Cultural Implications of Transfer of Hr Practices in Multinational Corporations
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- Category: Corporation
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Abstract: With the advent of globalization and liberalization, the emerging economies like China and India have grown manifolds. The mushrooming of MNCs is taking place at a very fast pace. The role of HRM in these companies has shifted from being a mere administrative to strategic one. The companies have realized that HR policies form the framework for culture in the business management and human assets are an emerging source of competitive advantage for them. Therefore National culture plays an important role in absorbing the HR practices from the MNC headquarters to Host country subsidiary. This paper examines the various HR practices which can be transferred, whether the subsidiaries follow the HQ practices or adopt the local ones. This area of research has been left unexplored by the researchers and therefore an attempt has been made to identify the reasons of transfer and what practices are transferred as well as the impact of transfer on organisational culture. In the end the result of transfer will be discussed as to how these HR practices shape the subsidiary company.
Key words: International HRM, subsidiary, MNC, HRM practices, culture.
Transfer of Human Resource Management Practices in Multinational Corporations: A perspective
According to Randhawa (2007) Human Resource management (HRM) refers to the policies and practices involving in carrying out the people or human resource aspects of a management position, including recruitment, screening, training, rewarding and appraising. Whereas, international HRM can be defined as set of activities aimed managing organizational human resources at international level to achieve organizational objectives and achieve competitive advantage over competitors at national and international level. Globalization is the buzzword today, and with the world shrinking it is very important to keep a track of activities of those employed in organisation in order to meet the competition. A multi-national corporation (MNC) has been defined as one which has its producing and trading activities in a number of countries, and which has a central organization regulating the activities of its units, across national frontiers, with specific global objectives.
A host country is an independent nation state where an MNC has established its business operations through either subsidiaries or branches and affiliates. Indeed, HRM is evolving from being a mere support function to one of strategic importance. Several authors note that HRM policies and practices are becoming crucial because they can act as mechanisms for coordination and control of international operations. Furthermore, managing HR in an international context is more complex than in a domestic setup because of several pronounced differences between headquarters and the subsidiaries. In the light of globalization, it has been acknowledged that HRM constitutes a major constraint when MNCs attempt to implement global strategies, mainly because of the different cultural and institutional framework of each country in which a given MNC operates. Henceforth, these MNCs have to adjust their HR policies and practices according to the host environment. These MNCs either adapt to change according to the local HR practices and policies or try to implement their own. In order to survive the competition, HR practices are moulded according to the need. Culture is defined as the informal values, norms, and beliefs that control how individuals and groups in an organization interact with each other and with people outside the organization. Most managers have been introduced to the concept of culture through the work of Deal and Kennedy.
In their landmark book, Corporate Cultures, first published in 1982, the authors describe culture in the following terms: “Values are the bedrock of any corporate culture”. They go on to add: “As the essence of any company’s philosophy for achieving success, values provide a sense of common direction for all employees and guidelines for their day-to-day behaviour” (Deal and Kennedy, 1982) Needless to mention, HR policies guide various functions of HRM. HR policies of certain companies seem to discriminate on the basis of its diverse backgrounds of its workforce for example, sex, race, age, religion, education, sexual orientations and so on and so forth. The sources of the country of origin effect lies in the culture and institutions of the home country of the MNC. The mechanisms through which the effect manifests itself are the hiring of home-country nationals by the MNC, and the inbuilt administrative preferences of these host-country nationals in the organizational structures, procedures and processes of the MNC.
The homogeneity of the home culture, substantive characteristics of the home country culture, size and openness of the home-country economy, the cultural and institutional diversity of the environments in which the MNC operates, and the international growth path of the MNC are often taken to impact on the strength of the country-of-origin effect. Often, cultural perspective has concentrated its attention on the cultural distinctiveness of practices, beliefs and values of a community. Culture and values are associated with the national culture of a country as boundaries that allow interaction and socialization within them. Researchers have analysed the influence of these national cultural values, attitudes and behaviours on business and management styles (Hofstede, 2001).
