Effects of Country of Origin on HRM in Multinational Companies from Emergent Market - Research Paper Example

Student’s name Course code+name Professor’s name University name Date of submission Contents Contents 2 1.0.Introduction 2 2.0.Country of Origin Effect 6 3.0.Effects of Country of Origin on Human Resource Management Practices 9 3.1. Control of subsidiaries in emergent markets 10 3.2.Control of subsidiaries in emergent markets: case study from Indian Multinationals 11 3.3. Internationalisation of emerging economy 12 3.4.Adoption of control and coordination mechanisms 13 4.0.Existing Empirical Studies 13 4.1.Empirical studies on Management Practices and Country of Origin 14 5.0.Discussion 17 6.0.Conclusion 19 7.0.References Lists 21 1.0. Introduction Going by the statement from Almond (2011), managers have been pondering how countries such as India and China will disrupt industries, workforces, companies, and markets. Research on MNCs has tended to be focused on those from developed countries establishing subsidiaries either in other developing economies (best known as emergent markets) (e.g. Japan, India, Africa among others) or into developed economies (e.g. the U.S.A and United Kingdom). While this continues, in the past three to four decades, international management literatures have been concerned with two central and recurring debates: on the macro (country level), there has been the so called divergence vs. convergence debate. This debate has remained a key point of controversy in cross-cultural management. Secondly, there is the meso (company level) which brings the aspect of localisation vs. stanadardisation debate. This has been the central issue in the literature regarding multinational companies from emergent markets. Based on this debate, there have been theoretical frameworks suggested with attempts to relate country of origin and human resource management on multinational companies from emergent market. More recent studies on multinational companies from emergent market have focused on the influence of the home country on HRM strategic choice and its practices on the overseas subsidiaries (Chang et al., 2009; Thite et al., 2012). This is understood to be “the country of origin” (Becker & Gerhart, 1996 p.23). Most researches have only focused on the existing difference between national models instead of mentioning on the process by which the country of origin affects HRM strategic practice and choice (Becker & Gerhart 1996; Björkman & Park 2007). In as much, contemporary scholars in this field begin to suggest that companies operating in multiple nations realise that the environment for human resource management can differ significantly but in important ways (Engle & Festing, 2008; Evans et al., 2002; Bloom et al., 2003). In contrast to the idea that, depending on the situation, either localisation or standardisation to varying degrees may be effective, now there are academic works that support the fact that country differences, national culture to be specific, are so significant that multinational companies from emergent market will typically be constrained to follow localisation strategy. Further, researches continue to focus on the Multinational Companies (MNC’s) from what seems to be advanced economies but yet to establish how the country of origin can influence strategies used by MNCs from emergent markets or developing countries and such have a large cultural difference from the host country. This is particularly relevant to the case of subsidiaries of Japan or Chinese MNCs in operation in western countries such as United States of America or United Kingdom. Comparative study by Collins (2001) on the effects of foreign companies investing in Africa and China continues to draw mixed reactions. He concludes that significant national differences between western countries and the emergent markets affect the transfer of management. His arguments are embedded on two issues: Direct comparison between western companies and African companies to explore the effect of institutional and cultural differences on human resource management. Another issue is the comparative study of western companies that invest in emergent market using local companies to explore the effects of national cultural features on HRM practices. He also concludes that transfer of HRM practices is not only impactful but difficult especially if it is moving to emergent market. Collins (2001) has restricted view on the effects of country of origin on human resource management in multinational companies from emergent market. His studies (Collins & Porras 1994; Collins 2001) have based their findings merely on the effect of different national characteristics on HRM transfer and strategy in the emergent market. However, how these distinctive national differences in HRM have influence on emergent markets operating in foreign or established markets have not been fully captured. In a more general term, what is available are researches reflecting deficiency in most cross cultural management and these continue from developed market point of view rather than international perspective. Combs et al. (2006) and Hofstede (2001) have identified need for researches that are going to focus on Australia, Africa, Japan the Pacific Rim and other sectors. Even though the effect of the country of origin on human resource management in multinational companies from emergent market is significant to understand, not all evidences point in the same direction. For instance, Kozlowski & Klein (2000) conducted an assessment comparable to that of Combs et al. (2006) and