Influence of the Business System of the MNCs Home Country in the Foreign Subsidiaries of the Firm - Case Study Example

Influence of the national business system of the MNC’s home country in the foreign subsidiaries of the firm Introduction The expanding role of Multinational Corporations (MNCs) overseas and the international competitiveness have emerged as the two major new and interrelated themes in the global marketplace. Particularly in the post GATT world, the MNCs have grown in all possible dimensions. Their capital stocks have increased and they are symbolising ‘the survival of the fattest’, there has been a massive growth in the number of affiliates of MNCs. Simultaneously the area under operations- the number of countries in which firms are active- has also grown rapidly. Further the products manufactured and the goods and services sold abroad through the affiliates of MNCs too have diversified to a great deal. In several cases, the very survival of MNC firm in the home and traditional market is on the borrowed strength from its overseas affiliates. The MNC has now become one of the most important players in the movement of tangible and intangible goods across the national boundaries. Similarly, the MNCs have grown as a major source of foreign direct investment (FDI) in developed and in developing countries. The FDI has been incorporated integrally into most of the MNCs corporate strategies. Besides the America and Europe, Japan and handful of more countries too have emerged as home ground of the new MNCs. While presently the American and European economies are showing signs of slum and Japanese economy is stagnant, the emerging markets with high growth rates of national economy, have provided for the pull factor for the expansion of the economy. Previously it were the ASEAN economies of Indonesia, Thailand, Malaysia, Singapore and the Philippines, and now it looks like the turn of India and China. There has been a plethora of studies on MNCs and their overseas affiliates in recent decades. For example, Hamel & Prahalad, 1985; Prahalad & Doz, 1987; Gupta & Govindarajan, 1991; Kobrin, 1992; Rosenzweig & Singh, 1994 etc. However, the subject of international human resource management (IHRM) is still in its infancy in academics. There is little consensus in the field, despite of some important theoretical and empirical contributions in the past decade. There is no common paradigm to guide empirical research and there is meagre empirical research on the management of MNC affiliates overseas, particularly outside of the U.S. and Europe. The discussion is subject to several presumptions. What is an MNC? An overgrown branch of a home firm or a stateless entity? One line of argument believes that the MNCs are becoming stateless players with increasing globalisation and are believed to be detached from individual nation states. The growth of strategic international alliances and joint ventures, cross-national mergers and the rise of business divisions headquartered outside the ‘home’ country etc. are cited as the evidences of this argument. On the other hand, much contrary evidences are also available, leading towards the suggestion that even the most global of companies ultimately remain firmly rooted in the national systems of business in the country of their origin. There is very little to see the ‘truly international’ kind of companies, and for most of the MNCs, the home nation is almost always the primary locus of operations and employment, ownership and control, bulk of sales, research, design and development. The conception of the global corporation transcending national boundaries continues to be very largely a myth. The concepts like ‘competitive advantage of nations’ clearly state that the success of international companies springs from characteristics of their national resource bases.1 The parameters This approach of resource-base view of the firm provides for a good theoretical platform to understand the international human resource management. This approach conceptualises of firms as unique bundles of resources and capabilities that are the foundation upon which competitive advantage is based and built.2 According to this theory, the competitive advantage is derived through means of resource accumulation and deployment. Therefor, a unique competitive advantage necessitates the resource to be valuable, rare, imperfectly mobile, and inimitable.3 With the passage of time, firms accumulate unique combinations of resources and abilities, resulting in distinctive competencies and providing them with a ‘distinctive sustained competitive advantage and competencies’.4 Now, a MNC can have three levels of competitive advantage, based on the resources available to the firm. One set of resources is based on their place or origin.5 These resources are based in the specific arrangement of economic, cultural, human, and other resources in the MNC’s home country and are available to all firms from that.6 As the firm itself represents the unique bundle of assets and capabilities, the second level of competitive advantage is at the level of the parent company. It is that competitive advantage which the MNC has developed over its lifetime. Thirdly, resources at the affiliate-level may provide a source of competitive advantage for the MNC. These advantages may be deployed both at the local level and at the regional and/or global levels. The origin of the resource determines its usefulness at other locations. The same applies to the HR competence as well. Their level of context-specificity decides their utility outside the location in which they were developed.7 HR system provides a potential distinctive competence, as it is called ‘a repository of knowledge about firm-specific knowledge, skills, abilities, relationships, and the work-related values of its employees.’ 