CHAPTER TWENTY HUMAN RESOURCE MANAGEMENT

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, compensate, and retain managers To profile MNEs relations with organized labor

Chapter Overview
Firms the world over agree on the importance of qualified personnel to achieve their foreign growth and operational objectives. Chapter Twenty broadly deals with two primary human resource concerns. The management discussion begins with an overview of specific international management qualifications and characteristics; it then explores the advantages of transferring and promoting home country vs. expatriate vs. thirdcountry managers, plus the associated issues of compensation and repatriation. The chapter concludes with an exploration of international labor concerns, including comparative labor relations issues and the role of the MNE in the collective bargaining process.

Chapter Outline
OPENING CASE: A Career in International Business Todays global companies are increasingly looking for managers who are comfortable on the world stage. International companies use expatriate managers to varying degrees, some extensively and some sparingly. Many companies develop their managers for years before assigning the manager to an overseas position. Laying the foundation for a possible career in international business is hard work, and the experience of actually working internationally can be even harder. Managers in foreign assignments are usually given much broader responsibilities than they have experienced in their home country. After completing an international assignment, repatriation to the home country presents major challenges as well. Despite the challenges of international careers, more and more CEOs assert that international experience is an essential feature of a high-performance career. Teaching Tip: Review the PowerPoint slides for Chapter 20 and select those you find most useful for enhancing your lecture and class discussion. For additional visual summaries of key chapter points, also review the figures and tables in the text.

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I.

INTRODUCTION This chapter looks at the role of the individual in international business and discusses facets of human resource management as they apply to managers in the company with international operations. Factors that cause international human resource management to be more complex than the domestic function include environmental differences and organizational challenges.

II. THE STRATEGIC FUNCTION OF INTERNATIONAL HRM International HRM can be a source of creating superior value and competitive advantages. Superior human resources can sustain high productivity, competitive advantage, and value creation for the international company. Despite the importance of international HRM, many multinationals report that effectively developing and managing human resources is one of their weakest capabilities. III. STAFFING POLICIES Staffing policy is the process by which the company assigns the most appropriate candidate to a particular job. There are over 63,000 MNEs with over 690,000 foreign affiliates spread over the more than 200 countries of the world. For most of these companies, staffing policy revolves around the decision of whether to run international operations with local workers in the host nation, expatriates sent from the home country, or third-country nationals. Companies are often interested not only in finding people that have the right skills, but also want to place people in positions who have the appropriate professional values for the job, regardless of where the job might be located. Companies develop interpretive frameworks that help them structure the world they operate in and serve as a foundation for decision making. A. The Ethnocentric Approach An ethnocentric staffing approach fills all key management positions with home-country nationals. People transferred from headquarters are more likely to have a thorough understanding of the companys core competencies and values. This approach can, however, lead the company to adopt a narrow perspective in foreign markets and blinds the company to the benefit of exposure to different, and possibly better, ways of doing things. The leading reasons to staff foreign operations with expatriates include maintaining command and control consistent with headquarters policy, filling local talent gaps, using international assignments as a mechanism for social integration, safeguarding intellectual property in joint ventures, transferring best practices from other locations, counteracting high turnover among local employees, and as a management development tool to help managers develop a global outlook (see Table 20.1) B. The Polycentric Approach A polycentric staffing policy uses host-country nationals to manage local subsidiaries and helps local motivation and morale. This approach can, however, result in problems of accountability and allegiance if a gap develops between headquarters and local operations. A polycentric approach is used to control costs, to cater to host-country nationalism, to develop local management talent, to boost employee morale, to counteract high expatriate failure rates, and to maximize local adaptations for particular products (see Table 20.2). 228

