Due to globalization, the economy around the world has been largely integrated. Many corporations are expanding their markets into regions or other countries they have never touched before. These corporations are experiencing an evolutionary stage: internationalization. It is clear that effective human resource management of an organization is the major competitive advantage and may even be the most important determinant of organizational performance. Thus, in order to survive in the crucial global economic market, a multinational corporation (MNC) mainly relies on the capability of its international human resource management (IHRM) during the internationalization process. In other words, it is the IHRM’s responsibility to enable the MNCs to be successful globally.
Definition of International Human Resource Management (IHRM)
What is IHRM? Actually, it is not easy to provide a precise definition of international human resource management (IHRM) because the responsibility of an HR manger in a multinational corporation (MNC) varies from one firm to another. Generally speaking, IHRM is the effective utilization of human resources in a corporation in an international environment. IHRM is defined as “the HRM issues and problems arising from the internationalization of business, and the HRM strategies, policies and practices which firms pursue in response to the internationalization of business”.
The term IHRM has traditionally focused on expatriation. However, IHRM covers a far wider spectrum than expatriation management. Four major activities essentially concerned with IHRM were recruitment and selection, training and development, compensation and repatriation of expatriates.
Recent definitions concern IHRM with activities of how MNCs manage their geographically decentralized employees in order to develop their HR resources for competitive advantage, both locally and globally. The role and functions of IHRM, the relationship between subsidiaries and headquarters, and the policies and practices are considered in this more strategic approach. IHRM is also defined as a collection of policies and practices that a multinational enterprise uses to manage local and non-local employees it has in countries other than their home countries.
Due to the development of globalization, new challenges occur and increase the complexity of managing MNCs. IHRM is seen as a key role to balance the need for coordinating and controlling oversea subsidiaries, and the need to adapt to local environments. Therefore, the definition of IHRM has extended to management localization, international coordination, and the development of global leadership, etc.
To sum up, IHRM should not become a description of fragmented responses to distinctive national problems nor about the ‘copying’ of HRM practices, as many of these practices suit national cultures and institutions. Indeed, issues of concern in IHRM are those of consistency or standardization within diverse social and cultural environments.
Reasons for growing importance of International Human Resource Management (IHRM)
In order to explore the field of IHRM, it is important to understand why there is gradual increase of interest in International Human Resource Management. IHRM is of great importance at present for a number of reasons:
- Recent years have witnessed the rapid growth of globalization and international competition. The multinational corporations (MNCs) have increased in number and significance, which contributing to the growing importance of the international role of human resource management.
- It has been increasingly recognized that the effectiveness of human resource management is one of the major factors to determine the success or failure of international business. There is also recognition that the quality of management in international operations seems to be more critical than in domestic operations.
- A growing shortage of managers with international exposure and experience is becoming an increasing deficiency which affects a company’s corporate efforts to expand abroad. Meanwhile, the emerging markets require managers with distinctive competence and context-specific knowledge of how to do business successfully in countries which are both culturally and economically distantly. Thus, a larger role for IHRM activities in multinational corporations is assigned.
- The failure in international business arena is often costly both in human and financial terms, and is proved to be more severe than that in domestic business. Companies need to take precautionary measures to train and compensate human resources. This makes a full-fledged IHRM necessary.
- HR strategy plays a significant role in the control and implementation in MNCs. It is not difficult to determine which strategy to pursue for a MNC in an internationalizing environment. What challenges is how to implement these strategies to be successful. Developing unique organizational cultures is of far more importance than structural innovations in any global or transnational strategy. To this extent, IHRM strategy becomes the crucial determinant of the implementation and success of the MNC strategy.
- The complex nature of HRM problems involving in global environment is underestimated by some companies. Poor management of human resource often results in business failures in international business. Expatriate performance failure or underperformance continues to be problematic for IHRM in many international corporations.
Strategic International Human Resource Management
Under the global context, understanding how multinational Corporations (MNCs) can operate more effectively becomes more important than ever. This links a MNC with the need of an internationalized strategy which can direct its subsidiaries’ operation not only in the home country, but also in different parts of the world. There are several reasons to develop IHRM strategy: 1) at any level, HRM is important to strategy implementation; 2) major strategic components of multinational enterprises have a major influence on international management issues, functions, and policies and practices; 3) the attainment of the concerns and goals of MNCs can be influenced by many of these characteristics of IHRM; 4) the study of IHRM is challenging and important because there are a wide variety of factors making the relationship between MNCs and IHRM complex. Strategic IHRM is defined as human resource management issues, functions and policies and practices that result from the strategic activities of multinational enterprises and that impact the international concerns and goals of those enterprises.
