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T
he rise of foreign direct investment emerging markets still rose in 2008 and 2009
(FDI) by multinational corporations (Sauvant et al., 2011).
(MNCs) over the past three decades In most cases, FDI by an MNC leads to
has been astounding. Since 1980 the creation of a set of subsidiaries, defined
1985, FDI flows have grown by a as value-adding entities in host countries
factor of 40, to surpass US $2.1 trillion in (Birkinshaw & Hood, 1998, p. 774). In theory,
2007 (Sauvant, Maschek, & McAllister, 2011). subsidiaries can provide MNCs with several
Even the recent global financial crisis has not competitive advantages, such as economies
stopped this trend. While FDI flows to of scale and economies of scope (Hansen
Correspondence to: Julie A. Cogin, School of Management, Australian School of Business (incorporating the
AGSM), University of New South Wales, Sydney NSW 2052, Australia, Phone: +61-2-9385-9719,
Fax: +61 2 9662-8531, E-mail: julie.cogin@unsw.edu.au, julie.cogin@agsm.edu.au.
Human Resource Management, SeptemberOctober 2014, Vol. 53, No. 5. Pp. 701721
2014 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI:10.1002/hrm.21602
702 HUMAN RESOURCE MANAGEMENT, SEPTEMBEROCTOBER 2014
& Nohria, 2004). Subsidiaries may also pro- examines the question of how subsidiary
vide MNCs with a portfolio of options for leaders decisions to adopt standardized or
hedging risks and improving performance by customized HRM practices influence subsid-
providing a means to shift activities across iary performance. There is growing agreement
national borders in response to changes in among scholars and practitioners that HRM
local demand, competitors actions, foreign practices play an important role in shaping
exchange rates, and other environmental how effectively firms utilize the human and
contingencies (Reuer & Leiblein, 2000). One social capital embedded within their employ-
of the ways MNCs attempt to realize these ees (Barney, 1991; Coff, 1997; Collins & Clark,
potential benefits is to engage in cross-unit 2003; Nahapiet & Ghoshal, 1998; Wright,
transfer and implementation of standard Dunford, & Snell, 2001). Thus, while there
business practices across their subsidiar- are several factors that impact subsidiary
ies (Kostova, 1999). The implementation of outcomes (e.g., subsidiary type [Birkinshaw
common business practices across an MNC & Morrison, 1995], industry [Bartlett &
can create a cohesive worldwide presence and Ghoshal, 1998], and products produced
support clients with global opera- and markets served [Wilkinson, Gamble,
tions (Prahalad & Doz, 1987) and Humphrey, Morris, & Anthony, 2001]), a key
Despite the potential enhance synergy and efficiency, proposition of our article is that subsidiary
importance of while also potentially bringing leaders decisions to implement standard-
firm-specific knowledge to a for- ized or customized HRM practices influence
standardized eign market that can be a source the knowledge, skill, and behaviors of their
of competitive advantage (Bartlett workforces, which in turn impacts subsid-
business practices & Ghoshal, 1987). iaries operational and financial outcomes.
Despite the potential impor- However, to date, there is limited research
within MNCs,
tance of standardized business examining this issue. Schuler, Budhwar, and
there is substantial practices within MNCs, evidence Florkowski (2002) suggest that international
exists that standardization may HRM research has traditionally overlooked
evidence that not always generate performance the need to link the implementation of dif-
benefits for subsidiaries. There are ferent HRM practices with behavioral and
standardization may
a profusion of examples where financial outcomes. In a review of the litera-
not always generate MNC subsidiaries underperform or ture, Rosenzweig (2006, p. 46) states that if
fail to generate a profit. Starbucks a link to performance can be established then
performance struggles in Australia, Wal-Mart the value of the standardizationlocalization
and Carrefours difficulties in South framework would get a new breath of life. As
benefits for
Korea, and Googles challenges in such, there are several unanswered questions
subsidiaries. China provide high-profile exam- about the benefits subsidiaries may or may
ples of how businesses can battle not receive should they pursue standardized
to implement highly developed or customized HRM practices. Thus, there is
standardized practices in foreign locations. a need for empirical research that provides
As such, an evolving body of research has evidence-based recommendations on how
examined the factors that influence subsid- to manage the HRM function and the con-
iary leaders decisions to implement MNC ditions that lead to superior performance in
practices and the performance implications of subsidiaries of MNCs.
