15. International Human Resource Management – Fundamentals of International Business

CHAPTER 15

International Human Resource Management

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

  • Define international human resource management and discuss human resource strategies in overseas operations
  • Illustrate the importance of human resources in international business
  • Examine different policies of companies for recruitment, selection, compensation, development, and retention of international managers
  • Discuss how companies differ in terms of labor policies
  • Understand the selection and screening criteria used in choosing people for overseas assignments

IKEA SAYS ‘NO’ TO CHILD LABOR

The best carpets in the world are sourced from weavers in India. The Indian carpet industry has traditionally been based in the cities of Bhadohi, Mirzapur, and Varanasi in the state of Uttar Pradesh, which houses India’s largest and poorest population. The supply chain for carpets is a sordid tale of forced, bonded child labor and human trafficking, as carpet factories spin the most exquisite yarn for the world’s leading exporters. Leading US stores including Macy’s, Bloomingdale’s, Neiman Marcus, Target TGT, Williams-Sonoma, Pottery Barn, and IKEA are some of the global buyers of Indian carpets.

Swedish furniture MNE IKEA adopted IWAY—The IKEA Way on Purchasing Products, Materials and Services, a code of conduct which specifies the requirements expected from suppliers of products and services. It includes the most stringent rules on labor rights, working conditions and safety and environmental protection, especially in the context of child labor. IWAY is based on international conventions and declarations. It includes provisions based on the United Nations Universal Declaration of Human Rights (1948), the International Labor Organization Declaration on Fundamental Principles and Rights at Work (1998), and the Rio Declaration on Environment and Development (1992).

IKEA currently sources its carpets from four suppliers in India who have to follow this code of conduct to remain part of the IKEA supply chain. The Code includes a complete ban on forced and bonded labor including child labor and explains how IKEA will always act in the best interests of children. These suppliers face regular audits by IKEA and third party auditors to check compliance with IWAY in order to remain part of the IKEA global supply chain.

References: Your Beautiful Indian Rug Was Probably Made By Child Labor, https://www.forbes.com; TAINTED CARPETS, https://cdn2.sph.harvard.edu; IWAY guides our work, https://www.ikea.com; last accessed on 27 September 2018.

INTRODUCTION

A successful international company needs an appropriate structure and controls to put its strategy into effect. Accordingly, International Human Resource Management (IHRM) is the process of selecting, training, developing and compensating personnel in accordance with the firm’s overall strategy. The aim of the HRM policies of a firm is to match people with the firm’s strategy, structure and controls. We may find, for example, that the CEO and staff required to effectively manage a multi-domestic company are quite different from the team required to effectively manage a transnational company. In the following sections we will discuss the role of various HRM activities in matching people to strategy, structure and control systems.

A TNC has three basic sources of human resources.

  1. The first is its home country nationals, who may be residents abroad but are citizens of the home country. They are known as expatriates. An example would be an Indian manager who works at the Infosys office in New Jersey.
  2. The second category consists of host-country nationals, consisting of domestic staff hired by the TNC. An example of this is a British national working for BMW in London.
  3. The third category consists of third-country nationals, who are citizens of other countries and work for the TNC in a foreign location. An example is a German manager working for Panasonic in Japan.

The advantages of using home-country staff for foreign assignments is that it ensures that senior management has full knowledge of the capabilities, experience, attitude and perspectives of those in charge of foreign operations; since expatriate managers are fully conversant with company policies and procedures, communication is fast and efficient. The interests of the parent company are also looked after as the expatriate manager depends upon the parent organization for career advancement.

On the other hand, the disadvantages of using expatriates include their lack of familiarity with the local language, culture and business practices, a long settling-in period during which time productivity is low, dealing with racial and other biases, and blocking promotion opportunities of locally recruited staff.

The major steps in the process of IHRM are as follows:

  • Human resource planning (this is part of the organization’s strategic plan)
  • Recruitment
  • Selection
  • Induction and orientation
  • Training (to improve job skills)
  • Development (to educate people beyond the requirements of their present position)
  • Remuneration and rewards
  • Transfers
RECRUITMENT AND SELECTION

There are four choices in recruitment and selection policy—the ethnocentric approach, the polycentric approach, the geocentric approach and the regiocentric approach. The IHR policy of the TNC, a feature of its long-term strategy, depends on its business orientation and its age as a TNC. There are four choices in policy—the ethnocentric approach, the polycentric approach, the geocentric approach and the regiocentric approach.

