Analysis of Employee Treatment in MNCs in Malaysia
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Published: Wed, 07 Feb 2018
According to The Columbia Encyclopedia (2008), a multinational company also called as multinational enterprise (MNE) or transactional corporation (TNC); it is a corporation business enterprise with manufacturing, sales, or service subsidiaries in one or more foreign countries. It can also be referred to as an international corporation. Besides that, Mohamed A. Youssef (2004) said that multinational companies are firms that engages in foreign direct investment and owns or controls value-adding activities in more than one country. The study of multinational companies is relevant to the major theme of changing national business systems in two important ways. Firstly, multinational companies reflect the strengths and weaknesses of their own country. Second, multinational companies work in at least two different national business systems, in their home and host countries (Maurits van Os, Gerarda Westerhuis, Onno de Wit, 2003).
The Multinational companies are a powerful vehicle for the transfer of not only the capital and other production functions but also managerial and technical knowledge across nations (Limerick, 2004). Based on Bartlett’s (2003) research, the multinational corporations account for 40% of the worlds manufacturing output and almost a quarter of the world trade. About 85% of the world’s automobiles, 70% of computer and 65% of soft drinks are produced and marketed by multinational corporations. During the last two decades, many smaller corporations also become multinational, some of them in developing nations (The Columbia Encyclopedia, 2008). This often results in very powerful corporations that have budgets that exceed some national’s GDP and multinational corporations play an important role in international relations and globalization (Multimedia Corporation, 2009).
In Bartlett (2003) research shows that in 1973, the United Nations defined the multinational corporation as an enterprise which control assets, factories, mines, sales offices and the like in two or more countries. The first qualification required a multinational corporation to have substantial direct investment in foreign countries and not just an export business. The second requisite for a true multinational corporation would be a company that engaged in the active management of these offshore assets rather than simply holding them in a passive financial portfolio.
Overview of Multinational Companies in Malaysia
Malaysia ranks as among the world’s top 20 attractive countries for foreign direct investment, according to the World Investment Prospects Survey 2007-2009. Among the Southeast Asian countries, Malaysia was the third favourite foreign direct investment location, just after the Vietnam and Thailand (Rajeswari Raman, 2008).
Historically, multinational corporations in Malaysian manufacturing were concentrated in import substitution production in areas such as foods and beverages, chemicals and pharmaceutical. Their involvement in export production was limited to some processing activities linked to primary product sectors. In 1970s, there was a dramatic transformation in the product structure of multinational corporations’ participation. From about the mid-1980s, production for the domestic market has become secondary to using Malaysia as a base for manufacturing for the global market (Multinational Enterprises, Employment and Real Wages in Malaysian Manufacturing, 2005).
According to Halim’s (2000) study, foreign direct investment has always been a major factor in developing Malaysia’s industrial sector. The promoting of the presence of the multinational corporations in Malaysia is to provide domestic firms with access to advanced technologies through subcontracting, the creation of spin-off firms, OEM and training activities. The Malaysian government encourages direct foreign investment, particularly in export oriented manufacturing and high-tech industries, but it has discretionary authority over individual investments. Malaysia has a stated policy of not promoting low value-added and labour-industries, preferring “quality” investments. A foreign company or a multinational corporation can conduct business in Malaysia through setting up a representative office, registering a branch office, setting up a joint venture company or granting patent licenses and franchising. General policy limits foreign equity to minority 30 percent shares, but 100 percent foreign ownership in manufacturing is permitted in certain instances for export-oriented industries (www.atimes.com). According to list of multinational companies in Malaysia (2009), there are 37 major industry sectors covered in the foreign companies in Malaysia which are:
- Academic food & drink petrochemicals
- Accountancy government pharmaceuticals/medical
- Agriculture/environmental individual printing/paper
- Aviation/defence insurance real estate/property
- Banking/finance IT/computers/software retail
- Chemicals legal services
- Chemicals/petrochemicals machinery/equipment telecoms/communications
- Construction/engineering manufacturing textiles
- Consultancy media tourism/travel/leisure
- Consultancy goods motor industry transport
- Electronics/electrical oil & gas
- Energy/utilities packaging
Multinational corporations from more than 60 countries have invested in over 3,000 companies in Malaysia’s manufacturing sector, currently 1052 regional establishments were approved, which included 67 operational headquarters, 182 international procurement centres, 29 regional distribution centres, 579 representative offices and 195 regional offices. The main sources of foreign investment were from USA, Germany and Japan (Rajeswari Raman, 2008).