Hofstede (2001) for companies with subsidiaries of MNC’s from United States and Japan. In contrast with previous studies, they realised that only limited differences in human resource development practices associated with the parent company’s national origin existed. Furthermore, this findings conforms to that of Laurent (1983) who realised that American and European MNCs studied adopted what he termed as standardised performance management practices and policies both overseas and home country subsidies practices. Tregaskis & Brewster (2006) on the other hand explain that although MNCs continue to be firmly embedded in, and strongly influenced by, ‘their country of origin’ to emergent markets (p 132). In can be understood that much of these researches have one thing in common, focusing on in-depth studies which is limited in number of countries thus not allowing systematical comparison existing between localisation, country of origin and dominance effect. This study therefore builds from this perspective to employ a very carefully matched design in which it investigates the effects of country of origin on human resource management in multinational companies from emergent market. Based on large scale samples of multinationals as well as subsidiaries from different markets, the study will test the extent to which HRM practices in subsidiaries are characterised by country-of-origin. 2.0. Country of Origin Effect The country of origin effect remains to be ill-defined term so far. As a result, authors have not been specific and discuss extensively diverging phemomena as example of the effect. In their explanation they continually refer very different and involving mechanisms that produce the effect. In order to give this research streamlined discussion that will be in accordance with its thesis statement, there is a need to delineate understanding of the country of origin effect. In this respect, understanding country of origin effect needs to be given even in-depth analysis. Doing this will need discussion of two significant distinctions: first, the distinction existing between phenomena at the level the person or individual subsidiaries and phenomena existing at the level of the MNCS’s as a whole. Secondly, the distinction between the effect of MNCs policies and subconscious influences. Again, failure to clarify whether the country of origin effect pertains to the overall policy of the MNCs or to features of the subsidiaries may make the research risks falling into circular explanations in which the country of origin effect is seen as influencing itself. Therefore, understanding country of origin effect needs to be approached from the perspective of phenomena at the level of the MNCs as a whole. To begin with, Trompenaars & Hampden-Turner (2000) put forward a concept of country of origin effect in three elements: first, cultural values and institutional norms. Second is the economic and physical resources and lastly, the national government’s economic and industrial policies. However, it sounds counterproductive to combine three radically different factors in a single concept of “country of origin.” Secondly, given the fact that country of origin effect is regarded to work through the administrative behaviour of country of origin nationals working for the MNC, main mechanism for durable country of origin effect can then be said to be the continued hiring of country of origin people or nationals, even in the event the concerned firm operates in other countries. Actually, this extends to emergent market and the continued hiring of home country labour for key management posts is the first interpretations through which the country of origin effect can well be understood. Thirdly, there has been an administrative preference from multinational companies or the home-country nationals that for long have spread the MNC---and to larger extent, dominate top management. Such dominance has also been embedded in organisational process, procedures and structures. Talking about structure, it is now easy to integrate definition of country of origin effect. Structure of a multinational company has can be seen as the crystallisation of the power relations within the corporation (Tsui et al. 2007; Tsui et al. 2006). Therefore, when these companies move to acquire emergent market elsewhere, it becomes difficult to change the structure or culture. At this juncture, country of origin effect becomes the international application of nationally-inherited administrative approaches so as to sustain the culture or structure of the company. While that is the application of country of origin, Yeganeh & Su, (2006) explain that its effect is realised when the use of homegrown administration is counterbalanced by other forces different from country-of-origin. While the analyses above form one perspective of understanding country of origin effect, traditionally, the country of origin effect has been looked into with the Japanese foreign establishments (Zhou & Martocchio 2001; Tukey 1991; Lado & Wilson, 1994). However, the country of origin effect has gained renewed interest in America, United States and Ireland. These countries represent cases where the MNCs foreign direct investment has been rife. While one group of scholars look at country of origin effect from the two perspectives highlighted earlier in the text (divergence vs. convergence debate), this group have two distinctive conceptual levels in analysing country of origin effect. The first level can be understood to be the influence of MNC’s on the IRs and local HR practices (Kristof-Brown et al. 2005). The