Ethnocentric Approach

In initial stages of global venturing, a business firm prefers to use home-country managers for its overseas units. This is characteristic of the firm’s ethnocentric orientation, based on the belief of superiority of one’s own ethnic group. It has been observed that most Japanese TNCs prefer to use home-country managers for their senior staff positions. European TNCs similarly assign home-country managers for their entire career. US TNCs, however, view overseas assignments as temporary, and are often found working under host-country managers. Large TNCs such as Procter & Gamble, and Samsung Group had their important overseas subsidiaries manned by home-country nationals as they place a high value on corporate culture.

 

Ethnocentric orientation is based on the belief of superiority of one’s own ethnic group, and refers to the preference for home-country managers in overseas units.

The firm basically believes that parent-country nationals are better qualified and more trustworthy than host country nationals. For firms which are transferring core competencies through a foreign operation, it is best done with the help of stafffamiliar with organizational processes and routines that are associated with these competencies. It also considers the ethnocentric approach more suited for maintaining a unified corporate culture. The basic merit in this approach is the benefit of the experience curve effects derived from standardization of production. The firm produces in the home country initially and transfers its core competency to the host country under the guidance of expatriate managers. However, host country nationals are denied the opportunity of decision-making and advancement, leading to resentment among them. Expatriate managers are also expensive to maintain, and may often become insular in their attitudes and prone to cultural myopia. This often results in management overlooking niche market opportunities.

Polycentric Approach

Polycentricity or polycentrism is a belief that local people know the local environment better than outsiders. Under this orientation, a firm recruits host-country nationals to manage their subsidiaries and parent-country nationals occupy key positions at the corporate headquarters. The basic advantages of this approach is quick and flexible responsiveness, as local managers react to market needs in the areas of pricing, production, product life cycle, and political activity. There is greater sensitivity to cultural issues and continuity in the management of foreign subsidiaries.

 

Polycentricity or polycentrism is the belief that local people know the local environment better than outsiders, thus a firm recruits host country nationals to manage their subsidiaries while parent-country nationals occupy key positions at the corporate headquarters.

A major drawback of this approach is that host-country nationals remain limited in their experience, and thus opportunities for professional growth are consequently limited. This leads to resentment and high turnover among the staff. There also exists a barrier between home and host-country managers regarding language barriers, national loyalties and a host of other cultural differences. This in turn may lead to the isolation of the corporate headquarters from national units and lead to lack of integration and corporate inertia.

Geocentric Approach

A geocentric staffing policy is based on the notion that the best people should be employed, regardless of their nationality. It ensures optimum utilization of the firm’s human resources, and helps it to develop a global workforce that can work anywhere in the world, under any cultural constraints. It also allows the firm to reap the advantages of scale economies and experience curve effects, and also enjoys the benefits of local responsiveness and cultural adaptation. It is, however, an expensive policy as it entails huge cross-cultural training and orientation, costs of relocation and immigration. The adoption of a geocentric policy may be limited by local laws and policies that require foreign subsidiaries to employ local staff.

 

A geocentric staffing policy is based on the notion that the best people should be employed, regardless of their nationality.

Regiocentric Approach

Regiocentricity is the variation of staffing policy to suit particular geographic areas. It is particularly suited in geographical regions that are culturally proximate and similar. For instance, firms operating in the MENA region find it useful to employ Muslim staff as it creates a sense of cultural affinity and eases the working atmosphere in the region. The policy shows sensitivity to local conditions and provides a stepping stone for a firm wishing to move from an ethnocentric or polycentric approach to a geocentric approach.

 

Regiocentricity is the variation of staffing policy to suit particular geographic areas. It is particularly suited in geographical regions that are culturally proximate and similar.

