International Business

Chapter Twenty

Human Resource Management

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Chapter Objectives

• To discuss the importance of human resource management in international business

• To profile principal types of staffing policies used by international companies

• To explain the qualifications of international managers

• To examine how MNEs select, prepare, compen-sate, and retain managers

• To profile MNEs’ relations with organized labor

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Introduction

Human resource management (HRM): the conduct of the broad range of activities that relate to the effective staffing of an organization

• Generally, HRM is more challenging for firms that compete internationally because of:– differences in political, cultural, legal, and environmental

factors amongst countries– the challenges of convincing highly-skilled executives to

go abroad • The mandate for HRM is to develop the means and

methods for a firm to build and retain the cadre of managers that can lead an organization to even greater performance in a day and age of globalization.

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Fig. 20.1: Human Resources in International Business

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The Strategic Function of Human Resource Management

Creating value by opening and operating a business, subsidiary, or branch requires that a firm:

• determine its human resource needs• hire the people required to meet those needs• motivate its employees to perform well• continually upgrade its employees’ skills • retain those employees whose performance explicitly

improves the productivity of the firm’s core competencies within the context of the value chain

The roles and characteristics of international managers evolve over time.

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Staffing Policies

Staffing policy: defines the process by which a firm assigns the most appropriate candidate to a given position

Expatriate: an employee who leaves his or her home country to live and work in a foreign (host) country

Third-country national: an employee who is a citizen of neither a firm’s home country nor its host country

Interpretive framework: the way in which a firm understands its world and the strategy it pursues to create value

• The strategic values and leadership ideals of a firm translate into the assumptions and generalizations that define its interpretive framework.

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MNE Staffing Policies:The Ethnocentric Approach

Ethnocentric staffing policy: fillsall key management positionswith home-country nationals

Core competency: the special outlook, skill, capability, and/or technology that creates unique value for a firm and is hard for rivals to imitate

• People transferred from headquarters to pursue an international strategy are more likely to best under-stand and protect the firm’s core competencies.

• An ethnocentric policy can result in anarrow perspective of foreign operations.

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Leading Reasons to Staff Foreign Operations with Expatriates

• Command and control Effective transfer of corporate systems to foreign operations

• Local talent gaps Specialized skills of corporate managers

• Social integration Improved understanding of the global entity

• Ownership structure Use of key positions to protect property and other interests

• Local implementation Quicker resolution of break-downs and bottlenecks

• Higher turnover among locals Prevention of intellectual property leaks

• Management training Development of corporate managers’ global

perspectives

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MNE Staffing Policies:The Polycentric Approach

Polycentric staffing policy: useshost-country nationals to managelocal subsidiaries

• A polycentric policy views the effectiveness ofthe business practices of host country operationsas equivalent to those in the home country.

• The use of host country managers to pursue a multi-domestic strategy helps to maintain local motivation and morale and also to improve the firm’s local image.

• A polycentric policy can result in a gap betweenlocal and global operations because of issues of accountability, allegiance, and mobility.

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Leading Reasons to Staff Foreign Operations with Locals

• Cost containment Expatriate compensation is typically higher than that of

a local hire• Nationalism Host governments may

restrict access to local jobs • Management development Training of local mangers

motivates local employees• Employee morale Local workers may respond

better to a local manager• Expatriate failure rates Consequences to corporate

and local operations of expat-riate failure can be severe

• Product issues Local managers interpret local conditions more effectively

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MNE Staffing Policies: The Geocentric Approach

Geocentric staffing policy: seeks the bestpeople for key positions throughout theorganization, regardless of their nationality

• A geocentric policy enables firms pursuing a globalor transnational strategy to build the requisite cadreof cosmopolitan executives who can promote global learning by moving amongst countries and cultures without forfeiting their effectiveness.

• Economic factors, decision-making routines, and legal contingencies often make geocentric staffing policies hard to develop and costly to maintain.

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Features and Functions of Staffing Approaches

STAFFING GENERAL STRATEGICAPPROACH ASSUMPTONS FIT ADVANTAGES

Ethnocentric Headquarters International Leverages a firm’s makes all core competence decisions

PolycentricHeadquarters Multidomestic Eases adaptation to makes broad the local workplace strategic decisions

GeocentricHeadquarters Global and Leverages ideasand subsidi- Transnational worldwide;

promotes aries diffuse global learning

best practicesvia collaboration

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International Staffing Approaches: Unforeseen Contingencies

The strategic fit of an MNE’s staffing policy can be unpredictably influenced by:

• types of foreign ownership: while firms may secure staff for foreign operations through acquisitions and joint ventures, they may do so at the price of serious conflicts with their existing staffing policies

• third-country nationals: when firms establish lead oper-ations abroad, third-country nationals often have the com-petencies needed to get new, regional operations up and running

MNEs tend to champion those staffing policies that are most congruent with their existing standards of value creation.

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Expatriate Qualifications

Expatriate selection is largely influenced by a candidate’s:

• technical competence: translates into the managerial attributes of self-confidence and mental toughness

• adaptiveness: reflects a person’s potential for personal resourcefulness and self-maintenance, for developing satisfactory relationships with host nationals, and for interpreting the immediate environment

• leadership ability: a key indicator of success for a senior manager at a foreign subsidiary where ambiguity and a broad range of duties are involved

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Expatriate Preparationand Development

Expatriate failure: the premature return home of an expatriate employee

• Areas of training and development that can improve the probability of expatriate success include:– relevant country-specific information– cultural sensitivity training– practical social training

• The need to generate, transfer, and adopt ideas on a worldwide basis compels MNEs to regularly engage a greater proportion of their employees in international development.

The leading cause of expatriate failure is the inability of a spouse to adapt to the host nation.

