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Fast growth of globalization has brought about a change in the global economy during the past several decades. Factors like trade liberalization and access to cheaper labor, as well as similarity of consumer demand around the world and advances in technology and communication has expanded the consumption and production on a global level. These factors created new challenges for businesses around the world. Therefore, as a response, many companies decided to spread out their operations across national borders in order to be competitive.
A company that operates its business in at least one country other than its country is called Multinational Corporation (MNC) and is attributed with the nature of multiculturalism. The number of MNCs is increasing fast and today it is not surprising to find major MNCs such as McDonalds, Toyota, Nike and Microsoft almost in every country. They played a powerful role in the globalization by being considered as the main vehicle that enables goods and services to move around the world.
However, when company decides to internationalize, it is aware that its operations will be exposed to various environmental and cultural challenges. In order to operate successfully, it should be able to modify its products and services to meet the cultural preference of foreign customer and to adjust its operations to comply with the local legal requirements. Most likely it will employ local people and managers, whereby it should be noted that those employees then come with different culture backgrounds and different working styles as compared to its employees in the Headquarter. This is where Human Resource Management (HRM), and especially International Human Resource Management (IHRM), become an important issue for the organization which is MNC.
Human Resource Management becomes more complex at the international level and, therefore, is crucial for the organization to execute the right HRM strategy for its international operations. To make it more severe, it is argued that business failures in the international arena are often linked to poor management of human resources.
This paper aims to discuss the hypothesis given above. The importance of Human Resource Management and, especially, International Human Resource Management, as well as the business challenges of MNCs around the world and factors affecting the business operations will be all discussed and analyzed throughout the paper.
DEFINING HUMAN RESOURCE MANAGEMENT (HRM)
Human Resource Management (HRM) is the management of a business’ employees. HRM is handled differently by every business with larger businesses utilizing an entire department dedicated to this function. Smaller businesses may combine their HRM functions with other tasks of the company.
There are different definitions of Human Resource Management and it mainly refers to the function performed in organizations that facilitates the most effective use of people (employees) to achieve organizational and individual goals. It is a system that is used by organization to ensure that human talent is used effectively and efficiently to meet its organizational goals. Therefore, HRM plays a major role in everyday business practices and in the effective use of personnel or employees of the company.
There is a variety of HRM areas in each organization, regardless the size, from laws implementation to salaries. HRM’s job is to keep up with the changes and amendments of organization’s policies and to make all employees aware of the new laws and/or procedures. Also, HRM is part of the organization’s planning process and it is critical to an organization’s success. It determines what the “supply and demand” is now and will be for human resources in the future.
Organizations worldwide have very complex rules and regulations to abide by when it comes to its employees. The degree to which these regulations apply to a certain organization depends upon the type of business an organization is. Different organizations require different trainings for its employees; therefore some of them require online training classes regarding labor laws and sexual harassment, while others emphasize on the violence in the workplace. With such an HRM educating the employees on various areas, the employees gain knowledge as to what to do in different challenging situations so the company’s liability risk is small.
DEFINING INTERNATIONAL HUMAN RESOURCE MANAGEMENT (IHRM)
After defining Human Resource Management (HRM) itself, which usually covers functional areas such as human resource planning, staffing, reward, motivation, and performance management, it is important to define International Human Resource Management (IHRM) and to mention that all the activities of HRM change once it goes internationally.
With an increasing number of MNCs around the world, the role of IHRM is becoming more and more important for the internationalization process of each company. It has been identified as a powerful strategic tool that helps companies to formulate and implement their international business strategies and improve their subsidiaries performances.
IHRM refers to human resource management issues, policies and practices that result from the strategic activities of multinational enterprises. Managing HR in MNCs is different from the way the HR is being managed in the country.
There are three factors that differentiate IHRM from domestic HRM. First, the countries of operations are different. Second, there is a different type of employee to deal with. In international environment, HR management has to deal with the host-country nationals (HCNs), expatriates or home-country nationals (PCNs), and third country nationals (TCNs). For example, if L’Oreal hired an Indonesian employee in their Indonesian subsidiary, that employee is HCN. When manager from L’Oreal Headquarter in France comes to work in Indonesian subsidiary, that manager is PCN. If L’Oreal employs manager neither from Indonesia nor France to work in their Indonesian subsidiary, that manager is TCN. Third factor is the way HR practices (e.g. staffing, compensation, training, etc.) are conducted. Although IHRM practices seems to have the same activities as domestic HRM, in IHRM the manager will be dealing with different environment and diversity of employees from different cultural background.
