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chapter 17 Global Human Resource Management

LEARNING OBJECTIVES

1 Summarize the strategic role of human resource management in the international business.

2 Identify the pros and cons of different approaches to staffing policy in the international business.

3 Explain why managers may fail to thrive in foreign postings.

4 Recognize how management development and training programs can increase the value of human capital in the international business firm.

5 Explain how and why performance appraisal systems might vary across nations.

6 Understand how and why compensation systems might vary across nations.

7 Understand how organized labor can influence strategic choices in international business firms.

opening case MMC China

It had been a very bad morning for John Ross, the general manager of MMC's Chinese joint venture. He had just gotten off the phone with his boss in St Louis, Phil Smith, who was demanding to know why the joint venture's return on investment was still in the low single digits four years after Ross had taken over the top post in the operation. “We had expected much better performance by now,” said Smith, “particularly given your record of achievement; you need to fix this, Phil. Our patience is not infinite. You know the corporate goal is for a 20 percent return on investment for operating units, and your unit is not even close to that.” Ross had a very bad feeling that Smith had just fired a warning shot across his bow. There was an implicit threat underlying Smith's demands for improved performance. For the first time in his 20-year career at MMC, Ross felt that his job was on the line.

MMC was a U.S. based multinational electronics enterprise with sales of $2 billion and operations in more than 10 countries. MMC China specialized in the mass production of printed circuit boards for companies in the cell phone and computer industries. MMC was a joint venture with Shanghai Electronic Corporation, a former state-owned enterprise that held 49 percent of the joint-venture equity (MMC held the rest). While MMC held a majority of the equity, the company had to consult with its partner before making major investments or changing employment levels.

John Ross had been running MMC China for the past four years. He had arrived at MMC China after a very successful career at MMC, which included extended postings in Mexico and Hungary. When he took the China position, Ross thought that if he succeeded he would probably be in line for one of the top jobs at corporate headquarters within a few years. Ross had known that he was taking on a challenge with MMC China, but nothing prepared him for what he found there. The joint venture was a mess. Operations were horribly inefficient. Despite low wages, productivity was being killed by poor product quality, lax inventory controls, and high employee turnover. The venture probably employed too many people, but MMC's Chinese partner seemed to view the venture as a job-creation program and repeatedly objected to any plans for cutting the workforce. To make matters worse, MMC China had failed to keep up with the latest developments in manufacturing technology, and it was falling behind competitors. Ross was determined to change this, but it had not been easy.

To improve operations, Ross had put in a request to corporate HR for two specialists from the United States to work with the Chinese production employees. It had been a disaster. One had lasted three months before requesting a transfer home for personal reasons. Apparently, his spouse hated China. The other had stayed for a year, but he had interacted so poorly with the local Chinese employees that he had to be sent back to the United States. Ross wished that MMC's corporate HR department had done a better job of selecting and then training these employees for a difficult foreign posting, but in retrospect he had to admit that he wasn't surprised at the lack of cultural training; he had never been given any.

After this failure, Ross had taken a different tack. He had picked four of his best Chinese production employees and sent them to MMC's U.S. operations, along with a translator, for a two-month training program focusing on the latest production techniques. This had worked out much better. The Chinese had visited efficient MMC factories in the United States, Mexico, and Brazil and had seen what was possible. They had returned home fired up to improve operations at MMC China. Within a year they had introduced a Six Sigma quality control program and improved the flow of inventory through MMC's factory. Ross could now walk though the factory without being appalled by the sight of large quantities of inventory stacked on the floor or bins full of discarded circuit boards that had failed postassembly quality tests. Productivity had improved as a result and after three tough years, MMC China had finally turned a profit.

Apparently this was not good enough for corporate headquarters. Ross knew that improving performance further would be tough. The market in China was very competitive. MMC was vying with many other enterprises to produce printed circuit boards for large multinational customers that had assembly operations in China. The customers were constantly demanding lower prices, and it seemed to Ross that prices were falling almost as fast as MMC's costs. Also, Ross was limited in his ability to cut the workforce by the demands of his Chinese joint-venture partner. Ross had tried to explain all of this to Phil Smith, but Smith didn't seem to get it. “The man is just a number cruncher,” thought Ross. “He has no sense of the market in China. He has no idea how hard it is to do business here. I have worked damn hard to turn this operation around, and I am getting no credit for it, none at all.”•

  Source: This is a disguised case based on interviews undertaken by Charles Hill.

Introduction

Human Resource Management (HRM)

Activities an organization conducts to use its human resources effectively.

This chapter continues our survey of specific functions within an international business by looking at international human resource management. Human resource management (HRM) refers to the activities an organization carries out to use its human resources effectively.1 These activities include determining the firm's human resource strategy, staffing, performance evaluation, management development, compensation, and labor relations. None of these activities is performed in a vacuum; all are related to the strategy of the firm. As we will see, HRM has an important strategic component.2 Through its influence on the character, development, quality, and productivity of the firm's human resources, the HRM function can help the firm achieve its primary strategic goals of reducing the costs of value creation and adding value by better serving customers.

The opening case described what can happen when the HRM function does not perform as well as it might. MMC sent two expatriates to MMC China to help the beleaguered boss of that unit, John Ross, but neither expatriate was successful. Apparently, the HR department had picked two employees who were well qualified from a technical perspective but were not suited to a difficult foreign posting. This is not unusual. As we shall see, a large number of expatriates return home before their tour of duty is completed, often because while they have the technical skills to perform the required job, they lack the skills required to manage in a different cultural context or because their spouses do not like the posting. To his credit, Ross came up with a solution to the problem: send Chinese employees to the United States to be trained in the latest manufacturing techniques. The MMC case also illustrates another problem in international HRM: how to evaluate the performance of expatriate managers who are operating in very different circumstances from those found in the home country. It is apparent from the case that John Ross was being evaluated on the basis of the performance of his unit against corporatewide profitability criteria, but these criteria failed to account for the difficult conditions Ross inherited and the problems inherent in doing business in the Chinese market. The most skilled multinationals have found ways of dealing with this problem and adjust performance appraisal criteria to take differences in context into account. MMC apparently did not do this.

Irrespective of the desire of managers in many multinationals to build a truly global enterprise with a global workforce, the reality is that HRM practices still have to be modified to national context. The strategic role of HRM is complex enough in a purely domestic firm, but it is more complex in an international business, where staffing, management development, performance evaluation, and compensation activities are complicated by profound differences between countries in labor markets, culture, legal systems, economic systems, and the like (see Chapters 2, 3, and 4). For example,

• Compensation practices may vary from country to country, depending on prevailing management customs.

• Labor laws may prohibit union organization in one country and mandate it in another.

• Equal employment legislation may be strongly pursued in one country and not in another.

Expatriate Manager

A national of one country appointed to a management position in another country.

If it is to build a cadre of managers capable of managing a multinational enterprise, the HRM function must deal with a host of issues. It must decide how to staff key management posts in the company, how to develop managers so that they are familiar with the nuances of doing business in different countries, how to compensate people in different nations, and how to evaluate the performance of managers based in different countries. HRM must also deal with a host of issues related to expatriate managers. (An expatriate manager is a citizen of one country who is working abroad in one of the firm's subsidiaries.) It must decide when to use expatriates, determine whom to send on expatriate postings, be clear about why they are doing it, compensate expatriates appropriately, and make sure that they are adequately debriefed and reoriented once they return home.

This chapter looks closely at the role of HRM in an international business. It begins by briefly discussing the strategic role of HRM. Then we turn our attention to four major tasks of the HRM function: staffing policy, management training and development, performance appraisal, and compensation policy. We will point out the strategic implications of each of these tasks. The chapter closes with a look at international labor relations and the relationship between the firm's management of labor relations and its overall strategy.

The Strategic Role of International HRM

LEARNING OBJECTIVE 1

Summarize the strategic role of human resource management in the international business.

A large and expanding body of academic research suggests that a strong fit between human resources practices and strategy is required for high profitability.3 You will recall from Chapter 12 that superior performance requires not only the right strategy, but the strategy must also be supported by the right organization architecture. Strategy is implemented through organization. As shown in Figure 17.1 (which is based on Figure 12.5), people are the linchpin of a firm's organization architecture. For a firm to outperform its rivals in the global marketplace, it must have the right people in the right postings. Those people must be trained appropriately so that they have the skill sets required to perform their jobs effectively and so that they behave in a manner that is congruent with the desired culture of the firm. Their compensation packages must create incentives for them to take actions that are consistent with the strategy of the firm, and the performance appraisal system the firm uses must measure the behavior that the firm wants to encourage.

FIGURE 17.1 The Role of Human Resources in Shaping Organization Architecture

As indicated in Figure 17.1, the HRM function, through its staffing, training, compensation, and performance appraisal activities, has a critical impact upon the people, culture, incentive, and control system elements of the firm's organization architecture (performance appraisal systems are part of the control systems in an enterprise). Thus, HRM professionals have a critically important strategic role. It is incumbent upon them to shape these elements of a firm's organization architecture in a manner that is consistent with the strategy of the enterprise, so that the firm can effectively implement its strategy.