Previous research have shown that cultural and institutional characteristics impact on HRM practices and their transfer, either inhibiting or facilitating them (Beechler et al., 1993; Gooderham et al., 1999; Myloni et al., 2004; Tayeb, 1994;). In other words, HRM practices in an MNC “are shaped by the interplay of opposing pressures for internal consistency and for isomorphism with the local institutional environment …” Rosenzweig & Nohria, 1994). One of the key issues is that since each country has its own unique socio cultural environment, the MNCs are perplexed as to what level and quantum the transfer of HR practices take place from their headquarters to the subsidiary established in the host country. 2. Dimensions of National Culture
Researchers have for long focused on the nexus between corporate culture and organizational practices. Most of them have underlined four distinct but interrelated components of organizational culture: behavioural norms, such a company’s approach to people management and industrial relations and the strength of peer-pressure to conform to expected company norms; shared values, business principles and ethical standards that are preached and actually practiced; different types of artefacts such as often repeated stories and revered traditions; and behaviours such as how managers and employees interact with each other and how a company deals with external stakeholders (Thompson, Strickland and Gamble, 2007). Hofstede, Geert (2001) have identified four dimensions of culture in his study of national influences: Power distance – The degree to which a society expects there to be differences in the levels of power.
Uncertainty avoidance reflects the extent to which a society accepts uncertainty and risk. Individualism vs. collectivism – individualism is contrasted with collectivism, and refers to the extent to which people are expected to stand up for themselves, or alternatively act predominantly as a member of the group or organization. Masculinity vs. femininity – refers to the value placed on traditionally male or female values at the same time, the movement of people across national borders and the preservation of particular groups with specific idiosyncratic customs, together with differences in social and economic experiences, highlights that subcultures can coexist in many countries. According to Hofstede the values that distinguished countries from each other could be grouped statistically into four clusters. These four groups became the Hofstede dimensions of national culture: (a) Power Distance – PDI, (b) Individualism versus Collectivism – IDV, (c) Masculinity versus femininity – MAS, and (d) Uncertainty Avoidance – UAI. 3. Local subsidiary Versus MNC Head Quarters
An active area of academic debate is the degree to which HRM practices follow the multinational or local partners practice in international joint ventures. A wider-ranging view of the MNC-environment relationship has been provided by Rosenzweig and Singh (1991). They argue that there are many different factors that determine the trade-off between integration and adaptation, such as: legal and regulatory constraints, industry, technology, parent country culture, cultural distance, work force composition, type of subsidiary establishment and dependence of the host country on the MNC. Drawing on the open-systems approach, as well as resource dependence and institutional theory, they emphasize the importance of both organisational and national environments. MNC subsidiaries can be viewed as being located in two different contexts, that of the whole organisation as well as the host country environment. According to this view, subsidiaries are confronted with different, and often contradictory, forces arising from these two contexts.
On the one hand they face pressures to conform to conditions of the local environment and be locally responsive; and on the other hand there is the need for global integration and consistency within the MNC. Ijose Olumide (2010) develops a framework linking national and organizational culture with the adoption of organizational practices. His study adopts a multidisciplinary focus by bringing in evidence from the strategic management, cross-cultural studies, knowledge transfer, industrial relations, human resource management and control literatures to examine the successful adoption of organizational practices in the U.S. automotive sector. The results of the research suggest that cultural differences across the two liberal market economies affect the HR management prevalent in the Czech Republic.
The research concludes that national culture differences can be important and must be understood in explaining the organizational practices adopted by the foreign subsidiary of a parent company. Myloni Barbara, Dr Anne-Wil K Harzing and Professor Hafiz Mirza (2004) have done a comparative analysis of HRM practices in the subsidiaries of MNCs and local companies of Greece. The research investigates as to how HRM practices in subsidiaries of MNCs in Greece differ from those in local companies. The descriptive analysis in the research reveals both differences and similarities and indicates that Greek companies are highly embedded in their local regulatory framework and cultural environment. Moreover, the research also assess that there is evidence that subsidiaries are using hybrid HRM practices, shaped by both local forces and their parent company’s practice.
4. The reasons for transfer of HRM Practices
As to the reason for transfer, one of the most developed arguments is that competition in the global economy on the basis of competitive advantages is the incentive for MNCs to transfer and recombine new knowledge and practices across borders (Bartlett and Ghoshal, 1998; Kostova, 2002). As Kostova(2002) put it, “for purposes of synergy and efficiency, organizations often engage in cross-unit transfers of business practices that reflect their core competencies and superior knowledge and that they believe to be a source of competitive advantage”. HR policies and practices are often considered by top management to be one of those sources. Moreover, they may stem from both national and organizational contexts. Furthermore, HR practices may stem from particular organizational contexts and convey organizational strategies. It is obvious that the competences of different MNCs of the same country-of-origin are not identical. They may develop core competences which are highly firm-specific. Indeed, a number of Japanese MNCs have been identified with different core competencies in the literature (Bartlett and Ghoshal, 1998). Kostova (2002), in her research studies complex organizational phenomena which arise as a result of cross-national transfer of HR practices.