Dissimilarities between HRM and IHRM are mostly due to the deep differences between host and home countries in terms of culture, economy, legal system, and labor markets. Because of these reasons, managing HRM in the overseas’ subsidiary is likely to be more complex and difficult as compared to managing its domestic HRM. Hence, it is important for HR manager to understand the complexity of IHRM and to be aware of other important issues related to IHRM, as well as to be able to develop and implement HR strategy that suits the international practices. Limitation to understand IHRM’s context and inability to implement the right approach will result in a failure of that particular organization’s strategy and, consequently, business overseas as a whole.
As a result of internationalization processes, companies must increasingly be managed globally, which puts managers facing several challenges. Market, product, and production plans must be coordinated on a worldwide basis. Such an organization’s structure must be formed whereby the balance between centralized home-office’s control and adequate local autonomy must be created. For example, Ford Motor Company today is managed as a global business. Activities such as product development and vehicle design are conducted on a worldwide basis, rather than in regional development centers. Manufacturing and purchasing are also handled globally. Ford approaches HR on the same global basis, “moving employees from anywhere to anywhere if they’re the best ones to do the job.” At Ford and at other global companies, this kind of global HR perspective “requires understanding different cultures, what motivates people from different societies, and how that’s reflected in the structure of international assignments.” As a result, some of the most pressing challenges companies face concern the impact of “going global” on the employers’ human resource management systems. This is because all those HR activities are complicated by the sorts of cultural and political differences that characterize different countries around the world.
When compared with domestic human resource management, IHRM requires a much broader perspective on even the most common HR activities. This is particularly so for HR managers operating from MNC’s headquarters (HQ). The number and variety of IHRM activities are daunting. International HR managers must deal with issues as varied as international taxation; international relocation and orientation; various other administrative services for expatriates; selecting, training and appraising local and international employees; and managing relations with host governments in a number of countries around the world.
HUMAN RESOURCE AND INTERNATIONAL BUSINESS CHALENGES
Companies have gone global and the number of their employees abroad has increased. In terms of employees overseas, for instance, a recent survey of 351 companies found that virtually every firm had at least one employee on international assignment. About 67% of the firms had between 1 and 40 employees abroad, while the remaining firms have 41 or more employees on international assignments. About 20% of the assignments were short term, up to 1 year, while 50% were for up to 3 years, and about 30% were for up to 5 years or more.
With more employees abroad, HR departments have had to tackle new global challenges. Each firm is faced with certain global pressures affecting its human resource management practices. Among them, the three were especially announced:
Deployment: Easily getting the right skills to where they are needed in the organization regardless of geographic allocation;
Knowledge and innovation dissemination: Spreading knowledge and practices throughout the organization regardless of where they originate; and
Identifying and developing talent on a global basis: Identifying who has the ability to function effectively in a global organization and developing these abilities.
Dealing with such challenges means most employers have had to move quickly to develop HR policies and procedures just for handling global assignments. This process itself can be very complex. For example, it is a trouble just to decide on whom to deploy to an overseas assignment and how to pay that person. What one needs to do hereby is following:
Candidate identification, assessment, and selection. In addition to the required technical and business skills, key traits to consider for global assignments include, for instance: cultural sensitivity, interpersonal skills, and flexibility.
Cost projections. The average cost of sending an employee and family on an overseas assignment is reportedly between three and five times the employee’s pre-departure salary. As a result, quantifying total costs for a global assignment and deciding whether to use an expatriate or a local employee are essential in the budgeting process.
Assignment letters. The assignee’s specific job requirements and associated pay will have to be documented and formally communicated in an assignment letter.
Compensations, benefits and tax programs. There are many ways to compensate employees who are transferred abroad, given the vast differences in living expenses around the world. Some common approaches to international pay include home-based plus a supplement and destination-based pay.
Relocation assistance. The assignee will probably have to be assisted with such matters as maintenance of the person’s home and cars, shipment and storage of household goods, and so forth.
Family support. Cultural orientation, language training, education assistance, and emergency provisions are just some of the matters to be addressed here before the family is shipped abroad. And that is just the small part. Cross-cultural, technical, and language training programs will probably be required too.
Complex labor laws and rules from country to country and provisions for re-assimilating the expatriate when he or she returns home are some of the other issues that are to be addressed as well.