these decisions (e.g., Birkinshaw & Morrison, We theorize that the performance benefits
1995; Cantwell & Mudambi, 2005; Frost, associated with implementing customized or
Birkinshaw, & Ensign, 2002; Kostova, 1999; standardized HRM practices are contingent
Rugman & Verbeke, 2001). upon the attributes of subsidiaries external
The goal of this article is to build upon environment. This logic builds upon prior
prior research by focusing on human resource research that notes that MNC subsidiaries are
management (HRM) decisions made by sub- embedded within institutional and social con-
sidiary leaders. In particular, our investigation texts that may impact the value subsidiaries
derive from the knowledge embedded within between the customization of HRM practices
an MNCs standardized practices (Kostova, and subsidiary performance.
1999). Subsidiaries often face different insti- The source of standardized HRM prac-
tutional environments, which can create a tices can come from a variety of directions
tension between being locally sensitive and within MNCs, including transfers from the
globally integrated (Birkinshaw & Morrison, parent company to foreign subsidiaries or
1995). As a result, leaders of subsidiaries may from subsidiaries to the rest of
or may not decide to implement particular the organization. However, the
practices or they might customize the imple- underlying focus of this article is We contend that
mentation, tailoring certain aspects of prac- not the source of the standard-
environmental
tices to their setting while ignoring the rest ized HRM practices but the extent
(Kostova, 1999). to which subsidiaries custom- uncertainty as
In particular, we theorize that the level of ize their HRM practices relative
environmental uncertainty within a subsid- to the standardized practices in experienced at the
iarys external environment can increase the the MNC. As such, we examined
importance of customizing HRM practices to how the extent to which a subsid- subsidiary level of
maximize performance. We define environ- iary adopts a system of standard- analysis (regardless
mental uncertainty as the extent to which ized HRM practices (recruitment/
managers cannot predict the future com- selection, training, performance of source) may
petitive situation, its possible effects, and/or appraisal, and remuneration) as
the consequences of their firms behaviors suggested by the MNC corporate increase or
(Milliken, 1987). We contend that environ- headquarters versus customized
decrease the value
mental uncertainty can stem from multiple HRM practices developed by a
sources. Uncertainty can emerge from coun- subsidiarys local management of the knowledge
try variance in economic conditions. For influences subsidiary financial
example, subsidiaries spread out across devel- and nonfinancial performance embedded within
oped, developing, and emerging economies and how this relationship is mod-
MNCs standardized
are likely to face different institutional con- erated by the subsidiarys external
texts that place different pressures on subsid- environment (e.g., perceived envi- practices, in turn
iaries. However, we also contend that focusing ronmental uncertainty).
solely on country classifications fails to con- The level of analysis for this moderating the
sider the substantial level of environmental study is that of the subsidiary. We
link between the
variance that can exist across different indus- tested our predications by exam-
tries within one country. It is common for ining HRM practices in subsid- customization of
multibusiness MNCs to have multiple subsid- iaries of a large European MNC
iaries within the same country that compete with business units operating in HRM practices
in different industries (Birkinshaw & Hood, 27 countries across four different
1998), each of which may face different envi- industries. All of the subsidiaries and subsidiary
ronmental challenges. For example, the chal- in our sample had responsibility performance.
lenges faced by manufacturing subsidiaries in for both costs and revenues and
India from technological advancements are had a profit-creating mandate. As
very different from the major challenge of such, the subsidiaries in our sample are best
equipping firms with trained people who can categorized as being profit centers (Gitman &
cross-sell services and attract new business Zutter, 2012).
experienced by Indian professional services This study promises to extend HRM
firms. Thus, we contend that environmental research by providing new evidence on
uncertainty as experienced at the subsidiary how HRM decisions influence performance
level of analysis (regardless of source) may in an MNC setting. The preponderance of
increase or decrease the value of the knowl- prior international human resource manage-
edge embedded within MNCs standard- ment (IHRM) research has largely examined
ized practices, in turn moderating the link US MNCs or US affiliates of foreign-based
MNCs (Bjorkman, Fey, & Park, 2007; Ferner a long line of inquiry extending the work of
et al., 2004; Fey, Morgulis-Yakushev, Park, Lawrence and Lorsch (1969) to the consider-
& Bjorkman, 2009; Gunnigle, Murphy, ation of standardization versus customization
Cleveland, Heraty, & Morley, 2002; Rosenzweig of management practices within MNCs.