In short, superior human resource management can be a sustained source of high productivity and competitive advantage in the global economy. At the same time, research suggests that many international businesses have room for improving the effectiveness of their HRM function. In one study of competitiveness among 326 large multinationals, the authors found that human resource management was one of the weakest capabilities in most firms, suggesting that improving the effectiveness of international HRM practices might have substantial performance benefits.4

In Chapters 12, we examined four strategies pursued by international businesses: localization strategy, international strategy, global standardization strategy, and transnational strategy. Firms that emphasize localization try to create value by emphasizing local responsiveness; international firms, by transferring products and competencies overseas; global firms, by realizing experience curve and location economies; and transnational firms, by doing all these things simultaneously. In this chapter, we will see that success also requires HRM policies to be congruent with the firm's strategy. For example, a transnational strategy imposes different requirements for staffing, management development, and compensation practices than a localization strategy. Firms pursuing a transnational strategy need to build a strong corporate culture and an informal management network for transmitting information and knowledge within the organization. Through its employee selection, management development, performance appraisal, and compensation policies, the HRM function can help develop these things. Thus, as we have noted, HRM has a critical role to play in implementing strategy. In each section that follows, we will review the strategic role of HRM in some detail.

• QUICK STUDY

1. Outline the relationship among HRM, strategy, and organization performance.

Staffing Policy

LEARNING OBJECTIVE 2

Identify the pros and cons of different approaches to staffing policy in the international business.

Staffing Policy

Strategy concerned with selecting employees for particular jobs.

Corporate Culture

The organization's norms and value systems.

Staffing policy is concerned with the selection of employees for particular jobs. At one level, this involves selecting individuals who have the skills required to do particular jobs. At another level, staffing policy can be a tool for developing and promoting the desired corporate culture of the firm.5 By corporate culture, we mean the organization's norms and value systems. A strong corporate culture can help a firm implement its strategy. General Electric, for example, is not just concerned with hiring people who have the skills required for performing particular jobs; it wants to hire individuals whose behavioral styles, beliefs, and value systems are consistent with those of GE. This is true whether an American is being hired, an Italian, a German, or an Australian and whether the hiring is for a U.S. operation or a foreign operation. The belief is that if employees are predisposed toward the organization's norms and value systems by their personality type, the firm will be able to attain higher performance.

TYPES OF STAFFING POLICY

Research has identified three types of staffing policies in international businesses: the ethnocentric approach, the polycentric approach, and the geocentric approach.6 We will review each policy and link it to the strategy pursued by the firm. The most attractive staffing policy is probably the geocentric approach, although there are several impediments to adopting it.

The Ethnocentric Approach

Ethnocentric Staffing Policy

A staffing approach within the MNE in which all key management positions are filled by parent-country nationals.

An ethnocentric staffing policy is one in which all key management positions are filled by parent-country nationals. This practice was widespread at one time. Firms such as Procter & Gamble, Philips Electronics NV, and Matsushita (now called Panasonic) originally followed it. In the Dutch firm Philips, for example, all important positions in most foreign subsidiaries were at one time held by Dutch nationals, who were referred to by their non-Dutch colleagues as the Dutch Mafia. Historically in many Japanese and South Korean firms, such as Toyota, Matsushita, and Samsung, key positions in international operations have often been held by home-country nationals. For example, according to the Japanese Overseas Enterprise Association, only 29 percent of foreign subsidiaries of Japanese companies had presidents who were not Japanese. In contrast, 66 percent of the Japanese subsidiaries of foreign companies had Japanese presidents.7 Today, there is evidence that as Chinese enterprises are expanding internationally, they too are using an ethnocentric staffing policy in their foreign operations.8

Firms pursue an ethnocentric staffing policy for three reasons. First, the firm may believe the host country lacks qualified individuals to fill senior management positions. This argument is heard most often when the firm has operations in less developed countries. Second, the firm may see an ethnocentric staffing policy as the best way to maintain a unified corporate culture. Many Japanese firms, for example, have traditionally preferred their foreign operations to be headed by expatriate Japanese managers because these managers will have been socialized into the firm's culture while employed in Japan.9 Procter & Gamble until fairly recently preferred to staff important management positions in its foreign subsidiaries with U.S. nationals who had been socialized into P&G's corporate culture by years of employment in its U.S. operations. Such reasoning tends to predominate when a firm places a high value on its corporate culture.

Third, if the firm is trying to create value by transferring core competencies to a foreign operation, as firms pursuing an international strategy are, it may believe that the best way to do this is to transfer parent-country nationals who have knowledge of that competency to the foreign operation. Imagine what might occur if a firm tried to transfer a core competency in marketing to a foreign subsidiary without a corresponding transfer of home-country marketing management personnel. The transfer would probably fail to produce the anticipated benefits because the knowledge underlying a core competency cannot easily be articulated and written down. Such knowledge often has a significant tacit dimension; it is acquired through experience. Just like the great tennis player who cannot instruct others how to become great tennis players simply by writing a handbook, the firm that has a core competency in marketing, or anything else, cannot just write a handbook that tells a foreign subsidiary how to build the firm's core competency anew in a foreign setting. It must also transfer management personnel to the foreign operation to show foreign managers how to become good marketers, for example. The need to transfer managers overseas arises because the knowledge that underlies the firm's core competency resides in the heads of its domestic managers and was acquired through years of experience, not by reading a handbook. Thus, if a firm is to transfer a core competency to a foreign subsidiary, it must also transfer the appropriate managers.

Despite this rationale for pursuing an ethnocentric staffing policy, the policy is now on the wane in most international businesses for two reasons. First, an ethnocentric staffing policy limits advancement opportunities for host-country nationals. This can lead to resentment, lower productivity, and increased turnover among that group. Resentment can be greater still if, as often occurs, expatriate managers are paid significantly more than home-country nationals.

Second, an ethnocentric policy can lead to cultural myopia, the firm's failure to understand host-country cultural differences that require different approaches to marketing and management. The adaptation of expatriate managers can take a long time, during which they may make major mistakes. For example, expatriate managers may fail to appreciate how product attributes, distribution strategy, communications strategy, and pricing strategy should be adapted to host-country conditions. The result may be costly blunders. They may also make decisions that are ethically suspect simply because they do not understand the culture in which they are managing.10 In one highly publicized case in the United States, Mitsubishi Motors was sued by the federal Equal Employment Opportunity Commission for tolerating extensive and systematic sexual harassment in a plant in Illinois. The plant's top management, all Japanese expatriates, denied the charges. The Japanese managers may have failed to realize that behavior that would be viewed as acceptable in Japan was not acceptable in the United States.11

ANOTHER PERSPECTIVE Recruiting Entry-Level Staff in China

Education and training have improved in China in recent years, such that there are more locals available to perform management jobs, particularly at the entry level. Adding to the pool of talent are those who are educated abroad—“returnees”—who are ideal for middle- and upper-level management roles. Recent years have shown rapid expansion in higher education in China. Between 1995 and 2000, undergraduate enrollment in China doubled from 1.84 million to 3.76 million. In addition, last year there were over half a million applicants for post-graduate study within China. These figures do not count the tens of thousands of Chinese studying abroad, who are generally the “cream of the crop” in China. Foreign firms are helped by the fact that many university students are interested in employment with a foreign firm. A recent study of students at Beijing's top universities showed that 63.9 percent of students hope to work for foreign firms upon graduation.

  Source: www.globalhrnews.com/story.asp?sid=99.

The Polycentric Approach

Polycentric Staffing Policy

A staffing policy in an MNE in which host-country nationals are recruited to manage subsidiaries in their own country, while parent-country nationals occupy key positions at corporate headquarters.

A polycentric staffing policy requires host-country nationals to be recruited to manage subsidiaries, while parent-country nationals occupy key positions at corporate headquarters. In many respects, a polycentric approach is a response to the shortcomings of an ethnocentric approach. One advantage of adopting a polycentric approach is that the firm is less likely to suffer from cultural myopia. Host-country managers are unlikely to make the mistakes arising from cultural misunderstandings to which expatriate managers are vulnerable. A second advantage is that a polycentric approach may be less expensive to implement, reducing the costs of value creation. Expatriate managers can be expensive to maintain.

A polycentric approach also has its drawbacks. Host-country nationals have limited opportunities to gain experience outside their own country and thus cannot progress beyond senior positions in their own subsidiary. As in the case of an ethnocentric policy, this may cause resentment. Perhaps the major drawback with a polycentric approach, however, is the gap that can form between host-country managers and parent-country managers. Language barriers, national loyalties, and a range of cultural differences may isolate the corporate headquarters staff from the various foreign subsidiaries. The lack of management transfers from home to host countries, and vice versa, can exacerbate this isolation and lead to a lack of integration between corporate headquarters and foreign subsidiaries. The result can be a “federation” of largely independent national units with only nominal links to the corporate headquarters. Within such a federation, the coordination required to transfer core competencies or to pursue experience curve and location economies may be difficult to achieve. Thus, although a polycentric approach may be effective for firms pursuing a localization strategy, it is inappropriate for other strategies.

The federation that may result from a polycentric approach can also be a force for inertia within the firm. After decades of pursuing a polycentric staffing policy, food and detergents giant Unilever found that shifting from a strategic posture that emphasized localization to a transnational posture was very difficult. Unilever's foreign subsidiaries had evolved into quasi-autonomous operations, each with its own strong national identity. These “little kingdoms” objected strenuously to corporate headquarters' attempts to limit their autonomy and to rationalize global manufacturing.12

The Geocentric Approach

Geocentric Staffing Policy

A staffing policy where the best people are sought for key jobs throughout an MNE, regardless of nationality.

