corporate policies, and keeping corporate HQ

informed

As the firm expands its foreign production or service facilities into other countries,

increasing the size of its foreign workforce, accompanied by a growth in the number of

expatriates, more formal HR policies become necessary Welch and Welch (1997) argue

that the capacity of corporate HR staff to design appropriate policies may depend on

how institutionalized existing approaches to expatriate management concerns have

become, especially policies for compensation and predeparture training, and that the

Managing Director

International Division

Subsidiary Italy

Subsidiary Japan

Subsidiary Australia

as residing outside its current domain.

2.6 GLOBAL PRODUCT/AREA DIVISION

Over a time, the firm moves from the early foreign production stage into a phase ofgrowth through production (or service), standardization, and diversification Consequently,the strain of sheer size may create problems, and the international division becomesoverstretched making effective communication and efficiency of operation difficult Insome cases, corporate top managers may become concerned that the international divisionhas enjoyed too much autonomy, acting so independently from the domestic operations

to the extent that it operates as a separate unit—a situation that cannot be tolerated asthe firm’s international activities become strategically more important

Typically, tensions will emerge between the parent company (headquarters) and itssubsidiaries, stemming from the need for national responsiveness at the subsidiary unitand global integration imperatives at the parent headquarters The demand for nationalresponsiveness at the subsidiary unit develops because of factors such as differences inmarket structures, distribution channels, customer needs, local culture, and pressure fromthe host government The need for more centralized global integration by the headquarterscomes from having multinational customers, global competitors, and the increasinglyrapid flow of information and technology—and from the quest for large volume for

economies of scale (Dowling et al., 2001) As a result of these various forces for change,

the multinational confronts two major issues of structure:

1 The extent to which key decisions are to be made at parent headquarter or at thesubsidiary units (centralization vs decentralization), and

2 The type of control exerted by the parent over the subsidiary unit (bureaucraticcontrol vs normative)

The structural response, at this stage of internationalization, can be either a product - orservice-based global structure or an area-based structure

As part of the process of accommodating subsidiary concerns through decentralization,the MNC strives to adapt its HRM activities to each host-country’s specific requirements.This naturally impacts on the corporate HRM function There is an increasing devolution

of responsibility for local employee decisions to each subsidiary, with corporate HR staffperforming a monitoring role, intervening in local affairs only in extreme circumstances.For example, in the late-1980s, Ford Australia had a ceiling on its HRM decisions, andany decision that involved an amount above that ceiling (such as promotions above acertain salary grade) had to be referred to its regional HQR for corporate approval.Expatriate management remained the responsibility of corporate HR staff

This HRM monitoring role reflects management’s desire for central control of strategicplanning—formulating, implementing, and coordinating strategies for its worldwidemarkets The growth in foreign exposure combined with changes in the organizationalstructure of international operations results in an increase in the number of employeesneeded to oversee the activities between the parent firm and its foreign affiliates Withinthe human resource function, the development of managers able to operate in internationalenvironments becomes a new imperative (Puick, 1985)

29 Perspectives and Approaches of IHRM

2.6.1 Global Product Division

In this structure, the company treats each of its major products as distinct Strategic

Business Units (SBUs) Divisions/functions at the corporate office are given worldwide

responsibility for production, finance, marketing and management of supply chain for

each product or product line These product divisions also have internal functional support

The structure is shown in Figure 2.5

Source: Gupta S.C., International HRM (2006) p 138

Figure 2.5: Global Product Division

This structure has certain advantages If the firm is very diverse, the need to customise

the product to the specific demands of the buyer becomes important This structure also

helps to integrate marketing, production and finance globally on the product basis Further,

the firms are able to strategise shift of products from one market to another as they

reach different life cycle stages, according to acceptability and scope

The disadvantage of this structure is duplication of personnel within each division, making

it expensive A second is that product managers may pursue currently attractive markets

and neglect other areas with better long-range potential A third is that many divisional

managers spend too much time tapping their local markets rather than international markets,

because it is more convenient and easier, and because they are more experienced in

domestic operations

2.6.2 Global Area Division

In this arrangement, a multinational prefers to divisionalise its foreign operations on the

basis of geographical unit rather than on product basis The corporate structure at the

