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Chapter 14 International Human Resource Management

LEARNING OBJECTIVES Understand what international human resource management is Know the basic human resource management functions, such as recruitment, selection, training and development, performance appraisal, and compensation, and how they apply to international workers Appreciate the various labor and union relations around the world Understand expatriates and how international human resource management applies to expatriates Understand the growth of women expatriates in the future

General Overview
Human resources are critical to enable a multinational to implement and realize its strategic objectives. This chapter presents the students with international human resource management, which deals with managing the human resource functions at an international level. The chapter considers the unique circumstances pertaining to workers as well as upper-level expatriates. As such, in the section pertaining to workers, students read about how the various human resource management functions of recruitment, selection, training, performance appraisal, and compensation differ from country to country. Specifically, the chapter discusses how both cultural and institutional aspects affect these functions and some of the ways these differences can be addressed. In the section on expatriates, students will learn about the unique challenges facing multinational companies as they send upper-level employees on international assignments. Specifically, students will learn not only about the high costs of expatriates and the high level of failure but also about some of the things companies do to ensure expatriate success. In the final section, students will read about the situation facing women as they embark on international careers.

Web Exercise/In-class Exercise

Go to the Mercer website (http://www.mercer.com) and review the cost of living survey. Which cities are most expensive? Cheapest? How do the Mercer researchers estimate the cost of living in different cities? What are the various elements of the cost of living index? Invite an expatriate from a local multinational. Ask the person to discuss the challenges of moving to the US. Ask them about their spouse (if applicable) and any specific challenges related to their spouse integrating into the US. Ask them what the local multinational is doing well to welcome expatriates. What can be done to improve things?

Video Resources
Insight Media (www.insight-media.com)HR Orientation for Employees Insight Media (www.insight-media.com)Outsourcing: White Collar Exodus Films for the Humanities and Sciences (www.films.com)Employer/Employee Rights and Responsibilities

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2 Films for the Humanities and Sciences (www.films.com)1-800-INDIA: Importing a White-collar Economy

CHAPTER OUTLINE

Introduction
As the multinational company hires workers in the different countries in which it operates, it faces significant challenges regarding human resource management practices The human resource management function is an extremely critical aspect of a multinationals ability to successfully implement its strategy Properly designed human resource management systems provide the company with the human resources to enable it to compete successfully Why is cross-cultural human resource management so challenging? Countries have widely differing human resources environments because of cultural and social institutional differences To succeed in their operations, multinational companies need to be able to understand these differences and how they affect human resource management practices However, beyond differences, the international workforce environment is rapidly changing Many multinationals are finding that it is difficult to attract and retain talented individuals Human resource management is thus becoming an increasingly important aspect of a multinationals ability to succeed. This chapter will inform you of the key issues for multinational companies as they face these human resource management challenges This chapter contains several sections o In the first section, we define international human resource management o In a subsequent section, we discuss issues pertaining to expatriates After reading this chapter you should understand some of the key issues pertaining to human resource management as they are applied internationally You should be able to understand the important human resource management functions and how they apply to workers for multinationals with foreign operations You should also be able to appreciate the unique challenges facing companies when they hire expatriates Finally, you should understand the future of expatriates in terms of the increases in the number of women expatriates

International Human Resource Management: The International Setting

From a strategy perspective, human resources are extremely critical as they provide the multinational with the necessary skills and capabilities to outsmart rivals Managing and developing human assets are thus the major goals of human resource management Human resource management (HRM) deals with the entire relationship of the employee with the organization When applied to the international setting, the HRM functions become international human resource management (IHRM)

Exhibit 14.1 IBMs Employees Worldwide shows the countries with the largest number of IBM employees
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3 When a company enters the international arena, the human resource management function takes on added complexity Many of the crucial human resource functions are dependent on the cultural and institutional context It therefore becomes necessary for multinational managers to decide whether or how to adapt the companys HRM policies to the national cultures, business cultures, and social institutions where the company is doing business

