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Effect of Human Resources on Global Expansion of MNCs

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Published: Tue, 06 Mar 2018

MBA Literature review

The Relevance of Innovative Human Resource Programs to Facilitate Global Expansion of Multinational Companies (MNC’s) from the UK.

2. Introduction

The activities of multinational companies (MNCs) are at the heart of Britain’s internationally open and global economy. This global economy has emerged as companies all over the world are joining forces through alliances, mergers, joint ventures, acquisitions, and the like, thus creating the need for a constant mobile workforce and the HRM strategies to support and develop it. This would therefore imply a fundamental shift in the role of human resources from transaction and administration to strategy and business transformation through innovative programmes which supports the global strategy of the company.

This section gives an overview of the literature review and the theoretical basis for the forthcoming chapters. The chapter consists of journals, books and research materials which throw more light into Innovative Human Resource Programs to Facilitate Global Expansion of Multinational Companies (MNC’s) from the UK.

The following were the primary information sources used for the literature review;

  • ACM Digital Library
  • Pro-Quest Direct
  • EBSCO Publishing
  • Gale Group Info Track
  • OCLC First-Search
  • Java Sun Microsystems Library
  • IEEE Library
  • Emerald Database

2.1 Evolution from Personnel Management to HRM

According to Guest (1987), the origins of the traditional concept of personnel management can be traced to the post World War One ‘welfare tradition’ of concern for the basic needs of employees. The developing and mature phases of personnel management from the 1940s to the 1970s saw an increase in the status and professionalism accorded to the personnel function, particularly in relation to industrial relations (IR) matters (see Sparrow 2004).

The concept of HRM, as a new strategic approach to the management of people, evolved in the early 1980s (Ericksen 2005). Its evolution was influenced by a range of factors, including increased competitive pressures caused by deregulation and globalisation, and the influence of notable academics in the US and the UK (Ericksen, 2005). Although it has been suggested that HRM may be no more than ‘old style personnel management with a new name’ (Gunnigle and Flood, 1990), Storey (1992) identifies four features of HRM which distinguish it from traditional personnel management:

it is explicitly linked with corporate strategy;

  • it seeks to obtain the commitment of employees rather than their compliance;
  • employee commitment is obtained through an integrated approach to human resource policies (for example, reward, appraisal, selection, training); and
  • unlike personnel management, which is primarily the domain of specialists, HRM is owned by line managers as a means of fostering integration.

2.1.1 Approaches to Human Resource Management

2.1.1.1 Hard Approach

If an organisation focuses on control of resources and achievement of strategy, it may adopt a ‘hard’ approach to HRM (see Storey, 1989) in which employees are viewed as a resource to be managed like any other factor of production. In this approach, the critical task for management is to align the formal structure and HR systems of the organisation so that they drive the strategic objectives of the organisation. This approach is exemplified in the strategic model of HRM developed by Fombrun et al (1984). It has been argued however that an over-emphasis on hard HRM ignores the potential resistance of workers and trade unions, factors which cannot be ignored if business strategy is to succeed (see Hendry, 1995).

2.1.1.2 Soft Approach

In contrast, an organisation may place an emphasis on a ‘soft’ approach to HRM (Storey, 1992 p. 30), in which employees are viewed as a valuable asset whose commitment will assist in achieving organisational success. The objective for organisations in such an approach is to integrate HR policies with the strategic planning process, to gain the willing commitment of employees, to achieve flexibility through avoidance of rigid bureaucratic structures and to improve quality (see Guest, 1987). The most well known ‘soft’ model of HRM is known as the Harvard Model of HRM (Beer et al 1984), views business strategy as just one situational factor which influences management’s approach to HRM. This model identifies a range of other situational factors which influence HR policy choices, including prevailing management philosophy, laws and societal values. In the context of this study, this model is significant in that it identifies a range of stakeholder interests (including unions, government and management) which influence HR policy choices. It is argued that unless HR policies are influenced by key stakeholders, the enterprise will fail to meet the needs of these stakeholders, and ultimately its own objectives (see Beer et al 1984).