other is the analysis of the existing differences between IR and HR practices between countries of origin (Hofstede & McCrae 2004). The two levels therefore give one understanding, that there is difference between HRM and IR strategy as it exists between various countries of origin. To give this assertion an alternative explanation, Hofstede & McCrae (2004) refute the country of origin effect in non-union recognition practice and argue that it can be understood as a sector specific phenomenon of “electronics sector” (p 28). What Hofstede and McCrae try to explain is that investment made for the cost advantage, the MNCs tries to take advantage of the cost competitiveness of local environment, and it is more likely that the headquarters tend to impose the HRM and IR practices proved as efficient in their home country. All these explanations tend to focus the definition of country of origin effect towards the strong impact multinational companies have on management practices in their foreign subsidiaries, actually through their ethnocentric or rather national systems strategy. Ethnocentric approach as explained by Cooke et al. (2011) is the situation where MNC’s successfully transfer country of origin management practices into the emergent markets. The understanding of country of origin effect is the use of expatriates by the parent company but with this approach, there has been tendency to standardise management policies and this is where the aspect of ‘effect’ with regard to country of origin comes in. As discussed earlier, management preferences of the home country workers will ensure the culture, structure and procedures of the organisation is respected in their emergent markets or foreign subsidiaries. The ethnocentric approach as adopted by Treasury Wine Estates (in Australia) and The Coca-Cola Company are based on the aspect that management can be transferred from the country of origin to foreign subsidiaries. Through ethnocentric, MNC parent company is mandated to gain full control over practices and management duties of its emergent market or foreign subsidiary. When such happens, the effect of country of origin is implemented. In fact, Farndale et al. (2010) argue that the effect has always been reflected in centraliasation of management authority. According to their study, in every 20 MNC’s sampled, at least 14 exploring emergent markets elsewhere have management board being of nationals of the home country. To imagine to what extent this is true, Barney as cited in Adler (2002) explains that five of the largest 30 United States MNC’s had a foreigner on their board. This way, the effect of country of origin is understood to be prolonged culture, trainings, management traditions and organisational structures which conforms to practices from country of origin. 3.0. Effects of Country of Origin on Human Resource Management Practices The growing significance of emerging economies has facilitated upsurge of strategy research on the effects of country of origin on human resource management practices in the established markets Wright et al. (2005) and Barney & Wright (1998). While there has been growing recognition of research on this area and with respect to some relatively advanced economies such as Taiwan, Japan and Singapore (Glover & Wilkinson, 2007; Chang et al 2009b) effects of country of origin on human resource management still remains contentious. Previous research on MNCs has identified that there is pressure for these companies to come up with one single unit of operation that will ensure HRM practices in foreign subsidiaries are similar (Farley et al. 2004). These researches have been concerned with exploring the issues linked with the transfer of HR practices across borders within MNCs. As Chang et al. (2007) note, the continued diffusion of HRM from parent country to the emergent markets has been impactful in a number of ways. Researchers continue to explore these effects and the suggested do not exhaust the list. 3.1. Control of subsidiaries in emergent markets Human resource management in foreign countries have been for long exercising a degree of control over their subsidiaries to ensure the resources of the company are directed towards achievement of the main objectives of the MNC (Harzing & Sorge 2003). Control is defined as the situation in which HRM ensure their subsidiaries operate within a certain framework as suggested by headquarter so as to attain overall goal of the company. According to Au (1999) effects of country of origin on HRM practices circles around instituting mechanisms that ties the operations and decisions within and across components into a larger whole and establish coherence of meaning and purpose within the larger enterprise. Unlike in their country, the effects of country of origin on HRM practices can be argued based on the suggestions made by Zhang et al. (2008). They argue that the effect circles around the utilisation of knowledge obtained while operating in the developed markets. In so doing, managers in the newly established markets tend to ignore business practices within the host country. That is, the managers will strive to adopt polycentric or adaptive approach to management in the emergent markets. This is what Edwards & Rothbard (2000) refer to as adoption of low internal consistency with the rest of the firms within the host country and high external consistency with the external environment which is the parent country or country of origin. Becker & Huselid (2006) further suggests that the effect goes beyond hiring host country managers with local experience and transfer of practices both ways depending of the option that works better for the realisation of the continuity of the MNC’s key objectives. 