MBA book international human resource management

International Human
Resource Management

MBA Second Year
(International Business)
Paper No. 2.1

School of Distance Education

Bharathiar University, Coimbatore - 641 046


Author: P.L. Rao
Copyright © 2008, Bharathiar University
All Rights Reserved
Produced and Printed
by
EXCEL BOOKS PRIVATE LIMITED
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for
SCHOOL OF DISTANCE EDUCATION
Bharathiar University
Coimbatore-641046


CONTENTS

Page No.
Unit I
Lesson 1

Lesson 2

HR and Global Business Challenge
Perspectives and Approaches of IHRM

7
21

Unit II
Lesson 3
Lesson 4
Lesson 5

International HR Planning
Cultural Dimensions of IHRM
Performance Appraisal in a Global Context

51
70
88

Unit III
Lesson 6
Lesson 7

Orienting and Training Employees for Global Assignments
Compensation and Incentives

113
131

Unit IV
Lesson 8
Lesson 9

International Labour Relations
Repatriation

151
175
Unit V

Lesson 10
Lesson 11

Human Resource Practices and Programmes in Various Countries
International Law Related to Immigration and HR

Model Question Paper

193
229
247


INTERNATIONAL HUMAN RESOURCE MANAGEMENT
SYLLABUS
UNIT I
HR and global business challenge - Meaning of HR- The differences between
domestic and International Human Resources - The various perspectives and

approaches of International Human Resource Management.
UNIT II
International HR Planning: - The role of cultural understanding - Culture and HR
functions in a global subsidiary Recruitment and Selection - Staffing policies,
approaches, Selection criteria - Relocation Performance management of international
employees -performance appraisal in a global context. - Recent innovative methods
in HRM.
UNIT III
Orienting and training employees for global assignments - approaches to training Integrating business strategy with international training & development.
Compensation - various approaches - factors affecting compensation systems Benefits - The adjustments and incentives.
UNIT IV
International labor relations - key issues, various agreements International labour
standards, safety and fair treatment, repatriation: process, problems and solutions.
MNC`S and HR Policies.
UNIT V
Human Resources practices and programs adopted in USA, EUROPIEN Japan,
China and Asian countries. Laws related to immigration of people. International
contract Laws related to HR.


UNIT I


LESSON

1
HR AND GLOBAL BUSINESS CHALLENGE
CONTENTS
1.0 Aims and Objectives
1.1 Introduction

1.2 Developing International HR Strategies
1.3 Issues in IHRM
1.4 Global Business Challenge
1.5 Meaning of IHRM
1.6 Difference between Domestic and International Human Resource
1.6.1

More HR Activities

1.6.2

Need for a Broader Perspective

1.6.3

More Involvement in Employee’s Personal Lives

1.6.4

Changes in Emphasis as the Workforce Mix of Expatriates and Locals Varies

1.6.5

Risk Exposure

1.6.6

More External Influences

1.7 Expanding the Role of HRM in International Firms

1.8 Let us Sum up
1.9 Lesson End Activity
1.10 Keywords
1.11 Questions for Discussion
1.12 Suggested Readings

1.0 AIMS AND OBJECTIVES
After studying this lesson, you will be able to:
Know the concept of international HRM
Describe the complexity of IHRM
Discuss the role of HRM in international firms

1.1 INTRODUCTION
International dimensions of business and the globalisation of business have a significant
impact on human resource management. Therefore, a study of the concept of international
management is necessary to understand the subject of international human resource
management.


8
International Human
Resource Management

The focus of international business is on international transactions, whereas
international management deals with managing such transactions within the boundary
setup by corporate strategy.
Thus, when a company decides to enter a foreign market, that decision incorporates
planning to establish the ways by which business functions–marketing, accounting, human
resource management, and so on–are to be managed in that distant location. Managing
the various functions and coordinating them with the parent company’s overall strategy

is the task of international management.
The international dimension of management might follow the practice of its headquarters
or, the demand of the local market, or a combination of both. There is no single dimension
that is found to be the best. Suffice it to say that many companies follow practices set by
their headquarters for upstream activities (such as manufacturing) and respond according
to local practices for downstream activities (such as marketing).
With the recent advent of technological innovation and the emergence of the Newly
Industrialized Countries (NICs), we are witnessing a convergence among nations in
terms of rates and preferences, financial systems, and organization design. This
convergence, along with complementary developments, are forcing organizations to adhere
to “borderless” terms.
The interesting aspect of working internationally is that we have to work with people
who have different cultural heritages. Cultural differences should be taken into account
when communicating and interacting across nations and across cultures within nations.
Although multinational companies are supranational in operations and strategy, people
within them do not necessarily share the same cultural values and views on people and
life. The multinational model is built on the premise that it is necessary to understand
cultural differences, rather than trying to smooth them over or override them. For example,
companies like IBM may have a strong corporate culture, but one of the aspects that the
work of Hofstede (1980a) demonstrated was that within IBM, there is wide cultural
variation across nations.
Hofstede (1980a) was one of the first to attempt to develop a universal framework for
understanding cultural differences in managers’ and employees’ values based on a
worldwide survey, although not the only one.
Hofstede’s work focuses on ‘value systems’ of national cultures which are represented
by four dimensions:
Power distance: This is the extent to which inequalities among people are seen as
normal. This dimension stretches from equal relations being seen as normal to
wide inequalities being viewed as normal.
Uncertainty avoidance: This refers to a preference for structured situations versus

unstructured situations. This dimension runs from being comfortable with flexibility
and ambiguity to a need for extreme rigidity and situations with a high degree of
certainty.
Individualism: This looks at whether individuals are used to acting as individuals
or as part of cohesive groups, which may be based on the family or the corporation.
This dimension ranges from collectivism to individualism (Hui, 1990).
Masculinity: Hofstede (1980a) distinguishes ‘hard values’ such as assertiveness
and competition, and the ‘soft’ of ‘feminine’ values of personal relations, quality of
life and about caring about others, where in a masculine society gender role
differentiation is emphasized.


