Strategic international human resources management in multinational corporations

Globalisation has presented business organisations with an opportunity to do business internationally. Today, multinational corporations (MNCs) are prevalent, with many commanding immense power in the global marketplace. Nonetheless, operating in the global scene is usually not a straightforward undertaking. The global business environment presents numerous complexities, which MNCs must effectively deal with if they are to be successful (Noorderhaven and Harzing, 2003).

One of the major complexities MNCs face relate to human resource management (HRM). Indeed, managing human resources in the international context can be a daunting task. This is particularly because of considerable cultural, institutional, economic, and political differences across countries (Thite, Wilkinson and Shah, 2012). National (country-of-origin) characteristics tend to influence how MNCs behave in the host country. They influence not only corporate strategy, but also the kind of HRM practices MNCs adopt in the host country (Sethi and Elango, 1999; Yu, Park and Cho, 2007; Cox, 2014; Chung and Furusawa, 2015). For their subsidiaries or overseas operations, MNCs often have to choose between home-country HRM practices and host-country HRM practices. With reference to literature and real life examples, this paper discusses the impact of country of origin on strategic HRM practices in MNCs. The paper specifically demonstrates how national characteristics affect the transfer of HRM practice, how the transfer occurs, and which HRM practices are more likely to be transferred than others.

While MNCs may be considered 'nationless' organisations, most of them tend to be "strongly rooted in their country of origin" (Noorderhaven and Harzing, 2003: 2). This is referred to as the country-of-origin effect. Defining the country-of-origin effect may be quite problematic, but the concept generally means that firm behaviour largely reflects the characteristics of the firm's home country. This phenomenon is extensively supported by literature (Sethi and Elango, 1999; Ferner, Quintanilla and Varul, 2001; Yu, Park and Cho, 2007; Cox, 2014; Chung and Furusawa, 2015). It is important to note that the home country does not necessarily mean the location of the MNC's headquarters as MNCs may from time to time relocate their corporate headquarters for tax reasons. Rather, the home country refers to the country to which a MNC attributes its historical experiences and institutional foundation (Noorderhaven and Harzing, 2003). IKEA, for instance, the largest furniture retailer globally, is headquartered in The Netherlands, though the firm has a Swedish origin.

The country-of-origin effect stems from three major factors: economic factors (e.g. physical resources and industrial capacity), culture (e.g. values and institutional norms), and political factors (e.g. government regulations and policies) (Noorderhaven and Harzing, 2003). These factors significantly shape the behaviour of firms in the business environment (Sethi and Elango, 1999). They affect how firms strategize, compete, and manage personnel. Cultural theory, particularly Geert Hoftede's cultural dimensions model, demonstrates that significant differences exist between countries in terms of culture (Noorderhaven and Harzing, 2003). Some countries tend to be individualistic (prioritise individual wellbeing) and others collectivist (prioritise group wellbeing). Some are characterised as high power distance societies (accept unequal distribution of power and authority) and others as low power distance societies (promote equality). These intrinsic characteristics influence how individuals within a given society think, behave, and relate with one another (Pudelko and Harzing, 2007). Based on this premise, a lower power distance society is more likely to encourage greater autonomy and participative decision making at the workplace compared to a high-power distance society.

Countries differ in terms of not only culture, but also politics and institutions. This is explained in institutional theory, which asserts that regulatory, normative, and cognitive aspects shape the behaviour and actions of entities within a given society (Noorderhaven and Harzing, 2003). For instance, the U.S., UK, and most Western nations value equality and democracy. This is reflected in the institutions and laws these countries have enacted. As an example, these countries have instituted policies aimed at promoting equality and diversity at the workplace. Such policies have significant implications for firms as they must make HRM decisions that are consistent with those policies. On the whole, cultural and institutional characteristics affect organisational structures, organisational forms, personnel management practices, decision making processes, and virtually every aspect of firm behaviour.

The Japanese manufacturing industry provides a perfect example of the phenomenon of the country-of-origin effect and its implications on firm behaviour, particularly in an increasingly globalised business environment. Against the backdrop of tremendous growth of the Japanese economy in the 1980s, Japanese firms invested in a great deal of foreign direct investment (FDI) (Yu, Park and Cho, 2007). This background provided an opportunity for Toyota, Honda, and Nissan to expand their presence around the globe. As a result, the transferability of the Japanese style of management attracted scholarly attention from all over the world. Today, Japanese firms remain prominent sources of management lessons for firms in diverse sectors and industries around the world.

Broadly speaking, MNCs have two choices when it comes to international human resource management (IHRM). One of the options is to transfer home-country practices to the host country. This option essentially involves adopting a uniform HRM strategy internationally -- from the home country to the host countries (Chung and Furusawa, 2015). In other words, HRM practices in overseas operations are deliberately designed to reflect home-country practices. Empirical evidence provides strong support for the influence of country of origin on MNC's HRM strategy in overseas operations, especially for American, European, and Japanese MNCs (Ferner, 1997; Noorderhaven and Harzing, 2003; Yu, Park and Cho, 2007). The evidence shows that country of origin is the foremost predictor of the mechanisms MNCs use to control their foreign subsidiaries. In using the same HRM strategy across the board, MNCs hope to achieve consistency in their global HRM policy.

