UNIT 1 – CROSS NATIONAL HRM - INTRODUCTION

Human resource management refers to the activities undertaken by an organization to

effective use its human resources and includes the topics of HR planning, staffing,
performance management, training & development, compensation, and industrial relations.
HRM is involved with employees within a national boundary. Some HRM practices may help
with international human resource management (IHRM), but the way diversity is managed in
a single, national, legal and cultural context many not transfer to a multinational context
without modification. Hence, the approach taken to international human resource
management is to focus on aspects of multinational firms.

IHRM can be defined as set of activities aimed managing organizational human resources at
international level to achieve organizational objectives and achieve competitive advantage
over competitors at national and international level. IHRM includes typical HRM functions
such as recruitment, selection, training and development, performance appraisal and
dismissal done at international level and additional activities such as global
skills management, expatriate management and so on.

There are two major factors therefore which differentiate domestic HRM from IHRM. First,
the complexities of operating in different countries (and therefore in different cultures) and
secondly, employing different national categories of workers. This suggests that international
HRM is concerned with identifying and understanding how MNCs manage their
geographically dispersed workforces in order to leverage their HR resources for both local
and global competitive advantage. Globalization has brought new challenges and increased
complexity such as the challenge of managing newer forms of network organization. In
recognition of such developments, new requirements of IHRM is to play a key role in
achieving a balance between the need for control and coordination of foreign subsidiaries,
and the need to adapt to local environments.

International HRM differs from domestic HRM in a number of ways. One difference is
that IHRM has to manage the complexities of operating in, and employing people from,
different countries and cultures. A major reason for the failure of an international venture is
the lack of understanding of the differences between managing employees in the domestic
environment and in a foreign one. A management style successful in the domestic
environment often fails if applied to a foreign environment without the appropriate
modifications. The reasons that IHRM is more complex than domestic HRM are described
below.

1. International HRM addresses a broader range of activities than domestic HRM. These
include international taxation, coordinating foreign currencies and exchange rates,
international relocation, international orientation for the employee posted abroad, etc.

2. Human resource managers working in an international environment face the problem of

addressing HR issues of employees belonging to more than one nationality. Hence, these
HR managers need to set up different HRM systems for different locations. Human resource
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managers in a domestic environment administer HR programmes to employees belonging to a
single nationality.

3. International HRM requires greater involvement in the personal life of employees. The
HR manager of an MNC must ensure that an executive posted to a foreign country
understands all aspects of the compensation package provided in the foreign assignment, such
as cost of living, taxes, etc. The HR manager needs to assess the readiness of the employee’s
family to relocate, support the family in adjusting to a foreign culture through cross-cultural
training, and to help in admitting the children in schools. The HR department may also need
to take responsibility for children left behind in boarding schools in the home country by the
employees on foreign postings. In the domestic environment, the involvement of the HR
manager or department with an employee’s family is limited to providing family insurance
programmes or providing transport facilities in case of a domestic transfer.

4. There is heightened exposure to risks in international assignments. These risks include

the health and safety of the employee and family. A major aspect of risk relevant to IHRM
today is possible terrorism. Several MNCs must now consider this factor when deciding on
international assignments for their employees. Moreover, human and financial consequences
of mistakes in IHRM are much more severe than in domestic business. For example, if an
executive posted abroad returns prematurely, it results in high direct costs as well as indirect
costs.

5. International HRM has to deal with more external factors than domestic HRM. For
example, government regulations about staffing practices in foreign locations, local codes of
conduct, influence of local religious groups, etc. If an American organization is sanctioned
license by the Indian government to set up its subsidiary in India, the American company is
under legal obligations to provide employment to local residents.

6. International HRM Addresses a broad range of HRM activities. Whereas domestic

HRM deals with issues related to employees belonging to single nationality.

7. Greater exposure to risks in international assignments; human and financial

consequences of mistakes in IHRM are very severe.
Model Of International Human Resource Management:
The purpose of international human resource management is to get the competitive advantage
by hiring and improving the skills, efficiency, and productivity through the process of
procuring, allocating, assigning, providing training & development, performance appraisal,
compensating for the effective utilization of human resources in the global environment.
Globalization and the growth of information technology and the advancements in modern
business make the world to create and adopt new methods and concepts of human resource
management in the form of international human resource management (IHRM).
The ultimate goal of any organization is to satisfy the needs of the customers and to get the
position of the market leader; effective utilization of human resources at the international
level helps in fulfilling the needs of the customers with international standards. In the
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globalized markets knowing the needs, competing, and getting success are major challenges,
international human resource management can create a scope to reach the top most position
in the market with the effective utilization of human resources for the success of the
organizations in the multinational environments.

