POLYCENTRIC APPROACH

Polycentric approach

When a company adopts the strategy of limiting recruitment to the nationals of the host country
(local people), it is called a polycentric approach.

The purpose of adopting this approach is to reduce the cost of foreign operations gradually. Even
those organizations which initially adopt the ethnocentric approach may eventually switch over to
the polycentric approach. The primary purpose of handing over the management to the local
people is to ensure that the company understands the local market conditions, political scenario,
cultural and legal requirements better. The companies that adopt this method normally have a
localized HR department, which manages the human resources of the company in that country.

Many international companies operating their branches in advanced countries like Britain and
Japan predominantly adopt this approach for recruiting executives lo manage the branches."

The polycentric approach uses natives of the host country to manage operations in their country
and natives of the parent country to manage in the home office. In this example, the Australian
parent company uses natives of India to manage operations at the Indian subsidiary. Natives of
Australia manage the home office.

2012, July: Indian Information Technology companies supported nearly 2.8 lakh jobs in America in
the year 2011 by way of foreign direct investment through acquisitions of IT companies. India
invested nearly $ 5 billion in foreign direct investment. Top Indian IT companies like TATA, HCL
technologies India's fourth largest software export, Infosys and Wipro stepped in United States to
set up their subsidiaries and recruited American nationals from colleges and experienced
professionals who had the local knowledge and domain expertise. local employees have the
requisite knowledge and understanding of culture, people and were in a particular region.

The polycentric staffing policy describes a multinational's approach of recruiting host country
nationals to manage subsidiaries in their own country. The polycentric policy approach to staffing
assigns home country workers to top positions in the central offices or headquarters, and overseas
local workers to other positions.

The MNC with this approach staff its foreign subsidiaries with HCNs and its home office with
PCNs.
MOTTO

When in Rome, do as the Romans do

Advantages:

1. Eliminates language barriers.

2. Avoids adjustment problems

3. No adaptation problems

4. It facilitates organizational learning on local markets.

5. Better opportunities for locals to improve their careers through promotion.

6. Gives continuity to the management of foreign subsidiaries, thus reduces turnover.

7. The employment of HCNs is generally less expensive.

8. It eliminate the high cost of relocating expatriate manager and families.

9. "No tension between the locals and the "watchdogs" sent from headquarters occurs"

10. Enhances the moral and career opportunities of local staff.

11. Supported by host country governments.

12. Offer a great degree of autonomy in decision making to subsidiary heads.

13. Better local knowledge

14. Reduce personal problems

15. Host country managers can protect a MNC from hostile treatment by host Government.

16. Here subsidiary is allowed some autonomy but financial controls are kept.

17. Top people are limited to subsidiary and not for corporate position.

Disadvantages:
1. Difficulty of achieving effective communication between HCN managers at subsidiary level
and PCN managers at corporate headquarters.

2. Limited career opportunities for HCN and PCN managers.

3. It could create knowledge and performance gaps between overseas managers and
managers in the home country.

4. The gap between HQ and subsidiaries increased which becomes difficult to be managed.

5. Difficulty of coordinating the activities between headquarters and subsidiaries because of a
lack of "boundary persons".

6. There is a problem concerning the career paths of HCN and PCN managers as both have
very limited opportunities to gain experience abroad outside of their own country (reduced
opportunities for personnel to widen their horizons and get an international view).

7. This lack of international experience is a liability in an increasingly competitive environment.

CULTURAL SHOCK
Culture shock is a phenomenon experienced by people who move across cultures. The new
environment requires many adjustments in a relatively short period of time, challenging people’s
frames of reference to such an extent that their sense of self, especially in terms of nationality,
comes into question. People, in effect, experience a shock reaction to new cultural experiences
that cause psychological disorientation because they misunderstand or do not recognize important
cues.

Culture shock is the feeling of disorientation, loneliness, insecurity or confusion that can occur
when someone leaves his or her home country to live in a new culture. Culture shock may come
with any of the following symptoms:

 Homesickness

 Loneliness

 Depression

 Need for more sleep than normal

 Withdrawal from social activities

 Compulsive eating or loss of appetite

 Stereotyping of and hostility towards host nationals

 Lack of energy

According to anthropologists the culture shock can appear in different ways. Some expatriates can
feel lost and develop feelings of deprivation or feelings of impotence due to not being able to cope
with the new environment. Culture shock is the first reaction of the adjustment process to a new
environment. The symptoms that an expatriate develops are anxiety, helplessness, irritability, and
a longing for a more predictable and gratifying environment. The culture shock constitutes a
mental health problem and sometimes expatriates break down in the process of the adjustment
and return at the parent country. Culture shock can create major problems to the international
assignment and the HR department to the parent-country should handle them at the pre-departure
phase, during the assignment and at the repatriation phase.
The concept of an adjustment cycle is helpful in demonstrating the typical phases that may be
encountered during the cultural adjustment.

