Chapter 21

Human Resource Management





!          Illustrate the importance of human resources in international business.

!          Explain the unique qualifications of international managers.

!          Evaluate issues that arise when companies transfer managers abroad.

!          Examine companies’ alternatives for recruitment, selection, compensation, development and retention of international managers.

!          Discuss how national labor markets can affect companies’ optimum methods of production.

!          Describe country differences in labor policies and practices.

!          Highlight international pressures on MNEs’ relations with labor worldwide.

!          Examine the effect of international operations on collective bargaining.



Chapter Overview


Firms the world over agree on the importance of qualified personnel to achieve their foreign growth and operational objectives. Chapter 21 broadly deals with two primary human resource concerns. The management discussion begins with an overview of specific international management qualifications and characteristics; it then explores the advantages of transferring and promoting home country vs. expatriate vs. third-country managers, plus the associated issues of compensation and repatriation. The chapter concludes with an exploration of international labor concerns, including comparative labor relations issues and the role of the MNE in the collective bargaining process.



Chapter Outline


OPENING CASE: Dow’s International Management Program [See Map 21.1]

Founded in Michigan in 1897, Dow Chemical is today a global science and technology-based firm that develops and manufactures chemical, plastic and agricultural products and services for customers in 170 countries. Nearly three-quarters of Dow’s top-level management committee members either were born outside the U.S. or have had extensive foreign experience. Dow’s operations include eight global businesses that rely on 208 manufacturing sites located in 38 countries; more than half of its nearly $28 billion in annual revenues comes from foreign markets. Making international operations an integral part of the firm’s mission required Dow to seek the serious commitment to international business from a broad spectrum of corporate and country managers over a period of more than 20 years. Finally, in the mid 1990s, Dow was able to dismantle its geographical/functional organizational structure and replace it with a global business model. Dow now encourages managers everywhere to learn from top-caliber people and from best practices throughout the world. Every manager is part of a global team with opportunities to take on responsibilities with a scope that transcends national borders.


Teaching Tip: Review the PowerPoint slides for Chapter 21 and select those you find most useful for enhancing your lecture and class discussion. For additional visual summaries of key chapter points, also review the figures and tables in the text.


I.                   INTRODUCTION

In order to determine their human resource needs, hire qualified people, motivate employees to excel, upgrade their employees’ skills and ultimately retain their best people, MNEs increasingly invest in the development of their global intellectual assets. These assets include human capital (the knowledge each individual possesses and generates) and organizational capital (the knowledge institutionalized within the structure, processes and culture of an organization). Factors that cause international human resource management to be more complex than the domestic function include: labor market differences, international worker mobility problems, national management styles and practices, national orientations and strategy and control issues.



International management qualifications and characteristics primarily revolve around corporate philosophy, strategy and objectives.

A.                Headquarters-Subsidiary Relationship

International management is a two-tiered process that must accommodate the trade-offs between the competing requirements of global integration and national responsiveness. Thus, corporate and subsidiary managers alike must consider global and local needs and resources. The trade-offs are complex and depend on (i) basic corporate philosophy (ethnocentric, polycentric, or geocentric) and (ii) the operational benefits to be derived from a more independent vs. a more interdependent relationship between corporate headquarters and local subsidiaries. In addition to recognizing when and when not to introduce certain practices at the local level, international managers must be able to communicate effectively at all levels. While online collaboration technologies are enabling more efficient decision-making cycles, communication difficulties will always arise when functional languages differ. Although English has to a large extent become the international language of business, cultural differences subtly color the intentions and perceptions of messages. Further, in the aftermath of recent terrorist attacks, international businesspersons have been constrained in their abilities to develop important personal relationships with colleagues, customers, suppliers and other stakeholders in foreign locations because foreign travel has been severely curtailed by governments and companies alike.


B.                 Matching Style to Operations

Evidence suggests greater success can be achieved when managerial actions and styles are congruent with subordinates’ preferences and expectations. When a need exists for greater cross-border integration, humanist (relational) managers are apt to be more effective than a more analytical type of manager; cooperation is enhanced when managers take into account the perspectives of people who can either expedite or impede integration. While MNEs that follow a multidomestic strategy do not need to transfer human resource competencies from one entity to another, those that follow a global strategy will, so far as is possible, transfer home-company policies and practices to their foreign units. Those MNEs that follow a transnational strategy will transfer best practices to all operations in all countries, regardless of where they happened to originate.