Her study develops a multilevel model, in which she proposes that three sets of factors at three levels — country, organization, and individual-affect transfer success reflecting social, organizational, and relational embeddedness. Kostova’s multilevel model is systematic and integrated. First, it incorporates the interaction of country-of-origin and host-country effects at country level, namely “institutional distance between home and recipient” Second; it stresses the abilities and motives of subsidiaries to adopt the transferred practices at organizational and individual levels. One more contribution of the model is that it points out, transfers based on power/dependence relationships lead to implementation rather than internalization of the practice transferred. The unexpected similarity in international HRM practices is probably due to: (1) the nature of information technology, (2) closing levels of R&D between Indian and foreign MNCs, and (3) similar business cultures of Indian and foreign MNCs. IT-intensive global organizations are likely get a step closer to global IHRM standardization.( Mary Mathew, Harish C. Jain, 2008 ).
Björkman Ingmar and Pawan Budhwar (2007) have found in their research that HRM practices from the foreign parent organization are negatively associated with performance; and local adaptation of HRM practices is positively related with the performance of foreign firms operating in India. According to them the pathway is that HRM systems do improve organizational performance in the Indian subsidiaries of foreign firms. In a similar vein, Edwards (2008) distinguishes between two forms of international integration: standardization and segmentation.
He argues that “In those sectors in which MNCs have developed standardized operations, the transfer of employment practices is likely to be more attractive to management”; whereas “in MNCs which have segmented their international operations”, even where the degree of integration is high, “there will be little incentive to transfer practices across borders”. Taylor et al. (1996) also point to the importance of top management’s perception of the context generalizability of parent company’s HR competence, i.e. whether top management believe the competence can be used in other contexts outside the home country of the firm. If not, they argue, there will be no incentive to transfer its HR system across borders, regardless of the international strategy of the firm.
In summing up the research on the reasons for transfer, one can conclude that the transfer of HR practices within MNCs is the result of either external competition pressures or internal politics, or both, and is often linked with certain industry sectors and organizational strategies. (Tianyuan Yu, Nengquan Wu, 2009)
5. The Impact of Transfer of HRM Practices
Rogers (1995) has identified four key elements of the impact on the transfer of innovations within MNCs. These are the innovation itself; the communication channels through which the innovation is transmitted; a temporal dimension which track the adoption of the innovation over time; and the social system in which the individual adopters exist. Whether this knowledge flows from HQ to subsidiary which is termed forward diffusion, from subsidiary to the HQ, which is termed reverse diffusion, or possibly in both directions which is termed flow diffusion (Edwards, 2008) the challenge for MNCs is to codify this knowledge and ensure that its strategic benefit to the organisation is realized. Björkman Ingmar, Jon E. Lervik (2007) in their research provide an extensive evidence that planned transfers of management practices by the headquarters of MNCs to foreign subsidiaries are not always successful. Their research outlines a model of factors influencing the transfer of HR practices to MNC units abroad.
The major contributions of their study is; first, it develops a more holistic understanding of the outcome of HR practice transfer as encompassing three dimensions: implementation, internalisation and integration; second, it expands current explanations of transfers of practices to foreign units. The research throws light on the fact that transfer of HR practices is a social process where the governance mechanisms used by the MNC, characteristics of the subsidiary HR systems, the social relationship between the subsidiary and MNC headquarters, and the transfer approach taken by headquarters management will influence the outcome of the process. Dowling and Welch (2004) identify several significant differences between managing human resources in an international context as opposed to a domestic one. First, they argue that there is simply more HR work to be done when operating in an international environment, because the HR function must engage with a number of activities that would not be necessary in a domestic context including international taxation, international relocation and socialisation, host government relations and language translation services.
The international context also requires, they suggest, a broader perspective with international HR managers being forced to consider a wide range of variables in their decision-making. Concomitantly, such HR managers may also need to demonstrate a greater involvement in employees’ personal lives. This, they suggest, is particularly significant in relation to employees on global assignment as HR may have a role to play in relocation arrangements, health care arrangements, as well as issues relating to international assignee’s spouse and family. They also point the dynamics of the subsidiaries’ labour market noting that, the workforce mix of parent country nationals, third country nationals and host country nationals will vary, depending on how mature the MNC is. As the multinational matures, the reliance on expatriate employees as position fillers in subsidiaries reduces with the consequence that the HR emphasis for the subsidiary must shift from narrow issues concerned with the management of expatriates to a broader remit incorporating issues concerning host or third country employees who will require a different HR focus.