Manufacturing goods, mainly products from the electronics and electrical (E & E) industries make up the Malaysia’s largest body of exports. However, most manufactured exports were produced by foreign firms in Malaysia. For example, the electronics industry which contributes more than half the exports of manufactured goods comprised mostly foreign owned multinationals (Abd Halim, 2000).
Based on Rajeswari Raman (2008) research, the major factor that has attracted investors to invest in Malaysia is the government’s commitment to maintain a business environment that provides companies with the opportunities for growth and profits. The government having the regular government-private sector dialogues and these allow the various business communities to air their views and to contribute toward the formulation of government policies which concern them.
Besides, the Malaysian government offers multinational corporations a range of incentives designed to encourage the establishment of subsidiaries that are regarded as especially advantageous. The incentives primarily entail taxation allowances and more liberal ownership rights for investments (1) in particular industries like the manufacturing and high technology, (2) in particular geographic locations such as the Multinational Super Corridor or the Eastern Corridor, (3) offer significant learning opportunities such as from research and development and have particular strategic roles like the operational headquarters and international procurement centres (Southeast Asia, A New Era in Asian Shipping,2005).
By the mid-1980s, there was a growing conviction among the Malaysian policy circles that certain elements of the ethnicity-based affirmative action policy of the NEP were inconsistent with the national economic goal of achieving greater integration of the Malaysian economy with the global economy. These policy inconsistencies were redressed and further incentives for foreign investors were introduced under the promotion of Investment Act passed in 1986 (Multinational Enterprises, Employment and Real Wages in Malaysian Manufacturing, 2005).
The increasing trends of outsourcing of core as well as non-core activities by large multinational corporations have open greater investment opportunities in the provision of support services. Malaysia continues to enjoy healthy surplus in the external trade, low unemployment as well as strong international reserves and high national savings (Rajeswari Raman, 2008). According to Rajeswari Raman (2008), the private sector in Malaysia has become partners with the public sector in achieving the nation’s development objectives.
Based on Jaime Bonache (2005) finding, job satisfaction is usually defined as an affective or emotional response toward one’s job. A better salary, for an identical level effort, will determine the decision to quit and a higher level of satisfaction. To expect more and active contributions from the staff members to the company, satisfaction will become the natural choice. Furthermore, regarding the reason for demission, the American company attributes it to the culture and the Japanese company thinks that the most important reasons for demission are disappointment on welfare and the work satisfaction. Both American company and the Japanese company recognize that the requirement of employees should be fully concerned. The welfare, working environment, job satisfaction, and the self-realization are the three factors that motivate the staff. Sonal Shukla (2009) found out that appreciation and recognition are more important and meaningful than a financial pay raise or a position promotion. It is important for providing the satisfactory welfare package in the company, learn and try to meet the employee’s requirement, create chance for self-improvement and wide space for self-development to the employee in the company because the welfare, individual career development, and the company brand are the three attractive aspects. (Yuanqiang Zhou, Lei Lu, Bo Jiang, 2005).
Besides that, according to Jaime Bonache (2005), a person can be relatively satisfied with the absolute monetary rewards he or she received and dissatisfied with how they fare relative to others, or with other aspects of his or her job. Job satisfaction will not be understood as a unitary concept, but as an affective or emotional response toward various facets of one’s job, and in which processes of social comparison take place.