Internationalization of business can bring changes in organizational strategies, organizational

structure, human resource activities and approaches. P.V. Morgan explained the three-
dimensional model of IHRM, it includes human resource activities, types of employees, and
countries.

International human resource activities:

International human resource activities include major operative human resource functions
such as procurement, which involves human resource planning and induction. The second
major activity is allocation; it involves the plan for using human resources among various
subsidiaries or projects. Effective utilization of human resources is the third human resource
activity and helps in maximizing the skills and efficiency of the human resources and
productivity.
The activities of international human resource activities cover all the major activities like HR
planning, recruitment, selection, orientation, placement, training & development,
remuneration, and performance evaluation.

Categorization of countries in the concept of IHRM

In the concept international human resource management, the countries having headquarters
and subsidiaries are categorized as follows.

 Home country: Where the headquarters is located

 Host country: Where the subsidiary is located
 Third/other countries: These are the sources of finance and human resources

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Types of employees in IHRM
International human resource management operating in MNCs has generally three options of
employees that can employ. These employees can come from a home country where
headquarters of the company is established, secondly there is a host country where foreign
subsidiaries are allocated and there is also possibility of another different country that might
be a source of human capital as well.
IHRM deals with three national or country categories, i.e., the parent country where the firm
is actually originated and headquartered; the host country where the subsidiary is located; and
other countries from where the organization may source the labour, finance or research and
development. This is because there are three types of employees in an international
organization, i.e.

Parent country nationals (PCNs); A parent-country national is a person working in a

country other than their country of origin. Such a person is also referred to as an expatriate.
Long periods of assignment (perhaps 4 –5 years or more) may run the risk of “de facto”
employee status in the host country, so that labor laws or the host country apply.

A U.S. parent-country national residing abroad still owes U.S. taxes each year on his or her
worldwide income. The US has income tax treaties with over 35 other countries. The IRS and
the foreign taxing authorities can exchange information on their citizens living in the other
country. Qualifying U.S. citizens and residents working outside the United States are
permitted to elect to exclude a portion of their foreign earned income under the Internal
Revenue Code (IRC). This section provides a general exclusion limited to a specified amount,
another exclusion measured by foreign housing costs, and, for self-employed persons, a
foreign housing cost deduction.
To qualify for the foreign earned income and housing cost exclusions, the individual must
have foreign earned income, his or her tax home must be in a foreign country, and he or she
must meet either of two tests:

The bona fide residence test, which requires the taxpayer to be a bona fide resident of a
foreign country or countries for an uninterrupted period that includes a full tax year, or The
physical presence test, which requires the individual to be present in a foreign country
or countries at least 330 full days during a period of 12 consecutive months.
A U.S. citizen may qualify under either the bona fide residence or physical presence test. A
U.S. resident alien working abroad can qualify under the physical presence test, and in certain
limited cases, tax treaty non-discrimination rules may permit qualification under the bona
fide residence rule.

Host country nationals (HCNs); and

They are those employees of an organization who are the citizens of the country in which the
foreign subsidiary is located.
Third country nationals (TCNs).
Third Country National (TCN) describes and individuals of other nationalities hired by a
government or government sanctioned contractor who represent neither the contracting

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government nor the host country or area of operations. This is most often those performing on
government contracts in the role of a private military contractor.

Third Country Nationals

These are the citizens of a country other than the country where the organization is
headquartered and the country that is hosting the subsidiary.

Macro Factors Affecting International Human Resource Systems:

Legal and Political Factors:

The nature and stability of political systems vary from country to country. U.S. firms are
accustomed to a relatively stable political system, and the same is true in many of the other
developed countries in Europe. Although presidents, prime ministers, premiers, governors,
senators, and representatives may change, the legal systems are well-established, and global
firms can depend on continuity and consistency.
However, in many other nations, the legal and political systems are turbulent. Some
governments regularly are overthrown by military coups. Others are ruled by dictators and
despots who use their power to require international firms to buy goods and services from
host-country firms owned or controlled by the rulers or the rulers’ families.
International firms may have to decide strategically when to comply with certain laws and
regulations and when to ignore them because of operational or political reasons. Another
issue involves ethics. Because of restrictions imposed on U.S.-based firms through the
Foreign Corrupt Practices Act (FCPA), a fine line exists between paying “agent fees,” which
is legal, and bribery, which is illegal.

