978-0134200057 Chapter 20 Lecture Notes

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CHAPTER TWENTY

INTERNATIONAL HUMAN RESOURCE

MANAGEMENT

OBJECTIVES

20-1 Profile international human resource management

20-2 Distinguish the perspective of the expatriate

20-3 Differentiate the staffing frameworks used by MNEs

20-4 Describe expatriate selection

20-5 Appraise expatriate preparation

20-6 Summarize expatriate compensation

20-7 Profile expatriate repatriation

20-8 Describe expatriate failure

CHAPTER OVERVIEW

Firms the world over agree on the importance of qualified personnel to achieve their

foreign growth and operational objectives. Chapter Twenty broadly deals with two

primary human resource concerns. The management discussion begins with an overview

of specific international management qualifications and characteristics; it then explores

the advantages of transferring and promoting home country vs. expatriate vs.

third-country managers, plus the associated issues of compensation and repatriation. The

chapter concludes with an exploration of expatriate failure.

CHAPTER OUTLINE

OPENING CASE: Globalizing Your Career?

Today’s global companies are increasingly looking for managers who are comfortable

on the world stage. International companies use expatriate managers to varying

degrees, some extensively and some sparingly. Many companies develop their managers

for years before assigning the manager to an overseas position. Laying the foundation

for a possible career in international business is hard work, and the experience of

actually working internationally can be even harder. Managers in foreign assignments

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are usually given much broader responsibilities than they have experienced in their

home country. After completing an international assignment, repatriation to the home

country presents major challenges as well. Despite the challenges of international

careers, more and more CEOs assert that international experience is an essential feature

of a high-performance career.

I. INTERNATIONAL HUMAN RESOURCE MANAGEMENT

International Human Resource Management (IHRM) shepherds an MNE’s most

valued assets—its people. IHRM organizes people within the MNE, developing

policies and systems that improve individual productivity and collective

performance. Unconditionally, IHRM is more difficult for the MNE than for its

uni-national counterpart. Besides dealing with situations in the home market, IHRM

adjusts policies and systems for differing political, cultural, legal, and economic

circumstances.

A. The Strategic Role of IHRM

Anecdotes suggest and research confirms a powerful relationship between HRM

processes, management productivity, and strategic performance. International HRM

can be a source of creating superior value and competitive advantages. Superior

human resources can sustain high productivity, competitive advantage, and value

creation for the international company. The relationship between superior HRM

and high productivity, competitive advantage, and shareholder value confirms its

importance and has transformed HRM. HRM is now a driver of company strategy

and has a direct mission: to staff the right person in the right job in the right place

for the right salary.

1. A Case in Point: GE’s Evolution. Beginning in the 1980s, GE focused on

globalizing its markets and materials sourcing. At each step along the way

to its current transnational strategy, GE rethought its HRM philosophy to

make sure it had the human capital to achieve its strategy.

B. IHRM’s Mission

GE’s success, like that of many other MNEs profiled throughout this chapter,

highlights IHRM’s mission: find, staff, compensate, and retain executives with

the qualifications needed to support and sustain the MNE’s strategy. Done well,

IHRM supports higher productivity, stronger competitiveness, and improving

profitability. Done poorly, people problems undermine firm performance and

diminish careers.

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I. THE PERSPECTIVES OF THE EXPATRIATE

A. Who’s Who?

Classifying a foreign assignment, in terms of the executive’s relative

nationality, uses a range of terms, including

• expatriate,

• home-country national,

• parent-country national,

• third-country national,

• inpatriate,

• transpatriate,

• flexpatriate,

• reverse-expat.

An expatriate (or “expat”) is an executive sent to work temporarily in a

country that is not his or her legal residence. There are various types of

expatriates. A home-country national, also known as a parent-country

national, is a citizen of the country where the firm is headquartered. A

third-country national is neither a citizen of the home nor the host country

(i.e., a Malaysian national running the Russian subsidiary of his Australian

company). If the Malaysian executive is transferred to the MNEs Australian

headquarters, he is then an inpatriate. Finally, a transpatriate refers to expat

lifers who work an ongoing series of international assignments, plan never to

return to headquarters, and in extreme cases, profess neither a corporate nor

national “home.”

