Difficulties faced by multinational companies (MNCs) in transferring home country HRM practices to subsidiaries

© Peter Atkinson
September, 2005

There has been much discussion among business academics over the past two to three decades of the limitations placed upon the activities of Multinational Corporations (MNCs) by national culture. The reason for the debate arising and intensifying is the increasing development of MNCs. The question of whether it is possible for a multinational company to override local culture and transfer its home country HR practices and management system to its subsidiaries also raises the question of whether it is advisable that the MNC should try to standardise its HR activities like this. When an MNC is considering its approach to HR throughout its operation simplistic formulae are unlikely to be of use; the matter of culture is complex and needs a considered approach.

This essay will first look at the nature of the problem and examine what kind of difficulties culture has given rise to for MNCs. Secondly, this essay will look at the reasons for standardisation of HR policy and practice and look at some examples where policy has successfully been applied in different cultures. Finally, we shall look at the relationship between company culture and national cultures and suggest a guideline that an MNC might use when approaching this problem.

Over the last few decades the size and number of MNCs has increased dramatically. An evolutionary pattern may be perceived for the MNCs development along with an analogous pattern of development in HRM thinking. Adler and Ghadar (1990) cited in Harzing and Ruysfeld (1995) (1) point out this pattern: the organisation begins as a firm operating in one country and becomes a firm with subsidiaries abroad having to take on board the culture of the location of each foreign subsidiary that, in turn, as the market becomes more competitive, drops sensitivity to local culture in favour of leveraging the economies of scale by a uniform global approach, finally moving towards being a truly "Transnational Corporation" - using the term coined by Bartlett & Ghoshal (1998) (2) - that draws on local resources of all kinds for the benefit of the whole corporation. These stages correspond to the different types of head office to subsidiary communication described by Perlmutter (1969) who is cited by many authors in the literature, for example, Rosenfeld and Wilson (1999) (3), though we should not take this formula too literally since organisations often exhibit the characteristics of more than one of Perlmutter’s types:

  • Ethnocentric – the firm is focused on the home country and only draws on experience gained in the home country. Home country personnel are perceived to be superior to foreigners.
  • Polycentric – turns the ethnocentric approach on its head and assumes that local people know best how to run a foreign subsidiary.
  • Regiocentric – brings together subsidiaries in a region, eg. Europe, on the assumption that these will have enough in common for there to be local differentiation at the same time gaining some economies of scale.
  • Geocentric – a truly global organisation in which the head office has the role of facilitating collaboration between subsidiaries so that resources may be used to the best effect wherever they are located. No distinction is made on the basis of nationality when managers are being appointed anywhere in the global operation.

In the ethnocentric stage the firm only has experience of the home country and only has the confidence to use principles and practices from there. As the firm establishes itself in foreign locations it becomes more efficient by becoming fully versed in local conditions, using local resources effectively and catering to the needs of local markets.

A polycentric approach puts host country nationals in charge of decision making. Each subsidiary is able to respond to local markets but at the cost of possible economies of scale. If foreign subsidiaries are making a good profit other MNCs will be attracted into the market and competition increases.

The response to intense competition is to leverage economies of scale to be had from the global operation and the MNC tries to impose standard procedures on the global operation. These standard procedures may not be from the original home-country but may be borrowed from the country who is seen to be the most savvy at the time, in the recent past this has been the USA and Japan in turns.

There are often barriers for MNCs in moving from an ethnocentric to a polycentric approach. Timothy Keeley (2001) (4) discusses the difficulties faced by Japanese based MNCs in the 1980s and 1990s in escaping the ethnocentric mindset. Keeley says that ethnocentrism is an endemic style of HRM in Japanese companies because Japanese culture is itself strongly ethnocentric. Japanese managers live in a culture where jobs are not well defined because the emphasis is on the team and it is not easy to incorporate host country nationals who have a different more role orientated approach. The evidence cited by Keeley suggests that Japanese MNCs have a reluctance to allow decisions to be made in subsidiaries outside Japan by anyone other than Japanese expatriate managers. This situation has the effect of reducing the efficiency of these subsidiaries because host country managers become demoralised by their lack of career prospects and staff turnover is high and local staff generally feel that their Japanese bosses are out of touch with them and their market. Keeley builds a case that Japanese companies have difficulty in finding their way towards a geocentric view of HRM because of their own culture. In other words, Japanese firms often find it completely possible to override local culture and transfer their own practices but it often has a negative effect.