C.                Qualifications Specific to Headquarters and Subsidiaries

Both corporate and subsidiary managers have responsibilities that generally differ from those of home-country managers at similar organizational levels.

1.                  Headquarters Management. Corporate managers with international responsibilities must frequently interact with high-level authorities and executives in foreign countries to negotiate investments, sell technology, evaluate new market opportunities, assess monetary conditions, etc. Because they often must be away from home for extended and indefinite periods of time, their jobs tend to be very difficult and demanding.

2.                  Subsidiary Management. Foreign subsidiary managers usually have broader duties than do managers of similar-sized home-country operations. In addition, subsidiary managers must work more independently because of their limited access to staff specialists.



Managers are either locals, i.e., citizens of the countries in which they work, or expatriates, i.e., noncitizens. Further, expatriates are either home-country nationals, i.e., citizens of the country in which the firm is headquartered (chartered or incorporated), or third-country nationals, i.e., citizens of neither the country in which they work nor the headquarters country. In actuality, locals rather than expatriates fill most managerial positions in both corporate headquarters and foreign subsidiaries.

A.                Reasons for Staffing with Locals

Foreign managerial slots may be difficult to fill because (i) many managers prefer not to work abroad for personal and/or professional reasons and (ii) firms encounter legal impediments to the use of expatriates (such as professional licensing requirements). Those who choose to accept a foreign assignment may be given either a fixed-term or an open-ended assignment. The greater the need for local adaptations, the more advantageous it is to employ local managers. Furthermore, when a host-country is suspicious of foreign-controlled operations, local managers may be more readily accepted. In addition, local managers may cost less than expatriates, both because local wages may be lower than in the headquarters country and because relocation costs can be avoided.

B.                 Reasons for Using Expatriates

Although expatriate managers comprise only a minority of total managers within MNEs, firms use expatriates because of their competence, their need to gain foreign experience, their need to refine their business skills and their ability to manage operations according to corporate preferences. To some extent, a country’s level of economic development determines the availability of qualified local candidates; another factor is a firm’s need to transfer technologies abroad that require trained personnel. Although foreign assignments are, in principle, valuable educational experiences that prepare managers for greater corporate responsibility, many firms have been slow to reward people who have international experience with top-level corporate positions. Rotating home- and host-country nationals through different locations enables a firm to develop a hybrid type of corporate culture that understands the demands of both global integration and national responsiveness. People transferred from headquarters to foreign subsidiaries are more likely to know corporate policies; people transferred to headquarters are able to learn the corporate way. MNEs may assign upwardly-mobile candidates to foreign positions to broaden their perspectives and help them understand the overall corporate system, thereby developing a global management mindset.

C.                Home-Country vs. Third-Country Nationals

Home-country nationals tend to be the most familiar with a firm’s advances in technology, product and operating procedures. Nonetheless, third-country nationals may have more compatible and adaptive qualifications in a specific situation because of (i) their prior process and/or country experience and (ii) their knowledge of the local language.

D.                Some Individual Considerations for Transfers

What criteria should be used to identify the appropriate home-country and foreign national managers for a country transfer?

1.                  Technical Competence. Technical competence (usually indicated by past performance) is a significant determinant of success in foreign assignments. The foreign subsidiary manager must understand both the technical necessities of a position and also how to adapt to foreign conditions, such as scaled-down plant and equipment, varying productivity standards and less efficient national infrastructure.

2.                  Adaptiveness. Three types of adaptive characteristics influence an expatriate’s success when entering a new culture: (i) those needed for self-maintenance, (ii) those related to the development of satisfactory relationships with host nationals and (iii) cognitive skills and sensitivities that help one accurately perceive what is happening within the host society. The adaptation of a manager’s family is also crucial to the success of an overseas assignment.

3.                  Local Acceptance. Expatriates may encounter acceptance problems regardless of who they are or where they come from. Most such problems are cultural rather than legal in nature—some are insurmountable. Expatriates commonly make unpopular local decisions in order to meet corporate objectives. To minimize such conflicts, it is important that firms select well-qualified people, specify a clear title and job position and disseminate information about the person’s qualifications. It is also important that the expatriate manager develop appropriate coping skills.

