International Business: Actions(III)Business Functions within the MNCs

Business College

School of Management

Key Learning Objective

• This session will help you to understand the concepts of:

1) Internationalisation of business organisations

2) Key international business functions

3) Complexities of choices and approaches in internationalisation

Aims of the Session:

• To understand aspects of various functions in the international business organisations.

• To consider the benefits and problems of the internationalisation in human resource and knowledge management in IB organisations.

Key Questions

• What are the key functions in the process of internationalisation of firm?

• How does international business organisation manage its internal operations?

• How does international business organisation manage its external operations (e.g. relationship with the host country/communities)?

Recap

• We looked at the concept of ‘internationalisation’ of firms and rationale behind their decision-making process.

• Advantages and Risks of internationalisation

http://www.youtube.com/watch?v=KGfrN8jvgko : a BBC report on China and Chinese Business Expansion.

Corporate Governance within the MNC

•Corporate governance refers to the way in which company boards oversee the running of the corporation by its managers and how board members are accountable to shareholders and the company in general (Johnson and Turner, 2010)

The corporate Governance for IB organisation: Issues to be aware of

• Company Transparency;

• Relationship with stakeholders in the host countries;

• Shareholder rights;

• Labour relations;

• Fair competition;

• Tax and pension policy;

• Disclosure requirement.

(Source: Brooks et al, 2004)

Function: International Human Resource Management (IHRM)

• IHRM is distinct from generic HRM on two grounds:

1) The complexity of operating across multiple national environment.

2) Employing different national categories of workers.

This function requires careful attention from MNC.

Tapping the World’s Innovation Hot Spots(Source: Gao, 2009)

• Changing dynamics of global innovation: “What are the implications of this new “Innovation World?”

• System Integration Approach: companies can take advantage of the differences in national environments through innovation arbitrage

• 4 Innovation Models: some exist in pure form while others are a component of a nation’s overall innovation strategy

Model 1: The Focused Factory

• What is a focused factory?

- Clear strategic intent

- Infrastructure

- Talent

Examples: Denmark, Singapore (Biopolis, Fusionopolis)

Key players: GSK, Novartis.

Model 2:Brute Force

• What is “Brute Force”

- Large source of low-cost labour

- Innovation opportunities

- Law of averages

- Examples: India, China

- Players: Microsoft, Berkshire Hathaway

Model 3: Hollyworld

• What is “Hollyworld

- Forming a global creative class (Silicon Valley Effect)

- Developing an enticing innovation destination

- Examples: India/ Singapore

Model 4: Large Scale Ecosystems

• Large-Scale Ecosystems : end to end innovation systems

- Self-contained environments

- Alliance-management skills needed

Examples: Finland – Focus on education, science and technology (Aalto university)

Driving Forces of Global Innovation

1) Innovation as a currency of global competition- pursuing the “global dream”; countries in-source American culture

2) Global war for talent- talented young innovators can be attracted anywhere through incentives and opportunities

3) Innovation as a national agenda- nations increasing embrace innovation as a national priority

4) Power of networks – global networks are becoming increasingly intertwined

Activity 1:

• How could each of these companies take advantage of the innovation models?

• You will be divide into groups and please select one of these companies.

• Brainstorm how leveraging these models could benefit the strategic way the company do business.

• Share with the class.

IHRM: Approaches to Staffing

• Factors affecting approaches to staffing

– General staffing policy on key positions at headquarters and subsidiaries

– Constraints placed by host government

– Staff availability

Ethnocentric

Polycentric

Geocentric

Regiocentric

Ethnocentric

• Strategic decisions are made at headquarters;

• Limited subsidiary autonomy;

• Key positions in domestic and foreign operations are held by headquarters’ personnel;

• PCNs manage subsidiaries.

Polycentric

• Each subsidiary is a distinct national entity with some decision-making autonomy;

• HCNs manage subsidiaries who are seldom promoted to HQ positions;

• PCNs rarely transferred to subsidiary positions.

Geocentric

• A global approach - worldwide integration;

• View that each part of the organization makes a unique contribution;

• Nationality is ignored in favor of ability:– Best person for the job;

– Color of passport does not matter when it comes to rewards, promotion and development.

Geocentric Staffing Requirements(Source: Brooks et al, 2008)

Regiocentric

• Reflects a regional strategy and structure;

• Regional autonomy in decision making;

• Staff move within the designated region, rather than globally;

• Staff transfers between regions are rare.

