Topic 2 : The Organisational Context (Internationalising)

The aims and learning outcomes for this topic include:

 Examining the structural responses to international growth.
 Defining modes of operation utilised in global markets.
 Examining the impact of implemented organisational practices on the human
resource management function.
 Factors that influence standardisation or adaptation of work practices and the role
of HR, including host-country culture and workplace environment, mode of
operation, firm size, maturity and international experience and subsidiary mandate

The Globalisation of HRM

This figure outlines a range of factors relating to IHRM, relating to national culture,
the local institutional context, varieties of capitalism and national business models,
and the typical strategic capability and role of HRM in any one geography, that
shape much HRM practice.

Are there attractive investment opportunities to  Trade patterns and foreign direct investment
allow organisations to set up internationally e.g.  Disruptive technologies
tech companies in the UK  Business model innovation
 Demographics, labour arbitrage and reshoring
 Configurations of global integration and local
responsiveness
 Adoption of global HRM delivery models
 Business systems, structure
and labour markets
 Institutional influences on the Factors that result in Strategic pressures making
employment relationships distinctive national national/regional models
 Influence of national culture patterns of HRM receptive to change
 Role and competence of the
HRM function
Increasing local legal Processes of transition
frameworks through which new patterns of
HRM are being developed

 Building of global capabilities

 Global mindset and leadership
 Global talent management
 Management of an international labour force
 Employer branding
 Sourcing, shoring and partnership
 e-enablement of HRM
Source: Sparrow (2017: 3)
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 Changes in International Business

International trading being conducted by MNCs continues to grow, although in an

increasingly fragile and volatile global economy. Increased capital mobility has
meant that MNCs can more easily operate and locate abroad while repatriating
profits.

Demographics, labour arbitrage and reshoring

For employers, the availability and cost of workers are resulting in many
organisations moving production or services to countries where there are lower
labour costs. These are usually found in poorer countries, and are made up of lower
wages accompanied by lower levels of benefits and fewer legal requirements in
terms of the treatment of the labour force. For example, Ford Motors having
significant production facilities in Mexico. This is true of both manufacturing and
service industries. For example, the Indian IT market is significant as a source of off-
souring for many international organisations e.g. American Express, Microsoft.
Political interventions for host countries may well have a negative impact on off-
shoring in the future.

The assembly of goods adds less value than design and engineering work, and
technology has made manufacturing less labour-intensive, giving organisations less
incentive to seek out cheap labour in poorer countries. Factories take time to build
and MNCs have to factor in such trends. The issues of markets, transport costs and
legitimacy and skills and capabilities are also important in deciding upon operational
location. Due to the diverse education standards globally, organisations in industries
that require high levels of competence, may find their scope to relocate severely
restricted and have to locate to where the skills are. The phenomenon of ‘reshoring’
makes it evident that, in addition to shifts in the location of research and
development, organisations are making complex decisions about productivity and
labour availability and consider the challenges of having to manage complex supply
chains that are at risk of disruption, shifts in energy prices and inventory costs. BT

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outsource their Technical Support operations to India, but retain other operations
e.g. new sales, in the UK

The reshoring phenomenon – Industry Examples

New production strategies, manufacturing techniques and materials are making it

cheaper and easier to respond to local market tastes and changing customer
demands. Alongside falling labour costs as a proportion of total costs, this is driving
new locational factors and organisational models. For example, Volkswagen
introduced a new production strategy called Modularer Querbaukasten (MQB) based
on the costs of parameters for components such as engine mounting points, which
allows all cars to be manufactured on the same production line, thereby allowing its
factories in America, Europe and China to produce whatever vehicle the local market
requires. Adidas’ thirty largest suppliers are scattered throughout China, India,
Indonesia, Vietnam and Bangladesh. Yet in 2018 the company started a new
Speedfactory in Ansbach, Germany (home country) .

These examples does not mark a reversal of ‘offshoring’ that has shaped global
business for many years. Instead, it reflects trends such as demand for local
production in home markets, increasing manufacturing costs abroad, difficulties of
overseeing production overseas and the costs and risks inherent in global supply
chains.

