HRM in multinationals HR Management

The aim of the final part of this chapter is to consider how and why a closer integration of the institutionalist/comparative and strategic approaches is beneficial to our understanding of HRM in MNCs. The institutionalist/comparative and strategic approaches to international HRM have generally, despite examining similar issues, developed separately and with relatively little cross-reference between the two.

However, the two approaches should not be seen as being in opposition to each other; they are appropriate, in effect, for answering different parts of the same basic question as to how firms with employees in more than one country coordinate their human resource management systems. Here, we illustrate how the combination of the two perspectives can help further our understanding of HRM in multinationals, as well as pursuing the question of convergence and divergence.

  • HRM in MNCs: towards a combined institutional and strategic approach

The third part of this chapter concentrated on the strategic context of multinational practice. One weakness of the models available is that national contextual factors, while acknowledged, are not fully explained. In order to resolve this problem, it is necessary to qualify the insights of the strategic model with the implications of institutionalist research into comparative HRM, as reviewed in the second part of the chapter. One useful starting point here is the ‘four influences’ model elaborated by Edwards and Ferner (2000). They suggest that HR practice in MNCs is influenced by factors emerging from four sources, namely:

  • home country effects;
  • dominance effects;
  • pressures for international integration;
  • host country effects.
  • Home country effects

Home country effects cover elements of the human resource practices of MNCs, which can be traced back to the characteristics of the business and employment system from which the MNC originates. In other words, home country effects exist where the human resource policies of an MNC in a foreign country are affected by national institutions or understandings, which can be traced back to the country of origin of the firm.

For example, research has repeatedly shown that US-owned MNCs are more likely than those from other countries to have relatively centralised and formalised systems of human resource and industrial relations management (cf. Ferner et al., forthcoming). This can be traced back to the nature of the US business system. Effectively, US MNCs investing abroad have tended to export the organisational forms and management methods that had been established in the USA in order to serve mass markets in the USA (Ferner, 2003).

As Ferner (2003) argues, they thus introduced to the UK (and other countries) the multidivisional organisational form, with its division of management functions into distinct and highly specialised areas such as production, finance and personnel (Dunning, 1998). Hence, in the sphere of human resource management, the relatively high degree of centralisation of US MNCs can be traced back to some of the embedded features of the US economy reviewed in part one.

Such effects also occur in a number of substantive areas of practice. The effects of the civil rights movement and anti-discrimination legislation in the USA have led US MNCs to adopt relatively strong formal policies on ‘diversity’, which are often exported overseas, such that the managers of foreign subsidiaries are assessed against diversity targets (Ferner, 2003: 93). Equally, the strongly market-based assumptions behind the employment relationship in the USA have led to US firms being keen to export systems of performance appraisal and performance-related pay (Muller, 1999).

Additionally, the entrenched, ideological anti-unionism of many US managers and firms reviewed in part one, have led many US MNCs to seek to avoid trade unions in their foreign as well as domestic operations (cf. Royle 2000 on the particular case of McDonald’s; Almond et al., 2001). Similarly, Japanese transplants in the UK have transferred a number of practices which are innovative in the British context, such as flexibility of working methods, teamworking, continuous improvement of quality, and attempts to establish strong corporate cultures, on the Japanese model, through ‘high commitment management’ methods (cf. Oliver and Wilkinson, 1992).

Japanese firms have tended to seek either to imitate the Japanese industrial relations system of company unions (Bassett, 1986), or, as in cases such as Honda UK, to avoid trade unions altogether. It should be noted, however, that the twin policies of ‘lifetime’ employment and seniority-based pay and promotion, seen as cornerstones of the domestic Japanese system, have not been transferred to foreign environments. Hence, the conscious use of domestic policy to inform HR practice overseas is, in this and other cases, selective rather than total.