Whereas MNCs make deliberate choices regarding their HRM strategy in foreign countries, the decisions tend to be driven by subconscious values and beliefs largely influenced by cultural and institutional factors (Noorderhaven and Harzing, 2003). Generally, MNCs operate in the home country prior to internationalisation. Being setup in the home country means that a firm has to make organisational decisions that mirror the culture and institutions of the home country. In other words, the firm's decision makers are inherently driven by the cultural and institutional environment in which they have grown up. For instance, since the U.S. and the UK as societies are characterised by low power distance as per Hofstede's cultural dimensions model, American and British managers are likely to favour autonomy and decentralised decision making at the workplace. This orientation has a significant impact on remuneration practices, training and development procedures, unionisation, working arrangements, work conditions, participation, and other HRM aspects (Yu, Park and Cho, 2007).

Even when acting in the international environment, American and British managers are likely to behave in the same way they behave in the home country -- they are inherently wired to act in a certain manner. MNCs like Standard Chartered, PricewaterhouseCoopers (PWC), Unilever, and Procter and Gamble are good examples. A closer look at these firms' HRM strategies across their international operations -- from recruitment to training and development and performance management -- reveals significant similarities between practices in the home country and practices in foreign subsidiaries.

On the contrary, Chinese or Korean managers are likely to favour bureaucratic and hierarchical procedures since China as a society is characterised by high power distance. Based on this premise, it would not be unusual for Samsung and Lenovo executives managing the firms' subsidiaries in Europe or North America, for instance, to make and enforce managerial decisions that exemplify the characteristics of a high-power distance society. In other words, as Samsung and Lenovo are strongly rooted in the Asian culture, their HRM practices in their foreign subsidiaries are likely to reflect home-country practices.

Literature has extensively demonstrated the influence of the country-of-origin effect on HRM strategy in MNCs. In a study of 419 American, European, and Japanese subsidiaries operating in Korea, Yu, Park and Cho (2007) found that the country-of-origin effect significantly influenced the MNCs' choice between transplantation and localisation strategies. The study specifically established that American and European MNCs were more likely to use a mixture of the two strategies, while Japanese MNCs tended to use the localisation strategy. Transplantation involves transferring home-country HRM practices to the host country, while localisation involves adapting the HRM strategy to the local environment. Some firms may choose to use both transplantation and localisation -- a mixed strategy. The impact of the country-of-origin effect on MNC HRM strategy has also been reported elsewhere (Ferner, 1997; Ngo et al., 1998; Zhang and Edwards, 2003; Ferner, Quintanilla and Varul, 2001; Pudelko and Harzing, 2007; Hussein and Kachwamba, 2009; Thite, Wilkinson and Shah, 2012; Chung and Furusawa, 2015).

Whereas there is overwhelming evidence that the country-of-origin effect influences the type of HRM strategy MNCs implement in their foreign subsidiaries, some studies have reported conflicting findings, arguing that the effect has little or no impact (Yu, Park and Cho, 2007). This argument is particularly from the view that globalisation has increasingly eroded the influence of home-country factors. There is some truth in this assertion as MNCs across the globe now tend to depict similar organisational behaviour. For instance, the shift to performance-based compensation systems has been observed in not only North American and European subsidiaries, but also Asian subsidiaries. In other words, with greater diffusion of knowledge across the globe, management practices appear to be converging, making it quite difficult to notice the actual differences from country of origin (Cox, 2014).

MNCs prefer to replicate their HRM strategy for a number of reasons. One of the major reasons is that MNCs use a uniform HRM strategy across the board as a control mechanism (Noorderhaven and Harzing, 2003). Most MNCs comprise a chain of subsidiaries and business divisions spread throughout the globe. Controlling such complex operations presents a mammoth challenge. MNCs overcome this challenge often by centralising control. With considerable control over the subsidiaries, MNCs ensure their resources and efforts are effectively utilised in the achievement of their strategic goals and objectives (Thite, Wilkinson and Shah, 2012). Having control over subsidiaries often means that home-country practices are transferred to foreign subsidiaries. More specifically, a MNC will substantially standardise performance management policies, personnel development procedures, and other HRM practices in an attempt to achieve more effective coordination and greater control over its foreign subsidiaries.

How do MNCs globalise their HRM strategy, or rather how do they transfer their HRM practices from the home country to the host country? This is without a doubt a fundamental question. One of the ways MNCs globalise their HRM strategy is through ethnocentric staffing. Ethnocentric staffing is a staffing approach in which an MNC fills key positions in a foreign country using nationals from the home country (Yu, Park and Cho, 2007). This is not hard to observe in the real world. From Western MNCs such as Shell and Unilever to Asian multinationals such as Sony and Samsung, foreign subsidiaries are often headed by managers from the MNC's home country. With ethnocentric staffing, a MNC is better placed to transfer its corporate culture to the foreign subsidiary. As explained by Noorderhaven and Harzing (2003), cultural and institutional characteristics are transferred to firms through individuals. For instance, if the Dutch energy giant Shell appoints Dutch executives to manage its operations in Nigeria, then the Dutch way of doing things would be readily transmitted to the Nigerian subsidiary.