4.                  Securing a Successful Foreign Assessment. Firms generally expect people to prove themselves domestically before considering them for foreign assignment. Therefore, a good work record (plus language fluency and relevant education and experience) is a critical prerequisite for becoming an expatriate.

E.                 Post-Expatriate Situations

Nearly a third of returning expatriates leave their firms within one year of repatriation and nearly half are gone within two years of returning home. Repatriation problems arise in three general areas: (i) personal finances, (ii) readjustment to the home-country work environment and (iii) readjustment to home-country social life. Effective human resource practices for soothing re-entry includes placement in jobs that build on foreign experiences, a reorientation program and a corporate mentor who looks after expatriates’ interests while they’re abroad.

F.                 Expatriate Compensation [See Table 21.1]

The amount and type of compensation needed to entice an individual to accept a foreign assignment may vary widely by person and locale. Company practices also vary in terms of compensation for differences.

1.                  Cost of Living. Many expatriates encounter a cost-of-living increase when posted abroad, simply because their accustomed way of living is expensive to replicate in a foreign country. The ultimate objective of a cost-of-living adjustment is to ensure an expatriate’s after-tax income (and job motivation) will not decline as the result of a foreign assignment. Most firms raise salaries (aka a goods-and-services differential) to offset the higher costs. Firms also compare their expatriate compensation packages to those offered by other firms.

2.                  Foreign-Service Premiums and Hardship Allowances. Living conditions in certain settings pose particularly severe hardships (such as harsh climatic conditions, a loss in total family income, or civil unrest). Historically, firms tended to give expatriates premiums simply for accepting a foreign assignment. Although that practice is fading somewhat, firms still need to compensate expatriate managers and their families in ways that reflect local environments.

3.                  Remote Areas. Many international projects are in areas so remote that firms would get few people to transfer there if they did not find ways to improve their quality of life. MNEs may have to provide additional benefits to get employees to sign on in remote areas.

4.                  Complications of Nationality Differences. As firms employ expatriates from home and third countries, compensation issues grow more complicated. Salaries for similar jobs vary substantially across countries, as do the relationships of salaries within the corporate hierarchy. There is no general consensus as to how to deal with such issues.



To the extent firms have detailed records, they can compare employees to gauge which may be best suited to foreign assignment. However, firms typically know more about their employees’ technical capabilities than their adaptive ones. Foreign personnel are not easily encompassed in information inventories because foreign operations may not be wholly-owned. To avoid certain problems, a firm may choose to acquire a foreign company and, hence, its personnel; it may also choose to form a joint venture with a foreign partner. However, such actions may simply shift the problem, rather than truly solve it.



[See Figure 21.5]

Firms need people with a variety of specialized skills to carry out specialized international assignments. Therefore, programs to develop such managers must be tailored, to some degree at least, to specific individuals and situations. Ultimately, development programs should cultivate employees who exhibit the following characteristics:

·         Top executives must have a global mindset free of national prejudices—they must understand the global environment in such a way that they can provide the leadership needed to achieve a global mission.

·         Managers with direct international responsibility must be able to balance the well-being of corporate and national operations.

·         Managers without direct international responsibility must understand the importance of international competition to the firm’s performance.

Figure 21.5 identifies four types of expatriate managers according to their level of allegiance to the parent firm and their level of allegiance to local operations: (i) the free agent, who either puts his/her career above both corporate and local operations and/or whose career has plateaued at home; (ii) the going native type, who learns and accepts the local way of living and doing business and wants to stay in that location; (iii) the heart-at-home type, who is overly ethnocentric and eager to return home; and (iv) the dual citizen, who has a clear understanding of global needs, why he or she is needed at the foreign subsidiary and local realities that may necessitate national responsiveness. Some of the weaknesses of the first three types may be counterbalanced with support and training.



As a firm moves into foreign production, it must consider how to staff, motivate, compensate and retain its foreign workforce. The norms in these human resource activities vary substantially from one country to another. In addition, labor-saving devices that are economical at home may be more costly than labor-intensive types of production in a foreign country. The firm may also find it beneficial to simplify tasks and use equipment that might be considered obsolete in an industrial economy.