  • Dominance effects

Dominance effects are influences on host country operations, which are seen to flow from the hegemony of one or more countries. These can arise from two main sources. The first, control of the international political economy, can be seen in the case of the USA, in its attempts to internationalise US management methods, and to some extent industrial relations institutions, in postwar Europe (cf. Clark, 2000; Djelic, 1998). Second, economic dominance has been illustrated recently in widespread attempts at the diffusion of ‘Japanese’ forms of work organisation in the 1980s and 1990s.

Dominance effects impinge on the choices of MNCs in several ways. Whatever the source of ‘dominance’ is, the management methods of that country may become seen as a cross-national ‘best way’. This is picked up in the international HRM literature with regard to geocentric approaches to international HRM and geocentric mindsets driving global integration via the diffusion and standardisation of HR practices that are not necessarily parent driven. Hence, for example, an MNC from, say, France, may choose to adopt a combination of ‘US’ and ‘Japanese’ methods abroad, rather than home country practices, owing to a widespread belief that such methods are more efficient, either for a particular sector, or more generally.

This has particularly been the case with regard to ‘Japanisation’. In the 1980s and 1990s, the widespread debate on ‘global Japanisation’ (Oliver and Wilkinson, 1992) arose not merely because of investment by Japanese firms in the West, but mostly because of the attempts made by Western firms to copy such enterprises.

  • Pressures for international integration

Multinational corporations also face pressures to integrate their operations between sites in different parts of the world. The demands for integration and the mechanisms adopted have been addressed at length above. Integration applies not only when there is substantial intra-corporate trade, but also where customers themselves are large multinationals which desire commonality of service provision worldwide, as discussed in Prahalad and Doz’s I–R grid.

Corporations also display a tendency to attempt integration in order to mitigate the inevitable problems of controlling subsidiary behaviour. This may be achieved through attempts to impose uniformity of vision around a ‘corporate culture’, as well as through formal rules and/or financial controls. Such pressures, the extent of which will depend on product market strategy and the market position of the firm, have been linked with the greater use of mechanisms to control subsidiary action, including the standardisation and diffusion of HR practices.

  • Host country effects

Finally, the nature of the host country business system is likely to have a distinct effect. Carrying out production or service provision abroad will involve employing workers and managers from the host country. On the one hand, these might well have different understandings of issues such as appropriate management methods, the collective representation of employees and the wage–effort bargain than those that predominate in the home country of the MNC.

On the other, the firm will have to obey the legal and collective employment regulations of the home country, with inevitable effects on the conduct of employment relations and human resource management. Such effects may be more pronounced in some countries than others. For example, the German system, with its strong system of collective regulation of the employment relationship, is likely to move a US MNC further away from home country practices than, say, the less regulated systems of the UK or Ireland might.

Meanwhile, it is important to recognise that host country regulations and historically embedded features of business systems can provide ‘foreign’ firms with resources, as well as the more widely recognised constraints. In other words, an advanced system of vocational education and training might lead foreign MNCs to be more likely to invest in a given host country where particular skills are required.

In summary, this model provides one way of illustrating the combined effects of institutional and strategic issues on MNCs. It weakness lies in its underspecification of the precise relationship between these factors and how they combine to influence MNC practice. However, it provides an attempt to bring together work from two divergent fields of study, namely institutional and strategic.

  • The convergence/divergence debate and its r MNCs

The convergence/divergence debate questions whether national business systems – and, consequently, employment systems and HR practices – are converging cross-nationally, such that the management of personnel is likely to become more similar across different countries. For MNCs, whether the country contexts across which they operate are converging or diverging has important implications for how they manage employees and the effectiveness of processes and structures aimed at global integration and local responsiveness.

The MNC has also benefited strategically from the diversity in national business systems by, for example, exploiting knowledge and expertise not easily available elsewhere or by exploiting the lack of employment regulation or low skills to enhance efficiency gains. Equally, the MNC can be seen as a driving force of convergence, by promoting standardised human resource management tools applicable across countries.

