chapter 17 Global Human Resource Management
1 Summarize the strategic role of human resource management in the international business.
2 Identify the pros and cons of different approaches to staffing policy in the international business.
3 Explain why managers may fail to thrive in foreign postings.
4 Recognize how management development and training programs can increase the value of human capital in the international business firm.
5 Explain how and why performance appraisal systems might vary across nations.
6 Understand how and why compensation systems might vary across nations.
7 Understand how organized labor can influence strategic choices in international business firms.
opening case MMC China
It had been a very bad morning for John Ross, the general manager of MMC’s Chinese joint venture. He had just gotten off the phone with his boss in St Louis, Phil Smith, who was demanding to know why the joint venture’s return on investment was still in the low single digits four years after Ross had taken over the top post in the operation. “We had expected much better performance by now,” said Smith, “particularly given your record of achievement; you need to fix this, Phil. Our patience is not infinite. You know the corporate goal is for a 20 percent return on investment for operating units, and your unit is not even close to that.” Ross had a very bad feeling that Smith had just fired a warning shot across his bow. There was an implicit threat underlying Smith’s demands for improved performance. For the first time in his 20-year career at MMC, Ross felt that his job was on the line.
MMC was a U.S. based multinational electronics enterprise with sales of $2 billion and operations in more than 10 countries. MMC China specialized in the mass production of printed circuit boards for companies in the cell phone and computer industries. MMC was a joint venture with Shanghai Electronic Corporation, a former state-owned enterprise that held 49 percent of the joint-venture equity (MMC held the rest). While MMC held a majority of the equity, the company had to consult with its partner before making major investments or changing employment levels.
John Ross had been running MMC China for the past four years. He had arrived at MMC China after a very successful career at MMC, which included extended postings in Mexico and Hungary. When he took the China position, Ross thought that if he succeeded he would probably be in line for one of the top jobs at corporate headquarters within a few years. Ross had known that he was taking on a challenge with MMC China, but nothing prepared him for what he found there. The joint venture was a mess. Operations were horribly inefficient. Despite low wages, productivity was being killed by poor product quality, lax inventory controls, and high employee turnover. The venture probably employed too many people, but MMC’s Chinese partner seemed to view the venture as a job-creation program and repeatedly objected to any plans for cutting the workforce. To make matters worse, MMC China had failed to keep up with the latest developments in manufacturing technology, and it was falling behind competitors. Ross was determined to change this, but it had not been easy.
To improve operations, Ross had put in a request to corporate HR for two specialists from the United States to work with the Chinese production employees. It had been a disaster. One had lasted three months before requesting a transfer home for personal reasons. Apparently, his spouse hated China. The other had stayed for a year, but he had interacted so poorly with the local Chinese employees that he had to be sent back to the United States. Ross wished that MMC’s corporate HR department had done a better job of selecting and then training these employees for a difficult foreign posting, but in retrospect he had to admit that he wasn’t surprised at the lack of cultural training; he had never been given any.
After this failure, Ross had taken a different tack. He had picked four of his best Chinese production employees and sent them to MMC’s U.S. operations, along with a translator, for a two-month training program focusing on the latest production techniques. This had worked out much better. The Chinese had visited efficient MMC factories in the United States, Mexico, and Brazil and had seen what was possible. They had returned home fired up to improve operations at MMC China. Within a year they had introduced a Six Sigma quality control program and improved the flow of inventory through MMC’s factory. Ross could now walk though the factory without being appalled by the sight of large quantities of inventory stacked on the floor or bins full of discarded circuit boards that had failed postassembly quality tests. Productivity had improved as a result and after three tough years, MMC China had finally turned a profit.
Apparently this was not good enough for corporate headquarters. Ross knew that improving performance further would be tough. The market in China was very competitive. MMC was vying with many other enterprises to produce printed circuit boards for large multinational customers that had assembly operations in China. The customers were constantly demanding lower prices, and it seemed to Ross that prices were falling almost as fast as MMC’s costs. Also, Ross was limited in his ability to cut the workforce by the demands of his Chinese joint-venture partner. Ross had tried to explain all of this to Phil Smith, but Smith didn’t seem to get it. “The man is just a number cruncher,” thought Ross. “He has no sense of the market in China. He has no idea how hard it is to do business here. I have worked damn hard to turn this operation around, and I am getting no credit for it, none at all.”•
Source: This is a disguised case based on interviews undertaken by Charles Hill.
Human Resource Management (HRM)
Activities an organization conducts to use its human resources effectively.
This chapter continues our survey of specific functions within an international business by looking at international human resource management. Human resource management (HRM) refers to the activities an organization carries out to use its human resources effectively.1 These activities include determining the firm’s human resource strategy, staffing, performance evaluation, management development, compensation, and labor relations. None of these activities is performed in a vacuum; all are related to the strategy of the firm. As we will see, HRM has an important strategic component.2 Through its influence on the character, development, quality, and productivity of the firm’s human resources, the HRM function can help the firm achieve its primary strategic goals of reducing the costs of value creation and adding value by better serving customers.