Firms operating in international markets face different conditions and competitions.
Multinationals are characterised by an interdependence of resources and responsibilities
across all business units regardless of national boundaries. These companies have to
cope with large flows of components, products, resources, people and information among
their subsidiaries, while simultaneously recognising the specialised resources and
capabilities of each. This demands a complex process of coordination and cooperation
involving strong cross-unit integrating devices, a strong corporate identity and a well
developed worldwide management perspective. Since they look for opportunities in every
country (markets, cheaper cost of capital, labour and raw materials) and react to threats
by various means, including speedy withdrawal of resources, they have to necessarily
deal with the national governments, which control entry and impose conditions on doing
business in their territories, often safeguarding the interests of local firms and consumers.
Hence, the way multinationals do business requires high external focus and internal
responsiveness.
National cultural traits also play a critical role in the conduct of business by influencing
customer preferences and the values, beliefs and behaviour of employees. Thus, culture
affects both internal and external perspectives of management, including the cost of
doing business and its results.

People play a key role in any type of business activity but their role has become very
critical in the new economy and service sector. Multinationals have emanated mostly
from developed economies, which now control about 50% of world trade and 75% of
global GDP and dominate the service sector (60 to 80%). Therefore, how multinationals
manage their human resources (acquire, allocate, utilise and reward) becomes an important
field of study and analysis. This area of study comes under the purview of IHRM.
Since national cultures crucially influence these people, management processes, motivation
and decision-making, including negotiations and diplomacy–their study has also become
necessary to understand the subject of IHRM.
The second approach to IHRM is the study of industrial relations and labour management
practices and policies in different countries. Study of industrial relations in a country is
reflective of its state of society, historical evolution, power relationships between groups,
class struggle, political framework, prevailing labour laws and national approach to labour
management. This is a very wide field and encompasses different approaches.
Check Your Progress 1
What are the four dimensions of national culture as propounded by Hofstede?
......................................................................................................................
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1.2 DEVELOPING INTERNATIONAL HR STRATEGIES
Among the various factors that need to be addressed by a company’s international HRM
system for creating global strategies are:
Building a global culture, which will encourage the managerial mindsets and attitudes
to develop an integrated, networked organisation to cope with global customers
and global transactions.
Developing the leadership and managerial capability and structure to support global
strategies and operations.

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HR and Global

Business Challenge


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International Human
Resource Management

Gaining management interest and involvement in human resource management.
Ensuring optimum quality and depth of managerial personnel to serve global
customers.
Ensuring managers have the technical and managerial skills to work effectively at
the global level.
Increasing the extent and scope of managerial talent in the organisation.
Identifying the depth of managerial talent in the organisation.
Developing global and local approaches to training and development.
Ensuring management succession.
Sustaining and improving performance at all levels in all areas of the company.
Implementing global human resource systems for recruitment, performance
management, training and development, succession planning, remuneration and
benefits.
Establishing a total quality culture, and changing people’s attitudes to quality.
Linking HRM to strategic objectives.
Types of International Employees
Foreign parent expatriates are employees from the foreign parent headquarters
assigned to the venture, usually in upper management positions.
Host country nationals are employees directly recruited and employed by the venture
and are nationals of the host country. They may occupy all levels in the organisation;
however, initially they are usually not found in the upper management levels.
Third-country expatriates of the foreign parent are employees in the foreign parent
organisation who are nationals of neither the foreign parent country nor the host

parent country.
Third country expatriates of the new venture are employees recruited directly by
the venture who are nationals of neither the foreign parent(s) country nor the host
parent(s) country.
Check Your Progress 2
Identify and mention the types of employees of an international firm.
......................................................................................................................
......................................................................................................................

1.3 ISSUES IN IHRM
Before 1986, most written material on international HR focused on managing international
assignments, usually from an American perspective. Many current books and articles
are still written from a domestic point of view, but the literature is becoming considerably
broader in scope. The quantity and quality of such material have increased dramatically
in the past five years. The following topics have been most prevalent:
Managing international assignments: This continues to be the most popular
topic. Articles about the selection, training, compensation and repatriation of
expatriate failures. Many articles refer to expatriate managements as the major
concern of HR managers in multinational corporations.


Employee and family adjustment: People’s adjustment to expatriate assignments
can be extremely challenging, regardless of the country. For example, an American
family on an assignment in Indonesia went to a restaurant with their pet dog. The
restaurant manager politely greeted them at the door, took their dog and, 30 minutes
later–much to the family’s horror—served it to them. In America, a Chinese family
bought a can of what they believed—because of the picture on the label—to be
fried chicken. They were surprised and disappointed to open it and learn the can
contained only the shortening used for cooking fried chicken.
Selecting the right person for a foreign assignment: This is critical for success.

