MNCs: IHRM Policies and their Impact
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The increasing presence of multinational companies in countries other than their principal home country is becoming the standard in international business - MNCs: IHRM Policies and their Impact introduction. Multinational companies (MNCs) extend their global reach by setting up foreign based locations or headquarters usually managed by expatriate executive staff from the home country (HC). The transplanting of expatriate staff to fulfil the MNCs foreign corporate agenda has created many issues for International Human Resource Management (IHRM). Numerous questions, difficulties, and the ability to understand how the corporate objective may or may not mesh with the cultural, political, social, privacy norms, laws and fabric of the host country have become challenges that IHRM must overcome.
The increasing presence of multinational companies in countries other than their principal home country is becoming the standard in international business. Multinational companies (MNCs) extend their global reach by setting up foreign based locations or headquarters usually managed by expatriate executive staff from the home country (HC). The transplanting of expatriate staff to fulfil the MNCs foreign corporate agenda has created many issues for International Human Resource Management (IHRM). Numerous questions, difficulties, and the ability to understand how the corporate objective may or may not mesh with the cultural, political, social, privacy norms, laws and fabric of the host country have become challenges that IHRM must overcome. The world has become more competitive, dynamic, uncertain, and volatile than ever before (Kanter, 1991).
Many firms have to compete internationally because the costs associated with the development and marketing of new products are too great to be amortized only over one market, even a large one such as the USA or Europe (Bartlett and Ghoshal, 1991). Yet there are some products and services that demand accommodation to location customs, tastes, habits, and regulations. Thus, for many MNCs the likelihood of operating in diverse environments has never been greater.
While these scenarios suggest paths that MNCs have taken to being internationally competitive, they are being superseded by the need to manage globally, as if the world were one vast market, and simultaneously manage locally, as if the world were a vast number of separate and loosely connected markets (Bartlett and Ghoshal, 1991). The trend is creating a great deal of challenge and opportunity in understanding and conceptualizing exactly how MNCs can compete effectively. Knowledge of conditions in a variety of countries and knowledge of how to manage both within and across them is the essence of international HRM. The complexity of operating in different countries and employing different national categories of workers is a key variable (Dowling, Welch and Schuler, 1999).
MNCs are rich in resources. Aside from the typical monetary leverage, MNCs have large research departments and human capital assets at their disposal. This is a great benefit to MNCs because they can utilize the already available asset with no auxiliary cost. However, do MNCs really and fully utilize their own resources to aid them in understanding their interaction when conducting business in a foreign country? MNCs consistently underestimate the issues and whether their company is welcome in the host country. However, this lack of understanding is slowly changing due to the economic impact of not understanding how the MNC conducts its business.
Implementing Cross-Cultural Policy
In Japan, for instance, it can be hard to fire someone. As a result it can be hard to hire other Japanese when they see this implied agreement broken. Many countries have very pro-employee laws. Termination may mean very high monetary compensation, and some of these laws apply to expatriates as well. Another example would be recruiting in India. This may involve caste systems such as the Hindu Caste System, although constitutionally banned, exists as institutional racism (please see Appendix A for further explanation).
The process of recruitment would involve a detailed labour market analysis that includes research on workforce demographics, unemployment rates, wage levels and information about other competitors who have encountered the same issues and what their solutions have been.
It’s important for HR staff to upgrade any weak areas such as negotiation skills, then quickly acquire specific knowledge about the country or region and about the laws and political system that governs that area.
One such important example of understanding the presence of the multinational in a host country is presented by the case of GE.
GE purchased a majority interest in Tungsram, a manufacturer of lighting products in Hungary.
Tungsram was attracted to GE because of its low wage rates and the possibility of using the company to export its
products to Western Europe. GE transferred some of its best managerial talent to Tungsram. However, GE ran into many problems. The Hungrarians expected higher Western-style wages, not low wages. Americans wanted strong sales and marketing functions that would service customers, while the Hungarians believed these would take care of themselves. The American managers found the workers to lack in motivation. The Hungarian employees believed that the American managers were pushy. To turn the plant around, GE had to invest an additional $400 million in new plant and equipment and in retraining employees. GE also had to lay off half of the work force (Noe, Hollebeck, Gerhart and Wright, 2000, (found in Duane, 2001 p. 2)).
The GE example illustrates the importance of understanding its role, presence, expectations and demands that a MNC might encounter. This expatriate approach is instituted because parent company executives believe that they will be unable to find qualified senior management and professional employees in the host country. It is also believed that staffing key jobs with parent nationals will advance corporate culture (Perkins, Shortland, 2006 pp. 145-158).
(Perkins, Shortland pp. 145-158) also states that Japanese prefer to have their MNCs be headed by managers who have had previous exposure to the corporate culture and environment. Further American company Procter and Gamble followed and emulated the same procedure requiring a manager to work in the United States first before being transferred back to their home country in order to preserve corporate culture.