Recruitment and Selection

Recruitment refers to the process of identifying and attracting qualified people to apply for vacant positions in an organization For all types of positions, US companies use a variety of methods to recruit o These include, among others, applications and advertisements placed in newspapers or on the Internet, internal job postings where companies post a list of vacancies on their websites or internally, use of private or public agencies, and use of recommendations from current employees o Research shows that US managers see newspaper advertising as one of the most effective recruitment channels, while university recruitment was judged among the most effective only for professional and technical jobs o In contrast, other recruitment forms, such as employee referral and use of personal contacts for recruitment purposes, are not seen as very effective o Such methods can potentially run into legal issues and may not necessarily fulfill the typical US companys goal of finding the best person for the job o For instance, personal contacts can result in potential biases against certain groups, such as women and minorities In contrast, other parts of the world dont always prefer open forms of recruitment such as advertisements in newspapers o Consider, for instance, that for many of the collectivist societies, such as Japan, South Korea, and Taiwan, referrals from friends or family tend to be much more important o Such practices are not surprising as collectivist societies place emphasis on harmony and loyalty o By only recruiting from friends and family or other important social groups (e.g., high schools, universities, clubs), a multinational company can maximize the chances of finding someone who can fit the organizations culture o Furthermore, friends and family referrals suggest that these individuals can vouch for the potential employees work ethic and ability to fit in

Exhibit 14.2 Recruitment Methods shows which countries use asked friends or relatives as a recruitment practice After a multinational company has drawn up a list of potential candidates for a job, it has to select one person for the job The process by which a company chooses a person to fill a vacant position is known as selection In the US, the aim of selection practices is to gather quality information on a candidates job qualifications o Previous work experience, performance on tests, and perceptions of qualifications from interviews help inform personnel or hiring managers about the applicants qualifications

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4 o The US individualistic culture promotes a focus on individual achievements (e.g., education, natural ability, experience) and not on group affiliations such as the family o The ideal selection then results in a match between the specific skills of the job applicant and the specific job requirements One of the most critical differences pertains to more collectivist countries o In a collectivist society, preference is given to hiring relatives of the employer or employees. This reduces risk, and encourages positive behavior by the workforce In selecting employees, collectivist cultural norms value potential trustworthiness, reliability, and loyalty over performance-related background characteristics o Personal traits such as loyalty to the company, loyalty to the boss, and trustworthiness are the traits that family members can provide o However, larger and technically oriented companies may need professional managers and technicians with skills not available inside the family In these cases, the selection process still prioritizes personal characteristics over technical characteristics If one cannot have a family member, then the priority is to find employees who have the personality characteristics and background necessary to fit into the corporate culture What can a multinational do to ensure smooth recruitment and selection on a worldwide basis? o At a basic level, a multinational company needs to understand and adapt to local practices Thus, for example, foreign multinationals in the United States probably have most success using the typical US recruitment practicesadvertising in newspapers and going to college campuses o In other countries, the multinational manager will also need to discover and use local recruitment and selection practices o Multinational managers must always assess the trade-off between following home practices that get what they believe are the right people for the job and the costs and benefits of following local traditions

Training and Development

Training and development refer to the efforts of the multinational company to provide education and other programs to better equip employees to do their job o Such training at work may involve formal training, informal training, learning embedded in the workplace, and other forms of learning With globalization, many countries are seeing an increased emphasis on training as their people are required to learn more than ever before to adapt to the new work environment The ability to identify and train leadership talent has also become critical as multinationals face a shortage of talented executives US companies with over one hundred employees invest more than $60 billion in training costs per year o The most popular training topics are management development and computer skills o However, other types of training, such as those needed for new methods and procedures, reach more people on all levels of the organization In some environments, such as those found in Italy or Germany or Japan, companies in these countries have a difficult time hiring or firing workers o Consequently, they have no choice but to focus on cultivating the existing workforce o As such, companies in these countries see a heavy emphasis on training of the employees