2.1.1.3 Ideal Type Model: Integrated links from Personnel to HRM

Storey (1992) outlines a further model which illustrates the process involved in shifting from traditional personnel management to HRM. While this is an ‘ideal type’ model, it comprises features which are significant for this study. For example, it stresses the need for integrated links between beliefs, assumptions, management issues and key elements of HRM. It also identifies key levers of change in the various elements of HRM, including recruitment and selection, training and development and conditions of employment. A strategic approach to HRM can be developed by creating effective policies in these areas (Storey 1992)

2.1.2 The integrative aspects of HRM

A key theme running through many of the models is integration, which according to Guest (1987) lies at the heart of HRM. He identifies integration at three levels:

  • integration of HRM policies with business strategy;
  • integration of a set of complementary HRM policies;
  • integration of HRM into the line management function.

2.1.3 The Role of Management

According to Storey (1992), best practice indicates that the extent to which the transition process from traditional personnel functions to strategic HRM functions can be achieved will be influenced significantly by the belief and support of senior management in the added value that HRM can contribute to the organisation. More importantly, this belief must be visibly demonstrated, for example by committing additional resources to the development of HR strategy and the building up of HR skills levels. As a first step, the head of HR should be afforded a genuine role in the formulation of key business decisions. This contribution must be an integral part of the business strategy formulation process, so that HR issues are accorded a key priority as opposed to simply being added on to, or indeed excluded from, the core business of the organisation. On an ongoing basis, heads of HR should also be enabled to have a genuine input into decisions taken at top management level which have implications for HR. Clearly, if the head of HR is to be enabled to play a genuine role in ensuring that HRM issues become a top management priority, it is important that the professionalism accorded to HR, for example through the development of expertise in integrating HR and business strategies, begins at this level.

2.2 Definitions: Innovative HR Programmes

According to Agarwala (2003), defines innovative human resource programmes of a company can be described as:

“Any intentional introduction or change of HRM program, policy, practice or system designed to influence or adapt employee the skills, behaviours, and interactions of employees and have the potential to provide both the foundation for strategy formulation and the means of strategy implementation that is perceived to be new and creates current capabilities and competencies” (Agarwala, 2003).

2.2.1 Innovative HR Programmes

According to James (2002), innovative programmes can be grouped into a set of new initiatives which are associated with the process of developing a strategic approach to HRMenhancing its competitiveness. A few of these include:

Reducing costs through shared services centres, self-service, and outsourcing.

Develop uniform HR processes recognising local regulatory requirements to help foster a low-cost, administrative delivery model. Create a self-service culture for employees and managers. Establish global employee shared services centres focused on delivering HR administrative support to multiple geographic areas, thereby reducing administrative overhead. Outsource key services that can be more efficiently managed and administered externally.

Streamlining technology and information management

Improve information access to help companies more efficiently manage their human capital assets, provide employees and managers with enhanced access to information, improve HR reporting, and address growing compliance requirements. Reduce HR technology operating costs by consolidating multiple technologies, technical infrastructure, and IT skills.

Managing people globally

Help enable the company to respond to the interdependencies of global markets by managing human assets globally rather than nationally or regionally thereby improving competitiveness in the international marketplace.

Enabling HR to shift its focus from administration to strategy

Remove the administrative component of the work of business HR professionals, enabling them to provide more value-added services and to focus on consultative and analytical interactions with line managers. Facilitate HR’s transition to a strategic partnership with the company by upgrading talent and skills within the HR function.

2.3 Background: Human Resource Evolution

According to Cooke (2003), first Generation HR Transformation represented a fundamental shift in HR’s role, from transactions and administration to strategy and business transformation. First Generation HR Transformation focused on changing the existing relationship between employees, managers, and HR, (Randall 2006). With technology as a key enabler and process re-engineering playing a pivotal role, this First Generation effort sought to help make employees more self-sufficient, whilst asking them to take more responsibility for their own careers (Datta et al 2005). It also sought to help remove HR from the middle of the employee/manager relationship by making managers more responsible for handling their employees’ HR needs. Over the past ten years, HR Transformation has led to a major restructuring of HR operations and processes transforming the way HR services are delivered Cooke (2003).