3.2. Control of subsidiaries in emergent markets: case study from Indian Multinationals Between 2004 and 2010, human resource management practices have been greatly affected due to control of subsidiaries in its market by MNCs. According to research conducted by Sirkin et al. (2008), seven Indian multinationals that featured in Global Fortune 500 and twenty that featured in Boston Consulting Group’s BCG 100 new Global Challengers revealed that key to the success is to ensure that HRM practices in foreign countries conforms to the parent country. Bliese & Halverson (1998) also show that Indian firms have been showing that HRM practices prefer overseas management team while entering new markets. Alpha Services is one of the top five Indian consulting and IT services companies with a turnover of about US$ 2.5 billion from its operations in over 44 countries that employ around 45,000 professionals (Pradhan 2007). During in-depth, semi-structured interviews conducted with 12 senior managers of the company at three locations its headquarters in India, and Shanghai, China (representing a developing market) and subsidiary office in Melbourne, Australia (representing a developed market). The interviewees were 6 human resource (HR) managers and 4 business heads in India (the headquarters); 4 account managers in charge of key clients in Australia and the HR Head of the Asia Pacific region based in Singapore and the country head, HR head and 3 business managers in China. The research indicates that effects of country of origin on human resource management practices vary depending on the host country and other competing factors. With Alpha Services, such effects included complete change in the organisational structure and systems. 3.3. Internationalisation of emerging economy While studies try to discuss how country of origin brings about internationalisation of emerging economy through HRM practices, available materials on emerging markets predominantly approach the issue through institutional theory, transaction cost theory, resource-based theory and agency theory (Wright et al. 2005). While in the past, internationalisation of the emerging economy in countries such as Japan and Korea was attributed to Greenfield expansion. However, effect of country of origin on human resource management has diversified emerging economy. That is, HRM practices from foreign countries brings about access to the most dynamic growth markets in the world with a vast pool of low cost resources like production workers, natural resources and engineers (Wright et al. 2005). Internationalisation of emerging economy, has affected countries such as India and Singapore. In the process, emerging economies, decision making and control, and organisational structure and culture is made to conform to international practices (Pradhan 2007). 3.4. Adoption of control and coordination mechanisms If the degree of integration between the host country and headquarters is high, it therefore translates that there is higher level of control and coordination required. One effect of country of origin on human resource management practices is the adoption of control and coordination mechanisms. With respect to the external influencing factors, HRM practices from emerging markets have been facing a double hurdle of liability of foreigners and liability of country of origin with perceived poor global image of their home country (Contractor et al. 2007; Arndt & Geri, 2006; Chang et al. 2009a). These constraints faced by MNCs are further accentuated by liabilities of smallness and newness. Furthermore, HRM practices in these countries have been faced with the problem of trying to deal with the liability and competitive disadvantages faced from being latecomers lacking the needed resources and capabilities. This is the reason why such practices will have to adopt control and coordinate mechanisms. Further, the coordination and adoption need integration which has been influencing operations between headquarters and subsidiaries. Similarly, with respect to international influencing factors, the strategic practices as applied by HRM in foreign host countries include control and coordination through streamlined leadership, organisational culture. 4.0. Existing Empirical Studies Empirical studies on the effects of country of origin on human resource management in multinational companies from emergent market has basically focused on country of origin and its major effects on human resource management practices. Further to this, a number of literatures available have noted the influence of country of origin on HRM strategic choice and practices on MNC’s (Arndt & Geri, 2006; Chang et al. 2009a). These, according to Bloom & Milkovich (1999) have mostly concerned ethnocentric strategy or the process of forward diffusion. Contemporary scholars have started shifting attention and showing that MNC’s now draws attention to the influence of the home country on HRM strategic choices and subsequent practices in overseas emergent markets (Ax & Bjornenak 2005). This is basically what they now call “the country of origin effect.” Based on the new interpretation of the meaning of “the country of origin effect” Almond (2011), Bhagat & McQuaid (2004) have began focusing on the existing difference between national models instead of explaining the process by which the country of origin influences HRM strategic choices and practices in the emergent markets. Furthermore, instead of seeing a more focused research on the effects of country of origin on human resource management in multinational companies from emergent market, what is widely seen are researches that have been concentrated on MNC’S from advanced economies and what is even missed from such researches is how the country of origin influences strategies used by MNC’s from emergent markets that are operating in established markets. An interest has begun emerging with scholars from host countries. There is belief that significant national differences create problems of the transfer of management between the countries of operation (Chatman & Jehn, 1994; Cohen 1999; Combs et al. 2006; Chatman 2000). 