Phase of Culture Shock based upon the U-Curve Model

The U-Curve is based on psychological reactions and is consisted of 4 stages.

Phase 1 Honeymoon Euphoria and Excitement Elation Cultural encounter

In the first stage, the expatriate may experience a range of positive and negative emotions. This
phase is called “honeymoon”.

Phase 2 Frustration Culture Shock Depression Crisis Hostility Disintegration

In the second stage the expatriates go through the ‘culture shock’. The expatriates are stressed
and feel homesickness in this stage and they cannot perform well in the working environment.

The second stage is crucial for the expatriate’s adjustment. The failure of the process and an early
recall is often happening in this stage. In this stage the Human Resource department should
support and help the expatriates to adjust to work environment.

Phase 3 Adjustment

Phase 4 Adaptation Adjustment Acculturation

In this two stages, the expatriate begins to recover and adjust to the new environment. However,
some expatriates do not experience this U-Curve or they do not go through of all the stages.

Coping with culture shock

There are a lot of things you can do to cope with culture shock:

 First and foremost, know that your reactions are normal and that you can talk about them
with other people.

 Stay in touch with your family and friends back home, but do not spend all your free time
sending emails to them or reading your local newspapers.

 Make friends with other people. Although it will be comforting to have some friends from
your home country, try to make friends with people from other countries as well. It will enrich
your expatriate experience.
 Get some physical exercise. For many people sports is a good way to stop worrying.

 Find shops and restaurants that sell food you are used to at home.

 Get out of the house and do something.

 You have the rare privilege of living in a foreign country and experiencing another culture - it
will certainly be a memorable and valuable time in your life.
REGIOCENTRIC APPROACH

Definition: The Regiocentric Approach is an international recruitment method wherein the
managers are selected from different countries lying within the geographic region of business.

 Refers to the functional rationalization on a more than one country basis.

 Regionally oriented approach where an MNC divide its operations into geographical regions
and transfer staff within those regions.

Company's international business is divided into international geographic regions. The
regiocentric approach uses managers from various countries within the geographic regions of
business. Although the managers operate relatively independently in the region, they are not
normally moved to the company headquarters.

The regiocentric approach is adaptable to the company and product strategies. When regional
expertise is needed, natives of the region are hired. If product knowledge is crucial, then
parent-country nationals, who have ready access to corporate sources of information, can be
brought in.

The regiocentric approach places managers from various countries within geographic regions
of a business. In this example, the U.S. parent company uses natives of the United States at
company headquarters. Natives of European countries are used to manage the Italian
subsidiary.
In other words, the managers are selected from within the region of the world that closely
resembles the host country.

Advantages of Regiocentric Approach

1. Culture fit, i.e. the managers from the same region as that of the host country may not
encounter any problem with respect to the culture and the language followed there

2. Allows interaction between executives transferred to regional HQs.

3. A step for MNC to move from purely poly or ethnocentric or geocentric approach.

4. Less cost is incurred in hiring the natives of the host country.

5. The managers work well in all the neighbouring countries within the geographic region of
the business.

6. The nationals of host country can better influence the decision of managers at headquarters
with respect to the entire region.

Disadvantages of Regiocentric Approach

1. The managers in different regions may not understand the viewpoint of the managers
employed at the headquarters.

2. Corporate headquarters may not employ enough managers with international experience.

3. It provides federalism at regional basis rather than country basis. This serves as a barrier in
taking a global stance.

4. Limits career progression opportunities to the regional level
5. There could be a communication barrier because of different languages.

6. The manager selected from a particular region may lack the international experience.

7. It may lead to the confusion between the regional objectives and the global objectives. The
regional managers may only focus on accomplishing the regional targets and may oversee
the impact on the firm as a whole.

The rationale behind the Regiocentric Approach is that the person belonging to the same region as
that of the host country is well versed in the language and the culture that prevails there and would
better understand the problems that arise in the market, as compared to the foreign counterparts.
ETHNOCENTRIC STAFFING

Expatriates are often believed to better represent the interests of the home office and ensure that
the foreign offices are aligned with home headquarters. In fact, many expatriates are selected from
the company's current employees and are simply transferred to a foreign subsidiary.