People try hard to emigrate from countries with high unemployment and low wages to countries with labor shortages and high wages. Further, the incentive to hire immigrant labor is straightforward: immigrants work for significantly lower wages than domestic workers with comparable skills. (Critics accuse firms of behaving unethically when they hire foreign workers under such conditions.) However, firms are less certain of a labor supply when they depend on foreign workers because national guest worker policies fluctuate and vary.



Firms may gain a competitive advantage by establishing production facilities where labor rates are lower than those their competitors pay.

A.        Reasons for Country Differences in Labor Compensation

Both the amount and the method of compensating workers reflect a country’s culture. The level of compensation firms pay their workers depends on their contributions to the business, the supply and/or demand for particular skills in the region, the cost of living, government policies, labor laws and the collective bargaining process. Their method of payment (salaries, wages, commissions, bonuses and fringe benefits) depends on local customs, issues of security, taxes and government requirements. In general, MNEs tend to pay slightly higher wages than their local counterparts (but less than the rate in higher-wage countries), in part to entice local workers from their local jobs, in part because of their management philosophies and structures.

B.                 Differing Costs of Benefits

Fringe benefits differ radically from one country to another (e.g., in many countries, it is nearly impossible to lay off or fire employees). As a result, direct-compensation figures do not accurately reflect the amount a firm must pay for a given job in a given country. Thus, it is labor productivity that is the critical measure. Firms must constantly reassess productivity rates in light of national labor rates changes and exchange rate fluctuations.



In each country where an MNE operates, it must deal with groups of workers whose approach to the workplace reflects the sociopolitical environment of that country. This environment affects whether they join labor unions, how they bargain and what they want from businesses.

A.                Sociopolitical Environment

There are striking international differences in terms of how labor and management view each other. When there is little mobility between the two groups, a marked class difference exists—labor may even perceive itself to be in a class struggle. Approaches to reconcile labor-management differences vary by country. Union membership as a portion of the total workforce has been falling in most countries. Reasons for this decline include the increase in white-collar workers as a percentage of total workers, the increase in the service to manufacturing employment ratio, the rising proportion of women in the workforce, the rising proportion of part-time and temporary workers, the trend toward smaller average plant size and the decline in the belief in collectivism among younger workers.

B.                 Union Structure

Firms in a given country may deal with one or several unions that, depending upon the situation, represent workers in many industries, in many firms within the same industry, or in only one company. If it represents only a single company, the union may either represent all plants, or just one. Although variations exist within countries, one type of relationship typically predominates within most countries.

C.                Protection from Closures and Redundancy

The level to which workers are protected from plant closures and layoffs varies from country to country. In some nations, workers violently protest layoffs, whereas in other nations layoffs are rare and lifetime employment is widely practiced.

D.                Co-determination

Co-determination represents the process in which both labor and management actually participate in the management of a firm. Procedurally, labor is represented on the board of directors, either with or without veto power and cooperative (as opposed to adversarial) decision-making is emphasized.


X.                TEAM EFFORTS

In certain countries, firms emphasize work teams to foster group cohesiveness and involve workers in multiple tasks. Rotating jobs within work groups can both improve worker motivation and develop critical replacement skills. Nonetheless, the effectiveness of team efforts in improving labor relations has varied across cultures.



The International Labor Organization (ILO) was founded on the premise that the failure of any one country to adopt humane labor conditions impedes other countries’ efforts to improve their own conditions; it monitors labor conditions throughout the world. Several associations of unions from different countries also support the ILO’s ideals and efforts. Further, various codes of conduct regarding industrial relations, such as those issued by the OECD, the ILO and the EU, also serve to influence MNE labor practices.



An unresolved debate is whether the presence of MNEs and the nature of their operations systematically weaken labor unions and collective bargaining procedures.

A.        MNE Advantages

Critics argue MNEs weaken labor because their product and resource flows let them hold out longer before settling a strike, their multiple operations permit them to switch production to other locations and their size and complexity prevent unions from determining their capacity to meet labor’s demands.