Expatriates must be personally adaptable and their families capable of adjusting to
new and unusual challenges. Orientation and training are enormously valuable in
helping expatriates and their families adjust to the new culture and learn a new
language. Compensation plans for expatriates are usually complex and expensive
because of the taxes, allowances and premiums. Repatriation can be traumatic
and difficult for returning executives, and the transition back home needs to be
planned as carefully as the move abroad.
Culture, communication and gauge: International HR professionals are expected
to understand the implications of cultural differences between countries and their
interplay with differing corporate cultures. They are often responsible for seeing
that expatriates are trained to adapt to cultural differences and overcome cultural
shock. Also, HR professionals play an important role in ‘cultural wrinkles’ in
international joint ventures, mergers and acquisitions.
Language and communication: These are also important in international HR
management. Expatriate managers must learn the foreign language or rely on local
interpreters to communicate with the local workforce. Parent company officials
may struggle to communicate with local managers in foreign subsidiaries. Because
human resource professionals are often expected to foster international
communication, they must understand that effective communication involves more
than just speaking the same language. To communicate effectively, individuals must
share the deeper meanings that are often embedded cultural norms and traditions.
Check Your Progress 3
Mention any five issues in international human resource management.
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1.4 GLOBAL BUSINESS CHALLENGE
There are a number of unique problems that global companies face when trying to
implement consistent practices across their global HR networks. These problems act as
barriers to effective Global HRM. These are:

Variations: The biggest challenge is also the most obvious: the worldwide variations
in social, political, and economic circumstances. An HR practice that works in one
country may be unacceptable in another. Fluctuations in currency, government
regulations, compensation expectations, job security, and learning styles are just a
few examples of the local variations a global HR professional faces. Currently,
there is a European legislation that prohibits a company from sharing employment
records across geographical boundaries without the employee’s permission – a
potential threat to global staffing.

11
HR and Global
Business Challenge


Perception of HR: Another global challenge is that the perceived value of HR
function varies across locations. In one country, HR may be perceived as a true
business partner, working with high-level managers on critical strategic assessments.
In other country but within the same company, HR may be viewed as a transactional
personnel department that handles administrative work.

12
International Human
Resource Management

Attitude and actions of headquarters toward HR: These help to determine how
seriously the HR function is viewed locally. The position of the corporate chief HR
officer also sends signal to local units on the importance of the HR function.
Resistance to change: A third major challenge facing global HR practices is that
different locations have their own way of doing things and resisting change. If an
HR initiative that is viewed as being imposed by the corporate management on the

local HR staff, then it can be difficult to gain acceptance. This is true regardless of
whether it’s a US multinational ‘forcing’ initiatives on its local business or a German
company ‘forcing’ policies and practices on its international businesses.
Cultural differences in learning and teaching styles: These are subtle
differences. For example, the entertaining instructional style often used in the US
might not find a receptive audience in Japan, where such an approach is not
considered credible.
The field of international Human Resource Management has been characterized by
three broad approaches. Early work in this field emphasizes cross-cultural management
approach and examining human bahaviour within organizations from an international
perspective. A second approach developed from the comparative industrial relations
and HRM literature seeks to describe, compare and analyze HRM systems in various
countries. A third approach seeks to focus on aspects of HRM in multinational firms.

1.5 MEANING OF IHRM
Before we offer a definition of international HRM, we will first define the general field
of HRM. Typically, HRM refers to those activities undertaken by an organization to
utilize its human resources effectively. These activities would include at least the following:
Human Resource Planning
Staffing
Performance Management
Training and Development
Compensation and Benefits
Labour Relations (Industrial Relations)
An article by Morgan (1986) on the development of international HRM presents a model
of international HRM (shown in Figure 1.1) that consists of three dimensions:
1.

The three broad human resource activities: Procurement, allocation, and
utilization. (These three broad activities can be easily expanded into the six HR

activities listed above).

2.

The three national or country categories involved in international HRM
activities: The host-country where a subsidiary may be located, the home (parent)
country where the firm is headquartered, and ‘other’ countries that may be the
source of labour or finance.


3.

The three types of employees of an international firm: Host-country Nationals
(HCNs), Parent-Country Nationals (PCNs), and Third-Country Nationals (TCNs).
Thus, for example, IBM employs Australian citizens (HCNs) in its Australian
operations, often sends U.S. citizens (PCNs) to Asia-Pacific countries on
assignments, and may send some of its Singapore employees on an assignment to
its Japanese operations (as TCNs).

Morgan defines international HRM as the interplay among these three dimensions-human resource activities, types of employees, and countries of operation. We can see
that in broad terms, international HRM involves the same activities as domestic HRM
(e.g., procurement refers to HR planning and staffing); however, domestic HRM is
involved with employees within only a single national boundary.
Human Resource Activities

Procure

Allocation

Other

Utilize
Home

Host-Country Nationals (HCNs)

Host
Parent-Country Nationals (PCNs)

Countries

Third-Country Nationals (TCNs)
Type of Employees
Source: Adapted from P.V. Morgan, 1986, International human resource management

Figure 1.1: Model of International HRM

1.6 DIFFERENCE BETWEEN DOMESTIC AND
INTERNATIONAL HUMAN RESOURCE
The complexities of operating in different countries and employing different national
categories of workers are a key variable that differentiates domestic and international
HRM, rather than any major differences between HRM activities performed. Many
firms underestimate the complexities involved in international operations, and there is
some evidence to suggest that business failures in the international arena may often be
linked to poor management of human resources.
It is worthwhile examining in greater detail what is meant by the statement that
international HRM is more complex than domestic HRM. Dowling (1988) has summarized
the literature on similarities and differences between international and domestic HRM
and argues that the complexity of international HR can be attributed to six factors that
differentiate international from domestic HRM. These factors are as follows:

1.

More HR activities;

2.

The need for a broader perspective;

3.

More involvement in employee’s personal lives;

4.

Changes in emphasis as the workforce mix of expatriates and locals varies;

5.

Risk exposure; and

6.

More external influences.