A geocentric staffing policy seeks the best people for key jobs throughout the organization, regardless of nationality. This policy has a number of advantages. First, it enables the firm to make the best use of its human resources. Second, and perhaps more important, a geocentric policy enables the firm to build a cadre of international executives who feel at home working in a number of cultures. Creation of such a cadre may be a critical first step toward building a strong unifying corporate culture and an informal management network, both of which are required for global standardization and transnational strategies.13 Firms pursuing a geocentric staffing policy may be better able to create value from the pursuit of experience curve and location economies and from the multidirectional transfer of core competencies than firms pursuing other staffing policies. In addition, the multinational composition of the management team that results from geocentric staffing tends to reduce cultural myopia and to enhance local responsiveness.

In sum, other things being equal, a geocentric staffing policy seems the most attractive. Indeed, in recent years there has been a sharp shift toward adoption of a geocentric staffing policy by many multinationals. For example, India's Tata Group, now a $70 billion global conglomerate, runs several of its companies with American and British executives. Japan's Sony Corporation broke 60 years of tradition in 2005 when it installed its first non-Japanese chairman and CEO, Howard Stringer, a former CBS president and a U.S. citizen who was born and raised in Wales. American companies increasingly draw their managerial talent from overseas. One study found that by 2005, 24 percent of the managers among the top 100 to 250 people in U.S. companies were from outside the United States. For European companies, the average is 40 percent.14

ANOTHER PERSPECTIVE Women in International Assignments

Would you send a woman expatriate to Saudi Arabia, Kuwait, Japan, or Korea? How are Western women expatriates doing in foreign cultures that have traditionally limited women's public roles? Women sent to these countries have met with substantial success. Their key challenge is to get the assignments! Once in place, women expatriates are successful. This is in part because once in the culture, women expatriates are seen first as expatriates who fall outside the local role for women. In addition, “expat” women also have salience in their new environment—they are noticed—and this can be a distinct business advantage. Locals often take pride in developing business relationships with women expatriates because by doing so they can suggest that the foreign stereotype of their culture is superficial and incomplete.

However, a number of problems limit the firm's ability to pursue a geocentric policy. Many countries want foreign subsidiaries to employ their citizens. To achieve this goal, they use immigration laws to require the employment of host-country nationals if they are available in adequate numbers and have the necessary skills. Most countries, including the United States, require firms to provide extensive documentation if they wish to hire a foreign national instead of a local national. This documentation can be time consuming, expensive, and at times futile. A geocentric staffing policy also can be expensive to implement. Training and relocation costs increase when transferring managers from country to country. The company may also need a compensation structure with a standardized international base pay level higher than national levels in many countries. In addition, the higher pay enjoyed by managers placed on an international fast track may be a source of resentment within a firm.

Summary

The advantages and disadvantages of the three approaches to staffing policy are summarized in Table 17.1. Broadly speaking, an ethnocentric approach is compatible with an international strategy, a polycentric approach is compatible with a localization strategy, and a geocentric approach is compatible with both global standardization and transnational strategies. (See Chapter 12 for details of the strategies.)

TABLE 17.1 Comparison of Staffing Approaches

Staffing Approach

Strategic Appropriateness

Advantages

Disadvantages

Ethnocentric

International

Overcomes lack of qualified managers in host nation

Produces resentment in host country

 

 

Unified culture

Can lead to cultural myopia

 

 

Helps transfer core competencies

 

Polycentric

Localization

Alleviates cultural myopia

Limits career mobility

 

 

Inexpensive to implement

Isolates headquarters from foreign subsidiaries

Geocentric

Global standardization and transnational

Uses human resources efficiently

National immigration policies may limit implementation

 

 

Helps build strong culture and informal management networks

Expensive

While the staffing policies described here are well known and widely used among both practitioners and scholars of international businesses, some critics have claimed that the typology is too simplistic and that it obscures the internal differentiation of management practices within international businesses. The critics claim that within some international businesses, staffing policies vary significantly from national subsidiary to national subsidiary; while some are managed on an ethnocentric basis, others are managed in a polycentric or geocentric manner.15 Other critics note that the staffing policy adopted by a firm is primarily driven by its geographic scope, as opposed to its strategic orientation. Firms that have a broad geographic scope are the most likely to have a geocentric mind-set.16

• QUICK STUDY

1. Outline the advantages and disadvantages of an ethnocentric staffing policy.

2. Outline the advantages and disadvantages of a polycentric staffing policy.

3. Outline the advantages and disadvantages of a geocentric staffing policy.

EXPATRIATE MANAGERS

LEARNING OBJECTIVE 3

Explain why managers may fail to thrive in foreign postings.

Two of the three staffing policies we have discussed—the ethnocentric and the geocentric—rely on extensive use of expatriate managers. As defined earlier, expatriates are citizens of one country who are working in another country. Sometimes the term inpatriates is used to identify a subset of expatriates who are citizens of a foreign country working in the home country of their multinational employer.17 Thus, a citizen of Japan who moves to the United States to work at Microsoft would be classified as an inpatriate (Microsoft has large numbers of inpatriates working at its main U.S. location near Seattle). With an ethnocentric policy, the expatriates are all home-country nationals who are transferred abroad. With a geocentric approach, the expatriates need not be home-country nationals; the firm does not base transfer decisions on nationality. A prominent issue in the international staffing literature is expatriate failure—the premature return of an expatriate manager to his or her home country.18 Here, we briefly review the evidence on expatriate failure before discussing a number of ways to minimize the failure rate.

Expatriate Failure

The premature return of an expatriate manager to the home country.

ANOTHER PERSPECTIVE The World's Friendliest Countries

HSBC's Expat Explorer Survey shows that New Zealand, Australia, and South Africa are the three nations where it's easiest to befriend locals, learn the local language, integrate into the community, and fit into the new culture. New Zealand, in the top spot, had high scores in all four categories. Seventy-five percent of respondents living there reported that they were integrating well in the local community; in Australia it was 77 percent and in South Africa 79 percent. The least friendly country for expats, according to the Forbes formula, was the United Arab Emirates. And among the countries most challenging for expats overall were Saudi Arabia, Qatar, Russia, and India, according to this year's HSBC survey results. India ranked in last place for the second year in a row. New Zealand, Australia, and South Africa were helped to the top of the list because more than half the expats surveyed there—58 percent in New Zealand, 75 percent in Australia, and 72 percent in South Africa—say they are native English speakers. Coming in just behind the top three in terms of friendliness were Canada (dropping slightly from the top spot last year) and the United States.

  Source:www.forbes.com/sites/bethgreenfield/2012/01/06/the-worlds-friendliest-countries-2/.

Expatriate Failure Rates

Expatriate failure represents a failure of the firm's selection policies to identify individuals who will not thrive abroad.19 The consequences include premature return from a foreign posting and high resignation rates, with expatriates leaving their company at about twice the rate of domestic managers.20 Research suggests that between 16 and 40 percent of all American employees sent abroad to developed nations return from their assignments early, and almost 70 percent of employees sent to developing nations return home early.21 Although detailed data are not available for most nationalities, one suspects that high expatriate failure is a universal problem. Some 28 percent of British expatriates, for example, are estimated to fail in their overseas postings.22 The costs of expatriate failure are high. One estimate is that the average cost per failure to the parent firm can be as high as three times the expatriate's annual domestic salary plus the cost of relocation (which is affected by currency exchange rates and location of assignment). Estimates of the costs of each failure run between $40,000 and $1 million.23 In addition, approximately 30 to 50 percent of American expatriates, whose average annual compensation package runs to $250,000, stay at their international assignments but are considered ineffective or marginally effective by their firms.24 In a seminal study, R. L. Tung surveyed a number of U.S., European, and Japanese multinationals.25 Her results, summarized in Table 17.2, show that 76 percent of U.S. multinationals experienced expatriate failure rates of 10 percent or more, and 7 percent experienced a failure rate of more than 20 percent. Tung's work also suggests that U.S. based multinationals experience a much higher expatriate failure rate than either European or Japanese multinationals.

TABLE 17.2 Expatriate Failure Rates

Recall Rate Percent

Percent of Companies

U.S. multinationals

 

    20–40%

7%

    10–20

69

    <10

24

European multinationals

 

    11–15%

3%

    6–10

38

    <5

59

Japanese multinationals

 

    11–19%

14%

    6–10

10

    <5

76

Source: Data From R.L. Tung, “Selection and Training Procedures of U.S., European, and Japanese Multinationals,” California Management Review, Vol. 1.25, NO. 1, pp. 51–71.

Tung asked her sample of multinational managers to indicate reasons for expatriate failure. For U.S. multinationals, the reasons, in order of importance, were

1. Inability of spouse to adjust.

2. Manager's inability to adjust.

3. Other family problems.

4. Manager's personal or emotional maturity.

5. Inability to cope with larger overseas responsibilities.

Managers of European firms gave only one reason consistently to explain expatriate failure: the inability of the manager's spouse to adjust to a new environment. For the Japanese firms, the reasons for failure were

1. Inability to cope with larger overseas responsibilities.

2. Difficulties with new environment.

3. Personal or emotional problems.

4. Lack of technical competence.

5. Inability of spouse to adjust.

The most striking difference between these lists is that “inability of spouse to adjust” was the top reason for expatriate failure among U.S. and European multinationals but only the No. 5 reason among Japanese multinationals. Tung comments that this difference was not surprising, given the role and status to which Japanese society traditionally relegates the wife and the fact that most of the Japanese expatriate managers in the study were men.

