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Introduction The rapid pace of Globalization has led to a change in the global economy during the past several decades; it is believe that factors such as trade liberalisation, access to cheaper labour and resources, similarity of consumer demand around the world, and advances in technology and communication has widened the market of consumption, investment as well as production on a global scale. These globalization driven factors created new challenges and global competition for businesses around the world thus as a response many companies decided to expand their operation across national borders in order to be competitive.
A company that operates their business in at least one country other than its country is called Multinational Corporation (MNC). According to Claus (1998) the two fundamental differences between the domestic and international company are the spread of geographic location of the company’s operations and the nature of multiculturalism. The number of MNC is increasing faster than ever where today its not surprising to find major MNCs such as McDonalds, Toyota, Nike and Microsoft almost in every country.
Tayeb (2005) indicate that MNCs played a powerful and dominant role in the globalisation where they are considered to be the main vehicle that enables goods and services to move around the world. However, when company decided to internationalise their operation they will be expose to various environment, culture, legal and political differences and in order to operate successfully they should be able to modify its products and services to meet the cultural preference of their foreign customer as well as able to adjust their operation to comply with the local legal requirement (Tayeb, 2003).
To operate its subsidiaries MNC will likely to employ local people and manager, it should be noted however that these employees came from a different organization culture background with different working styles compare to their employees in the Headquarter. Therefore, this is where international human resource management (IHRM) become an important issue for the organization, Briscoe et al (2004) underline that HR management is becoming more complex in the international level, therefore, it is crucial for the organization to execute the right HR strategy for their international operations.
The purpose of this essay is to discuss the internal and external factors of MNCs that may affecting their decision in choosing International HR strategy for their subsidiaries. The essay will shape as follow: it will begin with a brief introduction of what is IHRM, how it is different with domestic HR and what makes IHRM strategy important for MNCs performance. Follow by an investigation and discussion of internal and external factors of MNCs and how these factors can influence MNCs IHRM practices.
Hofstede’s culture dimension theory with an example of different countries and cases of MNCs will be use to support the discussion of the topic. International Human Resource Management Before we define the meaning of International we should have an understanding of the basic HRM. By definition Human Resource Management is a system that is used by organization to ensure that human talent is used effectively and efficiently to meet its organizational goals (Mathis and Jackson, 2004).
HRM usually covers functional areas such as human resource planning, staffing, reward and motivation, performance management and many others, however, these activities changes when HRM goes internationally. With an increasing number of MNCs around the world the role of international HRM becoming important to the internationalisation process, IHRM has been identified as a powerful strategic tool that help company’s to formulate and implementing their international business strategies and improvement of their subsidiaries performance (Kim and Gray, 2005). What is International Human Resource Management?
Schuler et al (1993) defined IHRM as human resource management issues, function and policies and practices that result from the strategic activities of multinational enterprises and the impact on the international concerns and goal of those enterprises. Managing HR in MNC is different from the way the HR is being managed in the country, According to Morgan (1986) there are three factors that differentiate between IHRM and domestic HR: First, the countries of operations such as the -country where a subsidiary may be located, the host-country where the subsidiaries are located, and other countries.
Second, the different types of employee, in international environment the HR management have to deal with the host-country nationals (HCNs), expatriates or home-country nationals (PCNs) and third country nationals (TCNs), for example if L’Oreal hired an Indonesian employee in their Indonesian subsidiary the employee is a HCNs, and when manager from L’Oreal Headquarter in France came to work in Indonesian subsidiary the manager is a PCNs, and if L’Oreal employs manager neither from Indonesia nor France to work in their Indonesian subsidiary the manager is TCNs.
Third, is the way HR practices (eg. staffing, compensation, training, and etc) are conducted. Although IHR practices seems to have the same activities as domestic HR, in IHR the manager will be dealing with different environment and diversity of employees from different cultural background. Moreover, as mentioned earlier dissimilarities between domestic and international HR management mostly due to profound differences between host and home countries in term of culture, economic, legal system, and labour markets.
Due to these reasons managing HRM in the overseas subsidiary likely to be more complex and difficult compare to managing its domestic HRM (Gronhaug and Nordhaug, 1992). Hence, it is important for HR manager to understand the complexity and being aware of others important issues of IHRM, as well as able to develop and implement HR strategy that suits the international practices. Limited of understanding in IHRM context and inability to implement the right strategy will result in failure.
