linking human resource management practices and organizational strategy

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Linking Human ResourceManagement Practices andOrganizational StrategyC. Christopher Baughn a , Keith Ward a & Mark A.Buchanan aa Department of Management , College of Businessand Economics, Boise State University , Boise, ID,83725, USAPublished online: 22 Sep 2008.

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Linking Human Resource ManagementPractices and Organizational Strategy:

A Cross-National StudyC. Christopher Baughn

Keith WardMark A. Buchanan

ABSTRACT. The purpose of this exploratory study is to examinecountry differences in human resource management (HRM) policiesand practices and to attempt to determine whether, at a country level ofanalysis, there is a relationship between HRM practices and strategy.This study is based on survey data from over 4,000 firms in 57 nations.Two dimensions of HRM practices were found. The first dimension,“flexibility,” is related to companies’ discretion in setting wages, work-ing hours, hiring and firing practices, as well as levels of collective bar-gaining power. The second dimension, HR “investment,” includesissues related to the importance of skilled personnel at all levels; ef-forts to ensure such skill levels; a cooperative, participative approachto employee relations; and compensation based on merit. These twoHRM dimensions were significantly related to different competitivestrategies. [Article copies available for a fee from The Haworth Document Deliv-ery Service: 1-800-HAWORTH. E-mail address: <[email protected]>Website: <http://www.HaworthPress.com> © 2004 by The Haworth Press, Inc. Allrights reserved.]

C. Christopher Baughn is Professor, Department of Management, College of Busi-ness and Economics, Boise State University, Boise, ID 83725 (E-mail: [email protected]).

Keith Ward is Assistant Professor, Department of Management, College of Businessand Economics, Boise State University, Boise, ID 83725 (E-mail: [email protected]).

Mark A. Buchanan is Professor, Department of Management, College of Business andEconomics, Boise State University, Boise, ID 83725 (E-mail: [email protected]).

Journal of Transnational Management, Vol. 10(1) 2004Available online at http://www.haworthpress.com/web/JTRAN

© 2004 by The Haworth Press, Inc. All rights reserved.doi:10.1300/J482v10n01_07 99

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KEYWORDS. Human resource, organizational strategy, cross nationalstudy

Cross-national comparisons of business practices emphasize the impor-tance of the context within which organizations are embedded. Pressuresfrom a nation’s political, economic, educational and legal institutions, cou-pled with shared cultural values, will mold key business practices (Clark,Gospel, & Montgomery, 1999; Dickmann, 2003; Hampden-Turner &Trompenaars, 1993). Cullen (2002) suggests such pressures will shapethe laws and expectations regarding selection and termination practices,wage and promotion criteria, and labor relations. Eventually a set of hu-man resource processes emerge as a “favored” way for managing thehuman resource function within a nation (Claus, 2003; Fey, Pavlov-skaya, & Tang, 2004).

While some scholars have explored the national context of humanresource management, others have examined the potential impact ofhuman resource practices on the competitive advantages of firms(Barney, 1991; Bowen & Ostroff, 2004; Cascio, 1991; Pfeffer, 1994;Wright & McMahan, 1992). Such human resource management(HRM) practices as training and development, employee pay systems(particularly performance-based compensation), employee feedback,and workplace organization have been found to be related to firm per-formance (Fey & Bjorkman, 2001; Huselid, 1995; MacDuffie, 1995;Paul & Anantharaman, 2003). Some studies have found that a firm’salignment of its HRM practices with its business strategy resulted ineffective performance (Becker & Gerhart, 1996; Becker & Huselid,1998; Gomez-Mejia & Balkin, 1992).

This study combines these two areas of research, examining the link-ages between countries’ human resource management (HRM) practicesand competitive strategy. Specifically:

1. How do HRM policies and practices differ across countries?2. How do these differences relate to the competitive strategies of

firms operating in those countries?

While numerous studies have described national differences in HRMpractices (Abegglen, & Stalk, 1985; Arkin, 1992; Brown, 1995; Caplin,1992; Schuler, Jackson, Jackofsky, & Slocum, 1996; Steers, Shin, &Ungson, 1989; Warner, 2004), the intent of question 1 (above) is to finda parsimonious means of depicting national differences in HRM prac-tices which may be applied across a wide spectrum of countries. These

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measures may then be used to assess the relationship to the competitivestrategies followed by firms in those countries (question 2).

LITERATURE REVIEW

HR Management Practices and Competitive Strategy

In recent years researchers have examined linkages between HRmanagement practices and an organization’s competitive strategy. SuchHRM practices as training and development, employee pay systems(particularly performance-based compensation), employee feedback,and workplace organization have been found to be related to firm per-formance (Fey & Bjorkman, 2001; Huselid, 1995; MacDuffie, 1995).Reflecting researchers’ desires to link HRM practices to organizationalperformance, much research in HRM has shifted from micro analyticresearch to a more macro or strategic perspective (Bowen, Galang, &Pillai, 2002; Delery & Doty, 1996).