& Nohria, 1994). In addition, a limitation of Building upon extant research, we theo-
prior IHRM research that has examined the rize that external environment attributes may
HRM-performance link in MNCs is the use of impinge upon an MNCs management of its
subjective measurements of firm performance human resources and its efforts to be locally
obtained from company employees (e.g., Fey responsive and adaptable while remaining
et al., 2009). Our empirical setting provides globally coordinated and governed. Drawing
important insights into the generalizability upon institutional theory, we predict that
of the standardization-customization HRM there is likely to be variance in the social
framework to non-US settings. Furthermore, context of an MNCs subsidiaries (Scott,
our sample allows us to use uniform mea- 1995). This variance can stem from various
sures of objective subsidiary financial perfor- sources, including such things as the regula-
mance, in addition to capturing nonfinancial tory environment (e.g., laws and rules), cog-
measures of customer satisfaction nitive schemes of relevant stakeholder groups
from actual customers. This is (e.g., organizational categorizations), and/
The results of consistent with key performance or normative beliefs (e.g., norms of appro-
measures adopted in a balanced priate competition) (Kostova, 1999). Thus,
this study provide
scorecard approach (Kaplan & given variance in the social contexts across
important empirical Norton, 2001). Thus, the results MNC subsidiaries, there is the possibility that
of this study provide important an MNCs standardized HRM practices may
insights for empirical insights for practitio- be more or less relevant for a particular sub-
ners into how HRM can be best sidiarys institutional environment. This, in
practitioners into configured to drive multiple per- turn, may affect the ultimate benefit of imple-
how HRM can be formance outcomes. menting standardized HRM practices across
the MNC (Datta, Guthrie, & Wright, 2005).
best configured Thus, to better understand the relation-
Theory and Hypotheses
ship between implementing standardized
to drive multiple Lawrence and Lorsch (1969) out- versus customized HRM practices and subsid-
lined a fundamental management iary performance, it is important to consider
performance
challenge of achieving internal how relevant characteristics of a subsidiarys
outcomes. differentiation in response to envi- environment may enhance or constrain the
ronmental complexity and insta- value generated by the subsidiarys HRM strat-
bility while at the same time egy. One environmental characteristic that
developing adequate integration mechanisms may be particularly relevant in understand-
to coordinate firm activities. For example, in ing the relationship between HRM practices
their study, Lawrence and Lorsch showed that and performance is the level of environmen-
an organizations market and technological tal uncertainty encountered by a subsidiary.
environments have a major impact on organi- The predictability of the environment within
zation design. Consequently, they argued that which a firm competes (Dess & Beard, 1984)
an organizations internal structural arrange- may be an important factor for understand-
ment is contingent upon the demands of the ing the relationship between customization
external environment. Implicit in this formu- (versus standardization) of HRM practices
lation is a contingency perspective that holds and firm performance because the level of
that the best way to organize and manage uncertainty can influence the importance of
people depends on the situation (Donaldson, top managers discretion in shaping organiza-
2001). Lawrence and Lorschs (1969) frame- tional performance (K. G. Smith et al., 1994).
work did not explicitly discuss MNCs; how- Just as Lawrence and Lorsch (1969) argue
ever, Doz, Bartlett, and Prahalad (1981) began that organizational structure is contingent on
industrial setting, we speculate that perfor- This reduction in cost can enhance subsidiary
mance of a subsidiary is contingent on envi- profitability.
