International human resource management lesson 01

1 HR AND GLOBAL BUSINESS CHALLENGE CONTENTS 1.0 Aims and Objectives 1.1 Introduction 1.2 Developing International HR Strategies 1.3 Issues in IHRM 1.4 Global Business Challenge 1.5 Meani

UNIT I

1

HR AND GLOBAL BUSINESS CHALLENGE

CONTENTS

1.0 Aims and Objectives

1.1 Introduction

1.2 Developing International HR Strategies

1.3 Issues in IHRM

1.4 Global Business Challenge

1.5 Meaning of IHRM

1.6 Difference between Domestic and International Human Resource

1.6.1 More HR Activities

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 Varies 1.6.5 Risk Exposure

1.6.6 More External Influences

1.7 Expanding the Role of HRM in International Firms

1.8 Let us Sum up

1.9 Lesson End Activity

1.10 Keywords

1.11 Questions for Discussion

1.12 Suggested Readings

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 significant impact on human resource management Therefore, a study of the concept of international management is necessary to understand the subject of international human resource management

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 incorporates planning to establish the ways by which business functions–marketing, accounting, human resource management, and so on–are to be managed in that distant location Managing the 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 dimension that is found to be the best Suffice it to say that many companies follow practices set by their 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 Newly Industrialized Countries (NICs), we are witnessing a convergence among nations in terms of rates and preferences, financial systems, and organization design This convergence, 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 people who have different cultural heritages Cultural differences should be taken into account when communicating and interacting across nations and across cultures within nations Although multinational companies are supranational in operations and strategy, people within them do not necessarily share the same cultural values and views on people and life The multinational model is built on the premise that it is necessary to understand cultural 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 the work of Hofstede (1980a) demonstrated was that within IBM, there is wide cultural variation across nations

Hofstede (1980a) was one of the first to attempt to develop a universal framework for understanding cultural differences in managers’ and employees’ values based on a worldwide 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 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 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 personal relations, quality of life and about caring about others, where in a masculine society gender role differentiation 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 global customers

 Ensuring managers have the technical and managerial skills to work effectively at the 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, performance management, training and development, succession planning, remuneration and benefits

 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 host parent 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 host parent(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 international assignments, usually from an American perspective Many current books and articles are still written from a domestic point of view, but the literature is becoming considerably broader 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 of expatriate failures Many articles refer to expatriate managements as the major concern 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 true business partner, working with high-level managers on critical strategic assessments

In other country but within the same company, HR may be viewed as a transactional personnel 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 HR officer 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 the local HR staff, then it can be difficult to gain acceptance This is true regardless of whether it’s a US multinational ‘forcing’ initiatives on its local business or a German company ‘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 US might not find a receptive audience in Japan, where such an approach is not considered credible

The field of international Human Resource Management has been characterized by three broad approaches.Early work in this field emphasizes cross-cultural management approach and examining human bahaviour within organizations from an international perspective A second approach developed from the comparative industrial relations and HRM literature seeks to describe, compare and analyze HRM systems in various countries 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 to utilize 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 HR activities 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 the source 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 HRM

1.6 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 policies must be designed to ensure that there is no tax incentive or disincentive associated with any particular international assignment The administration of tax equalization policies is complicated on account of the wide variations in tax laws across host countries and by the possible time lag between the completion of an expatriate assignment and the settlement of domestic and international tax liabilities In recognition of these difficulties, many multinational firms retain the services of a major accounting firm for international taxation advice

1.6.2 Need for a Broader Perspective

HR managers working in an international environment face the problem of designing and 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 European regional 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 benefits would endorse the view that all expatriate employees, regardless of nationality, should receive a foreign service or expatriate premium when working in a foreign location Yet some multinationals, which routinely pay such premiums to their PCN employees on international 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 HCN and 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 the selection, training, and effective management of both PCN and TCN employees The

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

of the above programmes and provides services for PCNs and TCNs such as handling their banking, investments, homes while on assignment, coordinating homes visits, and final 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, and orientation are transferred to activities such as local staff selection, training, and management development The latter activity may require establishment of a programme

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

1.6.5 Risk Exposure

The human and financial consequences of failure in the international arena are more severe than in domestic business For example, expatriate failure (the premature return

of an expatriate from an international assignment) is a potentially high-cost problem for international companies Direct costs (salary, training costs, travel and relocation expenses)

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).