Dowling et al, 2008 state that there is some evidence to suggest that business failures in the international arena are often linked to poor management of human resources. Therefore, How can IHR manager design and manage the best IHRM strategy in their international operations or subsidiary? According to Fomburn et al (1984) the central issues is not to identify the best IHRM policy but rather to find the best fit between the company’s international environment, its overall strategy, organisational structure and HRM system and able to implement these entire dimension in direct alignment.
Thus what kinds of fit are required in the human resources practices of MNCs? And under what conditions will fit lead to organizational effectiveness? Milliman et al (1991) explain that since HRM take place within the overall internal organizational environment and the external national and international context of the subsidiaries, thus to develop an effective strategic IHRM required the management of two fits (external and internal) simultaneously, where then these two factors must be expanded to deal with the complexity of he international dimension in several ways. The external factors contained industry characteristic, nature of competitors, technology and country/regional characteristic (political, legal requirement, economic, and the socio-cultural conditions). On the other hand, internal factors are the structures of international operations, the international orientation of the company’s headquarter, the competitive strategy and company’s experience in international operations.
HRM policies and practices considered to be in their “best-fit” stage of IHRM when they are able to achieve simultaneously co-ordination and responsiveness, and in order to do so company must consider the various intervening factors, including company characteristic (internal) and the environment of their international operation (external) (Shen et al. , 2005). Therefore, both internal and external factors are important issue that can have tremendous influences on MNC’s IHRM strategies, policies and practices (Brewster & Suutari, 2005). These two factors will be discussed further in the next two section of this essay.
Furthermore, it is suggests that apart from developing the best-fit IHRM strategy, the need of MNCs flexibility also as important. The flexibility of a company indicate their ability to adapt effectively in a timely manner to a changing or diverse demand form either its environment or from within the company itself (Milliman et al, 1991), and its becoming important as the company increasingly internationalised. External IHRM Wong and Hendry (1999) highlighted that external environment is one of the major factors affecting an MNC decision when adopting IHRM policy and practices.
The authors also argue that there are external factors that cannot be controlled by the company. For example MNCs do not have control over the host or national country’s culture, legal requirement, political system, and economic requirements on the other hand they do have control over its business and employment strategy where often in overseas subsidiaries the strategy is being adjusted to meet the requirements of the host country. Due to limitation the discussion of external factors in this essay will mainly focus on the cultural environment aspect.
Culture can be defined as a system of values and norms that are shared among a group of people and that when taken together constitute a design for living (Hill, 2005). Every culture has its own values, beliefs, customs and practices that are reflected in behavioural norms, rules, regulation and laws of a country (Claus, 1998). Culture is an important factor for MNCs where it will influences their decisions in choosing which HR practices can be used globally and which practices need to be adapted with the culture and structure of the overseas subsidiaries.
Kim and Gray (2005) highlighted that the greater the cultural distance between the home and host country the harder for IHRM to export and implement its home HR practices to the host environment due to its unfamiliarity of the international environment. Moreover, less cultural distance the easier for IHRM to implement its home HR practices, the greater similarity of culture between home and host country the less barrier for HRM to utilized its home HR policies and practices.
Working with multicultural employees can be challenging, different culture perceptions can lead to different interpretations that may result in misunderstanding between colleagues or employer-employee within the organization. Due to cultural differences around the world HR practices such selection, training, performance appraisal, reward system, career development as well as socialization are varied from MNCs to MNCs depending on the culture of international operation environment. In addition, to provide better understanding of different work behaviours of cultures Hofstede’s cultural dimension theory will be used.
Based on his studies there are four dimensions of culture such as power distance, uncertainty avoidance, individualism/collectivism and masculinity/femininity. According to Hofstede (1) power distance refers on how less powerful individuals accept the power and influence of higher persons. Countries such Japan, Indonesia and Malaysia are considered to be high power distance where in these countries the person with higher positions in the company is respected and has power over its subordinates.
On the other hand countries such US and Australia considered to be low power distance culture where in the organization the people are being treated equally regardless their position in the company. (2) Masculinity refer to the extent of which a society emphasize traditional masculine values such as competitiveness, assertiveness, achievement, ambition and high earning as opposed to feminine one such as nurturing, helping other, putting relationship with people before money and minding the quality of life (Hofstede, 1980).
Country like Japan is considered to be masculine and egalitarian society such as Sweden to be more feminine. (3) Individualism/collectivism focuses on the relation between an individual and his or her fellow individual (Hofstede, 1983). Western countries (UK, Australia, etc) seen as an individualist society where they tend to stand up for themselves. On the other hand Asian countries (Japan, China, Indonesia, etc) considered a collectivist culture.