ronmental uncertainty at the subsidiary level. Conversely, when uncertainty is high,
Environmental uncertainty at the subsidiary leaders must vigilantly scan the environ-
level can simultaneously stem from attributes ment for information, effectively synthe-
in countries institutional and political envi- size the information gathered, and quickly
ronments and/or from industry attributes use this information to make strategic deci-
within a particular country (Furman, 2000; sions about firm operations before the envi-
McGahan & Porter, 1997; Rivkin, 1997). As ronment changes again (Eisenhardt, 1999;
such, different subsidiaries may face similar Rindova & Kotha, 2001). In terms of hiring,
levels of environmental uncertainty; how- high environmental uncertainty may mean
ever, this uncertainty may or may not stem sourcing new pools of talent or altering
from different factors. Regardless of source, employee selection criteria from a standard
underestimating uncertainty can lead to approach. These types of adapta-
strategies that neither defend against the tions may provide access to new
threats nor take advantage of the opportu- capabilities and enhance the Subsidiary leaders
nities that higher levels of uncertainty may operational effectiveness of a sub-
within MNCs are
provide. Therefore, the efficacy of the people sidiary; thus, improving its finan-
management strategy adopted by a subsidiary cial performance. Theoretically, in likely to have a
depends on the level of uncertainty in the order to perform these tasks suc-
subsidiarys relevant surroundings. cessfully, leaders must customize much greater
Subsequently, we theorize that in envi- HRM practices of their subsidiary
understanding of
ronments with low uncertainty, leaders are to best address environmental
able to manage by relying on established changes. Subsidiary leaders within the local external
routines. Standard operating procedures can MNCs are likely to have a much
create habitualized actions and routines that greater understanding of the local factors impacting
can be a central ingredient for creating reli- external factors impacting their
their operations
ability across an organization (Scott, 1995). operations than individuals in
Thus, standardization of HRM practices has a corporate function. Therefore, than individuals in a
the potential benefit of reducing subsidiar- when subsidiary leaders utilize
ies costs by streamlining development time these insights to customize HRM corporate function.
(Hout, Porter, & Rudden, 1985). Thus, in situa- practices in high-uncertainty
tions of low environmental uncertainty, a key environments, this should gener-
role for subsidiary leaders is that of executing ate superior financial performance compared
standardized organizational systems (Aldrich, to the implementation of standardized HRM
1979). For example, McDonalds, which is practices. Based on this logic, we predict:
regarded as part of the stable food chain
industry with lower levels of environmental Hypothesis 1: The relationship between custom-
uncertainty (Henderson, Miller, & Hambrick, ized HRM practices and subsidiary nancial per-
2006), has reduced duplication costs of host formance is positively moderated by the level of
countries designing and implementing staff uncertainty in a subsidiarys environment, such
training programs by successfully diffusing a that the higher the uncertainty in a subsidiarys
global training strategy across all operations environment, the greater the positive impact of cus-
(Royle & Towers, 2003). The McDonalds case tomized HRM practices on nancial performance.
highlights the efficiency gains subsidiaries
can derive from using standardized practices. Several scholars have reported that the
Further, an MNC could elect to use a largely implementation of a customer or market ori-
standardized performance management sys- entation strategy is in part shaped by firms
tem across all of its business units, reducing HRM practices (Jackson, Schuler, & Rivero,
time and costs of each subsidiary developing 1989). For example, in a study of call centers
its own performance management system. in the United States, Batt (2000) found that
implementation of HRM practices should of customer satisfaction and that this relation-
vary according to the characteristics of the ship will be strongest in environments with
customer. In addition, Peccei and Rosenthal high (compared to low) uncertainty, which are
(2001) found an association between HRM likely to place more importance on responsive-
practices (e.g., performance appraisal and ness and adaptation to customer preferences.
rewards systems) and positive customer-ori-
ented behaviors. The authors assert that HRM Hypothesis 2: The relationship between custom-
can cultivate prosocial employee behaviors ized HRM practices and subsidiary customer sat-
toward customers. For example, customer- isfaction is positively moderated by the level of
centered behaviors can be inculcated and uncertainty in a subsidiarys environment, such
reinforced through incentives that the higher the uncertainty in a subsidiarys
related to customer satisfaction environment, the greater the positive impact of cus-
We theorize and retention as well as training tomized HRM practices on customer satisfaction.
that by virtue of that gives employees the skills
and enthusiasm they need to keep Methodology
their geographic doing the right things for the cus-
Characteristics of the Subject Firm
tomer and the firm.
proximity and The marketing literature con- Becker and Gerhart (1996) suggest that com-
firms that customer preferences, parisons across different firms with diverse
narrower cognitive
language diversity, and differences measures of performance produce question-
foci, subsidiary in consumers lifestyles act as able results. They note that a benefit of sin-
major obstacles to implementing gle-firm studies is they provide the best means
managers, a universal advertising/marketing of identifying the mechanisms by which
strategy (Kanso & Kitchen, 2004). HRM creates value. Specifically, single-firm
compared to leaders
Furthermore, in highly uncertain studies allow HRM to be empirically linked
in MNC corporate environments, customer prefer- not only with standardized financial mea-
ences are much more likely to sures such as profit, but also with other mean-
headquarters, will change (Sanzo & Vzquez, 2011). ingful nonfinancial measures of firm
For example, an increase in the performance such as customer satisfaction
have greater access
economic uncertainty of an envi- (Becker & Gerhart, 1996).