8 The mobility and otherwise of the HRM expertise and capabilities depends on several factors, and competence is not the only factor. MNC can export overseas a HRM system developed and groomed in the home country or can engross the local system prevailing in the host country environment. In theory and on paper, it might look like that mere presence of a competence could determine whether HR system will be transferred overseas, however this notion is not substantiated empirically. There is no set scale of competence and thus, in many researches it is found that the top management's perception becomes the critical factor in deciding the presence or absence of competence. In a working paper on the influences on affiliate HRM systems in Japanese MNCs in Southeast Asia, Schon L. Beechler says that the level of HRM similarity between the parent company and the overseas affiliate depends on the strength of top management's belief that the parent company possesses a competence in HRM. 9 Further, affiliates are not created equal and MNCs do not approach all of their affiliates uniformly.10 The level of resource interdependence between the parent company and the affiliate is a critical underlying factor here. This resource interdependence defines several features of the relations between the parent company and the affiliates. The parent company relies and depends to varying degrees on the resources controlled by its overseas affiliates. The level of parent company's dependence for certain essential resources denotes the degree of control the parent company will wish to exercise over the overseas affiliate.11 But wishes are not horses and the greater reliance by the parent company on resource flows from the affiliate, increases the power of the affiliate over the parent company.12 Thus, among the overseas affiliates with the greatest inflows and outflows of resources to the rest of the organisation, the parent company’s desire to control it is at the most and simultaneously, the level of HRM system similarity between the affiliate and the parent company is also at the pinnacle. However, the degree of control that the MNC can exert over its affiliates is influenced by several other constraining factors. For example, the mode of entry of the MNC in the host country, level of expatriate presence, and the level of parent company ownership. Different situations, different solutions Several other situations can be taken to discuss the level of HRM system similarity between the affiliate and the parent company. For example an affiliate established as a greenfield (new) operation can be assumed to be more likely to have a higher degree of parent company control over its HRM system, as compared to MNC entering in partnership with a local firm or buying a pre-existing firm. According to the concept of ‘organisational imprinting’, the expatriates sent over from the parent company overseas to establish the new unit are more likely to arrive with a parent company-dominated mental model of HRM policies and practices.13 Secondly, as a greenfield operation is not likely to contend with the employee resistance to an organisational inertia, the parent company can institute its own HRM policies and practices with ease. On the other hand, the local managers would have a mental model shaped by local practices. Thus, the proportion of the numbers of expatriates can be a major factor in deciding the level of similarity in the HRM systems. Further, imposition the HRM system of choice depends upon the degree of control the parent company exercises over the affiliate. Higher levels of capital ownership of the parent company will augment its capability to control the affiliate. Thus, the level of HRM similarity between the affiliate and the parent company increases with the percentage of capital owned by the parent company. It is argued that the capital has a tendency to flow away from the ‘home countries ’of better employee protection regimes, towards the weakly regulated systems. In fact, most of the ‘negotiations’ on flow of capital and investments have centred upon the question of ‘labour reforms’, which is read as loosening of the labour protection laws of the capital hungry host country. The economic success of the ‘Asian tigers’ , coupled with the wave of ‘globalisation’ prompted other Asian countries to vie with each other in bringing about the demanded ‘labour reforms’. In fact, for the MNCs from strong regulatory systems, this one major competitive advantage occurs automatically, the moment they land to the host country. Thus, the very possibility of adopting and exporting the practices of their parent country in the host countries starts lacking business sense. 14 The MNC and the national history Not only the labour protection law, but history and size of the home country too becomes a determinant in setting the level of similarity of HRM systems between the MNC at the home country and the affiliate overseas. There are different historical patterns of international development in European, American and Asian MNCs. All the three continents followed different models of management also. Even the patterns of ownership are different and the later multinationalisation of their firms is also basically a reflection of a constellation of elements of the Japanese model of development and insistence on an export model of internationalisation. On the other hand, MNCs from countries like Sweden, Switzerland and Finland, with very small home markets, had on option but to ‘internationalise’ to a greater degree. They had a higher proportion of their foreign operations than those of Japanese or American MNCs. Also, the MNCs from smaller countries are more likely to expand through acquisitions, with smaller contingent of expatriates. Similarly, the MNC itself may be ‘evolving’. For example, some characteristic bearings of international HRM in Japanese MNCs may actually be reflecting the fact that Japan is in a transitional phase from massive producing at home and exporting overseas model to direct investment internationalisation phase. Such aspects can be expected to disappear in a comparatively short time. For example, the French business 'style' of bureaucratic, authoritarian firms with inflexible divisions of job and poor discretion at middle and lower levels of the management hierarchy is found to have been transformed in recent years.15 Some other factors too prevent the MNCs to transfer home-country philosophies and practices to the host countries. For example, the European norm of managerial inter-firm mobility (in pursuit of career advancement) becomes unpalatable to the Japanese MNCs operating in Europe and they prefer expatriate managers with the typical Japanese degree of commitment to the company. 