Studies exploring the strategic human resource management per-spective have attempted to link HRM practices to the competitive strat-egies adopted by different firms. Schuler and Jackson (1988), Cabrera,Ortega and Cabrera (2003) and Arthur (1992), for example, uncoveredrelationships between organizations’ HR practices and the differentcompetitive strategies that they followed. However, research resultshave not been consistently supportive of the need to align HRM prac-tices with strategy (Fey & Bjorkman, 2001; Martell, Gupta, & Carroll,1996). A number of authors have argued for a universalistic (“best prac-tices”) perspective, maintaining that some HRM practices, such as in-centive pay, employment security, empowerment, training and skilldevelopment, will result in higher productivity and profitability regard-less of the firm’s strategic orientation (Ahmad & Schroeder, 2003;Pfeffer, 1994; Terpstra & Rozell, 1993).

With a few exceptions, the vast bulk of this research has taken placein the context of U.S. firms. Research on strategic human resource man-agement applied to the international arena (SIHRM) deals with the ef-forts of multinational firms (MNCs) to link HR management practicesto the strategic management processes of the organization (Taylor,Beechler, & Napier 1996). Studies on SIHRM link MNC strategy to de-cisions regarding the extent of transfer of human resource managementsystems to affiliates across national borders (or adaptation of host HRMpractices in those affiliates). The domain of comparative strategic hu-

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man resource management, wherein HRM-strategy relationships areexamined across a number of countries, is a relatively under-researchedarea (Clark, Gospel, & Montgomery, 1999). Research in comparativestrategic human resource management can address the national differ-ences in HRM systems (reflecting institutional and cultural pressures)which may not be obvious in single-nation studies.

Dimensions of HRM Practices

Characterizing HRM systems in multiple countries poses some inter-esting challenges. Even in a single-nation context, existing theory spec-ifying how HRM practices should be bundled together is quite limited(Fey & Bjorkman, 2001; Ngo, Turban, Lau, & Lui, 1998). Workingwith data from nearly 1,000 U.S. firms, Huselid (1995) identified twofactors in his analysis of HR practices. The first factor, “employee skillsand organizational structures,” captured practices intended to enhanceemployees’ knowledge, skills, and abilities (KSAs) and subsequentlyprovide a means through which employees can use those KSAs in per-forming their roles. The second factor found by Huselid was called“employee motivation,” and measured practices designed to recognizeand reinforce desired employee behaviors. Working in Hong Kong,Ngo et al. (1998) identified two HRM factors: “structural training anddevelopment” and “retention-oriented compensation.” A study of HRMpractices in Ukrainian industrial firms found three latent constructs: hu-man resources investment (emphasizing training), cost minimization(including reduction in employment following changes in production),and traditional social welfare (high range of benefits and social costs)(Buck, Filatotchev, Demina, & Wright, 2003).

In a study of foreign firms operating in Russia, Fey and Bjorkman(2001) found three HRM factors: “development” (training, career plan-ning, job security), “feedback” (information sharing programs), and“pay/organization” (performance appraisals, decentralized decisionmaking). However, factor analyses applied to the HRM practices offirms across a wide spectrum of countries may uncover other dimen-sions that reflect differing national pressures for organizational isomor-phism (Zucker, 1987).

HRM and Competitive Strategy Types Across Countries

Using a country level of analysis, one would expect national differ-ences in HRM systems to be related to competitive strategies adopted


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by the firms in those nations. Firms may be limited in their ability tocopy the strategies and organizational practices of the most successfulcompetitors in the world because of differences in the resource poolavailable to them (Cullen, 2002). Porter (1990) argues such resources–including the quantity, quality, and cost of available personnel, and thequality of supporting institutions (such as educational systems)–differconsiderably by country and can substantially shape the strategies offirms in those countries. Porter (1990) suggests that both natural-factorconditions and induced-factor conditions can be sources of competitiveadvantage. The cultural and institutional (political, economic, educa-tional and legal) pressures constitute the source of these induced-factorconditions. Firms from different nations will therefore have differentpools of (human) resources to tap in to different sources of competitiveadvantage, and potentially different strategies.

Germany, for example, has a large pool of technically trained work-ers. German firms also face strong cultural and institutional pressuresleading to the provision of pay raises to strong unions, as well as wel-fare, benefit costs, and taxes. In order to remain competitive, Germanfirms tend to position themselves in an industry by providing premiumproducts with high value added–a position usually associated with highcapital investment and training costs. Intensive management-labor co-operation is coupled with developmental human resource management(Dickmann, 2003). Competition based on low costs is rare in Germanyrelative to competition based on high quality differentiation (Cullen,2002; Hampden-Turner & Trompenaars, 1993).