After years of moving production to Asia, a number of European organisations are

following the US example and moving more production home.

In Italy ‘reshoring’ has taking place in clothing, footwear and electronics companies,
partly as organisations rediscovered the importance of a ‘Made in Europe’ label.
Many Italian organisations have reduced or overhauled their production lines
because of falling demand, concentrating their remaining manufacturing closer to
target markets. However, Italian wages rose steadily in the last decade, despite
periodic recessions, and overall manufacturing costs remain almost 30 per cent

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higher than in China. However, this is offset by high transport costs from Asia and
import duties.

Italian clothing manufacturers find they need smaller volumes of a much larger
variety of products, and they are under pressure to reduce the time-to-market of their
products. Chinese factories are designed to handle large volume, and shipping from
China takes more time, which is a drawback for fashion companies. There are also
advantages in having close proximity to local production networks, such as the
leather industry.

In Spain depressed wage levels since the eurozone crisis have led a number of
foreign car organisations to open production lines there. As trade unions accepted
flexible working practices and salary freezes due to high unemployment, companies
such as Ford Motor Co. and PSA Peugeot Citroen SA were encouraged to open
assembly lines.

In Germany a number of mid-sized companies, such as the chainsaw maker Stihl,

have reshored production.

Global transfer of work, either in terms of the creation of new jobs or through the
global sourcing of certain parts of an individual’s or unit’s work. This is having a
major impact on the type of organisations and nature of work that remain viable in
different parts of the world. This ‘global division of labour’ has been extended from
the ‘low skilled’ manufacturing sector to skilled labour such as research and
development, scientists, engineers and research technologists. In the service sector,
MNCs are increasingly sourcing both skilled and ‘unskilled’ low-cost labour from a
global market for financial services, banks, software and IT enabled services and
retail concerns.

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 Why internationalise?

There are a number of reasons why organisations would wish to internationalise :

1. Ghauri (2000) claims that organisations want to emulate their competitors so as

not to lose competitive advantage.

2. There is a desire to access international markets, due to limited domestic

markets which is especially important for products with short lifecycles e.g.
Hollywood films.

3. There can be production advantages offered in other countries, for example,

a. Cheaper labour: UK call centres are located in Asia (BT) or South Africa
(Easyjet)
b. Increasing use of Far Eastern suppliers, wishing to enter new markets
(Primark)

4. Availability of greater pool of skilled labour

a. India have highly qualified IT workers (used by IBM and Google).
b. Opportunities in developing markets
c. China – there is a growing demand for cars (Volkswagen).

5. Financial inducements - there can be direct financial assistance and favourable

tax rates, for example, Hyundai into Slovakia; technology companies into
Ireland – Google, Facebook, Microsoft

Trade barriers, tariffs, quotas and/or specific rules and regulations necessitate
establishing production facilities in a foreign country.

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 Management demands of international growth

Dowling (2017)

 Size – grow organically versus start big

 Structure – hierarchical or flat organisational structure
 Geographical dispersion – wide foothold in multiple markets or narrow focus
on few countries?
 Control mechanisms – Headquarters versus local management
 National cultures and languages – adopt local customs or adhere to HQ
country customs?
 Host country demands – employ local staff to enter joint ventures
 Operation modes – franchise (McDonalds, Starbucks)
 Flow and volume of information – centralised or decentralised databases

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 Standardisation versus Localisation

Morris et al (2006) recognised that balancing the need for global integration with
local responsiveness was necessary.

Why globally standardise HRM?

To achieve consistency, transparency and alignment of a geographically fragmented
workforce around common principles and objectives.

Why locally responsive HRM? (focus on “local” environment)

To respect local cultural values, traditions, legislation, government policies and
education systems, regarding HRM and work practices.

There is a range of advantages and disadvantages relating to standardisation and

globalisation. Therefore what processes, routines, procedures and practices should
be transferred abroad and what should be decided locally?