THE INTERNATIONAL BUSINESS ENVIRONMENT
International business is different from domestic business because the environment changes when a firm crosses international borders. Typically, a firm understands its domestic environment quite well, but is less familiar with the environment in other countries and must invest more time and resources into understanding the new environment. The following considers some of the important aspects of the environment that change internationally.
The economic environment can be very different from one nation to another. Countries are often divided into three main categories: the more developed or industrialized, the less developed or third world, and the newly industrializing or emerging economies. Within each category there are major variations, but overall the more developed countries are the rich countries, the less developed the poor ones, and the newly industrializing (those moving from poorer to richer). These distinctions are usually made on the basis of gross domestic product per capita (GDP/capita). Better education, infrastructure, technology, health care and so on are also often associated with higher levels of economic development.
In addition to level of economic development, countries can be classified as free-market, centrally planned, or mixed. Free-market economies are those where government intervenes minimally in business activities, and market forces of supply and demand are allowed to determine production and prices. Centrally planned economies are those where the government determines production and prices based on forecasts of demand and desired levels of supply. Mixed economies are those where some activities are left to market forces and some, for national and individual welfare reasons, are government controlled. In the late twentieth century there has been a substantial move to free-market economies, but the People’s Republic of China, the world’s most populous country, along with a few others, remained largely centrally planned economies, and most countries maintain some government control of business activities.
Clearly, the level of economic activity combined with education, infrastructure, and so on, as well as the degree of government control of the economy, affect virtually all facets of doing business, and a firm needs to understand this environment if it is to operate successfully internationally.
The political environment refers to the type of government, the government relationship with business, and the political risk in a country. Doing business internationally thus implies dealing with different types of governments, relationships, and levels of risk. There are many different types of political systems, for example, multi-party democracies, one-party states, constitutional monarchies, dictatorships (military and nonmilitary). Also, governments change in different ways, for example, by regular elections, occasional elections, death, coups, war. Government-business relationships also differ from country to country. Business may be viewed positively as the engine of growth, it may be viewed negatively as the exploiter of the workers, or somewhere in between as providing both benefits and drawbacks. Specific government-business relationships can also vary from positive to negative depending on the type of business operations involved and the relationship between the people of the host country and the people of the home country. To be effective in a foreign location, an international firm relies on the goodwill of the foreign government and needs to have a good understanding of all of these aspects of the political environment.
A particular concern of international firms is the degree of political risk in a foreign location. Political risk refers to the likelihood of government activity that has unwanted consequences for the firm. These consequences can be dramatic as in forced divestment, where a government requires the firm give up its assets, or more moderate, as in unwelcome regulations or interference in operations. In any case, the risk occurs because of uncertainty about the likelihood of government activity occurring. Generally, risk is associated with instability and a country is thus seen as more risky if the government is likely to change unexpectedly, if there is social unrest, if there are riots, revolutions, war, terrorism, and so on. Firms naturally prefer countries that are stable and that present little political risk, but the returns need to be weighed against the risks, and firms often do business in countries where the risk is relatively high. In these situations, firms seek to manage the perceived risk through insurance, ownership and management choices, supply and market control, financing arrangements, and so on. In addition, the degree of political risk is not solely a function of the country, but depends on the company and its activities as well-a risky country for one company may be relatively safe for another.
The cultural environment is one of the critical components of the international business environment and one of the most difficult to understand. This is because the cultural environment is essentially unseen; it has been described as a shared, commonly held body of general beliefs and values that determine what is right for one group. National culture is described as the body of general beliefs and values that are shared by a nation. Beliefs and values are generally seen as formed by factors such as history, language, religion, geographic location, government, and education; thus firms begin a cultural analysis by seeking to understand these factors. Firms want to understand what beliefs and values they may find in countries where they do business.
Advantages and Challenges of Having a Global HR Approach
Technology is pushing global HR to the forefront, because it seamlessly integrates HR systems by taking advantage of advance servers and databases that facilitate the presence of a comprehensive Human Resource Information Systems. Payroll and benefits data is accessible across markets as a result of these technological advancements: in effect, making information readily available to HR professionals in a multinational corporation across the globe.
Learning organization: For example, it is not uncommon for Visa or American Express to have its customer service operations outsourced to a call center in Bangalore. Cross-collaboration has also been made possible because of the virtualization of IT functions across the globe. The use of video technology also enables virtual teams to communicate “face to face”, although separated by land and ocean.
