38 International Human Resource Management

Pragya Dheer

Learning Outcomes: The aim is to familiarize the tools and methods of Human Resource Management in an International environment.

Understanding the relationship between (international) strategic objectives, organizational performance and human behaviour should enable students to better motivate and understand International Human Resource Management (IHRM) phenomena’s and to diagnose and analyze complex behaviour in a different cultural setting.

Objectives are for:

• Being able to understand HR challenges in international management.
• Know how the HRM function can contribute to the firm’s international strategy.
• Have an understanding how to appraise and evaluate in an international environment.
• Know how to prepare, train and develop employees for international posts.
• Identify the main trends regarding international compensation for executives.
• Understand major ethical and SCR in international business.

    38.1. Introduction:

When human resource management assumes a global perspective, it becomes international human resource management. Several factors like new technologies and new markets are driving changes in the various spects of an organisation. But the advent of globalization in recent decades has provided a decisive momentum to international human resource management as an increasing number of companies are realizing that their future success and growth depend on their ability to internationalize their operations.

In the global village, organisations have crossed the boundary of the country in terms of their business operations. The liberalization process in India, has thrown enormous opportunities for foreign companies to come to India and Indian companies to expand the market beyond the country. Infact, many Indian multinationals are performing extraordinarily well outside the country.

Globalisation of business has probably touched the HR manager more severely than any other functional head. The HR executive needs to give international orientation to whatever he or she does employee hiring, training and development, performance review, remuneration, motivation, welfare or industrial relations. International orientation assumes greater relevance as businesses get increasingly interlinked across nations.

Just as the success of a domestic business depends on its human resource, so is the case with an international business. The type of people, the willingness with which they work and the commitment they exhibit towards the organisation determine the competitive edge of an MNC in the international market. The international firm may have the best of resources at its headquarters. The resources cannot be effectively utilized or transferred to foreign affiliates without using the human power.

38.2 Meaning and Definition:

International Human Resource Management (IHRM) is defined as the interplay between the three important dimensions of human resource management – types of employees, human resource activities and the country of operation. It is the complexities of operating in different countries and employing different national categories of workers, which essentially differentiates domestic and international HRM.

An international business must procure, motivate, retain and effectively utilize services of people both at the corporate office and at the foreign plants. The process of procuring, allocation and effectively utilizing human resource in an international business is called international human resource management (IHRM).

                                                       

International Human Resource Management (IHRM) is the process of acquiring, developing, allocating and utilizing human resources in a global corporation to achieve organizational objectives irrespective of geographical boundaries. In global firms, human resource managers must achieve two somewhat conflicting strategic objectives i.e.,

i. They must integrate human resource policies and practices across a number of subsidiaries in different countries so that overall corporate objectives can be achieved.

ii. The approach to HRM must be sufficiently flexible to take care of significant differences in business conditions and culture.

38.2.1. Definition:

According to P.V. Morgan, “International Human Resource Management (IHRM) is the interplay among three dimensions – human resource activities, types of employees and countries of operations.”

According to Nancy Wong, “International human resource management involves carrying out, on a worldwide basis, activities like candidate recruitment and selection, assignment terms and documentation, relocation processing and vendor management, immigration processing, cultural and language orientation and training, compensation administration and payroll processing, tax administration, career planning and development and handling of spouse and dependent matters.”

According to Micheal Armstrong, “International human resource management is the process of employing and developing people in international organisations which operate globally. It means working across national boundaries to formulate and implement resourcing, development, career management and remuneration strategies, policies and practices applicable to international workforce.”

38.3. Features of International Human Resource Management (IHRM):

1. IHRM involves employment of the right people at the right positions, irrespective of geographical locations.

   2. It requires the development of a long – term HR plan to make sure of an effective alignment of the HR strategies with the corporate objectives.

3. It requires the development of a diversified range of skills for employees, especially for those who need to work beyond national boundaries.

4. It necessitates the determination of compensation for host -, home – and third – country nationals on the basis of country – specific factors.

                                                            

    5. It  requiresthecreationofcentralizedreportingrelationshipsaroundtheworldfor  faster

information sharing. www.civilserviceindia.com/subject/Management/notes/international-human-resource-management.html

6. It requires the introduction of formal and informal methods to integrate the different parts of the global business effectively.