Industry Examples

1. Unilever use the same recruitment criteria and appraisal system on a worldwide
basis to ensure a particular type of managerial behaviour in each subsidiary.
However, features of the national education systems and skills levels of the local
labour pool must be considered.

2. Schering AG introduced a global performance system for top managers globally

comprising a standardised bonus scheme to standardise performance culture and
shared objectives. As cultural acceptance of variable bonuses differed across
subsidiaries, the proportions of fixed and variable compensation was adapted
according to country context. A global standard with local adaptation.

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 Balancing the standardisation and localisation of HRM in MNCs

Dowling, (2017)

Factors driving standardisation

MNCs that standardise:

• pursue multinational or transnational corporate strategies
• supported by corresponding organisational structures that are
• reinforced by a shared worldwide corporate culture

Factors driving localization

• Cultural environment
- more social context : more complete balance of extrinsic and intrinsic
rewards
- more individual or fast changing personal and social contexts : more
extrinsic rewards
• Institutional environment (country-of-origin host country)
• Mode of operation abroad

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• Subsidiary role: e.g., global innovator, integrated player, implementer

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 Factors Influencing Standardisation of Work Practices

Dowling et al. (2017)

Subsidiary mandate

The position a subsidiary holds within the global ‘family’ is an important aspect when
discussing the transfer of work practices. Transferring knowledge and competence
is difficult as subsidiary initiatives are often not seen as relevant. However, staff
movements can assist here

Standardisation of work practices

This depends on :
 The receptivity of local workforce to adhere to corporate norms of behaviour
 The effectiveness of expatriates as agents of socialisation
 Whether localisation is timely (not just prompted by cost considerations)
 Appropriateness to the local environment

Factors influencing standardisation

• Host-country culture and workplace environment

• Mode of operation involved
• Size and maturity of the firm
• Relative importance of the subsidiary
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 Convergence versus Divergence
(Standardisation versus Localisation)

Bartlett and Ghoshal (2002) proposed that strategies in an international context are
characterized by conflicting pressures of global standardisation (ie internal
consistency with the rest of the multinational company) and local differentiation (ie
external consistency with local environments).

Standardisation or convergence refers to the degree to which an international

parent company’s HR policies and practices are adopted by each of its subsidiaries.

Localisation or divergence refers to the extent to which subsidiaries operate their

own HR policies and practices and act and behave as local firms.

The International Scene

Brewster et al (2005) identified five distinct, organisational drivers of this process -

efficiency orientation, global service provision, information exchange, core business
processes and localisation of decision making. The outcome has been for
international businesses to focus on creating an alliance of global units (in the sense
of working together to achieve global strategic goals), rather than national units (in
the sense of taking a parochial interest in local concerns and ignoring global
requirements). This has resulted in an increased move towards standardisation
(convergence) of HRM policies and procedures and a decreased interest in their
localisation (divergence). Globalization has encouraged the development of
international HRM, enhancing the role and authority of international HR functions.

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 International HRM strategies

International HRM strategies will be affected by the different types of business

strategies that MNCs can adopt, as identified by Bartlett and Ghoshal (2002: 18–19):
1. Multinational – building strong local presence through sensitivity and
responsiveness to local needs.
2. Global – building cost advantages through controlled global-scale operations.
3. International – exploiting parent company knowledge and capabilities through
worldwide diffusion and adaptation.
4. Transnational – creating a new organisational model by simultaneously
developing global competitiveness, multinational flexibility and worldwide
learning capacity.

Contextual Factors
All HR activities are affected by the context in which they operate, but the variety of
contexts in which international HRM functions is significant. They strongly influence
decisions on the dissemination of parent company policies and practices
(convergence or divergence) and on the employment of expatriates. Cultural
differences in local environments are often treated as the most significant factor to
be taken into account in managing globally, but differences in local institutions and
practices, such as collective bargaining, can also be important.

