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Chapter 3: The Global Environment

Chapter 3

The Global Environment

Learning Objectives

Opening Case: On the Move

Chapter Outline

Closing Case: Training for Global Assignments

Discussion Questions

Additional Resource: Making Global Labor Fair

Learning Objectives

After studying this chapter, the student should be able to accomplish the objectives given below.

1. Describe the growth of international business

3. Discuss the human resource management function in international business

5. Describe the issues involved in managing international transfers and assignments

6. Summarize the issues in international labor relations

Opening Case: On the Move

Case Summary

Businesses have long sought new and innovative ways to lower their costs for producing goods

and services. Sometimes their quest includes buying raw materials and equipment from overseas

suppliers for lower prices. Sometimes they might borrow from foreign lenders who are offering

lower interest rates than can be obtained domestically. But for the last several decades, at least,

the focus has been on moving jobs to countries where labor costs are low. This practice is called

offshoring.

Chapter 3: The Global Environment

At the same time, though, China began to emerge as the world’s newest low-cost manufacturing

center. And for the next decade, China’s burgeoning manufacturing prowess firmly established

that country as the low-cost manufacturing hub. But sometimes history has a way of repeating

itself. As China’s economy boomed local workers demanded—and received—higher wages. Not

surprisingly, then, some firms that once abandoned Mexico for China started to reverse their

course.

Will Mexico be the last stop for these firms? Probably not, because for low-cost manufacturers it

generally pays to be where the lowest labor and materials costs are located. But now, at least,

Mexico seems to be rising once again.

Think It Over

1. What can these examples tell us about the pros and cons of offshoring?

2. What conditions might cause a country’s labor costs to remain low for an extended period

of time?

Chapter Outline

Introduction

International business is an ever-growing component of the global economy. Almost every large

firm located anywhere in the world remains on the alert for new business opportunities anywhere

else in the world. Such opportunities include new markets where products and services can be

sold, new locations where products and services can be created for lower costs, and areas where

new information, financing, and other resources may be obtained. To manage international

expansion effectively, firms need skilled and experienced managers and employees who

understand both specific individual foreign markets (such as Japan or Germany) and general

Chapter 3: The Global Environment

international issues (including areas such as exchange rate fluctuations, political risk, and the

cost of labor). One of the fastest-growing and most important concerns for human resource (HR)

managers in many companies today is preparing other managers for international assignments. In

reality, however, this is only one part of international human resource management (HRM).

I. The Growth of International Business

International business is not a new phenomenon. In fact, its origins can be traced back literally

thousands of years to merchants plying their wares along ancient trade routes linking southern

Europe, northern Africa, the Middle East, and Asia. The forces that shaped today’s competitive

international business environment began to emerge in the years following World War II. As a

result of that global conflict, Japan and most of Europe were devastated. The United States was

the only major industrial power that emerged from World War II with its infrastructure relatively

intact.

Eventually, U.S. firms decided that they had little choice but to start over as well, so many of

them practically rebuilt themselves in the late 1980s and early 1990s. By the mid-1990s, global

competitiveness seemed to have become the norm rather than the exception. The United States,

Japan, and Germany remained the three leading industrial powers in the world. However, other

western European countries such as France, England, the Netherlands, Spain, and Belgium were

also becoming increasingly important. In Asia, Taiwan, Singapore, and Malaysia were also

emerging as global economic powers. Of course, China and India are clearly emerging as global

powers. Figure 3.1 of the text illustrates the regions of the world that are especially significant in

today’s global economy.

Chapter 3: The Global Environment

demand for certain types of consumer goods as well as for the availability of individuals to work

producing those goods. On the other hand, countries such as Mexico, India, Indonesia, and China

(despite its one-child-per-couple policy) continue to experience rapid population growth. This

growth is fueling a demand for international goods and also makes these locations attractive sites

for new businesses or joint ventures.

In recent years there have been several clear illustrations of this interdependence. In 2008, the

U.S. financial crisis, based largely upon improperly evaluated mortgages, quickly spread to most

of the western world. Today, no global organization can ignore elections in Iraq, the

developments in the Gaza strip, or the valuation of the Chinese renminbi. All of these events,

once seen as far removed from the concerns of American businesses, now strongly and

immediately affect how firms in this country and other countries around the world do business.

II. Global Issues in International Human Resource Management

As shown in Figure 3.2 of the text, one issue is the development of an international HRM

strategy.