The country-of-origin effect further shapes MNCs HRM strategy in foreign countries through organisational culture. Organisational culture essentially denotes the values, beliefs, traditions, and practices shared by a given organisation. These norms define organisational structures, decision making processes, chain of command, management-employee relationships, as well as supervisory and managerial techniques. Essentially, organisational culture influences how things are done in a given organisation. According to Noorderhaven and Harzing (2003), organisational norms do not just happen -- they are shaped by, among other factors, the history of the organisation. The norms become so deeply embedded in an organisation that changing them becomes difficult (Cox, 2014). When a firm embarks on internationalisation, therefore, the same structures, processes, and procedures used in the home country will be replicated in foreign countries (Pudelko and Harzing, 2007). For instance, PWC's recruitment, training and development, and performance management practices tend to be similar across the globe.

Whereas a MNC may implement a uniform HRM strategy across the board, the influence of the local environment cannot be understated. Indeed, as put by Noorderhaven and Harzing (2003), MNCs are significantly dependent on the local environment for their competitive advantage. This explains why it is not difficult to observe considerable differences in subsidiaries owned and/or operated by the same MNC. These differences in large part stem from adjustment to local conditions. For instance, given the underlying cultural, institutional, and political factors in the local environment, an American MNC may choose to have different performance management strategies in China, Brazil, India, and South Africa. Equally, rather than using ethnocentric staffing, the MNC may use polycentric staffing, which involves filling key management positions with locals (Yu, Park and Cho, 2007). With a polycentric approach, a MNC recognises the unique cultural and institutional characteristics of the local environment, and hence adjusts its HRM practices to align with those characteristics. Without adapting to the local environment, the MNC may not effectively achieve the desired outcomes in the foreign environment.

One major factor that compels MNCs to adapt their strategy to the local environment is the degree of cultural similarity between the home country and the host country. The greater the similarity, the easier it is to transfer home-country practices to the host country, and the greater the dissimilarity the more difficult it is to transfer (Noorderhaven and Harzing, 2003). For instance, it would be easier for GlaxoSmithKline (GSK), a British pharmaceutical firm, to transfer its management practices to a subsidiary in the U.S. than one in Saudi Arabia. This is because the U.K. is culturally closer to the U.S. than it is to Saudi Arabia. Typically, without making significant adjustments to the Saudi culture, GSK would have a difficult time operating in that environment.

Essentially, significant differences in culture between the home country and the host country mean that what may work in the home country may not necessarily work in the host country. To explain this, consider the issue of workplace diversity, an increasingly crucial topic in today's HRM arena. Western countries have particularly been at the forefront in terms of promoting equality and diversity at the workplace. Countries such as the U.S. and the UK have even enacted robust legislations prohibiting workplace discrimination on the basis of characteristics such as gender, racial background, religion, and sexual orientation. Nonetheless, workplace diversity remains largely a strange or an unpopular concept in conservative countries like Saudi Arabia. What this means for a British MNC such as GSK is that the pressure to implement HRM strategies that promote workplace diversity would be greater in the U.S. than in Saudi Arabia. In other words, GSK would be less concerned about workplace diversity when operating in Saudi Arabia.

Though it is common for MNCs to localise their HRM strategy, not all HRM practices may be replicated in the host country (Yu, Park and Cho, 2007). For Cox (2014), MNCs should transfer their home-country practices to their foreign subsidiaries only when a given practice has the potential to add to the subsidiary's competitive advantage or the practice is critical to the success of the subsidiary in the foreign country. For instance, aspects such as work hours, wage rate, retirement, and work leave or vacation tend to be significantly influenced by local regulations (Cox, 2014). Therefore, attempts to replicate such aspects in the host country may not work. Aspects that are less sensitive to local regulations include job design, pay structure, and promotion (Cox, 2014). These aspects can be readily transferred from the home country to the host country.

The HRM strategy of a MNC in the host country may be influenced by not only local circumstances, but also other factors such as the role of a given subsidiary within the MNC, the age and size of the subsidiary, industry background, as well as the origin of the subsidiary (Noorderhaven and Harzing, 2003). For instance, a subsidiary that contributes a significant share of the MNC's revenue may be managed differently from one that contributes an insignificant share. Similarly, firms in the banking, insurance, retail, distribution, and consumer products industries are more likely to be locally responsive compared to firms in other industries (Cox, 2014).

Further, there may be HRM differences between a subsidiary established through an acquisition and one established as a start-up. In Yu, Park and Cho's (2007) study, the type of entry strategy was found to be a significant predictor of MNC HRM strategy in a foreign environment. More specifically, a MNC is likely to use a localisation strategy for a subsidiary established through an acquisition since the acquired subsidiary would have a previous history in the local environment. However, the MNC may prefer the transplantation strategy if the subsidiary is being established as a new entity. In such a case, the MNC would prefer to transfer major characteristics of the parent company to the foreign subsidiary.