HQ remains as in case of product-based divisionalisation (See Figure 2.6) This signifies

a major change in the thinking of the company, because now the international operations

are put on the same level as domestic operations

Headquarters

Chief Executive Officer

Production Marketing

Corporate Product Division

Finance ResourceHuman

Operating

Divisions

Great Britain France Germany Netherland

South

Product A Product B Product C Product D Product E

International Human

Resource Management

Head Quarters departments

Operating divisions

Chief Executive Officer

Resource

South

Production Marketing Human

Resource

Figure 2.6: A Global Area Division Structure

This structure is useful when the product range is not too broad and therefore commonresources in a country can be shared and support all operations The HQ is responsiblefor transferring excess resources from one country to another as required and to establishcoordination between different countries to provide synergy and overall goal achievement

2.6.3 Global Matrix Structure

When a multinational is trying to integrate its operations in more than one dimension, likeproduct as well as area, or customers and technology, it resorts to the matrix structure

As shown in Figure 2.7, both product division and area division share joint responsibility.This means both executives jointly decide allocation of resources and other importantmatters, but the matrix manager is responsible for the results

In this structure, there is pressures from horizontal matrix managers for equal allocation

of resources; however, the vertical managers are supposed to balance this by taking intoaccount the relative importance of products or projects based on organisational prioritiesand other long-term considerations

However, there are several shortcomings associated with the Matrix As the designcomplexity increases, coordinating the personnel and getting everyone to work towards

a common goals often becomes difficult Second, some employees experience dualauthority, which is frustrating and confusing Managers, therefore need excellentinterpersonal and conflict-resolution skills

The most successful multinationals today focus less on searching for the ideal structure,and more on developing the abilities, behaviour and performance of individual managers.This creates a matrix in the minds of managers’ where individual capabilities are capturedand the entire firm is motivated to respond cooperatively to a complicated dynamicenvironment

31 Perspectives and Approaches of IHRM

Source: Dowling et al (2001) International Resource Management (p 43)

Figure 2.7: The Matrix2.7 NEW TYPES OF MULTINATIONAL STRUCTURES

In large, mature multinationals, these flows are multinational: from headquarters to

subsidiary and from subsidiary to other subsidiaries and also from subsidiary to

headquarters See Figure 2.8 – the result can be a complex network of interrelated

activities and relationships

Resources

Chief Executive Officer

Vice-President Global Products

Vice-President International

Pacific

International Human

Resource Management

Source: Dowling; International HRM (p 47)

Figure 2.8: Beyond the Matrix - A Networked Firm

It is possible to identify three main approaches from the multinational managementliterature — the heterarchy, the transnational, and the network firm Although they havebeen given different terms, each form recognises that the concept of a superior structurethat neatly fits the corporate strategy becomes inappropriate As Marschan (1996) explainsreconsidering the long-standing principle that “the parent knows best” requires a radicalchange in the way the entire multinational is managed, turning it from an organisationalpyramid into an integrated network These new forms and their IHRM implications areoutlined below Mergers, takeovers, joint ventures strategic alliances also give way tonewer variations in organisational structure design These can be considered under four

types: the heterarchy, the transnational, the network firm and the Keiretsu.