The opening case described what can happen when the HRM function does not perform as well as it might. MMC sent two expatriates to MMC China to help the beleaguered boss of that unit, John Ross, but neither expatriate was successful. Apparently, the HR department had picked two employees who were well qualified from a technical perspective but were not suited to a difficult foreign posting. This is not unusual. As we shall see, a large number of expatriates return home before their tour of duty is completed, often because while they have the technical skills to perform the required job, they lack the skills required to manage in a different cultural context or because their spouses do not like the posting. To his credit, Ross came up with a solution to the problem: send Chinese employees to the United States to be trained in the latest manufacturing techniques. The MMC case also illustrates another problem in international HRM: how to evaluate the performance of expatriate managers who are operating in very different circumstances from those found in the home country. It is apparent from the case that John Ross was being evaluated on the basis of the performance of his unit against corporatewide profitability criteria, but these criteria failed to account for the difficult conditions Ross inherited and the problems inherent in doing business in the Chinese market. The most skilled multinationals have found ways of dealing with this problem and adjust performance appraisal criteria to take differences in context into account. MMC apparently did not do this.
Irrespective of the desire of managers in many multinationals to build a truly global enterprise with a global workforce, the reality is that HRM practices still have to be modified to national context. The strategic role of HRM is complex enough in a purely domestic firm, but it is more complex in an international business, where staffing, management development, performance evaluation, and compensation activities are complicated by profound differences between countries in labor markets, culture, legal systems, economic systems, and the like (see Chapters 2, 3, and 4). For example,
• Compensation practices may vary from country to country, depending on prevailing management customs.
• Labor laws may prohibit union organization in one country and mandate it in another.
• Equal employment legislation may be strongly pursued in one country and not in another.
A national of one country appointed to a management position in another country.
If it is to build a cadre of managers capable of managing a multinational enterprise, the HRM function must deal with a host of issues. It must decide how to staff key management posts in the company, how to develop managers so that they are familiar with the nuances of doing business in different countries, how to compensate people in different nations, and how to evaluate the performance of managers based in different countries. HRM must also deal with a host of issues related to expatriate managers. (An expatriate manager is a citizen of one country who is working abroad in one of the firm’s subsidiaries.) It must decide when to use expatriates, determine whom to send on expatriate postings, be clear about why they are doing it, compensate expatriates appropriately, and make sure that they are adequately debriefed and reoriented once they return home.
This chapter looks closely at the role of HRM in an international business. It begins by briefly discussing the strategic role of HRM. Then we turn our attention to four major tasks of the HRM function: staffing policy, management training and development, performance appraisal, and compensation policy. We will point out the strategic implications of each of these tasks. The chapter closes with a look at international labor relations and the relationship between the firm’s management of labor relations and its overall strategy.
The Strategic Role of International HRM
LEARNING OBJECTIVE 1
Summarize the strategic role of human resource management in the international business.
A large and expanding body of academic research suggests that a strong fit between human resources practices and strategy is required for high profitability.3 You will recall from Chapter 12 that superior performance requires not only the right strategy, but the strategy must also be supported by the right organization architecture. Strategy is implemented through organization. As shown in Figure 17.1 (which is based on Figure 12.5), people are the linchpin of a firm’s organization architecture. For a firm to outperform its rivals in the global marketplace, it must have the right people in the right postings. Those people must be trained appropriately so that they have the skill sets required to perform their jobs effectively and so that they behave in a manner that is congruent with the desired culture of the firm. Their compensation packages must create incentives for them to take actions that are consistent with the strategy of the firm, and the performance appraisal system the firm uses must measure the behavior that the firm wants to encourage.
FIGURE 17.1 The Role of Human Resources in Shaping Organization Architecture
As indicated in Figure 17.1, the HRM function, through its staffing, training, compensation, and performance appraisal activities, has a critical impact upon the people, culture, incentive, and control system elements of the firm’s organization architecture (performance appraisal systems are part of the control systems in an enterprise). Thus, HRM professionals have a critically important strategic role. It is incumbent upon them to shape these elements of a firm’s organization architecture in a manner that is consistent with the strategy of the enterprise, so that the firm can effectively implement its strategy.
In short, superior human resource management can be a sustained source of high productivity and competitive advantage in the global economy. At the same time, research suggests that many international businesses have room for improving the effectiveness of their HRM function. In one study of competitiveness among 326 large multinationals, the authors found that human resource management was one of the weakest capabilities in most firms, suggesting that improving the effectiveness of international HRM practices might have substantial performance benefits.4
In Chapters 12, we examined four strategies pursued by international businesses: localization strategy, international strategy, global standardization strategy, and transnational strategy. Firms that emphasize localization try to create value by emphasizing local responsiveness; international firms, by transferring products and competencies overseas; global firms, by realizing experience curve and location economies; and transnational firms, by doing all these things simultaneously. In this chapter, we will see that success also requires HRM policies to be congruent with the firm’s strategy. For example, a transnational strategy imposes different requirements for staffing, management development, and compensation practices than a localization strategy. Firms pursuing a transnational strategy need to build a strong corporate culture and an informal management network for transmitting information and knowledge within the organization. Through its employee selection, management development, performance appraisal, and compensation policies, the HRM function can help develop these things. Thus, as we have noted, HRM has a critical role to play in implementing strategy. In each section that follows, we will review the strategic role of HRM in some detail.