B. Trends in Expatriate Assignment.

Demand for expatriates escalates worldwide. MNEs of all types struggle to

staff

subsidiaries. Shortages of talented executives, in light of flexible logistics and

shifting markets, change the characteristics of the international assignment. The

notion of “a few years” increasingly gives way to a few months, a few weeks,

or even a few days. So-called commuter assignments post an expatriate for a

short span. In extreme cases, it comprises the workweek, with the expat

returning

home for the weekend—say, shuttling between Paris and Madrid. Increasingly,

commuter assignments give rise to so-called flexpatriates, executives who run

the commuter cycle for a longer span as they work “frequent flyer

assignments”.

1. The Young, the Old, and the Restless. Traditionally, an

international assignment was seen as a midcareer opportunity for

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development. Now companies are looking to older and younger

employees who are more mobile. Younger employees are given an early

opportunity for international experience. More females are also seeking

expatriate placements.

2. Expanding Scope of Women. Females currently comprise about

20% of all expatriates.

3. Growing Scope of Third Country National. The changing

workplace of globalization elevates the role of third country nationals,

who often have the particular outlook and versatile competencies needed

to run organizations in diverse locations. Short-term assignments boost

the logistical appeal of third-country nationals.

4. Reverse Expatriates. The rising importance of emerging markets

refines our evolving ideas of expatriates. Historically, MNEs recruited

executives in richer countries and assigned them to units in developing

countries. Now, talented executives from emerging economies—so-called

reverse-expats—are sent straight to richer countries to speed their

development. They spend anywhere from a few weeks to a year in an

operational unit before eventually returning home—where they often

replace a traditionally defined, and usually higher-paid, expatriate.

C. The Economics of Expatriates.

Economic pressures and cost concerns spur companies to emphasize frequent

business travel in lieu of a longer-term international assignment. Cost pressures

encourage localization, whereby an expatriate retains the foreign assignment

but accepts the status of a local hire and, correspondingly, a lower host-location

salary.

D. The Enduring Constant.

Evolving trends in the global marketplace drive evolving ideas on staffing

international operations. Still, there is an enduring constant: Running the

hundreds of thousands of subsidiaries throughout the world requires a mix of

talented, enterprising locals, parent-country execs, and third-country

expatriates.

III. STAFFING FRAMEWORKS IN THE MNE

IHRM professionals apply staffing frameworks (a conceptual structure that helps

solve complex issues) to organize expatriate policies and systems. Research

emphasizes the ethnocentric, polycentric, and geocentric staffing frameworks.

A. The Ethnocentric Framework.

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Ethnocentrism occurs when one group places itself at the top of a supposed

hierarchy of relevant groups. Hence, the ethnocentric framework signifies the

belief that the management principles and business practices used by

headquarters are superior to those used in other countries.

1. Advantages. Staffing overseas slots with parent-country executives has

strategic, skills, and socialization advantages.

a. Strategic Advantages. Headquarters prefers entrusting control of

the company’s “crown jewels” to those who will best protect

them: namely, trustworthy colleagues from the home country.

b. Skills and Socialization Advantages. Regulating the transfer of

its core competencies is vital when they are difficult to articulate,

specify, or standardize. An ethnocentric framework offsets this

problem by posting a home-country manager with technical

knowledge and direct experience to local slots.

2. Limitations. This approach can, however, lead some difficulties.

a. Workplace Tensions. Ethnocentric staffing policies demotivate

local workers. Unless an expatriate transfers unique skills, local

employees may resent someone they see as no more, perhaps less,

qualified than themselves.

b. Legal-Political Tensions. An ethnocentric staffing policy can

prove legally difficult and politically impractical. Employment

law in countries worldwide regulates, sometimes lightly,

sometimes strictly, the use of expatriates in place of locals.

c. Misreads and Misfits. Tensions Force-fitting foreign operations

to mimic the standards of the home office risks pounding square

pegs into circular slots. Certainly, an MNE can make its foreign

operations mirror the outward appearance of its home-country

headquarters. Assigning home-office executives to foreign

operations, however, does not automatically create a successful

“mini-me” subsidiary. Consequently, an ethnocentric framework

can prove detrimental, posting executives who misread markets

and methods.

B. Polycentric Framework.

The polycentric staffing framework looks to host-country nationals to manage

local subsidiaries.

