SHRM Challenges for TNC

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SHRM Challenges for TNC (Transnational

Corporation) in emerging economyIIM RANCHI

SUBMITTED BY

VISHWESH KOUNDILYA

PGEXP/004/2012-14


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SHRM Challenges for TNC (Transnational Corporation) in emerging

economy

Arrival of SHRM in the global Scene

Strategic Human Resource Management (SHRM) has been, and remains, one of the mostpowerful and influential ideas to have emerged in the field of business and management during

the past twenty-five years. Policy makers at government level have drawn upon the idea in order

to promote highperformance workplaces and human capital management. Within business

corporations, the idea that the way in which people are managed could be one of, if not the most

crucial factor in the whole array of competitiveness inducing variables, has become a widely

accepted proposition during this period. Many management consultancy firms both large and

small have built substantial businesses by translating the concept into frameworks,

methodologies and prescriptions. And, not least, academics have analyzed, at considerable

length, the meaning, significance and the evidence base for the ideas associated with SHRM.

The idea that it is sensible for an organization in the public or private sector to view its people

management in a strategic way is nowadays conventional wisdom.We can say that SHRM is a

progression to a more sophisticated, high-value-added, high-performance workforce, high-

commitment management, employment nirvana.It is a distinctive approach to employment

management which seeks to achieve competitive advantage through the strategic deployment of

a highly committed and capable workforce using an array of cultural, structural and personnel

techniques.

Emergence of Transnational Corporations in the era of Globalization

With the collapse of communism and the end of the cold war, the fading away of non- alignment

and of the North- South conflict, nations are moving closer to each other. Internationalization

and globalization and integration seem to be the order of the day. Along with the change in

socio, political and cultural order, the movement of global economy in 1990s is exerting a new

environmental trend which is significantly influencing the pattern of global competition. As a

result rapid technological changes have transformed the time dimension of com petition. In the

past the new entrants with new technologies and expertency had years of monopoly to exploit

their technological advantages, which have now shrunk to few months only. The speed and

quality in addressing the needs of world wide customers is deciding the winners of tomorrow.

Again, it witnessed a new trend that the countries like Taiwan, South Korea those were outsidethe periphery of global competition, now they become powerful global players. Besides all these

rapid internationalization of service business have emerged as a bi-product of global

competitiveness.

The forces of globalization are sweeping across the world and national borders are disappearing.

One major out come of this change is that competition has intensified many folds. In the past, in


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efficient companies could survive because they were protected by national boundaries. It may

not be possible any more. In global era, companies have to be able to take on other companies

located in any part of the world. They need to be supple and adapt able to meet the competitive

challenge.

In the era of globalization, the traditional organizational- dependent contract is deterioratingunder significant pressure from globalization, changed management philosophies and economic

realities. Traditional contracts operated in a long-term setting and assumed the feasibility of

predictability and functional specialization. Society was driven by manufacturing and product-

driven engines, which were characterized by stability, growth, monopolistic markets and

predictable technology. Presently, the time is such that the old psychological contract in which

full- time permanent workers gave their loyalty to an organization in exchange for employment

security is dead. In its place, a new global contract is emerging in which employers expect a

value added contribution to the organization. In exchange, organizations offer pay that reflects

employee contributions and experiences and training that will give them employability

security or the ability to get a job else where.

If we look around , we will find that the railways, air travel and now information technology

have conspired to lessen the gaps between individuals and create a smaller and smaller

globalised world in which it is no longer necessary for employees to be in close geo graphic

proximity to work together. Telework is not a new idea, and work such as catalogue sales and

customer information services has been accomplished via teleworking for some time in the past.

What is new is increasing globalisation pressures and the advent of relatively inexpensive and

sophisticated computer based systems which have made it possible to set up flexible

arrangements for a far wider range of jobs and employees than was previously the case.

As globalisation continues, HR managers will understand relevant ethical, legal and cultural

norms over seas and decisions will be made in the con text of world- wide com petition - both for

business and for quality people. HR professionals will recognize that the new contingent work

force views the marketplace as world wide, and that the importance of organization

demographics and the aging population across the developed world must be part of HR decision-

making and be reflected in the job market.