7. It requires the development of a well – organized evaluation system to assess the performance of employees across different locations and nations

8. It is necessary to understand the cultural dimensions of host nations that influence the HR operations.

9. It is essential to maintain good communication among all the parts and people of the organisation at the global level.

10. The perceived value of the HR activities generally varies across the different locations of international companies.

38.4. Reasons for the growth of International Human Resource Management (IHRM):

Factors that have contributed to the growth of International Human Resource Management (IHRM) are:

1. The advent of globalization has increased the growth of multinational companies and international business operations, which has contributed to the global mobility of human resources.
2. A growing shortage of human resources with international exposure and experience affects the companies’ global preparedness in human resource management. This has forced the international companies to assign a larger role for global human resource management activities in their organisation.
3. In  a  significant  number  of  cases,  the  successes  of international operations of companies are determined by the performance of the expatriates and other employees working in a foreign country. This has made the organisations attach a greater significance to IHRM activities.
4. Since the failure of international operations often proves costly to the organisation, companies take additional precautionary measures in training and compensating human resources. This necessitates the establishment of a full – fledged international HR department.
5. Differences in the people, process, tax computation, organizational structure and culture of different nations force the companies to undertake several complex HR activities like tax planning, orientation, training and compensation fixation.

                                                       

38.5. Need / Characteristics of International Human Resource Management (IHRM):

These are the various factors which represents the need/characteristics along with the factors which differentiate between domestic human resource management and international human resource management:

38.5.1. The need for a broader perspective:

HR managers working in a domestic environment generally function in a single government scenario managing the employees of only the host country. In multinational platform, the HR managers have to take a broader view of different international issues, such as expatriates’ benefits and cross – cultural work dynamics in managing people.

38.5.2. More involvement in employee’s personal lives:

High degree of personal involvement in the employees’ personal lives is necessary for the selection, training, placement and effective management of both Parent Country Nationals (PCNs) and Third Country Nationals (TCNs) employees. The role of the HR department is to make the expatriate employees understand their housing, health care, work culture, compensation and all other matters so that they feel comfortable at the new places.

38.5.3. Emphasis changes as the workplace mix of expatriates and locals varies:

As international operations of companies gain experience, the emphasis put on the various human resource activities changes.

38.5.4. Risk Exposure:

The consequences of failure in international operations are more severe than the domestic business. The failure of an expatriate in terms of performance or his premature return from the assignment costs the company heavily and has tremendous impact over the market share and international customer relationship.

38.5.5. More external influences:

The influence of the external factors, such as different types of governments, state of economy and business policies and practices of various host countries are quite high, and therefore, pose a great challenge for HR professionals to manage. Depending on the attitude of the government towards international firms in their country; the HR policies of the MNC changed.

38.6.  Complexities / Challenges of International Human Resource Management (IHRM):

38.6.1. Need for Broader Perspective:

In the international business, the HR managers require a broader view of various international issues such as expatriated benefits, cross culture work dynamics in managing people, etc.

38.6.2. Ethical and Corporate Social Responsibility:

Ethics and corporate social  responsibility in the international business environment are always debatable. MNCs have been accused of being indifferent to the problems of host countries as they are more concerned about the profitability of their companies. MNCs have to balance the ethics and moral of their country and host country. It includes:

                                                           

38.6.2.1. Ethical Relativist:

They believe that there is no right or wrong. What is right in a particular situation in one place may not be so in another. Relativism offers flexibility but may prove to be disastrous in the long run for an MNC.

38.6.2.2. Ethical Absolutist:

An MNC which believes in this approach is strongly influenced by the practices and policies of its home country. They do not give much importance to the culture and values of the host country. Ethical absolutists have been criticized for their arrogance and for showing little respect to the traditions and cultures of the host countries.

38.6.2.3. Ethical Universalist:

An Ethical Universalist believes that there are fundamental rules which help us differentiate between right and wrong. These rules need to be adhered to in any country and in any situation. An ethical universalist believes that cultural variations between countries should not lead to any wrongdoing on the part of the MNCs. There is a distinction between practices which are culturally different and ones which is morally wrong.