Convergence and Divergence

International HRM involves the need to determine how an organisation should
implement similar policies and practices across the world (convergence), or allow
overseas subsidiaries to adopt or modify their own practices of the parent company
to suit local requirements (divergence). This is a dilemma facing all MNCs -
achieving a balance between international consistency and local autonomy. Festing
and Eidems (2011: 163) claim, ‘In the course of increasing globalization, more and
more MNEs are being forced to compete globally and simultaneously adapt their
business strategies to changing local demands…and…firms tend not to standardize
a whole HRM system but rather focus on single practices’.
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 The nature of convergence and divergence

It is acceptable for management in the parent company to shape and standardise

key HR policies and practices throughout an international organisation – a ‘one-
country’ approach. However, divergence in the form of allowing subsidiaries to apply
their own practices to ensure local requirements are incorporated (localisation), can
also be necessary - ‘think globally but act nationally’.

Where global integration and coordination are important, subsidiaries need to be

globally integrated with other parts of the organisation and/or strategically
coordinated by the parent. Additionally, where local responsiveness is important,
subsidiaries have greater autonomy and there is less need for integration. However,
it is not a simple choice between adopting a total convergence or total divergence
approach. Even within a single HR function there might be convergence at one level
but divergence at another level.

Industry examples

IBM and Oxfam operate models based on universal principles/values across the
organisation, which are then implemented differently at regional or national level.

With McDonald’s, there are only limited local variations, but the product is
essentially the same globally.

Unilever, whose products and processes tend to be much more responsive to the
local market.

The convergence and divergence of HRM policies are associated with centralisation
and decentralisation – but there are differences.

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 Factors affecting convergence and divergence

Drivers for convergence (Standardisation)

Smale (2011) identified drivers for global integration or convergence:

1. Environmental drivers, which include the removal of trade and investment
barriers, deregulation of markets, emergence of global customers, spread of
web-based technologies and the opening up of developing countries such as
Brazil, China and India. These drivers force organisations to adopt a globally
integrated approach to managing the business.
2. Strategic drivers - which capture the business advantages that result from
global integration e.g global branding, worldwide standardisation, and the ability
to respond quickly to competitive challenges by redeploying resources.
3. Structural drivers - global structures based on international product divisions
that promote integration. Lertxundi and Landeta (2012: 1988) explained that
‘organisational practices should be viewed as valuable resources and
capacities that it is useful to replicate and exploit throughout the organisation.’

Choice of convergence

Harris and Brewster (1999) identified factors affecting the choice of convergence:
 The extent to which there are well-defined local norms.
 The degree to which an operating unit is embedded in the local environment.
 The strength of the flow of resources e.g. finance, information and people,
between the parent and the subsidiary.
 Nature of the industry – the extent to which it is a domestic industry at local
level.
 The specific organisational competencies, including HRM, which are critical for
achieving competitive advantage in a global environment.

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Organisations seek what works for them and for HR in multinational companies, the
range of options is limited to a few common practices that are believed to secure
high performance.

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 Advantages and Disadvantages of Convergence

Advantages

1. Convergence can ensure that established good practice and common values in
the parent company, can also contribute to the success of foreign subsidiaries.
2. It can help to ensure that a global mindset exists that enables distinct units to
work together to achieve a common purpose - (General Motors mantra is ‘One
GM one global team’).
3. It can advance approaches in each unit that are consistent with the values and
beliefs of the parent company.
4. Gives greater control over dispersed operations internationally
5. Can provide cost controls.

Disadvantages

1. Can lead to the introduction of inappropriate practices that will fail to operate
effectively, alienate local managers and inhibit their willingness and ability to
think for themselves.
2. Harmonisation can stifle innovation, across different units/countries
3. The centre/HQ loses touch with the front line of the business
4. Ill-conceived policies may be undermined at a local level
5. Does not readily fit with workforce segmentation.

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 Achieving convergence

It is easier to transfer strategies and policies, rather than practices. Trying to impose
central practices globally, in certain cases it may be preferable to establish broad
policy/guidelines that underpin the values that the parent company would like to be
applied throughout the organisation. For example, ethical principles on how people
should be treated, or preferred approaches to the recruitment, selection, induction
and reward of employees. It might be necessary to issue guidelines in union
recognition and collective bargaining, which recognise that in some countries trade
unions will have to be accepted and allowed the rights at least to represent their
members and, perhaps, to negotiate on their behalf. However, it may not be possible
to standardise some aspects of HRM because of local employment law regulations.