In conclusion, it is argued that HR professionals must fundamentally shift their thinking if they

are to continue to add value to organizations in a global world of in creasing contingent work.

Changed employment relationships imply different HRM contributions to competitive advantageand a longer- term perspective of what constitutes organization effectiveness. In the past, the HR

contribution has tended to be short- term in focus. For example, many HR professionals have

devoted the last decade to drastic measures such as helping their organizations to downsize. Such

drastic measures as downsizing HR may result in short- term ROI improvement, but constitute a

decrease in capability in the longer- term. When the time comes to develop new opportunities,

those organizations may have permanently lost their competitive edge to do so. Developing and


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maintaining a vibrant team of contingent workers offers a real opportunity to respond to sudden

shifts in the global market place. This requires a different perspective on HRM effectiveness. For

example, a traditional HR manager worries about training employees be cause they might leave.

In a global world the new professional HR manager worries about not training the employees be

cause they might stay.

Globalization is changing our perception of the traditional work site and work organization. In

particular, globalization and technological advancements have facilitated the spatial

transformation of both production and work. In recent years it has become evident that

production and employment are no longer permanently anchored to a particular physical

location. As part of the process of internationalization of production Transnational Corporation

can now locate production sites at various locations around the globe and production can be re

located easily to suit company objectives (Chaykowski and Giles, 1998). In an internationalized

economy - a borderless world - the role of nation- states as production units for organizations has

changed and will continue to change. Companies are now increasingly making conscious efforts

to de sign their production and distribution systems in order to meet the demands and changes in

the global economy. Even organizations that operate solely in domestic economies are also

responding to the competitive pressures arising from globalization. Need less to say, these

competitive pressures pose challenges to human resource management in organizations.

Managing Human Resources Strategically in the Global Era

Naturally, the question arises how companies can face the competitive threats posed by

globalization. We think that management of human resources is critical to achieving flexible and

adaptable organizations. The Resource Dependence View suggests that the parts or departments

of the organization that meet the external environment challenges become more influential. Forexample, at one time engineers ran companies because technological problems were the most

important. It was followed by mass marketing era when marketing departments took over. Then

came mergers and acquisitions, and stock market considerations. A result was that the financial

managers were in- charge of the organizations. In years to come, we believe that human resource

function will become critical for organizational survival. There are some trends suggesting that

this is happening.

Our premise is that people are one of the most important factors providing flexibility and adapt

ability to organizations. For ex ample, a Chief Executive of a big company in Asia noted that, in

tapping the many new opportunities in the growth corridor of the Asia- Pacific region, or eventhe world, it is the human matrix that determines the success of the ventures. Further, we need to

bear in mind that people (managers), not the firm, are the adaptive mechanism in determining

how the firm will respond to the competitive environment.

We think that the field of strategic human resource management emerged mainly in recognition

of the fact that human resources need to be managed strategically for the firm to enjoy


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sustainable competitive advantage over competition. Several scholars have noted that managing

people is more difficult than managing technology or capital. However, those firms that have

learnt how to manage their human resources well would have an edge over others for a long time

to come because acquiring and deploying human resources effectively is cumbersome and takes

much longer time horizon. The field of strategic human resource management has seen a spate of

studies over the years. The progress has been quite uneven, however, and most of the key issues

are notably in need of further attention.

Strategic Human Resource Management transforming the organizational Landscape

Different strategic archetypes affect the integration of HR management with organizational

strategy. Following the contingency perspective, firms that achieve a tight vertical fit between

strategy and HR management perform better than their counterparts who have a disjointed

linkage. The HR function needs to address issues which vary accordingly to the type and level of

strategy and thus the HR system has to develop different degrees of linkage to deal with those

issues specific to the strategy. For example, a recent study found that strategic HR involvementis more prominent when companies are pursuing product innovation strategies. We believe that

strategic archetypes are a factor influencing the degree of linkage between HR management and

strategy. This is because different strategic types place varying demand on the HR function. In

order to fulfill those demands, we would expect different degree of HR- strategy integration to

exist between the three strategic archetypes.