38.6.3. Bribery:

According to survey conducted by J. Macken, developed countries give around $85 billion to underdeveloped countries in form of bribes. MNCs from developed countires have been accused of bribing government officials. Hence, countries should frame laws to prevent corruption.

38.6.4. Code of conduct for international business:

The first step in framing code of conduct for international business players came in the form of the “Caux Roundtable Conference” on “Principles for Business Conduct” held in 1994. It was a conference on international business ethics, held at Caux, Switzerland and was attended by the business leaders from all countries. The focus was to formulate a set of rules and ethical codes which would be used for benchmarking global business practices. The main aim of Caux conference as given in the charter is, “to further the twin value of living and working together and human dignity by promoting free trade, environmental and cultural integrity and prevention by bribery and corruption.

38.7. Stages of International Human Resource Management (IHRM):

From an organizational viewpoint, the international human resource development and usage process generally goes through four stages viz,

38.7.1 Transfer:

The 1st stage involves the transfer of an executive or executives from the home country to fill key positions in a foreign operations.

                                                         

38.7.2. Mixed Resources:

In this 2nd Stage, sometimes due to pressures from foreign government (or because foreign nationals have been suitably trained for the work), most foreign operation jobs are held by local personnel.

38.7.3. Unitary Resources:

At this stage, in the evolution process, the entire operation is staffed by foreign nationals including the top management positions. In other situations, the organisations’ operations may have matured to the point at which foreign nationals at all levels have been trained to handle all jobs effectively.

38.7.4. Interchange:

In this final stage, there is the recognition that a manager’s skill and competence rather than his or her passport should be the basis of advancement, privileges and rewards. In other words, there is not only the opportunity for home country managers to obtain international assignments, but foreign managers within the organisation are given assignments at the home office.

38.8. Model of International Human Resource Management (IHRM):

Morgan has presented a model to highlighted the broad function of international human resource management. This model consists of the following 3 dimensions:

38.8.1. Human Resource Activity: procurement, allocation and utilization.

38.8.2. Country of Operation: the host country where a subsidiary may be located, the home country in which the firm’s headquarters are located and a third country which may be the source of labour, finance etc.

38.8.3. Types of employees of an international firm: host country nationals, parent country nationals and third country nationals.

Thus, international human resource management is the interplay between three dimensions namely human resource activities, the country of operation and the types of employees. International human resource management differs from domestic HRM due to the complexities of operating in different countries and employing workers belonging to different nations.

                                                     

Sources: P.V. Morgan, 1986, “International Human Resource Management: Fact or Fiction”, Personnel Administrator, 31 (9), Page no. 44.

38.9. Functions of International Human Resource Management (IHRM)

• Recruitment and Selection
• Performance Management
• Compensation
• Repatriation

38.9.1. International Recruitment:

The response of an international firm to an international recruitment and selection depends on:

i.   Its general staffing policy on key positions in headquarters and subsidiaries.

ii.  Its ability to attract the right candidate, and

iii. The constraints placed by the host government on hiring policies.

Thus, there are 4 major approaches to multinational staffing decisions:

38.9.1.1. Ethnocentric Approach:

Under this parent nation employees fill all key positions in a multinational. While this approach may be common for firms at the early stages of internationalization, there are business reasons for pursuing such an approach:

a.       A perceived lack of qualified host nation employees ,and

b.       The need to maintain good communication, coordination and control links with corporate headquarters.

Normally, when a multinational company acquires a firm in any other country it wishes to replace local managers with the parent company nationals to ensure that the culture and values to be uniform in all the units of the MNC throughout the globe. But sometimes, based on the competency of the local people they may be inducted to the company to have the local understanding in terms of managing people and market dynamics.

Disadvantages:

a.       It limits the promotion opportunities of host country nationals, which may lead to decline productivity and high labour turnover.

b.       The parent company nationals being placed in the host country take lots of time in understanding the local dynamics leading to faculty decisions.

c.       The salary structure of the parent company nationals, create a feeling which is much better its employees in other countries, discrimination and frustration among the employees from the host country.

38.9.1.2. Polycentric Approach:

This approach is basically taken up while employing host country nationals in the subsidiary of the MNC operating in that country and its basic premise is that parent country nationals will only hold positions in the corporate headquarters. This policy resolves many disadvantages of ethnocentric approach and has the following advantages:

a.       There would be no language barrier.

b.       Managing local politics and administration will be very easier.

c.       This is less expensive than the ethnocentric approach.