There are many case studies of examples of difficulties experienced by managers from the home-country with host-country colleagues. An amusing example appears in a case study in Rosenfeld & Wilson (1999) where a Russian manager is troubled by being made by an American colleague to bend a rule where there is an obvious benefit to the business but has no qualms about sticking to a rule where there is obvious harm to the business.

The prevalence of such case studies in the literature indicates the level of need that there is for it. Geert Hofstede’s research and theories are often quoted, eg. Hofstede (1983) (5). Hofstede scored managers from different countries on four indicators and found that there was remarkable similarity in the scores of managers from the same country. Hofstede then deduced from the average scores of the managers from each country what their attitude to their working environment was and how this knowledge might be used to organise operations in different parts of the world.

The four indicators used by Hofstede are:

Individualism – the extent to which people perceive themselves as autonomous individuals rather than as members of an in-group. For example, Australians are very individualistic whereas Indonesians are very collectivist.

Power Distance – the extent to which society is concerned with differences in status between individuals and how much power they wield. Austrians have a low power distance score whereas Malaysia scores highly on this parameter.

Uncertainty Avoidance – the extent to which people avoid the unknown including unstructured work environments. Greece has a very high uncertainty avoidance score whereas Jamaica has a very low one.

Masculinity versus Femininity – the extent to which society values attributes traditionally associated with masculinity such as achievement over values traditionally associated with femininity such as nurturing. Sweden scores very highly on the feminine end of the scale whereas Japan scores highly at the masculine end of the scale.

Hofstede is able to draw some illuminating conclusions from his data. For example, when he plots the scores for Power Distance on one axis and Uncertainty Avoidance on the other, four different general attitudes towards the business organisation become apparent. So, countries that have small Power Distance and weak Uncertainty Avoidance tend to perceive the organisation as being like a village market where relationships are negotiated individually eg. Great Britain. Countries that have large Power Distance and weak Uncertainty Avoidance perceive the organisation as being like a family where superiors are expected to act paternalistically eg. Singapore. Countries that have small Power Distance and strong Uncertainty Avoidance perceive the organisation as being like a well-oiled machine where rules are impersonal and everyone must follow them eg. Germany. And, countries that have large Power Distance and weak Uncertainty Avoidance see the organisation as a pyramid of people where the place of everyone in the hierarchy is important eg. Mexico.

Hofstede points out the utility of his ideas in managing an MNC, for example, in societies where Individualism scores highly people are motivated by rewards for individuals whereas in collectivist societies it has to be the group that is rewarded. In much management literature an emphasis is placed on “challenge” and “achievement”. On closer inspection we find that this literature emanates from the US which has strong Masculine values and weak Uncertainty Avoidance where people feel the need to perform and are prepared to take some risks. These concepts are not likely to be motivating in cultures where there is a high Femininity score and a high score on Uncertainty Avoidance such as Portugal.

Though the points made by Hofstede have been found to be useful, you could argue that it this emphasis on national culture as a consideration in shaping management practices can be overstated and is, perhaps, only useful as an organisation makes the transition from an ethnocentric to a polycentric approach. After all, the MNC only really becomes effective as it leverages the economies of scale that can be had from using the same resources across national boundaries. If we take the motor industry as an example where it is now unthinkable for a firm to operate on a purely national basis anymore, we can see that lean production techniques, developed originally in Japan, have been successfully applied across the whole world.

In order to apply lean production techniques such as Total Quality Management (TQM) and Just-In-Time (JIT) all members of the workforce must be willing to take on some responsibility for the final product. In the UK there has traditionally been a world view in industrial relations of “them” and “us” between managers and the workforce especially in heavily unionised industries such as motor manufacturing. In this view the workers’ responsibility is to do what they are told and the managers’ to tell them what to do. However, if lean production techniques are to work effectively responsibility for quality and continuous improvement are devolved right down to the lowest levels. Japanese working practices have been summarised as “teamwork, quality consciousness and flexibility.”(6) In Japan companies had fostered a culture of mutual commitment between the company and its employees through such practices as lifetime employment and seniority pay. Oliver and Wilkinson (1988) (7) have a case study of the Nissan assembly plan in the UK. In a market downturn in the late 1980s Nissan negotiated a particular relationship with the plant’s union, the AEU, at the request of the members that effectively sidelined the union in the plant’s industrial relations. Instead a Company Council that includes representatives of all groups of employees make decisions as the final arbiter in grievance procedures and also conduct negotiations over pay and conditions. In the composition of the Council there is a great deal of company control and the body functions as a means of cooperation between the company and its employees but its proceedings are ratified by the AEU. This is in accordance with the way that unions work with companies in Japan where there is an almost complete identification of interests between the two.

