CHAPTER 1 ll-JTRODUCTIOIR
SCOPE OF THE BOOK
The field of international H R M has been characterized by three broad approaches.’ The first^ emphasizes cross-cultural management: examining h u m a n behavior w i t h i n organizations f r o m an international perspective. A second approach developed f r o m the comparative industrial relations and H R M literature^ and seeks to describe, compare and analyze H R M systems in var-ious countries. A t h i r d approach seeks to focus on aspects of H R M in multinational firms . ” These approaches are depicted in Figure 1 . 1 . I n this book, we take the t h i r d approach . O u r objective is to explore the implications that the process of internationalization has for the activ-ities and policies of H R M . I n particular, we are interested i n h o w H R M is practiced in multina – tional enterprises ( M N E s ) .
FIGURE 1 .1 Inter-relationships between approaches to the field
IHRM In the
Comparative
multinational
HRand IR
context
systems
As Figure 1.1 demonstrates, there is an inevitable overlap between the three approaches when one is attempting to provide an accurate view of the global realities of operating in the international business environment . Obviously, cross-cultural management issues are impor – tant when dealing w i t h the cultural aspects of foreign operations. Some of these aspects w i l l be taken up in Chapter 2 where we deal w i t h the cultural context of H R M in the host country context – indicated by (a) in Figure 1 . 1 . Chapter 9 deals w i t h international industrial relations and the global institutional context and draws on literature from the comparative IR field –
(b) in the above figure. W h i l e the focus of much of this book is on the established M N E – a f i r m w h i c h owns or controls business activities in more than one foreign country – we recog-nize that small, internationalizing firms w h i c h are yet to reach multinational f i r m status, and family – owned firms, also face international H R M issues and many of these issues are addressed i n Chapter 4 .
DEFINING INTERNATIONAL HRM
Before we can offer a definition of international H R M , we should first define the general field of H R M . Typically, H R i M refers to those activities undertaken by an organization to effectively utilize its human resources. These activities w o u l d include at least the f o l l o w i n g :
Human resource planning.
Staffing (recruitment, selection, placement).
Training and development.
- Compensation (remuneration) and benefits.
The q i oped t dimem
1Thus,
( H C N : some c nation; t u r n is M o resour,
I H R M and St: bound. more £ H R M I H R M single . text w i
Wha
‘inpatr
CHAPTER 1 INTRODUCTION
The question is of course w h i c h activities change when H R M goes international? A model devel-oped by Morgan^ is helpful i n terms of answering this question. H e presents I H R M on three dimensions:
The broad human resource activities of procurement, allocation and utilization. (These three broad activities can be easily expanded Into the six HR activities listed above.)
The national or country categories involved in international HRM activities:
- the host-country where a subsidiary may be located:
-
- the parent-country where the firm is headquartered; and
-
-
- ‘other’ countries that may be the source of labor, finance and other inputs.
-
-
- The three categories of employees of an International firm:
-
-
- host-country nationals (HCNs);
-
-
- parent-country nationals (PCNs); and
-
-
- third-country nationals (TCNs).
Thus, for example, the US multinational I B M employs British citizens i n its British operations ( H C N s ) , often sends US citizens (PCNs) to Asia-Pacific countries on assignment, and may send some of its Singaporean employees on an assignment to its Chinese operations (as T C N s ) . The nationality of the employee is a major factor in determining the person’s ‘category’, which in t u r n is frequently a major driver of the employee’s compensation and employment contract.
M o r g a n
defines
international H R M as
the interplay among the three dimensions of
human
resource
activities,
type o f employees and countries
of
operation.
We can see that in broad terms
I H R M
involves the same activities as domestic H R M (e.g. procurement refers to H R
planning
and staffing). However, domestic
H R M is involved
w i t h employees within
only one
national
boundary.
Increasingly, domestic
H R M is taking
on
some of
the flavor of
I H R M as
it deals
more
and
more
w i t h a
multicultural workforce . Thus, some
of the current focus of
domestic
H R M
on issues of managing workforce diversity
may prove to be beneficial to the practice of
I H R M . H o w e v e r , it must be remembered
that the way i n w h i c h diversity is managed
w i t h i n a
single
national,
legal and
cultural
context
may not necessarily
transfer to a multinational con-
text w i t h o u t some
modification .
What is an expatriate?
One obvious difference between domestic and international H R M is diat staff are moved across national boundaries into various roles w i t h i n the international firm’s foreign operations – these employees have traditionally been called ‘expatriates’. A n expatriate is an employee w h o is w o r k i n g and temporarily residing in a foreign couniry . M a n y firms prefer to call such employees ‘international assignees’. W h i l e it is clear in the literature that PCNs are always expatriates, it is often overlooked that T C N s are also expatriates, as are H C N s w h o are transferred into parent country operations outside their o w n home country.*’ Figure 1.2 illustrates h o w all three catego-ries may become expatriates.