The capacity to decide where to invest, who to employ and how to maximize the competitive

advantage of wage cost differentials and flexible employment practices, taxation levels and the

strictness of labour laws among different national labour markets increasingly determines

whether to re- locate. The results of the study support the proposition that as a consequence ofthe globalization of markets, multinationals are tending to adopt a global strategy in which there

is greater coordination of management practice, together with the development of internationally

orientated management. For longer established multinationals this has generally meant changing

from a multidomestic strategy where local subsidiaries had a great deal of autonomy. The pre

dominant structural form is to organize in cross- national business units which are coordinated

through an organizational matrix linking business, country, and management functions. As

businesses continue to expand their operations across international boundaries, more

organizations are sending employees on international assignments. Among the many factors that

contribute to the success of an international assignment, the adjustment of the expatriates spouse

and family is considered to be the most important (e.g., Arthur & Bennett, 1995; Harvey, 1985).

The organizations in the study varied in the pace at which they were globalizing, and the actions

they were taking. Nevertheless some patterns emerged that illustrate the strategic human

resource implications of this trend. One is that firms with a global strategy take an international

view of both management development and management succession. The aim is to create an

international orientation in which managers feel a responsibility for the success of the whole


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organization and not just their unit. There were a number of ways in which companies were

promoting the transfer of know-how. These included encouraging net working through both

face- to- face and electronic communication, internal bench marking to compare the performance

of businesses and functions and promulgate best practice, and knowledge facilitators with a

roving world- wide brief. Most of the firms were doing some thing to encourage learning, but

were at a stage where they were still exploring possibilities.

Almost all the companies had developed some international human resource policies, most

frequently in areas that relate to performance appraisal and development. Generally such policies

are laid down as principles or guidelines, so that practice might vary. Even so, there were some

accounts from informants of difficulties with global initiatives, and international meetings of

executives did not always find it easy to reach agreement. Despite this, there was evidence of

some agreement as to what should constitute good practice in SHRM.

The research study confirmed that as firms globalize, they integrate senior management

appointments, encourage cross- national sharing of experience and develop international HRpolicies on issues that support corporate objectives. This in turn has placed new demands on the

Personnel function within businesses and at corporate head office. Within the participating

companies, the implications are still being worked out. Head office Personnel executives favored

a consensus building approach in which the most appropriate policies are implemented in each

business and national location. How ever subsidiary Personnel executives sometimes saw

globalization as the centralization of power. Global organizations need to find ways of

developing a genuinely geocentric orientation in which innovation and progress may come from

any where, not just from the parent company. Personnel executives should understand the social

processes that are involved in cross- cultural interaction, and potentially the way they manage

their own coordinating mechanisms could be a role model for other groups.

Challenges for TNC (Transnational Corporation) in emerging economy and SHRM

With the opening of World Market to Multinational companies, a rapid change and development

is observed in the field of HRM. The scope of personnel function has changed drastically. Now

apart from managing the head quarters HRs, the personnel function is also required to manage

HRs in their subsidiaries. This has resulted in the growth of the new topic of Strategic HRM. The

various studies have justified the role of SHRM in achievement of competitive advantage and

listed human resource planning, staffing, appraising, compensating, training and development

and union management relationships as key HRM practices, which if carried out successfullyhelp in achieving competitive advantage. It has been pointed out that the advantage of skill based

SHRM approach which leads the organization to perform better and results in creating core

competencies which is an important key to competitive success. Similarly studies have showed

the contribution of effective human resource system in the creation of sustainable competitive

advantage. Some studies also have reflected the importance of HRM in management change and


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contribution of SHR practice as key to reform and restructuring programme to set- up the old

organizations in new work culture.

However, the strategic HR practice in global firms has its own value and status for its success.

The most important issues which strategically managed by HR professionals is cultural diversity

with new leadership styles. Some researcher suggested in this regard that the strategic alliance ofSHRM and development of multicultural top management group can lead such organization to

success.

