The fundamental strategic HRM issue for multinational companies is how to cope with ‘complex cultural, geographical and constitutional pressures’ (Sparrow and Braun, 2007: 187). They have to ‘enhance the ability of specific functions to perform globally’ (ibid: 188). The specific issues that affect international as distinct from domestic HRM are the impact of globalization, the influence of environmental and cultural differences, the extent to which operations should be centralized or decentralized, and the extent to which HRM policy and practice should vary in different countries (convergence or divergence). The last two issues are of particular concern when framing international HR strategies.
Globalization is the process of international economic integration in worldwide markets. It involves the development of single international markets for goods or services accompanied by an accelerated growth in world trade. Any company that has economic interests or activities extending across a number of international boundaries is a global company. This involves a number of issues not present when the activities of the firm are confined to one country. As Ulrich (1998: 126) put it: ‘Globalization requires organizations
to move people, ideas, products and information around the world to meet local needs’.
Source review The distinction between international and global HRM – Brewster et al (2005: 996)
Traditionally, international HR has been about managing an international workforce – the higher-level organizational people working as expatriates, frequent commuters, crosscultural team members and specialists involved in international knowledge transfer. Global HRM is not simply about these staff. It concerns managing all HRM activities, wherever they are, through the application of global rule sets.
Bartlett and Ghoshal (1991) argued that the main issue for multinational companies was the need to manage the challenges of global efficiency and multinational flexibility. They had to manage the risks and exploit the opportunities that arise from the diversity and volatility of the global environment.
Research conducted over a number of years by Brewster and Sparrow (2007: 48) has shown that the nature of international human resource management is changing fast. They noted that among some of the larger international organizations, ‘… these changes have created a completely different approach to international human resource management, one we have dubbed “globalized HRM”. Whereas international human resource management has tended to operate in the same way as local HRM but on a wider scale, globalized HRM exploits the new technologies available in order to manage all the company’s staff around the world in the same way that it has traditionally
managed staff in the home country.’
Environmental differences between countries have to be taken into account in managing globally. As described by Gerhart and Fang (2005: 971), these include ‘differences in the centrality of markets, institutions, regulation, collective bargaining and labour-force characteristics’. For example, in Western Europe collective bargaining coverage is much higher than in countries like the United States, Canada and Japan. Works councils are mandated by law in Western European countries like Germany, but not in Japan or the United States. In China, Eastern Europe and Mexico, labour costs are significantly lower than in Western Europe, Japan and the United States.
Cultural differences must also be taken into account. Hiltrop (1995) noted the following HR areas that may be affected by national culture:
- decisions on what makes an effective manager;
- giving face-to-face feedback;
- readiness to accept international assignments;
- pay systems and different concepts of social justice;
- approaches to organizational structuring and strategic dynamics.
The significance of cultural differences was the influential message delivered by Hofstede (1980, 1991). He claimed that ‘organizations are culture-bound’ (1980: 372). Using worldwide data on IBM employees he identified four national cultural dimensions: uncertainty avoidance, masculinity/femininity, power distance and individualism/collectivism. One of the conclusions Hofstede reached was that the cultural values within a nation are substantially more similar than the values of individuals from different nations. This has been taken up by subsequent commentators such as Adler (2002), who claimed that Hofstede’s study explained 50 per cent of the difference between
countries in employees’ attitudes and behaviours. But this view has been challenged by Gerhart and Fang (2005). They subjected Hofstede’s findings to further analysis and established that at the level of the individual as distinct from the country, only 2 per cent to 4 per cent of the difference was explained by national differences and that therefore: ‘Hofstede’s study should not be interpreted as showing that national culture explains 50 per cent of behaviours’ (ibid: 977). They also established from Hofstede’s data that culture varies more between organizations than countries. In their view, cross-country cultural differences, while real, have been overestimated and may well pale in importance when compared with other unique country characteristics when it comes to explaining the effectiveness of HR practices. But they accepted that national culture differences can be critical and that insensitivity to national culture differences can and does result in business failure (as well as failures and career consequences for individual managers).