HR regulations and laws vary among countries in character and detail. In many Western
European countries, laws on labor unions and employment make it difficult to reduce the
number of workers because required payments to former employees can be very high, as the
HR Perspective on the next page indicates. Equal employment legislation exists to varying
degrees.
In some countries, laws address issues such as employment discrimination and sexual
harassment. In others, because of religious or ethical differences, employment discrimination
may be an accepted practice.
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All of these factors reveal that it is crucial for HR professionals to conduct a comprehensive
review of the political environment and employment-related laws before beginning
operations in a country. The role and nature of labor unions should be a part of that review

Economic Factors:
Economic factors affect the other three factors in Figure. Different countries have different
economic systems. Some even still operate with a modified version of communism, which
has essentially failed. For example, in China communism is the official economic approach.
But as the government attempts to move to a more mixed model, it is using unemployment
and layoffs to reduce government enterprises bloated with too many workers.

Many lesser-developed nations are receptive to foreign investment in order to create jobs for
their growing populations. Global firms often obtain significantly cheaper labor rates in these
countries than they do in Western Europe, Japan, and the United States. However, whether
firms can realize significant profits in developing nations may be determined by currency
fluctuations and restrictions on transfer of earnings.
Also, political instability can lead to situations in which the assets of foreign firms are seized.
In addition, nations with weak economies may not be able to invest in maintaining and
upgrading the necessary elements of their infrastructures, such as roads, electric power,
schools, and telecommunications. The absence of good infrastructures may make it more
difficult to convince managers from the United States or Japan to take assignments overseas.

Economic conditions vary greatly. Cost of living is a major economic consideration for
global corporations. In many developed countries, especially in Europe, unemployment has
grown, but employment restrictions and wage levels remain high. Consequently,
many European firms are transferring jobs to lower-wage countries, as Mercedes-Benz did at
its Alabama plant. In addition, both personal and corporate tax rates are quite high. These
factors all must be evaluated as part of the process of deciding whether to begin or purchase
operations in foreign countries.

Cultural Factors:
Cultural forces represent another important concern affecting international HR management.
The culture of organizations was discussed earlier in the text, and of course, national cultures
also exist. Culture is composed of the societal forces affecting the values, beliefs, and actions
of a distinct group of people. Cultural differences certainly exist between nations, but
significant cultural differences exist within countries also. One only has to look at the
conflicts caused by religion or ethnicity in Central Europe and other parts of the world to see
the importance of culture on international organizations. Getting individuals from different
ethnic or tribal backgrounds working together may be difficult in some parts of the world.
Culture can lead to ethical differences among countries.
One widely used way to classify and compare cultures has been developed by Geert Hofstede,
a Dutch scholar and researcher. Hofstede conducted research on over 100,000 IBM
employees in 53 countries, and he identified five dimensions useful in identifying and
comparing culture. A review of each of those dimensions follows.
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 Power Distance : The dimension of power distance refers to the inequality among the
people of a nation. In countries such as Germany, the Netherlands, and the United
States, there is a smaller power distance—which means there is less inequality—than
in such countries as France, Indonesia, Russia, and China. As power distance
increases, there are greater status and authority differences between superiors and
subordinates.
One way in which differences on this dimension affect HR activities is that the
reactions to management authority differ among cultures. A more autocratic approach
to managing is more common in most other countries, while in the United States
there is a bit more use of participatory management.
 Individualism: Another dimension of culture identified by Hofstede is individualism,
which is the extent to which people in a country prefer to act as individuals instead of
members of groups. On this dimension, people in Asian countries tend to be less
individualistic and more group-oriented, whereas those in the United States score the
highest in individualism. An implication of these differences is that more collective
action and less individual competition is likely in those countries that deemphasize
individualism.
 Masculinity/Femininity: The cultural dimension masculinity/femininity refers to the
degree to which “masculine” values prevail over “feminine” values. Masculine values
identified by Hofstede were assertiveness, performance orientation, success, and
competitiveness, whereas feminine values included quality of life, close personal
relationships, and caring. Respondents from Japan had the highest masculinity scores,
while those from the Netherlands had more femininity-oriented values. Differences on
this dimension may be tied to the role of women in the culture. Considering the
different roles of women and what is “acceptable” for women in the United States,
Saudi Arabia, Japan, and Mexico suggests how this dimension might affect the
assignment of women expatriates to managerial jobs in the various countries.
 Uncertainty Avoidance: The dimension of uncertainty avoidance refers to the
preference of people in a country for structured rather than unstructured situations. A
structured situation is one in which rules can be established and there are clear guides
on how people are expected to act. Nations high on this factor, such as Japan, France,
and Russia, tend to be more resistant to change and more rigid. In contrast, people in
places such as Hong Kong, the United States, and Indonesia tend to have more
“business energy” and to be more flexible.
A logical use of differences on this factor is to anticipate how people in different
countries will react to changes instituted in organizations. In more flexible cultures,
what is less certain may be more intriguing and challenging, which may lead to
greater entrepreneurship and risk taking than in the more “rigid” countries.
 Long-Term Orientation: The dimension of long-term orientation refers to values
people hold that emphasize the future, as opposed to short-term values, which focus
on the present and the past. Long-term values include thrift and persistence, while
short-term values include respecting tradition and fulfilling social obligations. People
scoring the highest on long-term orientation were China and Hong Kong, while
people in Russia, the United States, and France tended to have more short-term
orientation.
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 Differences in many other facets of culture could be discussed. But it is enough to
recognize that international HR managers and professionals must recognize that
cultural dimensions differ from country to country and even within countries.
Therefore, the HR activities appropriate in one culture or country may have to be
altered to fit appropriately into another culture or country.