C. The Geocentric Approach A geocentric staffing policy seeks the best people for key jobs throughout the organization, regardless of their nationality. This policy is instrumental to companies pursuing a global and, especially, a transnational strategy. This approach is hard to develop, costly to maintain, and can be complicated by economic factors, decision making routines, and legal contingencies. In some cases, such an approach may be practically impossible due to immigration laws and/or workplace regulations that push MNEs toward local staffing. D. Summary Each of the three staffing approaches has its merits and drawbacks (see Table 20.3). Companies may use elements of each policy, but normally one is dominant. Type of ownership and third-country nationals can both change MNEs approaches to staffing policy. In a joint venture situation, even polycentric MNEs may want to employ expatriates in positions within joint ventures to protect company interests. If special circumstances such as the availability of context-specific knowledge require it, companies will use third country nationals regardless of their previous orientation. IV. EXPATRIATE SELECTION What criteria should be used to identify the appropriate home-country and foreign national managers for a country transfer? A. Technical Competence Technical competence (usually indicated by past performance) is a significant determinant of success in foreign assignments. The foreign subsidiary manager must understand both the technical necessities of a position and also how to adapt to foreign conditions, such as scaled-down plant and equipment, varying productivity standards and less efficient national infrastructure. B. Adaptiveness Three types of adaptive characteristics influence an expatriates success when entering a new culture: (i) those needed for self-maintenance, (ii) those related to the development of satisfactory relationships with host nationals and (iii) cognitive skills and sensitivities that help one accurately perceive what is happening within the host society. The adaptation of a managers family is also crucial to the success of an overseas assignment. C. Leadership Ability Leadership ability is increasingly seen as a key to an expatriates success since expatriates often assume a greater breadth and depth of leadership responsibility on a foreign assignment than they likely would in the home country. Communication skills, motivation, self-reliance, courage, risk-taking, and diplomacy become essential qualities for success. Skills and attitudes such as optimism, drive, adaptability, foresight, experience, resilience, sensitivity, and organization are necessary for expatriates to be successful. V. EXPATRIATE FAILURE Expatriate failure is when a manager returns home from a foreign assignment prematurely due to poor job performance and is very expensive for the MNE. In the 1980s, research reported that between 16-40% of Americans sent abroad to developed countries returned early, while nearly 70% sent to less developed 229

countries returned home early. Expatriate failure reflects a failure of the MNEs selection policies to find the right individual for the job. Companies may try to avoid expatriate failure by expanding through acquisitions and thereby instantly acquiring foreign personnel. MNEs also try to reduce failure rates through improved training and better selection procedures. The leading cause of expatriate failure is the inability of a spouse to adapt to the host nation. Foreign assignments are usually more stressful for the expatriates family than for the expatriate. VI. EXPATRIATE PREPARATION AND DEVELOPMENT Training and predeparture preparations can lower the probability of expatriate failure and include general country orientation, cultural sensitivity, and practical advice. A. General Country Understanding Training in general country understanding typically includes briefings on political structures, job design, compensation norms, housing, climate, education, health conditions, home sales, taxes, transport of goods, job openings after repatriation, and salary distribution. B. Cultural Sensitivity Cultural training tries to preempt the effects of culture shock by helping employees to take an open mind to the different ideas, attitudes, and beliefs they are likely to encounter in the host culture. Foreign language competency and cultural training for spouses and families is often also included. C. Practical Skills This type of training attempts to familiarize the expatriate and his or her family with the routines of life in the host country. Issues such as schooling, socializing, and shopping are addressed. D. Training Gaps and Trends Many managers dont receive adequate training prior to an overseas assignment, despite the proven effectiveness of training programs. Companies usually blame too much urgency as the reason for not investing in more training for individual employees. Sometimes companies struggle because of uncertainty as to whether they should emphasize country specific knowledge or general cultural sensitivity in their training programs. Research has shown there is no significant difference in the relative effectiveness of the two approaches.

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POINT-COUNTERPOINT: Learning a Foreign LanguageStill Useful? POINT: Many HR professionals feel foreign language competence adds profession and personal value for employees. Even when used poorly, the effort to use the local language sends a positive cultural message and creates a friendlier cross-cultural environment by helping to build rapport with local employees. Those who learn the language typically also learn more about the culture and perform better. Great opportunities exist for those who speak other languages, particularly Portuguese, Russian, Chinese, and local Indian languages). COUNTERPOINT: English is so prevalent in the global business world that it is not necessary to learn other languages. In addition, the growing sophistication of translation software makes foreign language competency a moot point. Other abilities such as technical competence, leadership skills, and career development are far more important than language skills. Finally, one can have great cultural sensitivity without speaking foreign languages.

VI.