Furthermore, Jaime Bonache (2005) lodge that satisfaction results from one’s perception that work outcomes, relative to the inputs, compares favourably with a significant other’s outcomes and inputs. We can identify the referent used in the individual’s comparisons by analyzing people’s satisfaction with their salary.
Through Sonal Shukla (2009) research, it is accepted that a satisfied, secure and happy employee during times of a recession, gives back much more to the organization in terms of loyalty and performance.
A low level of salary satisfaction is a very common problem among all types of employees. It is well known that employees on international assignments are particularly costly for most organizations (Jaime Bonache, 2005). According to John Stredwick (2000), the pay must become more variable instead of a wage or salary being a fixed amount each week, month or year. A growing proportion should become contingent upon performance. Performance can be measured on an individual basis, often called performance related pay, or through the team based pay, gain sharing or the profit related pay. In addition, there must have the final change for the basic pay itself, which also need to become more flexible. The 1st thing that needs to be changed is in how levels of basic pay have been determined. In the public sector and in many large private concerns, basic pay levels used to be subject to national negotiations between a collection of unions and officials from the trade association or government body.
Furthermore, according to John Stredwick (2000), the reward issues need to play a major part to produce a high-performance people machine, focused on organizational objectives. Many schemes of performance related pay have a built in conflict because they have been devised to reward the achievements of individuals while other parts of the human resource policy puts great emphasis on building up team working skills and practice.
To release the company from the conflict, there must be a reward strategy in place. It must be derived from and contribute to corporate strategy and be based on corporate values and beliefs. A further development in reward strategy is related to the development of competencies. Organizations have identified specific competencies which can differentiate them from their competitors. So, rewards must contingent upon circumstances and performance (John Stredwick, 2000).
Nowadays, the economic down turn has given a lot of impacts to each companies and organizations, especially the multinational corporations because they have a lot of transnational companies in each country. No one can run away from this economic down turn and each country’s exports and imports have decreased dramatically in 2009. Malaysia also suffered in this financial crisis and the Malaysia government has tried their best to cushion the economic. Organizations also cut down the employee welfare to lower their monthly expenses. The Watson Wyatt survey shows that 61% of employers expect their current financial performances to remain poor at least until the end of 2009. About half said they plan to increase their cost-cutting actions in 2009 and beyond (Sarah, 2009). In view of recession, additional financial measures for welfare may not be possible. According to Sonal Shukla (2009), recession changed the work of work culture where cost-cutting plays a predominant part. The first affected are the employee welfare. All the luxuries enjoyed by the employees are either reduces or may come to a standstill.
Furthermore, although the rewards system can motivate the employees to perform well and become the company’s core competitive advantage, some of the organizations seldom provide the rewards system in their organizations. The employees will only get the bonus or incentives once or twice a year but this is quite hard to motivate the employees. Most of the Asian companies still experience double-digit voluntary turnover rate like the India (13.8 percent) and China (10.3 percent). An organization’s ability to retain talent is a challenge facing all companies. This provides challenges to be more innovative in retaining the top people in the organizations with a tighter budget during the recession time (Salary Increases Decline in Asia Pacific after One Year of Economic Turmoil, Hewitt Annual Salary Increase Study Reports, 2009).
Besides that, organizations in Malaysia rarely provide the self-improvement and the self-development environment for the employees. The employees will lost their aspirations towards the organizations because they will feel that they cannot have any improvement in the organizations and they will resign the job. Employees will feel that the organizations are not pay attention to their basic needs and the organizations will also lost the high productivity workers and the turnover rate will be very high. This issue will become more serious during the economic downturn. According to Sarah (2009), during the recession time, most of the employers will intend to save the money by freezing salaries, reducing workweeks and eliminating the training programs and 18% intend to reduce or eliminate tuition reimbursement and subsidized other financial perks.