Management / People Approaches To International Human Resource Management:

ETHNOCENTRIC APPROACH
Countries with branches in foreign countries have to decide how to select management level
employees. Ethnocentric staffing means to hire management that is of same nationality of
parent company.
When a company follows the strategy of choosing only from the citizens of the parent
country to work in host nations, it is called an ethnocentric approach. Normally, higher-level
foreign positions are filled with expatriate employees from the parent country. The general
rationale behind the ethnocentric approach is that the staff from the parent country would
represent the interests of the headquarters effectively and link well with the parent country.
The recruitment process in this method involves four stages: self-selection, creating a
candidate pool, technical skills assessment, and making a mutual decision. Self-selection
involves the decision by the employee about his future course of action in the international
arena. In the next stage, the employee database is prepared according to the manpower
requirement of the company for international operations. Then the database is analysed for
choosing the best and most suitable persons for global assignments and this process is called
technical skills assessment. Finally, the best candidate is identified for foreign assignment
and sent abroad with his consent.

The ethnocentric approach places natives of the home country of a business in key positions
at home and abroad. In this example, the U.S. parent company places natives from the United
States in key positions in both the United States and Mexico.
POLYCENTRIC APPROACH
When a company adopts the strategy of limiting recruitment to the nationals of the host
country (local people), it is called a polycentric approach. The purpose of adopting this
approach is to reduce the cost of foreign operations gradually. Even those organizations
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which initially adopt the ethnocentric approach may eventually switch over lo the polycentric
approach. The primary purpose of handing over the management to the local people is to
ensure that the company understands the local market conditions, political scenario, cultural
and legal requirements better. The companies that adopt this method normally have a
localized HR department, which manages the human resources of the company in that
country. Many international companies operating their branches in advanced countries like
Britain and Japan predominantly adopt this approach for recruiting executives lo manage the
branches."

The polycenlric approach uses natives of the host country to manage operations in their
country and natives of the parent country to manage in the home office. In this example, the
Australian parent company uses natives of India to manage operations at the Indian
subsidiary. Natives of Australia manage the home office.

GEOCENTRIC APPROACH
When a company adopts the strategy of recruiting the most suitable persons for the positions
available in it, irrespective of their nationalities, it is called a geocentric approach. Companies
that are truly global in nature adopt this approach since it utilizes a globally integrated
business strategy. Since the HR operations are constrained by several factors like political
and ethnical factors and government laws, it is difficult to adopt this approach. However,
large international companies generally adopt the geocentric strategy with considerable
success.
For international recruitment, especially on foreign soil, organizations generally use
manpower agencies or consultants with international connections and repute to source
candidates, in addition to the conventional sources. For an effective utilization of the internal
source of recruitment, global companies need to develop an internal database of employees
and an effective tracking system to identify the most suitable persons for global postings.

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The geocentric approach uses the best available managers for a business without regard for
their country of origin. In this example, the UK parent company uses natives of many
countries at company headquarters and at the U.S. subsidiary.

REGIOCENTRIC APPROACH
The Geocentric Approach is one of the methods of international recruitment where the
Multinational Companies recruit the most suitable employee for the job irrespective of their
Nationality. The regiocentric approach uses managers from various countries within the
geographic regions of business. Although the managers operate relatively independently in
the region, they are not normally moved to the company headquarters.
The regiocentric approach is adaptable to the company and product strategies. When regional
expertise is needed, natives of the region are hired. If product knowledge is crucial, then
parent-country nationals, who have ready access to corporate sources of information, can be
brought in.
One shortcoming of the regiocentric approach is that managers from the region may not
understand the view of the managers at headquarters. Also, corporate headquarters may not
employ enough managers with international experience.