In collectivism individuals usually belong to a group (eg, family or tribe). In collectivist social relation, self-sacrifice and family integrity are very strong (Noordin et al, 2002). And (4) Uncertainty avoidance, people that are risk taker considered to be low in uncertainty avoidance (US, Australia, and UK), Hofstede (1983) believed that people in this category tend to feel relatively secure, able to made important decision on their own and willing to accept the responsibility for the outcome.
Nevertheless, people with high uncertainty avoidance such as Japanese tend to avoid risk and try to create security. By identifying the Hofstede culture dimensions we can now examination how culture in different overseas subsidiaries can influence the HR practices. The management in high power distance adopting hierarchical structure and highly centralized, where there are high ratio of supervisory and often employees are reluctance to make decision without discussing it to their manager.
For example in Malaysia due to its culture of non assertive respect for elder or person with higher power the worker are afraid to object supervisors and manager decision because it will considered to be rude and showing lack of respect (Rowley et al, 2007). IHRM should pay attention when operating in country where Islamic law applied, in Bahrain gender segregation in occupational structure seen as appropriate and proper business practices (Metcalfe, 2007). Selection and recruitment in collectivism society can be different from individualism country.
The recruitment and selection processes are often conducted informally in collectivism culture, for example in India, Korea and Latin America connection seen as much more important than technical competency (Jain et al, 1998). In Indonesia it is often that the local managers feel an obligation to employ their extended family if they are in a position to do so (Dowling et al, 2008), on the other hand individualist culture sees this practice as nepotism and should not be implemented.
The process in individualist culture such as US and Australia are based on formal procedures such as interview or written test and the employees are being hired based on their capability and experiences. Other factors that may lead to biases decision-making will be eliminated (Janssens, 2001). Furthermore, IHRM should be aware when recruiting in Japan that due to their high level of uncertainty avoidance the Japanese management is famous for their “shushin koyo” or permanent employment (Bird et al, 1998).
Training and development process can also be different from country to country. Taybe (2005) found that in developing country apprenticeship is still the main channel through which new recruit learn the skills needed to perform their job. The author also found that in countries such Japan, German, France and US the company spend large amount of times and finances on employees training. In France, the law required company to spend a certain percentage of their annual turnover on employee training.
In performance appraisal it is important for manager to conduct performance appraisal in collectivism country as a group or a team, According to Gamble (2003) collectivism culture like China respect to a group orientation and concept of face, they believes that good performance came from the hard work of the whole group not just the individual therefore they should be appraise as a group. In collectivist country often by rewarding and frequently praising the group for doing the right thing it will lead to higher productivity (Gamble, 2003).
High power distance country such Japan there is higher need for recognition and their promotion is usually based on employee seniority (Yan, 1999). In Malaysia beside their basic salary they often received payment of allowances for overtime, shift, meals and transport (Rowley et al, 2007). Additionally, apart from culture host country government also play an important role in IHRM where every MNCs are legally bound to follow the legal requirement in order to operate their subsidiary, therefore, HR policies should be adapted to fit the local law and custom (Briscoe et al, 2004).
For example in countries like French, Japan and UK the government introduce national minimum wage (NMW) to the economic policies to make sure that the worker earn a basic standard of living (Ozbligin, 2005). Legal system can have big influences on the staffing strategy. For example in Malaysia in order to promote employment opportunities the government required MNCs hired the indigenous malays who tend to be under represented in business and professional relative to Chinese Malays and Indian Malays (Dowling et al, 2008).
Moreover MNCs should also pay attention to countries that have strong labour system as it will affecting their subsidiary’s staffing policy. The mistake that MNCs often make in their international operation is lack of understanding the cultural differences and legal requirement of the host country, often they underestimate this differences by believing ” my way is the best” or “what works at home will work here” (Tung, 1993) if they continued to do as such in the long run it will lead to failure. Internal IHRM fit
In our discussion so far, we have discuss the external factors that are affecting SIHRM, it is believe that some of these factors also have great influences over the internal factors of MNCs in regards to their structure of international operation and strategy. For example the cultural differences can influence the staffing policy of MNCs whether to employee PCN, HCN or TCN and legal system can influence the MNCs mode of entry strategy. Developing business strategy can be difficult and challenging due to the conflicting demand of internationalisation of the host country.
The difficulties arise as MNCs attempt to maximize their abilities to respond to the host countries (local responsiveness), while trying to maintain their controlled business structure worldwide (global integration) (Caligiuri & Stroh, 1995). Company internationalise their business using different types of entry mode, through wholly owned Greenfield (developing new venture), international joint venture, and merger and acquisition. Entry mode decision is influenced by the differences of culture, language and legal system between home and host country.