to information about ronment significantly impacts The research setting for this study is a large
consumer preferences in the form European MNC with established operations in
changes in their of higher levels of online buying 27 countries. The MNC has well-established
and a move from being brand- divisions operating in relatively mature mar-
customers needs oriented to price-focused (Rust kets. The firm has four diverse divisions plus
and preferences. & Lemon, 2001). We argue that a shared services unit. Division 1 is a manu-
HRM practices cannot be stan- facturing business with a large market share
dardized to deliver superior cus- following a history of monopolistic condi-
tomer outcomes when customers needs and tions. It offers a limited range of products and
values are difficult to predict during periods of has a strong focus on efficiency and process
high uncertainty. We theorize that by virtue improvement to produce profit. Division 2 is
of their geographic proximity and narrower a service-based business. Division 3 is a prod-
cognitive foci, subsidiary managers, compared uct-based business that has a heavy empha-
to leaders in MNC corporate headquarters, sis on new product and service development.
will have greater access to information about Division 4 is a consulting business that con-
changes in their customers needs and prefer- centrates on product offerings and expand-
ences. Therefore, we predict that the extent ing market opportunities to retain customers,
to which they use this knowledge to imple- resulting in a high level of innovation and a
ment customized versus standardized HRM broad market and product line.
practices (assuming they motivate customer- The level of analysis for this study is
centric behaviors) will generate higher levels that of the subsidiary. In considering the
most appropriate measure of subsidiary per- under standardized global employment con-
formance, we evaluated the strategic role ditions (e.g., worldwide talent management
assigned to each subsidiary and the level strategy, succession plans, and remuneration
of responsibility given to its management structures). Second, there are some manda-
(Gitman & Zutter, 2012; M. Smith, 2002). tory, global people management practices in
For example, if the role assigned to a particu- subsidiaries for the local workforce related to
lar subsidiary only requires it to produce as pension, safety training, induction, and social-
much as possible at a specified level of qual- ization programs. However, it was revealed
ity with a fixed amount of resources, then that subsidiary leaders had high levels of dis-
it would be treated as a cost center and the cretion and autonomy in the management
main focus is cost control (Gitman & Zutter, of local workforces, which we empirically
2012). If subsidiary managers are expected to verified by this studys survey results (reported
determine product prices, market the prod- later). This research focuses only on the man-
ucts, and achieve sales growth, then their agement of the local workforce in subsidiaries,
responsibilities are greater. In this case, the not senior subsidiary executives.
subsidiary has responsibility for both costs
and revenues, and as such should be evalu-
Data Collection
ated as a profit center (Gitman & Zutter,
2012). If, in addition to managing costs and Taylor, Beechler, and Napier (1996) empha-
revenues, the subsidiary manager were also size that top management are instrumental in
given the responsibility for making invest- realizing the value derived from HRM in
ment decisions, then such a subsidiary would MNCs. Given that the level of analyses in this
be treated as an investment center (Gitman study is the subsidiary, we targeted each sub-
& Zutter, 2012). All of the subsidiaries in the sidiarys general manager and deputy general
subject firm have a profit-creating mandate. managers to participate in the study. The gen-
Furthermore, drawing on Birkinshaw and eral managers are the most senior leaders of
Morrisons (1995) typology of MNC subsid- each subsidiary and report directly to MNC
iaries, the subsidiaries within each division corporate headquarters. These senior leaders
could be best described as local implement- are responsible for multiple or single sites in
ers with limited geographic scope, operat- their subsidiary. For example, in Germany,
ing out of a single country (Birkinshaw & one subsidiary had more than ten offices;
Morrison, 1995, p. 733). None of the sub- conversely, an Egyptian subsidiary had only
sidiaries had a world mandate with world- one office. We obtained survey responses
wide or regional responsibilities (Birkinshaw from the general manager in every subsidiary
& Morrison, 1995, p. 733) or could be clas- across each of the 27 countries in which the
sified as centres of excellence (Ambos & MNC had operations. Surveys were com-
Reitsperger, 2004). pleted by respondents while they attended a
One of the authors worked with the MNC company-sponsored leadership program in
in a consulting role for several years before April 2009.