2.4 UK MNC’s: Achieving Global Expansion

MNCs in the United Kingdom have long been well established in manufacturing, but in recent years they have emerged as dominant players in the private service sector and have even become involved in the provision of public services (Edwards 2004). Levels of both inward and outward investment are high: foreign direct investment (FDI) into the UK by companies based overseas accounts for almost 9% of the total global stock while UK-based companies’ investments overseas account for over 14% of the global stock (Edwards 2004). In both instances, the UK is second only to the world’s largest economy, the United States. As a result MNCs are significant employers in Britain; for example, 18% of the workforce in the production sector are employed by overseas-owned companies with many more being employed in the domestic operations of British-owned multinationals (Edwards 2004).

For multinational companies in the UK to achieve a successful transition in their drive for global expansion and competitive advantage, multinational companies would require innovative HR programmes which would enable them to anticipate critical workforce trends, shaping and executing business strategy, identifying and addressing people-related risks and regulations, enhancing workforce performance and productivity, and offering new HR services to help a company improve and grow (Edwards et al 2007).

2.5 HR Practices: Effectiveness

A number of authors have explored the links between individual HR practices and corporate financial performance. For example, Lam and White (1998) reported that firms’ HR orientations (measured by the effective recruitment of employees, above average compensation, and extensive training and development) were related to return on assets, growth in sales, and growth in stock values. Using a sample of banks, Richard and Johnson (2001) examined the impact of strategic HRM effectiveness (ratings of how effectively a variety of HR practices were performed) on a number of performance variables. They found that strategic HRM effectiveness was directly related to employee turnover and the relationship between this measure and return on equity was stronger among banks with higher capital intensity (greater investments in branches). In this thesis, HRM would be described in the context of a number of innovative practices which have been proven to enable MNC’s manage the transition process in their drive for global expansion, thus enabling organizational effectiveness and better performance outcomes. Wright and McMahan (1992) defined innovative human resource programmes as practices and activities employed to enable an organization achieve its goals. These practices are seen as a departure from the traditional HR activities. Delery and Doty (1996) asserts that these practices are key drivers required by MNC’s to respond with the right strategy as they expand their operations in different environments (Boselie et al, 2005).

2.6 Empirical Research: Human Resource Factors & MNC Global Expansion

The drive for global expansion by UK MNC’s has necessitated the need for a human resource strategy that would ensure that the company is able to sustain its workforce. This has therefore led to the departure from the traditional HR administrative role to a more robust global HR function which takes cognisance of employee profile, the work and environment demographics, de-skilling, re-skilling and multi-skilling and issues related to outsourcing and synergy of its processes vis-à-vis work-force reduction Lam and White (1998).

The largest survey of employment practice of multinational companies (MNCs) in the UK was carried out by Edwards et al (2007). The key findings from the first large-scale, representative survey of employment practice in MNCs which have operations in the UK. The survey is comprehensive in its coverage of all but the smallest international companies. The findings derive from interviews with senior HR executives in each of 302 multinationals operating in Britain, both overseas- and UK-owned. The findings from the research suggest a connection between human resource practices and the performance of firms, a summary include the following HR programmes stated below.

2.6.1 Innovative HR Practice: Compensation & Payment

85% of the firms surveyed were found to have a robust innovative program in terms of compensation and payment. This is achieved through a performance appraisal programme such as upward/peer appraisal and forced distribution. 72% of the MNC’s utilized an innovative scheme for managers, through individual ‘output’ criteria which were supplemented by a range of other criteria including behaviour in relation to desired competencies and to corporate values.