The term inpatriate has come into vogue to signify the transfer of subsidiary staff into the parent country (headquarters) operations . ‘ For many managers this term has added a level of confusion surrounding the definition of an expatriate. The (US) Society for H u m a n Resource Management defines an inpatriate as a ‘foreign manager in the US’. Thus, an inpatriate is also defined as an expatriate. A further indication of the confusion created by the use of the term ‘inpatriate’ is that some writers in international management define all H C N employees as inpa – triates. H C N s only become ‘inpatriates’ when they are transferred into the parent – country oper-ations as expatriates, as illustrated in Figure 1.2.
4 CHAPTER 1 INTRODUCTiOM
Given the substantial amount of jargon in I H R M , it is questionable as to whether the term ‘inpatriate’ adds enough value to justify its use. However, some firms n o w use the term ‘inpatri – ate’ for all staff transferred into a country . For clarity, we w i l l use the term expatriate through-out this text to refer to employees w h o are transferred out of their home base/parent country into some other area of the firm’s international operations. In doing so, we recognize that there is increasing diversity w i t h regard to w h a t constitutes international w o r k , the type and length of international assignments and the increasingly strategic role of the FIR function in many organi-zations, w h i c h in t u r n influences the nature of some expatriate roles.
FIGURE 1 ,2 International assignments create expatriates
National
border
Stahl, B j o r k m a n and M o r r i s have recognized this expansion in the scope of the field of I H R M in their Handbook of Research in International Human Resource Management where they define the field of I H R M as follows:
We define the field of IHRM broadly to cover all issues related to managing the global workforce and its contribution to firm outcomes. Hence, our definition of IHRM covers a wide range of human resource issues facing MNEs In different parts of their organizations. Additionally we Include compara-tive analyses of HRM In different countries.^
We believe that this broad definition accurately captures the expanding scope of the I F I R M field and we w i l l use this definition in this book .
DIFF RENCES BETWEEN DOMESTIC
AND INTERNATIONAL HRM
In our view, the complexity of operating in different countries and employing different national categories of workers is a key variable that differentiates domestic and international H R M , rather than any major differences between the H R M activities performed . D o w l i n g ^ argues that the complexity of international H R can be attributed to six factors:
1 More HR activities. , .
2 The need for a broader perspective.
CHAPTER 1 INTRODUGTiON
-
-
-
- More involvement in employees’ personal lives.
Changes in emphasis as the workforce mix of expatriates and locals varies.
-
- Broader external influences.
Each of these factors is n o w discussed i n detail to illustrate its characteristics.
More HR activities
T o operate in an international environment, a h u m a n resources department must engage in a number of activities that w o u l d not be necessary in a domestic environment . Examples of required international activities are:
International taxation;
international relocation and orientation; administrative services for expatriates; host-government relations;
language translation services.
Expatriates are subject to international taxation, and often have both domestic (i.e. their home-country) and host-country tax liabilities. Therefore, tax equalization policies must be designed to ensure that there is no tax incentive or disincentive associated w i t h any particular interna-tional assignment.’*^ The administration of tax equalization policies is complicated by the wide variations in tax laws across host countries and by the possible time lag between the completion of an expatriate assignment and the settlement of domestic and international tax liabilities. In recognition of these difficulties, many M N E s retain the services of a major accounting f i r m for international taxation advice.
International relocation and orientation involves the f o l l o w i n g activities:
-
-
- arranging for pre-departure training;
-
-
- providing immigration and travel details;
-
-
- providing housing, shopping, medical care, recreation and schooling Information;
-
-
- finalizing compensation details such as delivery of salary overseas, determination of various overseas allowances and taxation treatment.
The issues involved when expatriates return to their home – country (repatriation) are covered in detail in Chapter 7. iVIany of these factors may be a source of anxiety for the expatriate and require considerable time and attention to successfully resolve potential problems – certainly m u c h more time than w o u l d be involved in a domestic transfer/relocation such as L o n d o n to Glasgow, F r a n k f u r t to M u n i c h , N e w Y o r k to Dallas, Sydney to M e l b o u r n e , or Beijing to Shanghai.