Outside of the arena of SIHRM, most studies of the relationships be-tween HRM and strategy have utilized the typologies of Porter (1985)or Miles and Snow (1978) (Fey & Bjorkman, 2001). Given the founda-tion provided by Porter’s (1990) discussion of national sources of com-petitive advantage and the arguments presented above, Porter’s distinctionbetween strategies based on cost versus those based on differentiationseems to be particularly appropriate.

METHODOLOGY

Data regarding human resource practices in different countries wereobtained from the World Economic Forum’s Global CompetitivenessReport 2000 (Porter, Sachs, Warner, Cornelius, Levinson, and Schwab,2000). The report presents the results of a survey administered to seniorbusiness leaders who addressed a wide variety of questions regarding


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competitive conditions in their country. In developing the samplingframe for the survey, non-agricultural firms were chosen from a com-prehensive register of firms in each country. The distribution of eco-nomic sectors and firm size represented in each country’s sample wasdesigned to be proportional to the distribution in that country. Becauseof the small number of firms completing the survey in two of the coun-tries (Luxembourg and Ecuador) in the Porter et al. study, those twocountries were eliminated from this analysis. The resulting sample in-cludes 4,007 firms located in 57 countries (for the purposes of thisstudy, Hong Kong was treated separately from the rest of China). Thisyields an average of 70 surveyed firms per country.

Included in the survey were several items dealing with human re-source policies and practices. The items included such statements as“Hiring and firing practices by companies are determined by employ-ers,” and “Companies invest heavily to attract, develop, motivate andretain staff.” Respondents were asked to respond to these items usingseven-point Likert scales (1 = strongly disagree; 7 = strongly agree), in-dicating the extent to which these statements characterized practices intheir country. The 10 items dealing with human resource practices arepresented in Appendix I.

The Porter et al. survey also asked respondents to provide an indica-tion of their firm’s strategy. Respondents were given five categories tochoose from, three based on low cost, and two based on differentiation.The categories were:

• Low cost based on low wages or natural resource availability.• Low cost based on favorable costs of skilled workers.• Low cost based on product or process technology.• Differentiates your product from your competitors’ based on prod-

uct design or image.• Differentiates your product from your competitors’ based on ser-

vice.

Each respondent could choose only one of the 5 categories to de-scribe their firm’s main strategy. The percentage of firms endorsingeach of the strategy categories was calculated for each country. This ledto the creation of five variables measuring strategic orientation (“Cost-Wage/Resource,” “Cost-Skill,” “Cost-Tech,” “Diff-Product,” and “Diff-Service,” respectively).

Per capita gross domestic product for 1999 (in U.S. dollars, con-verted at purchasing power parity exchange rates) was obtained from


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the CIA World Factbook. Real (inflation adjusted) percentage growth inGDP during the years 1995 through 1999 was obtained from the Inter-national Monetary Fund World Economic Outlook (2000).

The analyses represent a three-step sequence. The first step involvesunderstanding the relationships among the human resource manage-ment practices themselves. The second stage involves depicting countrydifferences and similarities on HRM practices. Step three entails exami-nation of the relationships between the HRM dimensions and countryconditions as well as the relationships between HRM and the strategicemphasis of the firms in the 57 countries under study.

RESULTS

Dimensions of HRM Policies/Practices

The first step in this exploratory process was to examine the extent towhich the HRM items in this study formed coherent structures based onthe pattern of correlations among them. For this purpose, factor analysiswas applied to the ten items listed in Appendix I. The results of thisanalysis are presented in Table 1.

Factor analysis (Maximum Likelihood extraction, Varimax rotation)yielded two factors with eigenvalues greater than one, extracting 67%of the variance from the 10-item data set. Examination of the loadingspresented in Table 1 suggests that the two factors are each representedby 5 items. The first factor, represented by such items as “Hiring and fir-ing practices by companies are determined by employers” and “Wagesare determined by each individual company,” seems to reflect the flexi-bility that firms in that country have to adjust employment levels andcompensation. The factor also appears to reflect the movement of em-ployees among companies (“Turnover among local firms is high”). Thesecond factor contains items dealing with investment in human re-sources (“Companies invest heavily to attract, develop, motivate and re-tain staff”). This factor also includes items reflecting positive evaluationof employee competence and willingness to delegate authority to em-ployees. Based on the item loadings, the two factors will be subse-quently referred to as human resource flexibility and human resourceinvestment.

It should be noted that the label of the “flexibility” dimension placesa positive connotation for high scores on this factor–a connotation un-


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likely to be shared by those placing great value on the provision of eco-nomic safeguards for workers. While a high score on this dimensionreflects fewer constraints on company decisions to hire, fire, adjustwages and working hours, it also reflects less built-in protection ofworkers’ economic security in those countries. While the term “flexibil-ity” will be used throughout this paper, one could also conceive of thisfactor as a (reverse-scored) measure of protection of worker security.

