What factors influence the policies and practices of multinational firms?

“What factors influence the policies and practices of multinational firms?”

Multinational firms are those who have direct operations and employees within several countries (Almond and Tregaskis, 2007). The types of policies and practices in which multinational corporations inhibit have created vast interest within the realm of academic literature. It would be wrong to suggest that policies and practices are of homogenous nature throughout the globe, since every country has their own distinct cultures and societal beliefs. Thus, what is suitable in one nation such as Japan may not be deemed as suitable within others such as the U.S (Almond and Tregaskis, 2007). Because of their wide stretched global operations, MNC’s open themselves up to a wide range of factors. Since MNC’s are not just operating within their country-of-origin, expatriate (host country) factors must also be acknowledged.

Many academics have created their own favoured frameworks in which they try to explain factors that influence MNC policy and practice. Assessment of academic literature therefore concludes that there is no one specific factor or approach that explains influence. Thus, in order to create a valid discussion a range of approaches and factors shall be explored. It is important to note that the factors explored should not be considered in isolation because factors of influence can act as forces that either complement or oppose each other.

Edwards, Rees and Coller (1999) explore the influence of structural and political factors. They acknowledge that these two factors can indeed have determining effects upon each other. Edwards, Rees and Coller (1999) identify structural factors as the MNC’s external environment as well as its organisational structure. The external environment can incorporate the 4 influences framework (Edwards and Ferner, 2002). Elements of these 4 influences have also been incorporated into the work of others (see Edwards, Rees, Coller, 1999; Ferner, 1997; Ferner, Quintanilla and Varul, 2001; Muller-Camen et al, 2001).

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The first of the 4 influences is that of the country-of-origin effects or sometimes called home-country effects. This is from where the MNC originates. Country-of-origin effects can be best described via cultural and institutional approaches (Almond et al, 2005). Cultural approaches are based upon the norms, values and attitudes of a given country. Hofstede (1980) developed a framework called ‘dimensions of national cultures’. This focuses upon explaining the differences in culture between countries and is based upon 4 value dimensions which included, power distance, individualism/collectivism, masculinity/femininity and uncertainty avoidance. For example, it is advocated that Japan has less emphasis upon individualism that the U.S. Another example is how Japan has high tendencies of masculinity compared to the feminine culture of Spain. These differences in culture could be problematic for MNCs who want to implement home grown practices in expatriate subsidiaries. For example the U.S and their MNCs have an anti-union ethos and would possibly struggle to implement this policy within host country subsidiaries such as Japan, where Japanese culture shows that they have high emphasis upon collectivism. “The greater the cultural difference between home country and the host, the harder it will be for the MNC to transfer home-country philosophies” (Ferner, 1997:25). Although Hofstede (1980) and his cultural dimensions show differences between nations it does not solely explain country-of-origin effects. This is due to the fact that it does not explain why different nations are categorised by different values (Almond et al, 2005). Thus it is important to explore the institutional approach which looks at how nations firms are entrenched within historical development of national institutions.

The institutional approach incorporates the role of national business systems within the country of origin and shows how the national institutional framework has historically evolved and how this influences the policies of MNCs (Edwards, 2004; Ferner, 1997). To name a few, national institutions cover aspects of the labour market, financial markets, institutions of education, firm structures and their coordination with other national firms, legal systems and industrial relations (Almond et al, 2005). It is the national institutions that provide a framework for how businesses operate within their domestic/national markets, as a consequence MNCs are also likely to build their policies and practices around their national framework and historical roots. For example U.S MNCs are extremely anti-union in their approach. Almond et al (2005:280) believes that “ the relative reluctance of U.S MNCs abroad to engage with systems of collective bargaining can be traced back to the particularly hostile relationship between capital and organised labor, as well as a more general opposition to state regulation and the employment relationship”. The United States and their anti-union ethos could also be linked to the nature of how they acquire corporate finance. U.S firms generate capital from stock markets and have less reliability upon banks for finance. Thus capital is raised from shareholders. Union activity is seen as a threatening to shareholders decisions, because shareholders are the financial tool it is therefore important that threats such as collective labour unrest are eradicated (Almond et al, 2005).