1.                  Product and Resource Flows. MNEs appear to gain advantages from international diversification when confronted with collective bargaining situations, but only in limited circumstances. Operationally, MNEs can continue to supply customers in a strike-afflicted country only if they have excess capacity and produce an identical product in more than one country. Further, they may also confront limitations in the form of legal restrictions and tariff and transportation costs.

2.                  Production Switching. Although MNEs sometimes threaten to move production to foreign countries in order to extract concessions from their workers (thus pressing unions to demand less compensation in favor of more job security), actually switching often entails the abandonment of valuable fixed assets in one country and the expensive process of building new facilities elsewhere.

3.                  Size and Complexity of MNEs. Critics argue that when the ultimate decision-makers are far removed from the bargaining location, arbitrary management decisions are more likely, even though MNEs generally delegate labor relations to subsidiary management. While unions regularly examine MNEs’ financial data to determine their ability to meet labor’s demands, interpreting the data is often difficult because of disparities among managerial, tax and disclosure requirements between home and host countries. Nonetheless, financial statements prepared for local authorities should be no more difficult to interpret than those of a purely local firm.


B.        Labor Initiatives

Unions engage in several tactics to counter the power of MNEs. Internationally they can share information, assist bargaining units in other countries and deal simultaneously with MNEs. Nationally they can exert pressure for legislation that restricts the methods and mobility of MNEs.

1.                  Information Sharing. The most common form of international cooperation among unions is exchanging information, which serves to refute company claims and identify precedents from other countries pertaining to bargaining issues.

2.                  Assistance of Foreign Bargaining Units. Labor groups in one country may choose to support their counterparts in other countries by refusing to work overtime, disrupting work in their own countries and/or sending financial aid to workers on strike.

3.                  Simultaneous Actions. In order to increase the impact on an MNE, workers may invite unions in other countries to join in simultaneous negotiations and/or strikes.

4.                  National Approaches. Unions’ efforts to counter MNEs’ power have occurred primarily on a national basis. Worker representation on boards of directors, the regulated entry of foreign workers and the limitation of imports and foreign investment outflows are most often the result of labor initiatives.



What Are Fair Labor Practices Anyway?

Ethical dilemmas frequently arise regarding labor issues when MNEs expand their operations to developing countries. While capital-intensive production methods can increase both productivity and quality, they may also lead to wide-scale unemployment. In addition, when labor is substituted for capital, its comparatively lower productivity rate condemns workers to lower wage rates. MNEs are disparaged for the low-wage rates and the poor working conditions of their labor forces, given the high prices of their products and the amounts they pay to celebrities to endorse them. MNEs are also criticized for intentionally employing women in countries where they are legally paid less than men and for hiring children as young as 5 years of age. Although firms, unions and human rights groups have attempted to develop a voluntary code of conduct, they have been unable to agree on what constitutes acceptable working conditions. Nearly 250 million children between ages 5 and 17 work; often their choice is not one of work at the expense of education, because in many countries, the poor have little access to education. Even UNICEF concedes the unfortunate need for children to work in poverty-stricken nations, but it urges eliminating hazardous or exploitative child labor.



Which Countries Will Have the Jobs of the Future?

As capital, technology and information become more mobile among companies and countries, it will become increasingly difficult for firms and nations to retain highly skilled, highly valued employees. Thus, human resource development will become an increasingly important component of firm and national competitiveness. Population trends in many industrialized countries suggest in the future there will be fewer people to do the productive work. At the same time, the continual push toward the adoption of robotics and other labor-saving devices will escalate the need for higher-skilled workers. As a result, the gaps between the have-nots will widen within industrialized nations just as surely as between industrialized and developing countries. Suggested solutions to these problems include increased emigration from developing to industrialized countries on the one hand, and the promotion of policies that discourage brain drain and encourage re-circulation on the other. Governments in industrialized countries will then face the challenge of dealing with under-qualified workers who face deteriorating job prospects, as their citizens blame government policies and foreign workers for their plight.




Teaching Tip: Visit for additional information and links relating to the topics presented in Chapter 21. Be sure to refer your students to the on-line study guide, as well as the Internet exercises for Chapter 21.