1. Advantages. Staffing foreign operations with locals has strategic,

economic, and political advantages

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c. Strategic Advantages. Proponents of polycentrism reason that

local managers are stronger performers given their keener

understanding of local customers, markets, and institutions.

d. Economic Advantages. Using host-country managers boosts

local motivation and morale. Still, likely costs include gaps with

global operations due to problems of accountability and

allegiance.

e. Political Advantages. Understandably, host governments prefer

polycentric approaches. They see local managers as better citizens

and stakeholders than expatriates, far more likely to champion

national interests over global objectives. Activist officials often

require the MNE hire locals, such as licensing requirements that

prohibit expatriate accountants and lawyers or visa regulations

that put a hard cap on the number of foreigners who can staff a

local subsidiary. The polycentric framework neutralizes these

impediments.

2. Limitations. A polycentric approach, by effectively decentralizing

authority to local subsidiaries, fans organizational tensions on several

counts.

a. Autonomy Tensions. Installing local executives in

decision-making roles and growing resource independence from

the parent could turn the local subsidiary into a quasi-autonomous

unit. Unchecked, an MNE risks devolving into a federation of

loosely connected, largely autonomous national operations that

pay little mind to headquarters.

b. Accountability and Allegiance Tensions. Dilemmas over

allegiance emerge when host country managers are loyal to local

colleagues instead of their home-country bosses.

c. Motivation and Mobility Tensions. Locals have scant

opportunities to work outside their home country, effectively

imposing a glass ceiling on their professional mobility.

Consequently, local managers may see little incentive to study

multinational business practices or identify ways to improve

cross-national integration. The resulting single-country focus can

isolate national subsidiaries as well as push enterprising

executives, ambitious to work abroad, to quit.

C. The Geocentric Staffing Framework.

The geocentric framework posts the most qualified executives, regardless of

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nationality, to expatriate slots.

1. Advantages. The geocentric framework develops executives whose

global mindset enables them to easily and effectively navigate cultures and

countries

a. Strategic Advantages. Geocentricity, and its advocacy of a global

mindset, develops expats that command key competencies. They

understand and interpret what is going on in a global situation,

they decipher verbal and nonverbal messages and signals from

people of different outlooks, and their flexibility helps them deal

appropriately with different situations. They effectively

implement global and, especially, transnational strategies, finding

ways to exploit learning opportunities, transfer knowledge, and

promote collaboration

2. Limitations. A geocentric framework is tough to develop and costly to

maintain. Professional and logistic tension complicate its effectiveness

b. Professional Tensions. Difficulty plagues expat development

given the need for executives to retain a sense of identity in the

face of increasing diversity. Working with groups marked by

cultural diversity takes on a different vibe than with groups

composed of people of similar ethnicities and nationalities.

c. Logistics Tensions. The geocentric framework imposes costly

logistics. Exposing executives to different ideas in diverse places,

given the quest to improve their global mindset, is expensive.

D. Which Framework When? Each of the three staffing approaches has its

merits and drawbacks. [see Table 20.1].

IV. EXPATRIATE SELECTION

Screening executives to find those with the greatest inclination and highest

potential for a foreign assignment is the process of expatriate selection (see Figure

20.3). Today, IHRM applies operational, cultural, and personality measures,

commensurate with the prevailing staffing framework, to identify candidates. These

screens, applied through objective evaluations and in-depth personal interviews,

assess candidates on several dimensions. Anecdotes and analysis emphasize the

following.

A. Technical Competence.

Technical competence (usually indicated by past performance) is a significant

determinant of success in foreign assignments. The foreign subsidiary manager

must understand both the technical necessities of a position and also how to

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adapt to foreign conditions, such as scaled-down plant and equipment, varying

productivity standards and less efficient national infrastructure.

B. Self-Orientation.

An expatriate assignment is marked by ambiguity, uncertainty, and risk. Thrust

into challenging situations, an expat’s effectiveness depends upon developing

new knowledge, skills, and abilities. Facing ambiguities, one must organize

interpretation and fortify decision-making.

C. Others-Orientation.

Orientation, both self and others, help expats (1) manage ambiguity, uncertainty

and risk, (2) resolve physical, emotional and social stress, (3) support effective

communication, and (3) enhances interpersonal interactions.

D. Resourcefulness.

Resourcefulness refers to a person’s potential for (1) self-maintenance

situational flexibility, (2) interpreting the immediate environment, and (3)

developing productive workplace relationships.

E. Global Mindset. [see Figure 20.4]

Increasingly a precondition as well as an outcome of expatriate success, a

global mindset reflects awareness of differences across countries coupled with

a capacity to divine overlapping principles. A global mindset helps successful

expatriates see not a barren landscape, but a cornucopia of choices upon

entering foreign markets.