When a company follows the strategy of choosing only from the citizens of the parent country to
work in host nations, it is called an ethnocentric approach. Normally, higher-level foreign positions
are filled with expatriate employees from the parent country. The general rationale behind the
ethnocentric approach is that the staff from the parent country would represent the interests of the
headquarters effectively and link well with the parent country. The recruitment process in this
method involves four stages: self-selection, creating a candidate pool, technical skills assessment,
and making a mutual decision. Self-selection involves the decision by the employee about his
future course of action in the international arena. In the next stage, the employee database is
prepared according to the manpower requirement of the company for international operations.
Then the database is analysed for choosing the best and most suitable persons for global
assignments and this process is called technical skills assessment. Finally, the best candidate is
identified for foreign assignment and sent abroad with his consent.

The ethnocentric approach places natives of the home country of a business in key positions at
home and abroad. In this example, the U.S. parent company places natives from the United States
in key positions in both the United States and Mexico.

MOTTO

This works in my country, so it must work in all other countries.

REASONS:

 Lack of qualified HCNs particularly senior management talent.

 A desire to maintain good communication, coordination, tighter control and a unified
corporate culture linked with corporate HQ.

 A desire to transfer parent firm’s core competencies to a foreign subsidiary more
expeditiously.
ADVANTAGES:

 Organizational control and coordination is maintained and facilitated.

 Promising managers are given international experience.

 Assure that subsidiary will comply with company objectives.

 The alignment of interests and perspective of the home office with all foreign subsidiaries
abroad.

 Communication is also easier because there should be no language and cultural barriers.

 The company may also be able to transfer employees with a clear performance record that
will provide some level of predictability.

DISADVANTAGES:

 Limits the promotion opportunities of HCNs which may lead to reduced productivity and
increased turnover among that group.

 The adaptation of expatriate managers to new environment takes time during which these
expatriates make poor decisions.

 Income packages of expatriates are 4 times higher than locals.

 You can lose local perspective and insights that local employees can provide that may help
overcome unique hurdles in each foreign office.

 Hiring expatriates tends to be expensive compared to hiring locally.

 A high ratio of expatriates may create local resentment at foreign subsidiaries, which may
hurt morale.
FACTORS INFLUENCING EXPATRIATE PERFORMANCE

• Goals need to be carefully identified, depending on the following factors:

– Resources need to be provided for the individuals, teams

• Finance is fundamental to a lot of initiatives

• To make decisions at the unit level needs to be clearly identified

• The power of authority and control on local spending would need to be
ensured for smooth operational decisions.

– Participation of the individual/teams in goal setting

• The rationale for such involvement is the employee's acceptance and
commitment to the established goals

– There is also the need for prioritizing goals

• Performance of the non-expatriate is generally influenced by

– Job extrinsic factors (e.g. working conditions and company policy)

– Job intrinsic factors (e.g. challenging job, career prospects).

• An expatriate's performance depends on several other influencing factors

– The impact of job extrinsic and job intrinsic factors on performance cannot be
undermined.

• The performance of an expatriate depends on several variables

– Compensation Package

– Task

– Headquarters Support

– Host Environment
– Cultural Adjustment

• Compensation Package

– Perceived as a balancing factor for the 'emotional relocation” that the assignment
demands

– Pay, according to Herzberg's two-factor theory of motivation, is a hygiene factor

– Pay acts as remover of dissatisfaction as well as a booster for enhanced
performance

– Money continues to remain as one of the most significant motivators for expats.

• Task

– Nature of the job tends to influence performance.

– A tougher task tends to evoke better performance than a job which is relatively easy
to handle.

– How work is viewed by the expatriate also matters.

• Headquarters Support

– An assignee accepts

• Making extra money

• Improving his career prospects

• Loyalty to the organisation

• Commitment to make the Arm successful

• It is necessary that the home office extends support and offers moral courage, particularly in
times when the expatriate is passing through a culture shock.

• Host Environment

– Hostile host country environment, expatriates are under constant pressure and often
there is a threat to their life itself.

– The form of ownership of the subsidiary is important too.
• Cultural Adjustment

– Multicultural adjustability refers to being sensitive to the host culture

• Multicultural sensitivity

• Language ability

• Diplomacy

• Adaptability

• Positive attitude

• Emotional stability

• Maturity
APPROACHES TO INTERNATIONAL COMPENSATION

There are two main options in the area of international compensation – the Going Rate Approach
(also referred to as the Market Rate Approach) and the Balance Sheet Approach (sometimes
known as the Build-up Approach).