Country Similarities and Differences

Two methods were used to compare country scores on the measuresof human resource practices. The first method involved comparing sim-ilarities and differences among the 57 countries on the ten items. Hierar-chical cluster analysis was used to group countries on the basis of theirscores on each of the HRM items. The 57 countries could readily begrouped into four clusters, which will be presented below.

The second method of comparing country scores involved creatingscales based on the dimensions found in the factor analysis of the HRMitems and arraying countries on the two scales. To do this, two separatefive-item scales were created from the HR items based on the factoranalysis discussed previously. Both scales were found to have reason-ably high levels of internal reliability. Coefficient alpha for the flexibil-


TABLE 1. Human Resource Practices and Policies: Factor Analysis

Rotated Factor Matrix Factor

1 2

1. Hiring and firing determined by employers .02 .76

2. Labor regulations facilitate the adjustment of working hours .14 .76

3. Union power and influence is low –.19 .82

4. Wages determined by each company –.26 .79

5. Turnover among local firms is high .13 .49

6. Management worker relations are cooperative .58 .18

7. Companies invest to attract, develop, motivate and retain staff .91 –.18

8. Willingness to delegate authority to subordinates is high .96 –.13

9. Compensation is closely linked to job performance .88 .11

10. Senior management positions filled by skilled professionals .92 �.08

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ity scale was .83. The alpha for the investment scale was .92. Means forboth the flexibility and investment scales were then calculated for eachof the countries in this study. Country scores for these two dimensionsare plotted in Figure 1. Abbreviations for the 57 countries in Figure 1are provided on the accompanying coding table (Figure 1A).

The positioning of the countries presented in Figure 1 indicates theirscores on the dimensions of human resource investment and flexibility.The investment and flexibility scores for Sweden, for example, are 5.78and 2.4, respectively. This places Sweden in the upper left-hand portionof the figure. In Figure 1, countries belonging to the same cluster (of thefour clusters revealed in the hierarchical cluster analysis) are enclosedin circles. For example, nine European nations make up the clusterfound in the upper left-hand portion of Figure 1 (high levels of HR in-vestment, lower levels of flexibility). A second cluster is found in theupper right-hand portion of Figure 1. This cluster includes a number ofEnglish-speaking nations, including New Zealand, the United King-dom, Canada, the U.S., and Australia. However, economically devel-


6.5

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3.02.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0

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INV

ES

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FLEXIBILITY

FIGURE 1. Mapping Country Scores on Human Resource Flexibility and In-vestment

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oped countries from Asia (Taiwan, Japan, Singapore, Hong Kong) andother geographic regions (Switzerland, Israel, Iceland) are also repre-sented in this group. This group is seen to show high levels of both in-vestment and flexibility. A third, 14-nation cluster is found in the lowerleft-hand portion of the Figure, while the remaining 22-nation cluster(high on flexibility, low on investment) is found in the lower right-handportion of the map.

Figure 1 is also divided into four quadrants based on overall medianscores for the flexibility and investment variables. The median score forHR flexibility is 4.12, while the median score for the investment vari-able is 4.34. Cluster membership meshes reasonably well with position-ing on the two dimensions of flexibility and investment. The quadrants


FIGURE 1A. Countries and Codes

Code Country Code Country Code Country

1. Arg Argentina 21. Hok Hong Kong 41. Por Portugal

2. Aul Australia 22. Hun Hungary 42. Rus Russian Federation

3. Aut Austria 23. Ice Iceland 43. Saf South Africa

4. Bel Belgium 24. Ido Indonesia 44. Sin Singapore

5. Bol Bolivia 25. Ind India 45. Slo Slovak Republic

6. Bra Brazil 26. Ire Ireland 46. Spa Spain

7. Bul Bulgaria 27. Isr Israel 47. Swe Sweden

8. Can Canada 28. Ita Italy 48. Swi Switzerland

9. Chl Chile 29. Jpn Japan 49. Tai Taiwan

10. Chn China 30. Jor Jordan 50. Tha Thailand

11. Col Columbia 31. Kor Korea (S) 51. Tur Turkey

12. Cos Costa Rica 32. Mal Malaysia 52. Ukr Ukraine

13. Czr Czech Republic 33. Mau Mauritius 53. UK United Kingdom

14. Den Denmark 34. Mex Mexico 54. USA United States

15. Egp Egypt 35. Net Netherlands 55. Ven Venezuela

16. Els El Salvador 36. Nor Norway 56. VN Vietnam

17. Fin Finland 37. Nzl New Zealand 57. Zim Zimbabwe

18. Fra France 38. Per Peru

19. Ger Germany 39. Phi Philippines

20. Gre Greece 40. Pol Poland

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are numbered 1-4, in the same order that the cluster analysis resultswere presented above.