TRAINING AND DEVELOPMENT

Training and development refers to the acquisition of knowledge, skills and behaviour pertaining to the job. For an international business, training and development procedures and methods vary depending on whether the individual is from the home country, host country or a third country.

Bird’s-eye View

The International Human Resource policy of a TNC is a feature of its long-term strategy and depends on its basic business orientation and on its age as a TNC. A TNC can thus have any of the following four approaches or a combination of all—the ethnocentric approach, the polycentric approach, the geocentric approach and the regiocentric approach.

The training and development are two different but related issues. Training is concerned primarily with the acquisition of skills (for example, learning a language), but may also refer to the acquisition of awareness (for example, cultural training). Development is the term used to describe a process of change through the acquisition of knowledge via some form of education programme, which may include some training.

Training programmes designed for individuals who are going overseas provide information related to local customs, cultures and work habits to help them interact and work effectively with the local workforce. Training should include at least two phases. Pre-departure training should focus on language, history and culture for the whole family and include job-specific training for the manager. On arrival in the new country, the expat should be allowed some time away from too much job-related activity to allow him to adapt to the new culture. Transition training should continue with language and culture training as well as meetings at which the new expatriates have the chance to mix with local residents and other foreign nationals.

The home office must remain alert to the need to provide psychological support in a variety of ways and to convince expatriates that they will not be at a disadvantage for promotion by service in a foreign country. In this context, the expatriate should get out of the host culture on a regular basis once or twice a year. The ability to ‘touch base’ with the home culture gives reassurance to expatriates that they are valued servants of the organization. It also helps in avoiding ‘culture shock’ when they finally return to the home country. People need to be prepared for re-entry to the home culture, and the organization needs to provide the support facilities for this.

Training in the context of the expat employee takes the form of Cross-cultural training, language training and specific skills training.

Cross-cultural Training

This entails learning about the host country’s culture, history, politics, economy, religion and social and business practices. There are two facets of this: In the first module, the expat is given information consisting of living conditions, cultural awareness and the country’s macro conditions. The second aspect consists of cognitive and behavioural techniques to acquire skills such as transition-stress management, relationship-building, cross-cultural communication and negotiation.

Effective cross-cultural training is based on five basic guidelines:

  1. Awareness of skills required to function well in the target culture.
  2. To understand the appropriate use of certain behaviour.
  3. Keep this understanding contextual and appropriate based on the target culture.
  4. Acquire proficiency through practice.
  5. Anticipate emotional changes and deal with them appropriately.

Language Training

Proficiency in a foreign language is a critical factor in the effective adjustment of expatriates in the host country. For the longest time this has meant being fluent in English, but with the emergence of business opportunities in Latin America and China, there is an increased emphasis on learning Spanish and Mandarin. Knowledge of the local language enhances communication and makes the process of settling in easier and more comfortable for the expat.

Specific Skills Training

The expat as a manager needs specific skills of communication, negotiation skills and survival that are contextual and help in adjustment. This also includes training in performance appraisal and total quality management.

Management development includes a range of activities such as skills training; in-house programmes on company-related topics; external seminars and conferences; university courses; job rotation and/or transfers within the company, including overseas postings; exchange visits to other departments and organizations; and networking with other managers within the company, government officials, suppliers and customers.

Performance appraisal is an important aspect of training and development. Managers at all levels use appraisal to communicate expectations and to help subordinates improve personal deficiencies. However, in international business, performance appraisal has problems not usually encountered in the domestic company. These problems usually pertain to bias arising out of the expatriate manager’s location. Expatriate managers are assessed by their superiors in both the host country and the home country.

Host-country assessors may be biased by their cultural frame of reference and set of expectations.

Home-country assessors may be negatively influenced by their distance from the home country and by their own lack of experience in the host country. Their cultural frame of reference may be the same as that of the person being assessed, but their expectations of that person may or may not be realistic. Home-country assessors rely on facts and figures in making their assessment: facts and figures do not take account of the ‘soft’ variables associated with working in another culture.

It is usually very difficult for an expatriate manager to counter an adverse performance appraisal arising from these biases. This often becomes the cause of frustration in overseas postings. Companies that are aware of this, focus their performance evaluation on factors that are within the scope of control of the person being evaluated. This in itself presents difficulties because there are many types of decisions over which expatriate managers have little or no control.

