Human Resource Management in Multinational Companies - Essay Example

 Human Resource Management in Multinational Companies: Cultural and Institutional Factors Restrict the Implementation of Policies and Practices Across the Company’s Subsidiaries Introduction In the contemporary global market, multinational companies (MNCs) are expanding from their home countries to establish subsidiaries at planned locations around the world. Strategic human resource management (HRM) practices are decisions and actions related to the management of employees at all levels in the business, to help the organisation achieve sustained competitive advantage The human resource managers in multinational companies have to plan and implement consistent and aligned tactical practices, programmes and policies to achieve the organisation’s intended objectives across all of the company’s subsidiaries. The implementation of these policies and practices is required to be within the parameters of the organisation’s and its subsidiaries’ cultural and institutional factors (K’Obonyo and Dimba, 2007). The organisational culture is the set of shared values, collective beliefs, and customary ways of thinking and doing things, which guide work practices of the employees and functioning and the organisation. Besides organisational culture, the multinational company’s national culture of both home country and subsidiaries are taken into account, for improving organisational outcomes. National culture constitutes “values, beliefs, and assumptions learned in early childhood that distinguishes people in one society from those in another” (K’Obonyo and Dimba, 2007, p.3). Thesis Statement: The purpose of this paper is to investigate the extent to which Human Resource Managers in Multinational companies are restricted by cultural and institutional factors in implementing policies and practices across their subsidiaries. Cross-National Transfer of HRM Practices Based on Cultural and Institutional Factors The values that form organisational culture, are shared collectively among members of the firm. They are categorised in seven dimensions including “innovation, stability, respect for people, outcome orientation, detail orientation, team orientation, and aggressiveness” (Liu, 2004, p.505). While some companies have extremely strong cultures which are uncompromisingly fixed, and the subsidiaries have to make changes to adjust to the cultural elements of the main organisation, the organisational cultures in other companies may be weak. Significantly, the transfer of practices is impacted by the compatibility of the organisational cultures of the two organisations involved in the alliance, as a part of the multinational company and its subsidiaries, or those firms undertaking a merger or acquisition. For example, research evidence indicates that “successful Japanese MNCs often choose to set up their subsidiaries in American rural areas” (Yang, 1992, p.321) or areas which are less known. Besides seeking out less expensive areas, another reason for the choice of rural area is the conceptualisation that the values of rural Americans and those of the Japanese would be more alike in terms of team orientation, outcome orientation, work values, and other important assessments. Consequently, this would make it easier for Japanese companies to transfer their home country human resource management practices to overseas subsidiaries, state Beechler and Yang (1994). The similarity of two organisational cultures can influence the transfer of human resource management practices. All human resource management practices are based on some deep value assumptions. Compatibility between values inherent in certain human resource management practices, and the values underlying the culture of an organisation, enables the subsidiary to understand and accept the human resource management practices from the parent company. On the other hand, it would be difficult for employees at the subsidiary to understand the human resource management practices transferred from the parent company, if their underlying values are incompatible. For example, it would be more difficult to transfer a compensation system rooted in personal performance to a company with a higher team orientation, than to one with a culture of low team orientation. Hence the extent to which human resource management practices are transferable from the parent company to the subsidiary will be directly related to “the degree of compatibility of two organisational cultures embedded in the two units”, states Liu (2004, p.506). Transfering human resource management practices across borders is a key issue in multinational companies. This diffusion has to take into consideration the local culture and institutional context, as well as ensure the carrying out of best practice by local managers (Thite et al, 2012). Multinational companies are under dual pressure for the need to conform to home country and host country institutional environments when planning and implementing human resource management strategies and practices, state Hillman and Wan (2005). This is reiterated by the evidence from research conducted by Farley et al (2004). Although there is increasing globalisation of trade and commerce resulting in cross-national integration, there are considerable variations in implementing business activities and in employee management (Brewster et al, 2005). This is because universalistic models of international human resource management focusing on a single best way has limitations, asserts Hofstede (2000). Thus, each multinational company has to develop distinctive human resource management practices and policies, based on its unique cultural and institutional factors. For example, the findings from research conducted by Bjorkman and Budhwar (2007) indicates that human