2.6.2 Innovative HR Practice: Training & Development Programmes

In respect of adoption of high potential innovative training programmes among MNCs, the organisations were asked if both their UK and overseas operations had a management development programme specifically aimed at developing its ‘high potentials’ or senior management and employee potential. The data show that high potential programmes are adopted by 70% of organisations; 30% of organisations are not using them. Organisations were asked whether they used a global high potential programme that was adopted elsewhere worldwide, or a local, nationally specific programme. Most organisations indicated that their programmes are global in scope.

2.6.3 Innovative HR Practice: Appraisal Activities

In comparison of performance appraisal practices and management values, the formal performance appraisal schemes for all three groups are very widespread; over nine out of ten firms have them for key group and managers, and over 80% have them for large occupational groups. Only 3% of firms have no formal appraisals at all. Just over a fifth of firms use ‘forced distributions’ for the results of appraisal. A clear majority of firms use the results of appraisal as the basis of decisions on redundancy and redeployment.

2.6.4 Innovative HR Practice: Employee Involvement & Communication

UK-based multinationals most commonly cite ‘setting a broad policy HR programme as being significant or very significant (62% and 66% for training and development and for employee involvement policy respectively). HR advice and consultancy is also relatively prominent for training and development policy (53% significant or very significant), but less so for employee involvement policy (33%). For training and development, and employee involvement, policy, the respective proportions reporting the other means of influence as significant or very significant are: setting detailed HR policies (32% and 31%); monitoring HR policy implementation (39% and 34%); and HR benchmarking and information exchange (42% and 28%).

2.6.5 Innovative HR Practice: Global Knowledge Sharing & Diffusion

In respect of innovative HR programmes which promote employee knowledge, learning and diffusion, international employee learning mechanisms are used extensively across all MNC both within the UK and across overseas operations. The survey focused on five formal organisational learning mechanisms used by managers that are international in their scope:

  • International projects groups or task forces, which are often used to address specific issues;
  • International formal committees;
  • Secondments involving the placing of MNC employees in external organisations such as suppliers, customers, universities or private R&D companies;
  • Expatriate assignments

The evidence showed that the most common organisational learning mechanism adopted among the managerial community within MNCs is the informal network (used by 84% of companies). International project groups/task forces also play a prominent role (used by 73% of organisations) and to a lesser degree expatriate assignments (used by 60% of organisations) and international formal committees (53% of organisations). In contrast, secondments are only adopted by around a quarter of the organisations (26%). The majority (82%) of organisations use two or more organisational learning mechanisms, with 53% adopting between three and four of the five organisational learning mechanisms among their managerial community. Around 9% fail to use any of the mechanisms listed. MNCs requiring integration between the UK operations and other sites worldwide are significantly more likely to adopt multiple organisational learning mechanisms (Tregaskis, Glover and Ferner, 2005). However, these national variations show that the form that organisational learning and diffusion take is strongly shaped by the national context of the parent firm.

2.6.6 Innovative HR Practice: UK MNC’s Use of Shared Services

According to Edwards et al (2007), the findings from the study found that half of the UK MNCs operate shared services centres and have international HR policy formation bodies. They are far less likely, compared to US and other European MNCs, to have a worldwide approach to workforce management. UK firms consistently aim to pay a greater proportion of employees (managers, LOG and key group) in the top or 2nd quartile. Nine in ten UK firm have performance appraisal for their managers while seven in ten have formal appraisals for their LOG (Edwards et al 2007). Use of forced distribution is uncommon as is the use of 360-degree feedback. An overwhelming majority of UK MNCs tend to recognise trade unions for collective bargaining purposes. Formally designed teams and problem-solving groups are commonly found in UK MNCs as are a large number of communication mechanisms with meetings between line managers and employees, newsletters/emails and systematic use of the management chain the most commonly found communication mechanisms. Although the majority of UK MNCs have succession planning and formal management development programmes these tend to be comparatively less than other MNCs.

2.6.7 Use of Expatriates

According to Edwards et al 2007, UK MNCs make considerably greater use of parent country expatriates than third country expatriates. This may reflect the short geographical proximity and cultural similarity between the UK and Ireland. UK MNCs tend to have considerable discretion over the various HR policy areas, much more than US firms.