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5 However, in countries such as the UK and the USA there is emphasis on the short term and on efficiency o There is adversarial competition with employees and a focus on an efficient external labor market o It is therefore not surprising to see that such countries place relatively low emphasis on training and development Finally, in other countries found in central and Eastern Europe, there is a focus on the need to control costs o Such cost control is often achieved by reducing the number of employees in companies that previously had too many employees o These countries also dont place much emphasis on training The above clearly shows that there are wide variations in terms of the importance of training around the world However, the nature of training can also be different For instance, consider the nature of vocational training in Germany There are two major forms of vocational education in Germany o One form consists of general and specialized vocational schools and professional and technical colleges o The other form is called the dual system The dual system combines in-house apprenticeship training with part-time vocational school training, leading to a skilled worker certificate This training can be followed by the Fachschule, a college giving advanced vocational training What are the implications for multinational companies? The extent of training will depend on what the multinational company expects of its workers o If employers want to keep local workers out of headquarters managerial ranks, there is more emphasis on respecting local training norms o However, if the multinational company wants to source local talent for its worldwide operations, training practices should follow the corporate culture Many companies in the emerging countries around the world realize the importance of training In the case of expatriates and other managerial-level workers, important cultural training may need to be offered Furthermore, for a multinational to deploy a training program successfully, it needs to make sure that the training is consistent with local workplace customs and traditions

Performance Appraisal
The process by which companies appraise their employees is known as performance appraisal Regardless of the national setting, all companies at some point must assess their employees performance to identify people to reward, promote, demote, develop and improve, retain, or fire Not everyone can move up the ladder of the organizational pyramid and the performance appraisal function serves as an important tool to assess employees The US performance-appraisal system is highly rational, logical, and legal o It represents cultural values that include individual rights, duties, and rewards, and respect of the legal system, thereby promoting equal opportunity o Ideally, US appraisal systems provide management with objective, honest, and fair data on employee performance One of the dimensions that seems to impact performance appraisal is the collectivist cultural dimension

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6 o Recall that in collectivist societies the group takes precedence over individuals and harmonious relationships are emphasized o As such, in more collectivistic cultures, both employer and employee accept as correct and fair that human resource decisions should take into account personal background characteristics more than achievement o In such cases, the usefulness of a US style performance-appraisal system is less clear because who you are and how old you are may count more than how you perform o Furthermore, managers in collectivist societies often avoid direct performance-appraisal feedback In other collectivist societies such as South Korea, there is a preference for seniority-based promotions, rather than appraisal-based promotions o This follows from the Confucian tradition that strives to preserve harmony (since it is unseemly for younger employees to supervise older ones) o While job performance is important and most companies do have appraisal systems, seniority is most important for advancement o Because of the long-term orientation of Korean culture, Korean performance-appraisal systems focus on evaluating and developing the whole man for the long-term benefit of the company o They evaluate sincerity, loyalty, and attitude on an equal footing with job performance International performance appraisals can be very complex o Consider also that while the major objective of performance appraisal is to provide feedback, some societies may not engage in such practices o In many Asian countries such as China and Japan, feedback is generally not given, to save face A multinational company must often match its performance appraisal system to fit the local culture Failure to do so may result in unnecessary conflict with local workers

Compensation
Compensation includes the efforts of the multinational to distribute wages and salaries, incentives such as bonuses, and benefits such as retirement contributions Compensation is also a critical aspect of the human resource management policies companies use to motivate their employees There are wide variations both among countries and among organizations within countries concerning how to compensate workers Some differences stem from whether compensation should be based on achievement or performance Other important differences include whether everyone in a team should be paid the same or whether compensation should be made based on individual performance The highly mobile US labor market requires that US companies design compensation systems that focus on external equity (i.e., do we pay at or above market level?) The individualistic US culture views careers as private and personal, and mobility, advancement, and higher wages often require leaving a company As such, most US companies develop formal and systematic policies to determine wages and salaries, taking into consideration external and internal factors o External factors include local and national wage rates, government legislation, and collective bargaining o Internal factors include the importance of the job to the organization, the affluence of the organization or its ability to pay, and the employees relative worth to the business (merit)

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7 Most US companies also develop procedures to establish that people receive equitable pay for the types of jobs they perform o A variety of methods help establish a grading of jobs based on the worth to the company o Issues such as responsibility, skill requirements, and the importance of the jobs tasks to the organization contribute to the worth of a particular job o Those who occupy the higher-ranked jobs are paid higher o Furthermore, although the worth of a job to the company largely determines the base pay assigned to a certain position, raises in pay are determined mostly by merit Compensation practices clearly vary around the world o Latin American and Germanic countries (i.e., Austria, Germany) are more likely to favor fixed pay plans because multinationals want to minimize uncertainty in such countries o However, despite the relatively low levels of uncertainty avoidance in the US, a recent survey of accountants compensation shows that the US had the lowest level of variable pay where performance is linked to higher compensation o Many emerging markets are more likely to use variable pay o It is possible that such countries tend to rely on variable pay to motivate their employees to achieve their best