According to Kogut and Singh, 1988 the greater cultural gap between the two countries, company more likely to choose joint venture or Greenfield over an acquisition. By forming JV it will help the company to overcome the culture differences and legal requirement when entering the market. However, in JV culture clash between partners often occur as well as conflict in deciding whether to use the host or home HR practices. Nevertheless, forming Greenfield enable MNCs to introduce the home (HQ) organization and managerial practices without being faced with existing one.
In Greenfield the home company control the HRM policy and practices and hiring employees who are fit their national culture (Hofstede, 2001). Moreover, countries with high uncertainty avoidance prefer a JV since it involves lower risk than Greenfield. The decision to centralize or decentralize will also influence the degree of control over the subsidiary’s HRM system. Centralized strategy means the headquarter have full control over its subsidiaries where there is a high level of integration between the home and host operation and the HR policies and practices will be much the same to the HQ system (Kim & Gray, 2005).
Furthermore, in decentralized strategy the subsidiary are given the autonomy to control its operation thus HR policies and practices will be adjusted to the local environment. It should be note, however when making these decision MNCs should considered which strategy will be acceptable in the host country. According to Yan (1999) European company often adapted the decentralized strategy, as Chinese company more likely to be highly centralized due to is collectivist culture that HQ should take care of their subsidiary.
In Heenan and Perlmutter’s (1979) study there are four management strategies there are ethnocentric (using home country nationals), polycentric (using host country nationals), regiocentric (using people from one the countries in the region) and geocentric (using the best qualified in the world). Ethnocentric is similar to centralization where MNCs maximise home company control over its subsidiary. Usually ethnocentric staffing strategy is adapted on the early stage of internationalisation when there is lack of appropriate skills and knowledge and need to maintain good communication, coordination and control links with the home company.
Countries with collectivism background tend to have ethnocentric approach, for example Chinese company often unwilling to decrease the level of control over its subsidiary due to its family oriented business background (Yan, 1999). In ethnocentric strategy expatriates are usually appointed to fill the managerial position in the subsidiary since they have more knowledge of HQ operation and more familiar with the HQ strategy, and to ensure the subsidiary complies with the HQ objectives and policies. It should be note, however there is a high cost involve when employing an expatriate such as elocation and failure cost (Caligiuri & Stroh, 1995) and there have been many cases of expatriate failure over the past couple of years mostly due to its inability to deal with cultural differences thus ethnocentric approach may require intensive training of cultural differences. Furthermore, as the subsidiaries growth the company will be less dependent towards the HQ and it will likely to adopt the polycentric strategy. The polycentric approach on the other hand allows more local responsiveness and less control from the home company. The subsidiary often hired a host country national (HCNs) employee to manage the operation.
HCNs considered to be less costly than expatriate and since they are culturally sensitive, understand legal system and speak the same local language, employing HCN help the company to adjust easily with local environment (Caligiuri & Stroh, 1995). It is suggest that polycentric approach fits well when there is a large cultural gap between the home and host country, for example when Australian company open a subsidiary in Japan it will be difficult to send home employee to work in the area since Japan has different legal system and language than Australia, therefore by hiring HCNs it will eliminate cost of expatriate failure and training.
Centralization strategy will be hard to apply because the HCNs manager have different orientation from the PCNs manager thus there will be different HR approaches (Briscoe et al (2004). Regiocentric approach is similar to polycentric but based on regionally. Geocentric strategy approach attempts to balance both global integration and local responsiveness thus the corporate culture between the parent and subsidiary often highly unified (Caligiuri & Stroh, 1995). In this approach the best available managers regarding its culture background (TCNs) are often hired to manage the subsidiary.
Geocentric strategy offers the greatest amount of decentralization thus less concerned with maintaining the home culture compare to other strategy (Caligiuri & Stroh, 1995). Every country has different cultural background and imposing different legal requirement. Therefore, it is important to consider the external factors and the need of each different overseas subsidiary when choosing the IHRM strategy. Conclusion Globalization has created new challenges and global competition for businesses around the world thus as a response many companies decided to expand their operation across national borders in order to be competitive.
As company internationalise their operation they will be expose to various environment, culture, legal and political differences and in order to operate successfully they should be able to adjust their operation to comply with the local culture and legal requirement (Tayeb, 2003). The main challenge for IHR manager is to develop practices which will maintain congruence with the overall strategic plan of their respective MNCs, while balancing the economic, social, politic and legal constrain of the various host countries.
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