How Inter-country Differences Affect HRM

The field of IHRM has been characterized by three broad approaches:

The first approach emphasizes cross-cultural management: examining human behaviour within organizations from an international perspective.

A second approach developed from the comparative industrial relations and HRM literature and seeks to describe, compare and analyze HRM systems in various countries.
A third approach seeks to focus on aspects of HRM in multinational firms. These approaches are depicted in the following figure:
IHRM in the multinational context

Cross-cultural management

Comparative HR and IR systems

Defining International HRM

Before we can offer a definition of IHRM, we should first define the general field of HRM. Typically, HRM refers to those activities undertaken by an organization to utilize its human resources effectively. These activities would indicate at least the following: 1. 2. 3. 4. 5. 6. Human resource planning Staffing (Recruitment, Selection & Placement) Performance Management Training and Development Compensation (Remuneration) and benefits Industrial relations.

The question is, of course, which activities change when HRM goes international.

A model developed by P.V Morgan presents IHRM on three dimensions: 1. 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). 2. The national or country categories involved in IHRM activities: the host country where a subsidiary may be located the home country where the firm is headquartered and other countries that may be the source of labour, 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).

3.

For Example: the US multinational IBM employs Australian citizens in its Australian operations (HCNs), often send US citizens (PCNs) to AsiaPacific countries on assignment and may send some of its Singaporean employees on an assignment to its Japanese operations (as TCNs). The nationality of the employee is a major factor in determining the persons category.
Morgan defines IHRM as the interplay among these three dimensions human resource activities, types of employees and countries of operation. We can see that in broad terms IHRM involves the same activities as domestic HRM, e.g. procurement refers to HR planning and staffing. However, domestic HRM is involved with employees within only one national boundary. Increasingly, domestic HRM is taking on some of the flavor of IHRM as it deals more and more with a multicultural workforce.

What/Who is an expatriate?
An expatriate is an employee who is working and temporarily residing in a foreign country. Some firms prefer to call such employees international assignees. One obvious difference between domestic and international HRM is that staff are moved across national boundaries into various roles within the international firms foreign operations the employees have traditionally been called expatriates. For clarity we will use the term expatriate throughout this subject to refer to employees who are transferred out of their home base into some other area of firms international operations.

Although it is clear in the literature that PCNs are always expatriates, it is often overlooked that TCNs are expatriates, as are HCNs who are transferred into parent country operations outside their home country. Figure 1-3 illustrates how all three categories may become expatriates.
Parent Country HQ/Operations HCNs HCNs National Border PCNs TCNs Subsidiary Operations country B National Border

PCNs

Subsidiary Operations country A

Fig: 1.3 International Assignments Create Expatriates

Differences between domestic and international HRM

The complexities of operating in different countries and employing different national categories of workers is a key variable that differentiates domestic and international HRM, rather than any major differences between the HRM activities performed. Dowling argues that the complexity of international HR can be attributed to six factors:

more HR activities the need for a broader perspective more involvement in employees personal lives changes in emphasis as the workforce mix of expatriates and locals varies risk exposure broader external influences.
Each of these factors is now discussed in detail to illustrate its characteristics.

More HR activities
To operate in an international environment, a human resources department must engage in a number of activities that would not be necessary in a domestic environment: international taxation; international relocation and orientation; administrative services for expatriates; host-government relations; and language translation services.

Expatriates are subject to international taxation and often have both domestic (i.e. home-country) and host-country tax liabilities.
International relocation and orientation involve arranging for predeparture training; providing immigration and travel details; providing housing, shopping, medical care, recreation and schooling information; and finalizing compensation details such as delivery of salary overseas, determination of various overseas allowances and taxation treatment.

The need for a broader perspective

HR managers working in a domestic environment generally administer programs for a single national group of employees who are covered by a uniform compensation policy and taxed by one national government. Because HR managers working in an international environment face the problem of designing and administering programs for more than one national group of employees (e.g. PCN, HCN and TCN employees who may work together in Zurich at the European regional headquarters of a US-based multinational), they need to take a broader view of issues. For example, a broader, more international perspective on expatriate benefits would endorse the view that all expatriate employees, regardless of nationality, should receive a foreign service or expatriate premium when working in a foreign location.

More involvement in employees personal lives

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

For example, some governments require the presentation of a marriage certificate before granting a visa to an accompanying spouse. Thus, marital status could become an aspect of the selection process, regardless of the best intentions of the firm to avoid using a potentially discriminatory selection criterion.