16 Thus, the ‘cultural distance’ and the ‘degree of strangeness’ - between the home country and the host, makes it harder for the MNCs to install the home-country HRM system. In such a scenario, finding it difficult to introduce country-of-origin patterns into host country operations, the MNCs follow the strategy of adopting the local patterns of the host country, and they may differ considerably from those of the country of their origin. Actually, most MNCs follow a particular international ‘division of labour’, based on sheer cost- benefit analysis, and that makes the export of home country practices redundant. Common place phrases like ‘Made in China syndrome’ and ‘screw-driver technology transfer’ explain it all. Many times Japanese MNCs reproduce a ‘core-periphery relationship’ with their foreign subsidiaries in the typical BPO style. Here, the subsidiary unit is required to perform only relatively low value-added activities. Naturally, the remuneration for such activities are also low valued. No MNC, barring those on knowledge based activity sector, is ever known to have taken their R&D offshore. MNCs in practice In the 'insider' European system (particularly German), the long-term bank credit and family ownership play a greater role. This ‘long term’ attitude provides for relative protection from the threat of hostile take-over and a relatively low proportion of profits is paid out to shareholders. Here the employees are regarded as assets and a source of competitive advantage. However, with the 'outsider' Anglo-Saxon systems, the employees as deemed as 'disposable liabilities' and are rarely offered stakeholder rights. Thus, the MNCs' responses to European employee involvement are influenced by country-of-origin governance structures. 17 Similarly, the Anglo-Saxon corporations don’t share risk with financial institutions, rather they 'internalise' it and consequently develop a strong finance department and complex systems of financial control.18 British and US MNCs typically have complex systems of control, through budget-setting and monitoring, primarily oriented to short-term financial performance and the same goes to their international systems of performance management.19 On the other hand the formal financial control systems are less significant in German firms. They rely more on face-to-face performance management processes. As compared to Anglo-Saxon MNCs, the Japanese MNCs' systems of performance management rely much less on arms-length formal systems and more on face-to-face informal assessment. Here they appear much like the German control systems and it is one of the reasons of them being ‘expatriate-intensive’. With such a background, the Japanese MNCs are found to be pursuing the 'enclave' strategy. They really mean to 'export' the Japanese patterns of work.20 Much less is known, however, about European MNCs, barring that the Germans seem to work in much close to Japanese fashion and the French MNCs are still learning to globalise . It can be said that the emergence of common trends in MNCs may contradictorily accommodate the continuation of national differences between them, imbibed through their countries of origin. Although the MNC world is fast coming out of the ‘international division of labour’ mould, yet the extent to which the MNCs transfer their parent company HRM systems overseas is not fixed. The key determinants to it continue to be fluent. References: 1. Porter, M. 1990. The Competitive Advantage of Nations. London/Basingstoke: Macmillan 2. Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of 3. Management, 17(1): 99-120 4. Conner, K. 1991. A historical comparison of resource-based theory and five schools of 5. thought within industrial organization economics: Do we have a new theory of the 6. firm? Journal of Management, 17(1): 121-154. 7. Selznick, P. 1953. TVA and the grass roots: A study of politics and organisation. 8. Taylor, S., Beechler, S. & Napier, N. 1995. Toward an integrative theory of strategic 9. international human resource management. Unpublished Manuscript 10. Porter, M. 1990. The Competitive Advantage of Nations. London/Basingstoke: Macmillan 11. Taylor, S., Beechler, S. & Napier, N. 1995. Toward an integrative theory of strategic 12. international human resource management. Unpublished Manuscript 13. Lado, A. & Wilson, M. 1994. Human resource systems and sustained competitive advantage: 14. A competency-based perspective. Academy of Management Review, 19(4): 699-727 15. Schon Beechler, Michelle Najjar, B.C. Ghosh, Sukiswo Dirdjosuparto & Sieh Mei Ling ,Influences on affiliate HRM systems in 16. Japanese MNCs in Southeast Asia, Working Paper No. 102, Center on Japanese Economy and Business, Columbia University, February 1996 17. Gupta, A. & Govindarajan, V. 1991. Knowledge flows and the structure of control within multinational corporations. Academy of Management Review, 16(4): 768-792. 18. Beechler, S. & Yang, Z. 1994. The transfer of Japanese-style management to American subsidiaries: Contingencies, constraints, and competencies. Journal of International Business Studies, 25(3): 1-25 19. Gupta, A. & Govindarajan, V. 1991. Knowledge flows and the structure of control within multinational corporations. Academy of Management Review, 16(4) 20. Bartlett, C. & Ghoshal, S. 1989. Managing across borders: The transnational solution. Boston: 21. Harvard Business School Press. 22. Streeck, W. 1991. 'More uncertainties: West German unions facing 1992'. 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EIRR (European Industrial Relations Review) 1992. 'Employment Practices of Japanese Companies in Europe'. EIRR 223, August, 18-22. Read More