CHAPTER 2

THE ORGANIZATIONAL CONTEXT

The human resource (HR) function does not operate in a vacuum.

As with other areas of the organization, the shift from a domestic to a global focus affects the HR
activities described in Chapter 1.
As a consequence, HR activities are determined by. and influence, various organizational.factors,
such as:
* Stage of internationalization;
* Mode of operation used in the various foreign markets;
* method of control and coordination; and
* Strategic importance of the overseas operations to total corporate profitability.
To a certain extent, how the internationalizing firm copes with. the HR demands of its various
foreign operations determines its ability to execute Its chosen expansion strategies. indeed
Finnish research suggests that personnel policies should lead rather than follow international
operation decisions, yet one could argue that most companies take the opposite approich that is,
follow 'market driven strategies. For example, after reading the cases in Exhibit 2-1, one could
ask whether GE's top managers fully anticipated the HR investment that the Tungsram
acquisition would entail prior to its decision to purchase the Hungarian firm GE is a large
multinational with experience and resources to draw on- For smaller, newly internationalizing
firms, lack of suitable staff may be a major constraint, as the experience of the Australian firm in
Exhibit 2-1demonstrates.

EXIBIT 2-1
In January 1990 the U.S. multinational, general tungsram a hungarian lighting company, as part
Of its European market expansion strategy. By 1994

its equity had risen to 99.6 Percent. the

expansion hungarian operation had 13 existing factories employing 17,600 workers.

GE initially appointed a hungarian born U.S. expatriate as its lop manager, though he was loner
replaced when tungsram was brought under the direct control of GE Lighting europe in 1993 .
Staff transfers played on important role in training and developing the hungarian staff. Key
executives were brought over from the united states for varying lengths of time (three to six
months) to assist in knowledge and skills transfer. Management training also involved sending
tungsram staff to the united States, giving selected Hungarian exposure to GE's working
environment, and American life in General In oeder to improve tungsram's competitivenes GE
reduced staff levels by almost half and closed five plants, despite the unionized environment

it

also invested heavily in training (quality programs) to improve production workers' outputDuring this period its european market share increased from 5 percent in 1989 to 15 percent in
1994
Australian Systems Limited
Australian Systems Limited (ASL) is a subsidiary of a UK project firm, opera ting in the highly
competitive construction industry. In 1994, ASL was one of nine companies out of 200
applicants, judged prequalified to bid for work connected with the extension and modernization
of a motor airport in south east asia . ASL's managing director was pleased that his small
company was internationally competitive but commented that there were olways twc constraints
in international project operations finance and people.
He explained:
finance is always on issue in terms of how much you can put into it. And the other thing is
available resources pie. Finding good people is always difficult. We used to think it was our
specialized part of the industry, but most of the business people! talk to bemoan the fact of

getting good people good marketing good engineering, whatever''

He added " when we started to look at resources, the bottom line is that if we had won (the south
east asian airport project ) plus what (work) we had already, we would have had to close the
order books for twelve months because we would not find the people to handle more works;

The demands placed by international growth on the HRM department and its responses are the
focus of this chapter. By way of introduction, we outline various approaches to staffing foreign
operations. We then follow the path a domestic firm may take as it evolves into a global entity
the organizational context with a focus on how this development is reflected in its form of
structure, the approach to control and coordination, and the mode of operation used. The purpose
is to draw out the international dimension of human resource management to provide a
meaningful context for the remainder of the book.

International HUMAN resource management approaches

In Chapter 1 we discussed the IHRM implications of Porter's multido mestic and global industry
classifications to illustrate how multinational strategies have HR consequences. Here, we are
concerned with perhaps a more fundamental aspect-the allocation of human resources to the
various international operations to ensure effective strategic outcomes.
The IHRM literature uses four terms to describe MNE approaches to managing and staffing their
subsidiaries: ethnocentric polycentric, regeocentric, and geocentric. These terms are taken from
the seminal work - of Perlmutter, who claimed that it was possible to identify among international executives three primary attitudes- ethnocentric, polycentric and geocentric-toward
building a multinational enterprise, based on top management assumptions upon which key
produce functional, and

geographical decisions were made. To demonstrate these three

attitudes, perlmutter used aspects of organizational design, such as decision

making, evaluation and control, information flows and complexity of organization. He also

included "perpetuation,'' which he defined as recruiting , staffing, development." A fourth

attitude-regiocentric-was added later.

although the HR implications of the approaches identified by Perlmutter will, be examined in

detail in Chapter 3, it is important to briefly outline them here, since they have a bearing on our
discussion of the organizational structure and control mechanisms that typically are adopted.
by firms as their internationalization progresses. The four approaches are:
1. Ethnocenetric: Few foreign subsidiaries have any autonomy; strategic decisions are made at
headquarters. key positions at the domestic and foreign. Operations are held by headquarters'
management personnel In other words. subsidiaries are managed by expatriates from the home
country (PCNs).