1. The Going Rate Approach

 With this approach, the base salary for international transfer is linked to the salary
structure in the host country. The multinational usually obtains information from local
compensation surveys and must decide whether local nationals (HCNs), expatriates
of the same nationality or expatriates of all nationalities will be the reference point in
terms of benchmarking.

 For example, a Japanese bank operating in New York would need to decide
whether its reference point would be local US salaries, other Japanese
competitors in New York or all foreign banks operating in New York.

 With the Going Rate Approach, if the location is in a low-pay county, the multinational
usually supplements base pay with additional benefits and payments.

2. The Balance Sheet Approach

 The basic objective is to ‘keep the expatriate whole’ (that is, maintaining relativity to
PCN colleagues and compensating for the costs of an international assignment)
through maintenance of home-country living standard plus a financial inducement to
make the package attractive.

 The approach links the base salary for PCNs and TCNs to the salary structure of the
relevant home country.

 For example, a US executive taking up an international position would have
his or her compensation package built upon the US base-salary level rather
than that applicable to the host country.

 The key assumption of this approach is that foreign assignees should not suffer a
material loss due to their transfer, and this is accomplished through the utilization of
what is generally referred to as the Balance-sheet Approach.
 There are four major categories of outlays incurred by expatriates that are
incorporated in the Balance Sheet Approach:

 Goods and services – home-country outlays for items such as food, personal
care, clothing, household furnishings, recreation, transportation, and medical
care.

 Housing – the major costs associated with housing in the host country.

 Income taxes – parent-country and host-country income taxes.

 Reserve – contributions to savings, payments for benefits, pension
contributions, investments, education expenses, social security taxes, etc.

 Where costs associated with the host-country assignment exceed equivalent costs in
the parent country, these costs are met by both the firm and the expatriate to ensure
that parent-country equivalent purchasing power is achieved.

 There are advantages and disadvantages of the Balance Sheet Approach

3. Taxation

 This aspect of international compensation is probably the one that causes the most
concern to HR practitioners and expatriates (both PCNs and TCNs), as taxation
generally evokes emotional responses. No one enjoys paying taxes, and this issue
can be very time consuming for both the firm and the expatriate.

 An assignment abroad can mean that a US expatriate is taxed both in the country of
assignment and in the USA. This dual tax cost, combined with all of the other
expatriate costs, makes some US multinationals think twice about making use of
expatriates.

 Multinationals generally select one of the following approaches to handling
international taxation:

 Tax equalization – firms withhold an amount equal to the home-country tax
obligation of the PCN, and pay all taxes in the host country.

 Tax protection – The employee pays up to the amount of taxes he or she
would pay on compensation in the home country. In such a situation, the
employee is entitled to any windfall received if total taxes are less in the
foreign country than in the home country.

 Tax equalization is by far the more common taxation policy used by multinationals.

 Thus, for a PCN, tax payments equal to the liability of a home-country
taxpayer with the same income and family status are imposed on the
employee’s salary and bonus. Any additional premiums or allowances are
typically paid by the firm, tax-free to the employee.

 As multinationals operate in more and more countries, they are subject to widely
discrepant income tax rates. It is also important to note that just focusing on income
tax can be misleading, as the shares of both personal and corporate taxes are rising
in the OECD countries.

 For example, if we look at total tax revenues as a percentage of GDP, the ‘top
five’ highest taxation countries are Sweden, Denmark, Finland, France and
Belgium. The United States is 25th with the other large advanced economies
towards the bottom of the list (Japan, 26th; Britain, 16th; and Germany, 12th).

 Many multinationals have responded to this complexity and diversity across countries
by retaining the services of international accounting firms to provide advice and
prepare host-country and home-country tax returns for their expatriates.

 Increasingly, firms are also outsourcing the provisions of further aspects of the total
expatriate compensation packages including a variety of destination services in lieu
of providing payment in a package.
 When multinationals plan compensation packages, they need to consider the extent
to which specific practices can be modified in each country to provide the most tax-
effective, appropriate rewards for PCNs, HCNs and TCNs within the framework of
the overall compensation policy of the firm.

 The difficulties in international compensation ‘are not compensation so much as
benefits’.

 Pension plans are very difficult to compare or equalize across nations, as
cultural practices vary endlessly.

 Transportability of pension plans, medical coverage and social security
benefits are very difficult to normalize.

 Therefore, companies need to address many issues when considering benefits,
including:

 Whether or not to maintain expatriates in home-country programs, particularly
if the company does not receive a tax deduction for it.