4.1. Empirical studies on Management Practices and Country of Origin Previous studies on country of origin and HRM practices in the host country have either focused on a limited range of practices or countries. Some researches related to the emphasis placed to the use of a given measures of HRM tools (Collins 2001) realises that nationality of multinational corporations across Ireland, Australia, Malaysia and Singapore influenced the degree of performance metrics used in the hosting country. For instances, Dawis & Lofquist (2001) recognise that country of origin has affected HRM practices in the manner that business and customer services index in enhanced. America and European organisations for instance placed more importance on financial performance measures than Japanese companies but Japanese companies placed more emphasis on business and customer service indices (Dawis & Lofquist 2001) Some literatures argue that the choices of HRM practices in host country circles around capital investment (Hofstede & Bond 1999). For instance, Australian and UK companies have preferred payback practices compared to Japanese organisations which has been using preferred rate of return, while American companies operating in host countries uses payback to supplement discounted cash flow models (Vacha-Haase et al. 2000). On the other hand, some countries such as American have adopted planning and administrative capital budgeting procedures (Vandenberghe 1999). Yeganeh & Su (2006) studied three MNC’s management practices in three different countries; their research explain that companies from America and United Kingdom used more strategic management control as practiced from the country of origin. This is different compared to practices executed by Canadian and German companies operating in new markets. This opinion has been disputed by Björkman & Park (2007) explaining that American, Canadian and German used strategic management control but the level differed. However, these companies lagged behind multinational companies especially in Singapore where there was long-term planning and budgeting. 4.2. HRM Practices Constrained to cultures of Country of Origin The literatures on HRM differences in most countries are sparse and a tendency to equate any country difference with that of culture differences. Further to this, the literature on HRM practices in the emergent markets focus on single country and such are measured on a single respondent from the particular MNC. Zhou & Martocchio (2001), in a study of 20 U.S. based affiliates of foreign-based MNCs, concluded that “in general affiliate HRM practices closely follow country of origin but with time adopt practices” (p 229). This conclusion was based on asking affiliate companies to make comparison of their HRM practices in at least four markets they currently operate. The difference in the mode of practice was established on a three-point scale (1 = identical to 3 = very different). The mean difference from the four identified foreign practices was compared with those within the country. They realised that foreign practice was 1.5 versus a 1.8 difference from the parent MNC practice. Whether a difference of 1.5 versus 1.8 on a 3-point scale supports the conclusion that localisation dominates is, I believe, open to question. After the recent economic meltdown, researches have begun arguing that development of human resources within an organisation is strongly linked to the national context within which the organization operates. To underscore this claim, research by Tregaskis & Brewster (2006) made a comparison by using three staffing practices as used by HRM in host countries by five European countries. The data used was the 1999, 2003 and 2004. They realised that the variance explained by country in the 1999, 2003 and 2004 was 21 % in 1999, 15 % in 2003, and, mostly recently and perhaps most relevant, 11 % in 20004. In fact, bringing Cohen’s benchmarks as explained by Tsui, et al. (2007), this will be a medium effect size. Unlike previous discussions that have narrowed to specific countries in analysing the effects of country of origin on human resource management in multinational companies, Tregaskis & Brewster (2006) provide estimates of country effects, but not of national culture effects. In short, what their research argues about is that the effect of any given characteristic of country on HRM practices in emergent market need to be the same size if not smaller than overall country effect. 