Human Resource Management
Study question
Identify and analyze critical factors (3-5) multi-national corporations (MNCs) should take into consideration when deciding on the extent to which they should centralize or localize HR functions in a new foreign national location?
Introduction:
Multinational Corporations (MNC) refers to organizations that wholly or partially (under partnership) operates in several countries to gain competitive advantage in the global market. In the past few decades, companies have been affected with increasing competition. Intensive competitive environment have been catalyst by globalization, international integration liberation, international production integration and internationalization of marketing and research by leading Multinational Corporations (MNC) (Adler, 2002, p. 321).Globalization has prompted MNCs to invest in the oversea markets to maintain or gain competitive advantage. Human Resource Management (HRM) practices and policies are crucial as they co-ordinate and control the international operations of the MNC from the headquarters. The HR systems assist in shaping the organizational culture and the operations of its stakeholders (Briscoe D. and Schuler, 2004, p. 53).
There have been attempt by the MNCs to integrate their HRM policies and practices in the subsidiary companies which have been met with some resistance.HRM faces major constraints while trying to implement global strategies to the subsidiaries. This is due to the differences involved in the managing and employing people from disparate cultural and national backgrounds (Almond, 2004, p. 596). The MNCs have been undergone critical decision making on whether to centralize or localize HR functions to the subsidiaries and to what extent should it be exercised.
HRM uses several strategies while co-coordinating its functions between the headquarters and the Subsidiaries firms namely: The exportive strategy where HR functions and decisions are made by the parent company; Adaptive strategy where HR functions are determined by the subsidiary companies; and Integrative strategy where the two entities co-ordinate their activities: There are specific functions performed by the parent and subsidiary companies (Brewster, 2007, p. 87).
To fit in the globalised market, the traditional HR departments have been transformed to either Strategic International Human Resource Management (SIHRM) or International Human Resource Management (IHRM).the MNC should design HR system that considers both the global integration and local responsiveness (Beardwell, 2007, p. 173). The main challenge facing the MNC is how to apply the Management policies from the headquarters and at the same time conform to the local market practices. This study focuses on the factors to consider before localizing or centralizing HR functions for smooth operational and co-ordination. Several factors to be considered are financial compensation, cultural differences, performance appraisal, Training and Development, Country of origin and Influence of trade unions. But before analyzing these factors, it is important to review several scholarly articles talking about centralization and localization of HR functions (Gooderham, 2008, p. 2047).
Overview of HR functions and co-ordinations in MNCs:
“balancing the competing demands of global versus local requirements as well as the needs of coordination, control and autonomy” (Özbilgin, 2002, p. 123). The statement addresses the operational relationship between the subsidiaries and the parent companies. The main point it to whether the HR- practices and policies should be transferred from the head quarter to the subsidiaries or if the policies should be centralized or localized. The HR department can generally be guidelines that guide subsidiary braches to be locally sensitive while at the same time safeguarding the corporate image. The point is, for the employees to present the corporate image they should guided by the parent company policies rather than the subsidiary policies (Tayeb, 2005, p. 56).
According to (Harzing, 2011, p. 432) Human Resource should adhere to the local cultural practices and strategic demand to the community for the Multi-National Corporation to be adaptable and flexible to the local conditions. (Hollinshead G, 1995, p. 76) proposed that MNCs should leverage resources to the subsidiary levels to gain competitive advantage. In case where HR policies at the subsidiary branch obtain values, this should be considered to be an overall value gained by the MNC.
With regards to balancing between location and globalization of HR-functions. (Bamber, 1998, p. 236) states that parent company control should be higher employed on employee control since employees as an asset to the MNC are important to the success. When employees are coordinate from a central point, the MNC obtains a higher chance of gaining competitive advantage. According to. (Budhwar, 2001, p. 499) MNCs operations in as an external environment are influenced by economic, social, legislative and political pressure .Such forces highly influence localization of HR-functions. Some of the factors that influence centralization of the HR-functions are disparity in labor market regulations, trade unions, cultural differences, communication problems and geographical dispersion.
A study by (Fenton-O’creevy, 2008, p. 162) on the Swedish MNC subsidiaries situated in Russia, Finland and China found diversified degree of location/centralization of HR-functions (Edwards, 2006, p. 320) Compared the HRM practices between MNCs and subsidiaries in Greece and realized different degrees to the extent of localization/centralization of HR-practice of the firms. The scholar further argued that HR-functions within subsidiaries differ across different employees. For instance, the level of localization /centralization of managers functions are likely to be different from those applied on the supervisors. A study by (Bartlet, 1991, p. 14) on the appropriate ways to implement HR policies and practices at the subsidiary companies found out that the implications found be analyzed critically. He said that the extent to localize or centralize HR-functions should be based on the local resources.