A n M N E also needs to provide administrative services for expatriates i n the host countries i n w h i c h it operates. Providing these services can often be a time – consuming and complex activity because policies and procedures are not always clear-cut and may conflict w i t h local conditions . Ethical questions can arise when a practice that is legal and accepted in the host country may be at best unethical and at worst illegal in the home country . For example, a situation may arise in w h i c h a host country requires an A I D S test for a w o r k permit for an employee whose parent
6 CHAPTER 1 INTRODUCTION
f i r m is headquartered i n the USA, where employment-related A I D S testing remains a controver-sial issue. H o w does the corporate H R manager deal w i t h the potential expatriate employee w h o refuses to meet this requirement for an A I D S test and the overseas affiliate w h i c h needs the services of a specialist expatriate f r o m headquarters? These issues add to the complexity of pro-viding administrative services to expatriates.
Host – government relations represent an important activity for the H R department i n an M N E , particularly in developing countries where w o r k permits and other i m p o r t a n t certificates are often more easily obtained when a personal relationship exists between the relevant govern-ment officials and multinational managers. M a i n t a i n i n g such relationships helps resolve poten-tial problems that can be caused by ambiguous eligibility and/or compliance criteria for documentation such as w o r k permits . US-based multinationals, however, must be careful i n h o w they deal w i t h relevant government officials, as payment or p a y m e n t – i n – k i n d , such as din – ners and gifts, may violate the US Foreign C o r r u p t Practices A c t ( F C P A ) . ” Provision of lan-guage translation services for internal and external correspondence is an additional international activity for the H R department. M o r g a n ‘ ^ notes that if the H R department is the major user of language translation services, the role of this translation g r o u p is often expanded to provide translation services to all foreign operation departments w i t h i n the M N E .
The need for a broader perspective
H u m a n resource managers w o r k i n g i n a domestic environment generally administer programs for a single national g r o u p of employees w h o are covered by a u n i f o r m compensation policy and taxed by one national government . Because H R managers w o r k i n g in an international envi-ronment face the problem of designing and administering programs for more than one national group of employees (e.g. P C N , H C N and T C N employees w h o may w o r k together in Z u r i c h at the European regional headquarters of a US-based multinational), they need to take a broader view of issues. For example, a broader, more international perspective on expatriate benefits w o u l d endorse the view that all expatriate employees, regardless of nationality should receive a foreign service or expatriate p r e m i u m w h e n w o r k i n g i n a foreign location . Yet some M N E s that routinely pay such premiums to their P C N employees on overseas assignment (even if the assign-ments are to desirable locations) are reluctant to pay premiums to foreign nationals assigned to the home country of the f i r m . Such a policy confirms the traditional perception of m a n y H C N and T C N employees that P C N employees (particularly US and European PCNs) are given pref-erential treatment. ‘^ Complex equity issues-.arise when employees of various nationalities w o r k together, and the resolution of these issues remains one of the major challenges in rhe I H R M field . (Equity issues w i t h regard to compensation are discussed in Chapter 8.)
More involvement in employees’ personal lives
A greater degree of involvement in employees’ personal lives is necessary for the selection, train-ing and effective management of both P C N and T C N employees. The H R department or H R professional needs to ensure that the expatriate employee understands housing arrangements, health care, and all aspects of the compensation package provided for the assignment (cost-of – living allowances, premiums, taxes and so on). M a n y M N E s have an ‘International H R Ser-vices’ section that coordinates administration of the above programs and provides services for PCNs and T C N s , such as handling their banking, investments, home rental while on assign-ment, coordinating home visits and final repatriation .
In the domestic setting, the H R department’s involvement w i t h an employee’s family is rela-tively limited and may not extend beyond p r o v i d i n g employee benefits such as health insurance coverage for eligible family members and some assistance in relocating the employee and family members. I n the international setting, however, the H R department must be much more
involve!
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CHAPTER 1 INTRODUCTION
involved in order to provide the level of support required and w i l l need to k n o w more about the employee’s personal life. For example, some national governments require the presentation of a marriage certificate before granting a visa for an accompanying spouse. Thus, m a r i t a l status could become an aspect of the selection process, regardless of the best intentions of the M N E to avoid using a potentially discriminatory selection criterion . In such a situation, the H R depart-ment should advise all candidates being considered for the position of the host country’s visa requirements w i t h regard to marital status and a l l o w candidates to decide whether they wish to remain in the selection process. A p a r t f r o m p r o v i d i n g suitable housing and schooling in the assignment location, the H R department may also need to assist children placed at boarding schools in the home country – a situation that is less frequently encountered in the United States but relatively c o m m o n in many other countries, particularly former British colonies such as Sin-gapore, H o n g K o n g , Australia and N e w Zealand and in E u r o p e . I n more remote or less hospi-table assignment locations, the H R department may be required to develop, and even r u n , recreational programs . For a domestic assignment, most of these matters either w o u l d not arise or w o u l d be seen as the responsibility of the employee rather than the H R department. In a sense the ‘psychological contract’ is n o w between the M N E and the entire immediate family of the international assignee.