The example of Nissan’s industrial relations practice in the UK is a large scale example of an international HRM policy being transplanted from one culture to another where it was not obvious beforehand that it would work. However, there are numerous examples in the literature, pace Hofstede and writers in a similar vein, which support the notion that there is an increasing convergence in the world of HRM practices. For example, a study of a much smaller scale HRM policy implemented across regions having widely diverse cultures, an idea suggestion system, confirms the convergence view. Bonache (1994) (8) examines the introduction of a system that consists of training and encouraging employees to submit ideas on how to improve production processes in order to achieve higher quality levels and to reduce production costs. He uses Hofsede’s indicators saying that the relevant values are strong Uncertainty Avoidance, small Power Distance and high Collectivism. The plants where the scheme was introduced were in Anglo cultures (US and Canada) and Latin cultures (Portugal, Mexico and Brazil). Despite the fact that Anglo and Latin cultures have radically different scores on the relevant values there was no appreciable difference in the success of the scheme from plant to plant.

Both of the examples given here of the successful introduction of HRM practices across cultures are taken from the motor industry, an industry that is notable for its necessity of operating in a global context. Other industries where MNCs must focus on the national context of their operations, such as insurance for example, seem to have less success in implementing global HRM practices, at least the lack of examples in the literature suggests this.

Some writers insist that national cultural differences must always confound the international implementation of HRM policies while others feel that national differences are overstated and point to successes in international implementation. However, culture is not static but continually evolving. For example, Rowley & Benson (2002) (9) find evidence for convergence of HR practice in four Asian countries. The examples we have seen of policy being successfully imposed internationally may have been successful because coincidentally there were factors in the environment that predisposed people to change.

With the evolution of the properly transnational company that uses the best ideas, the best practices and the best personnel wherever they come from it ceases to be a question of home-country policy being imposed on foreign subsidiaries. Instead it is a question of finding the best practice to suit the situation wherever the subsidiary is and wherever the idea comes from. It can be advantageous for a MNC to have international HR policies but if they are imposed insensitively they may do more harm than good. Tayeb (1998) (10) examines HR policy at NCR Dundee and argues that policy imposed by the American parent was successful because there was a large amount of latitude allowed for local interpretation. This seems to be the blueprint for the best way forward: to create policy and identify best practice centrally but to allow local mangers to use their discretion in its implementation.

1 Harzing, Anne-Wil & van Ruysseveldt, Joris (1995) International Human Resource Management. Heerlen: SAGE.

2 Bartlett, Christopher A., & Ghoshal, Sumantra (1998) Managing Across Borders. Boston, Mass.: Harvard Business School Press.

3 Rosenfeld, Robert H., & Wilson, David C. (1999) Managing Organisations. London: McGraw Hill.

4 Keeley, Timothy Dean (2001) International Human Resource Management in Japanese Firms – Their Greatest Challenge. New York: Palgrave.

5 Hofstede, Geert (1983) “The Cultural Relativity of Organisational Practices and Theories”, Journal of International Business Studies, 14.

6 Wickens, P. (1985) The Road to Nissan. London: Macmillan, quoted in Oliver & Wilkinson (1988), p217

7 Oliver, N. & Wilkinson, B. (1988) The Japanization of British Industry. Oxford: Blackwell.

8 Bonache, J. (1994) “The International Transfer of an Idea Suggestion System”, International Studies of Management and Organisation, 24.

9 Rowley, C. & Benson, J. (2002) “Convergence and Divergence in Asian Human Resource Management”, California Management Review, 44.

10 Tayeb, Monir (1998) “Transfer of HRM practices across cultures: An American company in Scotland”, The International Journal of Human Resource Management, 9.