Since Tung's study, a number of other studies have consistently confirmed that the inability of a spouse to adjust, the inability of the manager to adjust, or other family problems remain major reasons for continuing high levels of expatriate failure.26 One study by International Orientation Resources, an HRM consulting firm, found that 60 percent of expatriate failures occur due to these three reasons.27 Another study found that the most common reason for assignment failure is lack of partner (spouse) satisfaction, which was listed by 27 per cent of respondents.28 The inability of expatriate managers to adjust to foreign postings seems to be caused by a lack of cultural skills on the part of the manager being transferred. According to one HRM consulting firm, this is because the expatriate selection process at many firms is fundamentally flawed: “Expatriate assignments rarely fail because the person cannot accommodate to the technical demands of the job. Typically, the expatriate selections are made by line managers based on technical competence. They fail because of family and personal issues and lack of cultural skills that haven't been part of the selection process.”29

The failure of spouses to adjust to a foreign posting seems to be related to a number of factors. Often, spouses find themselves in a foreign country without the familiar network of family and friends. Language differences make it difficult for them to make new friends. While this may not be a problem for the manager, who can make friends at work, it can be difficult for the spouse, who might feel trapped at home. The problem is often exacerbated by immigration regulations prohibiting the spouse from taking employment. With the recent rise of two-career families in many developed nations, this issue has become much more important. One survey found that 69 percent of expatriates are married, with spouses accompanying them 77 percent of the time. Of those spouses, 49 percent were employed before an assignment and only 11 percent were employed during an assignment.30 Research suggests that a main reason managers now turn down international assignments is concern over the impact such an assignment might have on their spouse's career.31 The accompanying Management Focus examines how one large multinational company, Royal Dutch/Shell, has tried to come to grips with this issue.

Expatriate Selection

One way to reduce expatriate failure rates is by improving selection procedures to screen out inappropriate candidates. In a review of the research on this issue, Mendenhall and Oddou state that a major problem in many firms is that HRM managers tend to equate domestic performance with overseas performance potential.32 Domestic performance and overseas performance potential are not the same thing. An executive who performs well in a domestic setting may not be able to adapt to managing in a different cultural setting. From their review of the research, Mendenhall and Oddou identified four dimensions that seem to predict success in a foreign posting: self-orientation, others-orientation, perceptual ability, and cultural toughness.

MANAGEMENT FOCUS Managing Expatriates at Royal Dutch/Shell

Royal Dutch/Shell is a global petroleum company with joint headquarters in both London and The Hague in the Netherlands. The company employs more than 100,000 people, approximately 5,500 of whom are at any one time living and working as expatriates. The expatriates at Shell are a diverse group, made up of more than 70 nationalities and located in more than 100 countries. Shell, as a global corporation, has long recognized that the international mobility of its workforce is essential to its success. By the 1990s, however, Shell was finding it harder to recruit key personnel for foreign postings. To discover why, the company interviewed more than 200 expatriate employees and their spouses to determine their biggest concerns. The data were then used to construct a survey that was sent to 17,000 current and former expatriate employees, expatriates' spouses, and employees who had declined international assignments.

The survey registered a phenomenal 70 percent response rate, clearly indicating that many employees thought this was an important issue. According to the survey, five issues had the greatest impact on the willingness of an employee to accept an international assignment. In order of importance, these were (1) separation from children during their secondary education (the children of British and Dutch expatriates were often sent to boarding schools in their home countries while their parents worked abroad), (2) harm done to a spouse's career and employment, (3) failure to recognize and involve a spouse in the relocation decision, (4) failure to provide adequate information and assistance regarding relocation, and (5) health issues. The underlying message was that the family is the basic unit of expatriation, not the individual, and Shell needed to do more to recognize this.

To deal with these issues, Shell implemented a number of programs designed to address some of these problems. To help with the education of children, Shell built elementary schools for Shell employees where there was a heavy concentration of expatriates. As for secondary school education, it worked with local schools, often providing grants, to help them upgrade their educational offerings. It also offered an education supplement to help expatriates send their children to private schools in the host country.

Helping spouses with their careers is a more vexing problem. According to the survey data, half of the spouses accompanying Shell staff on assignment were employed until the transfer. When expatriated, only 12 percent were able to secure employment, while a further 33 percent wished to be employed. Shell set up a spouse employment center to address the problem. The center provides career counseling and assistance in locating employment opportunities both during and immediately after an international assignment. The company also agreed to reimburse up to 80 percent of the costs of vocational training, further education, or re-accreditation, up to $4,400 per assignment.

Shell also set up a global information and advice network known as “The Outpost” to provide support for families contemplating a foreign posting. The Outpost has its headquarters in The Hague and now runs 40 information centers in more than 30 countries. The center recommends schools and medical facilities and provides housing advice and up-to-date information on employment, study, self-employment, and volunteer work.

  Sources: E. Smockum, “Don't Forget the Trailing Spouse,”Financial Times, May 6, 1998, p. 22; V. Frazee, “Tearing Down Roadblocks,”Workforce 77, no. 2 (1998), pp. 50–54; C. Sievers, “Expatriate Management,” HR Focus 75, no. 3 (1998), pp. 75–76; and J. Barbian, “Return to Sender,” Training, January 2002, pp. 40–43.

1. Self-orientation. The attributes of this dimension strengthen the expatriate's self-esteem, self-confidence, and mental well-being. Expatriates with high self-esteem, self-confidence, and mental well-being were more likely to succeed in foreign postings. Mendenhall and Oddou concluded that such individuals were able to adapt their interests in food, sport, and music; had interests outside of work that could be pursued (e.g., hobbies); and were technically competent.

2. Others-orientation. The attributes of this dimension enhance the expatriate's ability to interact effectively with host-country nationals. The more effectively the expatriate interacts with host-country nationals, the more likely he or she is to succeed. Two factors seem to be particularly important here: relationship development and willingness to communicate. Relationship development refers to the ability to develop long-lasting friendships with host-country nationals. Willingness to communicate refers to the expatriate's willingness to use the host-country language. Although language fluency helps, an expatriate need not be fluent to show willingness to communicate. Making the effort to use the language is what is important. Such gestures tend to be rewarded with greater cooperation by host-country nationals.

3. Perceptual ability. This is the ability to understand why people of other countries behave the way they do, that is, the ability to empathize. This dimension seems critical for managing host-country nationals. Expatriate managers who lack this ability tend to treat foreign nationals as if they were home-country nationals. As a result, they may experience significant management problems and considerable frustration. As one expatriate executive from Hewlett-Packard observed, “It took me six months to accept the fact that my staff meetings would start 30 minutes late, and that it would bother no one but me.” According to Mendenhall and Oddou, well-adjusted expatriates tend to be nonjudgmental and nonevaluative in interpreting the behavior of host-country nationals and willing to be flexible in their management style, adjusting it as cultural conditions warrant.

4. Cultural toughness. This dimension refers to the relationship between the country of assignment and how well an expatriate adjusts to a particular posting. Some countries are much tougher postings than others because their cultures are more unfamiliar and uncomfortable. For example, many Americans regard Great Britain as a relatively easy foreign posting, and for good reason—the two cultures have much in common. But many Americans find postings in non-Western cultures, such as India, Southeast Asia, and the Middle East, to be much tougher.33 The reasons are many, including poor health care and housing standards, inhospitable climate, lack of Western entertainment, and language difficulties. Also, many cultures are extremely male-dominated and may be particularly difficult postings for female Western managers.

THE GLOBAL MIND-SET

Some researchers suggest that a global mind-set, one characterized by cognitive complexity and a cosmopolitan outlook, is the fundamental attribute of a global manager. Such managers can deal with high levels of complexity and ambiguity and are open to the world. How do you develop these attributes? Often they are gained in early life, from a family that is bicultural, lives in foreign countries, or learns foreign languages as a regular part of family life.

Mendenhall and Oddou note that standard psychological tests can be used to assess the first three of these dimensions, whereas a comparison of cultures can give managers a feeling for the fourth dimension. They contend that these four dimensions, in addition to domestic performance, should be considered when selecting a manager for foreign posting. However, practice does not often conform to Mendenhall and Oddou's recommendations. Tung's research, for example, showed that only 5 percent of the firms in her sample used formal procedures and psychological tests to assess the personality traits and relational abilities of potential expatriates.34 Research by International Orientation Resources suggests that when selecting employees for foreign assignments, only 10 percent of the 50 Fortune 500 firms surveyed tested for important psychological traits such as cultural sensitivity, interpersonal skills, adaptability, and flexibility. Instead, 90 percent of the time employees were selected on the basis of their technical expertise, not their cross-cultural fluency.35

Mendenhall and Oddou do not address the problem of expatriate failure due to a spouse's inability to adjust. According to a number of other researchers, a review of the family situation should be part of the expatriate selection process (see the Management Focus on Royal Dutch/Shell for an example).36 A survey by Windam International, another international HRM consulting firm, found that spouses were included in preselection interviews for foreign postings only 21 percent of the time and that only half of them received any cross-cultural training. The rise of dual-career families has added an additional and difficult dimension to this long-standing problem.37 Increasingly, spouses wonder why they should have to sacrifice their own career to further that of their partner.38

• QUICK STUDY

1. What are the main causes of high expatriate failure rates?

2. How can an international business reduce expatriate failure?

Training and Management Development

LEARNING OBJECTIVE 4

Recognize how management development and training programs can increase the value of human capital in the international business firm.