Channels of Influence
The primary channel of influence that the MNC has to negotiate with is the subsidiary’s government. Which government does not wish its citizens to be employed and to politically reap the benefits of having a MNC build and contribute to their economy? Another powerful influence besides the government is utilising local prominent and successful businesses to leverage the partnership and goodwill of all business entities. The MNC is also able to draw upon existing knowledge of its partners and are able to better understand and overcome any differences in culture,
policy and way of achieving its business objectives. These partnerships, whether through political or existing business alliances, allow the MNC to rapidly deploy and cut-through otherwise entrenched bureaucracy and foster a successful beneficial partnership (Rosenzweig, Nohria 1994).
Within these channels of influence are specific policy and systems safeguarding many employees personal and private data. In fact, the European Union Commission (EUC) is very stringent in the enforcement of employee privacy. This may prove rather engaging to the MNC and provide the IHRM with additional duties. Recent guidance from the EUC has summed up the view that simply obtaining the employees’ consent to the transfer of their HR data is unlikely to provide an adequate long-term solution for companies engaged in repeated or structural transfers. This is a precarious position because many MNCs wish to export data (in the form of a database) and this issue arises with a centralised HR database scheme. (http://www.workforce.com/archive/feature/24/36/92/index.php).
Many international companies wishing to transfer HR data from their European subsidiaries to the United States have found their plans restricted by EUC data protection rules. In broad terms, the EUC authorities do not regard the United States as having sufficiently tight data protection rules in place to make it a safe destination for such data in the absence of additional safeguards. This is becoming an increasingly pressing issue, given the wish of many multinationals to put in place centralised HR databases, often located in, or accessed from, the United States.
In order to provide their MNCs with guidance, The United States has created the Safe Harbour Programme operated by the US Department of Commerce. However, the Safe Harbour programme is voluntary. MNCs have to voluntarily assign themselves to follow the programme. Safe Harbour requires the US parent to certify to the US government that it will conform to certain EU data protection norms reflected in Safe Harbour principles. The process is relatively straightforward, but many companies incorrectly assume that registration is the final step in the process. Companies still need to make sure that their processing within the EU is in compliance with local data protection rules, which vary from country to country (Clinton-Davis, Harrop, Burr, Hurewitz, Medine, 2006).
The Safe Harbour registration facilitates the data transfer however additional data regulations may still apply. These may include requirements to notify data protection authorities in individual EU Member States, or to adopt specific or group-wide data protection policies or confidentiality agreements. Further, employees must be given a data privacy notice that explains the nature of the data being transferred to the United States and the purpose of the transfer. Safe Harbour is applicable only to data transfers from an EU Member State to the United States. Alternative compliance mechanisms must be used for transfers to corporate data processing centres in other countries (Clinton-Davis et al, 2006).
Not having proper procedure can be detrimental to the MNC. Spain has a reputation as the most aggressive country when it comes to fining companies over data privacy violations (Dowling, 1999). However, European governments also tend to negotiate with firms to facilitate an understanding of the law, rather than immediately prosecuting or fining the MNC.
Expatriates as a Channel of Influence
One of the ways of doing business in the international marketplace is formalize and develop co-operation among expatriates, third-country nationals (TCNs), and domestic workers. To attain the company’s objectives in a cost-effective manner, management must develop a global mobility strategy through an expatriate policy that searches for and implements best practices (Harris, 2002).
Expatriate policy provides the framework for which senior management will deploy their company’s approach to expatriation. Some factors that attribute to the success or failure of expatriation are: appointment of competent leaders, providing competitive compensation, establishing an appropriate environment that fosters learning, and selecting the right domestic workers who can learn and more importantly want to learn the policies and procedures of the MNC (Harris, 2002).
TCNs and domestic workers look at the treatment of the expatriate. Particularly they look at how much compensation the expatriate receives especially if that expatriate performs the same business function. Also included is the development of the ability to evaluate national compensation and benefit plans, human resource policies from other business cultural/legal systems, the benefits and liabilities of different national labour-management relations decision making systems, management assumptions regarding business motivational systems for employees in other cultures and key factors and priorities in planning management training programs for international managers (Harris, 2002).
International human resource managers play a key role in determining appropriate plans and strategies for such pay packages. When designing these plans to ensure successful international transfers, IHR managers need to keep two ingredients in mind: cost containment and a link between expatriation strategies and the company’s global business and financial goals. IHR should consider these factors in every aspect of the organization’s expatriate policies.
Alternatively, many companies send employees overseas for the wrong reasons and at unnecessary cost. For example, some organizations reward mediocre employees with international assignments rather than have another individual fill a business need elsewhere, using his or her particular skills and expertise.
