International Human Resource Management Policies and Practices for Multinational Enterprises

International Human Resource

Management Policies and Practices for
Multinational Enterprises 5th Tarique
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 CHAPTER 2
Strategic International Human Resource
Management

CHAPTER OVERVIEW

Section 1: Strategic Context Chapter 2 Page 2

This chapter is about Strategic International Human Resource Management (SIHRM). While the
first chapter described the new global business realities and introduced IHRM, this chapter
describes international business strategy and how IHRM supports and enhances the international
business strategies of the firm. The chapter starts with a general description of the process of
international strategic management and then follows with an explanation of the evolution of
international business strategy and describes how IHRM fits into the overall strategic
management of the MNE. This includes describing the links of global business strategy to the
performance of HR responsibilities in international business and discussing the outcomes that a
strategically managed international business might expect from effectively tying together an
international business strategy and SIHRM. The chapter then summarizes the findings of
research studies on the nature and role of strategic IHRM.

LEARNING OBJECTIVES

 Describe the development of SIHRM and the process of international strategic

management.
 Describe the evolution of the MNE in terms of various stages of internationalization and
the methods firms use to enter international markets.
 Describe the process for developing MNE strategy and IHRM strategy and the
relationship between the two.
 The extent and nature of research into the practice of strategic IHRM.

CHAPTER REVIEW OUTLINE

I. Strategic International Human Resource Management: An Introduction

SIHRM is the part of IHRM that focuses on creating and implementing IHRM
policies and practices that help achieve an MNE’s international vision and
objectives, that is, its international strategy. It also involves the strategic
management of the IHR function and department itself.

II. Evolution of the Multinational Enterprise

As a firm internationalizes, it moves through stages and in each stage it must

make a choice of methods for market entry. An important point here is that as
firms pass through the various stages, they increase their degree of international
activity, and as firms increase their levels of international activity, their IHRM
responsibilities become increasingly complex.

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 A. Internationalization process and methods for market Entry within the five
stages

1. Stage 1

a. Portfolio investment

At the simplest level of involvement, a firm may just decide to make

financial investments in foreign firms, buying shares of stock, much as
it could do within its own domestic equities markets.

b. Exporting

Due to a foreign inquiry (often unsolicited) as to the possibility of

buying or selling the firm’s product(s) or the desire by the firm to
expand beyond its domestic markets, many firms begin to export their
products or services to foreign markets through the use of direct sales
to foreign customers (via direct mail or Internet sales, for example), or
they sell through import/export firms or through foreign distributors.

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 2. Stage 2

a. Sales subsidiary/local sales office

If foreign sales or purchasing increase in importance, a firm will assign

responsibility for international sales to a sales manager and/or
purchasing agent. This individual may travel to foreign countries in
which the firm has sales, but is likely to be chosen purely for reasons
of sales of purchasing experience or product or service knowledge.

3. Stage 3

a. Operations through licensing

In this strategy, the firm usually locates foreign firms that have the
experience to manufacture (and sometimes market) their products—
with minimal technology transfer, in order to bypass import duties and
to provide the simplest avenue to local sales.

b. Operations through franchising

Here the organization puts together a package of the “successful”

ingredients that made them a success in their home market and then
franchises this package to overseas investors. The franchisor may help
out by providing training and marketing the services or product.

c. Operations through contracting/sub-contracting

Increasingly, as firms manage their supply chains on a global basis,

they sub-contract all or most of their manufacturing to firms abroad, in
order to take advantage of lower labor and operating costs.

4. Stage 4

a. Wholly-owned subsidiaries

Subsidiaries can be developed in a number of ways, including through

greenfield or brownfield projects or through acquisition of existing
foreign-owned businesses. The development of a subsidiary through a
greenfield project involves acquiring an open (green) “field” in order

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 to build the subsidiary facilities from scratch. A brownfield project
involves the purchase of existing facilities (buildings) and developing
the subsidiary inside those facilities (sometimes referred to as a
turnkey operation). The third alternative is often seen as providing the
easiest access to new (foreign) markets and involves the acquisition of
an existing enterprise that is already established in the target country.

b. Maquiladora

A Maquiladora is a form of subsidiary with special characteristics

favorable to the foreign parents. These “twin plants” (one in the US
and one in Mexico) were established to attract investment and create
jobs in Mexico along the US-Mexican border, with the intention to
reduce the numbers of Mexicans entering the US illegally in search of
jobs.