2.7.1 Heterarchy

The heterarchy is a structural form proposed by Hedlund (1986) that recognizes amultinational may have a number of different kinds of centres apart from the traditionalcentre referred to as “headquarters” Each subsidiary centre may be simultaneously acentre and a global coordinator of discrete activities, thus performing a strategic role notjust for itself, but for the MNC as a whole For example, some multinationals maycentralize research and development in a particular subsidiary In a heterarchical MNC,control is less realist on the top-bottom mechanisms of previous hierarchical modes andmore reliant on normative mechanisms, such as the corporate culture and a widely sharedawareness of central goals and strategies

From an HRM perspective, the heterarchy is interesting in that its success appears torest solely on the ability of the multinational to formulate, implement, and reinforce therequired human resource elements The heterarchy demands skillful and experiencedpersonnel as well as sophisticated reward and punishment systems in order to developthe normative control mechanisms necessary for effective performance The use ofstaff as an informal control mechanism is important

Centre

Corporate Headquarters

Nodal Unit

33 Perspectives and Approaches of IHRM

2.7.2 Transnational

The term transnational has been coined to describe a new organizational form that is

characterized by an interdependence of resources and responsibilities across all business

units regardless of national boundaries The transnational tries to cope with the large

flows of components, products, resources, people, and information among its subsidiaries,

while simultaneously recognizing the distributed specialized resources and capabilities

As such, it demands a complex process of coordination and cooperation involving strong

cross-unit integrating devices, a strong corporate identity, and a well-developed worldwide

management perspective Developing transnational managers or global leaders who can

think and act across national and subsidiary boundaries emerges is an important task for

top management introducing these complex organizational forms Staff transfers play a

critical role in integration and coordination The role of human resources is once again

very critical and similar as in matrix or heterarchy Unilever, for example, is more like a

transnational organisation today

Bartlett and Ghoshal (1990) define transnationals in the following words:

Among the companies we studied, there were several that were in the process of

developing such organisational capabilities They had surpassed the classic capabilities

of the multinational company that operates as decentralized federations of units able to

sense and respond to diverse international needs and opportunities; and had evolved

beyond the abilities of the global company with its facility for managing operations on a

tightly controlled — worldwide basis through its centralized hub structure They had

developed what we termed transnational — capabilities — the ability to manage across

national boundaries, retaining local flexibility while achieving global integration More

than anything, this involved the ability to link local operations to each other and to the

centre in a flexible way, and in doing so, to leverage those local and central capabilities

2.7.3 Networked Firm

U Anderson, M Forsgren, C Pahalberg, and P Thilenius (1990), suggest viewing certain

large and mature international firms as a network, in situations where:

 Subsidiaries have developed into significant centres for investments, activities and

influence, and cannot be regarded as being at the periphery

 Interaction between headquarters and each subsidiary is likely to be dyadic, taking

place between various actors at many different organisational levels and covering

different exchanges, the outcome of which is important for effective global

performance

 Such multinationals are loosely coupled political systems rather than tightly bonded

homogeneous, hierarchical systems This runs counter to the traditional structure

where linkages are described formally via the organisation’s structure and

standardised procedures, and informally through interpersonal contact and

socialisation

 One subsidiary may act as a nodal unit linking a cluster of satellite organisations

Thus, one centre can assume responsibility for other units in its country or region

The management of a multi-centered networked organization is complex Apart from

the intra-organizational network (comprising of headquarters and the numerous

subsidiaries), each subsidiary also has a range of external relationships (involving local

suppliers, customers, competitors, host governments, and alliance partners The

management of both the intra-organizational and inter-organizational spheres, and of the

total integrated network, is crucial to global corporate performance It involves what has

decision-of formal procedures; and differentiation decision-of work, responsibility, and authority across thenetworked subsidiaries (Marschan, 1997).