Selection is just the first step in matching a manager with a job. The next step is training the manager to do the specific job. For example, an intensive training program might be used to give expatriate managers the skills required for success in a foreign posting. However, management development is a much broader concept. It is intended to develop the manager's skills over his or her career with the firm. Thus, as part of a management development program, a manager might be sent on several foreign postings over a number of years to build his or her cross-cultural sensitivity and experience. At the same time, along with other managers in the firm, the person might attend management education programs at regular intervals. The thinking behind job transfers is that broad international experience will enhance the management and leadership skills of executives. Research suggests this may be the case.39

International businesses, such as Caterpillar, are increasingly providing general management development programs in addition to training for particular foreign postings.

Historically, most international businesses have been more concerned with training than with management development. Plus, they tended to focus their training efforts on preparing home-country nationals for foreign postings. Recently, however, the shift toward greater global competition and the rise of transnational firms have changed this. It is increasingly common for firms to provide general management development programs in addition to training for particular posts. In many international businesses, the explicit purpose of these management development programs is strategic. Management development is seen as a tool to help the firm achieve its strategic goals, not only by giving managers the required skill set, but also by helping to reinforce the desired culture of the firm and by facilitating the creation of an informal network for sharing knowledge within the multinational enterprise.

With this distinction between training and management development in mind, we first examine the types of training managers receive for foreign postings. Then we discuss the connection between management development and strategy in the international business.

TRAINING FOR EXPATRIATE MANAGERS

Earlier in the chapter, we saw that the two most common reasons for expatriate failure were the inability of a manager's spouse to adjust to a foreign environment and the manager's own inability to adjust to a foreign environment. Training can help the manager and spouse cope with both of these problems. Cultural training, language training, and practical training all seem to reduce expatriate failure. We discuss each of these kinds of training here.40 Despite the usefulness of these kinds of training, evidence suggests that many managers receive no training before they are sent on foreign postings. One study found that only about 30 percent of managers sent on one- to five-year expatriate assignments received training before their departure.41

Cultural Training

Cultural training seeks to foster an appreciation for the host country's culture. The belief is that understanding a host country's culture will help the manager empathize with the culture, which will enhance his or her effectiveness in dealing with host-country nationals. It has been suggested that expatriates should receive training in the host country's culture, history, politics, economy, religion, and social and business practices.42 If possible, it is also advisable to arrange for a familiarization trip to the host country before the formal transfer, because this seems to ease culture shock. Given the problems related to spouse adaptation, it is important that the spouse, and perhaps the whole family, be included in cultural training programs.

Lenovo decided that English was to be the official language of the company, even though it is a Chinese enterprise.

Language Training

English is the language of world business; it is quite possible to conduct business all over the world using only English. Notwithstanding the prevalence of English, however, an exclusive reliance on English diminishes an expatriate manager's ability to interact with host-country nationals. As noted earlier, a willingness to communicate in the language of the host country, even if the expatriate is far from fluent, can help build rapport with local employees and improve the manager's effectiveness. Despite this, one study of 74 executives of U.S. multinationals found that only 23 believed knowledge of foreign languages was necessary for conducting business abroad.43 Those firms that did offer foreign language training for expatriates believed it improved their employees' effectiveness and enabled them to relate more easily to a foreign culture, which fostered a better image of the firm in the host country.

Practical Training

Practical training is aimed at helping the expatriate manager and family ease themselves into day-to-day life in the host country. The sooner a routine is established, the better are the prospects that the expatriate and his or her family will adapt successfully. One critical need is for a support network of friends for the expatriate. Where an expatriate community exists, firms often devote considerable effort to ensuring the new expatriate family is quickly integrated into that group. The expatriate community can be a useful source of support and information and can be invaluable in helping the family adapt to a foreign culture.

REPATRIATION OF EXPATRIATES

A largely overlooked but critically important issue in the training and development of expatriate managers is to prepare them for reentry into their home-country organization.44 Repatriation should be seen as the final link in an integrated, circular process that connects good selection and cross-cultural training of expatriate managers with completion of their term abroad and reintegration into their national organization. However, instead of having employees come home to share their knowledge and encourage other high-performing managers to take the same international career track, expatriates too often face a different scenario.45

Often when they return home after a stint abroad—where they have typically been autonomous, well-compensated, and celebrated as a big fish in a little pond—they face an organization that doesn't know what they have done for the past few years, doesn't know how to use their new knowledge, and doesn't particularly care. In the worst cases, reentering employees have to scrounge for jobs, or firms will create standby positions that don't use the expatriate's skills and capabilities and fail to make the most of the business investment the firm has made in that individual.

Research illustrates the extent of this problem. According to one study of repatriated employees, 60 to 70 percent didn't know what their position would be when they returned home. Also, 60 percent said their organizations were vague about repatriation, about their new roles, and about their future career progression within the company; 77 percent of those surveyed took jobs at a lower level in their home organization than in their international assignments.46 Not surprisingly, 15 percent of returning expatriates leave their firms within a year of arriving home, and 40 percent leave within three years.47

The key to solving this problem is good human resource planning. Just as the HRM function needs to develop good selection and training programs for its expatriates, it also needs to develop good programs for reintegrating expatriates back into work life within their home-country organization, for preparing them for changes in their physical and professional landscape, and for utilizing the knowledge they acquired while abroad. For an example of the kind of program that might be used, see the accompanying Management Focus that looks at the repatriation program developed by Monsanto.

MANAGEMENT DEVELOPMENT AND STRATEGY

Management development programs are designed to increase the overall skill levels of managers through a mix of ongoing management education and rotations of managers through a number of jobs within the firm to give them varied experiences. They are attempts to improve the overall productivity and quality of the firm's management resources.

International businesses are increasingly using management development as a strategic tool. This is particularly true in firms pursuing a transnational strategy, as increasing numbers are. Such firms need a strong unifying corporate culture and informal management networks to assist in coordination and control. In addition, transnational firm managers need to be able to detect pressures for local responsiveness—and that requires them to understand the culture of a host country.

MANAGEMENT FOCUS Monsanto's Repatriation Program

Monsanto is a global provider of agricultural products with 10,000 employees. At any one time, the company will have 100 mid- and higher-level managers on extended postings abroad. Two-thirds of these are Americans posted overseas; the remainder are foreign nationals employed in the United States. At Monsanto, managing expatriates and their repatriation begins with a rigorous selection process and intensive cross-cultural training, both for the managers and for their families. As at many other global companies, the idea is to build an internationally minded cadre of highly capable managers who will lead the organization in the future.

One of the strongest features of this program is that employees and their sending and receiving managers, or sponsors, develop an agreement about how this assignment will fit into the firm's business objectives. The focus is on why employees are going abroad to do the job and what their contribution to Monsanto will be when they return. Sponsoring managers are expected to be explicit about the kind of job opportunities the expatriates will have once they return home.

Once they arrive back in their home country, expatriate managers meet with cross-cultural trainers during debriefing sessions. They are also given the opportunity to showcase their experiences to their peers, subordinates, and superiors in special information exchanges.

However, Monsanto's repatriation program focuses on more than just business; it also attends to the family's reentry. Monsanto has found that difficulties with repatriation often have more to do with personal and family-related issues than with work-related issues. But the personal matters obviously affect an employee's on-the-job performance, so it is important for the company to pay attention to such issues.

This is why Monsanto offers returning employees an opportunity to work through personal difficulties. About three months after they return home, expatriates meet for three hours at work with several colleagues of their choice. The debriefing session is a conversation aided by a trained facilitator who has an outline to help the expatriate cover all the important aspects of the repatriation. The debriefing allows the employee to share important experiences and to enlighten managers, colleagues, and friends about his or her expertise so others within the organization can use some of the global knowledge. According to one participant, “It sounds silly, but it's such a hectic time in the family's life, you don't have time to sit down and take stock of what's happening. You're going through the move, transitioning to a new job, a new house, and the children may be going to a new school. This is a kind of oasis; a time to talk and put your feelings on the table.” Apparently it works; since the program was introduced, the attrition rate among returning expatriates has dropped sharply.

  Sources: C. M. Solomon, “Repatriation: Up, Down, or Out?” Personnel Journal, January 1995, pp. 28–34; and J. Schaefer, E. Hannibal, and J. O'Neill, “How Strategy, Culture and Improved Service Delivery Reshape Monsanto's International Assignment Program,” Journal of Organizational Excellence 22, no. 3 (2003), pp. 35–40.