According to (Boselie, 2005, p. 87) centralization do vary from MNC to another depending on the extent at which subsidiary rely on the environmental contingencies. (Scullion, 2005, p. 54) in his study found out that MNCs are turning to localization of the HR-functions as a way of gaining competitive advantage in the market. He said that the subsidiary HR department can be relied upon by the headquarters HR to balance the global and local needs. (Gold, 2004, p. 109) stated that it was high time the MNCs understand the pressure that exists in different host country .Localization of the HR-functions was the best way of achieving this. (Dowling P.J., 2004, p. 472) stated that although the MNCs operate under common goals and objectives, there was the need to localize the HR-functions. The decision was highly influenced by the different cultural and institution practices found in the hoist countries. (Golding, 2004, p. 410) however stated that activities like training and development of the new employees should remain with the HR department in the headquarters due to the cultural difference. (Gerhart, 2000, p. 41) said that the employees being the asset of MNCs they should undergo a uniform training to possess the core values of the organization.
Localization and Centralization in MNCs
The scholarly reviews have shown the co-ordination of functions between the HR departments existing under the MNCs. The review have also revealed that integration of HR-functions is important to competitiveness in the global market (Ferner, 2004, p. 363).Will accepting that some function need to be localized or centralized, there is a need to examine the extent .Before discussing the factors that influence the degree of localization or centralization of HR-function, it is essential to discuss the two terms.
Localization of the MNC is applied when local managers are used in running the business within the local set up instead of taking orders from managers at the parent company. There include devolving the HR functions as well. Centralization of MNC refers to a practice where the local subsidiaries are run from the parent company (Hollinshead, 2010, p. 54). All the policies and operations originate from the headquarters without considering the interests of the local stakeholders.
The table below differentiates localization and centralization systems/drivers:
| Differences | Centralization drivers | Localization drivers |
| Competency difference | Global practice | Local/Contingent practice |
| Consistency difference | There is the practice of global coherent and consistency in the HR system | There is political-legal differentiation ,the coherence adhere to the local regulations |
| Power difference | MNC have an advantage in the international market and affiliated industry. | The local partner control resources like material, labor, market, distribution and information. |
| Experience difference | The MNC is experienced in internationalizing its operations: the organization is at its maturity level. | The subsidiary is experienced in engaging other foreign partner s in negotiations. |
The differences between the centralization and localization systems arise from both internal and external factors. The internal factors include structural attributes such as ownership, management perception, internationalization state, source of authority, and decision styles (Hollinshead G, 1995, p. 71). The external factors are competition and industry characteristics, local politics, legal, social-cultural and economic conditions.
Factors that influence localization or Centralization of HR-functions between the MNCs and their Subsidiaries
As pointed earlier in the scholarly review, there several factors that influence the level of centralization or localization of HR-functions within the MNCs. This section will explicitly examine the factors while addressing their influence to the success of MNC partnerships.
The universal functions of the HR department in any organizations are recruitment and selections of new employees, training and development, financial compensations, performance appraisal. Another factor that influences the operations of the HR departments is trade unions, cultural differences existing within the employees (Hodgetts R.M. and Luthans, 2003, p. 309). The operations of MNCs are also influenced by the country of origins practices (political, economical, legal and social ).the same practices should are likely to be experienced in the host country. This section will discuss with respect to HR-functions.
Recruitment and Selection:
Several studies have revealed that there is a higher degree of localization of the recruitment and selection HR-function as compared to training and development. In a study on Western- Chinese MNC ventures, it was revealed that the parent company relied on the local HR department (Almond, 2004, p. 636). The parent company relied less on the standardized recruitment process. The mechanism is applied to recruit trustworthy personnel who are known to the local HR. Most preferred recruitment is done internally.
Some arguments that support localization of recruitment and selection process are: First, the labor markets are local in nature with various factors that influence the candidates supply; this is exceptional of senior managers. Secondly, the study on cross-national revealed that there are varying practices of recruitment and development (BoseliE, 2005, p. 76). Hence a centralized recruitment practice would not work in different social behaviors and national cultures. Although, Some MNCs choose to standardize the selection process as a way of promoting the organization culture and image. Under such a practice, centralized interview process is used in additional to universal psychometric tests and group interviews (Budhwar, 2001, p. 505). The process is used to eliminate recommendation and reference system that dominates the localized practice.
Localization of the recruitment process has several advantages to the MNCs. First, it provides the firm with the opportunity to gain benefits by investing in other environments. For example, the use certain assessment tests and socio-psychological selection can be easily transferred across other boarders. Secondly, with localization of the process assessment and psychometric tests that best fit a given environment could be developed (Fenton-O’creevy, 2008, p. 151). Third, the HR department will be involved with other activities to help the organization gain competitive advantage with devolvement of recruitment and selection process.