MNCs will attempt to diffuse country of origin policies and practices into host-country subsidiaries since they feel that these have contributed to the success of their nations firms and their competitive advantage. For example this was seen in the Ford Motor Company and Japanese firms where practices were based around the most efficient methods of production, both of which were internationalised (Almond and Tregaskis, 2007). This diffusion of practices is best known as forward diffusion, by where practices and policies are transferred from the MNCs headquarters (HQ) to subsidiaries. MNCs are highly likely to concentrate HQs within their home country as it is advocated that the most important functions of the firm stay within the home country (Almond and Tregaskis, 2007).

The second of the four influences framework is that of host country effects. The host country effect is also shaped via cultural and institutional factors. Muller-Camen et al (2001) explain that host country effects are firstly dependent upon institutional distance between the two countries and the strength of national institutional regulation. Where there is large institutional distance between the two countries it will be harder for the home country to impose its practices upon expatriates, thus host country effects can act as a negative force against home country policies and practices. The strength of national institutional regulation also plays a key role as “MNCs are under more pressure to comply in more tightly regulated business systems than in weaker institutional environments” (Muller-Camen et al, 2001:437). Almond et al (2005) show how much U.S MNCs invest within host countries. FDI in Britain and Ireland per head was considerably larger than FDI per head in Germany and France. Thus suggesting that host countries which have a lack of regulation are likely to receive more FDI because home country practices of U.S MNCs are easily transferred in unregulated economies such as Britain compared to highly regulated economies like France.

The above suggests that the host country effect can block diffusion of practices influenced by the country of origin. As previously explored when talking about the cultural differences between Japan and the U.S it was presented that home country practices may not fit with those practices usually adopted by expatriates and their domestic firms consequently showing that there is large institutional difference between the two. For example a U.K MNC whose host country has adopted a 48 hour working week may struggle to enforce this within French subsidiaries where it is the norm to work a 35 hour working week. Another example of uneasy transfer is where Swedish Unions blocked performance related pay introduced by the US multinational IBM in its Swedish subsidiaries. Similarly other U.S multinationals such as Pizza Hut and McDonalds experienced strikes within Italy and France which completely went away from the US anti-union ethos (Muller-Camen et al, 2001).

The above examples have shown how host country effects can have a determining impact upon policies transferred from the country-of-origin. However, host country effects aren’t always seen as problematic to MNCs they can also be of advantage. MNCs can exploit national differences, such as having access to cheap or highly skilled labour (Almond and Tregaskis, 2007). The transfer of host country practice to home country is known as reverse diffusion, this is where the policies of expatriate subsidiaries are transferred to the country of origins HQ. This reverse diffusion can be of benefit as the MNC may acquire new knowledge, policies and practices that could enable them to achieve further competitive advantage.

Edwards et al (2005) acknowledge that British MNCs are engaging themselves in reverse diffusion in order to learn and gain knowledge. There is also premise within academic literature that German MNCs are engaging in reverse diffusion by taking practices and policies from their Anglo-Saxon subsidiaries such in the UK. This reverse diffusion is moving German MNCs into new modes of operation (Edwards et al, 2005; Ferner, Quintanilla and Varul, 2001; Ferner and Varul, 2000). German MNCs are using British subsidiaries as a vanguard for policies and practices because the UK are seen as a developed, internationalised and deregulated economy with much knowledge of globalised industries. German MNCs believe that these factors will assist them in learning new ways in which to operate in order to stay ahead in the global market where competition is rife (Ferner and Varul, 2000).

Similarly there is also the need for MNCs to be aware of different customer demands within different countries, thus it is important that host country policies and practices are used in order to meet these demands. This is called divergence where an MNC has different policies and practices throughout its global subsidiaries in order to fit with the context of local market demands. (Almond and Tregaskis, 2007).

The third of the 4 influences is dominance effects. This presupposes that countries that possess dominance through economic or political power will have their practices replicated by other countries. For example “MNCs which originated in ‘dominant’ countries may seek to utilise their home-country practices in their foreign subsidiaries. Alternatively, MNCs may use those subsidiaries in ‘dominant’ countries to gain access to new practices which are subsequently used across their operations” (Edwards and Ferner, 2002:98). This statement suggests that dominance effects can reinforce both forward and reverse diffusion; it is solely dependent upon which country is the most dominant. As previously explored German MNCs are engaging in reverse diffusion of practices from Anglo-Saxon subsidiaries, dominance effects could be the reason why this is happening. Since Anglo-Saxon countries such as the U.S and Britain are highly dominant economies firms decide to emulate practices that have helped economies and firms succeed (Almond et al, 2005). An example of this is the growth and success of firms within Japan through their use of lean production techniques. Lean production techniques are now used in many forms throughout the world.