Management development programs help build a unifying corporate culture by socializing new managers into the norms and value systems of the firm. In-house company training programs and intense interaction during off-site training can foster esprit de corps—shared experiences, informal networks, perhaps a company language or jargon—as well as develop technical competencies. These training events often include songs, picnics, and sporting events that promote feelings of togetherness. These rites of integration may include “initiation rites” wherein personal culture is stripped, company uniforms are donned (e.g., T-shirts bearing the company logo), and humiliation is inflicted (e.g., a pie in the face). All these activities aim to strengthen a manager's identification with the company.48

Bringing managers together in one location for extended periods and rotating them through different jobs in several countries helps the firm build an informal management network. Such a network can then be used as a conduit for exchanging valuable performance-enhancing knowledge within the organization.49 Consider the Swedish telecommunications company Ericsson. Interunit cooperation is extremely important at Ericsson, particularly for transferring know-how and core competencies from the parent to foreign subsidiaries, from foreign subsidiaries to the parent, and between foreign subsidiaries. To facilitate cooperation, Ericsson transfers large numbers of people back and forth between headquarters and subsidiaries. Ericsson sends a team of 50 to 100 engineers and managers from one unit to another for a year or two. This establishes a network of interpersonal contacts. This policy is effective for both solidifying a common culture in the company and coordinating the company's globally dispersed operations.50

• QUICK STUDY

1. How can training be used to reduce the risks of expatriate failure?

2. How does management development tie in with the strategy of an international business?

Performance Appraisal

LEARNING OBJECTIVE 5

Explain how and why performance appraisal systems might vary across nations.

Performance appraisal systems are used to evaluate the performance of managers against some criteria that the firm judges to be important for the implementation of strategy and the attainment of a competitive advantage. A firm's performance appraisal systems are an important element of its control systems, which is a central component of organization architecture (see Figure 17.1). A particularly thorny issue in many international businesses is how best to evaluate the performance of expatriate managers.51 This section looks at this issue and considers guidelines for appraising expatriate performance.

PERFORMANCE APPRAISAL PROBLEMS

Unintentional bias makes it difficult to evaluate the performance of expatriate managers objectively. In many cases, two groups evaluate the performance of expatriate managers—host-nation managers and home-office managers—and both are subject to bias. The host-nation managers may be biased by their own cultural frame of reference and expectations. For example, Oddou and Mendenhall report the case of a U.S. manager who introduced participative decision making while working in an Indian subsidiary.52 The manager subsequently received a negative evaluation from host-country managers because in India, the strong social stratification means managers are seen as experts who should not have to ask subordinates for help. The local employees apparently viewed the U.S. manager's attempt at participatory management as an indication that he was incompetent and did not know his job.

Home-country managers' appraisals may be biased by distance and by their own lack of experience working abroad. Home-office managers are often not aware of what is going on in a foreign operation. Accordingly, they tend to rely on hard data in evaluating an expatriate's performance, such as the subunit's productivity, profitability, or market share. Such criteria may reflect factors outside the expatriate manager's control (e.g., adverse changes in exchange rates, economic downturns). Also, hard data do not take into account many less-visible soft variables that are also important, such as an expatriate's ability to develop cross-cultural awareness and to work productively with local managers. Due to such biases, many expatriate managers believe that headquarters management evaluates them unfairly and does not fully appreciate the value of their skills and experience. This could be one reason many expatriates believe a foreign posting does not benefit their careers. In one study of personnel managers in U.S. multinationals, 56 percent of the managers surveyed stated that a foreign assignment is either detrimental or immaterial to one's career.53

GUIDELINES FOR PERFORMANCE APPRAISAL

Several things can reduce bias in the performance appraisal process.54 First, most expatriates appear to believe more weight should be given to an on-site manager's appraisal than to an off-site manager's appraisal. Due to proximity, an on-site manager is more likely to evaluate the soft variables that are important aspects of an expatriate's performance. The evaluation may be especially valid when the on-site manager is of the same nationality as the expatriate, since cultural bias should be alleviated. In practice, home-office managers often write performance evaluations after receiving input from on-site managers. When this is the case, most experts recommend that a former expatriate who served in the same location should be involved in the appraisal to help reduce bias. Finally, when the policy is for foreign on-site managers to write performance evaluations, home-office managers should be consulted before an on-site manager completes a formal termination evaluation. This gives the home-office manager the opportunity to balance what could be a very hostile evaluation based on a cultural misunderstanding.

• QUICK STUDY

1. What kinds of performance appraisal problems arise in an international business?

2. How can performance appraisal problems be reduced in an international business?

Compensation

LEARNING OBJECTIVE 6

Understand how and why compensation systems might vary across nations.

Two issues are raised in every discussion of compensation practices in an international business. One is how compensation should be adjusted to reflect national differences in economic circumstances and compensation practices. The other issue is how expatriate managers should be paid. From a strategic perspective, the important point is that whatever compensation system is used, it should reward managers for taking actions that are consistent with the strategy of the enterprise.

NATIONAL DIFFERENCES IN COMPENSATION

Substantial differences exist in the compensation of executives at the same level in various countries. The results of a survey undertaken by Towers Perrin are summarized in Table 17.3. Among other things, this survey looked at average compensation for top human resource executives across 26 countries in the 2005–2006 period for companies with annual sales of about $500 million.55 The figures include both base compensation and performance-related pay bonuses, but they do not include stock options. As can be seen, wide variations exist across countries. The average compensation for a top HR executive in the United States was $525,923, compared with $278,697 in Japan and $158,146 in Taiwan. According to Towers Perrin, similar pay differences can be seen across other job categories, including the CEO and CFO positions. These figures underestimate the true differential because many U.S. executives earn considerable sums of money from stock option grants.

TABLE 17.3 Compensation in 26 Countries for Top Human Resource Executives

Country

HR Executive Total Compensation ($)

Argentina

212,879

Australia

293,782

Belgium

446,624

Brazil

356,733

Canada

307,053

China (Hong Kong)

268,158

China (Shanghai)

   85,393

France

384,904

Germany

456,665

India

146,384

Italy

432,569

Japan

278,697

Malaysia

140,587

Mexico

382,334

Netherlands

287,247

Poland

120,410

Singapore

230,281

South Africa

371,781

South Korea

182,716

Spain

305,519

Sweden

302,473

Switzerland

447,563

Taiwan

158,146

United Kingdom

494,519

United States

525,923

Venezuela

225,317

Source: Towers Perrin, Towers Perrin Worldwide Total Remuneration Study, 2005–2006, www.towersperrin.com.

MANAGEMENT FOCUS Global Compensation Practices at McDonald's

With more than 400,000 managers and senior staff employees in 118 countries around the world, by the early 2000s McDonald's realized it had to develop a consistent global compensation and performance appraisal strategy. After months of consultation with managers all over the world, the company began to roll out its new global compensation program in 2004.

One important element of this program calls for the corporate head office to provide local country managers with a menu of business principles to focus on in the coming year. These principles include areas such as customer service, marketing, and restaurant re-imaging. Each country manager then picks three to five areas to focus on for success in the local market. For example, if France is introducing a new menu item, it might create business targets around that for the year. Human resource managers then submit their business cases and targets to senior executives at headquarters for approval. At the end of the year, the country's annual incentive pool is based on how the region met its targets, as well as on the business unit's operating income. A portion of an individual employee's annual bonus is based upon that mix.

The other portion of an employee's annual incentive is based on individual performance. McDonald's has always had a performance rating system, but in 2004 the company introduced global guidelines that suggest 20 percent of employees receive the highest rating, 70 percent the middle, and 10 percent the bottom. By giving guidelines rather than forced ranking, McDonald's hopes to encourage differentiation of performance while allowing for some local flexibility nuances. By providing principles and guidance, and yet allowing local managers to customize their compensation programs to meet local market demands, McDonald's also claims it has seen a reduction in turnover. The company's own internal surveys suggest more employees now believe that their compensation is fair and reflects local market conditions.

  Source: J. Marquez, “McDonald's Rewards Program Leaves Some Room for Local Flavor,” Workforce Management, April 10, 2006, p. 26.

National differences in compensation raise a perplexing question for an international business: Should the firm pay executives in different countries according to the prevailing standards in each country, or should it equalize pay on a global basis? The problem does not arise in firms pursuing ethnocentric or polycentric staffing policies. In ethnocentric firms, the issue can be reduced to that of how much home-country expatriates should be paid (which we will consider later). As for polycentric firms, the lack of managers' mobility among national operations implies that pay can and should be kept country specific. There would seem to be no point in paying executives in Great Britain the same as U.S. executives if they never work side by side.

However, this problem is very real in firms with geocentric staffing policies. A geocentric staffing policy is consistent with a transnational strategy. One aspect of this policy is the need for a cadre of international managers that may include many different nationalities. Should all members of such a cadre be paid the same salary and the same incentive pay? For a U.S. based firm, this would mean raising the compensation of foreign nationals to U.S. levels, which could be expensive. If the firm does not equalize pay, it could cause considerable resentment among foreign nationals who are members of the international cadre and work with U.S. nationals. If a firm is serious about building an international cadre, it may have to pay its international executives the same basic salary irrespective of their country of origin or assignment. Currently, however, this practice is not widespread.

Over the past 10 years, many firms have moved toward a compensation structure that is based on consistent global standards, with employees being evaluated by the same grading system and having access to the same bonus pay and benefits structure irrespective of where they work. Some 85 percent of the companies in a survey by Mercer Management Consulting stated they now have a global compensation strategy in place.56 McDonald's, which is featured in the accompanying Management Focus, is one such enterprise. Another survey found that two-thirds of multinationals now exercise central control over the benefit plans offered in different nations.57 However, except for a relative small cadre of internationally mobile executives, base pay in most firms is set with regard to local market conditions.