 Whether companies have the option of enrolling expatriates in host-country
benefit programs and/or making up any difference in coverage.

 Whether host-country legislation regarding termination affects benefit
entitlement.

 Whether expatriates should receive home-country or host-country social
security benefits.

 Whether benefits should be maintained on a home-country or host-country
basis, who is responsible for the cost, whether other benefits should be used
to offset any shortfall in coverage and whether home-country benefit programs
should be exported to local nationals in foreign countries.

 Differences in national sovereignty are also at work in the area of mandated public
and private pension schemes, what many nations refer to as ‘social security’
programs.

 For many international firms, expatriate assignments are likely to increase in
distance, number and duration over an employee’s career, and more and more firms
may create cadres of permanent international assignees – called ‘global’ by some
firms.

 The inherent complexity and dynamism of culturally embedded and politically volatile
national tax and pension processes promise to tax the resources, time and attention
of international human resource managers for the foreseeable future.

 Seamless networks of global firms, their specialist consultants and local and regional
public and private interest are a goal, not yet a reality.

4. International living costs data

 Obtaining up-to-date information on international living costs is a constant issue for
multinationals.

 The level of local knowledge required in many areas of international HRM requires
specialist advice.

 Many multinationals retain the services of consulting firms that may offer a broad
range of services or provide highly specialized services relevant to HRM in a
multinational context.

 With regard to international living costs, a number of consulting firms offer regular
surveys calculating a cost-of-living index that can be updated in terms of currency
exchange rates.

 A recent survey of living costs in selected cities ranked the 10 most expensive
cities as Tokyo, Moscow, Osaka, Hong Kong, Beijing, Geneva, London, Seoul,
Zurich and New York. The first US city in the index was New York, ranked as
the 10th most expensive city.

 The least expensive city was Asuncion (Paraguay).

 Multinationals using the Balance Sheet Approach must constantly update
compensation packages with new data on living costs, which is an on-going
administrative requirement.
 Multinationals must also be able to respond to unexpected events such as the
currency and stock market crash that suddenly unfolded in a number of Asian
countries in late 1997.

 Some countries such as Indonesia faced a devaluation of their currency (the
Ruphiah) by over 50 per cent against the US dollar in a matter of weeks.

 This action had a dramatic impact on prices and the cost of living.

 It is also possible to take a wider view and focus on business costs rather than living
costs for expatriates, because the multinational firm is interested in the overall cost of
doing business in a particular country as well as the more micro issue of expatriate
living costs.

 The Economist Intelligence Unit calculates such indices, which measure the
relative costs of doing business in different economies by compiling statistics
relating to wages, costs for expatriate staff, air travel and subsistence,
corporation taxes, perceived corruption levels, office and industrial rents and
road transport.

 Generally the developed countries tend to rank as more expensive than
developing countries because their wage costs are higher.
DIFFERENTIATING BETWEEN PCNS AND TCNS

 One of the outcomes of the Balance Sheet Approach is to produce differentiation
between expatriate employees of different nationalities because of the use of
nationality to determine the relevant home-country base salary.

 This is a differentiation between PCNs and TCNs.

 Many TCNs have a great deal of international experience because they often
move from country to country in the employ of one multinational (or several)
headquartered in a country other than their own (for example, an Indian
banker may work in the Singapore branch of a US bank).

 As Reynolds has observed, there is no doubt that paying TCNs according to their
home-country base salary can be less expensive than paying all expatriates on a
PCN scale (particularly if the multinational is headquartered in a country such as the
USA or Germany, which have both high managerial salaries and a strong currency),
but justifying these differences can be very difficult.

 Nonetheless, it is common practice for multinationals to use a home-country Balance
Sheet Approach for TCNs.

 The reduction in expenses outweighs the difficulty of justifying any pay differentials.
However, as firms expand internationally, it is likely that TCN employees will become
more valuable and firms may need to rethink their approach to compensating TCNs.

 Starting point, multinational firms need to match their compensation policies with
their staffing policies and general HR philosophy.

 If, for example, a firm has an ethnocentric staffing policy, its compensation
policy should be one of keeping the expatriate whole (that is, maintaining
relativity to PCN colleagues plus compensating for the costs of international
service).

 If, however, the staffing policy follows a geocentric approach (that is, staffing a
position with the ‘best person,’ regardless of nationality), there may be no
clear ‘home’ for the TCN, and the firm will need to consider establishing a
system of international base pay for key managers paid in a major reserve
currency such as the US dollar or the Euro.

 This system allows firms to deal with considerable variations in base salaries
for managers.