the study and through in-depth conversa- A total of 289 surveys were distributed,
tions with senior business leaders identified and 213 useable responses were returned, giv-
several relevant characteristics of the firm ing a response rate of 73.7 percent. Sixteen
and their people management strategy. First, responses were received from general manag-
the MNC had low levels of interfirm trade, ers in the shared services unit, which is part of
making it a suitable case for analyzing and the companys corporate headquarters. These
comparing financial performance across sub- 16 responses were discarded because the
sidiaries. Second, the MNC made clear distinc- shared services unit does not register finan-
tions between the management of expatriate cial performance data comparable to those of
executives versus the management of the the other four divisions, nor do they collect
local workforce. Subsidiary leaders (the major- satisfaction ratings from external customers.
ity of which are expatriates) are employed Table I details the manager sampling frame.
Across the various countries, there were for environmental uncertainty, all at or above
several cases where multiple distinct subsid- the conventionally acceptable value of .70. We
iaries in different business divisions operated also calculated the intraclass correlation coeffi-
within a single country. Thus, the final sample cients ICC(1) and ICC(2) (Bryk & Raudenbush,
represented 92 subsidiaries from 27 countries 1992). ICC(1) values were .39 for custom-
across the four business divisions. We were ized HRM and .21 for environmental uncer-
able to obtain multiple responses from several tainty. ICC(2) values were .57 for customized
large subsidiaries that sent a general manager HRM and .34 for environmental uncertainty.
and deputy general managers to the leadership Overall, based on these indices we concluded
program. In those cases where we received that aggregation was justified.
multiple responses from managers in the same
subsidiary, we averaged their responses to cre- Measures
ate a subsidiary score. Given that the extent
Firm Financial Performance
of customized HRM and environmental uncer-
tainty were measured at the individual level, We considered several issues in developing
within-group agreement is important for indi- measures of subsidiary performance. All of
cating consensus and justifying the aggrega- the subsidiaries in the sample had a profit-
tion of these responses to be representative creating mandate, and consequently, finan-
scores for a subsidiary (D. Chan, 1998). The cial performance was regarded as an
average rwg index (James, Demaree, & Wolf, appropriate measure of performance. Thus,
1984) was .98 for customized HRM and .99 we used subsidiary net profit margin
distribution of the variable. We were unable to examines commercial uncertainly on six sub-
obtain net profit margin data for one subsid- scales: government and policies, economy,
iary; thus, for the net profit margin analyses, resources and services, products, market and
the sample size was 91 subsidiaries. demand, and competition and technology.
The group chief operating officer also Millers instrument has been well validated
provided data on annual customer satisfac- (see R. Y. K. Chan, 2005; Werner, Brouthers, &
tion ratings of each subsidiary for the finan- Brouthers, 1996). Participants were asked to
cial year-ends of 2009 and 2010. We used the indicate the degree of predictability in the
average customer satisfaction score for 2009 external environment of various attributes
and 2010 as the dependent variable. As with using a seven-point scale where 1 = highly
net profit, a two-year average was used to predictable and 7 = highly unpredictable. In
reduce the likelihood that our results were order to ease the interpretations of the results,
overly impacted by any short-term fluctua- we reverse-coded the scale so that higher
tions in the firms outcomes. All customers scores indicated greater levels of environmen-
were external to the organization. tal uncertainty and lower scores indicated
lower uncertainty. The Cronbachs alpha for
Customized HRM this measure was .96. The use of perceptual
rather than objective measures of the envi-
Customization of HRM practices was mea-
ronmental uncertainty was considered justi-
sured using a ten-item scale adapted from
fied, as Pfeffer and Salancik (1978) point out
Hannon, Huang, and Jaw (1995) and Kim and
that it is only what executives perceive that
Gray (2005). Following Kim and Grays (2005)
informs their decision making. Previous stud-
approach, the following four areas were inves-
ies have also suggested that perceptual data
tigated: recruitment/selection, training, per-
are more relevant to the measure of the oper-
formance appraisal, and remuneration. These
ating environment than archival data (Boyd,
four areas have been identified as relevant
Dess, & Rasheed, 1993).