5. Stage 5

a. Operations through international joint ventures (IJVs)

Two or more firms (at least one from each of at least two countries)
create a new business entity (the joint venture) with shared ownership
and managerial responsibilities. This entity is often created with
limited objectives and a planned limited life.

b. Operations through international mergers and acquisitions (IM&As)

One of the preferred market entry methods in both developed and

emerging markets in order to most easily consolidate the scope of
activities and the parent firms’ positions in the global marketplace.

c. Operations through international alliances, partnerships and consortia

These are defined as informal or formal partnerships or agreements

that do not result in an independent legal entity. Firms using these
methods do not necessarily replace their wholly owned subsidiaries.
But rather they develop less formal structures, such as alliances,
partnerships (e.g., in research and development projects), and other
forms of linkages to operate internationally.

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 B. Auxiliary methods of internationalization

Auxiliary methods refer to approaches firms can use to further internationalize

their operations at any stage.

1. Outsourcing (a form of subcontracting)

With the development of computers and the Internet, making long-

distance control easier, firms began to contract out other business
processes, such as information technology and business processes such as
call centers, accounting, claims processing, customer service, and data
analysis, to other firms in their home country and in other countries.
Typically, the initial reason for outsourcing to a third party (whether a
single function or an entire business process) was to reduce costs, but
improving quality (because the service provider specializes in the
outsourced function) and freeing company resources for greater focus on
core competencies have also become reasons given for outsourcing. The
term “outsourcing” was developed to describe this process of contracting
with an external firm to provide products or services that would otherwise
be completed internally.

2. Off-shoring

Differs from outsourcing in that it involves the relocation of one or more

aspects of a firm’s business processes to a location in another country for
the purpose of lowering costs. That is, the function is now performed by
an entity owned by the firm but staffed with foreign personnel in an
offshore location (although sometimes, at least some of the employees are
relocated from the home locale). This can include any business process,
such as operations, manufacturing, or services. So, the unit performing the
process in a foreign country is still a part of the parent firm and the
employees are employees of the parent.

C. The born-global firm

Frequently IT based, that almost immediately operate in key global

markets due to the nature of their products, global networking, and
possible partnering on projects of the engineers and scientists involved,
and marketing through the World Wide Web.

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 D. IHRM and the evolution process of internationalization

As firms increase their levels of international activity, their organizational

structures (discussed in the next chapter) and IHRM responsibilities become
increasingly complex. Some firms have used complete assembly or
manufacturing plants as their means of initial entry to certain countries,
normally to take advantage of cheap labor or sources of materiel,
manufacturing products for export, such as is often the case for American and
Asian firms in the maquiladora sector of the Mexican economy. Others have
internationalized through sub-contracting or licensing their manufacturing.
Still others have used franchising or joint ventures or partnerships to
internationalize. And still others acquire their foreign operations directly.

III. MNE Business Strategy

An MNE’s business strategy provides a direction for managing various

subsidiaries. The nature of an MNE’s business strategy is primarily guided by the
extent of integration and/or local responsiveness required by the firm to manage
its worldwide operations.

Integration is defined as the extent to which the subsidiaries and the headquarters
develop a unified whole and can thus provide the MNE with a variety of
competitive advantages such as economies of scale (being able to utilize all of the
firm’s global resources), improved quality, and standardization.

Local responsiveness is defined as the extent to which subsidiaries respond to

local differences, which involves the modification of products or services in order
to fully meet local customer needs, respond to local competition and culture,
remain compliant with various government regulations, more readily attract local
employees, and penetrate local business networks.