COMPENSATION

A compensation programme of a TNC focuses on attracting and retaining qualified employees, facilitation of transfer between the head office and its affiliates, creation of consistency and equity in compensation, and maintaining competitiveness.

On selection and recruitment, you will recall that international firms may adopt an ethnocentric, polycentric, regiocentric or geocentric approach. The firm’s strategic approach combined with host-country laws, regulations and cultural traditions determine the compensation policy. You will also recall that one aspect of the geocentric approach is the creation of a pool or cadre of international managers who are, theoretically at any rate, capable of being employed anywhere in the world. The geocentric approach leads to more compensation problems than the other approaches.

The various approaches to staffing relate to compensation by being concerned primarily with:

  • Parent-country nationals (PNCs): Ethnocentric and geocentric
  • Locals or host-country nationals (HCNs): Polycentric
  • Third-country nationals (TCNs): Geocentric and regiocentric

The cost of employing an expatriate is almost three to five times the cost of a domestic hire. Expatriate compensation usually consists of the following elements:

  • Salary: This is the basic pay, including incentives such as profit sharing and bonus plans, and may be cash-based or a deferred payment.
  • Housing allowance: The expat may be given an allowance, company accommodation or the facility to rent a house. All these are provided at a level equivalent to the expat’s living standard in his home country.
  • Service allowances and premiums: These allowances are meant to cover the differences in expenditure and cost of living between home and host country. These include the cost of relocation, children’s education and home country visits. The allowance is based on the expected level of hardship and the job type.
  • Tax equalization: The allowance is meant to provide an adjustment to the expat based on tax rates in the home country. Depending on tax treaties between the home and host country and duration of stay, the expat may be taxed on income tax rules of both home and host country. This allowance helps to smooth out the tax liability for the expat.

There are three basic approaches or policies to international compensation. These policies are:

  1. Home-based policy: This policy links the base salary for PCNs and TCNs to the salary structure of the relevant home country. For example, a US executive transferred to France would have a compensation package based on the US base salary rather than that applicable to France. All PCNs and TCNs are treated equitably in relation to their home countries, but they may be paid different amounts for doing the same work. For example, in the London branch of an American bank, a US expatriate and an Australian (TCN) may perform the same banking duties, but the American will receive a higher salary than the Australian because of differences in their respective home-country base salary levels.

    This policy is usually applicable in temporary assignments where the number of people from a single nationality is usually low and there is a predominance of international staff at top-level positions in the host country. It facilitates mobility of personnel and makes repatriation to the home country easy. However, it creates discontent within the organization as staff at the same organizational position but from different parts of the world are paid differently.

  2. Host-based policy: The base salary is linked to the salary structure of the host country but supplementary allowances for cost of living, housing, schooling and so on are linked to the home-country salary structure. This policy is attractive to TCNs where host-country salaries are greater than those in their home countries, but unattractive to expatriates whose home-country salary levels are greater than those of the host country.

    The policy is used when international assignments are of an indefinite duration in a location where the compensation is high and host-country local staff occupy a large number of top positions. It is an easy system to administer as all employees get equivalent compensation, and leads to a happier workplace.

    The system is at risk when there are huge fluctuations in exchange rates. It is also an expensive policy, as host country salaries improve as a result of improvements in living standards.

  3. Hybrid compensation policy: This is something of a compromise between the home-based and host-based policies, whereby expatriates working in their home regions (for example, an Italian in Germany) are compensated at lower levels than those working in regions far from home, for example, an American working in Saudi Arabia.

    The policy is equitable and enables the transfer and development of an international management cadre. It is also complicated to administer and difficult to communicate.

Bird’s-eye View

Training and development and compensation are two important aspects of human resource management. Training is concerned with the acquisition of skills which become agents of change through development.

INTERNATIONAL LABOR RELATIONS

International labor relations is a vast topic of considerable complexity and is variously called industrial relations, employer–employee relations and workplace relations—different terms that are indicative of different perspectives. Labor relations by whatever name is commonly the domain of the HRM function, but some organizations manage their labor relations through a department that is separate. A TNC needs to manage its relations with labor in its own country and in other countries where subsidiaries are located, and they will all be different.