Managing human resources in an international context also brings with it greater risk exposure which concerns not only the increased cost attached to expatriate assignment but also the increased cost of failure in an international environment (Scullion, 2001), factors which make the HR issues pertaining to these issues even more significant and broader external influences which as Dowling and Welch suggest might include pressures from governments and pressure groups that may take more interest in the MNC because of their high profile. An approach explaining the incentives for MNCs to transfer HR practices looks at political relationships within organizations (Edwards, 2008 and Kostova, 2002) terms this explanation “the political approach”, indicating that “actors in organizations can be willing to engage in the process of transfer as a way of obtaining legitimacy and to advance their own interests”. 6. What HR Practices will be transferred?
Issues relating to HRM in MNCs generally fall under the rubric of international HRM which may be viewed as: “the HRM issues and problems arising from the internationalization of business, and the HRM strategies, policies and practices which firms pursue in response to the internationalization of business” (Scullion,2001 ). While traditionally IHRM research has focused solely on the issue of expatriate management, recent decades have heralded an expanding scope and interest in HRM in MNCs. Commenting on the increasing interest in IHRM Scullion points to a number of key issues. He points to the increase in internationalisation of small and medium firms. Thus, MNCs are not a homogenous group of companies such as the typical examples of IBM and Ford but rather include a large number of smaller, privately owned firms which operate in a single core business area and have only a small number of subsidiaries. He also points to the significant challenges faced by MNCs in managing the performance of international assignees.
A further significant trend, which he identifies, is a move from traditional hierarchical structures in MNCs towards flatter organizational structures and network-based organisations which make the management process less codified and more complex (Boxall and Purcell, 2003). Thus, the issue of HRM is increasingly one which concerns management at all levels of the hierarchy in multinational companies. Rosenzweig and Nohria (1994) hypothesize that HR practices will tend to be transferred in the following order, starting with the one that will most likely to be transferred: (1) Participation; (2) Executive Bonus; (3) Training; (4) Gender Composition; (5) Benefits; and (6) Time off. This hypothesis has been generally supported by their following empirical test. They argue that this is because “practices for which there are diffuse and poorly defined local norms, or which are seen as being critical to maintaining internal consistency or arriving at critical decisions”, are more likely to be transferred.
Conversely, “practices for which there are well-defined local norms and which affect the rank-and-file of the affiliate organization are likely to conform most closely to the practices of local competitors. This argument highlights the internal differentiation of HR management practices within a MNC, instead of viewing it in terms of an overall orientation. It recognizes the significance of host country effects as well as organizational strategies. One possible proposition according to Tianyuan Yu, Nengquan Wu (2009) is that whenever and wherever possible, MNCs’ subsidiaries, especially in relatively low-skilled sectors, would tend to pursue “low-road” HR practices, such as less paid time off, lower benefits, non-unionism, etc. in order to maximize their profits. Their research suggests that, MNCs are likely to take this “principal” into consideration when they decide whether to transfer their home country practices or to adapt to local polices with regard to certain HR issues. 7. The Results of Transfer- Success or Failure
In their study of HRM practices in six European countries (United Kingdom, Ireland, France, Denmark, Germany and Sweden) Gunnigle et al. (2002) compared how MNC subsidiaries of different nationalities adapted their HRM policies to account for the host environment. In their study they compared the European and US MNCs operating in these six countries. They found that while both European and the US firms localised their practices to account for local institutional constraints, the level of localisation in the US firms was lower. In other words, American firms operating in the European context were more likely to implement globally standardised HRM policies and practices than their European counterparts. Thus, there was a discernible difference in HRM practice between the US and European firms, although the level of difference varied in different host environments.
They pointed to the degree of institutional constraint in the host environment, the economic dominance of the country of origin as well as the free market ideology dominant in the US as significant in explaining this variation. Wenchuan Liu, (2004), in his study develops a theoretical model of the cross-national transfer of HRM practices in MNCs. This model integrates the significant research on transferability, transfer mechanisms, effects of transfer, and reverse transfer to produce a comprehensive analytical framework. The research provides a three-fold analysis of transferability is presented to include national, company and HRM practice level. The transfer mechanisms are categorized into direct and indirect methods. The analysis of reverse transfer is not only a complement to the forward transfer but also an important part of the integrated model. The model reflects the complexity of cross-national transfer HRM practices in MNCs. Yi Ying Chang, Adrian J. Wilkinson and Kamel Mellahi, (2007) in their research examine the HRM practices of MNCs from emerging economies operating in western developed countries.