While dividing this map based on mean scores for the flexibility andinvestment variables (3.98 and 4.54, respectively) would have shownsomewhat better correspondence with the cluster results, the use of me-dian splits has the advantage of creating four groups of almost identicalsize for subsequent analysis.

Relations Among HR Dimensions, Country Conditions,and Strategy

The next step in this study involved examination of the extent to whichthe dimensions of human resource investment and flexibility were relatedto other country conditions, as well as to the principal strategies engagedin by firms in those countries. This initially required correlational analy-sis. Table 2 presents the resulting matrix of correlations, linking flexibil-ity and investment to per capita GDP, GDP growth over the 1995-1999period, and the different strategies measured in the Porter et al. (2000)survey. In addition to the five strategy orientations discussed previously,a composite measure of differentiation strategy was created by summingthe two (differentiation based on product design and differentiation basedon service) measures. This is the “diff-composite” variable presented onTable 2 and on subsequent tables.

As can be seen in Table 2, the scales of human resource flexibilityand investment are reasonably independent (r = �.13, n.s.). While theflexibility scale is not related to either per capita GDP or GDP growth(r = �.13 and r = �.14, respectively), the scale measuring human re-source investment was highly correlated with country per capita GDP (r =.86, p < .01). Over the 57 countries in the sample, human resource flexi-bility tended to be associated with cost strategies based on wages andnatural resources (r = .27, p < .05) and cost strategies based on skilledworkers (r = .34, p < .05). Flexibility was inversely related to differenti-ation based on product design or image (r = �.37, p < .01).

Human resource investment was negatively related to cost strategiesbased on wages or skilled workers (r = �.37, p < .01, r = �.41, p < .01).The investment scale was significantly related to differentiation basedon product design and image (r = .45, p < .01) as well as to the overalldifferentiation composite (r = .49, p < .01). It should be noted that coststrategies based on product or process technologies were related to nei-ther flexibility nor investment (r = �.07 and r = �.14). Similarly, differ-


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entiation based on service was not related to flexibility (r = �.05) nor toinvestment (r = .25) at the .05 level of significance.

Human Resources Dimensions and Strategy: Regression Analyses

Use of simple bivariate correlations to assess the relationshipsamong the HR dimensions and strategy types is insufficient. As notedabove, the HR investment dimension is significantly related to countrywealth, as measured by per capita GDP. Because country wealth is re-lated to a host of conditions (higher labor costs, value added perworker, and higher quality educational systems) that may shape thestrategic choices of firms in a given country, it seems appropriate tocontrol for per capita GDP in assessing relationships between HR in-vestment and strategy. To address this issue, multiple regression anal-yses were performed, regressing each of the strategy options measuredin this study on the two HR scales as well as per capita GDP. The re-sults are presented in Table 3.


TABLE 2. Relationships Among Variables

1 2 3 4 5 6 7 8 9 10

1.Flexibility (.83)

2. Investment –.13 (.92)

3.GDP PerCapita

–.13 .86** –

4.GDPGrowth

–.14 .10 .02 –

5.Strat: Cst-Wge/Res

.27* –.37** –.43** –.22 –

6.Cost-Skill .34* –.41** –.46** –.02 .18 –

7.Cost-Tech –.07 –.14 –.03 –.13 .06 –.11 –

8.Diff-Product –.37** .45** .35** .01 –.43** –.29* –.24 –

9.Diff-Service –.05 .25 .29* .21 –.37** –.47** –.53** –.12 –

10.Diff-Composite

–.27* .49** .47** .19 –.59** –.59** –.61** .52** .79** –

n = 57(reliability coefficients are in parentheses)* p < .05** p < .01

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Of the six strategy-related dependent variables, the regression equa-tions provided significant prediction for all but the predictions of lowcost strategies based on technology and differentiation based on service.In the prediction of low cost strategies based on skilled workers, humanresources flexibility was significant, consistent with the bivariate corre-lation. In the prediction of differentiation strategies based on productdesign and image, the flexibility and investment variables were bothsignificant. That is, controlling for per capita GDP, product differentia-tion is more prevalent in counties with higher investment in human re-sources and lower human resource flexibility, consistent with thebivariate findings.

Examination of the Combined Effects of HR Flexibilityand Investment

It may be necessary to consider a country’s policies on both the in-vestment and flexibility dimensions simultaneously. The effect of flexi-bility on strategy choice, for example, may be a function of a country’slevel of investment in human resources. That is, the specific combina-tion of investment and flexibility, as represented by membership in spe-


TABLE 3. Multiple Regression Analyses

Dependent Variables

CostWage/Resc.