Exhibit 14.3 Variable Pay Use Worldwide shows the use of variable pay for accountants in a range of countries Another important cultural dimension that impacts compensation is the individualism--collectivism cultural dimension o In individualistic societies like the US, individuals are only loosely connected to each other o In contrast, in highly collectivistic societies people tend to be more tightly connected to each other and there is a focus on harmony Given the above, it is advisable for multinationals to apply equity principles (compensate according to performance) in more individualistic societies In contrast, equality or parity principles (compensate everyone equally) seem to be more sensible for collectivistic countries In such countries, there is more emphasis on harmony and cohesion and compensating all employees equally minimizes the risk of conflict How should a company approach compensation? o For each host country, worker compensation levels must match wage levels in the local labor market o Compensation must also meet local minimum-wage rates o Country-level comparative compensation data are available from many government, private, and international sources o Information on compensation laws is usually available from host country governments Beyond legal requirements, many multinationals are also aware that they may need to provide local perks to retain their local employees o For instance, because of years of financial instability, Latin Americans prefer deferred compensation plans such as a pension plan It therefore becomes very important for the multinational to carefully assess the local situation to provide perks that are deemed attractive

See Exhibit 14.4 Perks in Ten Countries

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8 There are wide variations in terms of compensation and perks The multinationals need to be aware of such differences and adapt their policies to conform with local requirements However, although compensation practices vary widely, recent trends also suggest that the large multinational companies are moving toward one compensation system for all of their subsidiaries

Labor Relations
Labor relations provide an indication of the relationship between companies and their employees, and the degree to which employees influence the companys operations There are wide variations in the patterns of labor relations in different nations These differences in patterns stem from cultural factors as well as historical factors o Historical factors, such as the state of technological development during early unionization and the time when governments recognized the legality of unions, influence current union structure and activities In the US, most unions remain at the regional level o Most local unions associate with some craft, industry, or mixed national union o Local craft unions tend to represent workers in a local region, while local industrial unions tend to represent workers at the level of the plant o Although most collective bargaining takes place at the local level, in some instances, such as in the automobile industry, unions attempt to make company-wide or industry-wide agreements o However, the US has seen declining union membership o As trade globalizes, local unions are slowly losing their power over workers In Germany, labor unions are more powerful and have an important influence on what companies do o At the company level, industrial democracy in Germany gives many workers equal representation on the board of directors with those elected by the shareholders o In fact, co-determination or, in German, Mitbestimmung means that management provides workers with a share of the control of the organization reserved traditionally for management and owners in the US o In Germany, co-determination exists at two levels At the plant level, workers elect the works council This group has certain prerogatives supported by law Some decisions are shared with management, such as selection criteria o Finally, management must consult and inform the works council about other decisions, such as accident protection How can a multinational manager assess the extent of labor influence? A strong factor that indicates the degree of labor influence is the union-membership density Union-membership density refers to the proportion of workers who belong to unions in a country

See Exhibit 14.5 Union Density for Selected Countries In some societies, such as Thailand and the USA, union membership levels are relatively low, thereby suggesting minimal influence of labor unions on the multinationals operations However, many former communist countries in Eastern and Central Europe have strong protection of worker rights o Although these countries have opened themselves to foreign investment, labor still has important influences on company operations

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9 Other countries such as Brazil and Mexico also show the significant influence labor has on company operations It is interesting to note that in many European countries, such as Austria, Belgium, Denmark, and Norway, the union density levels are high Despite the high union membership density in some societies, recent trends suggest that labor unions and their ability to negotiate higher wages are weakening As the world economy globalizes and there is declining local support for labor unions, more workers are being pressured to accept local wages Furthermore, the increased emphasis on technological innovation and the willingness of multinationals to start operations in other locations are also decreasing union influence Although labor unions influence is diminishing, multinational companies have no choice but to adapt to local labor practices and traditions when they hire local workers As a result, the impact of dealing with unions and related labor laws must be considered in any strategic decision regarding locating in another country