V. EXPATRIATE PREPARATION AND DEVELOPMENT

Ideally, IHRIM begins preparing an executive for an international assignment long

before she is slated to go. Too, IHRIM does not stop once she begins her new job;

support systems carry on to optimize her performance. Conventionally, IHRM

focused on fitting an expat’s technical know-how with the position’s requirements.

Figure 20.5 identifies leading concerns of expatriates ahead of moving to their

foreign assignment. These concerns show that improving cultural sensitivities and

interpersonal skills improves the odds of successful adjustment and, by extension, a

successful assignment. IHRM translate this imperative into a two-stage program:

preparation prior to departure, and then, once in-country, ongoing development:

A. Pre-Departure Preparation Programs

Expatriate preparation programs aim to transfer specific information about

the host country as well as improve the executive’s cultural sensitivity.

preparing expats often requires helping them recognize gaps in their global

mindset. Realization helps immunize them to culture shock—a

soon-after-arrival dissatisfaction with the host society that can deteriorate

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into homesickness, irritability, arrogance, and disdain.

B. In-Country Development Programs

In-country development efforts, often through mentorship programs,

virtual meetings, and executive coaching, support the expatriate.

Increasingly, MNEs use CD-based or web-based development programs,

given that the expatriate can tap resources anywhere, anytime during an

assignment. Their economical convenience provides in-country

reinforcement tools that can span the assignment.

C. Family Matters

Increasingly, expatriate preparation and support activities include the

spouse and family members. An emerging trend is including families in

predeparture preparation, particularly destination familiarization and

cultural orientation programs.

POINT-COUNTERPOINT: English: Destined to be the Global Language

POINT: English is quickly becoming the lingua franca of the world. English is being

taught as the second language in a number of schools throughout the world. Nearly a

quarter of the world’s population speaks some English, and English speakers account for

40 percent of the world’s output. The prevalence of English on the Internet makes it

possible to conduct business all over the world in one language, and translation software

makes learning a foreign language less useful. Many managers report that foreign

language skills rank low relative to other skills needed to work abroad.

COUNTERPOINT: There are many reasons for learning a foreign language. Surveys

report that managers who learn foreign languages make better innovative contributions

to their organizations. Learning the local language can build rapport with local

employees and sends an important message. Cross-cultural literacy can also keep one

from being excluded from important business networks and chatting with local officials

and colleagues. Learning a foreign language is also a personally enriching experience

for anyone going abroad. Finally, foreign language competency may be needed as

Americans increasingly face strong competitors who are bilingual or multilingual.

VI. EXPATRIATE COMPENSATION

Compensation plays a decisive role in attracting, motivating, and retaining

expatriates. Setting effective compensation systems that fairly reward executives

here, there, and everywhere requires IHRM deal with a range of issues regarding

differing pay levels, benefits, tax programs, and prerequisites.

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A. Types of Compensation Plans.

The most common approach to expatriate pay is the balance sheet

approach, which aims to develop a salary structure that equalizes

purchasing power across countries so expatriates have the same standard

of living in their foreign assignment as they had at home. There are three

common methods of implementing the balance sheet compensation plan.

1. Home-Based Method. The home-based method sets compensation

based on the salary of a comparable job in the expatriate’s home city.

2. Headquarters-Based Method. The headquarters-based method

sets salary in terms of the salary of a comparable job in the city where

the MNE has its headquarters.

3. Host-Based Method. Sometimes called destination pricing, going

rate, or localization, this method bases expatriate compensation on the

prevailing pay scales in the foreign locale.

4. Global Market Method. The global market approach views an

international assignment as a continuous but an irregular activity. It

recognizes that an expatriate, in the context of a commuter or flex

assignment, irregularly works for different durations in the same or,

sometimes, different countries. Implementing this approach requires

designing flexible systems and sophisticated performance tracking

that, in spite of logistical complications, keeps the expat whole.

B. Components of Expatriate Compensation.

Commonly, expatriates negotiate their base salary, foreign-service

premium, various allowances, fringe benefits, tax differentials, and benefits

[see Table 20.2]. Each dimension can significantly influence the total

compensation. The changing economics of expatriate assignments

moderates compensation schemes. In particular, the mandate to contain

costs pushes IHRM to review the link between aspects of selecting and

classifying expatriates with compensation standards. Key points include:

1. Assignment Type. The growing use of commuters and flexpatriates

alters the compensation calculus. Short-term assignments typically do

not trigger a change in pay or benefits, but add a per diem to regular

pay.