resource management systems help to improve organisational performance in the Indian subsidiaries of foreign firms. Significantly, this was further enhanced by focusing on the localization of human resource management practices. Although some researchers such as Gerhart and Fang (2005) have opposed the emphasis on national culture and the overlooking of organisational differences in international management, multinational companies’ country of origin is acknowledged as an important element, in most research undertaken in this domain, as reiterated by Harzing and Sorge (2003). The broad basis for the conceptual framework examines key factors such as cultural differences, institutional differences, organisational differences and their mutual dynamics, according to Schuler et al (2002). One of the critical challenges facing multinational companies is balancing the need for global integration and local adaptation. The national origin of MNCs is found to have a crucial impact on this balance (Thite et al, 2012). As opposed to Ohmae’s (1990) theory of a borderless world and nationless corporations, cultural and institutional determinants in the countries where subsidiary companies are located, have been found to be significant factors emerging from a firm’s context. Gamble (2003) observes that among the issues relating to multinational companies’ management of their foreign subsidiaries, the main influence on the multinational company’s effort to have a degree of control over their subsidiaries, was the country of origin. This is reiterated by Harzing and Sorge (2003), who add that although multinational companies are highly internationalised, their organisational coordination and control practices at the international level are usually influenced by their country of origin (Thite et al, 2012). For example, research undertaken by Myloni et al (2004) investigated the impact of cultural and institutional factors originating from the host country on the transfer of human resource management practices by multinational companies to their overseas subsidiaries. The authors found that MNC subsidiaries located in Greece have adapted their HRM practices to a considerable extent from the local human resource management practices as are found in local Greek firms; however, some practices of the subsidiaries were more localised than others. HRM practices from the parent multinational company which contrasted with employee regulations or were unsuitable with Greek culture revealed a low level of transfer. At the same time, due to significant cultural changes, the institutional environment was gradually changing to a more relaxed one, with greater room to manoevre, for multinational companies. Empirical evidence indicates that almost all multinational companies have a trace of the country of their origin within them. This could be in the form of subconscious choices “influenced by the cultural and institutional characteristics of the country of origin of the MNC, or it could be transferred through the people who work in the organization”, state Thite et al (2012, p.7). Multinationals in the United States are found to contrast with Japanese multinationals in their employment of human resource management styles in their subsidiaries. Japanese multinationals are distinguished by their strong but informal centralization, and reliance on establishing international networks. United States multinationals have elaborate systems of control and standardized worldwide systems. Further, the country’s position, whether high or low on cultural context influences the impact of their country of origin on the international human resource management practices. Where cultural context is high as in Eastern countries, the country of origin has greater influence; and where cultural context is generally low and situations are more explicit as in Western countries, the country of origin has less influence. Thite et al (2012) observe that the dynamics between national and organisational culture have a significant influence on the success of global mergers, acquisitions and alliances. For example, Cao and Zhao (2009) report their evidence from research indicating that a significant proportion of China’s foreign-invested-enterprises localise their labour practices by adopting Chinese-style structures, and “the extent of localisation is shaped by both institutional processes and strategic considerations” (Cao and Zhao, 2009, p.165). The researchers found that the Chinese style structures effectively reduced tension and conflict between labour and management, whereas the two western style structures did not serve this function. The findings emphasize the high potency of the Chinese institutional environment, and demonstrates the interaction of organisational interests with institutional forces. This creates a uniquely local mixture of managerial structures and practices in the era of globalisation. The conceptual perspectives used by emerging economies include institutional theory, followed by resource-based theory, transaction cost theory and agency theory. While multinational companies from developing countries, enter developed economies for exploration, they enter other developing economies for exploitation. Earlier, Japan and Korea internationalised through greenfield expansion, founding their own subsidiaries that eliminated cultural clashes (Thite et al, 2012). Chang et al (2007) identified human resource management practices used by emerging economy multinational companies in an advanced economy. They found that multinational companies from emerging economies behave differently from those originating from developed countries such as Japan, the United States, and Western European countries. Earlier research had shown that multinational companies from advanced economies such as Japanese MNCs in