• QUICK STUDY
1. Outline the relationship among HRM, strategy, and organization performance.
LEARNING OBJECTIVE 2
Identify the pros and cons of different approaches to staffing policy in the international business.
Strategy concerned with selecting employees for particular jobs.
The organization’s norms and value systems.
Staffing policy is concerned with the selection of employees for particular jobs. At one level, this involves selecting individuals who have the skills required to do particular jobs. At another level, staffing policy can be a tool for developing and promoting the desired corporate culture of the firm.5 By corporate culture, we mean the organization’s norms and value systems. A strong corporate culture can help a firm implement its strategy. General Electric, for example, is not just concerned with hiring people who have the skills required for performing particular jobs; it wants to hire individuals whose behavioral styles, beliefs, and value systems are consistent with those of GE. This is true whether an American is being hired, an Italian, a German, or an Australian and whether the hiring is for a U.S. operation or a foreign operation. The belief is that if employees are predisposed toward the organization’s norms and value systems by their personality type, the firm will be able to attain higher performance.
TYPES OF STAFFING POLICY
Research has identified three types of staffing policies in international businesses: the ethnocentric approach, the polycentric approach, and the geocentric approach.6 We will review each policy and link it to the strategy pursued by the firm. The most attractive staffing policy is probably the geocentric approach, although there are several impediments to adopting it.
The Ethnocentric Approach
Ethnocentric Staffing Policy
A staffing approach within the MNE in which all key management positions are filled by parent-country nationals.
An ethnocentric staffing policy is one in which all key management positions are filled by parent-country nationals. This practice was widespread at one time. Firms such as Procter & Gamble, Philips Electronics NV, and Matsushita (now called Panasonic) originally followed it. In the Dutch firm Philips, for example, all important positions in most foreign subsidiaries were at one time held by Dutch nationals, who were referred to by their non-Dutch colleagues as the Dutch Mafia. Historically in many Japanese and South Korean firms, such as Toyota, Matsushita, and Samsung, key positions in international operations have often been held by home-country nationals. For example, according to the Japanese Overseas Enterprise Association, only 29 percent of foreign subsidiaries of Japanese companies had presidents who were not Japanese. In contrast, 66 percent of the Japanese subsidiaries of foreign companies had Japanese presidents.7 Today, there is evidence that as Chinese enterprises are expanding internationally, they too are using an ethnocentric staffing policy in their foreign operations.8
Firms pursue an ethnocentric staffing policy for three reasons. First, the firm may believe the host country lacks qualified individuals to fill senior management positions. This argument is heard most often when the firm has operations in less developed countries. Second, the firm may see an ethnocentric staffing policy as the best way to maintain a unified corporate culture. Many Japanese firms, for example, have traditionally preferred their foreign operations to be headed by expatriate Japanese managers because these managers will have been socialized into the firm’s culture while employed in Japan.9 Procter & Gamble until fairly recently preferred to staff important management positions in its foreign subsidiaries with U.S. nationals who had been socialized into P&G’s corporate culture by years of employment in its U.S. operations. Such reasoning tends to predominate when a firm places a high value on its corporate culture.
Third, if the firm is trying to create value by transferring core competencies to a foreign operation, as firms pursuing an international strategy are, it may believe that the best way to do this is to transfer parent-country nationals who have knowledge of that competency to the foreign operation. Imagine what might occur if a firm tried to transfer a core competency in marketing to a foreign subsidiary without a corresponding transfer of home-country marketing management personnel. The transfer would probably fail to produce the anticipated benefits because the knowledge underlying a core competency cannot easily be articulated and written down. Such knowledge often has a significant tacit dimension; it is acquired through experience. Just like the great tennis player who cannot instruct others how to become great tennis players simply by writing a handbook, the firm that has a core competency in marketing, or anything else, cannot just write a handbook that tells a foreign subsidiary how to build the firm’s core competency anew in a foreign setting. It must also transfer management personnel to the foreign operation to show foreign managers how to become good marketers, for example. The need to transfer managers overseas arises because the knowledge that underlies the firm’s core competency resides in the heads of its domestic managers and was acquired through years of experience, not by reading a handbook. Thus, if a firm is to transfer a core competency to a foreign subsidiary, it must also transfer the appropriate managers.
Despite this rationale for pursuing an ethnocentric staffing policy, the policy is now on the wane in most international businesses for two reasons. First, an ethnocentric staffing policy limits