13
HR and Global
Business Challenge


14

International Human
Resource Management

1.6.1 More HR Activities
Expatriates are subject to international taxation, and often have both domestic
(i.e., parent-country) and host-country tax liabilities. Therefore, tax equalization policies
must be designed to ensure that there is no tax incentive or disincentive associated with
any particular international assignment. The administration of tax equalization policies is
complicated on account of the wide variations in tax laws across host countries and by
the possible time lag between the completion of an expatriate assignment and the
settlement of domestic and international tax liabilities. In recognition of these difficulties,
many multinational firms retain the services of a major accounting firm for international
taxation advice.

1.6.2 Need for a Broader Perspective
HR managers working in an international environment face the problem of designing
and administering programmes for more than one national group of employees
(e.g., PCN, HCN, and TCN employees who may work together in Zurich at the European
regional headquarters of a U.S.-based multinational). They need to take a broader view
of issues. For example, a broader, more international perspective on expatriate benefits
would endorse the view that all expatriate employees, regardless of nationality, should
receive a foreign service or expatriate premium when working in a foreign location. Yet
some multinationals, which routinely pay such premiums to their PCN employees on
international assignment (even if the assignments are to desirable locations), are reluctant
to pay premiums to foreign nationals assigned to the home country of firm. Firms following
such a policy often use the term inpatriate to describe foreign nationals assigned to the
home country of the firm. Such a policy confirms the common perception of many HCN
and TCN employees that PCN employees are given preferential treatment.

1.6.3 More Involvement in Employee’s Personal Lives

A greater degree of involvement in the employee’s personal lives is necessary for the
selection, training, and effective management of both PCN and TCN employees. The
HR department or professional needs to ensure that the expatriate employee understands
housing arrangements, health care, and all other aspects of the compensation package
provided for the assignment (cost-of-living allowances, premiums, taxes, etc.). Many
multinationals have an “International HR Services” section that coordinates administration
of the above programmes and provides services for PCNs and TCNs such as handling
their banking, investments, homes while on assignment, coordinating homes visits, and
final repatriation.

1.6.4 Changes in Emphasis as the Workforce Mix of Expatriates and
Locals Varies
As the need for PCNs and TCNs declines and more trained locals become available,
resources previously allocated to areas such as expatriate taxation, relocation, and
orientation are transferred to activities such as local staff selection, training, and
management development. The latter activity may require establishment of a programme
to bring high-potential local staff to corporate headquarters for developmental assignments.

1.6.5 Risk Exposure
The human and financial consequences of failure in the international arena are more
severe than in domestic business. For example, expatriate failure (the premature return
of an expatriate from an international assignment) is a potentially high-cost problem for
international companies. Direct costs (salary, training costs, travel and relocation expenses)


per failure to the parent firm may be as high as three times the domestic salary plus
relocation expenses, depending on currency exchange rates and location of assignments.
Indirect costs such as loss of market share and damage to international customer
relationships may be considerable (Zeira and Banai, 1984).
Terrorism is another aspect of risk exposure relevant to international HRM. Most major

multinationals must now consider this factor when planning international meetings and
assignments; it is estimated that firms spend 1 to 2% of their revenues on protection
against terrorism. The HR department also may need to devise emergency evacuation
procedures for highly volatile assignment locations. The invasion of Kuwait and the
ensuring Gulf War in 1991 is an example of a situation in which employees unexpectedly
and very rapidly came to risk.

1.6.6 More External Influences
Major external factors that influence international HRM are the type of government, the
state of the economy, and the generally accepted practices of doing business in each of
the various host countries in which the multinational operates. A host government can,
for example, dictate hiring procedures, as is the case in Malaysia. During the 1970s, the
Malaysian government introduced a requirement that foreign firms comply with an
extensive set of affirmative action rules designed to provide additional employment
opportunities for the indigenous Malays who constitute the majority of the population but
tend to be under-represented in business and professional employment groups relative to
Chinese Malays and Indian Malays.
In addition to complexity, there are four other variables that moderate differences between
domestic and international HRM. These variables are discussed below:
(i)

Cultural Environment: Anyone travelling abroad, either as a tourist or
businessperson, experiences situations that demonstrate cultural differences in
language, food, dress, hygiene, and attitude to time. While the traveller can perceive
these differences as novel, even enjoyable, for people required to live and work in
a new country, such differences can prove difficult. They experience culture
shock—a phenomenon experienced by people who move across cultures. The
new environment requires many adjustments in a relatively short period of time,
challenging people’s frames of reference to such an extent that their sense of self,
especially in terms of nationality, comes into question. People, in effect, experience

a shock reaction to new cultural experiences that cause psychological disorientation
because they misunderstand or do not recognize important cues. Culture shock
can lead to negative feelings about the host country and its people and a longing to
return home.
Activities such as hiring, promoting, rewarding, and dismissal will be determined by
the practices of the host country and often are based on a value system peculiar to that
country’s culture. A firm may decide to head a new international operation with an
expatriate general manager but appoint as the HR department manager a local—a
person who is familiar with the host country’s HR practices. This practice can cause
problems, though, for the expatriate general manager, as happened to an Australian
who was in charge of a new mining venture in Indonesia. The local manager
responsible for recruitment could not understand why the Australian was upset to
find that he had hired most of his extended family rather than staff with the required
technical competence. The Indonesian was simply ensuring that his duty to his family
was fulfilled—since he was in a position to employ most of them, he was obligated to
do so. The Australian, however, interpreted the Indonesian’s actions as nepotism, a
negative practice according to his own value system (Dowling et al., 1989).