These debates are long-standing and the evidence is equivocal. It is clear that national business systems, and elements within them, do not exist independently of global economic dynamics; they must react to global pressures within the international economic system. Does this mean that countries facing similar pressures are likely to react in similar ways, however? Evidence from recent history would tend to show that significant global pressures and structural crises during the past century – such as the Second World War, the collapse of fixed exchange rates and the postwar economic order centred around the dollar, the oil and commodities crises of the 1970s and 1980s, the Kuwait crisis, and the emergence of new economic powers such as Japan and the East Asian ‘tiger’ economies – were managed in nationally specific ways.

The comparative approach to the analysis of business systems and associated institutional characteristics such as the management of human resources examines how global pressures for and processes of economic and political change are filtered, mediated and structured in nationally specific ways. One question frequently posed, however, is whether contemporary international pressures, usually conflated into the notoriously imprecise term ‘globalisation’, will bring about new forms of cross-national convergence, or whether national business and HR systems will continue to differ.

  • Converging on US HRM?

It is frequently argued that economic ‘globalisation’, however defined, is a major contributory factor to the pressures being faced in recent years by the more densely institutionalised business and employment systems. Although the examples of CME used in this chapter are Germany and Japan, this argument is often extended to those countries where there is extensive legal, rather than collective, regulation of the employment relationship, such as France, Spain or Portugal.

The argument is that the recent increase in global forms of competition is likely to lead to ‘convergence’ in human resource practices across the world, such that employment policy and practice throughout the (developed?) world will eventually approximate much more closely to the system found in LMEs, of which the USA is the exemplar. Such arguments are far from new. Early convergence theorists (cf. Kerr et al., 1960) argued that developments in technology would lead to the development of similar economic, political, social and organisational patterns across industrialised societies, with convergence on the hegemonic US model.

More recently, globalisation and international competition have brought about discussion on the possibility of convergence on US models of HRM, sometimes mitigated by talk of ‘cultural effects’. In other words, although differences of detail may remain, human resource management systems across the globe will come to be based mainly on a neo-liberal ideology, taking elements of the firm-based systems of the larger (non-union) US employers, such as performance-based pay and promotion and efforts to promote corporate ‘culture’.

To this will be added policies, such as employee involvement, and company-specific training programmes, believed, from the experience of competition with Japan, to boost productivity and performance. Clearly, there is some evidence of elements of such a system encroaching into areas where certain ‘HRM’ practices might previously have been seen as alien. We have seen, for example, that there is evidence of performance-related elements in pay packages becoming a more prominent feature in the German and Japanese systems than previously. However, there remain several grounds on which assumptions of convergence can be challenged.

Firstly, it is often argued, within the ‘varieties of capitalism’ literature, that different national configurations of business and employment systems might be more appropriate to some industries than others (cf Whitley, 2000; Hall and Soskice, 2001; Sorge, 1991). Hence, firms within a given national system are likely to specialise in those sectors where national institutions offer a form of institutional comparative advantage.

There is some evidence that this is the case; for instance, German firms, due in no small part to the vocational training system, tend to specialise in incremental innovation within established industries, while US firms, with greater access to speculative capital, are more likely to specialise in radical innovation. This is reflected in statistics on the sectors in which firms in these two countries have been granted patents in recent years (cf. Hall and Soskice, 2001).

Hence CMEs should not, as some have predicted, become uncompetitive because of the globalisation of firms and markets. Instead, their business and employment relations systems might promote competitiveness in different sectors of the ‘global’ economy, such as sectors reliant on high levels of vocational training rather than labour cost minimisation. Further, it is important to be careful with regard to how the term ‘convergence’ is used. Very often, it is taken to imply merely the existence of trends in the same direction, such as, for example, the general increase in the proportion of employment within the countries of the European Union that is part-time.