Global HR policies in areas as talent management, performance management and

reward may be developed, communicated and supported by centres of excellence,
often through global networking. However, a degree of freedom is often allowed for
local management to adopt their own practices in accordance with the local context –
as long as in principle these are consistent with global policies.

Convergence can be achieved by exercising centralised control; forcing subsidiaries

to install the HR policies and practices of the parent company. But managers in
subsidiary companies may seek to maintain as much independence as possible and
block/dilute attempts made by HQ to enforce its policies. A performance
management system complete with standardized forms can be installed in foreign
companies.

There are other ways of disseminating good practice from headquarters such as
information, communication and learning. HR and expatriates can play a major role
in these activities. One method of moving practices across boundaries is to establish
formal mechanisms to facilitate the transfer of knowledge. For example,
Bertelsmann, the German publishing company, has created a number of ‘expert
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committees’ for this purpose composed of specialists in such areas as HR,
distribution and IT.

Host country culture and workplace environment

The Linkage between Culture and Behaviour

The work behaviour is culturally determined. Whether

the corporate culture supersedes or replaces other
‘cultures’, is a subject of much debate. Often, what is
meant by corporate culture translates into universal
work behaviours and the standardisation of work
practices.

Mode of operation

The choice of mode of operation is important in determining the standardisation of

work practices. Ownership and control are important factors e.g. wholly owned
subsidiaries provide greater opportunities for transferring work practices than in
International Joint Ventures (IJVs).

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 Examples of impact of the cultural and institutional context on HRM practices

Mode of Operation and HRM

The mode of operation and HRM is not just subsidiary operations. Organisations
may also adopt contractual modes, e.g.

 Licensing e.g. Unilever have a licensing agreement with Vera Wang to

develop their fragrance
 Franchising e.g. Subway, McDonalds outlets
 Management Contracts e.g. Hilton, Mariott hotel chains internationally
 Projects and/or fixed term assignments for a specific purpose
 Co-operative modes (such as joint ventures), e.g. Toyota and Panasonic in
the development of batteries for electric vehicles

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 Linking Operation Mode and HRM

Dowling and Welch, (2005)

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 Formation of an international equity joint venture

Dowling et al. (2017)

International Joint Ventures (IJV) challenges include

• HR must manage relations at the interfaces between IJV and parent
companies, as different rules can create critical dualities
• HR must develop appropriate HRM practices and strategies for the IJV itself
i.e. HR must recruit, develop, motivate, retain human resources at IJV level

Industry example : BMW and Toyota, in the development of next-generation

environmentally-friendly vehicles and technologies.

HR Factors for International Joint Ventures

HR issues and activities that affect the successful functioning of international joint
ventures include:
 Assigning managers to the joint venture.
 Evaluating their performance.
 Handling aspects pertaining to career path.
 Compensation benefits.

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 HR activities in the phases of a cross-border Mergers and Acquisitions

These phases below are often use in the planning and implementation of integrating
human resources when aligning more than one organsation, across international
borders

Dowling et al. (2017)

Barriers to international markets by SMEs

1. Not enough working capital to finance exports

2. Inability to identify valid foreign business opportunities
3. Limited information to locate/analyze markets
4. Inability to contact potential overseas customers
5. Inability to obtain reliable foreign representation
6. Lack of managerial time to handle internationalization
7. Untrained or not enough personnel to go international
8. Difficulty in managing competitors’ prices
9. Lack of home government assistance & incentives
10. Excessive transportation & insurance costs

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 Topic Summary

Through the approach taken in this topic, it has been demonstrated

that there is an interconnection between international HRM
approaches and activities and the organisational context and that
HR managers have a crucial role to play. In order to perform this
role better, it would seem important that HR managers understand
the various international structural options - along with the control
and co-ordination demands imposed by international growth - and
the HR implications that accompany the range of operation modes
outlined.

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