2. Supply Dynamics. Many international assignments have “gone from

being special and unique, with piles of money thrown at them, to being

an everyday part of the company.” Foreign service premiums, likewise,

have been phased out by many.

3. Redefining Markets. Cost-reduction techniques redefine the

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compensation parameters of an international assignment. Many MNEs

with operations in Europe now treat the continent as if it were one

country. Others cut hardship allowances for locales that are far more

hospitable than they once were, such as Prague, Shanghai, and Rio de

Janeiro. Increasing globalization steadily reduces the number of

hardship destinations.

C. Compensation Complications.

Setting compensation in evolving organizations that use several types of

expatriates expands the parameters of analysis. IHRM, for instance,

regularly resolves complications of the following sort.

a. Changing Standards. The evolving dynamics of globalization require

IHRM fine-tune compensation methods. MNEs struggle to equalize

pay for the same type of job that is done by different people in

different countries.

b. Consistency Concerns. Legal, cultural, and regulatory differences

require tailoring performance-based pay by country and region.

Managing expatriates of multiple nationalities transferred from

high-to- low or low-to-high cost markets quickly creates anomalies

and exceptions. IHRM must determine if all managers who perform

the same job, but in different locations, receive the same

compensation.

VII. REPATRIATING EXPATRIATES

Repatriation is the process of returning the expatriate to his or her home

country-working environment, and is a process fraught with difficulties.

A. Repatriation Challenges

1. Career Progression. The principal cause of repatriation frustrations

is finding the right job for the returning executive.

2. Changes in Personal Finances. Most expatriates enjoy a rich

lifestyle and returning home with fewer benefits and perks

may be difficult.

3. Personal Readjustment. Expatriates may experience reverse

culture shock when returning home. They may find that they have to

relearn things they took for granted.

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5. Managing Repatriation. Effective human resource practices for

soothing re-entry include placement in jobs that build on foreign

experiences, a reorientation program, and a corporate mentor who looks

after expatriates’ interests while they’re abroad. The principal cause of

repatriation frustrations is finding the right job for someone to return to.

B. Improving Repatriation

IHRM notes the importance of effective repatriation. Most have formal

repatriation policies, organize workshops, and link return strategies to

career management. IHRM studies and solves repatriation complications

precisely because the greater the difficulties that repatriates confront, the

greater the difficulty in convincing others to accept international

assignments.

VIII. EXPATRIATE FAILURE

Expatriate failure, narrowly defined, is a manager’s premature return home due

to poor operational performance. Broadly defined, it is the breakdown of IHRM’s

expatriate management systems. In the 1980s, performance problems brought

nearly a third of American expatriates assigned to advanced countries home

early; the failure rate was twice that for those posted to less-hospitable

countries. Today, approximately 5 percent of expats fail to complete their

assignment. Leading causes include quitting to work elsewhere, family concerns,

spouse/partner dissatisfaction, inadequate job performance, organizational

restructuring, and internal transfer.

A. The Costs of Failure.

Expatriate failure is operationally costly, professionally detrimental, and

personally stressful. The average cost of an expatriate failure can be as

high as three times the annual domestic salary plus the cost of relocation.

A. The Wildcard

Some folks, despite best intentions, do not adjust well to working abroad.

In theory, an ideal expatriate’s technical qualification, self-confidence,

resourcefulness, and global mindset make her effective anywhere and

everywhere. Displacement can lead to nostalgia, culture shock, and

depression. Notwithstanding the glamour and rewards, the expatriate

lifestyle moves some far beyond their comfort zone. Then, no matter the

degree of preparation, a sought-after adventure devolves into a

nerve-wracking exile

LOOKING TO THE FUTURE: I’m Going Where? The Changing Locations of

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International Assignments

In the past, expatriates found their assignments in the premier business centers of

Europe, North America, and Japan. The rising importance of emerging economies in fast

expanding Asia and Africa is the driving force behind Western MNEs relocating a large

share of operations in these regions. As sales, growth, labor, and executive opportunity

migrate from the west to faster growing emerging economies, you can expect a change

in the geography of expatriate assignments and activities. Data already confirms the

trend is underway: China, Brazil, the United Arab Emirates, Hong Kong, India, and

Singapore are leading destinations for expats.

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