A. Types of strategic business approaches

1. International

International is the simplest business strategy, requiring limited local

responsiveness and limited integration. This is the type of strategy that
begins with export or import and may be limited to licensing or sub-
contracting. It typically involves no overseas offices or operations, other
than possibly small sales offices.

Section 1: Strategic Context Chapter 2 Page 8

 2. Multi-domestic

A multi-domestic approach responds to the high needs, values, and

demands of a local market is used mostly used by MNEs with a multi-
domestic organizational structure.

3. Global

An approach that uses a unified strategy implemented for all countries

regardless of their cultural and national differences.

4. Transnational

The transnational approach attempts to maximize responsiveness and

integration by being global and multi-domestic at the same time.

B. Headquarters’ international orientation and MNE business strategy

The orientation of senior executives usually referred to with terms such as

ethnocentrism, regiocentrism, polycentrism, and geocentrism. The key
strategic issue in these orientations (or mind-sets) is the degree of domination
of the MNE headquarters over subsidiary management and HR practices as
compared to the degree of localization of subsidiary practices.

1. Ethnocentrism

Managers use a home-country standard as a reference in managing

international activities.

2. Polycentrism or regiocentrism

Host-country cultures and practices assume increased salience for

managers.

3. Geocentrism

Managers’ outlook is one of creating a global network and a preference for

following an integrative and interdependent transnational strategy among
various elements of the global organization.

Section 1: Strategic Context Chapter 2 Page 9

 IV. IHRM Strategy

The creation and implementation of IHR practices that help achieve an MNE’s
international vision and objectives and involve the strategic management of the
HR function and department.

A. IHRM strategy formulation

For IHRM, the central trade-off pits pressures for centralization against the
need for decentralization.

1. Centralization (integration) vs. Localization (differentiation)

a. Centralization is very similar to the notion of integration and refers to

the concentration of authority and decision making toward the top
(HQs) of an organization.

b. Decentralization is similar to the notion of local responsiveness and

defined as the dispersion of authority and decision making to operating
units throughout the organization.

2. Convergence—the use of parent-company policies and procedures

throughout a firm’s global operations.

3. Divergence—cultural and institutional differences play a role in the

manner in which seemingly universal techniques and procedures (globally
applied) are implemented (in varying ways) within differing countries.

B. IHRM strategies and MNE business strategies

The overall effectiveness of an IHRM strategy is contingent on the context in

which it is used. An IHRM strategy’s effect on organizational effectiveness is
always dependent on how well the IHRM strategy fits with and supports a
MNE’s business strategy.

1. Autonomous IHRM strategy—low degree of global integration and high

degree of local responsiveness.

Each subsidiary has the freedom to develop and implement its own IHRM
policies and practices that support local rules and conditions.

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 2. Receptive IHRM strategy—high degree of global integration and a low
degree of local responsiveness.

Each subsidiary is tightly connected with headquarters with very little

freedom to adapt to the local conditions.

3. Active IHRM strategy—high degree of global integration and a high

degree of local responsiveness.

A MNE with this type of IHRM strategy is more likely have a transition
HR function with considerably more control over HR decision making
than autonomous IHRM strategy but less than in a receptive IHRM
strategy.

V. Research on SIHRM

The existing research on SIHRM has found that local culture and national
managerial orientation influence the nature of HR practice; that the degree of
global mind-set influences the nature of an MNE’s global strategy; and that global
strategy influences the degree of global focus in the HR strategy. In addition, it
has been found that following appropriate global HR practices—rather than only
using the parent firm’s HR practices—was associated with the later stages of an
organization’s life cycle (as the MNE matures) and with better organizational
performance.

A. Models/frameworks for understanding SIHRM

In an effort to understand the role of IHRM in MNEs, scholars and researchers

have suggested several SIHRM models or frameworks. The model has five
parts: 1) Strategic MNE components; 2) Exogenous factors; 3) Endogenous
factors; 4) IHRM issues, functions, and policies and practices, and; 5) MNE
concerns and goals.

