International Business

Chapter Twenty
Human Resource
Management
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 busi-
ness, 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 expli-citly
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: fills all
key management positions with
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 a narrow
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: uses
host-country nationals to
manage local subsidiaries
• A polycentric policy views the effectiveness of the
business practices of host country operations as
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 between local
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 best
people for key positions throughout the
organization, regardless of their nationality
• A geocentric policy enables firms pursuing a global or
transnational strategy to build the requisite cadre of
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 STRATEGIC
APPROACH ASSUMPTONS FIT ADVANTAGES
Ethnocentric Headquarters International Leverages a firm’s
makes all core competence
decisions
Polycentric Headquarters Multidomestic Eases adaptation to
makes broad the local workplace
strategic
decisions
Geocentric Headquarters Global and Leverages ideas
and subsidi- Transnational worldwide;
promotes aries diffuse global
learning best practices
via collabora-
tion

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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 Preparation
and 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 Posed by
Country Differences
Stock 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 congru-

ence 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 demon-
strates 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 tech-
nical 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.

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