dimensions to the strategic needs of MNCs
(Dowling & Schuler, 1990). As per Hannon
etal. (1995), participants were asked to indi- Control Variables
cate the extent to which HRM practices were
In order to rule out alternative explanations
customized to the needs of their subsidiary
for our predictions, seven control variables
using a seven-point Likert scale where 1 =
were included in the analyses. First, we wished
your existing HRM practices have no similar-
to rule out the possibility of reverse causality
ity to parent-company HRM practices and 7 =
or the potential that financially high-per-
there is a significant level of similarity of your
forming subsidiaries have more autonomy to
existing HRM practices to parent-company
customize HRM practices, so we controlled
HRM practices. The scale ascertains the extent
for the effects of average 20072008 net profit
to which leaders of subsidiaries implement
margin when predicting average 20092010
parent HRM practices or the extent they might
subsidiary net profit margin.
customize a practice, tailoring certain aspects
As described earlier, even though the
of practices to their context. In order to ease
primary goal of each division is to generate
the interpretations of the results, we reverse-
profit, each of the four divisions of the MNC
coded the scale so that higher scores indicated
competes in very different industrial markets
greater customization and lower scores indi-
and has different product offerings. Bartlett
cated greater standardization. The Cronbachs
and Ghoshal (1989) suggest that the pressures
alpha for this measure was .98. The Appendix
faced by diversified corporations with multi-
displays the items used.
ple business divisions vary according to the
industries they operate in. Further, Khanna
Environmental Uncertainty
and Rivkin (2001) found that industry effects
Perceived environmental uncertainty was are an important variable in predicting the
measured using Millers (1993) scale, which performance of a company in emerging
markets. Such pressures may not only con- as the capacity of the environment to per-
strain the types of HRM practices subsidiaries mit organizational growth (Aldrich, 1979).
within each division may use, but also impact We included two measures of environmen-
the effectiveness of certain HRM strategies. tal munificence: the 20092010 average
Thus, we controlled for business division by profit of the geographic region (in millions)
including three division dummy variables and the 20092010 average gross domestic
where Division 1 was the comparison group. product per capita of a subsidiarys country.
The extent to which a subsidiarys work- The company, which divided its global busi-
force is unionized may also constrain both the ness operations into five geographic regions,
level of flexibility managers have to customize provided us with the overall profit for each
HRM practices and the viability of a particular region. Gross domestic product per capita was
HRM strategy. Some studies even suggest that obtained in international dollars from the
unionization is associated with poorer finan- World Economic Outlook (WEO) database.
cial performance (Laroche & Wechtler, 2011).
Thus, we controlled for subsidiary unioniza- Results
tion in our analyses. Unionization was mea-
sured by asking participants a question on the Table II contains the descriptive statistics and
level of unionization in their subsidiary, where correlations between the measured variables.
1 = 020 percent membership, 2 = 2140 per- As recommended by Aiken and West (1991),
cent membership, 3 = 4160 percent member- we used multiple regression analysis to exam-
ship, 4 = 6180 percent membership, and 5 = ine the effects predicted in the hypotheses.
81100 percent membership. We used mean-centered variables for the
Subsidiary size has been found to be corre- main and interactive terms in the regression
lated with increased resources and autonomy, analysis. Separate regression analyses were
with increasing size requiring greater coordi- conducted for subsidiary net profit margin
nation complexity, a need for more effective and customer satisfaction. The control vari-
managerial experience and expertise, and ables were entered into the regression in
growing interdependence between the subsid- Model 1, followed by the main effects of cus-
iary and the rest of the corporation (Johnston tomized HRM practices in Model 2, followed
& Menguc, 2007). Given the potential impact by the main effects of the moderator variable
of size, we controlled for this variable by mea- and the two-way interaction term in Model 3.
suring the number of full-time employees in The results of the regression analyses for sub-
each subsidiary in 2010 (Grinyer & Yasai- sidiary net profit margin are shown in Table
Ardekani, 1980, 1981; Johnston & Menguc, III and the results for customer satisfaction
2007). A natural log transformation was are provided in Table IV.
applied in order to address skewness in the Hypothesis 1 predicted that perceived
distribution of the variable. environmental uncertainty would moderate
Given that respondents were the most the relationship between customization of
senior managers of each business unit, we subsidiary HRM practices and net profit mar-
controlled for the effects of managerial experi- gin. As shown in step 3 of Table III and consis-
ence, as we viewed this as a gauge of business- tent with our predictions, the customization
unit expertise, which in turn could influence of subsidiary HRM practices perceived envi-
subsidiary performance. The effects of mana- ronmental uncertainty interaction term had
gerial experience were controlled by collecting a significant positive relationship with sub-
data on years of experience in respondents sidiary net profit margin ( = .22, p < .05).