You will probably know from your reading of newspapers and magazines, and from your own experience, that labor relations is a subject with political, sociological and emotional overtones. It is sometimes felt that labor unions are the enemy of TNCs. This may be so in some cases, but it need not.

Unions, or organized labor, are usually thought to be concerned about pay, job security and working conditions. In fact, unions are concerned about many other issues, including quality of life, equal opportunity and superannuation. In the international context, unions are concerned about the power of TNCs to move production facilities from one country to another (or even from one part of one country to another part) with the consequent loss of jobs. TNCs typically make such decisions through negotiation with governments, and unions are thus potentially at a great disadvantage unless they have influence with the government in power. The power of unions ultimately lies in the strike, but there are also about 20 forms of non-strike activity such as go slow, work to rule and overtime bans.

Another concern of unions is the ability of TNCs to move some production facilities so that low-skill jobs are ‘exported’ from the home country to countries where labor costs are lower. There is also the desire of some TNCs to transpose work practices from one country (for example, Japan) to the home country. In Australia, for example, Mitsubishi and Toyota have been fairly successful in implementing some Japanese employment practices in their Australian factories. However, this was done in consultation with unions. In the US, Japanese auto companies have been able to establish non-union plants—a practice that is feasible in the US because of the low level of unionization of the private sector workplace (about 9 per cent), but not feasible in Australia where unions are much stronger, even though membership is declining (now about 25 per cent of the total workforce).

There are two broad approaches to international labor relations—centralized and decentralized. Both approaches are necessary and one must dovetail into the other.

  1. Centralization is desirable when decisions are concerned with labor and transportation costs, skill levels, availability of natural resources and the political climate in countries in which the TNC operates.
  2. Decentralization is desirable when decisions are concerned with labor laws, union power, the nature of collective bargaining and the work culture. Increasingly, the way work is organized in particular countries is seen as a source of competitive advantage. Employee participation has a long history and comes in many forms.
INTERNATIONAL LABOR STANDARDS

It has been the effort of developed nations to establish internationally agreed norms and standards of behaviour for the conduct of employee relations. The main objective of this is to prevent unfair competition among countries by reducing labor conditions to unacceptably low levels. The International Labor Organization (ILO), founded in 1919, is the most important body concerned with the setting of labor standards. It is the only tripartite UN agency with government, employer and worker representatives. This tripartite structure makes the ILO a unique forum in which the governments and the social partners of the economy of its 183 member states can freely and openly debate and elaborate labor standards and policies. Since its inception, the ILO has maintained and developed a system of international labor standards aimed at promoting opportunities for women and men to obtain decent and productive work, in conditions of freedom, equity, security and dignity. In today’s globalized economy, international labor standards are an essential component in the international framework for ensuring that the growth of the global economy provides benefits to all.

The constitution of the ILO requires it to:

  • Encourage the improvement of workers conditions.
  • Discourage particular countries from failing to adopt humane conditions of labor.
  • Promote the principle that labor not be regarded as a mere ‘commodity or article of commerce’.
  • Support the view that the price of labor be determined by human need and that workers are entitled to a reasonable standard of living.

Standards refer to minimum levels of work condition for the employed and to levels of social security for the unemployed. Standards are usually formally incorporated into the laws of member countries based on the recommendations of bodies that set international standards.

Achieving the goal of decent work in a globalized economy requires action at the international level. Over a period of time international legal instruments on trade, finance, environment, human rights and labor have emerged. The ILO contributes to this legal framework by elaborating and promoting international labor standards aimed at making sure that economic growth and development go along with the creation of decent work. The ILO’s unique tripartite structure ensures that these standards are backed by governments, employers and workers alike. International labor standards therefore lay down the basic minimum social standards agreed upon by all players in the global economy.