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Expatriate Compensation

Balance sheet compensation plan: aims to develop a salary structure that equalizes purchasing power across countries

• Common methods of implementing a balance sheet compensation plan include:– the home-based method

[preserves equity with home-country colleagues]– the headquarters-based method

[preserves equity with headquarters colleagues]– the host-based method

[reflects prevailing costs and salary scales in the host country]

Compensation must neither overly reward nor unduly punish a person for accepting a foreign assignment.

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Expatriate Compensation:Key Aspects

• Living abroad may be expensive because:– expatriates may be slow to change their habits– expatriates may be unsure of how and where to shop

• Key aspects of expatriate compensation include:– the base salary– the foreign-service premium– cost-of-living allowances [housing, spouse, hardship, travel]– fringe benefits [medical & retirement benefits plus risk insurance]– tax differentials [double taxation issues]

MNEs often provide additional compensation or greater fringe benefits to employees who work in remote or dangerous areas.

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Sending an Expatriate from Seattle to Tokyo: Typical Expenses

DIRECT COMPENSATION COSTS• Base salary $150,000• Foreign service premium 25,000• Goods and services differential 120,000• Housing 97,000• Hypothetical U.S. taxes (38,000)

COMPANY-PAID COSTS

• Education (for 2 children) $ 30,000• Japanese income taxes 115,000• Transfer moving costs 47,000• Miscellaneous costs 85,000• Working spouse allowance 75,000• Annual home leave expenses 15,000• Add’l insurance, pension, & evacuation coverage 20,000

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Complications Posedby Country DifferencesStock options: the right to purchase a specific number

of shares of stock for a specified price at specified times [usually granted to key employees]

• Firms struggle to determine how to pay managers in different countries because of the complications caused by legal, cultural, and government-related factors.

• Total compensation, forms of compensation, as well as the gap between top executives and hourly workers vary substantially across countries.

While the inequality between CEO and average worker pay is greatest in the United States, it is smallest in Japan.

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Fig 20.3: Variance in CEO Packages Among Countries

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Fig. 20.4: The Difference in Pay between CEOs and the Average Worker, 2000

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Expatriate Repatriation• Expatriates face repatriation strains in three key areas:

– changes in personal finances– readjustment to the home-country corporate structure– readjustment to life at home

• One survey of repatriated executives found that:– more than 33% still held temporary assignments three

months after returning home– nearly 80% viewed their new jobs as demotions when

compared to their foreign assignments– more then 60% felt they did not have opportunities to transfer

their international expertise to their new jobs– nearly 25% left their companies within three months of

returning home

The principal cause of repatriation frustration is the challenge of matching an expatriate to a job that offers sufficient responsibility.

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International Labor Relations

Labor union: an association of workers who have united to collectively express their views for wages, hours, and working conditions

Collective bargaining: negotiations between labor union representatives and employers regarding a broad spectrum of work-related issues

• Overall attitudes within a country affect the ways in which management and labor view one another and the ways in which labor attempts to negotiate better working conditions.

A country’s sociopolitical environment will largely determine the type of relationship between labor and management and affect the number,

representation, and organization of unions.

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International Labor Relations:Labor’s Concerns about MNEs

• A key concern is the degree to which organized labor can limit an MNE’s operational and strategic choices.

• Labor claims it is disadvantaged in dealing with MNEs because:– it is very difficulty to get complete information regarding

MNE operations and to interpret their financial data– MNEs can manipulate product and resource flows– MNEs can easily switch value-adding activities to other

countries and/or regions– the scale and complexity of MNE operations make it hard

to identify the location of decision-making authority

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International Labor Relations:Labor’s Actions toward MNEs

• Workers have organized unions to fight for higher pay, better benefits, greater job security, and improved working conditions.

• Internationally, unions cooperate with one another by sharing information, assisting bargaining units in other countries, and dealing simultaneously with MNEs.

• Labor can appeal to transnational institutions such as the International Labor Organization (ILO) and a variety of industry-specific trade secretariats to assist in their efforts to check the power of MNEs.

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International Labor Relations: Labor’s Continuing Struggles

Codetermination: emphasizes cooperative decision making that benefits both workers and the firm via the joint participation of management and labor in the management of a firm

• The demography, structure, ideals, and goals of unions vary significantly from country to country.

• Both collective bargaining methods and approaches to the reconciliation of labor tensions differ from country to country.

• National unions are locked in a zero-sum game, as they compete with each other to attract both domestic and foreign investment.

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Trends in the Relationship between MNEs and Labor

• MNEs’ efforts to integrate labor relations across countries sharpen their understanding of labor issues and ultimately increase their bargaining power.

• Reasons behind the declining union membership seen in many countries include:– the increase in white-collar works as a percentage of total

workers– the increase in service employment in relation to manufacturing

employment– the rising portion of women in the workforce– the rising portion of part-time and temporary workers– the trend toward smaller average plant size– the decline in the belief in collectivism among younger workers

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Fig. 20.5: Trade Union Decline in Industrialized Countries

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Implications/Conclusions

• Firms are increasingly sensitive to the congruence between (i) their organizational cultures and leadership values and (ii) those of their employees.

• Two major international training functions are(i) building global awareness amongst managers in general and (ii) equipping managers to handle the specific challenges of a foreign assignment.

[continued]

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• Hiring locals rather than expatriates demonstrates that MNEs do provide opportunities for local citizens, are considerate of local interests, and may prefer to avoid the red tape of cross-national transfers.

• MNEs transfer managers abroad to infuse technical competence and headquarters business practices, to control foreign operations, and to develop managers’ international business skills.

• The debate is ongoing as to whether the MNE, through the power of its globally dispersed value chain, systematically weakens the rights and roles of labor.