Changes in emphasis as the workforce mix of PCNs and HCNs varies
As foreign operations mature, the emphasis put on various h u m a n resource activities change. For example, as the need for PCNs and T C N s declines and more trained locals become avail-able, resources previously allocated to areas such as expatriate taxation, relocation and orienta-tion are transferred to activities such as local staff selection, training and management development. The latter activity may require the establishment of a p r o g r a m to bring high – potential local staff to corporate headquarters for developmental assignments. The need to change emphasis in H R operations as a foreign subsidiary matures is clearly a factor that w o u l d broaden the responsibilities of local H R activities such as human resource planning, staffing, training and development and compensation.
Risk exposure
Frequently the human and financial consequences of failure in the international arena are more severe than in domestic business. For example, while we discuss the topic in more detail in Chapter 5, expatriate failure (the premature return of an expatriate from an international assign-ment) and Linder-performance while on international assignment is a potentially high-cost prob-lem for M N E s . The direct costs of failure (salary, training costs, travel costs and relocation expenses) Co the parent f i r m may be as high as three times the domestic salary plus relocation expenses, depending on currency exchange rates and location of assignments. Indirect costs such as loss of foreign market share and damage to key host-country relationships may be considerable.
Another aspect of risk exposure that is relevant to I H R M is terrorism, particularly since the W o r l d Trade Center attack in N e w Y o r k in 2 0 0 1 . M o s t major M N E s must n o w consider politi – cal risk and terrorism when planning international meetings and assignments and spending on protection against certotism is increasing. Terrorism has also clearly had an effect on the way in which employees assess potential international assignment locations.’*’ The H R department may also need to devise emergency evacuation procedures for highly volatile assignment loca-tions subject to political or terrorist violence, or major epidemic or pandemic crises such as severe acute respiratory syndrome (SARS) and avian influenza.^” For a comprehensive analysis of the impact of SARS on human resource management in the H o n g K o n g service sector, see Lee and W a r n e r . ”
CHAPTER 1 INTRODUCTION
Broader external influences
The major external factors that influence I H R M are the t)’pe of government, the state of the economy and the generally accepted practices of doing business in each of the various host countries i n w h i c h M N E s operate. A host government can, for example, dictate h i r i n g proce-dures, as has been the case u n t i l recently i n Malaysia . The Malaysian Government d u r i n g the 1970s introduced a requirement that foreign firms comply w i t h an extensive set of affirmative action rules designed to provide additional employment opportunities for the indigenous M a l a y ethnic g r o u p w h o constitute the majority of the p o p u l a t i o n of Malaysia but tend to be under-represented in business and professional employment groups relative to Chinese Malaysians and Indian Malaysians . Various statistics showing employment levels of indigenous Malays t h r o u g h o u t the f i r m (particularly at middle and senior management levels) were required to be forwarded to the relevant government department. M a n y foreign investors regarded these requirements as a major reason for complaints about bureaucracy and inflexibility with regard to perceived affirmative action appointments at management level in Malaysia and these com-plaints are one significant reason for the subsequent revision of these requirements.
I n developed countries, labor is more expensive and berrer organized than in less-developed countries and governments require compliance w i r h guidelines on issues such as labor relations, taxation and health and safety. These factors shape the activities of the subsidiary H R manager to a considerable extent. In less-developed countries, labor tends to be cheaper, less organized and government regulation is less pervasive, so these factors take less time. The subsidiary H R manager must spend more time, however, learning and interpreting the local ways of doing business and the general code of conduct regarding activities such as gift giving and employment of family members. I t is also likely that the subsidiary H R manager w i l l become more involved i n administering benefits either provided or financed by the M N E , such as housing, education and other facilities n o t readily available i n the local economy .
VARIABLES THAT MODERATE DIFFERENCES BERA/EEN DOMESTIC AND INTERNATIONAL HRM
Earlier in this chapter it was argued that the complexit)’ involved i n operating i n different coun-tries and employing different national categories of employees is a key variable that differenti-ates domestic and international H R M , rather than any major differences between the H R M activities performed . M a n y firms f r o m advanced economies w i t h limited experience in interna-tional business underestimate the complexities involved in successful international operations – particularly in emerging economies. There is considerable evidence to suggest that business fail-ures i n the international arena are often linked to poor management of human resources. I n addition to complexit)’, there are four other variables that moderate (that is, either diminish or accentuate) differences between domestic and international H R M . These four additional moder-ators are:
The cultural environment.
The industry (or industries) with which the multinational is primarily involved.
The extent of reliance of the multinational on its home-country domestic market.
The attitudes of senior management.
Together
w i t h the complexity involved in operating in different countries, these five variables
constitute
a model that explains the differences
between domestic and international H R M
(see Figure 1.3).
N
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