A. International Human Resource Management Strategy

The effective management of a firm’s international human resources also must be approached

with a cohesive and coherent strategy. Some firms adopt what is called an ethnocentric

staffing model. Firms that use this model primarily use parent-country nationals (PCNs) to

staff higher-level foreign positions. This strategy is based on the assumption that home-office

perspectives and issues should take precedence over local perspectives and issues and that

PCNs will be more effective in representing the views of the home office in the foreign

Chapter 3: The Global Environment

model puts PCNs, HCNs, and TCNs in the same category. The firm then attempts to hire the

best person available for a position, regardless of where that individual comes from. The

geocentric staffing model is most likely to be adopted and used by fully internationalized

firms such as Nestlé and Unilever. In many ways, the corporate HR function in geocentric

companies is the most complicated of all. Every aspect of the HRM process—planning,

recruiting, selection, compensation, and training—must be undertaken from an international

perspective. Each foreign subsidiary or operation still needs its own self-contained HR unit to

handle ongoing employment issues.

However, whatever model that is followed, there is growing awareness of the need to adopt a

talent management approach to managing human resources internationally. This means using

analytics to better understand which resources are critical for operations across cultures and

locations. Therefore, international HRM may be the area that will be best served by new

developments in the area of HR analytics.

B. Understanding the Cultural Environment

A country’s culture can be defined as the set of values, symbols, beliefs, and languages that

guide the behavior of people within that culture. Cultural beliefs and values are often

unspoken and may even be taken for granted by those who live in a particular country. When

cultures are similar, relatively few problems or difficulties may be encountered.

More significant issues can arise, however, when considerable difference exists between the

home culture of a manager and the culture of the country in which business is to be

conducted. Thus, there is a higher likelihood of culturally related problems and difficulties

between managers from, say, Canada and India. Differences in language, customs, and

business and personal norms increase the potential for misunderstandings, miscommunication,

and similar problems.

Chapter 3: The Global Environment

There have been at least two major studies of national culture and its influence on behavior at

work. The first of these, conducted by Dutch scholar Geert Hofstede, began with the study of

over 100,000 IBM managers in 50 countries but was later extended to other countries, other

organizations, and a wide variety of jobs. From this work, he identified four dimensions of

national culture that he believed were important for doing business across cultures:

• Power distance (or status and authority differences between a superior and a

subordinate)

Hofstede’s later work, especially in Asia, led him to add two more dimensions. These were:

• Long-term orientation versus short-term orientation, which associates the connection of

the past with the current and future actions/challenges

More recently, a group of scholars led by Robert House conducted a study of 62 different

national cultures. Their GLOBE project (Global Leadership and Organizational Behavior

Effectiveness) was built upon the work of earlier scholars and proposed a rather

comprehensive nine-dimension framework to explain cultural similarities and differences.

Following are their nine cultural values.

• Uncertainty avoidance: defined as Hofstede

• Power distance: defined as Hofstede

• Individualism versus collectivism: defined as Hofstede

• Assertiveness: defined the same as masculinity/versus femininity in Hofstede

Although Hofstede’s work has been applied more widely and is generally better known, there

Chapter 3: The Global Environment

are limitations to his work. Although the initial sample was quite large (100,000), it was

drawn from a single organization (IBM). Thus, it is not always possible to know if the effects

found in the study were due to country cultures or aspects of the corporate culture that all

employees shared.

Yet another significant cultural factor has to do with children. In the United States, child labor

is closely regulated, and children traditionally attend school until they become young adults.

In other countries, however, this practice may be quite different. In Bangladesh, it is quite

common for children to be a major source of income for their families. On the one hand, local

cultural factors suggest that it is acceptable to hire young children to work for low wages

because other businesses do the same. On the other hand, this practice would be illegal or

unethical by the standards that exist in most industrialized countries.

The HR manager dealing with international issues thus faces two fundamental cultural

challenges. The first challenge is simply understanding and appreciating differences that exist

in different cultures. The second challenge is more ethical in nature. On the one hand, many

businesses relocate manufacturing facilities to other countries to capitalize on lower labor

costs. The ethical issue, however, is the extent to which this situation becomes exploitation.

C. Understanding the Political and Legal Environment

Figure 3.3 of the text illustrates four fundamental aspects of the political and legal

environment of international business that are of primary concern for HR managers:

government stability, potential incentives for international trade, controls on international

trade, and the influence of economic communities on international trade.

Government stability can be thought of as either the ability of a given government to stay in

power against opposing factions or as the permanence of government policies toward

business. In general, companies prefer to do business in countries that are stable in both

Chapter 3: The Global Environment

This EU became much more formidable with the introduction of the euro, a common currency

designed to eliminate exchange-rate fluctuations and make cross-national transactions easier.

Twelve early members of the EU (all except Denmark, Sweden, and the United Kingdom)

officially converted their domestic currencies to the euro on January 1, 2002. These twelve

countries now make up what is called the eurozone. From an HRM perspective, the advent of

the euro brings up two issues.

1. Individuals and employers in the eurozone can more readily compare their

compensation packages to those of their peers in other countries because they are all

Another less-comprehensive economic community was created by the North American Free

Trade Agreement (NAFTA). NAFTA attempts to reduce the trade barriers that exist among

Canada, the United States, and Mexico making it easier for companies to do business in each

of the three countries.