The regiocentric approach places managers from various countries within geographic regions
of a business. In this example, the U.S. parent company uses natives of the United States at
company headquarters. Natives of European countries are used to manage the Italian
subsidiary.

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ENTRY STRATEGY ALTERNATIVES:
In an increasingly globalized world, many businesses may find international expansion to be
an attractive option for market expansion. Entering a foreign market is not easy however, and
there are multiple options for any company looking to enter a foreign market. A company can
enter a new country in several ways: as an exporter; through a licensing agreement; in a joint
venture; or by way of a wholly owned subsidiary. It is important for managers to understand
these different entry strategies before entering a new country.

Exporting
Exporting is the simplest method of entering a foreign market. By exporting to a foreign
country, a company is able to enter this country without actually establishing itself in the
country. The company must simply manufacture products that can then be shipped to the
foreign country. Exporters can take two forms, direct exporters and indirect exporters. Direct
exporters sell directly to foreign buyers and may have sales teams in those countries. Indirect
exporters rely on domestic intermediaries who broker the relationship with foreign buyers.

Licensing
Licensing is a good strategy for a company that has an in demand product or brand, but lacks
the resources to expand internationally. When a company licenses its products in a foreign
country, it sells the rights to manufacture the product in a foreign country to another
manufacturer. This means that a company does not need to invest in developing the market
but can simply collect payment from a foreign firm.

Franchising
Franchising is a typical North American process for rapid market expansion but it is gaining
traction in other parts of the world. Franchising works well for firms that have a repeatable
business model (eg. food outlets) that can be easily transferred into other markets. Two
caveats are required when considering using the franchise model. The first is that your
business model should either be very unique or have strong brand recognition that can be
utilized internationally and secondly you may be creating your future competition in your
franchisee.

Acquisitions
In some markets buying an existing local company may be the most appropriate entry
strategy. This may be because the company has substantial market share, are a direct
competitor to you or due to government regulations this is the only option for your firm to
enter the market. It is certainly the costliest and determining the true value of a firm in a
foreign market will require substantial due diligence. On the plus side this entry strategy will
immediately provide you the status of being a local company and you will receive the
benefits of local market knowledge, an established customer base and be treated by the local
government as a local firm.

Piggybacking
Piggybacking is a particularly unique way of entering the international arena. If you have a
particularly interesting and unique product or service that you sell to large domestic firms that
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are currently involved in foreign markets you may want to approach them to see if your
product or service can be included in their inventory for international markets. This reduces
your risk and costs because you are essentially selling domestically and the larger firm is
marketing your product or service for you internationally.

Joint Venture
A joint venture involves entering a new market with a local partner. Joint ventures have the
advantage of providing companies with a partner who knows the local environment well.
This means that there is less risk of failing due to an inability to understand local customs,
laws or culture. The disadvantage of a joint venture is that it does not give a company total
control over the operation; the firm must be able to work well with its foreign partner to
succeed.

Wholly Owned Subsidiary

Entering a foreign market with a wholly owned subsidiary involves creating a local firm
without the aid of a local partner. There are two ways of doing this. The first is through what
is called greenfield development. This involves creating a new organization in the foreign
country from the ground up. The second method is what is referred to as brownfield
development. This involves purchasing an existing company in a foreign country. Brownfield
developments can be beneficial because they offer local expertise, but they can be difficult
because there may be resistance from those in the company to new ownership.

Greenfield Investments
Greenfield investments require the greatest involvement in international business. A
greenfield investment is where you buy the land, build the facility and operate the business on
an ongoing basis in a foreign market. It is certainly the costliest and holds the highest risk but
some markets may require you to undertake the cost and risk due to government regulations,
transportation costs, and the ability to access technology or skilled labour.

Strategic Alliances (SA)

Strategic alliances is a term that describes a whole series of different relationships between
companies that market internationally. Sometimes the relationships are between competitors.
There are many examples including:
 Shared manufacturing e.g. Toyota Ayago is also marketed as a Citroen and a Peugeot.
 Research and Development (R&D) arrangements.
 Distribution alliances e.g. iPhone was initially marketed by O2 in the United Kingdom.
 Marketing agreements.
Essentially, Strategic Alliances are non-equity based agreements i.e. companies remain
independent and separate.

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