It has few disadvantages:

a.       Maintaining understanding between the corporate and the subsidiary management becomes difficult.

b.       It also becomes difficult to imbibe the original culture of the company.

c.       This will not provide the opportunity to the host country employees to get exposure and experience outside their own country, which will minimize their growth and development in the organisation beyond their own country.

38.9.1.3 Geocentric Approach:

This approach subscribes the view of employing the best people in key positions throughout the organisation without the consideration of any nationality. This addresses the disadvantages of both ethnocentric and polycentric approach. It is not necessary that the competent people are available only in the host or parent nations. They may be available in any part of the globe. Moreover, it helps the organisation to develop core competency taking the best talents in the core area.

Drawbacks:

a.       Constraints in terms of the employment policy of the particular country.

b.       Paper work involved in hiring a foreign national instead of a local nationals.

c.       Hassles of obtaining work permit for dependents of the employees.

d.       Expensive in terms of the investment toward training and development of the individual.

e.       Benchmarking the salary with the international compensation package, which is definitely more than the salary to be given to the individual in home country.

38.9.1.4. Regiocentric Approach:

This approach advocates the division of operations of the multinational company on the basis of some geographical regions & allows the transfer of employees within a particular region.

Its main advantages:-

(a)  A major motive for using such an approach is that it allows interaction between executives transferred to regional headquarters from subsidiaries & parent country nationals posted to regional headquarters.

(b)  It also reflects some senstivity to local conditions.

(c)   Another advantage is that such an approach can prove highly effective for a multinational to move from a purely ethnocentric to geocentric approach.

Disadvantages:-

(a)  It can produce ‘federalism’ at a regional rather than a country basis.

(b)   While this approach does improve career prospects at the national level, it only moves the barrier to the regional level.

                                                      

Sources:-  DA  Heenan  &  Howard  v  Perlmutter,  “Multinational  Organisation  Development”,  (Reading,  Mass: addision-wesley, 1979) pp.18-19. Ken Kamoche , “The Integration- differentiation Puzzle: A Resource –capability perspective in international Human Resource Management”, The International Journal of Human Resource Management, Vol.7(I), 1996, pp 230-244.

38.9.2. International Selection:-

A very crucial function of IHRM, selection of people of the parent company nationals for their home country operations placements is normally a general function carried out by the HR department. The selection of expatriates is even more crucial since it has to follow international recruitment & selection standards.

38.9.2.1 Expatriate Selection:-

This area is extremely complex & receives a lot of attention from the multinationals. Predicting future performance potential when hiring or promoting staff, especially in foreign environment is very difficult at the best of times. In this context, there’s a concept called ‘expatriate failure’ .This refers to the premature return of an expatriate from an international assignment. This may be due to a selection error or absence of proper training on cultural issues and self-adjustment. There are two major categories of costs associated with expatriate failure-direct cost & indirect cost. Direct cost include airfare & associated relocation expenses, salary & training costs. However, these cost precisely depends on

(a)  Level of position concerned

(b)  Country of destination

(c) Exchange rates

Indirect costs are harder to quantify but are often more expensive for the company.

38.9.2.2 Criteria for Selection:-

A chance of failure & the risk involved being high, the selection criteria for expatriate is a serious function of IHRM. Utmost care requires to be taken in selecting highly motivated people in terms of strong emotions & high level of competence.

The various factors that are widely accepted to have a major impact on the probability of success in international assignments are based on the model proposed by Dowling, Welch and Schuler(1999).

(i)Technical Ability:

The important parameter to judge any individual for a foreign assignment is the performance. Expatriate’s technical skills& managerial competency need to be judged during selection process meticulously to avoid incompetency at work after the posting. The competency demanded by the job need to be studied carefully, and based on the key competencies, proper matching has to be done.

(ii) Cross-cultural suitability:

Competency is not the sole criteria for success. An individual is able to perform well only when he gets acclimatized in the new environment, which might be in the opposite pole of the cultural continuum. Cross-culture ability is very important in determining effectiveness of the individual at work in foreign assignment.