CostSkill

CostTech

Diff-Product

Diff-Service

Diff-Composite

IndependentVariablesa

GDP Per Capita –.42+ –.38 .36 –.14 .30 .17

Flexibility .22+ .28* –.08 –.32** –.01 –.21+

Investment .02 –.05 –.47+ .53* –.01 .32

R2 .23** .29** –.06 .30** .09 .30**

Adj. R2 .19** .25** –.01 .26** .03 .26**

a Standardized regression coefficients are tabled for each independent variable.+ p < .10 * p < .05 ** p < .01

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cific quadrants or clusters depicted in Figure 1, may be critical indetermination of strategy.

To address this issue, analyses of variance, using each of the strategytypes as dependent variables, is provided below. The analyses of vari-ance used median splits on the flexibility and investment variables tocreate 4 groups. These 4 groups are comprised of the countries shown ineach of the four quadrants in Figure 1. The analysis of variance consistsof comparing means for each of the strategy types across the 4 groups.The results of this analysis are presented in Table 4A.

An alternative grouping procedure, based on the clustering of coun-tries, is also possible. As noted previously, the four clusters are circledin Figure 1. As one can surmise by comparing quadrant and clustermembership, one would expect to see little difference between the twoapproaches. The analysis of variance results using the four clusters asthe grouping variable is presented in Table 4B.

Overall means for each of the strategy types are presented in the firstcolumn of these tables. It can be seen that differentiation based on ser-vice was the most frequently endorsed strategy type, chosen by nearly38% of the company (aggregated by country) respondents. Over 26% ofthe firms indicated differentiation based on product design or image astheir main strategy. Therefore, approximately 64% of the firms in thissample emphasized some form of differentiation (as measured by the“diff-composite” variable). Of the remaining 35.6% of the firms com-


TABLE 4A. Analysis of Variance Using Median Splits on Human ResourcesFlexibility and Investment

Means

Strategy Overall Quad 1 Quad 2 Quad 3 Quad 4 F Ratio

Cst-Wge/Res 5.13 3.08 3.83 4.85 8.63 3.57*

Cost-Skill 8.52 3.91 6.70 6.84 16.27 13.68**

Cost-Tech 21.95 21.34 20.49 22.75 23.19 .32

Diff-Product 26.42 30.82 27.53 27.50 20.03 6.72**

Diff-Service 37.98 40.81 41.44 38.05 31.87 2.65+

Diff-Composite 64.40 71.63 68.97 65.55 51.90 11.37**

n = 57 15 14 13 15+ p < .10* p < .05** p < .01

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peting primarily on the basis of cost, most emphasized cost strategiesbased on product or process technology. This category was endorsed bynearly 22% of the firms in this study. Cost strategies based on wages ornatural resources (5.13%) and low cost of skilled labor (8.52%) weremuch less frequently seen as the main strategic emphasis of these firms.

Examination of the F ratios for the five ANOVAs presented in Table4A suggest that use of cost-based strategies based on wages (F = 3.57,p < .05) and cost of skilled workers (F = 13.68, p < .01) differ signifi-cantly across the four quadrants. The most substantial of the mean dif-ferences involved the stronger reliance on cost strategies based onskilled workers seen in quadrant 4. While the means for this strategytype ranged from 3.91 to 6.84 for quadrants 1 through 3, the mean forquadrant 4 was 16.27. A similar pattern, though not as pronounced, isseen for quadrant 4’s emphasis on cost strategies based on wages or nat-ural resources.

The countries represented in quadrant 4 (high flexibility, low invest-ment) show less reliance on differentiation strategies. Just over half ofthe quadrant 4 countries emphasized differentiation strategies (see thedifferentiation composite) while over 70% of the quadrant 1 countriesdid so. The significant mean differences for differentiation (F = 11.37,p < .01) seem to be primarily a function of differentiation based on prod-uct design/image (F = 6.72, p < .01) rather than differentiation based onservice (F = 2.65, p < .10), though the trends are similar for both types ofdifferentiation. Post hoc tests (Scheffé) indicated significant differences


TABLE 4B. Analysis of Variance Using Cluster Membership

Strategy Overall Cluster 1 Cluster 2 Cluster 3 Cluster 4 F Ratio

Cst-Wge/Res 5.13 2.33 3.83 4.59 7.33 2.37+

Cost-Skill 8.52 4.55 5.34 5.05 14.08 10.47**

Cost-Tech 21.95 20.00 20.79 23.06 22.68 .38

Diff-Product 26.42 33.36 27.30 27.56 22.38 5.63**

Diff-Service 37.98 39.77 42.73 39.74 33.54 2.39+

Diff-Composite 64.40 73.13 70.03 67.29 55.92 8.13**

n = 57 9 12 14 22

+ p < .10* p < .05** p < .01

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between the quadrant 4 group and each of the other three quadrants inregards to product differentiation strategies and to cost strategies basedon skilled workers.