Two major strategic components of MNCs that influence Strategic IHRM are pointed out: inter-unit linkages and internal operations. Regarding inter-unit linkages, multinational enterprises are concerned with how to effective operate their various world-wide operating units. In particular, the key objectives appear to be how these operating units are to be differentiated and integrated, controlled and coordinated. For strategic IHRM, the issues associated with integrating and coordinating an MNC’s units represent a major influence on strategic IHRM issues, policies and practices. With respect to internal operations, they require the same attention as the linkage of the units, since they all influence MNC effectiveness. Each unit has to be operated as effectively as possible relative to the competitive strategy of the MNC and the unit itself.
It has been argued that the success of strategic IHRM in a MNC is largely influenced by the quality of its human resources and how effectively the corporation’s employees are managed. There are three approaches which describe how multinational companies manage the human resources and their overseas subsidiaries: ethnocentric, polycentric and geocentric.
- Ethnocentric Approach: This practice usually happens in the early stage of a firm’s internationalization involvement. With this approach, strategic decisions are all made by the headquarters and the management practices are transferred to the subsidiaries. Most important positions are filled by parent-country nationals (PCNs).As a result, little autonomy is given to overseas operating units. During this stage, home country expatriates exercise tight control.
- Polycentric Approach: When the strategy becomes polycentric, there is a marked decline in the number of PCNs sending abroad and their role changes into communication and coordination of strategic objectives. Host-country nationals (HCNs) are recruited to manage the operating units in their own country because local managers know more about the local circumstances and are more familiar with local business ethics. More autonomy is given to local managers to develop their own management practices appropriate for the subsidiary.
- Geocentric Approach: This approach relates most closely to the global or transnational strategy. Selection of employees is based on competency rather than nationality. The best of headquarter and local practices are combined by MNCs in order to come up with a global-implemented HR strategy.
Most MNCs take the IHRM strategy as a guideline and implement it locally. It is therefore the HR managers’ responsibilities to provide the proper international HR strategy to prepare and manage the employees in their home country or an international assignment.
IHRM and Culture
Different cultures of various countries and MNCs are one of the most important and difficult challenges to the conduct of IHRM. National and organizational cultures differentiate from one country and firm from those of another. Often these differences clash when companies conduct business in multinational environment. Cultural differences across countries can influence people in their work environment.
Hofstede defines culture as “collective programming of the mind which distinguishes the members of one human group from another”. It is important to understand peoples’ different cultural backgrounds to be able to identify the consequences for international management. Culture is a crucial variable in international assignments and should be included in international management practices. Knowledge about and competency in working with country and company cultures is the most important issue impacting the success of international business activity, understanding various values, beliefs and behaviors of people are essential aspects of success for doing business internationally.
Understanding Culture as Layers
The multiple layers of meaning of “culture” are one of the complexities that make it so difficult to manage. There are a large number of readily observable characteristics (such as food, art, clothing, greetings and historical landmarks) that differ obviously from other countries or operations. Sometimes these are referred as manifestations of underlying values and assumptions which are much less obvious.
One way to understand this complexity is explained by the layers of culture model. The model represents culture as a series of layers. Moving from outside to inside, each layer represents less and less explicit values and assumptions while the values and assumptions become more important in determining the attitudes and behaviors. The outermost layer, which is called the surface layer, corresponds to readily visible values and assumptions, like dress, body language and food. The middle layer or the hidden culture layer corresponds to religions, values and philosophies concerning for example what is right and wrong. The invisible layer at the core represents one culture’s universal truths, which is most difficult for foreigners to understand. There exist different cultural dimension among different cultures. These cultural dimensions have been identified and one frequently cited work from a well-known researcher within this cultural dimension field is Geert Hofstede.
Hofstede’s Cultural Dimensions
Hofstede have identified five cultural dimensions for which each country could be classified in. These five dimensions are power distance, uncertainty avoidance, individualism versus collectivism, masculinity versus femininity, and long-term versus short-term orientation. Power distance indicates the level of inequality in institutions and organizations. A country with large power distance is characterized by formal hierarchies and by subordinates who have little influence in their own work and where the boss have total authority. Uncertainty avoidance focuses on the level in which people in a certain country tolerate uncertainty and ambiguity within the society. High uncertainty indicates that the country has a low tolerance for uncertainty and ambiguity. This will inevitably create a society which is rule-oriented, which institutes laws, regulations and controls to diminish the amount of uncertainty.
Individualism versus collectivism refers to the degree where people prefer to take care of themselves, and making their own decisions rather than being bound to groups or families. A highly individualistic society consists of usually impersonal and loose relationships between individuals, while a low individualistic society has more tight relationships between individuals, hence referred to as collectivism by Hofstede. The masculinity versus femininity dimension describes if a culture are bound towards values that are seen as more similar to women’s or men’s values. Masculinity is characterized by stereotype adjectives such as assertiveness and competitive, while the femininity is characterized by modesty and sensitivity. A high masculinity ranking indicates the country experiences a high degree of gender differences, usually favoring men rather than women. The fifth and last cultural dimension is long-term versus short-term orientation. A long-term oriented society emphasize on building a future oriented perspective in contrast to the short-term oriented society which values the present and past.