TNCs have no doubt increased global output and disseminated some technology. There are many

accounts of how they have even contributed to the level and quality of employment. The world

investment report from UNCTAD (2010) indicates that although developed-country

transnational corporations (TNCs) account for the bulk of global foreign direct investment (FDI),

developing and transition economies have emerged as significant outward investors accounting

for one quarter of global FDI outflows in 2010, the bulk of which came from Asia. Similarly, the

growth rate of the number of TNCs from developing countries and transition economies over thepast 15 years has exceeded that of TNCs from developed countries. Asia dominates the list of

100 largest developing country TNCs. Further, the emerging economies are investing heavily in

low-income host countries, generating considerable South-South investment flows (UNCTAD,

2007). It is anticipated that in the new world economy, the balance of power will shift to the East

as China and India continue to evolve as two of the most attractive inward as well as outward

FDI destination countries.

One of the key challenges facing the TNCs is how to balance between the need for global

integration and local adaptation. National origin of TNCs is seen as a major influence in

determining this balance (Ngo, Turban, Lau, & Lui, 1998, p. 632) . Contrary to Ohmaes (1990)view of a borderless world and nationless corporations, cultural and institutional determinants in

the country in which firms were located are seen to be salient determinants arising from a firms

context (Chang & Taylor, 1999; Gooderham, Nordhaug, & Ringdal, 1999). Researchers, such as

Ferner (1997) and Gamble (2003) examined the issues dealing with how TNCs manage their

foreign subsidiaries and concluded that the main influence on the TNCs effort to have a degree

of control over their subsidiaries was their country of origin (Harzing & Sorge, 2003; Hu, 1992).

Supporting this view, Harzing and Sorge (2003) state that although multinationals are highly

internationalized, their organizational coordination and control practices at the international

level tend to be explained by their country of origin.

TNCs from emerging economies enter developed economies for exploration and other

emerging economies for exploitation(Wright, Filatotchev, Hoskisson, & Peng, 2005). While in

the past Japan and Korea internationalized through greenfield expansion, founding their own

subsidiaries that mitigated cultural clashes, China and India are expanding mainly through

acquisitions in Western countries (Hofstede, 2007). Moreover, their internationalization is very


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rapid and different from that of the conventional Western TNCs and erstwhile developing

country TNCs (Matthews & Zander, 2007). They also tend to use exporting and FDI as

combined and simultaneous strategy, rather than being distant alternatives (Contractor, Kumar,

& Kundu, 2007)

According to Taylor et al. (1996), there is a growing consensus that a key differentiator betweenthe corporate winners and losers in the 21

stcentury will be the effectiveness of the human

organization and it is particularly critical in the emerging markets (Strategic Direction, 2007). In

the context of SHRM, Ngo, Turban, Lau and Liu (1998) found strong support for the hypothesis

that country of origin influences the firms SHRM practices. Taylor et al.s (1996) model of

SHRM considers that the transfer of SHRM policies and practices can go in any direction, not

just from home to host countries. Similarly, American and European SHRM systems influence

and are influenced by East Asian SHRM systems (Chew & Zhu, 2002). Empirical studies on the

diffusion of SHRM practices by TNCs across their subsidiaries indicate that they predominantly

adopt hybrid methods, combining both push force for control from headquarters and pull factors

for conformity to host country, to suit the markets they are serving (Rose & Kumar, 2007).

Global, national and internal pressures play a role in influencing SHR strategic recipes and

delivery mechanisms (Brewster, Sparrow, & Harris, 2005). Edwards & Rothbard (2000) contrast

different approaches to the transfer of employment practices in TNCs and argue for an integrated

approach that focuses on interrelationships between markets and institutions on the one hand and

the material interests of actors on the other.

Research shows that control and coordination mechanisms and diffusion of management

practices in a TNC are subject to several external and internal influencing factors (see Figure 1).