Their findings are a blend of practices which have been adopted by the subsidiaries, ranging from emulating home country practices, adapting host country practices, and a melange of home and host country practices. The research suggests that MNCs from emerging economies behave differently from MNCs from developed countries such as Japan, the USA and Western European countries. However, Taiwanese MNCs deliberately adopt a varied HR approach to operate in an advanced economy as a result of dual pressures of home and host country effect. Consequently, in the study, apart from strategic issues wholly made by headquarters in Taiwan, other HR practices either adapt to local practices or use a hybrid style. In a similar vein Gooderham et al. (1999) point to the significance of adapting practices to acquire legitimacy from government, the law, labour unions and other actors in the host environment.
Geppert and his colleagues also pointed to differences in the change management strategies pursued by organisations of different nationalities, with the host environment also emerging as a significant mediating factor. Indeed, based on this research they postulate: “the more globalized the strategies and structures of an MNC are, the more it allows for and relies on national specifics to play a key role in its global subsidiaries”. In other words truly global firms not only acknowledge the need for adaptation of policies in different subsidiary operations, they actually appear. (Geppert et al. 2003) In the research paper published by Almond, P.; Ferner.; et al. 2005 , the authors use in- depth case study analysis of the HR structure and industrial relations and pay policies of a large American MNC. They conceptualise a country as a “national business system” in which sets of interlocking structures and institutions in different spheres of economic activity combine to produce a nationally distinct way of organising economic activity.
The competencies of firms, as well as their economic behaviour, are thus seen as embedded within social, economic and political institutions at a national level. If societal institutions shape the strategic choices of firms, it follows that MNCs should be seen as having ties to multiple countries, not only to the system of the country from which they originate, but also to those of the host society in which they operate. According to their vision, there are four factors that influence employment relations in MNCs. The first one is the “country of origin effects”, which refers to elements of the behaviour of MNCs and can be traced back to the characteristics of the national business system from which the MNC originates. The second factor, “dominance effects,” refers to the organizational, political, and technological influences exerted by dominant or hegemonic states, which invite dissemination and adoption across the global capitalist system. Third are pressures for international integration due to reduced cross-national differences in consumer tastes, the deregulation of product markets and the reduction of tariff barriers.
The final factor, “host business systems,” vary in terms of how open they are, making them more or less amenable to external management style. As the need for control grows, there is a stronger requirement for integration and co-ordination of an MNC’s policies and practices and, therefore, it is more likely that the subsidiary’s HRM practices will resemble those of the parent (Rosenzweig & Nohria, 1994). When a subsidiary is highly dependent on the parent to provide crucial resources, it is common for the MNC to exert control through formal coordination mechanisms and HR strategies. This allows the company to standardise HRM practices across its operations, thus facilitating the control process (Beechler et al., 1993). According to Rosenzweig and Nohria (1994), the tighter the control that the parent exerts on the subsidiary, the less its HRM practices will resemble local ones. 8. Conclusion
This paper has attempted to develop a research perspective for examining the process of transferring HR practice internationally within MNCs by looking at the contents, the mechanisms, and the results of the transfer in turn. The arguments presented in this paper have two principal implications. First, when looking at the pictures as a whole, a multilevel approach may be appropriate for studying the process of cross-national transfer of HR practices. Indeed, one can conclude from the previous sections that the reason for transfer may stem from national, organizational and relational contexts. And the contents, methods and results of transfer can also be analyzed from the three levels. Furthermore, , HR practices in MNCs’ subsidiaries in developing countries or transition economies deserve more systematic exploration. Similarly, there is a remarkable divergence between HRM policies on the one hand, and HRM practices on the other.
It is found that whereas companies might find it feasible to have company-wide policies, they might find it unavoidable to be responsive to local conditions when it comes to HRM practices due to various cultural implications. Further, it is maintained that some practices can be transferred across nations almost without any change from one country to another; some have modified to become workable in another cultural setting; and some are more deeply culture-specific and may not always be transferred. It may be pointed out that there is often noted a divergence between HR policies and HR practices. Henceforth, it is utmost important for the MNCs to realise the role of international HRM in transferring the practices from the headquarters to the subsidiaries, taking into consideration the local forces at play. In order to achieve success in in the globalised world the MNCs cannot ignore the growing role of international HRM. Furthermore, the interweaving of local and headquarter practices is the key to success and survival for the MNCs.
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