Cost of labor: The cost of labor in new markets enables corporations to maximize access to international knowledge workers at minimal cost. The Inquirer (http://www.theinquirer.net) in 2003 reported computer programmers in India earned $10,000 in comparison to their US counterparts who earned over $60,000. Additionally, a global salary comparison chart provided by worldsalaries.org shows that the purchasing power parity (PPP) of computer programmers in the US is $4141 compared to $1075 for their Chinese counterparts. As a result, the cost imperatives for US businesses to take advantage of well-qualified overseas talent are very strong.
New markets: When organizations decide to expand their global strategy through mergers and acquisitions or direct investment, HR is needed to implement the people strategy of such an investment. Having a global HR strategy enables firms to create an environment and strategy that can absorb cultural obstacles through creating a proactive HR management framework. Previous experience with a global HR strategy positions an organization positively, so that it can take advantage of new market opportunities based supported by an experienced and tested global HR process.
A multinational corporation operating internationally competes with cultural shades which are not always overcome by having a standardized corporate culture across different markets. There is a clear difference between having a multinational manager or professional who speaks the right languages in contrast to one who maintains a true open-mind, while working within the international framework.
Managers had trepidations about working overseas because of the expectation that employees will be demoted, after repatriation to their home location. For example, a manager of an IT team in Silicon Valley could have concerns about bringing on an expatriate trained in India, because of concerns that the Indian professional may not be up to same level.
Because of the obvious geographical, cultural, legal and linguistic differences, there are inherent challenges in setting up a standardized HR approach across borders. For example in most of Europe, specifically in the UK, job advertisements can clearly have age and sex requirements. Also, most job seekers are comfortable adding details about their families and may add a professional photo of themselves to their resumes. In the USA, these examples present clear equal employment opportunity challenges because basic qualifications of a job description cannot include sex and age requirements unless it is a bona fide occupational requirement. Also, putting a picture on a resume plus details of one’s family life can present concerns about employment discrimination, if a particular job seeker is not hired by company. HR is seen as a separate function in the UK, however in France it is a sub-set of the finance department and a sub-set of the legal department in Germany. This reflects a clear difference in orientation based on the aforementioned observation. A further observation is made in Russia, where expatriates there do not have a clear understanding of their total rewards and tax obligations, because of the informal manner in which such matters are handled.
Even when dealing with one particular HR function area such as compensation, the international HR manager is faced with a great variety of national and international pay issues. For example, while dealing with pay issues, the HQ-based HR manager must coordinate pay systems in different countries with different currencies that may change in relative value to one another over time. An American expatriate in Tokyo who receives a salary of $100,000 may suddenly find the buying power of that salary dramatically diminished if the Japanese yen strengthens in value relative to the US dollar.
In the case of extreme benefits provided to host company employees, some interesting complications might arise. For instance, it is common in the United States to provide health insurance benefits to employees and the employee’s family, which usually means spouse and children. In some countries, however, the term “family” may include a more extended group of relatives-multiple spouses, aunts, uncles, grandparents, nephews, and nieces. How does the firm’s benefit plan deal with these different definitions of family?
HUMAN RESOURCE MANAGEMENT AND INTER-COUNTRY DIFFERENCES
To a large extent, companies operating only within the borders of its own country have the luxury dealing with a relatively limited set of economic, cultural, and legal variables. While the different states and municipalities certainly have their own laws affecting HRM, a basic country law framework also helps produce a fairly predictable set of legal guidelines regarding matters such as employment discrimination, labor relations, and safety and health.
A company operating multiple units abroad is generally not blessed with such a relative homogeneity. For example, minimum legally mandated holidays may range from none in the United Kingdom to 5 weeks per year in Luxembourg. And while there are no formal requirements for employee participation in Italy, employee representatives on boards of directors are required in Denmark for companies with more than 30 employees. The point is that the management of the HR function in multinational companies is complicated enormously by the need to adapt personnel policies and procedures to the differences among countries in which each subsidiary is based. Cultural and economic dissimilarities are only some inter-country differences that demand such an adaptation.
In many modern languages the word culture is used in a figurative sense, with two meanings:
The first, most common, meaning is “civilization”, including education, manners, arts and crafts and their products.
The second meaning derives from social anthropology, but in the past decades it has entered common parlance. It refers to the way people think, feel, and act.
Human culture is the result of hundreds of thousands of years of evolution. During most of this time, competition between bands of gatherer-hunters was a powerful evolutionary pressure. As a result our social and intellectual skills have become ever bigger. But we did not lose the elements of our behavior that identify us as social mammals. Fights for dominance, competition for partners, a wish to belong and to know who does not belong – all of these basic drives are alive in us. No wonder that culture revolves around basic issues that have to do with group membership, authority, gender roles, morality, anxiety, emotions and drives. Culture affects our love lives, our professional lives, our wars and our dreams.