5.0. Discussion In sum, the literatures reviewed and empirical results discussed partially support the effects of country of origin on human resource management practices in the emergent markets. In fact, what exist are the effects when MNCs operating in emergent markets are faced with choice between profit making and mixed strategies to implement. The findings in these literatures raise some interesting issues to be discussed. And in so doing, a number of reservations to this study has been identified and should be mentioned. To begin with, the research has realised partial adjustment values and practices in HRM activities of MNCs from strong economies such as United Kingdom and Australia. These adjustments are as a result of the need from such companies to realign themsleves with the new environment (host country). However, it needs to be noted that there are certain practices that were less important to be adopted and a particular case regards characteristic values found in HRM in Japanese firms. Some of the practices included universalism values. On the other hand, social orders have been documented to be more important. This partial adjustment means the presence of a given local responsiveness to the values implicit to some countries such as Australia and U.S HRM, as well as a partial country of origin effect. The information presented by this research gives an evidence of changes in values in HRM practices of MNCs firms in emergent markets such as India and to some extent Japan. As mentioned earlier, empirical literatures analysed raise some concern. At the outset, there are significant discrepancies and difference in the process of choosing HRM practices by the MNCs operating in emergent market. And these differences and discrepancies are prevalent with countries such as America and Australia subsidiaries. The effects of country of origin on human resource management in multinational companies from emergent market can be summed as the choice between local and mixed strategy. That is, mixed strategy makes MNCs to be faced with urgent need to react to environmental pressure, and this may explain why companies operating in emergent markets have to make choices determined by their countries of origin. Similar to other literatures that have been reviewed, this research realises that there are apparent differences of choosing HMR practice strategy between Australia, United Kingdom and America subsidiaries. It has also been realised that more companies which have been found to be successful had more bargaining power with their parent companies. In this regard, the attitudes of HRM in the emergent markets have more effect in the area of performance and work organizations. Further to this, the characteristics of top expatriates, to be specific their international management experience and abilities are key issues which have been limiting the absorption of host country/local practices. It needs to be noted that some of the companies this research has identified are state-owned. Since governments play bigger role in terms of their operation, they not only have strong financial base but also autonomy in engaging business activities from international markets. This promotes diffusion of culture and practices from country of origin to the newer markets. The implication this has is that HRM practices in the emergent markets will be dictated by government policies from the country of origin. As mentioned, this research has a number of reservations that needs to be highlighted. To begin with, the data analysed tend to be focused on only a few MNCs and not for others. Unfortunately, there are few other surveys can make a representation for others. Secondly, the scope or extent of the study needed to be wider and extensive than presented since a number of HRM practices in the emergent markets were not reflected in the study. This translates that the overall comparison with regard to values could change especially if other practices are included. Overall, this study presents a valid argument regarding the effects of country of origin on HRM in MNCs from emergent market. 6.0. Conclusion This study demonstrates far greater analysis and complexity in the effects of country of origin on HRM in MNCs from emergent market than previous analyses have argued. Nevertheless, owing to the fact that there is clear evidence of the influence of the country of origin on HRM practices in the emergent markets, reaching internationalisation of HRM strategies and practices is still far from being reached. That is, there are barriers to the standardisation of “good” HR practice in the management of workforces across national boundaries. Further to this, though empirical findings are not as consistent as they should, this research concludes that there is growing recognition of the influence of the country of origin on important aspects of MNCs. Such inconsistencies have been brought by the fact that the concept of country of origin effects and its relationship with HRM in the emergent market have been ill-defined. In defining or understanding the country of effect, this research has confined itself to the differences in the internationalisation strategies and international control strategies of MNCs that can be ascribed to the different national origins of these MNCs. It will be of practical significance, as the country of origin effect, as it has been outlined in this research, portrays itself largely undeliberately through decisions managers make and influenced by taken-for-granted institutional influences and cultural values. Making this research responds to these biasness and influences increase the possibility of making or shaping MNCs management to reflect the requirements of the environment, instead of the existing or historical country institutions and culture. 7.0. References Lists Adler, NJ 2002, International dimensions of organizational behavior. Cincinnati: South- western, 4th edition. Oxford University Press, Oxford. 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