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III. The Human Resource Function in International Business

Contemporary Challenges in HR: Competing with Local Headhunters

When international businesses first began to aggressively move into China and India,

they generally transferred expatriate managers from their home company to run these

new operations. But in the 1990s things began to change. In China, for instance, many

locals sharpened their English language skills, developed more leadership and decision-

making skills, and became increasingly familiar and comfortable with the international

business world. As a result, more and more locals are entering the ranks of middle and

upper level managers today. This trend is not restricted to China; the same pattern is also

occurring in India. Nor is this trend found only among U.S. firms in China.

Why are firms moving in this direction? There are several reasons. For one thing, hiring

local managers is much cheaper. Local managers have a strong understanding of local

market conditions, competitive behaviors, and government regulations. In addition,

hiring locally can boost employee morale and motivation. The local manager has a rich

environment.

2. If you were to be given an expatriate assignment, what steps would you take to

adapt?

Students’ answers will vary. Some may say that interacting with locals outside

speaking, reading, and writing the language of the country they are working in.

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international business. The HR function, for example, must deal with several general,

fundamental management challenges in international business. These challenges are illustrated in

Figure 3.4 of the text.

A. General Human Resource Issues in International Business

One general set of challenges relates to differences that may exist in culture, levels of

economic development, and legal systems that typify the countries where the firm operates. A

particularly difficult set of issues arises when conflict exists between the laws or cultures of

the home country and those of the host country.

The first issue of conflict is discrimination. For example, it is illegal in the United States to

discriminate in an employment relationship on the basis of gender. In Saudi Arabia, on the

other hand, such discrimination is not only allowed but also expected.

Third, international businesses must also deal with complex training and development

challenges. At one level, for example, HR managers need to provide cross-cultural training

for corporate executives who are chosen for overseas assignments. In addition, training

programs for production workers in host countries must be tailored to represent the education

offered by local school systems. Dramatic differences in the skill and educational levels

within a labor force make it necessary for international businesses to pay close attention to the

training and development needs of all its employees in foreign markets.

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B. Specific Human Resource Issues in International Business

Such an approach to international business has many advantages. First, it is usually the easiest

way to enter a new market. In addition, it typically requires only a small outlay of capital.

Because the products are usually sold “as is,” there is no need to adapt them to local

conditions. Finally, relatively little risk is involved. On the other hand, products exported to

other countries are often subject to taxes, tariffs, and high transportation expenses. In addition,

because the products are seldom adapted to local conditions, they may not actually address the

needs of consumers in local markets, and consequently the products may not achieve their full

revenue potential.

A third international strategy for doing business is direct foreign investment. A direct

investment occurs when a firm headquartered in one country builds or purchases operating

facilities or subsidiaries in a foreign country; that is, the firm actually owns physical assets in

the other country.

There are actually two different forms of direct investment. First, the firm can simply acquire

an existing business in the foreign country. Alternatively, the firm can create or build a new

wholly owned subsidiary, factory, or other unit.

Chapter 3: The Global Environment

In either case, direct investment has the advantage that it provides the firm its own company-

owned facilities in the foreign country, and allows it to become truly integrated in a particular

foreign market. Considerably more profit potential can be realized in direct investment

because the company itself keeps all the profits its investment earns in that country. On the

other hand, considerably more risk is attached to this strategy. Just as the investing firm can

keep all its profits, so too must it absorb any and all losses and related financial setbacks. In

addition, of course, the costs of direct investment are quite high and borne solely by the

investing firm.

At this level of international business activity, the HR function changes substantially from

that of a domestic firm or business using a pure exporting or licensing strategy. This

difference stems from the fact that in a direct investment, employees of the firm are working

in foreign locations.

A fourth form of international strategy is a joint venture or strategic alliance. In this case,

two or more firms cooperate in the ownership or management of an operation, often on an

equity basis. Joint venture is the traditional term used for such an arrangement and describes a

situation in which actual equity ownership exists. A strategic alliance might not involve

ownership but still involves cooperation between firms. They represent a way for two or more

firms to achieve synergy from working together, they reduce risk, and they provide mutual

benefit to both partners.

IV. Domestic Issues in International Human Resource Management

Regardless of their level of internationalization, all firms dealing in foreign markets must

confront three sets of domestic issues in the management of their human resources. These

domestic issues, shown in Figure 3.5 of the text, are local recruiting and selection, local training,

and local compensation.

A. Local Recruiting and Selection Issues

Nonmanagerial employees, such as blue-collar production workers and white-collar clerical

and office workers, are usually HCNs in international business. Simply put, HCNs are usually

cheaper to employ than PCNs or TCNs. HCNs are also frequently used because local laws