2.6.8 IT Based Networks & Services

A key development in HR service provision over the past two decades has been the increased use of information technology (IT) (Edwards et al 2007). This is all the more relevant in MNCs, where IT systems may be used to monitor policy implementation and performance, and also to facilitate communications and networking, across borders. It thus provides an insight on the extent to which corporate management has access to HR data on its international operations and can compare performance on HR metrics across sites and countries. Specifically examined was the usage of IT based HR information systems (HRIS) and ‘shared services’ provision on an international level.

In regard to the diffusion of HRIS, respondents were asked whether the worldwide company had an “HR Information System (such as PeopleSoft or SAP HR) that holds data relating to the firms international workforce”. The responses for both foreign and UK-owned MNCs showed that just over half (54 per cent) of all MNCs in the UK reported the use of HRIS that operates on an international basis. This is a similar to a study by Collings et al (2007), that found in the parallel UK study, where some 52 per cent used such a system (Edwards et al., 2007). However, among MNCs in the UK, a greater proportion of foreign-owned MNCs (56 percent) than UK-owned MNCs (44 per cent) reported the use of HRIS on an international basis (Edwards et al 2007).

There were some discernable differences in regard to ownership. As indicated from the study, American firms were the highest users of HRIS (70 per cent), while the ‘rest of the world’ MNCs is the least likely. This again resonates with the UK findings where US MNCs were among the greatest users of HRIS and Japanese MNCs the lowest (Edwards et al, 2007). The impact of sector on the take-up of HRIS will be fully outlined and placed in the appendix in the forthcoming chapters. Among UK MNCs, the service sector accounted for the greatest number of firms with HRIS. However, among foreign-owned MNCs multi-sector firms were by far the largest users, followed by those in the service.

2.7 Previous Research: Human Resource Factors

Previous studies have been utilized in exploring the current human resource innovative programmes that UK MNC’s must take into account in their drive for global expansion. One of the main limitations of this review is that it is limited within the context of UK MNC’s as there was the lack of evidence to determine the effects of these practices on MNC’s operating in the context of both emerging and non-emerging economies. This is in consonance with Ericksen and Dyer (2005) and Wright et al’s., (2005), both of who also called for further empirical research from different contexts. Gerhart (2005) substantiate the question, to what extent are these innovative HR programmes valid for other context by saying: “This is a concern because it seems unlikely that one set of HR practices will work equally well no matter what context”. To shed more light on the issue and to further examine the relevance and effects of such programmes, it is important to conduct research in non-US / UK context, (Katou & Budhwar, 2007), especially in emerging economies.

2.8 HR Factors for Global Expansion: Effectiveness

Previous research has explored the links between individual HR practices and corporate overall performance. For example, Lam and White (1998) reported that firms’ HR innovative programmes which are largely measured by the effective recruitment of employees, compensation programme, and extensive training and development were related to return on assets, growth in sales, and growth in stock values. Using a sample of manufacturing companies, multinational servicing companies and global financial institutions, Richard and Johnson (2001) examined the impact of strategic HRM effectiveness (ratings of how effectively a variety of HR practices were performed) on a number of performance variables. The findings suggested that implementation of innovative HR programmes had an effect on employee turnover and the overall performance of the company.

2.8.1 Recruitment & Selection

According to Terpstra and Rozelle’s (1993), who compared the relationship between recruiting / selection practices among US / UK MNC’s and the firms performance, it was found that there was a strong connection in the company’s performance between implementation of the new HR practices and the previous traditional practices, this was focused mainly on recruiting, selection and the use of formal selection procedures and firm performance. Cascio (1991) also states that the improved performances recorded after implementation of such new HR practices are generally substantial.

2.8.2 Employment Training Programmes

Russel, Terborg and Powers (1985) in a survey of 30 US MNC’s establish a link between the adoption of employment training programs and financial performance. The use of performance appraisals (Borman, 1991) and linking such appraisals with compensation has strongly been connected with the performance of a firm. (Gerhart & Milkovich, 1990). Koch and McGrath (1996) reported that firms using more sophisticated staffing practices (planning, recruiting, and selection) had higher labour productivity.