B. Basic steps in SIHRM model

1. Strategic MNE components

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 a. Inter-unit linkages

How MNEs manage the different geographically dispersed operating

units and describes how they balance the competing pressures for
differentiation and integration.

b. Internal operations

How each unit operates within its local environment, laws, politics,
culture, economy, and society.

2. Exogenous factors

Forces external to the firm that are largely beyond an MNE’s control, but
can create challenges that affect an organization's IHRM issues, functions,
policies and practices.

3. Endogenous factors

Issues and concerns that are internal to the firm and include structure of
the organization, stage of internationalization, business strategy, and
headquarters’ international orientation.

4. IHRM issues, functions, policies and practices

a. IHRM issues are HR issues that result from the inter-unit and intra-
unit needs and challenges.

b. IHRM function includes the resources (time, energy, money) allocated

to the human resource department or unit, and the location of those
resources and HR decision making.

c. IHRM policies and practices involve the development of general

guidelines on how individuals will be managed and specific HR
initiatives or activities.

5. MNE concerns and goals

This part of the model can be defined in terms of utilizing and integrating
appropriate IHRM practices and policies that enhance overall performance

Section 1: Strategic Context Chapter 2 Page 12

 of the MNE on several criteria, both short term and long term. There are
five criteria:

a. Global competitiveness

How can IHRM policies and practices help provide competitive

advantage?

b. Efficiency

How much can IHRM help make the MNE more efficient by
delivering the most effective human resources that will deliver world-
class products and services world wide?

c. Local responsiveness

How much can IHRM help the MNE be locally responsive and
globally competitive at the same time?

d. Flexibility

How much can IHRM help the MNE be more flexible in adapting to
changing conditions—internal and external?

e. Organizational and Transfer of Learning

How much can IHRM facilitate learning and transfer of this learning
across geographically dispersed units?

VI. Conclusion

END OF CHAPTER DISCUSSION QUESTIONS

1. How has the multinational enterprise evolved? How have the changes in MNEs
affected IHRM?

The typical development of multinational firms has moved from very limited presence overseas
(exporting) to very complex and integrated presence (partnerships, joint ventures, acquisitions,
wholly-owned subsidiaries and businesses, subcontracting).

Section 1: Strategic Context Chapter 2 Page 13

Until recently, MNEs developed through simple exporting and sub-contracting. As the extent of
their overseas sales increased, they moved to more closely held business forms. With the advent
of the Internet and opportunities for e-sales, many Internet businesses (such as Amazon.com) are
“born global”.

The importance and complexity of IHRM increases with the complexity and global integration of
an MNE’s global business.

2. What are the various choices that MNEs have for entry into international business?
How do the functions of HR vary with these various choices?

See Discussion Question no. 1, and refer to figure 2.2.

The responsibilities of HR increase and become more complex with increased

internationalization. Refer to the discussion of the internationalization of HR in Chapter 1. In the
early stages, the use of expatriates evolves and takes on major importance in IHRM. As the level
of international business increases, the numbers and types of expats increases (and the IHRM
workload for managing them), and as foreign business ownership and the number of
international partnerships and joint ventures increase, MNE IHRM takes on additional
responsibility for local workforces, as well. Eventually, efforts to integrate foreign workforces
and managers with home-country workforces and management become a central focus.

3. What is the link between SIHRM and IHRM? Why is it important for IHRM to be
strategic?

The most important link between international strategy and IHRM is the degree to which the
firm pursues a localization strategy versus a centralization or standardization strategy. A strategic
emphasis on localization (a multi-domestic strategy) requires a localization strategy for IHRM,
with an emphasis on localized HR policy and practice, in every area of HR, from recruiting and
staffing, to training, to compensation and benefits, to labor relations and employee health and
safety. A strategic emphasis on centralization (referred to as a Global strategy, with emphasis on
integration of HQ policy with the local business) requires a large emphasis on use of expatriates
and international assignees in all locales of the business, developing a global mindset and a
headquarters’ focus throughout the business. A strategy to be as local as possible within the
context of an integration and centralization strategy requires HR to develop policies and
practices that are global in scope while being sensitive to local custom, drawing on the best
practices from headquarters as well as from throughout the world.