(iii) Family requirements:

It is an established fact that spouse acceptability & comfortability toward foreign assignment is an important variable in determining the success of the expatriate manager. Worldwide dissatisfaction & lack of adjustment by the spouse has caused failure of expatriate manager.

(iv) Language:-

It is an effective communication drives. It has been seen that people having competency over the host country language have drawn better mileage than their counterparts having no language knowledge. Especially, People being posted in senior cadre management position in MNC subsidiaries should have the knowledge of the host country language.

(v) Country/Cultural requirement:-

The culture & employment policies of multinational companies have an influence over the selection & recruitment decisions. The company may have certain policies of recruiting certain percentage of people from the home country as expatriates according to their corporate philosophy.

Other situational factors influencing selection criteria:

1.  Negotiated agreement by the local partner may create some constraints to depute expatriates.

2.  Duration of the assignment will determine the selection decision.

3.  Amount of knowledge transfer inherent in the expatriate’s job in the foreign operation.

38.9.3 International Performance Management:

One of the most challenging aspects for a firm operating is an international environment is managing the performance of its various international facilities. Monitoring performance & ensuring conformance to agreed standards are important elements of IHRM.

Various constraints that may affect goal attainment are:-

38.9.3.1 Whole as against part:

A multinational company operates in different countries through its subsidiaries which function in a multicultural environment. As a result, the integration & control imperatives often place it in a position where it may decide that good of the whole is more important than one subsidiary’s short term profits.

38.9.3.2 Volatility of international environment:-

Global market is mostly dynamic & unpredictable in nature. Hence, the long term goal fixation & persuasion need to be emphasized rather than having extra ordinary importance on short term ups & down.

38.9.3.3 Variable levels of maturity:

Without the supporting infrastructure of the parent organisation, market development in foreign subsidiaries is generally slower & more difficult to achieve than at home. This is because at home, there are established brands that support new products & therefore, new businesses can be cross subsidized by other division.

Factors associated with individual performance and appraisal in an international context:

1. Compensation package:

Perceived financial benefits along with career progression potential associated with international assignment are often important motivating factors which drive the employee to accept international assignments.

2. Task (assignment variables & the role of the expatriate):

Four main expatriate task roles have been identified in the literature on IHRM against the following positions:

(i)  Chief executive officer (CEO) overseas the entire foreign subsidiary operation.

(ii)   Structure reproducer carried out the assignment of replicating the structure similar to the one in the parent country in the foreign subsidiary.

(iii)   Troubleshooter is normally sent by the parent company to a foreign subsidiary to analyse & solve a particular operational problem.

(iv)  operative performs functional job tasks in an existing operational structure & usually at lower level of the organisational hierarchy.

3. Headquarter’s support:

International assignments are different from domestic ones in many respects. One of them is due to the fact that the former involves relocation of the employee along with his/her family into a totally foreign environment.

4. The environment in which performance occurs:

The international context with its differing legal, economic, societal, technical & political demands are a major determinant of expatriate performance.

5. Cultural Adjustment:

The process by which an expatriate adjusts to the culture of the foreign country is extremely important. The longer it takes for expatriate & his/her family to adjust to the new environment, the most costly it is to the organisation as it affects their performance.

Every individual goes through a cultural adjustment cycle as shown in figure 38.4 while on an international assignment.

Source: H. De Cieri, P.J. Dowling and K.F.Taylor, 1991, The psychological Important of Expatriates Relocation on Partners, International Journal of Human Resource Management, 2(3), 380.

Phase 1: Just getting the offer throws stimulating emotions associated with pleasant excitements, anxiety, sense of adventure & range of positive & negative emotions.

Phase 2: The moment the initial excitement is over, the person encounters reality which gets translated to homesickness leading to possible negative appraisals of the situation & a period of crisis.

Phase 3: Slowly, the present work demands help the expatriate to gain motivation, who gets adapted to the new environment & begins to adjust.

Phase 4: As the person gets adjusted to the new environment, his performance improves & he is in a state of healthy recovery.

38.9.4 International Compensation Management:

When a firm develops international compensation policies, it tries to fulfill some broad objectives:

(i)  The compensation policy should be in line with the structure, business needs & overall strategy of the organisation.

(ii)  The policy should aim at attracting & retaining the best talent.

(iii)  It should enhance employee satisfaction.