15
HR and Global
Business Challenge


16
International Human
Resource Management

The HR department staff of a large firm in Papua New Guinea, were concerned
over a number of accidents involving operators of very large, expensive, earthmoving vehicles. The expatriate managers investigating the accidents found that
local drivers involved in the accidents were chewing betel nut, a common habit for

most of the coastal peoples of Papua, New Guinea, and other Pacific islands.
Associating the betel nut with depressants such as alcohol, the expatriate managers
banned the chewing of betel nut during working hours. In another move to reduce
the number of accidents, free coffee was provided at loading points, and drivers
were required to alight from their vehicles at these locations. What the managers
did not realize was that nut, like their culturally acceptable coffee, is, in fact, a
stimulant, though some of the drivers were chewing it to cover up the fact that they
drank beer before commencing work.
(ii)

Industry Type: Porter (1986) suggests that the industry (or industries if the firm is
a conglomerate) in which a multinational firm is involved is of considerable importance
because patterns of international competition vary widely from one industry to
another. At one end of the continuum of international competition is the multidomestic
industry, one in which competition in each country is essentially independent of
competition in other countries; traditional examples include retailing, distribution,
and insurance. At the other end of the continuum is the global industry, one in
which a firm’s competitive position in one country is significantly influenced by its
position in other countries; examples include commercial aircraft, semiconductors,
and copiers.
The role of the HRM function in multidomestic and global industries can be analyzed
using Porter’s value-chain model. In Porter’s (1985) model, HRM is seen as one
of four support activities for the five primary activities of the firm. Since human
resources are involved in each of the primary and support additives, the HRM
function is seen as cutting across the entire value chain of a firm. If the firm is in a
multidomestic industry, the role of the HR department will most likely be more
domestic in structure and orientation. The main role for the HRM function would
be to support the primary activities of the firm in each domestic market to achieve
a competitive advantage through either cost/efficiency or product/service
differentiation (Schelur 1984).

Lanrent (1986) proposes that a truly international conception of human resource
management would require the following steps:
1.

An explicit recognition by the parent organization that its own peculiar ways
of managing human resources reflect some assumptions and values of its
home culture.

2.

An explicit recognition by the parent organization that its peculiar ways are
neither universally better nor worse than others but are different and likely to
exhibit strengths and weaknesses, particularly abroad.

3.

An explicit recognition by the parent organization that its foreign subsidiaries
may have other preferred ways of managing people that are neither intrinsically
better nor worse, but could possibly be more effective locally.

4.

A willingness from the headquarters to not only acknowledge cultural
differences, but also to take active steps in order to make them discussable
and therefore usable.

5.

The building of a genuine belief by all involved that more creative and effective
ways of managing people could be developed as a result of cross-cultural

learning.


(iii) Reliance of the Multinational on its Home-Country Domestic Market: A
pervasive but often ignored factor that influences the behaviour of multinationals
and resultant HR practices is the extent of reliance of the multinational on its
home-country domestic market.
The United Nations Conference on Trade and Development (UNCTAD) in its
annual survey of foreign direct investment calculates what it refers to as an “index
of transnationality,” which is an average of ratios of foreign assets to total assets,
foreign sales to total sales, and foreign employment to total employment
(The Economist 1997). Based on this index of transnationality, the most foreignoriented multinational is Nestle, with 87% of assets, 98% of sales, and 97% of
employees located outside of Switzerland. The top ten multinationals are as follows:
1.

Nestle (Switzerland)

2.

Thomson (Canada)

3.

Hoderbank Finaciere (Switzerland)

4.

Seagram (Canada)

5.

Solvay (Belgium)

6.

Asea Brown Boveri (Sweden/Switzerland)

7.

Electrolux (Sweden)

8.

Unilever (Britain/Netherlands)

9.

Philips (Britain/Netherlands)

10. Roche (Switzerland)
There is not a single U.S. firm in the top fifteen multinationals listed—CocaCola
and McDonald’s are ranked 31st and 42nd, respectively. The reason is as obvious
as it is important—the size of the domestic market for U.S. firms. A very large
domestic market influences all aspects of how a multinational organizes its activities.
Thus, multinationals from small advanced economies like Switzerland (population
7 million), Belgium (10 million), Sweden (9 million), and the Netherlands (15 million)
are in a quite different position to U.S. multinationals based in the largest single
national market in the world with over 250 million people.
(iv) Attitudes of Senior Management to International Operations: It is likely that if
senior managements do not have a strong international orientation, the importance

of international operations may be underemphasized in terms of corporate goals
and objectives. In such situations, managers may tend to focus on domestic issues
and minimized differences and international HRM practices. This failure to recognize
differences in managing human resources in foreign environments, frequently results
in major difficulties in international operations (Desatink and Bennett, 1978). The
challenge for the corporate HR manager is to work with top management in fostering
the desire “global mindset.”
Check Your Progress 4
What are the factors that differentiate international HRM with that of domestic
HRM?
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HR and Global
Business Challenge


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International Human
Resource Management

1.7 EXPANDING THE ROLE OF HRM IN
INTERNATIONAL FIRMS
Bhatt et al. (1988) examined the role of HR staffs and managers in the strategic planning
of multinational firms. The study concluded that HR involvement at the corporate level
tended to be informal, limited in scope, and heavily dependent upon the competence and
personal characteristics of the senior HR manager. The HR manager played a major
role separate from that of the department or functional area. Staffing was the main area
in which the HR managers were involved in strategy formulation; other traditional HR

areas (e.g., compensation and evaluation of manager performance) were viewed as
general management concerns and not primarily HR related. At the SBU level, the HR
department was more involved in strategic planning; its role was more established and
the emphasis was on how HR staff could help implement a strategy. As Doz and Prahalad
(1986) point out, a HR system can be strong only if it receives extensive support and
involvement from senior management.
It is difficult to advocate international HRM policies if one is not fully appreciative of the
importance of the firm’s international operations to its overall profitability and
competitiveness, and aware as well of the special demands placed on the HR function
by the complex global environment. The need for a global perspective applies to both the
individual HR manager and the HR department. To accomplish this goal, Reynolds (1992)
suggests that HR managers be transferred from headquarters to international operations,
not into subsidiary HR departments but into other line positions that will broaden their
perspectives. Moving HR staff from the subsidiaries into headquarters is another way of
encouraging headquarters HR staff to appreciate the international operations of the firm
and to develop policies and activities to support staff throughout the entire global network.
Smaller firms with limited resources may find it impossible to finance staff transfers for
development purposes, but they may be able to identify other ways to globally orientate
HR staff, such as an annual visit to key foreign subsidiaries. Larger multinationals schedule
frequent meetings of corporate and subsidiary HR managers as a way to foster corporate
identity and to ensure greater consistency in global HR practices (Brandt, 1991).