2.7.4 Keiretsu

Still another type of newly emerging organisational arrangement is the keiretsu, which is

a large, often vertically integrated group of companies that cooperate and work closelywith each other A good example is the Mitsubishi group, shown in Figure 2.9 This

keiretsu consists of 28 core members who are bound together by cross ownership,

long-term business dealings, interlocking directorates, and social ties Many are three flagshipfirms in the group; Mitsubishi Corporation, which is a trading company; Mitsubishi Bank,

which finances the keiretsu’s operations; and Mitsubishi Heavy Industries, which is a

leading worldwide manufacturer

Source: Gupta, International HRM (2006), p 144

Figure 2.9: The Mitsubishi Keiretsu

This form of organisation has been cited by some international analysis as the reasonwhy Japanese multinationals are so successful However, the Japanese are not the onlyones using this organisational arrangement The Birla group can also be thought of as an

Indian keiretsu Reliance Industries was developing on the line of becoming on Indian

NIPPON CORP 27%

M MOTORS 55%

M KAKOKI 37%

NIPPON YUSSEN 25%

MITSUBISHI CORP 32%

M TRUST &

BANKING 33%

MEJI MUTUAL LIFE INS.

0%

TOKIO MARINE &

PIRE INSU.

24%

M MINING

& CEMENT 37%

M ALUMINIUM 100%

M METAL 21%

M CABLE INDUST 46%

M STEEL MANU 38%

M GAS CHEMICAL 24%

M PETRO CHEMICAL 37%

M PLASTIC INDUS.

57%

M KASEI 23%

M PAPER MILLS 32%

M CONST- RUCTION 100%

M ESTATE 25%

M OIL 1%

KIRIN BREWERY 19%

M ASAHI GLASS 28%

M

WA R E H O U S E

& TRANS 40%

M RAYON 25%

M ELECTRIC 17%

MITSUBISHI BANK 26%

MITSUBISHI HEAVY INDUSTRIES 20%

35 Perspectives and Approaches of IHRM

Keiretsu and that is the reason why demerger of the company into two separate entities

between Mukesh and Anil Ambani, had become so difficult Even large American

multinationals are creating their own type of keiretsu (see Box 2.1).

Ghoshal and Bartlett (1990) argue that a new way of structuring is not the issue– it is

more the emerging management philosophy, with its focus on management processes:

The actual configuration of the process themselves, and the structural shell within which

they are embedded, can be very different depending on the business and heritages of

each company

Box 2.1: Ford Motors Creates its Own Form of Keiretsu

Ford Motors is now focusing its attention only on automotive and financial services, and

has divested itself of most other businesses In the process of reorganising, Ford has

created a giant keiretsu-like arrangement that includes research and development, parts

production, vehicle assembly, financial services, and marketing For example, in R&D, Ford

belongs to eight consortia that conduct research in areas such as improved engineering

techniques, materials and electric-car batteries In parts production, Ford has equity stakes

in Cummins (engines), Excel Industries (windows), and Decoma International (body parts,

wheels) and relies on these firms as major suppliers In vehicle assembly, Ford has ownership

interests in Europe South America and Asia, and uses these arrangements to both

manufacture and sell autos in these parts of the world In financial services, Ford has seven

wholly owned units that cover a wide gamut from consumer credit to commercial lending In

the marketing area, Ford owns 49% in Hertz and uses this company and other rental car

agencies as an outlet for its production

Source: Business Week, 24 Sept.,1990 (p 198)

Ghoshal and Bartlett (1990) have expanded their concept of the transnational to define

the MNC as an inter-organizational system which is comprised of a network of exchange

relationships among different organizational units, including headquarters and national

subsidiaries, as well as external organizations, such as host governments, customers,

suppliers, and competitors, with which the different units of the multinational must interact

Ghoshal and Bartlett cite GE, ABB, and Toyota as prime examples of companies involved

in developing such processes, with Intel and Corning, Philips and Alcatel, Matsushita and

Toshiba regarded as companies embarking upon a network-type configuration Likewise,

the Ford Motor Company abandoned its regional structure in 1993, and adopted a

multidisciplinary product team approach, networking plants across regions (Financial

Times, 1997).