EXPATRIATE COMPENSATION The amount and type of compensation needed to entice an individual to accept a foreign assignment may vary widely by person and locale. Company practices also vary in terms of compensation for differences. A. Types of Compensation Plans The most common approach to expatriate pay is the balance sheet approach, which aims to develop a salary structure that equalizes purchasing power across countries so expatriates have the same standard of living in their foreign assignment as they had at home. There are three common methods of implementing the balance sheet compensation plan. The home-based method sets compensation based on the salary of a comparable job in his or her home city, the headquarters-based method sets salary in terms of the salary of a comparable job in the city where the MNE has its headquarters, and the hostbased method bases compensation on the prevailing pay scales in the locale of the foreign assignment, plus foreign-service premiums, extraordinary allowances, home-country benefits, and taxation compensation. B. Key Aspects of Expatriate Compensation [see Table 20.4] 1. Base Salary. Usually falls in the same range as the base salary for the comparable job in the home country and is paid in either home-country currency or local currency. 2. Foreign Service Premium. This is extra pay given to the expatriate for working outside the home country which rewards expatriates for living far from family and friends, dealing with a new culture, language, and workplace. Many firms pay 10-30% of after tax base salary as a premium. 3. Allowances. Companies usually pay for differences in cost-of-living for more expensive locations so that expatriates can enjoy the same living 231

standards abroad as they would at home. Housing allowances can be as much as a third of the expatriates total compensation package. A spouse allowance compensates for a spouse to find work and offsets the loss in income due to a spouse forsaking his or her job. A hardship allowance is paid to expatriates assigned to dangerous or especially difficult locations. Travel allowances pay for visits back to the home country, and education allowances pay for the cost of childrens schooling. 4. Fringe Benefits. Firms typically provide the same level of medical and retirement benefits abroad as they would at home, and may expand benefits to deal with local contingencies such as transferring ill employees or family members to out-of-country medical facilities or paying premiums on kidnapping insurance in high-risk countries. 5. Tax Differentials. Companies may adjust compensation even higher in high tax rate countries in order to make sure that expatriates have an equivalent after tax income in the new location. In cases of double taxation, the MNE generally pays the expatriates tax bill in the host country. C. Complications Posed by Nationality Differences As firms employ expatriates from home and third countries, compensation issues grow more complicated. Salaries for similar jobs vary substantially across countries, as do the relationships of salaries within the corporate hierarchy. There is no general consensus as to how to deal with such issues. VII. EXPATRIATE REPATRIATION Repatriation is the process of returning the expatriate to his or her home country working environment, and is a process fraught with difficulties. Repatriation problems arise in three general areas: (i) personal finances, (ii) readjustment to the home-country work environment and (iii) readjustment to home-country social life. A. Managing Repatriation Effective human resource practices for soothing re-entry includes placement in jobs that build on foreign experiences, a reorientation program and a corporate mentor who looks after expatriates interests while theyre abroad. The principal cause of repatriation frustrations is finding the right job for someone to return to. VIII. INTERNATIONAL LABOR RELATIONS In each country where an MNE operates, it must deal with groups of workers whose approach to the workplace reflects the sociopolitical environment of that country. This environment affects whether they join labor unions, how they bargain, and what they want from businesses. A. Labors Concerns About MNEs Some labor groups argue that MNEs systematically weaken the rights and roles of labor due to the power of their globally dispersed value chains and abilities to manipulate markets and governments. Labor argues it is disadvantaged because it is hard to get full data on MNEs global operations, MNEs can manipulate investment incentives, MNEs can easily move value activities to other countries, and ultimate decision making can be in another country. B. Product and Resource Flows 232