1.8 LET US SUM UP
The interesting aspect of working internationally is that we have to work with people
who have different cultural heritages. Multinationals are characterised by an
interdependence of resources and responsibilities across all business units regardless of
national boundaries. These companies have to cope with large flows of components,
products, resources, people and information among their subsidiaries, while simultaneously
recognising the specialised resources and capabilities of each. Therefore, how
multinationals manage their human resources (acquire, allocate, utilise and reward)

becomes an important field of study and analysis. This area of study comes under the
purview of IHRM.
There are a number of unique problems that global companies face when trying to
implement consistent practices across their global HR networks. These problems act as
barriers to effective Global HRM. These are:
Variations
Perception of HR
Attitude and actions of headquarters toward HR


19
HR and Global
Business Challenge

Resistance to change
Cultural differences in learning and teaching styles.
Morgan defines international HRM as the interplay among these three dimensions-human
resource activities, types of employees, and countries of operation. The complexities of
operating in different countries and employing different national categories of
workers are a key variable that differentiates domestic and international HRM.

1.9 LESSON END ACTIVITY
What inter-country differences affect HRM? Give examples of how each may specifically
affect HRM.

1.10 KEYWORDS
HRM: A process of bringing people and organisations together so that the goals of each
one is met, effectively and efficiently.
IHRM: It is the process of procuring, allocating and effectively utilising human resources
in a multinational corporation.

International corporation: A domestic firm that builds on its existing capabilities to
penetrate overseas markets.
Multinational corporations: A more complex form that usually has fully autonomous
units operating in multiple countries.
Global corporation: It has corporate units in a number of countries that are integrated
to operate as one organisation worldwide.

1.11 QUESTIONS FOR DISCUSSION
1.

What is International HRM? What are the issues involved in it?

2.

What are the barriers to effective global HRM?

3.

Define International HRM.

4.

Explain the International HRM model by a programme.

5.

“India is seen to be more attractive than China for Foreign Direct Investment”.
Substantiate this statement.

6.

What are the various steps required for a truly international conception of HRM?

Check Your Progress: Model Answers
CYP 1
Hofstede’s four dimension of National Culture: Hofstede’s work focuses on
‘value systems’ of national cultures which are represented by four dimensions:
Power distance: This is the extent to which inequalities among people are
seen as normal. This dimension stretches from equal relations being seen as
normal to wide inequalities being viewed as normal.
Uncertainty avoidance: This refers to a preference for structured situations
versus unstructured situations. This dimension runs from being comfortable
Contd....


20
International Human
Resource Management

with flexibility and ambiguity to a need for extreme rigidity and situations with
a high degree of certainty.
Individualism: This looks at whether individuals are used to acting as
individuals or as part of cohesive groups, which may be based on the family
or the corporation. This dimension ranges from collectivism to individualism
(Hui, 1990).
Masculinity: Hofstede (1980a) distinguishes ‘hard values’ such as
assertiveness and competition, and the ‘soft’ of ‘feminine’ values of personal
relations, quality of life and about caring about others, where in a masculine
society gender role differentiation is emphasized.
CYP 2

Types of Employees of an International Firm:
(i)

Host-country nationals

(ii)

Parent-country nationals

(iii) Third-country nationals
CYP 3
Issues in IHRM:
(i)

Managing international assignments

(ii)

Employee and family adjustment

(iii) Selecting the right person for a foreign assignment
(iv) Culture, communication and gauge
(v)

Language and communication

CYP 4
The complexity of international HR can be attributed to six factors that differentiate
international HRM from domestic HRM. These factors are as follows:
1.

More HR activities;

2.

The need for a broader perspective;

3.

More involvement in employee’s personal lives;

4.

Changes in emphasis as the workforce mix of expatriates and locals varies;

5.

Risk exposure; and

6.

More external influences.

1.12 SUGGESTED READINGS
P. L. Rao, International Human Resource Management, Excel Books, New Delhi, 2008.
Briscoi, Schuler and Claus, International Human Resource Management, Routledge, 2008.
Breuester, Sparrow and Vernon, International Human Resource Management (3rd edition).
P.J. Dowling and D.E. Welch, International Human Resource Management, Thomson,
London, 2004.