2.7.5 Control and Coordination

Human resource management plays a key role in control and coordination process,

particularly where less-hierarchical structures we discussed above are concerned:

 Ghoshal and Bartlett (1995) the key means for vital knowledge generation and

diffusion is through personal contact This means that networked organizations

need processes to facilitate contacts Training and development programmes, held

in regional centres or at headquarters, become an important forum for the

development of personnel networks that foster informal communication channels,

as well as for building corporate culture

 Network relationships are built and maintained through personal contact Therefore,

staffing decisions are crucial to the effective management of the linkages that the

various subsidiaries have established (Welch & Welch, 1999)

 As with the heterarchy, the management processes in a networked multinational

rely heavily on the ability of key staff to integrate operations to provide the internal

company environment that fosters the required level of cooperation, commitment,

and communication flows between functions and subsidiary units

staff to assist in coordination and control (Welch et al., 1994).

 Expatriates are used to instill a sense of corporate identity in subsidiary operations,and to assist in the transfer of corporate norms and values as part of corporatecultural (or normative) control

Thus, proponents of less-hierarchical configurations argue there is greater reliance oninformal control mechanisms than on the formal, bureaucratic control mechanisms thataccompanied the traditional hierarchy As seen from the above list, the informal controlmechanisms highlighted in Figure 2.10 are assisted by HR practices

Source: International Business Review 1996 (5.2) p 137

Figure 2.10: Control Mechanisms in the Network MNE

It is also important to remember that international growth affects the firm’s approach toHRM and the HRM implications at each stage of internationalization Firms vary fromone another as they go through the stages of international development, and react indifferent ways to the circumstances they encounter in the various foreign markets.Therefore, we find a wide variety of matches between IHRM approaches, organizationalstructure, and stage of internationalization (Dowling, 1989)

Check Your Progress 2

1 Define transnational organisations

2 What is global matrix structure?

2.8 ROLE OF HUMAN RESOURCE

These less-hierarchical and networked structures that are evolving, require coordinationand human resource processes of high-level involvement, taking into account culturalvariables of each unit and national culture Human resource management plays a keyrole in control and coordination processes:

 Ghoshal and Bartlett (1995) argues that the key means for vital knowledge generationand diffusion is through personal contact This means that networked organisations

Control Mechanisms

Informal Informal

Corporate Culture

37 Perspectives and Approaches of IHRM

need processes to facilitate contacts Training and development programmes held

in regional centres or at headquarters become an important forum for the

development of personal networks

 Network relationships are built and maintained through personal contacts Therefore,

staffing decisions are crucial to the effective management of the linkages that the

various subsidiaries have established

 The management processes in a networked multinational rely heavily on the ability

of key staff to integrate operations to provide on environment and culture that

fosters the required level of cooperation, commitment and communication flows

between functions and subsidiary units

 Staff transfers are also an important part of the required management processes,

particularly that of control The case of GE in Hungary (see case at end of chapter)

is a good example of how staff transfers were quite an important part of GE’s

attempts to integrated its new acquisition into its “global family”

 Expatriates are used to instil a sense of corporate identity in subsidiary operations,

and to assist in the transfer of corporate norms and values as part of corporate

cultural control

 The visit of the CEO to different countries also helps in integrating relationships

and developing, strategic focus

2.9 STRATEGIES FOR INTERNATIONAL

ORGANISATIONS

A great deal has been written on the need to develop new and more adaptive forms of

organizations as a result of increased internationalization Within multinational companies,

there is a need to balance international strategy with local conditions and needs; and

move towards new organizational structures

One of the key aspects of the strategic management of modern organizations is the

balance between differentiation and integration (Lawrance, Lorsch, 1967) While flexibility

is required in the way business is conducted differently in different locations, there is a

need to integrate activity and coordinate not only business activity, but the way people

are developed and deployed within the international organization

The level of strategic control needed in an international operation is depicted along three

axes: the type of subsidiary operating in each country; the type of international business

strategy employed; and the type of ownership

Table 2.1: Perlmutter’s Model of International Strategies Ethnocent ri c Polycentric Regi ocentri c Geocentric