If labor strikes, MNEs can divert output from the striking facilities to other facilities in other locations. This is only possible, however, if the MNE has excess capacity in other areas and manufactures the same product elsewhere. C. Value Activity Switching MNEs often threaten to switch activities to other countries in order to extract wage reductions or other concessions from workers. D. Scale and Complexity of MNEs Labor often has trouble identifying where decisions at the MNE are being made and also may have difficulty interpreting financial data for the typical MNE. Because of these ambiguities, labor can be at the mercy of activities, decision makers, and resources far from the country in which labor is employed. IX. LABORS ACTIONS TOWARD MNES Labor can strengthen its position toward MNEs by organizing in unions that cooperate internationally through the exchange of information, refusing to work overtime to supply a market normally served by striking workers in another location, sending financial aid to workers in other countries, and disrupting work in their own countries. Labor can also appeal to transnational institutions such as the International Labor Organization (ILO) for help across countries. A. Labors Success and Struggle Although there is sometimes cooperation among unions across countries, it is difficult due to the ongoing competition among unions in different countries for jobs and resources. Also, unions developed independently in each country and have significant differences in terms of demography, structure, ideals, and goals. Unions in different countries prefer different methods of collective bargaining, and approaches to reconcile labor tension differ from country to country. In some countries, particularly in northern Europe, labor is given the legal right to participate in the management of companiesa concept known as codetermination. Overall, organized labor has not been very successful in getting national and international bodies to regulate MNEs. LOOKING TO THE FUTURE: Which Countries Will Have the Jobs of the Future? As capital, technology and information become more mobile among companies and countries, it will become increasingly difficult for firms and nations to retain highly skilled, highly valued employees. Thus, human resource development will become an increasingly important component of firm and national competitiveness. Population trends in many industrialized countries suggest in the future there will be fewer people to do the productive work. At the same time, the continual push toward the adoption of robotics and other labor-saving devices will escalate the need for higher-skilled workers. As a result, the gaps between the have-nots will widen within industrialized nations just as surely as between industrialized and developing countries. Suggested solutions to these problems include increased emigration from developing to industrialized countries on the one hand, and the promotion of policies that discourage brain drain and encourage re-circulation on the other. Governments in industrialized countries will then face the

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challenge of dealing with under-qualified workers who face deteriorating job prospects, as their citizens blame government policies and foreign workers for their plight.

B. Trends in the Relationship Between MNEs and Labor Union membership as a percentage of the total workforce has been declining in most countries because (i) there has been an increase in white-collar workers as a percentage of total workers and white-collar workers are less likely to organize, (ii) there has been an increase in service employment relative to manufacturing employment with more variation in service activities making organization more difficult, (iii) the participation of women in the workforce is rising and women are traditionally less apt to join unions, (iv) there has been a rise in the percentage of part-time and temporary workers who are more difficult to organize, (v) there is a trend toward smaller plant size that leads to more aligned interests between management and labor at the plant level, and (vi) there has been a decline in the belief in collectivism among younger workers. MNEs have also become more adept at managing international labor relations and effectively use threats of production switching or resource redirection to further strengthen their positions. CLOSING CASE: Tel-Comm-Tek (TCT) [See Map 20.1] Tel-Comm-Tek (TCT) manufactures a variety of small office equipment such as copying machines, dictation units, laser printers, and paper shredders. The company is headquartered in the U.S., but has an Indian subsidiary. Steven Jones, the managing director of TCTs Indian subsidiary, has just resigned and needs to be replaced. Six candidates have been identified as possibilities to fill the position. Due to plans for the construction of a factory in Bangalore, the new director will need to have manufacturing experience as well as the ability to function effectively in other aspects of the position.

QUESTIONS 1. Which candidate should the committee nominate for the assignment if TCT follows an ethnocentric approach to staffing? A polycentric approach to staffing? A geocentric approach to staffing? Which approach do you think makes the best sense for TCT? Why? The best candidate from an ethnocentric point of view is either Tom Wallace or Brett Harrison. Wallace has the edge over Harrison due to his longer tenure with TCT and relevant experience with a similar operation in the U.S. From a polycentric approach, Saumitra Chakraborty would be the best selection. Although 234

young, he is well connected with the local business community and would be best able to integrate TCTs operations into the local situation. From a geocentric perspective, Jalan Bukit Seng is a good fit. He has a broad multicultural background and experience managing a similar operation successfully in Malaysia. It is critical that TCT have a person with line experience in the position to assure product quality and to control costs. Tom Wallace has that experience and would be able to manage the companies operations well. 2. What challenges might each candidate encounter in the position?