CLOSING CASE: Tel-Comm-Tek (TCT) [See Map 21.2]


1.         Which candidate should the committee nominate for the assignment? Why?

2.                  What challenges might each candidate encounter in the position?


Tom Wallace:

Pros:                                                    Cons:

-4.5 years from retirement                   -Wallace and his wife know

-experienced in the technical and         only English

  sales aspects of the job                      -He is not a management star

-managing a plant of similar size           —may be resented by local  

-expressed interest in foreign                management


-performance rated proficient

-grown children living in U.S.

-age and experience may be valued


Brett Harrison:

Pros:                                                    Cons:

-rated highly competent                      -Harrison may not view position as a

-poised to move to upper-level             promotion

management                                      -teenage children

-experience in Asian regional office   -wife has career—unable to relocate

-acquainted with Bangalore expatriates

-well-acquainted with India


Atasi Das:

Pros:                                                    Cons:

-rated excellent and upwardly mobile           

-experienced in both staff and line    


-expressed goal of foreign assignment

-speaks Hindi

-single; no children

-sees international experience as an

essential career step


Ravi Desai:

Pros:                                                    Cons:

-assistant managing director in                      

larger Asian operation

-citizen of India

-speaks English and Hindi

-married with four young children


Jalan Bukit Seng:

Pros:                                                    Cons:

-managing director of TCT’s assembly

operations in Malaysia

-performance rating positive-excellent


-citizen of Singapore


Saumita Chaka:

Pros:                                                    Cons:

-no moving or adjustment problems   -only 27

-performance rated competent            -lacks line experience


-excels in employee relations

-personal connections with prominent

families and local officials

-speaks Kannada, Hindi and English


3.                  How might TCT go about minimizing these challenges facing each candidate?


Tom Wallace:

·         Offer orientation and language-training for Wallace and his wife.

·         Provide training visits to similar operations elsewhere.

·         Offer extra encouragement so Wallace feels valued.


Brett Harrison:

·         Offer special commuting arrangements so his wife can maintain her career.

·         Offer fixed-term assignment.

·         Provide assistance in selecting and settling the children into schools.


Atasi Das:

·         Offer advanced work with local management.


Ravi Desai:

·         Offer advanced work with local management.


Jalan Bukit Seng:

·         Offer orientation and language training.

·         Provide training visits to similar operations elsewhere.


Saumita Chaka:

·         Provide staff assistance from headquarters.

·         Provide technical training and development at headquarters.


4.                  Should all candidates receive the same compensation package? If not, what factors should influence each package?

There is a good deal of variation among firms with respect to the ways they compensate managers abroad. In this instance, TCT needs to consider the base salary each employee is earning, as well as the cost-of-living adjustment necessary to relocate the employee to Bangalore. Housing allowances and tax differential compensation may also be in order.


5.                  What recommendations can you offer to help a company facing this sort of decision that will enable it to balance professional and personal concerns?

In order to balance professional and personal concerns, a firm might do the following:

·         Rank applicants according to some criteria, such as experience in company, technical competence (including managerial), language skills, area(s) of expertise, age, stability of marital relations, personal preferences, personality attributes and career plans.

·         Check applicants for adaptiveness, sensitivity and flexibility.

·         Check applicants for awareness levels.

·         Administer formal orientation programs that include concentrated training and briefing processes. Include family members in the language and culture courses.

·         Effectively deal with the issue of security.


Additional Exercises: Human Resource Management


Exercise 21.1. Ask students to discuss the human resource implications for an MNE that pursues (a) a multidomestic strategy, (b) a global strategy and (c) a transnational strategy. Then ask them to follow that discussion by examining the relationship among the human resource function and the sourcing/manufacturing and the marketing functions of MNEs that pursue each of those strategies.


Exercise 21.2. Research suggests many expatriate employees encounter problems that limit both their effectiveness in foreign assignments and their contributions to the firm once they return home. Ask students to discuss the primary causes and consequences of these problems. What can a firm do to reduce the occurrence of such problems?


Exercise 21.3. A key issue in international labor relations is the degree to which organized labor can limit a firm’s ability to pursue a global or a transnational strategy. Ask students to identify MNEs whose operations reflect each of those management strategies. Then ask them to discuss the ways in which organized labor can possibly affect (or has affected) their pursuit of those strategies. What, if anything, can MNEs do to counter those efforts?