P revai lin g

organi zational

culture

Ho me country Host country Regional Global

Finance Rep atriation o f

pro fit s to ho me cou ntry

Retention o f profit s in host country

Redistribut ion within regi on

Redistri bution globall y

Strateg y Glo bal

integration

National responsi ven ess

Regional integration and national responsiveness

Global integration national responsiveness

Contd

n eeds o f ho me countr y cu sto mers

Loc al pro duct development based on local needs

S tandardized within region, but not across

r egions

Global products with local variation

Personnel practices

P eople of ho me countr y devel oped for key positi ons ever ywh ere in th e world

P eo ple of local nat ionalit y dev eloped for key positions in their o wn cou ntr y

R egional

p eople

d eveloped for key

p ositions

an ywh ere in

t he region

Best p eopl e ever ywh er e developed for key positio ns ever ywh er e

is seen as the geocentric organization (see Table 2.1)

2.9.2 Bartlett and Ghoshal’s Model

In 1989, Bartlett and Ghoshal offered the ‘transnational’ as the ideal type They distinguish:multinational organizations; global organizations; international organizations; and,transnational organizations

Multinational

This type of organization responds to the need to exploit national diversity and recognizethat, for example, consumer tastes and needs of technology may be based on localconditions and national culture This type of organization will therefore have a strongnational presence and can respond to national diversity There is very little direct influencefrom the parent company, and interpersonal communication among representatives fromthe different cultures may be quite limited An example is the American ITT, whichneeds to respond on a local basis to specific regulations, requirements and formats in thetelecommunications switching industry

International

This type of organisation is an ideal type (Bartlett and Ghoshal, 1989) and is put forward

as some thing towards which many cross border companies ought to be striving Here,

39 Perspectives and Approaches of IHRM

the organization exploits the parent company’s knowledge and adapts it worldwide

Sources of core competences are centralized, but other competences may be

decentralized The role of overseas operations is to adapt the parent company’s

competences to the local environment Knowledge is developed at the centre and then

transferred to the overseas subsidiaries Procter and Gamble is a good example of an

international organization

Transnational

It seeks to integrate the separate forces operating in the international marketplace, which

each of the three organizational forms addresses only partially These three forces are:

 Global integration: The trend towards greater integration of global tastes Product

trends such as Coca-Cola and McDonald’s are examples

 Local differentiation: The demand of local and national tastes, and of protectionism

from national governments tend towards multinational organizational structures

 Worldwide innovation: The cost of innovation is great and it is more cost-effective

usually, if research and development are centralized, and such products emanating

from the centre are marketed globally, or are adapted internationally in local centres

around the world

2.10 IMPLICATIONS FOR HUMAN RESOURCE

MANAGEMENT POLICY

Adler and Ghadar (1990) provide an account of the implications of different phases of

internationalization for human resource management Their framework and typology

are similar in concept to previous ones They view organizational forms as representative

of stages in the development of international enterprises The four phases identified are:

domestic, with a focus on home markets and export; international, with a focus on

local responsiveness and the transfer of learning Multinational, with a focus on global

strategy and price competition And global with a focus on both local responsiveness

and global integration

Adler and Ghadar’s (1990) model particularly looks at the relationship of culture and

responses within human resource management In the first phase, domestic, there is a

denying or ignoring of other cultural contexts with foreigners simply being offered a

product developed in the home country In the second phase, international, it is important

to take the cultural component consideration, as firms are moving into foreign markets in

which they need to operate more fully and take account of local conditions The third

phase, multinational, is characterized by a globalization of products and services in order

to compete on price, and therefore culture is not such a major factor, but because of

necessity there is a recognition of cultural differences among the countries of operation

In the fourth phase, global, there is a more complete adaptation to local markets of global

products, and cultural sensitivity rather than an attitude of inconvenience, and the

international human resource function attempts to provide managers from anywhere

with opportunities to develop in order to develop the organization itself

2.11 AN INTEGRATED STRATEGIC FRAMEWORK

Schuler, Dowling and De Cieri (1993) suggest the need for an integrated framework of

strategic international human resource management that brings together a number of the

Some companies have large centralized human resource functions for selecting manyfunctions and repatriating expatriate staff, training and compensation Others devolvemany functions to the subsidiaries either as well as this central function or instead of it.