In order for IHRM to contribute to the global success of its firm, it must develop the
competencies to understand and execute practices in all areas of its responsibilities (e.g., staffing,
training, management development, compensation, health and safety and employee well-being,
union relations, etc.) and in all areas of the global business that support the global strategy of the
firm.

4. How does IHRM strategy vary with an MNE’s business strategy?

Section 1: Strategic Context Chapter 2 Page 14

When an MNE’s business strategy emphasizes globalization, with increased use of international
assignees, the need for executives with a global mindset, the use of a global workforce, and
operations in dozens of countries, IHRM must develop its own competencies to support such
strategies. It must grow from a purely domestic focus and skill-set to a truly global focus and
mindset. As the first two chapters point out, the global skill-set for IHR is very different from
that required in a domestic HR focus.

5. What are some of the IHRM challenges faced by a MNE with a transnational business
strategy?

Refer to Figure 2.4.

Transnational strategy implies geocentric mindset, taking advantage of global knowledge and
technology while adapting to local culture and values. IHRM plays an important role in
developing the global mindset while ensuring that local practice and values are accommodated

6. What are the pros and cons of centralization and decentralization of the IHRM
function?

Centralization takes advantage of standardized policy and practice; decentralization takes

advantage of local cultural values and differences. There is no easy answer to which strategy is
best—it all depends. Refer to Figure 2.6 to see the many variables that influence IHRM. The end
result is that there are both pros and cons to each of these strategies. The examples in this
chapter illustrate how these different factors influence IHRM as organizations become
increasingly global in focus.

END OF CHAPTER CASE

Case Study 2.1: The Early Evolution of Manufacturing Firms: Ford Motor Company goes
International (USA)

This is a general case study. Instructors are encouraged to use this case to allow students to
examine the automobile industry with which they are familiar—from their own countries, their
own experiences. It provides a great example of the evolution of international business as well
as IHRM in parallel with that evolution.

For instructors who need guided questions:

1. What are some of the reasons that HRM tends to develop at the local level in the
international expansion of firms like Ford Motor Co.?

 Each country has its own set of employment laws and laws related to social security
systems and related taxes; it is not likely that HQs have the expertise, initially, to
ensure local compliance with these foreign laws and regulations.

Section 1: Strategic Context Chapter 2 Page 15

  HR practices in each country will have evolved based on local culture and tradition;
only HR managers with training and experience in the local HR practices and laws
will have the necessary knowledge to be effective and legal.
 So, it is usually seen as easier to use local HR managers than to try to develop the
needed expertise in-house at headquarters—or even to hire it from headquarters.

2. Are there other alternatives?

 Companies can outsource HR practices to consultants or vendors that specialize in

various aspects of HR, e.g., payroll, staffing, taxes, labor relations.
 Given some time, it is possible to develop such expertise in-house.
 It is also possible to “hire” such expertise to be centralized from HQs, that is,
recruiting HR managers with the necessary experience.

3. What HR issues arise when a firm like Ford moves to regional and then global or
transnational structure?

 Questions arise as to centralization versus localization of HR practices (obviously,

local employment laws must still be followed, no matter the HQ strategy).
 This issue will be addressed on a frequent basis throughout this text, as each area of
HR responsibility is addressed: can it be standardized or does it need to be highly
localized to fit strong cultural and legal differences?
 As the MNE first regionalizes and then moves to an increasingly global and
transnational strategy and structure, debates over such standardization versus
localization become increasingly strong. Because of the nature of HRM, there are
strong pressures in both directions, often resulting in practices that combine these two
foci.
 Many of the cases in this text show various components and practices related to this
debate over centralization versus localization.

© 2016 Taylor and Francis

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