Lastly, the basic pay, or the salaries for the employees are very low amongst each companies. The fresh graduate with a bachelor’s degree can only command a basic salary ranging from RM1, 600 to RM3, 500, with a median of Rm2, 000 per month (Betty Yeoh, 2009). This issue becomes more serious after the world is having the economic down turn and the economic in each country are still very unstable. However, the low basic pay cannot match with the real life that the employees are facing with. 2009 the actual salary increase rate went down by 4 percent and 8 percent respectively and over 60 percent of responding companies keeping wages constant (Salary Increases Decline in Asia Pacific after One Year of Economic Turmoil, Hewitt Annual Salary Increase Study Reports, 2009). Now all the products’ prices increase the total expenses of each month become bigger and bigger but the salary still remains unchanged. The low basic pay will demotivate the employees and the productivity will also become very low. In short run, the low basic pay may cut down the total operating expenses of the organizations but in long run, the quality of the products will decrease and the organizations need spend more money to increase their production.
Based on the above scenarios, there is an urgent need for a deep discussion on the following problem:
- The cutting down of the welfares towards the employees in multinational companies
- The cutting down of the self-development and self-improvement activities in multinational companies
- The absence of the attractiveness of the incentives and bonus in multinational companies
- The low basic pay in the multinational companies
There are three main objectives in this study, which are:
- To address the adoption of compensations and benefits in the multinational corporations.
A well designed and managed compensations system can change the employees’ behaviour and their passion in their works, in order to improve their performance and productivity. The compensations may become a very critical in supporting managers to achieving the organizations’ goal. Furthermore, a good compensation system may also develop a positive organizational culture. It may influence the degree to which the employees view the organization is having the human resource-oriented, result based oriented and so on. Consequently, compensations not only influence on individual, but also affect the whole organization as a result.
- To examine the satisfaction towards compensations in the multinational companies will affect the performance.
Compensations can be considered as the best ways to ensure performance at the individual level. The employees may perform well when they get the high job satisfactions from the compensations. However, there are some arguments that indicate that the compensations may not be able to assist the workers to enhance their performance, and it may also lead to a negative organizational climate, which needs to use the compensations to motivate the workers and the absence of commitment to organizational objectives.
- To examine the satisfaction towards the benefits in the multinational companies will affect the performance.
The main purpose for having the benefits is to motivate workers to perform better well. It plays a critical role in affecting individual performance. It is critical to make sure that the benefits systems are effective in motivating individual performance as the increasing of importance of this systems in achieving organizations’ goal.
Organization of Paper
Chapter one addresses the overview of multinational companies, the overview of multinational companies in Malaysia, the research problems, the objectives and the significance of the study. From the overviews, we will have the brief idea on what are multinational companies and the multinational companies in Malaysia. Besides that, from the research problems, we will notice that what exactly happened around the world and we will understand what other researchers have found out from the significance of the study. Furthermore, form the objectives this part can know the main purposes to have this research.
In chapter two will reviews issues that related on the compensations and the multinational corporations literature. The role of the multinational companies, the conflict amongst the multinational companies and the labour union in Malaysia will be reviews in Chapter 2. Furthermore, Chapter 2 will also explain what are compensations and benefits towards the employees, the types of compensations and benefits, the importance to have the compensations and benefits.
In chapter three, will discuss the research method and the theoretical framework of the study. Chapter three also will present the development of the hypothesis to further describe the relationships between the independent variables and the dependent variables. Besides that, Chapter three will also include the questionnaire that used in this study.
In chapter four, will discuss the results of the statistical analysis of the data and the hypothesis tested. We want to know that the results will match with the finding from other researchers.
Lastly, chapter five will have a comprehensive discussion on the finding of this study, the limitations, recommendations and suggestions for future research.
Chapter 2: Literature Review
In this chapter, author presents the literature background on the multinational companies, the compensations and the benefits to the employees. Author will discuss the role of the multinational companies in Malaysia and their force and the conflict amongst the multinational companies with employees.