(iv)  It should be clear in terms of understanding of the employee & also convenient to administer.

The employee also has a number of objectives that he wishes to achieve from the compensation policy of the firm:

(i)  He expects proper compensation against his competency & performance level.

(ii)  He expects substantial financial gain for his own comfort & for his family also.

(iii)   He expects his present & future needs to be taken care of including children’s education, medical protection & housing facilities.

(iv)  The policy should be progressive in nature.

Major components of an international compensation package are:

(i) Base salary:

This term has a slightly different meaning in an international context than in a domestic one. In the latter case, it denotes the amount of cash compensation that serves as a benchmark for other compensation elements like bonus, social benefits.

(ii) Foreign service inducement premium:

This is a component of the total compensation package given to employees to encourage them to take up foreign assignments. This is with the aim to compensate them for the possible hardships they may face while being overseas.

(iii) Allowances:

One of the most common kinds of allowances internationally is the cost of living allowance (COLA). It is typically involves a payment to compensate for the difference in the cost of living between the two countries resulting in an eventual difference in the expenditure made.

Approaches to International Compensation:

There are two main options in the area of international compensation:

(i) Market rate approach:

Under this, the base salary is linked to the structure in the host country. The multinational obtains information from local compensation surveys & decides whether local employees, expatriates of different nationalities will be the points of reference for benchmarking of the compensation.

Advantages:-

(i) It is a simple approach to follow.

(ii)  Identification with the host country is possible.

(iii)  Equality with local nationals.

(iv)  Equality amongst people of different countries.

Disadvantages:-

(i)  There is a possibility of variation in the compensations offered to expatriates from the same country in different countries.

(ii)  It can pose problem when the expatriate is repatriated back to his country where the salary structure is lower than that in the host nation.

(iii)  There is also a danger of variation between assignment for same employee.

(ii) Balance Sheet approach:

This approach tries to maintain relativity to parent country employee colleagues & compensating for the costs of an international assignment. The key assumption of this is that employees going for foreign assignments should not suffer any kind of tangible loss due to working in a new environment.

Under this approach, 4 main categories of expenditure incurred by expatriates are covered:

(a)  Goods & Services – home country outlays for food, personal care, clothing, household furnishing etc.

(b)  Housing – cost associated with housing in the host country.

(c)  Income tax – host country & parent country taxes.

(d)  Resources – contributions to savings, payments for benefits, pension contribution etc.

Advantages:

1.  Equity between foreign assignment & expatriates of the same.

2.  Repatriation of expatriates.

Disadvantages:

1.  Complicated to administer & involves high cost.

2.  Result in huge disparities between expatriates of different nationalities.

38.9.5 Repatriation:

Though the people face difficulty in acclimatizing & developing adjustment with the new culture of the new country, still they do not feel comfortable in quitting job & going back to the home country by accepting the failures. This happening creates more psychological frustration than continuing in the new environment. This phase in always treated as the final stage of expatriation process.

The repatriation process (figure 38.5) is divided into four related phase (Welch, Adans, Batchley & Howard, 1992):

(i) Preparation:-

It involves developing plans for the future & gathering information about the new position. The organisation may provide a checklist to the employee for all the steps to be followed before his return to his home country.

(ii) Physical relocation:-

This stage involves shifting the personal belongings, travelling to the next posting which usually is to the home country.

(iii) Transition:-

In this stage, the person starts the process of setting down in the new setting. This involves settlement of new house, education of the children, social adjustment with the new friends & colleagues.

(iv) Readjustment:-

It Involves coping with the reverse culture shock & career depends. This phase is very critical for the repatriates in terms of adjusting to the new environment.

Fig 38.5 Repatriation Process

Source: D. Welch, T.Adams, B.Betchley & M.Howard, 1992, “The view from the outer side: The handling of repatriation & other expatriation activities by the Royal Australian Airforce, Proceeding of the Academy of International Business Southeast Asia Conference, June, Brisbane.

Summary:

Globalisation is the process of extending business activities to foreign countries. It has significant implications for employment, HRD, compensation, labour relations etc. The model of international HRM comprises of three variables – HR activities, country of operation and type of employees. Thus, there are four approaches to international recruitment – ethnocentric, polycentric, geocentric and regiocentric.