LESSON

2
PERSPECTIVES AND APPROACHES OF IHRM
CONTENTS
2.0 Aims and Objectives
2.1 Introduction
2.2 International Human Resource Management Approaches
2.3 The Path to Global Status
2.3.1

Export

2.4 Initial Division Structure (Early Stages of Internationalization)
2.5 International Division
2.6 Global Product/Area Division
2.6.1

Global Product Division

2.6.2

Global Area Division

2.6.3

Global Matrix Structure

2.7 New Types of Multinational Structures

2.7.1

Heterarchy

2.7.2

Transnational

2.7.3

Networked Firm

2.7.4

Keiretsu

2.7.5

Control and Coordination

2.8 Role of Human Resource
2.9 Strategies for International Organisations
2.9.1

Perlmutter’s Model

2.9.2

Bartlett and Ghoshal’s Model

2.10 Implications for Human Resource Management Policy
2.11 An Integrated Strategic Framework
2.12 Flexible Organisation: The EU Model
2.13 Context of Management and Organizations in Europe
2.14 Let us Sum up
2.15 Lesson End Activity
2.16 Keywords
2.17 Questions for Discussion
2.18 Suggested Readings


22
International Human
Resource Management

2.0 AIMS AND OBJECTIVES
After studying this lesson, you will be able to:
Distinguish between four types of international management approaches
Describe mode of operation used in the various foreign markets
Appreciate the strategic importance of the overseas operations

2.1 INTRODUCTION
The Human Resource (HR) functions do not operate in a vacuum. As with other areas
of the organisation, the shift from a domestic to a global focus affects the HR activities.
As a consequence, HR activities are determined by, and influence, various organizational
factors, such as:
Stage of internationalization;
Mode of operation used in the various foreign markets;
Method of control and coordination; and
Strategic importance of the overseas operations to total corporate profitability.

To a certain extent, how the internationalizing firm copes with the HR demands of its
various foreign operations determines its ability to execute its chosen expansion strategies.
Indeed, personnel policies should lead rather than follow international operation decisions
(Svard, 1982) yet one could argue that most companies take the opposite approach—
that is, follow market-driven strategies.

2.2 INTERNATIONAL HUMAN RESOURCE
MANAGEMENT APPROACHES
The HRM uses four terms to describe Multi-National Corporations (MNCs) approaches
to managing and staffing their subsidiaries: ethnocentric, polycentric, regiocentric,
and geocentric. These terms are derived from the work of Perlmutter (1969) who
claimed that. It was possible to identify among international executive three primary
attitudes—ethnocentric, polycentric, and geocentric—toward building a multinational
enterprise, based on top management assumptions upon which key product, functional,
an geographical decisions were made. To demonstrate these three attitudes, Perlmutter
(1969) used aspects of organizational design, such as decision-making, evaluation and
control, information flows, and complexity of organization. He also included perpetuation,
which he defined as “recruiting, staffing, development.” A fourth attitude—regiocentric—
was added later (Heanan and Perlmutter, 1979).
It is important to briefly outline them here, since they have a bearing on our discussion of
the organizational structure and control mechanisms that are typically adopted by firms
as their internationalization progresses. The four approaches are:
1.

Ethnocentric: Few foreign subsidiaries have any autonomy; strategic decisions
are made at headquarters. Key positions at the domestic and foreign operations
are held by management personnel of headquarters. In other words, subsidiaries
are managed by expatriates from the home country (PCNs).

2.

Polycentric: The MNC treats each subsidiary as a distinct national entity with
some decision-making autonomy. Subsidiaries are usually managed by local nationals
(HCNs) who are seldom promoted to positions at headquarters. Likewise, ‘PNCs’
are rarely transferred to foreign subsidiary operations.


3.

Geocentric: Here, the MNC takes a worldwide approach to its operations,
recognizing that each part (subsidiaries and headquarters) makes a unique
contribution with its unique competence. It is accompanied by a worldwide integrated
business, and nationality is ignored in favour of ability. For example, the chief
executive officer of the Swedish Multinational Electrolux claims that within this
global company there is no tradition to hire managing directors from Sweden, or
locally, but to find the person best suited for the job, that is, the colour of one’s
passport does not matter when it comes to rewards, promotion, and development.
PCNs, HCNs, and TCNs can be found in key positions anywhere, including those
at the senior management level at headquarters and on the board of directors.

4.

Regiocentric: Reflects the geographic strategy and structure of the multinational.
Like the geocentric approach, it utilizes a wider pool of managers but in a limited
way. Personnel may move outside their countries but only within the particular
geographic region. Regional managers may not be promoted to headquarter positions
but enjoy a degree of regional autonomy in decision-making. It may be seen as a
precursory step towards geocentrism.

It should be stressed that the above categories refer to managerial attitudes that reflect

the socio-cultural environment in which the internationalizing firm is embedded. These
attitudes also may reflect a general top management attitude. However, the nature of
international business often forces adaptation upon implementation. For instance, a firm
may adopt an ethnocentric approach to all its foreign operations, but a particular host
government may require the appointment of its own people in the key subsidiary positions;
so, for that market, a polycentric approach is mandatory, making a uniform approach
unachievable. Likewise, businesses active in Russia found that Western companies tended
to maintain an ethnocentric approach to staffing despite attempts to “Russify” the local
operations (Thornhill, 1996). Also, the strategic importance of the foreign market, the
maturity of the operation, and the degree of cultural distance between the parent and
host country, influence the manner in which the firm approaches a particular staffing
decision. In some cases, an MNC may use a combination of approaches—for example,
it may operate its European interests in a regiocentric manner and its Southeast Asian
interests in an ethnocentric way until there is greater confidence in operating in that
region of the world.
Because of these operating realities, it is sometimes difficult to equate precisely managerial
attitudes towards international operations with the structural forms. The environmental
contingencies facing the particular internationalizing firm influence its strategic position,
managerial mindset, organizational structure, and staffing approaches. The four typologies–
international, global, multidomestic, and transnational–are useful illustrations of these
linkages.
Check Your Progress 1
Distinguish between ethnocentric and polycentric approaches of international
management.
.......................................................................................................................
.......................................................................................................................