On the basis of research conducted in 30 multinational companies, Stiles (2007: 37) commented that ‘while national cultural differences were not insignificant, they were less important than we imagined; organizational culture actually had more influence on HR practice’. The conclusion from the research was that: ‘To think there is one best way to manage human resources is simplistic and wrong, but the variation and contextualization of HR, at least for the companies we studied, owes little to national culture’ (ibid: 41).
Centralization or decentralization
As Pucik (2007: 201) declared: ‘Many firms competing globally are being pointed in contradictory strategic directions. In order to survive and prosper in the new global competition, companies must embrace closer regional and global integration to cut cost and improve efficiency, while at the same time, meet demands for local responsiveness to increase local acceptance, flexibility and speed.’ On the basis of his research, Pucik (2007: 201) identified three strategic approaches to this issue:
- A mega-national strategy, which means that the whole company operates in a centralized fashion. Worldwide facilities are centralized in the parent company, products are standardized, and overseas operations are used as delivery pipelines to serve international markets. There is tight central control of strategic decisions, resources and information. As a result, the competitive strength of the meganational firm is its global integration resulting in cost efficiencies. However, the firm’s ability to respond to variations in local conditions is limited and the international operation can become bureaucratic and inflexible.
- A multi-domestic strategy, which emphasizes local differences by decentralizing operations to their subsidiaries and local business units in order to be close to customers, to create a heightened sense of local accountability and to encourage more local innovation and entrepreneurship. But this can lead to an inability to compete on global terms with fully integrated competitors, slowness in responding to change and failure to benefit from pooled resources, including knowledge and management expertise. Decentralized
companies meeting these problems tend to veer towards centralization until bureaucracy, lack of responsiveness and the inability to retain good people locally leads the pendulum to swing again towards centralization.
- Dual centralized/decentralized strategy, which aims to benefit from both approaches. Firms adopting a dual strategy recognize that
decentralization (local autonomy) and centralization (global integration) are not contradictory, but form a duality. They attempt
to maximize the benefits from both approaches in order to achieve high integration while remaining locally responsive. This can mean following the old adage of ‘think globally and act locally’ and can get the best out of both worlds. But it is a hard strategy to implement. It requires managers with what Pucik calls a ‘global mindset’, who can behave and act in a way that recognizes the global nature of the firm and who can focus both on worldwide strategies and the need to encourage the development of local initiatives and allow a reasonable degree of local autonomy within a global framework.
Convergence and divergence
According to Brewster et al (2002) the effectiveness of global HRM depends on the ability to judge the extent to which an organization should implement similar practices across the world or adapt them to suit local conditions. This is a strategic decision that is an aspect of the choice between centralization or decentralization referred to above. The dilemma facing all multinational corporations is that of achieving a balance between international consistency and local autonomy. They have to decide on the extent to which their HR policies should either ‘converge’ worldwide to be basically the same in each location, or ‘diverge’ to be differentiated in response to local requirements.
Source review Convergence and divergence issues – Perkins and Shortland (2006: 33)
Strategic choices surrounding employment relationships may be influenced primarily by ‘home country’ values and practices. But those managing operations in one or a range of host country environments face the challenge of transplanting ‘ethnocentric’ principles, justifying the consequential policies and practices in their interactions with local managers, other employees and external representatives.
Brewster (2004) believes that convergence may be increasing as a result of the power of the markets, the importance of cost, quality and productivity pressures, the emergence of transaction cost economies, the development of like-minded international cadres, and benchmarking ‘best practice’. Stiles (2007) noted that common practices across borders may be appropriate: ‘Organizations seek what works and for HR in multinational companies, the range of options is limited to a few common practices that are believed to secure high performance’. Brewster et al (2005) think that it is quite possible for some parts of a HR system to converge while other parts may
diverge. But there is a choice. The factors that affect the choice include the extent to which the unit is operating mainly at a local level, the strength of local norms, and the degree to which financial, managerial, technical and people resources flow from the parent company to the subsidiary. A further factor is that some international companies are much more prone to the exercise of central control than others, whatever the local circumstances.
Sparrow and Braun (2007: 170) identified three approaches to global HR strategy:
- The wholesale transfer of HRM policies and practices successful in the parent company to affiliates.
- The creation of HR systems with a maximum of adaptation to local context and conditions.
- The transfer of best practice from wherever it may be found among affiliates in the organization.