In these situations, IHR is responsible for challenging operational managers to confirm whether the assignment is geared to achieve the unit’s business and financial objectives. In some cases where an employee presence is legitimately needed, the company might instead hire a domestic employee rather than pay the high cost of sending an expatriate and their family abroad.
One of the ways of doing business in the modern international marketplace is to have an optimal synergy among expatriates, third-country nationals (TCNs), and local nationals. To attain the company’s objectives in a cost-effective manner, management must develop a global mobility strategy through an expatriate policy that, in turn, searches for and implements best practices and benchmark studies (Harzing, 1996).
From the perspective of the international manager who will have responsibility for significant numbers of employees to understand the emerging role and contribution of the IHRM function to the international business organization strategy including: the orientation of the function to contribute to sustaining and improving the competitive advantage of the business organization, the impact of different business cultures on job performance outside our home culture, the critical success and failure factors in long term overseas job assignments and the fundamental differences in comparative human resource systems (Harzing, 1996).
The objective of an expatriate policy is to create a comprehensive benefit and pay package that will attract employees to a foreign-country assignment. The policy should maintain a balance between the package offered to transferees coming from various business units of the same or different countries and that offered to local employees in the country of assignment. Once senior management has established the policy’s objectives, it then becomes easier to restructure and satisfy business needs necessary for working in the global marketplace (Shuler, 2000).
Multinationals are quickly moving to global compensation systems for their top employees. Fifty-six percent of multinational corporations plan to shift to a more centralized compensation structure during the next two years, up from 42 percent in 2004, according to a 2006 survey of 275 companies by Watson Wyatt Worldwide (Hansen, 2006). http://www.workforce.com/archive/feature/24/57/31/245736.php?ht=multinational%20hr%20policy%20multinational%20hr%20policy
Among U.S.-based multinationals, 63 percent use the same long-term incentive vehicles and 59 percent use the same grant values across all global locations. Multinationals based in Canada and Europe are even more likely to apply the same vehicles and values across all geographies (Hansen, 2006). http://www.workforce.com/archive/feature/24/57/31/245736.php?ht=multinational%20hr%20policy%20multinational%20hr%20policy
Using intraregional transfers and TCNs to a much greater extent might reduce the cost and necessity of training an expatriate in cultural differences. Before transferring a person from the UK to
Singapore for example, the employer might consider whether a regional new hire or regional transfer of an existing employee (e.g. from Malaysia or Indonesia), or a TCN, might be more cost-effective.
Transfer Mechanisms Available
MNCs utilise a variety of ways to transfer their dominant company policy to their foreign subsidiary. These include: exporting corporate culture by having expatriate workers emigrate to the HC, training HC workers and immersing them in the policies and core principles of the MNC, having a centralised base for IHRM operations (usually based in the HC) and having those policies exported to the various foreign subsidiaries. These methods require a constant vigilance and research on the part of the MNC to ensure that the message they wish to convey is both understood and translates into a positive income stream. This has given rise to numerous issues.
Cultural misunderstanding is chief among them. What does a MNC do when they have a foreign subsidiary located in a pre-dominant Muslim country? Do they close when specific Muslim celebrations occur? Do they have minimal staff performing basic operations that is comprised of non-Muslims? Does the MNC that is non-Muslim based adhere to religious based norms? The easy answer is, ‘yes they should.’ However, this isn’t necessarily the case. An expatriate from the HC who may or may not have formal training in the culture of the foreign subsidiary is typically employed as the high ranking executive. Even if they have been trained, they may not know the apparent implications that what are socially and culturally accepted norms in their HC, meanwhile are offensive in their foreign subsidiary. This for the large part has been overcome by allowing for religious differences and having minimal staff that are not religiously affiliated perform basic operations. For example, productivity may lag during Ramadan, which takes place over the course of a month and as a result employees are who are fasting. This has become an accepted norm when operating a MNC in a Muslim dominant country.
In the increasingly competitive, uncertain, complex world marketplace, multinational companies, unions, and governments must rethink and adjust their human resource strategies and legislative policies again and again. MNCs usually underestimate the influence that differences in industrial relations systems, workplace cultures, and local resistance to certain HR policies can all have on their operations. Unions too often fail to develop effective transnational and inter-union strategies to better serve their memberships in other countries and cultures. Public policy makers are torn between policies meant to respond to a need for workplace efficiency, against other policies meant to promote worker equity (Morgan, Kelly, Sharpe and Whitley, 2003).