Changes in emphasis as the workforce mix of PCNs and HCNs varies

As foreign operations mature, the emphases put on various human resource activities change. For example, as the need for PCNs and TCNs declines and more trained locals become available, resources previously allocated to areas such as expatriate taxation, relocation and orientation are transferred to activities such as local staff selection, training and management development. The latter activity may require the establishment of a program to bring high-potential local staff to corporate headquarters for developmental assignments. The need to change emphasis in HR operations as a foreign subsidiary matures is clearly a factor that would broaden the responsibilities of local HR 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, expatriate failure (the premature return of an expatriate from an international assignment) and underperformance while on international assignment are potentially high-cost problems for international companies.

Direct costs (salary, training costs and travel and relocation expenses) per failure to the parent firm may be as high as three times the domestic salary plus relocation expenses, depending on currency exchange rates and location of assignments. Indirect costs such as loss of foreign market share and damage to key host-country relationships may be considerable.

Another aspect of risk exposure that is relevant to international HRM is terrorism, particularly in the current political climate since the tragic events in New York on 11 September 2001. Most major multinationals must now consider political risk and terrorism when planning international meetings and assignments and it is estimated that they spend 12 per cent of their revenues on protection against terrorism. The HR department may also need to devise emergency evacuation procedures for highly volatile assignment locations. The IHRM in Action Case 1-1 presents an example of how a firm operating internationally can become unwittingly caught up in larger political events. The situation was extremely stressful for the captain and crew of The Tampa, and also for company staff at headquarters in Oslo and in the Australian subsidiary. Having clear policy and procedure guidelines in place for emergencies encountered at sea assisted personnel to handle the crisis.

Broader external influences

The major external factors that influence IHRM are the type of government, the state of the economy and the generally accepted practices of doing business in each of the various host countries in which the multinational operates. A host government can, for example, dictate hiring procedures, as has been the case in Malaysia. The government during the 1970s introduced a requirement that foreign firms comply with an extensive set of affirmative action rules designed to provide additional employment opportunities for the indigenous Malays who constitute the majority of the population but tend to be under-represented in business and professional employment groups relative to Chinese Malays and Indian Malays. Various statistics showing employment levels of indigenous Malays throughout the firm were required to be forwarded to the relevant government department. In developed countries, labor is more expensive and better organized than in less-developed countries and governments require compliance with guidelines on issues such as labor relations, taxation and health and safety.

Variables that moderate differences between domestic and international HRM

Many firms underestimate the complexities involved in international operations and there has been consistent evidence to suggest that business failures in the international arena are often linked to poor management of human resources. In addition to complexity, there are four other variables that moderate (that is, either diminish or accentuate) differences between domestic and international HRM. As Figure 1-4 illustrates, these four moderators 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 and the attitudes of senior management.

The cultural environment

There are many definitions of culture, but the term is usually used to describe a shaping process. That is, members of a group or society share a distinct way of life with common values, attitudes and behaviors that are transmitted over time in a gradual, yet dynamic, process. As Phatak explains: A person is not born with a given culture: rather, she or he acquires it through the socialization process that begins at birth: an American is not born with a liking for hot dogs, or a German with a natural preference for beer: these behavioral attributes are culturally transmitted.

Anyone traveling abroad, either as a tourist or on business, experiences situations that demonstrate cultural differences in language, food, dress, hygiene and attitude to time. Whereas the traveler can perceive these differences as novel, even enjoyable, for people required to live and work in a new country, such differences can prove difficult. They experience culture shock a phenomenon experienced by people who move across cultures.
The new environment requires many adjustments in a relatively short period of time, challenging peoples frames of reference to such an extent that their sense of self, especially in terms of nationality, comes into question. People, in effect, experience a shock reaction to new cultural experiences that cause psychological disorientation because they misunderstand or do not recognize important cues. Culture shock can lead to negative feelings about the host country and its people and a longing to return home.

Culture has often served simply as a synonym for nation without any further conceptual grounding. In effect, national differences found in the characteristics of organizations or their members have been interpreted as cultural differences.
Another issue in cross-cultural research concerns the emic etic distinction. Emic refers to culture-specific aspects of concepts or behaviour and Etic refers to culture-common aspects. These terms have been borrowed from linguistics: a phonemic system documents meaningful sounds specific to a given language and a phonetic system organizes all sounds that have meaning in any language. Both the emic and etic approaches are legitimate research orientations. A major problem may arise, however, if a researcher imposes an etic approach (that is, assumes universality across cultures) when there is little or no evidence for doing so.

A well-known example of an imposed etic approach is the convergence hypothesis that dominated much of US and European management research in the 1950s and 1960s. This approach was based on two key assumptions.
The first assumption - was that there were principles of sound management that held regardless of national environments. Thus, the existence of local or national practices that deviated from these principles simply indicated a need to change these local practices. The second assumption - was that the universality of sound management practices would lead to societies becoming more and more alike in the future. Given that the USA was the leading industrial economy at that time, the point of convergence was the US model.