current roles, where 1 = 02 years experience, Hypothesis 2 predicted that perceived envi-
2 = 35 years experience, 3 = 610 years expe- ronmental uncertainty would moderate the
rience, and 4 = 11 years or more experience. relationship between customization of sub-
Finally, the performance of a subsidiary sidiary HRM practices and customer satisfac-
might also be influenced by the munifi- tion. As shown in Model 3 of Table IV, the
cence of its external environment, defined customization of HRM practices perceived
.22*
.13
11
had a significant relationship with customer
satisfaction ( = .17, p = .05).
In order to interpret these results, we plot-
.02
.11
.11
10
ted the two-way interactions using values of
1.5 standard deviation to represent high and
.39*
.54*
.02
.10
low values of the variables (see Figures 1 and
9
2). As illustrated in Figure 1, a simple slope
test revealed a significant positive relation-
.07
.03
.03
.15
.01
8
ship between customization of HRM practices
and net profit margin for subsidiaries with
.32*
.09
.07
.13
.13
.11
high perceived environmental uncertainty
7
.05
.05
.03
.17
.11
6
.05
.04
.15
.12
.16
.01
5
.40*
.08
.01
.10
.19
4
.24*
.41*
.03
.20
.15
.18
.01
3
.31*
0.03
.07
.08
0.13
0.12
0.19
2
.25*
.39*
.21*
.25*
.07
.02
.02
.07
.08
.16
.01
Discussion
1.27
.42
.44
.44
.43
1.25
16,379.08
.43
1.50
.51
1.13
1.13
4,007.01
.23
.26
.25
1.25
4.85
3.68
3,881.82
4.37
3.17
5.12
6.76
24,195.10
7. Subsidiary size
TABLE III Results of Business Unit Net Prot Margin Regression Models
Model 1 Model 2 Model 3
unstd SE std unstd SE std unstd SE std
Constant 3.74 1.20 3.88 1.26 4.03 1.23
Division 1 .55 .35 .21 .53 0.36 .20 .49 .36 .18
Division 2 1.01 .33 .40* 1.01 0.33 .40* .88 .33 .35*
Division 3 .54 .34 .21 .52 0.35 .20 .51 .34 .20
Unionization .02 .31 .01 .01 .00 .00 .13 .32 .05
GDP .00 .00 .05 .00 .00 .05 .00 .00 .05
Manager experience .02 .26 .01 .03 .26 .01 .09 .26 .04
Region prot .00 .00 .07 .00 .00 .07 .00 0.00 .07
Net prot 2007/2008 .43 .12 .43* .08 .11 .41* .38 .13 .38*
Unit size .08 .11 .09 .04 .09 .09 .07 .11 .08
Customized HRM (CHRM) .04 .09 .05 .05 .09 .07
Environmental uncertainty (EU) .18 .24 .08
CHRM EU .35 .15 .22*
2
R .27 .27 .33
F 3.36* 3.01* 3.17*
The unstandardized and standardized regression coefcients are shown with standardized errors.
Note: N = 91.
*p < .05 (one-tailed test).
7.0 4.5
6.5
Subsidiary Net Profit Margin 4.0
Customer Satisfaction
6.0
3.5
5.5
5.0 3.0
4.5
2.5
4.0
2.0
3.5
3.0 1.5
Low Customization of High Customization of Low Customization of High Customization of
HRM Practices HRM Practices HRM Practices HRM Practices
FIGURE 1. Plot of Interaction Between Customiza- FIGURE 2. Plot of Interaction Between Customiza-
tion of HRM Practices and Environmental Uncer- tion of HRM Practices and Environmental Uncer-
tainty on Subsidiary Net Prot Margin tainty on Subsidiary Customer Satisfaction
congured to realize superior organizational outcomes (in both prot and not-for-prot
sectors) as well as the impediments to HRM professionals operating as true strategic
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APPENDIX
Participants were asked the extent to which they customized the following HRM practices to their
subsidiary.
Selection practices such as selection criteria, method, etc.
Recruitment method such as internal versus external
Training volume
Types of training programs
Purpose of performance appraisal
Performance appraisal criteria
The use of multiple performance appraisers
Remuneration criteria (performance versus seniority)
Pay-for-performance
Remuneration structure