An international legal framework on social standards ensures a level playing field in the global economy. It helps governments and employers to avoid the temptation of lowering labor standards in the belief that this could give them a greater comparative advantage in international trade. In the long run, such practices do not benefit anyone. Lowering labor standards can encourage the spread of low-wage, low-skill and high-turnover industries, and prevent a country from developing more stable high-skilled employment, at the same time making it more difficult for trading partners to develop their economies upwards.

International labor standards are sometimes perceived as entailing significant costs and thus hindering economic development. A growing body of research indicates, however, that compliance with international labor standards often accompanies improvements in productivity and economic performance.

Higher wage and working time standards and respect for equality can translate into better and more satisfied workers and lower turnover of staff.

Investment in vocational training can result in a better-trained workforce and higher employment levels.

Safety standards can reduce costly accidents and health-care fees.

Employment protection can encourage workers to take risks and to innovate.

Social protection such as unemployment schemes and active labor market policies can facilitate labor market flexibility; they make economic liberalization and privatization sustainable and more acceptable to the public.

Freedom of association and collective bargaining can lead to better labor-management consultation and cooperation, thereby reducing the number of costly labor conflicts and enhancing social stability.

CHAPTER SUMMARY
  • The firm’s IHRM policies should be congruent with the firm’s international strategy, its structure and its control systems.
  • There are four approaches to staffing, namely, an ethnocentric approach, a polycentric approach, a geocentric approach, and a regiocentric approach.
  • An ethnocentric approach emphasizes the importance of parent-country nationals (PCNs) in key positions. It is congruent with an international strategy, but it may breed cultural myopia.
  • A polycentric approach uses host-country nationals (HCNs) to manage subsidiaries and PCNs to manage corporate headquarters. This approach avoids cultural myopia but may produce tensions between home and host country operations. This approach suits a multi-domestic strategy.
  • A geocentric approach employs PCNs, HCNs and third-country nationals (TCNs) to get the best people for the job regardless of nationality. This approach builds a strong organization culture and is suited to both global and transnational strategies.
  • In a regiocentric approach, PCNs, HCNs and TCNs are used to employ the best person within a region rather than worldwide as in the geocentric approach. The regiocentric approach might be viewed as a scaled-down version of the geocentric approach or a transition stage between an ethnocentric and a polycentric approach.
  • Training is directed at the acquisition of skills and the development of the acquisition of knowledge and wisdom.
  • Management development is used as a strategic tool to build a strong organization culture and to promote informal networking, both of which support global and transnational strategies.
  • Performance appraisal has noted the existence of bias in the host country because of cultural factors, and in the home country because of distance and lack of familiarity with the local scene on the part of home-country assessors.
  • There are three approaches to compensation—the home-country approach, the host-country approach and the regional approach.
  • The most common form of expatriate compensation is based on the home country. It contains six elements—the home-country base salary, and five categories of outlays, namely, goods and services, housing, income tax, contribution to savings, education expenses and social security taxes, and shipment and storage charges on personal and household effects.
  • There is considerable disparity in the conduct of labor relations across countries, and for this reason a decentralized management approach is logical. However, the need to conduct operations globally or on a transnational basis makes it desirable to centralize some management decisions.
  • Unions are concerned about pay, job security and working conditions and especially about the power of TNCs to switch operations from one country to another. Unions have been generally unsuccessful in countering the bargaining power of TNCs, but there is potential for gaining a competitive edge if employees are allowed to participate in decision-making through quality circles, semi-autonomous work groups and the like.
KEY TERMS
  • Expatriate
  • Ethnocentric orientation
  • Polycentricity
  • Geocentric staffing policy
  • Regiocentricity
  • Training and development
  • Compensation programmes
DISCUSSION QUESTIONS
  1. Write short notes on:
    1. Cross cultural training
    2. International labor relations
  2. What do you understand by international HRM? Discuss the salient features of international HRM policy in terms of a firm’s strategic orientation.
  3. Distinguish between training and development of an expatriate manager.
  4. What are the basic approaches to compensation for an expatriate manager?
  5. ‘International HRM includes the important issues of labor unions and their intervention’. Comment.
  6. Shinjo Jen is a Japanese expatriate in India. He is joining the local arm of his parent MNE in Gurgaon. Discuss some issues he is likely to face for which he needs cross-cultural training.