Expatriates
The multinational company may rely on expatriate employees, who may come from a different country than where they are working Expatriates typically belong to the managerial and professional staff rather than to the lower-level workforce and thus present the multinational with unique challenges Expatriates can actually be of different types o Some expatriate employees who come from the parent firms home country are called home country nationals o Others who come from neither the host nor home countries are called third country nationals o Finally, local workers may also be hired in the host country where the unit (plant, sales unit, etc.) is located o These workers are known as host country nationals A basic dilemma facing the multinational company pertains to whether they want to hire host country or home country nationals Hiring host country managers can be advantageous because it offers the multinational the ability to hire someone who has a better understanding of the local cultural and institutional environment o Such knowledge can be valuable to the multinational company as it tries to navigate a foreign environment o Furthermore, host country nationals are usually better able to develop a closer relationship with other local managers and workers, and hence identify with the local subsidiary However, the host country manager presents the multinational company with a big challenge: how can a local person identify with and personify the companys headquarters corporate culture? Because many multinationals wish to hire someone who is familiar with the headquarters corporate culture, they often send home country nationals on expatriate assignments

Cost of Expatriates
To entice employees to take international assignments, the appropriate incentives have to be provided Often, expatriates are middle or upper-level managers who have to be encouraged to take international assignments They may be reluctant because they do not want to remove their children from school or may not want to sacrifice their partners career

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10 As a result, the multinational company has to provide significant incentives to encourage these workers to take such assignments, and expatriates can be very costly o For instance, the total compensation of expatriate managers can often exceed by three to four times the home-based salaries and benefits However, expatriates also incur significant additional costs o For instance, some multinationals provide company cars with a chauffeur, country club memberships, a paid vacation airfare to the home country, and a generous expenses budget Another critical aspect is the cost of living in a new city o For instance, sending someone to Moscow, Seoul, or Tokyo may entail a dramatically higher cost of living than sending someone to Toronto or Prague Many multinationals use the Mercer Human Resources Consultings cost of living index to determine how much they will pay their expatriates

Exhibit 14.6 Cost-of-living Indexes for Selected Cities shows data on the cost of living index in the top 10 and bottom 10 cities in the Top 50 cities list compiled by Mercer

Expatriate Failure
Expatriate failure occurs when the expatriate decides to return to their home country before the international assignment is over, failing to meet the expectations of the multinational company Current research indicates that failure rates are very high, at around 6070%, depending on the host country Expatriate failure can be extremely costly for companies o Recent estimates suggest that each expatriate failure can cost a multinational around $1 million o Collectively, expatriate failure costs US multinationals over $2 billion per year Expatriate failure also results in indirect costs for companies It may result in loss of opportunities in and knowledge of the foreign markets Other indirect costs can include loss of market share and damaged relationships with clients and local government officials Given such a high failure rate, it is critical to understand why expatriates fail Reasons for failure can include personal reasons such as inadequate adaptation to the new culture, lack of technical skills to perform the job, or lack of motivation for the new assignment However, family reasons can also play a prominent role in failure o Sometimes the family has difficulties adapting to the new culture or maybe the partner or spouse fails to adapt In addition, organizational reasons, such as a lack of preparation for the international assignment or giving the expatriate an extremely difficult assignment, may also account for failure An important aspect of the failure to adapt is culture shock, which refers to the anxiety or stress that is caused by being in a new and foreign environment and the absence of the familiar signs and symbols of the home country

Ensuring Expatriate Success

What can multinational companies do to ensure expatriate success? The multinational company needs to ensure that the various human resource management functions are applied to the unique situation presented by an expatriate Because expatriate success is so dependent on choosing the right person for the position, the recruitment and selection process is extremely important

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11 While it is obviously critical for the expatriate to have the appropriate technical skills and knowledge to perform the task, possessing such technical skills may not be sufficient if the person does not have the right traits for the job As such, it is important for the multinational to assess whether the person has the appropriate traits to adapt well in the new culture Adaptability relates to an individuals ability to learn from experience and to use new experiences to improve In addition to the ability to adapt, recent research suggests that expatriates need to have high emotional intelligence Emotional intelligence refers to being aware of oneself, understanding and relating to others, and being empathetic and managing ones emotions Emotional intelligence is seen as a critical factor in determining how an expatriate can adapt to the new environment Expatriates that have high emotional intelligence are more likely to relate well to other local managers and can also use emotions to better deal with the situation