How do MNCs choose to diffuse the policies of the domestic parent company into their foreign subsidiaries, or how do they decide to adopt policies and practices that originate in the host countries? They do this by tackling issues of organized labour’s generally diminishing relative power in a rapidly changing global workplace, then focus on transnational collective bargaining strategies and socio-political action. Finally, by recognizing recent multilateral agreements governing workplaces across borders, the contributors are able to assess the European Union Directive on transnational works councils and labour aspects and agreements (Morgan, Kelly, Sharpe and Whitley, 2003).
International HR policy must first contribute to the ‘global comprehension’ of functionaries active in an international setting. ‘Global comprehension’ can be seen as knowing what is going on in the global economy and being able to translate the consequences for the organization they are working for, the [local] business sector, as well as understanding the impact on the company’s global and local competitors and clients.
MNCs are multi-level entities that have socialization mechanisms linking the subsidiary to the rest of MNC (Gupta and Govindarajan, 2000). Crossing traditional organizational boundaries is
important for the effective use of human assets through common projects, decentralized and autonomous groups, flexible working arrangements and the ability to integrate with the host country. The underlying principle of flexibility was found to be associated with opportunities, organizational climate for innovation and development and the ability to focus and create policies that can effectively utilize the assets available to the MNC.
Lyles and Salk (1996, pp. 881-2) postulate that flexibility promotes the learning curve associated with the expatriate process: “by encouraging greater receptivity of organizational members to new stimuli from the outside, by promoting collaboration and exchanges of information within the organization and by granting members greater latitude in altering activity patterns and ways of doing things to adopt to perceived changing needs an conditions”.
Staffing, promotion, training, compensation and appraisal, when applied help MNCs to achieve higher outcomes with their subsidiary. Staffing (job analysis, recruitment and selection procedures) serves as the backbone for IRHM activities of the organization. In MNCs, staffing and promotion practices are closely connected since the MNC extensively uses internal recruitment for all positions, including managerial, and prefer promotion from within to recruitment from outside.
Placement decisions involving internal transfers, promotions, and demotions are also informed by the various selection approaches and by performance appraisals. Performance management is a process of identifying how closely the actual behavior matches the expectations derived from the previous job analysis. If the behaviour of an individual departs significantly from expectations, further actions should be taken to improve the actual behaviour through training and transfer and motivate for even better performance through compensation and benefits. MNCs utilize the performance appraisal results to customize compensation programs for “must-keep” employees (such as domestic and TCNs) and expatriates.
pose a significant way in which MNCs perform and conduct their business objectives. Without the adherence to various programmes MNCs are hindered and if they are conducting business in Spain or France face stiff penalties for non-compliance.
The greatest challenge that MNCs need to consider when transferring their policies and business practices is the ability to have cultural sensitivity. As, GE has demonstrated it is not only the fact and want of operating a profitable enterprise that is important. It is also important to understand the expectations of the domestic workforce. Striving to do less cost them $400 million and half of the skilled workforce.
Another important lesson that MNCs need to learn is that the culture, norms and customs of the host country can normally override the prevailing corporate policy. Muslims require a whole month that is necessary for Ramadan and provision for fasting, for example. Other cultures require time off for family emergencies; the Japanese require an implied guarantee of lifetime employment.
Implicit to this is once the MNC has the culture of their host country understood and comply with the regulations of the host country government’s legislation and policy, business operation runs as smoothly as it does in the parent country. IHRM provides the fundamental resources that human resource professionals require and need in order for their MNC of choice to succeed.
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Hindu Caste System
This system dates almost 3000 years back and was formed based on the need to form social order in ancient India. It is still very prevalent in India’s society. It occurs more in rural villages than in large urban cities, however the caste system is very prevalent in social matters such as kinship or marriage.
These four groups or varnas are considered “clean castes.” Typical roles of these four varnas:
Brahmans – priests, holy men, arbiters
Kshatriyas – kings, warriors, soldiers that protect and guard the country
Vaishyas – businessmen, traders, commercial class
Shudras – farmers, peasants
Below the four varna castes exists a fifth group – The Untouchables. This group is not mentioned in the Vedas Holy Records until the Bhagavad-Gita and they are considered outside of human society and of no caste. Unlike the upper four, The Untouchables are not considered “twice-born,” and as not having gone through the Hindu sacred thread ritual initiation. The fifth varna is deemed “unclean” and “polluting”. Their role in life and society is to perform menial, degrading jobs.
The Untouchables are known by a variety of names. They call themselves “Dalits”, priding themselves for the struggles they have fought against injustice. Mahatma Gandhi called them “Harijans” – Children of God – when he adopted, against the caste rules, an Untouchable child. Finally, the Untouchables are also known as the “Scheduled Castes” after an amendment to the 1935 constitution was set to protect them in society both economically and socially.
<http://www.friesian.com/caste.htm> viewed January 9, 2006.
Smith, Brian K. (1994). The Ancient Indian Varna System and the Origins of Caste. Oxford University Press, pp. 1-55.