Ethnocentric Approach

Advantages:To ensure new subsidiary complies

with overall corporate objectives and policies

Has the required level of competence

Assignments as control

Disadvantages:

Limits the promotion opportunities of HCNs, leading to reduced productivity and increased turnover among the HCNs

Longer time for PCNs to adapt to host countries, leading to errors and poor decisions being made

High cost

Considerable income gap, high authority, and increased standard of living may relate to lack of sensitivity

Polycentric Approach

Advantages:

Employment of HCNs eliminates language barriers, avoids adaptation of PCNs, reduces the need for cultural awareness training programs

Employment of HCNs allows a multinational company to take a lower profile in sensitive political situations

Employment of HCNs is less expensive

Employment of HCNs gives continuity to the management of foreign subsidiaries (lower turnover of key managers)

Polycentric Approach

Disadvantages:

Difficult to bridge the gap between HCN subsidiary managers and PCN managers at headquarters ( language barriers, conflicting national loyalties, cultural differences)

HCN managers have limited opportunities to gain experience outside their own country

PCN managers have limited opportunities to gain international experience

Resource allocation and strategic decision making will be constrained when headquarter is filled only by PCNs who have limited exposure to international assignment

Geocentric Approach

Advantages:

Ability of the firm to develop an international executive team

Overcomes the federation drawback of the polycentric approach

Support cooperation and resource sharing across units

Disadvantage:

Host government may use immigration controls in order to increase HCNs employment

Expensive to implement due to increased training and relocation costs

Large numbers of PCNs, HCNs, and TCNs need to be sent across borders

Reduced independence of subsidiary management

Regiocentric Approach

• Advantages:Allow interaction between executives transferred to regional headquarters from subsidiaries in the region and PCNs posted to the regional headquartersProvide some sensitivity to local conditionsHelp the firm to move from a purely ethnocentric or polycentric approach to a geocentric approach

• Disadvantages:Produce federalism at a regional rather than a country basis and constrain the firm from taking a global stanceStaff’s career advancement still limited to regional headquarters, not the parent country headquarters

Parent-Country Nationals

Advantages• Organizational control and coordination is

maintained.

• Rising stars are given international experience.

• PCNs may be the best people for the specific job due to special skills and experience.

• An assurance that the subsidiary will comply with company objectives & policies.

Advantages• Organizational control and coordination is

maintained.

• Rising stars are given international experience.

• PCNs may be the best people for the specific job due to special skills and experience.

• An assurance that the subsidiary will comply with company objectives & policies.

Disadvantages• Promotional opportunities of HCNs are

limited.

• Time and performance costs associated with adaptation to the host country.

• PCNs may impose an inappropriate HQ style.

• Compensation for PCNs and HCNs may differ.

Disadvantages• Promotional opportunities of HCNs are

limited.

• Time and performance costs associated with adaptation to the host country.

• PCNs may impose an inappropriate HQ style.

• Compensation for PCNs and HCNs may differ.

Host-Country Nationals

Advantages

• Language and other barrier eliminated

• Reduced hiring costs

• Continuity of management

• Government policy may require hiring HCNs

• Possible increased morale because of increased career potential

Advantages

• Language and other barrier eliminated

• Reduced hiring costs

• Continuity of management

• Government policy may require hiring HCNs

• Possible increased morale because of increased career potential

Disadvantages

• Hiring of HCNs may encourage a federation of national rather than global units

• HCNs have limited career opportunity outside the subsidiary

• Control and coordination of HQ may be impeded

• Hiring HCNs limits opportunities for PCNs to gain foreign experience

Disadvantages

• Hiring of HCNs may encourage a federation of national rather than global units

• HCNs have limited career opportunity outside the subsidiary

• Control and coordination of HQ may be impeded

• Hiring HCNs limits opportunities for PCNs to gain foreign experience

Third-Country Nationals

Advantages

• Salary and benefit requirements may be lower than for PCNs.

• TCNs may be better informed than PCNs about host-country environment.

Advantages

• Salary and benefit requirements may be lower than for PCNs.

• TCNs may be better informed than PCNs about host-country environment.

Disadvantages

• Transfers must consider national animosities.

• Host government may resent hiring TCNs.

• TCNs may not want to return to their own countries after assignment.

Disadvantages

• Transfers must consider national animosities.

• Host government may resent hiring TCNs.

• TCNs may not want to return to their own countries after assignment.

Determinants of IHRM Approaches and Activities

Activity 2: Management of IHR policies

• An Australian mining company (operating in Laos, Cambodia and Chile) is facing HR crisis. They can’t retain their staff and need some ideas to improve their policies. In your team please discuss the best IHR policy for the industry, company and explain why your team consider that policy.

Reasons for International Assignments

• Position filling, e.g.