The last of the 4 influences is that of the force for international integration. MNCs are facing 2 types of pressure, the pressure to integrate policies and practices across borders and secondly the need to respond to local differences (Almond and Tregaskis, 2007). This opens up the debate of whether there is need for convergence or divergence of policies and practices. It is largely attributed that globalisation is reducing national differences in consumer taste; thus, it is easier for MNCs to create synergy between their countries of operation (Almond et al, 2005).

Pressures of globalisation are pursuing the need for convergence and standardisation of policies and practices across borders. The need for convergence and standardisation can be attributed to competitive reasons as MNCs can benefit from cost reduction, economies of scale and easier transfer of knowledge (Almond and Tregaskis, 2007). Some MNCs “have moved away from country-based structures towards organising themselves around global divisions or regional blocks so that comparable operations are linked together” (Edwards, 2004:401). This reorganisation around regional blocks and global divisions however, is not a force for global integration but instead regional integration. This is showing that global convergence is not necessarily happening to all firms but that some are making small steps to make operations more integrated than before. Nevertheless, country based operations do still exist within many MNCs and this is where there is a need for divergence of policies and practices in order to respond to country based demands (Almond and Tregaskis, 2007).

The work of Prahalad and Doz (1987) cited in Almond and Tregaskis (2007:636) shows the Integration-Responsiveness (IR) Grid. This demonstrates how different firms fit into the grid depending upon whether there level of integration is high or low and whether their responsiveness to national differences is high or low. The nature of the structure and strategy of MNCs is also based upon where MNCs are situated within this grid. For example, MNCs that have multiple subsidiaries in different countries operating in many domestic markets would be situated within the low integration and high responsiveness part of the grid, therefore suggesting that there is need for these MNCs to have a diverse range of policies. Whereas MNCs who are offering standardised products within the global market are likely to be situated in the high integration and low responsiveness part of the IR grid and are much likely to achieve higher degree of international integration (Almond and Tregaskis, 2007).

As previously mentioned the structure of an MNC is informed by where tan MNC sits within the IR grid. The structure of the MNC determines whether the host or home country will have the largest effect and whether power comes from the HQ or from the subsidiary. Drawing upon the work of Bartlett and Ghoshal (1989) cited in Almond and Tregaskis (2007:638) different types of MNC structure are identifies. These include the multi-domestic structure; where subsidiaries have a high responsiveness to local markets; thus, the subsidiary has autonomous power in the choice of policies and practices which it uses which will more than likely be shaped around host country effects. Another structure is that of global structure; where there is high tendency towards international integration and a low responsiveness to local markets, due to the likeliness of products being standardised. As a result, the HQ will have more power over subsidiaries and will be likely to transfer those practices developed around home country effects.

Finally there is the transnational structure; this is where the MNC has high responsiveness to local markets and a high tendency towards integration. This structure does not exert power to either subsidiary or HQ and practices are neither solely shaped around host nor home country effects. This type of structure forms networks between subsidiaries and the HQ where there are tendencies of both, forward and reverse diffusion. Thus, this type of structure enables for subsidiaries and HQ to learn from each other. The force for integration show how practices and policies are determined by the structure, strategy and nature of MNCs operations and how these lead to differences in power and diffusion of home or host country influenced practices.

The 4 influences within structural factors have been analysed. However, there is one more structural factor to take into account. That is the method in which the MNC has grown i.e. Greenfield sites or those that are acquired. It is suggested that it will be easier for practices to be diffused within Greenfield sites as they are seen as a fresh canvas in which to be moulded. Unlike forms of acquisition where existing plants will have already has previous practices and policies; thus, it may be difficult to shape them (Edwards, Rees and Coller, 1999).