2.3 THE PATH TO GLOBAL STATUS
In addition to the strategic imperatives, mindsets, and staffing approaches outlined above,
IHRM is affected by the way the internationalization process itself is managed. Most

23
Perspectives and
Approaches of IHRM


24
International Human
Resource Management

firms pass through several stages of organizational development as the nature and size
of their international activities grow. As they go through these evolutionary stages, their
organizational structures change, typically due to the strain imposed by growth and
geographical spread, the need for improved coordination and control across business
units, and the constraints imposed by host-government regulations on ownership and
equity. Multinationals are not born overnight; the evolution from a domestic to a truly
global organization may involve a long and somewhat tortuous process with many and
diverse steps, as illustrated in Figure 2.1. Some firms may use licensing, subcontracting,
or other operation modes, instead of establishing their own foreign production or service
facilities.
Some firms are able to accelerate the process through acquisitions, thus leapfrogging
over intermediate steps (i.e., move directly into foreign production through the purchase
of a foreign rather than initial exporting, followed by sales subsidiary. Some firms can be
driven by external factors such as host-government action (e.g., forced into a joint venture)
or an offer to buy a company. Others are formed expressly with the international
market in mind. In other words, the number of steps, or stages, along the path to
multinational status varies from firm to firm, as does the timeframe involved. The following
section examines the typical path from domestic to global organization and draws out
key HRM implications.

Foreign
Production

Network of
Subsidiaries

Sales
Subsidiary
Exporting

Licensing

Subcontracting

Source: Dowling et al. (2001) International Resource Management (p. 34)

Figure 2.1: Stages of Internationalization

2.3.1 Export
Exporting is typically the initial stage for firms entering international operations. As such,
it rarely involves much organizational response until the level of export sales reaches a
critical point. Of course, simple exporting may be difficult for service companies (such
as legal firms) so that they may be forced to make an early step into foreign direct
investment operations (via a branch office, or joint venture) (Erramilli, 1997).
Exporting often tends to be handled by an intermediary (e.g., an export agent or foreign
distributor – usually a HCN, as local market knowledge is deemed critical). As exports
sales increase, an export manager may be appointed to control foreign sales and actively
seek new markets. This person is commonly from the domestic operations – that is, a
PCN. Further growth in exporting may lead to the establishment of an export department
at the same level as the domestic sales department as the firm becomes more committed

to, or more dependent on, its foreign export sales as Figure 2.2 shows.


25
Perspectives and
Approaches of IHRM

Managing Director

Production
Manager

Marketing/
Sales
Manager

Finance
Manager

Domestic
Sales

HR
Manager

Export
Sales

?

Figure 2.2: Export Department

At this stage, exporting is controlled from the domestic-based home office, through a
designated export manager. The role of the HR department is unclear, as indicated by
the dotted arrow between these two functional areas in Figure 2.2. Though there are
HR activities involved (such as the selection of export staff), and perhaps training of the
foreign agency staff, these activities are handled by the marketing department, or
exporting staff, the HR department has little, if any, involvement with the development of
policies and procedures surrounding the HR aspects of the firm’s early international
activities (Welch, etc., 1997).

2.4 INITIAL DIVISION STRUCTURE (EARLY STAGES OF
INTERNATIONALIZATION)
As the firm develops expertise in foreign markets, agents and distributors are replaced
by direct sales with the establishment of branch offices in the foreign market countries.
At this stage, the company creates an export division or function at the corporate home
office and the export division head directly reports to the CEO.
As international sales increase further, local governments exert pressure on these growing
markets for setting up on-site manufacturing facilities. This prompts the company to set
up a subsidiary and a branch office in the concerned foreign countries for economic
reasons, as well as to demonstrate to the local government that it wants to be a good
local citizen. This new structural arrangement is shown in Figure 2.3. Each subsidiary is
responsible for operations within its own geographic area, and the subsidiary manager
reports directly to the export division head at the corporate office. This arrangements is
useful because it takes a great deal of burden off the CEO for monitoring and supporting
the different subsidiaries in different foreign markets (Gupta, 2006).
In the beginning, PCNs are usually posted to important positions because the firm has
more confidence in them to implement proven home office human resource policies and
practices. This is known as the ethnocentric approach. The decision to use PCNs leads
into exportation of management issues and activities. At this point the HR department

becomes actively involved in the personnel aspects of the firm’s international operations.


26
International Human
Resource Management

Chief
Executive
Officer
Home office
departments
Production

Marketing

Finance

Personnel

V.P. International
operations
Overseas
subsidiaries
France

Japan

Egypt

Australia

Argentina

Source: International HRM (2006) S.C. Gupta (p. 136)

Figure 2.3: Use of Subsidiaries during the Early Stages of Internationalization

2.5 INTERNATIONAL DIVISION
For some firms, it is a short step from the establishment of a sales subsidiary to foreign
production or service facility. This step may be considered small if the firm already is
assembling the product abroad to take advantage of cheap labour or to save shipping
costs or tariffs. For some firms, though, the transition to foreign investment is a large,
sometimes prohibitive, step. For example, an Australian firm that was successfully
exporting mining equipment to Canada began to experience problems with after-sales
servicing and delivery schedules. The establishment of its own production facility was
considered too great a step, so the firm entered into a licensing agreement with a Canadian
manufacturer.
Having made the decision to produce overseas, the firm may establish its own foreign
production facilities, or enter into a joint venture with a local firm, or buy a local firm.
Regardless of the method of establishment, foreign production/service operations tend
to trigger the creation of a separate international division in which all international activities
are grouped, as Figure 2.4 illustrates (Thornhill, 1996).
With the spread of international activities, the firm establishes what has been referred to
as “miniature replicas” (the foreign subsidiaries are structured to mirror that of the domestic
organization). The subsidiary managers report to the head of the international division,
and there may be some informal reporting directly to the various functional heads. For
example, as shown in Figure 2.4, there may be contact regarding staffing issues between
the HR managers in the two subsidiaries and the HR manager at corporate headquarters.