2.8.3 Communication & Employee Involvement

Huselid (1995) reported that HR practices can influence firm performance through provision of organization structures that support involvement among employees and provides flexibility for improvement of job performance. Green et al (2006) states from findings of a survey that organizations that vertically aligned and horizontally integrated core human resource functions and practices performed better and produced more committed and satisfied HR function employees who exhibited improved individual and organizational performance.

2.8.4 Other Models

Most of the work on innovative human resource programmes and the company’s performance has been undertaken in the context of MNC’s who consider the US and the UK as their home country. The question which arises, though, is whether the UK and US-oriented models are appropriate and representative in other contexts (see debate in special issue of the International Journal of Human Resource Management, 12(7), 2001). Other studies analyzed such as Harel and Tzafrir (1999) found that in parts of Asia and the middle-east, innovative HR practices were related to perceived organizational and market performance. Bae and Lawler (2000) did find a significant relationship between HR practices and firm performance in their sample of 140 manufacturing firms in Asia, covering china, Japan and South Korea. Lee and Miller (1999) also found a strong relationship between HR practices and performance among a number of MNC’s in Asia, but it is clearly stated that this relationship was most strongly pronounced among firms using dedicated positioning (marketing differentiation or innovative differentiation) strategies. Bae et al., (2003) in their study of HR strategy in Pacific Rim countries found that the evidence of a strong relationship was however based on strict high-performance work system with a number of variable conditions. Morishima (1998) found support for the contingency perspective in a sample of Japanese companies. Firms with well-integrated high-involvement work practices and firms with well-integrated practices consistent with more traditional Japanese employment strategies both did better than firms with poorly integrated practices. Bae et al (2003) in their investigation of Hong Kong multinational companies found an increase in the firm’s performance due to certain core innovative HR work practices (training and compensation techniques) with high involvement characteristics.

2.9 Implementation

Whilst there are currently limited researches in respect of implementation of innovative HR programs in the context of UK MNC’s, however, according to Briscoe and Schuler (2004), Implementation may vary in respect of ‘what and how’, thus limiting the value of comparative survey research. Chew and Horowitz (2004) states that the subject of implementation should only be considered in the context of the specific MNC or firm involved, as there are lots of contextual factors and limitations in implementation hence the need to be cautious and dissuade any hasty conclusions when taking on findings from research journals on implementation. Horowitz (2004) states that primary research on implementation would need to focus on contingency approaches and mediating variables affecting the MNC level application. A number of theoretical approaches would also add to the importance of ‘context’ frameworks such as integration/divergence or universalism versus local particularism, and ethnocentric, geocentric, regiocentric and polycentric managerial strategies (Chew et al 2004). The author believes that such an extensive approach would not only examine the relationship between human resource innovative practices and relevance, but would take into account the host environment.

2.9.1 Implementation & Expansion: Formation of HR Strategies

According to Briscoe et al (2004), very little work has been done on the formation of methods for implementing and controlling the transition from specific administration HR services unto innovative programmes that are directly linked to strategic challenges such as increasing revenue through new market entry or mergers and acquisitions. The formation of the UK MNC’s corporate strategy has to take into account the balance between those activities that need to be centralized or standardized and the degree of flexibility required by the affiliate to operate in the host country Brock (2005).

The formation of HR strategies is distinguishable by variance in terms of level of abstraction and scope. The level of abstraction refers to the level at which the HR strategy is focused. According to Combs et al. (2006), there are different levels of abstraction in the design of a global HR system. Levels vary from recommendations, policy, to operational-level procedures. With a policy-level of abstraction, affiliates are given the freedom to implement their own HR strategies within the broad parameters of the standardized policies. However, with an operational level of abstraction, affiliates are expected to implement a more detailed HR management practice. Scope refers to the extent of HR management practices dealt with in the HR strategy. For example, the HR strategy may have a


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