IHRM Chapter 3

Cross-Border Alliances and SME’s

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Cross-Border Alliances

• There are various forms of cross-border arrangements that lead to internationalization of an enterprise

• Cross Border Alliances represent cooperative agreements between two or more firms from different national backgrounds, which are intended to benefit all partners

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Two Modes of Cross Border Alliances

• Non-Equity Modes

Investment vehicle in which profits and other responsibilities are assigned to each party according to a contract

• Equity Modes

Foreign direct investor’s purchase of shares of an enterprise in a country other than its own

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Equity and Non-Equity Modes of Foreign Operation (Figure 3.1)

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Cross-Border Mergers and Acquisitions

Merger• result of an agreement between two companies to join

their operations together

Acquisition• one company buys another company intending to control

the activities of the combined operations

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The Formation Processes of M & A’s and HR Challenge (Figure 3.2)

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HR Challenges in M&As

• creating new HR practices and strategies that meet the requirements of the M & A

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Cross-Border M&A

• merging or takeover of an enterprise in one country by an enterprise from another country

• facilitates the rapid entry into new markets

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Facts Firms Take into Consideration When Deciding on a Target

• the growth aspiration of the acquiring company• risk diversification• technological advantages• a response to government policies in a particular country• exchange rate advantages• favourable political and economic conditions• effort to follow clients

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IHRM and its Role in Employee Relations (M&A)

The quality of employee relations, ranging from employee support to employee resistance is influenced by variables such as the

• similarity between management styles of the two organizations

• type of cross-border combinations• combination potential in terms of efficiency gains• extent of organizational integration

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Employee Resistance Endangers M&A Performance

HRM role (task and human integration)• visibility and continuity of leadership• communication processes• integrating mechanisms• acquired personnel retained• voluntary personnel loss

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Human Integration Process

• especially difficult to manage and takes time• both firms are embedded in their own national,

institutional and cultural settings

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Typical Cross-Border M&A Problems

• within first year of merger, up to 20% of executives may be lost. Over a longer time frame, this tends to increase even further.

• personnel issues are often neglected.

• a high number of M & As fail or do not produce the intended results.

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Phases of Cross-Border M & A

• Pre- M & A phase (a screening of alternative partners based on an analysis of their strengths and weaknesses)

• Due diligence phase (analyzing the potential benefits of the merger, product-market combinations, tax regulations, and compatibility with respect to HR and cultural issues)

• Integration planning phase (planning for the new company)

• Implementation phase (action plan)

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HR Activities in the Phases of a Cross-Border M & A (IHRM Notebook 3.1)

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Strategic HRM and the Role of the HR Function in M&As

IHRM roles• strategic partner• administrative expert• employee champion• change agent

Cross Border International Equity Joint Ventures

Joint Venture• legal entity representing holdings of parent

firms located outside the country of operation

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The Main Reasons for Engaging in an IJV

• to gain knowledge and to transfer that knowledge• host government insistence• increased economies of scale• to gain local knowledge• to obtain vital raw materials• to spread the risks (e.g. share financial risks)• to improve competitive advantage in the face of increasing

global competition• provide a cost effective and efficient response forced by

the globalization of markets

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The Main Reasons for IJV Failure

• lack of interest in HRM• cross cultural management aspects

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IJV Development Stages and HR Implications (IHRM Notebook 3.4)

Strategic HRM and the Role of the HR Function in IJVs

• IJVs are embedded in their own national, institutional, and cultural settings

• the IHRM challenge is to balance the various interests and manage these cross cultural differences.

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Strategic HRM and the Role of the HR Function in IJVs

There exists interface and intra-IJV IHRM challenges.

Interface IHRM Challenges (initial stages of IJV formation process)

• manage the relationships at the interfaces of the parent companies to integrate dualities of rules and practices

• focuses on the compatibility of the respective  partners

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Strategic HRM and the Role of the HR Function in IJVs

Intra-IJV IHRM Challenges (initial stages of IJV formation process)

• develop IHRM strategies and practices for the new IJV entity.

• focus on managing the mutual learning processes between the parent companies  andthe new joint venture entity. 

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Strategic HRM and the Roles of the HR Function in IJVs

IHRM roles• partnership• change facilitator and strategy implementer• innovator • collaborator

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The Importance of Cross-Cultural Management ( M&As and IJVs)

• different national, institutional, and

cultural environments; cultural differences matter in collaboration, decision making and loyalty

• top management multicultural team; different cultural expectations, management styles and strategic objectives

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SME

• Small – Medium Enterprise (SME)• No common definition of SME• Definition of small and medium varies• Criteria used to define include

– Headcount– Total Sales (annual turnover)– Annual Balance Sheet (total assets)

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Access Barriers to International

Markets by SMEs (IHRM Notebook 3.5)

• shortage of working capital to finance exports• identifying foreign business opportunities• limited information to locate/analyze markets• inability to contact potential overseas customers• obtaining reliable foreign representation• lack of managerial time to deal with internationalization

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Access Barriers to International

Markets by SMEs (IHRM Notebook 3.5)

• inadequate quantity of and/or untrained personnel for internationalization

• difficulty in managing competitor’s prices• lack of home government assistance/incentives• excessive transportation/insurance costs

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Typical Challenges for IHRM in Internationalized SMEs

• importance of the founder/owner• recruitment, selection, and retention• human resource development; the challenge of learning• expatriate management• limited resources of the HR department and outsourcing

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Importance of the Founder/Owner

Specific skills of the founder have an impact on the internationalization process of SMEs

• international work experience or established networks and relationships abroad

• positive perceptions of the international environment

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Recruitment, Selection and Retention

SMEs • more difficulties than large firms in recruiting adequate

international managers• perceived to lack legitimacy as employers with a strong

international orientation• perceived as having disadvantages; career/international

work opportunities, pay/benefits, progressiveness of company, training

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Recruitment, Selection and Retention

IHRM activities for SMEs• communicate the company has a strong position in

international markets and offers international career opportunities

• use selection criteria that defines international competencies

• improve and emphasize benefits; training, career paths, financial

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SME Employer Image and

Internationalization (Figure 3.8)

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Human Resource Development: The Challenge of Learning

SMEs• short term oriented• informal learning• tacit knowledge

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Human Resource Development: The Challenge of Learning

IHRM activities for SMEs• learning processes are critically important• improve capacity to perceive relevant environmental

developments: strategy and communication training• resist the temptation to impose “large firm thinking”

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Learning in Small Organizations (IHRM Notebook 3.6)

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Expatriate and Limited IHRM Resources

SMEs• informal

IHRM activities for SMEs• cultural integration• outsourcing IHRM