EXPATRIATE PAY

The most common approach to expatriate pay is the balance sheet approach. According to Organizational Resources Consulting, some 80 percent of the 781 companies it surveyed used this approach.58 This approach equalizes purchasing power across countries so employees can enjoy the same living standard in their foreign posting that they enjoyed at home. In addition, the approach provides financial incentives to offset qualitative differences between assignment locations.59 Figure 17.2 shows a typical balance sheet. Note that home-country outlays for the employee are designated as income taxes, housing expenses, expenditures for goods and services (food, clothing, entertainment, etc.), and reserves (savings, pension contributions, etc.). The balance sheet approach attempts to provide expatriates with the same standard of living in their host countries as they enjoy at home plus a financial inducement (i.e., premium, incentive) for accepting an overseas assignment.

FIGURE 17.2 The Balance Sheet Approach to Expatriate Pay

The components of the typical expatriate compensation package are a base salary, a foreign service premium, allowances of various types, tax differentials, and benefits. We shall briefly review each of these components.60 An expatriate's total compensation package may amount to three times what he or she would cost the firm in a home-country posting. Because of the high cost of expatriates, many firms have reduced their use of them in recent years. However, a firm's ability to reduce its use of expatriates may be limited, particularly if it is pursuing an ethnocentric or geocentric staffing policy.

Base Salary

An expatriate's base salary is normally in the same range as the base salary for a similar position in the home country. The base salary is normally paid in either the home-country currency or in the local currency.

ANOTHER PERSPECTIVE Expat Resources on the Web

Not so many years ago, business professionals whose companies sent them overseas to work had few outside resources to help them become acclimated to their new status as expatriates. Today, however, a wealth of information is available online.

A simple keyword search for “expatriate” on a search engine yields an almost endless supply of links: newspapers and magazines published exclusively for expats; websites catering to expatriates in specific regions or countries; general information sites offering insiders' guides to different countries and their finance, culture, and health care systems; not to mention blogs and chat rooms, forums and groups. The expatriate boom has even fueled an industry offering a broad array of services for expats, from mail forwarding to tax preparation to health and life insurance.

Foreign Service Premium

A foreign service premium is extra pay the expatriate receives for working outside his or her country of origin. It is offered as an inducement to accept foreign postings. It compensates the expatriate for having to live in an unfamiliar country isolated from family and friends, having to deal with a new culture and language, and having to adapt to new work habits and practices. Many firms pay foreign service premiums as a percentage of base salary, ranging from 10 to 30 percent after tax, with 16 percent being the average premium.61

Allowances

Four types of allowances are often included in an expatriate's compensation package: hardship allowances, housing allowances, cost-of-living allowances, and education allowances. A hardship allowance is paid when the expatriate is being sent to a difficult location, usually defined as one where such basic amenities as health care, schools, and retail stores are grossly deficient by the standards of the expatriate's home country. A housing allowance is normally given to ensure that the expatriate can afford the same quality of housing in the foreign country as at home. In locations where housing is expensive (e.g., London, Tokyo), this allowance can be substantial—as much as 10 to 30 percent of the expatriate's total compensation package. A cost-of-living allowance ensures that the expatriate will enjoy the same standard of living in the foreign posting as at home. An education allowance ensures that an expatriate's children receive adequate schooling (by home-country standards). Host-country public schools are sometimes not suitable for an expatriate's children, in which case they must attend a private school.

Taxation

Unless a host country has a reciprocal tax treaty with the expatriate's home country, the expatriate may have to pay income tax to both the home- and host-country governments. When a reciprocal tax treaty is not in force, the firm typically pays the expatriate's income tax in the host country. In addition, firms normally make up the difference when a higher income tax rate in a host country reduces an expatriate's take-home pay.

Benefits

Many firms also ensure that their expatriates receive the same level of medical and pension benefits abroad that they received at home. This can be costly for the firm, because many benefits that are tax deductible for the firm in the home country (e.g., medical and pension benefits) may not be deductible out of the country.

• QUICK STUDY

1. When and why might an international business adopt a compensation structure for managers based on consistent global standards?

2. What is the function of the balance sheet approach to expatriate pay?

International Labor Relations

LEARNING OBJECTIVE 7

Understand how organized labor can influence strategic choices in international business firms.

The HRM function of an international business is typically responsible for international labor relations. From a strategic perspective, the key issue in international labor relations is the degree to which organized labor can limit the choices of an international business. A firm's ability to integrate and consolidate its global operations to realize experience curve and location economies can be limited by organized labor, constraining the pursuit of a transnational or global standardization strategy. Prahalad and Doz cite the example of General Motors, which gained peace with labor unions in Germany by agreeing not to integrate and consolidate operations in the most efficient manner.62 General Motors made substantial investments in Germany—matching its new investments in Austria and Spain—at the demand of the German metalworkers' unions.

One task of the HRM function is to foster harmony and minimize conflict between the firm and organized labor. With this in mind, this section is divided into three parts. First, we review organized labor's concerns about multinational enterprises. Second, we look at how organized labor has tried to deal with these concerns. And third, we look at how international businesses manage their labor relations to minimize labor disputes.

THE CONCERNS OF ORGANIZED LABOR

Labor unions generally try to get better pay, greater job security, and better working conditions for their members through collective bargaining with management. Unions' bargaining power is derived largely from their ability to threaten to disrupt production, either by a strike or some other form of work protest (e.g., refusing to work overtime). This threat is credible, however, only insofar as management has no alternative but to employ union labor.

A principal concern of domestic unions about multinational firms is that the company can counter its bargaining power with the power to move production to another country. Ford, for example, clearly threatened British unions with a plan to move manufacturing to Continental Europe unless British workers abandoned work rules that limited productivity, showed restraint in negotiating for wage increases, and curtailed strikes and other work disruptions.63

Another concern of organized labor is that an international business will keep highly skilled tasks in its home country and farm out only low-skilled tasks to foreign plants. Such a practice makes it relatively easy for an international business to switch production from one location to another as economic conditions warrant. Consequently, the bargaining power of organized labor is once more reduced.

A final union concern arises when an international business attempts to import employment practices and contractual agreements from its home country. When these practices are alien to the host country, organized labor fears the change will reduce its influence and power. This concern has surfaced in response to Japanese multinationals that have been trying to export their style of labor relations to other countries. For example, much to the annoyance of the United Auto Workers (UAW), many Japanese auto plants in the United States are not unionized. As a result, union influence in the auto industry is declining.

THE STRATEGY OF ORGANIZED LABOR

Organized labor has responded to the increased bargaining power of multinational corporations by taking three actions: (1) trying to establish international labor organizations, (2) lobbying for national legislation to restrict multinationals, and (3) trying to achieve international regulations on multinationals through such organizations as the United Nations. These efforts have not been very successful.

In the 1960s, organized labor began to establish international trade secretariats (ITSs) to provide worldwide links for national unions in particular industries. The long-term goal was to be able to bargain transnationally with multinational firms. Organized labor believed that by coordinating union action across countries through an ITS, it could counter the power of a multinational corporation by threatening to disrupt production on an international scale. For example, Ford's threat to move production from Great Britain to other European locations would not have been credible if the unions in various European countries had united to oppose it.

However, the ITSs have had virtually no real success. Although national unions may want to cooperate, they also compete with each other to attract investment from international businesses, and hence jobs for their members. For example, in attempting to gain new jobs for their members, national unions in the auto industry often court auto firms that are seeking locations for new plants. One reason Nissan chose to build its European production facilities in Great Britain rather than Spain was that the British unions agreed to greater concessions than the Spanish unions did. As a result of such competition between national unions, cooperation is difficult to establish.

A further impediment to cooperation has been the wide variation in union structure. Trade unions developed independently in each country. As a result, the structure and ideology of unions tend to vary significantly from country to country, as does the nature of collective bargaining. For example, in Great Britain, France, and Italy, many unions are controlled by left-wing socialists, who view collective bargaining through the lens of “class conflict.” In contrast, most union leaders in Germany, the Netherlands, Scandinavia, and Switzerland are far more moderate politically. The ideological gap between union leaders in different countries has made cooperation difficult. Divergent ideologies are reflected in radically different views about the role of a union in society and the stance unions should take toward multinationals.

Organized labor has also met with only limited success in its efforts to get national and international bodies to regulate multinationals. Such international organizations as the International Labor Organization (ILO) and the Organization for Economic Cooperation and Development (OECD) have adopted codes of conduct for multinational firms to follow in labor relations. However, these guidelines are not as far-reaching as many unions would like. They also do not provide any enforcement mechanisms. Many researchers report that such guidelines are of only limited effectiveness.64

APPROACHES TO LABOR RELATIONS

International businesses differ markedly in their approaches to international labor relations. The main difference is the degree to which labor relations activities are centralized or decentralized. Historically, most international businesses have decentralized international labor relations activities to their foreign subsidiaries because labor laws, union power, and the nature of collective bargaining varied so much from country to country. It made sense to decentralize the labor relations function to local managers. The belief was that there was no way central management could effectively handle the complexity of simultaneously managing labor relations in a number of different environments.