As can be seen in comparing the analyses in Table 4A with thosebased on cluster membership (Table 4B), the results are quite similar.The same significant pattern of mean differences is found for the strate-gies based on low cost of skilled labor (F = 10.47, p < .01) with cluster 4showing the greatest reliance on this strategy type. Firms in cluster 4countries indicated less reliance on differentiation strategies (F = 8.13,p < .01), particularly product differentiation strategies (F = 5.63, p <.01). Overall, the mean differences appear to be somewhat more pro-nounced in the analyses using the median splits, though the general pat-terns are the same.

DISCUSSION

In comparing human resource practices across countries, this studyidentifies 2 factors underlying such practices–HR flexibility and HR in-vestment. What we are labeling HR “flexibility” is determined by fac-tors related to companies’ discretion in setting wages, working hours,hiring and firing practices, as well as levels of collective bargainingpower. HR “investment” includes issues related to the importance ofskilled personnel at all levels, efforts to insure such skill levels, a coop-erative, participative approach to work relations, and compensationbased on merit. These factors in turn may reflect cultural and institu-tional pressures that set the relative bargaining power of the variousinputs to economic activity, especially that of capital and labor.

Superficially, the results presented in Figure 1 of this paper resemblethe country maps presented by Hofstede (1980, 2001), depicting coun-try positions (and cluster membership) on the four dimensions uncov-ered in his initial research. If one were to compare Figure 1 withHofstede’s measures, however, one would find that many countries aregrouped together here on the basis of HR practices despite some sub-stantial cultural differences. Germany and Austria, characterized byHofstede as “strong uncertainty avoidance cultures,” are clustered inFigure 1 with Sweden and Denmark, weak uncertainty avoidance cul-tures. This suggests that it is the adoption of variations of models of so-cial capitalism and industrial democracy in these European nationsrather than uncertainty avoidance per se that has led to the provision ofgreater safety nets (and hence lower flexibility) in these countries.


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While many of the countries in cluster 2 (U.S., Canada, U.K.) demon-strate highly individualistic, low power distance cultures, the clusteralso includes Hong Kong, Singapore, Taiwan, and Japan, which aremore collectivistic and show higher levels of power distance. This is notto say that the dimensions of HR and flexibility are unrelated to theHofstede measures–merely that they are not redundant with them.

HR Flexibility

High flexibility is characterized by relatively greater freedom of capi-tal interests to set the terms of utilization of labor, which may or may notbe accompanied by a social welfare system that spreads the burden of un-employment across society. Low flexibility is characterized by relativelygreater bargaining power of labor, which in turn may be due to strongerorganizational structures for labor and/or social norms leading to a legalenvironment that mandates labor protection or higher standards.

Germany and Sweden (in Cluster 1 on Figure 1) are among the coun-tries emphasizing such protections. Historically, the Swedish businessmodel was seen as a middle ground between capitalism and socialism.The Soziale Markwirtschaft (social market) of German capitalism pro-vides numerous institutions in the public continental law traditionwhich serve to reconcile public and private interests. This can be con-trasted with the sharp distinction between public and private sectorscommon to the English-speaking economies (Hampden-Turner andTrompenaars, 1993), which are found in Cluster 2. It should be notedthat while Australia is grouped with Cluster 2, it could easily be groupedwith Cluster 1 (and is in fact found in Quadrant 1 on Figure 1) due to thegreater historical influence of social egalitarianism in Australia’seconomic and labor structures (Patrickson & Hartmann, 2001).

A number of countries seemed to evidence higher levels of HR flexi-bility than might be expected given the writings on management prac-tices in those countries. Though Japanese HRM practices are rated hereas providing more labor protection than found in the U.S., Japan is stillfound in the same quadrant and cluster as the U.S. Perhaps Japan’splacement is less surprising given that Japanese practices of lifetimeemployment security are mostly a characteristic of large companies andmostly for men. Economic conditions in Japan have also reduced thenumber of firms able to afford such practices. It has been estimated thatcurrently only 15-18% of the workforce actually has lifetime security(Cullen, 2002, p. 480). Further, Japan’s enterprise unions are relatively


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weak, as many are company-dominated (Takahashi, 1997). This mayprovide greater freedom for firms in setting wages.

It might be hypothesized that a longitudinal study would show thatmost countries are currently moving to the right on Figure 1, that is,moving in the direction of increased flexibility and reduced economicsafeguards for employees. This movement reflects the trends of global-ization and its attendant pressures on resource allocation of labor andproductivity (see, for example, Bamber & Leggett, 2001; Zhu &Nyland, 2004). Australia, for example, has enacted a series of industrialreforms to de-regulate industrial relations and wage determination andaddress flexibility in business functions (Patrickson & Hartman, 2001;Sheridan & Conway, 2001). In South Korea, globalization coupled withthe economic crisis of the late 1990s led to statutory provisions topromote labor market flexibility (Lee & Lee, 2003).