– Skills gap, launch of new endeavor, technology transfer

• Management development

– Training and development purposes, assisting in developing common corporate values

• Organizational development

– Need for control, transfer of knowledge, competence, procedures and practices

Types of International Assignments

• Short term: up to 3 months– Troubleshooting

– Project supervision

– A stopgap until a permanent arrangement is found

• Extended: up to 1 year– May involve similar activities as short-term assignments

• Long term– Varies from 1 to 5 years

– The traditional expatriate assignment

Roles of an Expatriate

• Agent of direct control

• Agent of socialization

• Network builder

• Boundary spanner

• Language node

• Transfer of competence and knowledge

A Glamorous Life

• International business travelers cite the positives as:– Excitement and thrills of conducting business deals in foreign

locations

– Life style (top hotels, duty-free shopping, business class travel)

– General exotic nature

But a High Level of Stress!

• Home and family issues– Frequent absences

• Work arrangements– Domestic side of position still has to be attended to

• Travel logistics– waiting in airports, etc.

• Health concerns– Poor diet, lack of sleep, etc.

• Host culture issues– Limited cultural training

Centralized HR CompaniesDecentralized HR

CompaniesTransition HR Companies

• Large well-resourced HR departments

• Small HR departments • Medium-sized HR departments

• Key role: Managing all high-grade management positions worldwide

• Key role: Managing elite corporate managers

• Key role: Management and development of senior managers and expatriates

• Key activities: Planning international assignments and performance management globally, identifying high-potential staff

• Key activities: Influencing operating units to support international assignments, supporting decentralized HR

• Key activities: Persuading divisional managers to release key staff using informal and subtle methods, strategic staffing.

Source: Based on H. Scullion and K. Starkey, in Search of the Changing Role of the Corporate Human Resource Function in the International Firms, International Journal of Human Resource Management, V 11, N 6 (2000) pp. 1061-1081.

Various Roles of Corporate HR

RMIT University Slide 38

Reasons for Expatriate Failure

•US multinationals– Inability of spouse to adjust

–Manager’s inability to adjust

–Other family problems

–Manager’s personal or emotional immaturity

– Inability to cope with larger overseas responsibilities

• European multinationals

• Inability of spouse to adjust

•Japanese Firms–Inability to cope with larger

overseas responsibilities

–Difficulties with the new environment

–Personal or emotional problems

–Lack of technical competence

–Inability of spouse to adjust

(Source: Hill, 2010)

RMIT University Slide 39

Expatriate Selection

• Reduce expatriate failure rates by improving selection procedures

• An executive’s domestic performance does not (necessarily) equate to his/her overseas performance potential

• Employees need to be selected not solely on technical expertise, but also on cross-cultural

fluency

RMIT University Slide 40

4 Attributes that Predict Success

•Self-Orientation– Possessing high self-esteem, self-confidence and mental well-being

•Others-Orientation– Ability to develop relationships with host country nationals – Willingness to communicate

RMIT University Slide 41

4 Attributes that Predict Success

•Perceptual Ability– The ability to understand why people of other countries behave the way

they do

– Being nonjudgmental and flexible in management style

•Cultural Toughness– Relationship between country of assignment and the expatriate’s

adjustment to it

RMIT University Slide 42

Training and Management Development

•Training: Obtaining skills for a particular foreign posting

– Cultural training: Seeks to foster an appreciation of the host country’s culture

– Language training: Can improve expatriate’s effectiveness, aids in relating more easily to foreign culture, and fosters a better firm image

– Practical training: Ease into day-to-day life of the host country

RMIT University Slide 43

Training and Management Development

•Development: Broader concept involving developing manager’s skills over his or her career with the firm

– Several foreign postings over a number of years

– Attend management education programs at regular intervals

Activity 3: Life of Expat.

• Imagine you are working with the HR team from an automobile MNC. Now you need to set up a training package for 3 Australian engineers who are going to work in Singapore for 3 years.

• Please outline the content of your training and explain why your team propose such activities.

RMIT University Slide 45

Repatriation of Expatriates

• A critical issue in the training and development of expatriate managers is preparing them for reentry into their home country

• Repatriation should be seen as the final link in an integrated, circular process that selects, trains, sends, and brings home expatriate managers

• Research shows that there is a problem with the repatriation process

Why IHRM matter?

• Human capital provides competitive advantages to the firm.

• Personal and organisational knowledge can be transferred across locations (and firms).

• Management of HR across locations involve local knowledge and expertise.

• The sharing of knowledge across functions can be done through proper IHRM process.

Activity 4: Final Discussion

• In your team, please discuss factors influencing success and/or failure of HR practices in multinational corporations.

References

• Brooks, I., Weatherston, J. and Wilkinson, G. (2008), The International Business Environment: Challenges and Changes. London: Prentice Hall.

• Hill, C. (2010), International Business (7th Ed.), McGraw Hill: NY.

• John, D. and Turner, C. (2010), International Business: Themes and Issues in the Modern Global Economy. Oxon: Routledge.