Country-of-Origin Effects on HRM Strategy in MNCs

Introduction

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

One of the major complexities MNCs face relates to human resource management (HRM). Managing human resources in the international context can be a daunting task, particularly because of considerable cultural, institutional, economic, and political differences across countries (Thite, Wilkinson and Shah, 2012). National — or country-of-origin — characteristics tend to influence how MNCs behave in the host country. They shape not only corporate strategy, but also the kind of HRM practices MNCs adopt abroad (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 the literature and real-life examples, this paper discusses the impact of country of origin on strategic HRM practices in MNCs. It specifically demonstrates how national characteristics affect the transfer of HRM practice, how that transfer occurs, and which HRM practices are more likely to be transferred than others.

The Country-of-Origin Effect

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 concept may be quite problematic, but it generally means that firm behaviour largely reflects the characteristics of the firm's home country. This phenomenon is extensively supported by the 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, since MNCs may from time to time relocate their corporate headquarters for tax reasons. Rather, the home country refers to the country to which an 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 strategise, compete, and manage personnel. Cultural theory, particularly Geert Hofstede'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 (prioritising individual wellbeing) and others collectivist (prioritising group wellbeing). Some are characterised as high power distance societies — accepting an unequal distribution of power and authority — while others are low power distance societies that 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 in 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 by 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., the UK, and most Western nations value equality and democracy. This is reflected in the institutions and laws these countries have enacted — for example, policies aimed at promoting equality and diversity in the workplace. Such policies have significant implications for firms, as they must make HRM decisions 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 clear example of the country-of-origin effect and its implications for firm behaviour in an increasingly globalised business environment. Against the backdrop of tremendous growth of the Japanese economy in the 1980s, Japanese firms invested heavily in foreign direct investment (FDI) (Yu, Park and Cho, 2007). This expansion gave Toyota, Honda, and Nissan the opportunity to grow their presence around the globe, and the transferability of the Japanese style of management consequently attracted scholarly attention worldwide. Today, Japanese firms remain prominent sources of management lessons for organisations in diverse sectors and industries.

Conclusion

Overall, operating in the global environment presents daunting HRM challenges for MNCs, in large part due to cultural and institutional differences across countries. To effectively achieve their strategic goals and objectives in the dynamic and fiercely competitive business environment, MNCs must develop an effective HRM strategy. On one hand, MNCs may choose to transfer home-country practices to the host country; on the other, they may adapt the strategy to the local environment. In essence, there is no clear-cut, one-size-fits-all, or universally agreed HRM strategy for MNCs.

Given the influence of national characteristics and the need to be responsive to local factors, it is imperative for MNCs to think globally but act locally. Indeed, "think global, act local" has become a popular adage in today's globalised environment. Home-country practices can be a crucial source of competitive advantage in a foreign environment, yet MNCs cannot afford to ignore the characteristics of the local environment. Strategically, a successful MNC is one that capitalises on its home-country HRM practices while simultaneously making the necessary adjustments to suit the host country.

References

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