However, countries would also be moving right at different speedsand for different reasons. For instance, Russia might be moving rightdue to the breakdown in the enforcement of legal protections for labor,while China would be moving right more for its removal of lifelong em-ployment and allowing private enterprise greater freedom (more reflec-tive of marketization). Even within a given country, globalization mayhave a greater effect on some sectors than on others. In the Philippines,for example, firms in the export-oriented sectors have adopted proce-dures to promote flexibility in the workplace, while more rigid work-place structures characterize firms in the import-substitution sectors(Skene, 2003).

HR Investment

The HR investment dimension reflects the fundamental role of HRMpractices in influencing employee skills through the acquisition and de-velopment of a firm’s human capital. Of course, the development andacquisition of such skills in workers are not useful unless they are used.The dimension measured here also captures organizational orientationswhich allow for delegation of authority to subordinates. These issuesare the same as those captured in the factor called “employee skills andorganizational structures,” labeled by Huselid (1995) in his study ofHRM practices in nearly 1,000 U.S. firms. This factor in our study alsoincludes attempts to align the interests of the employees with those ofthe firm through performance-based compensation, while in the Huselid(1995) study this issue would fall under another factor, “employee mo-tivation.” At a country level of analysis, it would appear that in those


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countries where firms invest highly in the development of human capi-tal, they tend to develop structures to insure both the opportunity andmotivation for its effective use.

This study found a very strong relationship (r = .86, p < .01) betweenthe HR investment dimension and country per capita GDP. This is notsurprising, in that firms from wealthier countries are more likely to havecapital to invest in the development of their employees. Also, it is cer-tainly arguable that over time, high levels of HR investment in a givensociety lead to greater productivity and therefore yield greater wealthfor the members of that society (though this study did not find a signifi-cant relationship (r = .10, n.s.) between HR investment and per capitaGDP growth during the 1995-1999 time period). Further, firms inwealthier countries will need to insure a higher value-added per workerto offset higher wages. While labor saving technologies may limit thereturns for some forms of investment in human capital, the continuingshift toward service economies and the already high levels of automationin developed counties place limits on such substitution (see Huselid,1995).

National HRM Practices and Strategy

Regarding the relationships between HRM dimensions and strategy,firms in countries with higher levels of HR flexibility tended to followcost strategies based on lower overall wages and wages for skilledworkers than did firms in countries placing greater constraints on laborforce adjustment. Flexibility was associated with lower levels of en-gagement in product differentiation strategies, and investment in humanresources was associated with higher levels of product differentiationstrategies. These findings were maintained even when controlling forthe substantial effect of country per capita GDP on the strategies offirms in those countries.

In terms of specific combinations of flexibility and investment, it wasfound that firms in the high flexibility-low investment group (quadrantfour) tended to differ substantially from other firms in their greater reli-ance on cost-based strategies brought about through use of low costskilled labor. Firms in this quadrant (and cluster) also did not make asmuch use of product differentiation strategies.

Two strategy types, the technology-based cost strategy and differ-entiation based on service, showed only weak relationships to themeasured HRM practices. The use of technology to reduce the cost oflabor may be utilized in the context of both high and low HR invest-


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ment, and high and low levels of HR flexibility. While the bivariate re-lationship between HR investment and service strategy approachedsignificance (r = .25), the modest relationship found here is somewhatsurprising. It is possible that norms for service in different countriesattenuate the HR investment-service strategy relationship.

In linking human resource practices to organizational strategy in dif-ferent countries, future studies may examine both the impact of strategicchoices on HRM practices (see Cabrera, Ortega, & Cabrera, 2003) aswell as how country conditions shape and constrain both HRM policyand strategy formulation.

Future Considerations

This study may help in providing a context for future work examin-ing human resource practices and strategy across countries. An under-standing of how a firm’s HRM practices compare with those of otherfirms in its own nation as well as across nations can help to highlight im-portant sources of competitive (and comparative) advantage. Strategicorientations of domestic firms in different countries, as well as patternsof foreign direct investment, may reflect such considerations. Future re-search may also track country changes in the flexibility and investmentdimensions, and examine the relationships of such changes with FDIand organizational strategy in those countries.

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ACCEPTED: July 2004


APPENDIX I

Survey Items Measuring Human Resource Practices

1. Hiring and firing practices by companies are determined by employers.

2. Labor regulations facilitate the adjustment of working hours to meetunexpected changes in demand.

3. Union power and influence is low.

4. Wages are determined by each individual company.

5. Turnover among local firms is high.

6. Management worker relations are generally cooperative.

7. Companies invest heavily to attract, develop, motivate and retainstaff.

8. Willingness to delegate authority to subordinates is high.

9. Compensation is closely linked to job performance.

10. Senior management positions are filled by skilled professionals.

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linking human resource management practices and organizational strategy

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