If general guidelines are formulated by the centre that refer only to the need to develop

a system for rewarding individual performance, subsidiaries may then be free to developtheir own incentive schemes

Functions and policies are aimed ultimately at meeting the concerns and goals of themultinational organization These include global competitiveness, efficiency, localresponsiveness, flexibility, and organizational learning and transfer of information

Source: Schuler, Dowling and De Cieri’s (1993)

Figure 2.11: Integrated Strategic Framework

These concerns vary from company to company (Schwer et al., 1993) By an examination

of the various centripetal factors which are pressing hard for international integrationagainst those centrifugal factors which point towards local differentiation, it is possible to

 inter-unit linkages

 internal operations

MNC concerns and goals

 competitiveness

 efficiency

 local responsiveness

 flexibility

 learning and transfer

Strategic IHRM issues

Inter-unit control/variety

linkages-internal operations

local sensitivity strategic fit

 structure of international operations

 headquarters’ international orientation

 competitive strategy

 experience in managing international operations

41 Perspectives and Approaches of IHRM

discuss an optimum stance for appropriately managing people in subsidiary operations

This should be achievable not only by charting a course through these two opposing

forces, but also by drawing on the contributions that can be made from the parent and

the different subsidiaries This requires consideration of the strategic factors that should

be addressed to provide the optimum balance between integration and differentiation, a

consideration of cultural differences that exist among the different national operations

and the relative contributions which can be made by people in the different national

organizations to the global operation Schuler, Dowling and De Cieris (1993) integrated

strategic framework captures some of the aspects, but provides little information on the

optimization of appropriate people management policies and practices within these often

contradictory forces Some of these optimizing factors are captured in Figure 2.12

2.12 FLEXIBLE ORGANISATION: THE EU MODEL

Browster, Hegewisch and Holden (1992) allude the need for organisational flexibility

and state that:

HRM in Europe is complex There is no other region in the world where so many different

histories, cultures and languages exist in such a relatively small space Each European

country has its own approach to the employment of people; its own laws, institutions,

trade unions, education and training provisions, and managerial culture In many European

countries these approaches operate at a number of geographical levels Overlapping this

complicated picture, there is now the unique supranational legislation of the European

Community

New work practices are evolving to meet the combined needs of more effective and

competitive organizations, and to respond to requirements to humanize work in line with

the developing needs of people in organizations: whether this be from a perspective of

making best use of human resources in the face of downward trends in the working

population, or as a contribution to ‘valuing humanity’ Yet, in Europe, the lateral dimension

is probably more prominent than in other regions Much thought has been given to the

types of models that have been developed in Europe to meet this special perspective: the

management of people and change across national boundaries to provide synergies by

capitalizing on cultural differences

A good example of this is seen in the management education approach developed since

1973 by EAP (now ESCP-EAP following a merger with another Paris-based school)

European School of Management, a graduate management school of the Paris Chamber

of Commerce and Industry with integrated campuses in Paris, Oxford, Madrid and Berlin

Its core programme has been a pre-experience three-year, three-country, three-language

master’s Students are drawn from all over the European Union and beyond Students

spend a year in each of three different countries They share their experiences gained in

all the countries Although classes provide some national input in the different management

and business disciplines, there is an emphasis on international, border, and

cross-cultural approaches Much of the training is experiential Teamwork encourages flexibility

of approach and working across different countries and cultures, rather than instilling