SHRM Challenges for TNC (Transnational Corporation) in emerging economy

IIM RANCHI

SUBMITTED BY VISHWESH KOUNDILYA PGEXP/004/2012-14

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 most powerful 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 high performance 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, highcommitment 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 outside the 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

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 deteriorating under 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 productdriven 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 decisionmaking 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 advantage and 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

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. For example, 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 even the 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

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 involvement is 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 of the 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

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 HR policies 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 successfully help 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

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 of SHRM 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 the past 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

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 between the corporate winners and losers in the 21st century 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 the multinationals. 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

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 reason identified 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 taskoriented skills, improve employment prospects or enhance career development prospects. At the individual level, many employees undertake training with out any form of organizational or government 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.

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 in varied 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.