the United Kingdom, transplant the concepts and practices of the human resource management systems of their own parent companies. Contrastingly, in the present time, due to the dual pressures of home and host country effect, Taiwanese multinational companies deliberately adopt a different human resource approach to function effectively in an advanced economy. Consequently, most of their human resource management practices “either adapt to local practices or use a hybrid style” (Chang et al, 2007, p.404). China and India are expanding mainly through acquisitions in Western countries (Hofstede, 2007). Additionally, their “internationalization is very rapid and different from that of the conventional Western MNCs and erstwhile developing country MNCs” (Thite et al, 2012, p.8). Further, they tend to use exporting and foreign direct investment (FDI) as a combined and concurrent strategy, instead of as distant alternatives. According to Pucik et al (2011, p.120), “Mergers and Acquisitions (M&As) have become an increasingly popular strategy for achieving corporate growth and diversification”; and there has been increasing development of M&As in the global market during the last twenty years. A shift in the global profile of mergers and acquisitions is that cross-border M&As has increased from less than 30% in 2000, to nearly 50% of the total value of M&As worldwide in 2007. The key driver of cross-border mergers and acquisitions is the growth in global competition, and the simultaneous erosion of national boundaries (Pucik et al, 2011). Failures in mergers and acquisitions are generally caused by “problems of integrating the different cultures and workforces of the combined firms” (Pucik et al, 2011, p.121). The possibility of inter-organisational conflict is strong, when human resource personnel implement measures for integrating social and cultural elements, managerial approaches, and different human resource systems, between home country and host country (Stahl and Sitkin, 2005). The abillity to integrate culturally has been found to be of greater importance than financial or strategic factors in mergers and acquisitions. According to Puckik et al (2011), problems increase when mergers and acquisitions take place between companies based in different countries (2011). The distinctive challenges in cross-border mergers and acquisitions are due to different countries having dissimilar legal systems, regulatory requirements, accounting standards, employment systems, and other disparate features, state Aguilera and Dencker (2004). Besides the obstacles produced by variations in the broader institutional environments, the success of mergers and acquisitions may be weakened by cultural differences in management styles, business operations and the challenges of communicating across great distances. Cultural differences, dissimilar communication styles, cultural chauvinism, and xenophobia may have significant adverse impacts, despite the companies involved in mergers or acquisitions having a sound strategic and financial match, assert Goulet and Schweiger (2006). Conclusion This paper has highlighted human resource management in multinational companies, and examined cultural and institutional factors that constrain the implementation of policies and practices across the company’s subsidiaries. The values that constitute organisational culture, how the national culture of home country influences the human resource management strategies of multinational companies, cultural integration in mergers and acquisitions, and failures in M&As caused by problems in integrating the diverse cultures of the two merging companies, have been discussed. The research evidence indicates that there is increasing optimisation of outcomes through strategic human resource management practices based on transfer and integration of cultural factors, in multinational companies and their subsidiaries. It is clear that organisations around the world differ in their ways of implementing human resource management practices including making decisions, allocating resources, negotiating, managing and motivating employees, and training as well as developing employees. Organisational culture and institutional factors are found to be important determinants of several aspects of organisational behaviour. K’Obonyo and Dimba (2007) reiterate that human resource management practices should take into consideration existing theoretical and methodological pitfalls, and focus on cross-cultural issues in human resource management. It is concluded that cultural and institutional factors impose significant constraints on human resource managers in multinational companies, in their implementation of policies and practices across the company’s subsidiaries. Hence, it is essential to make organisational culture a global discipline. Thus, the development of a new system and methods are required, to make strategic human resource management practices more inclusive of cultures around the globe. Further, it is important to stimulate new debates and discussions on making cross-cultural issues the norm rather than the exception in the field of HRM, assert K’Obonyo and Dimba (2007). Future research should study the moderating influence of culture on relationships between strategic human resource management practices, motivation and organisational performance, to ensure the development of best practices in the field, for multinational companies and their subsidiaries. These measures would help to optimize corporate competitive advantage through increasing employees’ and organisational peformance. -------------------------------------------- Bibliography Aguilera, R.V. and Dencker, J. 2004. The role of human resource management in cross- border mergers and acquisitions. 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