Exhibit 14.7 Components of Emotional Intelligence shows a summary of the relevant aspects of emotional intelligence It is crucial for the multinational company to assess the family situation of the expatriate o Research shows that many expatriates fail because the needs of the accompanying family are not taken into consideration o While the expatriate has access to a social network through work, spouses are often left with chores such as finding schools for children and can feel alienated o It is therefore important to include the spouse and other family members in the selection process While selection and recruitment are critical steps in ensuring expatriate success, training can also be a major contributor to success The expatriate needs to be provided with pre-departure training whereby important information necessary upon arrival is provided Expatriates can also be provided with skills to facilitate adaptation to the new culture Once in the host country, it is strongly advisable for the multinational company to continue the cross-cultural training Furthermore, training from locals or other mentors about operating in the host country can be very helpful Many companies now have mentorship or buddy programs where new expatriates are paired with other expatriates in the host country They can thus get access to new social networks and learn about potential difficulties relatively quickly Finally, it is important to note that some training may also be necessary for the family Offering cultural and other language training programs may help the family better integrate into the new culture Another component of success is the provision of various forms of organizational support o For instance, by providing training programs, the multinational company can show its commitment to help the expatriate succeed It is also important for the multinational company to keep communication gateways open o For instance, the expatriate should be given the opportunity to stay in touch with colleagues and others at home

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12 o Such open communication will show that the headquarters care about the foreign operations and how well the expatriate is doing Another crucial aspect of expatriate success is compensation The multinational company needs to provide the necessary incentives to motivate the expatriate to succeed o Components of the compensation plan can include premium allowances for accepting postings in international locations, hardship allowances for postings in dangerous locations, relocation and home allowances to provide for the cost implications of moving o Many multinational companies are also providing other supplementary benefits, such as medical cover and pensions Expatriates typically face a repatriation problem, representing the difficulties that managers face in coming back to their home countries and reconnecting with their old jobs Furthermore, expatriates may also experience reverse culture shock whereby they experience significant challenges in reintegrating with their home countrys domestic environment These repatriation difficulties can be solved with proper preparation and planning by the expatriate and the company o For instance, the multinational company can provide some training for the return Returning expatriates generally expect to be rewarded with a promotion and an environment where their international skills can be utilized o A multinational would be well advised to provide an environment where such expectations can be met o If such expectations are not met, it is very likely that the expatriate may leave the organization upon return A survey of the practical literature suggests that there are programs to minimize reintegration challenges o They include components such as counseling to help the spouse find employment opportunities and to help children reintegrate in the educational system o Other companies provide mentors to help both with the expatriation and the repatriation process

The Future: Women Expatriates?

Despite the increase in demand for expatriates, the number of women in expatriate positions has remained at around 215% of all expatriate positions Many multinational companies tend to be reluctant to post women in expatriate positions o Some multinational companies are simply not interested, while others assume that women will face prejudice once in the foreign country o Many companies simply assume that women are not interested in international assignments or that managers are reluctant to send women abroad Although such myths may persist in some organizations, it is clear that the future will see a rapidly growing number of women expatriates o For instance, women are more likely to excel in relational skills, a major factor in expatriate success o Women report that local male managers can be more open in communication with a woman than with a man o Local men, even from traditional cultures, can talk at ease with a woman about an array of subjects that include issues outside the domain of traditional male only conversations Furthermore, women may sometimes have cultural predispositions that are more compatible with local cultures

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13 o For instance, it has been shown that women expatriates are preferred in India, where collectivistic traits such as nurturing and collaboration are more valued What can multinational companies do to encourage women expatriates? o If necessary, the perception that women are not willing to take international assignments has to be changed o Managers need to provide equal opportunities for both genders to explore expatriate job prospects o Additionally, every effort should be made to provide potential women expatriates with mentors and networks of other women expatriates o Finally, multinational companies are also strongly advised to address dual career issues

Cullen and Parboteeahs International Business Chapter Outlines Copyright 2010 Taylor & Francis Group