As noted in chapter one, the performance can be generally affected by the basic pay, performance related pay, the welfare, the employees’ development and the reward system (Jaime Bonache 2005; Sonal Shukla 2009; Yuanqing Zhou, Lei Lu, Bo Jiang, 2005; John Stredwick 2000). Therefore, in this chapter, relevant study background will be study to understand the types of the compensations and the benefits, and the importance to have the compensations and benefits.
As workers or the employees are the manpower of the company, there is a need to examine what will motivate the workers or the employees to perform better by using the compensations and the benefits package. Additionally, employers need to identify which plan will be more suitable and preferable in motivating a certain performance.
Foreign direct investment (FDI) represents one component of the international business flow and includes start-ups of new operations, as well as purchases of existing companies. Firms will choose to become multinational to reduce the direct and indirect costs, to reduce the capital costs, to reduce taxes, to reduce logistics costs, to overcome tariff barriers, to provide better customer service, to spread foreign exchange risks, to build alternative supply sources, to pre-empt potential competitors, to learn from local suppliers, and to attract talent globally (Zubair M. Mohamed, Mohamed A. Youssef, 2004).
According to Zubair M. Mohamed and Mohamed A. Youssef (2004), there are six strategic roles for foreign factories of multinational companies, they are; off-shore factory, source factory, server factory, contributor factory, output factory, and the lead factory. An off-shore factory is established to produce specific items at a low-cost and then export for further rework or for resale. For the source factory, is also a low-cost production but gives local managers authority over production planning, redesign, process changes, and out-bound logistics. The primary purpose of the server factory supplies specific national or regional markets. It typically provides a way to overcome tariff barriers, logistics costs, and exposure to foreign exchange fluctuations. Furthermore, a contributor factory also serves a national or regional market, as developed as a source factory, has more powers to develop products, process engineering, sources of supply, and development of production capabilities. Besides that, an output factory’s primary role is to collect information. They are located where competitors, research laboratories, or customers are located. Lastly, a lead factory creates new processes, products, and technologies for entire company. It should be noted that the choice of the factory not only influences the location, but also the operating decisions of the facility.
The shorter product life cycles, fragmented and saturated markets, more demanding customers, consolidation and mergers of companies, and rapid advances in processes and technology always present a dynamic competitive situation. A firm need to made the decisions related to international locations, production strategy, and operations strategy when they decides to become an multinational companies (Zubair M. Mohamed, Mohamed A. Youssef, 2004).he
From the list of multinational companies in Malaysia (2009), there have 1690 multinational companies in Malaysia.
The Role of Multinational Companies
Multinational corporations have played an important role in globalization. Countries and sometimes sub national regions must compete against one another for the establishment of multinational corporations’ facilities, and the subsequent tax revenue, employment, and economic activity. To compete, countries and regional political districts sometimes offer incentives to multinational corporations such as tax breaks, pledges of governmental assistance or improved infrastructure, or lax environmental and labour standards enforcement (Multimedia Corporation, 2009).
In the fifty year from 1950 to 2000 world trade grew by a remarkable 1,700 percent. There is an unprecedented growth in both trade and international investment leading directly to a remarkable growth in living standards, not just in developed, industrialized world but also in many developing countries when there is a period of remarkable openness in the international economy (John Browne, 2002). Multinational companies expected to help develop the region where they operate by hiring local employees, providing training programs, sourcing locally and consequently supporting the local economy (Juliette Bennett, 2002).
In addition, Juliette Bennett (2002) said that multinational organizations are increasingly drawing the private sector into the global initiative against corruption in order to encourage good governance and conflict prevention. When US multinational companies invest abroad, they usually introduce their management practices, along with production technology, into less developed countries (Daniel A. Sauers, Steven C.H. Lin, Jeff Kennedy, Jana Schrenkler, 2009).
Besides that, according to Juliette Bennett (2002), good corporate governance at home and abroad, promoting economic inclusiveness and community goodwill and it are very important elements of international security. The intercourse between the business and the government for the sharing skills and expertise can be valuable in promoting regional and global stability. Of course the multinational companies cannot and should not replace governments as the primary actors in international peacekeeping. However, multinational corporations working in partnerships with government and the civil society can use their business skills and financial leverage to promote regional stability.
