1. Examine why multinational corporations seek to transfer their home-country human resource management policies to their overseas subsidiaries. Use examples to explain the difficulties that firms might encounter in the transfer process.
Multinational corporations (MNCs) focus on their greatest strengths to gain and maintain a competitive advantage. They make use of their distinctive competencies to have a competitive edge over their rivals. These corporations can gain distinctive competencies in two main ways: managerial know-how and technological know-how (Porter, 1986). Human resource management policies greatly determine how these two aspects of organizational competence are harnessed. It is for this reason that some MNCs choose to transfer their home-country human resource management policies to their overseas subsidiaries.
More importantly, human resource management (HRM) falls within the realm of managerial know-how. However, it is only recently that HRM has come to be regarded as an aspect of managerial competence (Noorderhaven, 2003). However, there is a long-standing tradition in which HRM is recognized as a great contributor to the competitiveness of the firm. Three different components are worth exploring in efforts to determine why MNCs choose to transfer their home-country HRM policies to their overseas subsidiaries. These components include philosophy, practices, and policies. MNCs have to make a choice on which of these components need to be transferred to overseas subsidiaries.
HRM philosophy encompasses the prevailing attitudes and beliefs that the management holds with regard to the nature of employment as well as aspects of human nature surrounding this employment relationship (Sethi, 1999). On the other hand, HRM policies are simply the decision rules that HR managers use in their work. All organization members are expected to adhere to these procedures. On the contrary, practices tend to be less formal compared to policies. They take the form of the actual decisions that organizational members take. Sometimes, practices tend to deviate from the policies put in place. In other words, practices are a reflection of the policies that have actually been implemented within the organization.
Employment practices, policies, and philosophies greatly influence the decisions by MNCs to transfer HRM policies to overseas subsidiaries. For example, many Japanese MNCs feel the need to transfer their “lifetime employment” philosophy to several countries where their operations form a core component of their competitive advantages. In this policy, the corporations ensure that all their core workers are accorded employment security (Noorderhaven, 2003). Such employees are retained within the workforce until they attain the retirement age of between 55 and 60 (Noorderhaven, 2003). In most cases, these MNCs tend to extend this provision to employees working in subsidiaries of the MNC.
In some cases, MNCs also choose to transfer HRM policies that dwell on the candidate’s personality fit in the context of the firm rather than his skills. Moreover, it is sometimes necessary for a subsidiary to maintain the tradition of the head office whereby internal candidates are considered for promotion whenever there are open positions (Ghoshal, 1988). In this case, one may also notice some semblance between the selection procedures of the headquarter corporation and those of the subsidiary. This similarity may involve things like the tests done, the composition of the interview panel, and the selection criteria. On the other hand, practices are represented by actual promotion decisions.
HR managers of MNCs must make tough choices on which policies to transfer to host countries. They have to put into consideration various functions, including compensation, appraisal, recruitment, selection, and career development. These functions provide an excellent platform on which contributions to the corporation’s competence are determined. Through an analysis of these functions, managers are able to determine the impact they have on the distinctive competence of the corporation. They are able to determine the extent to which the functions can facilitate the work of attracting, motivating, and retaining the workforce as well as achieving overall HRM success. In the case of corporations that are greatly reliant on human resources in their efforts to gain competitive advantage, the success of HRM is normally equated to the success of the overall goals of the organization.
With regard to the transfer of HRM practices in overseas subsidiaries, the focus is normally on the design of the HRM system of the subsidiary (Milliman, 1991). In this regard, it is sometimes necessary for contingency assumptions to be made (Milliman, 1991). In situations where the HRM system of the subsidiary resembles that of the home company, it is assumed that most, if not all, HRM practices of the home company have been transferred to the subsidiary.
In other cases, a systems approach may be used to determine reasons for the transfer of policies and practices. In this approach, the focus is mostly on the conflicting demands imposed on various MNC systems and the impact this has on HRM transfer. Two conflicting demands tend to arise. One of them is the need for internal consistency between the home company and the local environment. The second one is the demand for external consistency with the firm’s local environment. In many cases, internal and external environments clash, thereby inhibiting organizational functioning at all levels. This also ends up affecting all functional areas of the firm. It is the responsibility of the management to resolve this conflict for the mission of the organization to be achieved.
The need to address conflicting demands must always be put into consideration whenever HRM systems are being designed for overseas subsidiaries. These tensions are said to have been resolved when organizational goals have been met, the local environment needs have been catered for, and all internal consistency demands have been addressed (Bartlett, 1986). In efforts to design an HRM system for an overseas subsidiary, the home-country company tends to design HRM policies, practices, and philosophies that are a reflection of local values. In this respect, the aim is to achieve high external consistency. In other cases, the home-country company may also attempt to transfer its HRM system to the overseas subsidiary. The objective, in this case, is to achieve high internal consistency. The other option entails developing and implementing a universal HRM system that contains features of both home-country and host-country practices.