If the degree of integration between the headquarters and the subsidiary is high it requires higher

levels of control and coordination (Taylor, Beechler, & Napier, 1996). With regard to external

influencing factors, the TNCs from emerging economies face a double hurdle of liability of

foreignness and liability of country of origin with perceived poor global image of their home

country (Chang & Taylor, 1999; Chang, Mellahi, & Wilkinson, 2009a; Engardio, Arndt, & Geri,

2006; Ferner, 1997; Ferner, Almond, & Colling, 2005; Smith & Meiskins, 1995). These

constraints are further accentuated by liabilities of smallness and newness (Contractor, Kumar, &

Kundu, 2007). As Guillen and GarciaCanal (2009) note, they also need to deal with the

liability and competitive disadvantage that stems from being latecomers lacking the resources

and capabilities of established TNCs from the most advanced countries. Furthermore, the degree

and level of integration between headquarters and subsidiaries will also influence themultinationals. Similarly, with regard to internal influencing factors, the strategic framework of

the TNC, organizational culture, leadership, decision making and delegation of authority can be

considerably different in TNCs from emerging economies than their counterparts in developed

markets due to national cultural, economic and political differences (Hofstede, 2007).

TNCs exercise a degree of control over their subsidiaries to ensure their resources and efforts

are directed towards attaining the main objectives of the TNC (Chang & Taylor, 1999). Control


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refers to the processes by which an TNC ensures that their subsidiaries operate in a particular

way as determined by the headquarters in order to achieve organizational goals (Chang &

Taylor, 1999). According to Harzing and Sorge (2003), corporate control comprises of all the

mechanisms instituted to tie the operations and decisions within and across components into a

larger whole and establish coherence of meaning and purpose within the larger enterprise

(p.190). We adopt the Harzings (1999) typology that suggests two dimensional classification

between direct (personal & impersonal) and indirect (personal & impersonal) control.

Complementary to the above typology is Taylor et al.s (1996) classification of adaptive or

polycentric approach vs. exportive or ethnocentric approach to management control of

subsidiaries.

Unlike developed country TNCs engaging in forward diffusion of superior home country

practices into developing country subsidiaries, emerging economy TNCs utilize the knowledge

gained in operating in developed markets to transfer best practices across the entire organization

(Zhang, Tsui, Song, Li, & Jia, 2008). They are expected to adopt an adaptive or polycentric

approach to management in developed country subsidiaries (Edwards & Rothbard, 2000; Kaye& Taylor, 1997). In terms of SHR strategy, this could mean low internal consistency with the

rest of the firm and high external consistency with the external environment. Accordingly, SHR

practices may include hiring host country managers with local knowledge and transfer of

practices both ways, depending on which is seen as working better.

TNCs from emerging economies entering other emerging markets may follow their counterparts

in developed markets by adopting an ethnocentric approach. They attempt wholesale transfer of

the parent firms HRM systems to their subsidiaries, especially with regard to their core

competencies (Pudelko & Harzing, 2007), to achieve high internal consistency. The other reasonidentified is the limited availability of management and technical skills in some countries (Delios

& Bjorkman, 2000; Scullion, 1994). Some authors have noted that TNCs are more likely to adopt

an adaptive or polycentric approach in developed countries than lesser-developed countries due

to the greater availability of managerial skills in developed countries (Bazeley & Richards, 2000;

Richards, 2001; Shen, 2006).

Training and development of staff is viewed as an essential component of industry and of

potential national importance. Training and development can be used as a way to improve task-

oriented skills, improve employment prospects or enhance career development prospects. At the

individual level, many employees undertake training with out any form of organizational orgovernment assistance. Reasons for this are varied, whether it is to enhance their position in the

organization, improve their promotional prospects or because of a general interest in some thing

new, that may or may not improve their job futures. At the macro- level, many countries have

training policies in place to improve national productivity, both of the firm and the country, to

raise the standard of living in that country and to provide benefit over all in the global

marketplace.


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Conclusion

Thus we can perorate by saying that TNCs are here to stay in the globalized world and the

challenges associated with managing the globally dispersed organizations, with operations invaried culture, languages and time zones are many and one of the biggest challenge is to manage

people which can be done with the help of strategic human resource management.

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SHRM Challenges for TNC