However, if we interpret convergence in its stricter sense, that of ‘moving towards uniformity’, it is clear that, with regard to the part-time employment example, convergence cannot be said to be occurring. While, as we saw in part two, the use of part-timers increased in 12 of the 15 countries between 1990 and 2000, the figures remain highly different between countries, and there is no overall trend suggesting that countries with previously low rates of part-time employment are generally ‘catching up’ with countries such as the Netherlands and the UK, which had higher rates of part-time employment at the beginning of the period under consideration.

Much comparative research on human resource management and industrial relations has focused on the question of convergence versus divergence. However, it is not always very clear what the terms mean; very often, trends in a given direction are interpreted as ‘convergence’, and continued difference as ‘divergence’. It is perhaps useful to frame the debate slightly differently. It would appear that there are four different possible outcomes, rather than just two:

  • Strong convergence, i.e. practices in different countries becoming more similar. This would occur if, for example, firms in countries such as Germany and Japan increasingly applied the individualistic elements of HRM, such as performance-related pay and promotion, such that there was a ‘catching up’ in this respect with practice in liberal market economies.
  • Weak convergence, i.e. there are similar trends in different countries, without outcomes becoming more similar. This would occur, for example, if every country in the EU had witnessed growth in the proportion of employment which is part-time, but without an overall tendency towards uniformity. From Table, this was the case between 1990 and 2000 with regard to this particular HRM practice (if for a moment we ignore the three countries where the proportion of part-time employment in fact diminished).
  • Strong divergence, i.e. the opposite of strong convergence. This would have occurred if the nature of policies was becoming more different across countries, rather than more similar. This would be likely to occur if the normative message of the ‘varieties of capitalism’ literature were obeyed, and firms used the comparative advantages offered by their embedded institutional systems to specialise in the appropriate areas.
  • Weak divergence, i.e. differences remain, and there is no overall trend. One might well argue that this is the case with regard to national industrial relations systems: in recent years there have been cases of centralised systems attempting decentralization (France), decentralised systems attempting a degree of centralisation (Ireland), and decentralised systems becoming more decentralised (UK).

Overall, it is difficult to conclude in which of these directions human resource systems have moved in recent years, and still more difficult to predict what is likely to happen in even the immediate future. There is some evidence that a number of large firms in CMEs have adopted some of the well-established, individualised practices of US firms; this would appear to offer support to the strong convergence thesis, although it should be noted that these trends are, at least so far, relatively limited in CMEs, an often led, as in Germany, by foreign MNCs.

However, support for any form of convergence remains much more limited with regard to other areas of the employment relationship, such as collective labour relations. Even with regard to an issue such as part-time employment, where there would appear to be strong reasons to expect at least weak convergence, it should be remembered that there are EU countries where the practice has in fact diminished.

Hence, it is probably more sensible to discuss convergence with regard to specific elements of employment practice, rather than with reference to human resource management as a whole. Finally, it is important not to mistake what may be popular fads among employers and managers for more durable changes in the nature of the employment relationship at a societal level. The question of convergence versus divergence is of direct significance to a debate on HRM in MNCs.

As the most visible manifestations of ‘globalisation’, they clearly have at least some power to bring about convergence, at least to the extent of developing similar policies across their various national operations. However, as we have seen above, there may be good strategic reasons why a given MNC does not pursue this route. Firms may have different HR policies in their different national subsidiaries for a number of reasons, including market responsiveness, and the nationally variable skills and costs of labour.

In other words, nationally specific institutional factors affecting the quality and cost of labour are not simply environmental factors that strategic decision-makers in MNCs have to tolerate; they can also be used strategically by MNCs themselves. A firm may well centre its research facilities in countries with excellent educational facilities, and segment its production strategy in order that elements of production which can be carried out in lower-cost and/or less regulated economies are relocated.

Hence, while some highly integrated MNCs may bring about a degree of cross-national convergence, this is not necessarily the case. This, and the fact that home country business systems may affect firms’ choices of overall business and HR strategies, underlines our point that the insights of the strategic and institutional schools on international HRM need to be combined, rather than compartmentalised.


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