An individual human being acquires most of her or his programming during childhood, before puberty. In this phase of our lives we have an incredible capacity for absorbing information and following examples from our social environment: our parents and other elders, our siblings and playmates. But all of this is constrained by our physical environment: its wealth or poverty, its threats or safety, its level of technology. All human groups, from the nuclear family to society, develop cultures as they go. Culture is what enables a group to function smoothly.
Today’s world population is divided into some 200 nations. Comparing nations has become part of most social sciences. Some nations are more culturally homogeneous than others; especially large nations like Brazil, China, India and Indonesia comprise culturally different regions. Other culturally similar areas belong politically to different nations: this is in particular the case in Africa. Because values are acquired in childhood, national cultures are remarkably stable over time; national values change is a matter of generations. What we see changing around us, in response to changing circumstances are practices: symbols, heroes and rituals, leaving the underlying values untouched.
Many of us spend a large part of their time in organizations. Organizational cultures distinguish different organizations within the same country or countries. Organizational cultures differ mainly at the level of practices (symbols, heroes and rituals); these are more superficial and more easily learned and unlearned than the values that form the core of national cultures. National cultures belong to anthropology; organizational cultures to sociology. Because organizational cultures are rooted in practices, they are to some extent manageable; national cultures, rooted in values, are given facts for organization management.
Entering an occupational field, like nursing or ICT, implies acquiring a degree of mental programming. Occupational cultures have symbols, heroes and rituals in common with organizational cultures, but they also often imply holding certain values and convictions. Occupational cultures in this respect take a position in between national and organizational cultures. The culture of management as an occupation contains both national and organizational elements.
Gender differences are not usually described in terms of cultures. It can be revealing to do so. If we recognize that within each society there may be a men’s culture that differs from a women’s culture, this helps to explain why it is so difficult to change traditional gender roles. Women and men are often technically able to perform the same jobs, but they do not respond to the symbols, do not look like the heroes, do not share the rituals. Even if some do, the other sex may not accept them in their deviant gender role. Feelings and fears about behaviors by the opposite sex can be of the same order of intensity as reactions of people exposed to foreign cultures. The degree of gender differentiation in a country is highly dependent on its national culture.
To start with, incentive plans in Japan still tend to focus on the work group, while in the West the more usual prescription is still to focus on individual worker incentives. Similarly, in a study of about 330 managers from Hong Kong and the United States, U.S. managers tended to be most concerned with getting the job while Chinese managers were most concerned with maintaining a harmonious environment.
In Mexico, individualism is not valued as highly as it is in the United States. As a result, workers do not place as much importance on self-determination as do those in the United States, and tend to expect to receive a wider range of services and benefits (such as food baskets and medical attention for themselves and their families).
The list of cu1tural differences from country to country is almost endless. In Germany, for instance, you should never arrive even a few minutes late and should always address senior people formally, with their titles. Such cultural differences are a two-way street, and employees from abroad similar1y need to be oriented to avoid the cultural shock of coming to work in any other than their own country. In the United States, for example, it is important to know more on topics like sexual harassment and recognition of gay and lesbian rights.
Differences in economic systems among countries also translate into inter-country differences in HR practices. In free enterprise systems, for instance, the need for efficiency tends to favor HR policies that value productivity, efficient workers, and staff cutting. Moving along the scale toward more socialist systems, HR practices tend to shift toward preventing unemployment, even at the expense of sacrificing efficiency.
In 1992, 12 separate countries of the European Community (EC) were unified into a common market for goods, services, capital and even labor. Generally speaking, tariffs for goods moving across borders from one EC country to another disappeared, and employees (with some exceptions) now find it easier to move freely between jobs in the EC countries.
The 1999 introduction of single currency, euro, further blurred many of the inter-country differences. However, differences remain. Many countries have minimum wages while others do not, and hours permitted in the workday and workweek vary from no maximum in the UK to 48 per week in Greece and Italy. Other differences exist in matters like minimum number of annual holidays and minimum notice of termination to be given by employers.
European Union strives to gradually reduce these sorts of differences. However, cultural differences still undoubtedly lead to differences in HR practices from country to country. Therefore, managing human resources at multinational level remains difficult for HR managers even just within the Europe.
In summary, inter-country differences in cultures, economic systems, labor costs and lega
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