These HRM options are of great importance in understanding why MNCs choose to transfer human resource policies and practices to overseas affiliates. By assessing various theoretical and practical implications, it is possible to understand the difficulties that companies encounter in this transfer process. For instance, one simple way of determining the extent of these difficulties is to compare the parent company characteristics with the characteristics of the local environment in which the subsidiary operates.
In terms of parent company characteristics, the issues to address include overall firm strategy, administrative history, and interdependence between the company and the subsidiary. In terms of MNC strategy, a distinction is normally between cost and differentiation strategies (Porter, 1986). Companies that abide by the cost leadership strategy set out to gain a competitive advantage through efforts to become the least-cost producers. In this strategy, the firm must put the most attention to functional policies. Efficiency considerations must take precedence in all the firm’s internal operations. The MNC has to put in place tight cost controls, produce frequent reports, establish incentives on the basis of efficient quantitative methods, and implement strict rules (Porter, 1986).
On the other hand, firms that make use of a differentiation strategy build competitive advantage through the creation of unique product value (Porter, 1986). In this strategy, the focus is not so much on cost but on identifying the special value that can be added to the product. In this strategy, an external focus must be developed based on the desires of customers. HR managers must focus a great deal on efficient qualitative methods. They also have to maintain technological leadership. In most cases, this turns out to be a difficult undertaking, particularly for HR managers who have to establish an HR system in the overseas subsidiary.
For MNCs that intend to pursue a global product differentiation strategy, the greatest difficulty is on determining whether product characteristics are salient across all markets. To achieve this goal, there is a need for commitment of all the employees involved in the production process. In efforts to create an efficient HR system, the MNC may have to transfer some of its workforces from the home country to the host country. This decision is necessary for efforts to ensure that the company’s competitive advantage is sustained.
On the other hand, firms that have chosen to adopt a low-cost strategy direct their efforts to output measures with the aim of achieving a high level of productivity. For such companies, it is not necessarily important for the home-company HR practices to be adhered to. The most crucial thing is for the production process to be undertaken using low-cost HR systems. In such an environment, it is not a must that the subsidiary should adopt the HR policies and practices of the home company. Therefore, compared to subsidiaries with a low-cost strategy, firms adopting cost-differentiation strategies are more likely to transfer the HR policies and practices of the parent company.
However, a business-level strategy represents only one of the factors that HR managers have to consider when deciding on whether to transfer their human resource management system to overseas subsidiaries. Another critical factor is the operations of the HRM system at the subunit level. At this level, the managers have to address the problem of tension exerted on external and internal environments in the context of the subsidiary’s HRM system. A good example is that of the tendency to characterize MNCs at the corporate level based on the choice between global and multi-domestic strategy. At the business level, the tendency is to characterize them on the basis of low-cost and differentiation strategies. Tension arises primarily because subsidiaries within a single multinational enterprise and business line tend to make different contributions to the overall strategy.
In conclusion, there are many benefits to be derived by multinational enterprises upon transferring their home-country HRM policies to their overseas subsidiaries. Many factors influence HRM managers in their decisions regarding the transfer process. In most cases, these decisions are influenced by the extent to which the strategy of the home-country firm resembles that of the overseas subsidiary.
HR managers of home-country firms that adopt the cost-differentiation strategy are highly likely to initiate the process of transferring the home-country HR policies to the overseas subsidiary. In contrast, the low-cost strategy can be successfully pursued in an overseas subsidiary without any need for a transfer of home-country HRM policies. With this understanding, HRM managers can overcome numerous difficulties that are normally encountered during the transfer process.
Bartlett, C. (1986). Building and Managing the Transnational: The New Organizational Challenge. Cambridge: Harvard University Press.
Ghoshal, S. (1988). Creation, Adoption, and Diffusion of Innovations by Subsidiaries of Multinational Corporations. Journal of International Business Studies, 3(2), 65-88.
Milliman, J. (1991). Organizational Life Cycles and Strategic International Human Resource Management in Multinational Companies: Implications for Congruence Theory. Academy of Management Review, 16(2), 318-339.
Noorderhaven, N. (2003). The “country-of-origin effect” in multinational corporations: Sources, mechanisms and moderating conditions. Management International Review, 43(2), 47-66.
Porter, M. (1986). Competition in Global Industries: A Conceptual Framework. Cambridge: Harvard University Press.
Sethi, S. (1999). The influence of “country of origin” on multinational corporation global strategy: A conceptual framework. Journal of International Management, 5(8), 285-298.
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