Training and Development
There have been contradictory opinions on whether to localize or centralize since the employees’ values would definitely influence the operations of the MNCs. There have been suspicions that HR department .First, due to cultural differences and variation in education systems, MNCs are affected with the variety of training and developments in the host countries. For the MNC that applies global strategy, it is advisable to centralize this practice while localization is appropriate for local strategized organizations (Fenton-O’creevy, 2008, p. 164). Cross-national differences in educational system and skills is the main divers use to localize Training and development activities.
For instance in china until recently, the education system has not been offering advanced study in human resource management as well as in marketing and business. Secondly, the host governments encourage MNC to invest in the locally and internal adapted trading and development management as a way of addressing specific skills lacking in the market (Ferner, 2004, p. 378). Hence, factors like education system, socio-cultural practices, political-legal and the local labor market factors should be examined before localizing or centralizing Training and development practices. However, the MNC headquarters are likely to be engaged on the details and types of specific training needs that the employees should possess in line with organizational vision, mission, goals and objectives. With the globalization and interaction strategies, there is likelihood that the control by the headquarters pertaining to training and development is likely to reduce (Gooderham, 2008, p. 53).
Performance Appraisal:
Several studies conducted on the system used by the MNC with regards to performance appraisal gave contradictory findings depending on nationality. Both Greece and China heavily depend on localization of the HR-function while the UK relies on the centralized practice (Adler, 2002, p. 73). The extent of localization or centralization of performance appraisal depends on salaries in the local labor market, equity and transparency as well as taxation policies.
Centralized performance appraisal practice is used to ensure effective performance evaluation and goals are set and used in the foreign subsidiaries. Centralization promotes strategic control over the subsidiaries’ operations (Dowling P.J., 2004, p. 227). Secondly, in order to promote fairness and transparency in the appraisal system, the headquarters usually provide universal procedures and forms to be used in the foreign units.
MNC usually transfer similar appraisal policies in all member units across nations in spite of the existing cultural diversity (Dowling P.J., 2004, p. 197). With taxation policies variation in different nations, the use of common performance appraisal system might favor some employees while oppressing others. For example, employees are likely to earn less in countries with higher percentage of taxable income. With regards to taxation policies, there have been proposals on the need to localize appraisal with some degree. The mechanism would assist in harmonizing salaries and performance appraisal methods to all MNC‘s employees across all the nations (Briscoe D. and Schuler, 2004, p. 43).
Financial compensation:
The HR-function is highly centralized compared to training and development, Recruitment and selection, and performance appraisal. The main factor that causes centralization of the practice is for the MNC HR at the headquarters to control the rewards and financial compensation of employees at the subsidiary levels. Output-based compensation is used by the MNC control the subsidiary units.
When there is a likelihood of financial misappropriation at the subsidiary level, Financial compensation practice is centralized. There have been financial scandals that have resulted to bankruptcy of MNCs with misappropriation of financial compensation and reward being cited as the main contributors (Gerhart, 2000, p. 65). Hence, to avoid such malpractices, MNCs prefer centralization of the practice rather than localization it. Most recently there has been a lot of political pressure on the MNCs to localize the practice in line with the local labor market policies and regulations. In response to the pressure, most MNCs localized the financial compensation and rewards of low and mid-level managers to subsidiary HR departments but still hold the control of the executives and top management (Edwards, 2006, p. 92). Hence, the extent of localizing or centralizing financial functions is influenced by political factors, financial misappropriation and control factors by the MNCs over their subsidiaries.
Cultural differences:
Cultural differences are major factors that influence the level of centralization or localization of HR- functions. This can be explained using China and UK as the case study. In china, the employees are granted the right to choose their employers while the employers are under no obligation to offer housing facilities (Boselie, 2005, p. 72). Secondly, the Chinese labor market relies on the team work in accomplishing organizational duties. There is high level of collaboration between the managers and employees. The Chinese culture prohibits individualism while promoting high long term orientation.
The UK cultural practices in the labor market in characterized by high masculinity and individualism. the UK culture promotes individual responsibility in the partaking of the organizational culture. The two scenarios presents contradictory situation which are likely to cause workforce conflicts as far as HR-functions are concerned (Boselie, 2005, p. 74).
Conclusion:
The debates on localization and centralization of HR-functions have been ongoing for a while as observed in the scholarly documents. There are several conflicting issues involved in the HR-departments between the parent and subsidiary companies. Factors such as political, cultural, social, legal practices in host and origin countries highly influence HR-policies and practices. There should be high evaluation of practices such as Recruitment and selection, training and development, Performance appraisal and financial compensation in the extent of localizing or centralization of HR-functions.
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