Although this logic still holds, the trend is toward greater centralized control. This trend reflects international firms' attempts to rationalize their global operations. The general rise in competitive pressure in industry after industry has made it more important for firms to control their costs. Because labor costs account for such a large percentage of total costs, some firms are now using the threat to move production to another country in their negotiations with unions to change work rules and limit wage increases (as Ford did in Europe). Because such a move would involve major new investments and plant closures, this bargaining tactic requires the input of headquarters management. Thus, the level of centralized input into labor relations is increasing.

In addition, the realization is growing that the way work is organized within a plant can be a major source of competitive advantage. Much of the competitive advantage of Japanese automakers, for example, has been attributed to the use of self-managing teams, job rotation, cross-training, and the like in their Japanese plants.65 To replicate their domestic performance in foreign plants, the Japanese firms have tried to replicate their work practices there. This often brings them into direct conflict with traditional work practices in those countries, as sanctioned by the local labor unions, so the Japanese firms have often made their foreign investments contingent on the local union accepting a radical change in work practices. To achieve this, the headquarters of many Japanese firms bargains directly with local unions to get union agreement to changes in work rules before committing to an investment. For example, before Nissan decided to invest in northern England, it got a commitment from British unions to agree to a change in traditional work practices. By its very nature, pursuing such a strategy requires centralized control over the labor relations function.

• QUICK STUDY

1. What are the main concerns of organized labor when dealing with multinational enterprises?

2. What strategies has organized labor adopted in order to deal with these concerns?

Key Terms

human resource management (HRM), p. 468

expatriate manager, p. 469

staffing policy, p. 471

corporate culture, p. 471

ethnocentric staffing policy, p. 471

polycentric staffing policy, p. 472

geocentric staffing policy, p. 473

expatriate failure, p. 475

Chapter Summary

This chapter focused on human resource management in international businesses. HRM activities include human resource strategy, staffing, performance evaluation, management development, compensation, and labor relations. None of these activities is performed in a vacuum; all must be appropriate to the firm's strategy. The chapter made the following points:

1. Firm success requires HRM policies to be congruent with the firm's strategy and with its formal and informal structure and controls.

2. Staffing policy is concerned with selecting employees who have the skills required to perform particular jobs. Staffing policy can be a tool for developing and promoting a corporate culture.

3. An ethnocentric approach to staffing policy fills all key management positions in an international business with parent-country nationals. The policy is congruent with an international strategy. A drawback is that ethnocentric staffing can result in cultural myopia.

4. A polycentric staffing policy uses host-country nationals to manage foreign subsidiaries and parent-country nationals for the key positions at corporate headquarters. This approach can minimize the dangers of cultural myopia, but it can create a gap between home- and host-country operations. The policy is best suited to a localization strategy.

5. A geocentric staffing policy seeks the best people for key jobs throughout the organization, regardless of their nationality. This approach is consistent with building a strong unifying culture and informal management network and is well suited to both global standardization and transnational strategies. Immigration policies of national governments may limit a firm's ability to pursue this policy.

6. A prominent issue in the international staffing literature is expatriate failure, defined as the premature return of an expatriate manager to his or her home country. The costs of expatriate failure can be substantial.

7. Expatriate failure can be reduced by selection procedures that screen out inappropriate candidates. The most successful expatriates seem to be those who have high self-esteem and self-confidence, can get along well with others, are willing to attempt to communicate in a foreign language, and can empathize with people of other cultures.

8. Training can lower the probability of expatriate failure. It should include cultural training, language training, and practical training, and it should be provided to both the expatriate manager and the spouse.

9. Management development programs attempt to increase the overall skill levels of managers through a mix of ongoing management education and rotation of managers through different jobs within the firm to give them varied experiences. Management development is often used as a strategic tool to build a strong unifying culture and informal management network, both of which support transnational and global standardization strategies.

10. It can be difficult to evaluate the performance of expatriate managers objectively because of unintentional bias. A firm can take a number of steps to reduce this bias.

11. Country differences in compensation practices raise a difficult question for an international business: Should the firm pay executives in different countries according to the standards in each country or equalize pay on a global basis?

12. The most common approach to expatriate pay is the balance sheet approach. This approach aims to equalize purchasing power so employees can enjoy the same living standard in their foreign posting that they had at home.

13. A key issue in international labor relations is the degree to which organized labor can limit the choices available to an international business. A firm's ability to pursue a transnational or global standardization strategy can be significantly constrained by the actions of labor unions.

14. A principal concern of organized labor is that the multinational can counter union bargaining power with threats to move production to another country.

15. Organized labor has tried to counter the bargaining power of multinationals by forming international labor organizations. In general, these efforts have not been effective.

Critical Thinking and Discussion Questions

1. What are the main advantages and disadvantages of the ethnocentric, polycentric, and geocentric approaches to staffing policy? When is each approach appropriate?

2. Research suggests that many expatriate employees encounter problems that limit both their effectiveness in a foreign posting and their contribution to the company when they return home. What are the main causes and consequences of these problems, and how might a firm reduce the occurrence of such problems?

3. What is the link between an international business's strategy and its human resource management policies, particularly with regard to the use of expatriate employees and their pay scale?

4. In what ways can organized labor constrain the strategic choices of an international business? How can an international business limit these constraints?

5. Reread the Management Focus on McDonald's global compensation practices. How does the McDonald's approach help the company take local differences into account when reviewing the performance of different country managers and awarding bonus pay?

Research Task http://globalEDGE.msu.edu

Global Human Resource Management

Use the globalEDGE Resource Desk (http://globaledge.msu.edu/Reference-Desk) to complete the following exercises:

1. The U.S. Department of State prepares quarterly reports for living costs abroad to compensate civilian employees working for the U.S. government at various posts worldwide. Using the most current report, compare the costs of living for three posts in Europe. What is the difference between the local index and the U.S. government index? How would this help determine the living allowances for U.S. government employees at each of the three posts you chose?

2. You work in the human resources department at the headquarters of a multinational corporation. Your company is about to send several American managers to Chile as expatriates. Because mobility will be required for some of the managers sent, utilize resources available on the globalEDGE website regarding working internationally to examine issues related to driver's licenses in Chile.

closing case AstraZeneca

AstraZeneca is one of the world's largest pharmaceutical companies. Headquartered in London, the company has 65,000 employees, 51 percent of whom are in Europe, 32 percent in the Americas, and 17 percent in Asia, Africa, and Australia. The company is active in more than 100 nations and has sales in excess of $30 billion. A key strategic imperative for this multinational is to build a talented global workforce, led by managers who have a global perspective and are comfortable moving around the world, interacting with people from other cultures and doing business in different nations. It is not easy.

To help build international bench strength, the company moves managers to another country for up to three years. Such assignments are not cheap; the company estimates that it can cost two to four times an employee's annual salary to cover expenses. Expenses can include a child's school tuition, tax equalization, cultural training, and subsidized housing. Because of this expense, AstraZeneca focuses its international assignments only on its most promising “high-potential” employees—those who are scheduled for advancement and leadership positions within the company. In every case, the human resource staff will assess whether the investment in a person is worth making. Simply posting an employee to a foreign country is not enough. To get promoted, employees must also learn to work in international teams and to manage across borders. If a person is judged to lack the capability to do this, he or she will not get a foreign posting. If the employee fails to do this effectively when on the posting, advancement prospects will be reduced.

To ease the transition to another country, AstraZeneca offers employees and their spouses help with moving, locating schools for children, learning a language, and understanding cultural differences. The company also offers repatriation training for employees coming home after extended postings abroad. It does this because experience has shown that many expatriates and their families have problems readjusting to their old life after extended time in a different culture.

Another problem that the human resource function at AstraZeneca has to grapple with is how to raise the talent base of employees in emerging markets where AstraZeneca has been making big investments in recent years. An example is China, where until recently, there was very little in the way of professional management education (this is now changing rapidly). In 2003 the company had a little more than 1,000 employees in China. Now it has more than 3,500. AstraZeneca has been trying to raise the skill level of key Chinese employees as fast as possible. With regard to key managerial talent, the company has been sending them abroad to get exposure to other cultures and to acculturate them into the way in which AstraZeneca does business. It wants them to understand what it is like to be part of a global business. Each expatriate will have a host-country line manager assigned to him or her, as well as a home-country line manager who monitors the expatriate's progress. After a period, the majority of them return to China where the most successful are targeted for future leadership positions within the Chinese subsidiary. The most talented, however, may go beyond this, and ultimately move into senior management positions at the corporate level.

  Sources: S. Stern, “AstraZeneca's Long March to China,” Daily Telegraph, September 7, 2006, p. 3; J. M. Von Bergen, “More U.S. Workers Getting Global Assignments,” Tribune News Service, August 12, 2008; and T. Mohn, “The Long Trip Home,” The New York Times, March 10, 2009, p. B6.

Case Discussion Questions

1. What international staffing policy is AstraZeneca pursuing with regard to its “high-potential” employees?

2. Why does AstraZeneca limit this policy to just high-potential employees? Can you see a drawback in doing this?

3. What staffing policy is AstraZeneca adopting with regard to its subsidiaries in places such as China? Is this an appropriate policy?

4. Do you think the company is doing enough to limit the well-known risks and costs associated with high expatriate failure rates? Is there anything else it might do?

(Hill 467)

Hill, Charles W. Global Business Today, 8th Edition. McGraw-Hill Learning Solutions, 09/2013. VitalBook file.