Tom Wallace: Pros: 4.5 years from retirement experienced in the technical and sales aspects of the job managing a plant of similar size expressed interest in foreign assignment performance rated proficient grown children living in United States age and experience may be valued Cons: Wallace and his wife know only English He is not a management star may be resented by local management Brett Harrison: Pros: rated highly competent poised to move to upper-level experience in Asian regional office acquainted with Bangalore expatriates well-acquainted with India

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Cons: Harrison may not view position as a promotion management teenage children wife has careerunable to relocate Atasi Das: Pros: rated excellent and upwardly mobile experienced in both staff and line positions expressed goal of foreign assignment speaks Hindi single; no children sees international experience as an essential career step Cons: Ravi Desai: Pros: assistant managing director in larger Asian operation citizen of India speaks English and Hindi married with four young children Cons: Jalan Bukit Seng: Pros: managing director of TCTs assembly operations in Malaysia performance rating positive-excellent single citizen of Singapore Cons: Saumita Chaka: Pros: no moving or adjustment problems performance rated competent single excels in employee relations personal connections with prominent families and local officials speaks Kannada, Hindi and English Cons: 236

 3.

only 27 lacks line experience

How might TCT go about minimizing these challenges facing each candidate? Tom Wallace: Offer orientation and language-training for Wallace and his wife. Provide training visits to similar operations elsewhere. Offer extra encouragement so Wallace feels valued. Brett Harrison: Offer special commuting arrangements so his wife can maintain her career. Offer fixed-term assignment. Provide assistance in selecting and settling the children into schools. Atasi Das: Offer advanced work with local management. Ravi Desai: Offer advanced work with local management. Jalan Bukit Seng: Offer orientation and language training. Provide training visits to similar operations elsewhere. Saumita Chaka: Provide staff assistance from headquarters. Provide technical training and development at headquarters. 4. Should all candidates receive the same compensation package? If not, what factors should influence each package? There is a good deal of variation among firms with respect to the ways they compensate managers abroad. In this instance, TCT needs to consider the base salary each employee is earning, as well as the cost-of-living adjustment necessary to relocate the employee to Bangalore. Housing allowances and tax differential compensation may also be in order. 5. What recommendations can you offer to help a company facing this sort of decision that will enable it to balance professional and personal concerns? In order to balance professional and personal concerns, a firm might do the following: Rank applicants according to some criteria, such as experience in company, technical competence (including managerial), language skills, area(s) of expertise, age, stability of marital relations, personal preferences, personality attributes, and career plans. Check applicants for adaptiveness, sensitivity, and flexibility. Check applicants for awareness levels.

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Administer formal orientation programs that include concentrated training and briefing processes. Include family members in the language and culture courses. Effectively deal with the issue of security.

WEB CONNECTION Teaching Tip: Visit www.prenhall.com/daniels for additional information and links relating to the topics presented in Chapter Twenty. Be sure to refer your students to the on-line study guide, as well as the Internet exercises for Chapter Twenty. _________________________ CHAPTER TERMINOLOGY: type of ownership, p. 716 third-country nationals, p. 716 codetermination, p. 734 _________________________ ADDITIONAL EXERCISES: Human Resource Management Exercise 20.1. Ask students to discuss the human resource implications for an MNE that pursues (a) a multidomestic strategy, (b) a global strategy and (c) a transnational strategy. Then ask them to follow that discussion by examining the relationship among the human resource function and the sourcing/manufacturing and the marketing functions of MNEs that pursue each of those strategies. Exercise 20.2. Research suggests many expatriate employees encounter problems that limit both their effectiveness in foreign assignments and their contributions to the firm once they return home. Ask students to discuss the primary causes and consequences of these problems. What can a firm do to reduce the occurrence of such problems? Exercise 20.3. A key issue in international labor relations is the degree to which organized labor can limit a firms ability to pursue a global or a transnational strategy. Ask students to identify MNEs whose operations reflect each of those management strategies. Then ask them to discuss the ways in which organized labor can possibly affect (or has affected) their pursuit of those strategies. What, if anything, can MNEs do to counter those efforts? Exercise 20.4. Have the students pick a country other than their home country in which they would like to work. What challenges do they think they would face working in that country? Would they feel that learning another language would be a prerequisite for working there? What type of compensation package would they expect?

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Exercise 20.5. Divide the class into two groups, one representing the management of a large MNE and the other representing workers at one of the companys plants in Chile. Tell the students representing Chilean workers that they are unhappy with their current compensation and working conditions. Have the two sides discuss the situation and come to an understanding of the challenges and likely negotiating positions on both sides.

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