Although structural factors are important Edwards, Rees and Coller (1999) also acknowledge the need to take into account political factors. This looks at the roles of organisational actors within MNCs and how they can either block or encourage the transfer of practices (Edwards, Rees and Coller, 1999). It is important to note that although it is expected that organisational actors should be working towards the goal of the organisation, they still aim to pursue goals that fit with their own interests. Thus, organisational actors will encourage or block diffusion at will dependent upon whether it fits with their interests.

Central management can have great power in encouraging the diffusion of practices. Instead of issuing formal policies which should be adhered to they use more subtle ways of control by engaging subsidiary managers in a participative policy making (Edwards, Rees and Coller, 1999). Consequently, the central management at HQ give plant managers some degree of autonomy, so that they feel included and motivated. If subsidiary managers have had some degree of participation in the shaping of practices and policies then they are more likely to encourage diffusion at plant level.

Another form of subtle control is that of coercive comparisons. This is by where central management at HQ creates internal competition between subsidiaries, stating that investment will be withdrawn from those who underperform. This puts great pressure on subsidiary managers to encourage workers to engage in policies and practices favoured by HQ in order to achieve. (Almond and Tregaskis, 2007; Edwards, Rees and Coller, 1999). However, coercive comparisons can act to block reverse diffusion of practices and act as a block to knowledge transfer. Subsidiaries would prefer to keep their own knowledge to themselves in order for them to stay competitive (Edwards, Rees and Coller, 1999). Central management also have the power to encourage forward and reverse diffusion through threatening to relocate subsidiaries elsewhere if organisational actors at subsidiary level do not partake in conforming to these types of diffusion.

Another method of control from HQ is related to performance management and pay. This control method is termed ‘forced distribution’ by where employees will only receive a pay rise if they are performing to the required standard. Subsidiary managers categorise employees into different rankings dependent upon their individual performance (Almond et al, 2005). This not only encourages employees to work within the framework set out by HQ but also encourages plant managers to manage their team using policies set out by HQ, as poor performance of employees will also reflect badly on plant managers. However, forced distribution can have negative impacts upon the sharing of knowledge within a subsidiary. Employees may start to compete against each other; as a result, individuals may be reluctant to share with their colleagues.

Managers are likely to benefit from better pay and promotion if they are to transfer policies deemed to be best practice across borders of MNC. Therefore, central management at HQ encourage managers to network across the organisation taking with them the knowledge that has led to success in other parts. This ensures that diffusion occurs and that career progression is accessible for those managers that comply. This term is referred to as ‘networking within hierarchy’ (Edwards, Rees and Coller, 1999)

However, control systems such as performance related pay can be blocked by unions. As previously explored, US MNCs attempted to implement performance related pay systems in Swedish subsidiaries. This was also evident within case studies by Edwards, Rees and Coller (1999) they found that subsidiary managers in 2 British MNCs collaborated with each other in order to block systems such as performance related pay. This resulted in the HQ restructuring the practice around the needs of those at plant level.

Subsidiary managers can also block forward diffusion from the HQ. For those that are situated where operations need to be specific to local context. Plant managers may have a greater knowledge about local markets and have greater familiarity with local language and culture. Thus, subsidiaries can use this power of local knowledge against the HQ to determine what is right for the domestic subsidiary in order for it to achieve (Edwards, Rees and Coller, 1999).

In conclusion, several influences that determine the nature of policies and practices adopted by MNCs have been explored. Although structural factors are important, political factors need to be taken into account as they can have a determining effect on structural factors by which they can dampen the influence of them. The two factors are not mutually exclusive; structural factors can also determine the effects of political factors. It is important to take all influences explored into account and not isolate them. It is the interlocking between these influences that shape the way in which policies and practices are created and diffused. The host country effect is of a powerful one as MNC headquarters can threaten to move subsidiaries elsewhere. This threat can enable host country effects to be weakened. The organisational structure of an MNC can also determine which effects are likely to shape policies and practice. As a consequence, the transnational structure seems to be the most prosperous as its premise is based upon the idea of networks between HQ and subsidiaries, thus, both are equally involved in the implementation of policies and practices with neither having a greater degree of power over the other. This structure also allows for reverse and forward diffusion of knowledge to occur concluding that MNCs will have a wealth of knowledge and skills to choose from. Finally the transnational structure is likely to diminish some of the political factors that block diffusion as both parties interests aim to be taken into account.