Furthermore, the multinational companies are a powerful vehicle for the transfer of not only the capital and other production functions but also managerial and technical knowledge across nations (Wenchuan Liu, 2004). Corporations have an interest in leveraging their skills and impact to promote stability in their areas of operation. All the multinational companies should bear some responsibility for the effects of their operations on the local environment and population (Juliette Bennett 2002). There are a lot of constructive engagements drives by the multinational corporations. For examples, the use of solar powered equipment to such as refrigerators which can store vital medicines in remote areas and the support for the creation of civil society in countries damaged by conflict and violence. There is a commitment from the multinational corporations to diversity founded not on quotas but based on the ability. Merit becomes the guiding factor which influences the multinational corporations’ approach to people everywhere (John Browne, 2002).
Lastly, according to Juliette Bennett (2002), multinational companies can contribute to crisis management in conflict zones through commercial or philanthropic support for humanitarian relief and responsible management of security arrangements for the company’s operations, thereby minimizing the risks of human rights abuses. Many cross-sector partnerships promote international security and explore conflict prevention, crisis management and post-conflict reconstruction strategies that address the three principal causes of conflict: corruption, poverty and social inequality.
However, there is a strongly argued view that in the poorer countries of the world the role of multinationals is exploitative, environmentally damaging, and hostile to human rights and democracy, and divisive, destroying established communities. It distorts the process of development against the interests of local communities. It challenges protected niches, and established patterns of activity. It is disruptive and in places where the adjustment mechanisms are imperfect of nonexistent it produces casualties (John Browne, 2002). Besides that, according to Juliette Bennett (2002), globalization creates poverty and inequality, which in turn create the motive for much violence. Juliette Bennett further explained that the private sector is becoming more public-minded, while the public sector is becoming more business-minded.
The Influence of Multinational Companies
According to Maral Muratbekova-Touron (2008), globalization processes during the past decades has led to the development of the large multinational companies expanding their activities across countries and continents. One of the main issues facing the development of the global companies has always been to find the right balance between the local autonomy between subsidiaries and the control of the corporate headquarters.
Compared with domestic firms, the operation of multinational companies’ foreign subsidiary is complicated by the existence of the dual imperatives to serve both the needs of the parent company, and possibly of other sister subsidiaries (Riliang Qu, 2007). According to Zubair M. Mohamed and Mohamed A. Youssef (2004), the growing trend among multinational companies is to leverage organizational practices across their international subsidiaries in order to improve the worldwide use of their organizational skills as an important source of competitive advantage. Traditional thinking assumed that corporate head quarters of multinational companies are responsible for the decisions concerning the roles and the capabilities of the foreign subsidiaries. However in recent reach showed that in some circumstances the management at multinational companies’ foreign subsidiaries are responsible for defining the strategies and objectives of their subsidiaries, within the constraints set for their operation (Riliang Qu, 2007). According to Daniel A. Sauers, Steven C.H. Lin, Jeff Kennedy, Jana Schrenkler (2009), Multinational companies faced the problems relate to the cultural differences. Thus, subsidiaries and joint ventures face conflicting pressures from the parent firm and the local environment. The subsidiaries of multinational companies face pressures for both local adaptation and global integration when they operate in foreign countries.
Furthermore, Riliang Qu (2007) has classified subsidiaries’ roles within the intra-firm organisational networks of multinational companies into four categories, which are receptive, active, autonomous and quiescent subsidiaries.
Receptive types of subsidiaries are highly integrated into the multinational companies’ network of operation and are given relatively little power in making their own decisions in relation to the local markets they serve. For the autonomous subsidiaries, are much less integrated to the multinational companies’ network operation and have a lot of autonomy powers. The following type is the quiescent type of subsidiaries,
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