1. ‘To what extent are human resource managers in a multinational company restricted by cultural and institutional factors in implementing policies and practices across their subsidiaries? Discuss your answer giving examples.’
In the face of globalization, organisations struggle to develop the human resource management strategy (HRMS) between global integration and local differentiation. This is regarded as a critical concern for multinational enterprises (MNEs) since they suffer from cultural and institutional differences to integrate HRM practices and shape HRM activities to operate abroad. Regarding that, each cultural and institutional factors are developed over its history with unique insight into managing the organisation, the appropriate HRM practice would vary. The differentiation in national culture and institution call the different management practices that need to be concerned significantly especially for multinational companies’ managers. Researchers highlight the congruence between these factors and HR practice for higher organsational performance.
When the HRM practice fits with the basic value shared by employees, the job satisfaction, employee motivation and commitment will be attained. This comes with the implication that cultural and institutional factors are pivotal in shaping the decisions and policies of managers of organisations. In this essay, it will explain what is the institutional and cultural factor with theoretical approach. After that it will suggest implications of institutional and cultural perspective for International Human Resource Management to answer how these factors influence in implementing management policies and practices.
According to Hofstede (1991), Culture refers to the “shared sets of beliefs, values and norms” that is programmed into an actor’s mind. It is regarded as the psychological ‘software’ and sets of informal rule, while institution is more ‘hardware’ of modified and negotiated legal systems that actors follow. The institutionalism emphasises the legitimacy, which organsations struggle to acquiring and maintaining in relation to the environment. One of the new institutionalist theories, the ‘Variety of capitalism’, treats the corporation as a relationships network that locates organisation in its stakeholders with employees and with competitors. The approach highlights the importance of institutional complementarities that argue the success of an organisation depending on the capability to coordinate effectively.
The theory draws two types of political and economic structures across nations. One is the liberal market economic orientation (LME) and the other is the coordinated market economic orientation (CME). Companies in some North-Western European countries including Germany and Switzerland with CMEs tend to have highly structured arrangements in labour market that form strong trade union. Banks in these countries are highly coordinated with firms and have long-term capital. In contrast, there are loose hire and fire labour market regulations and dispersed international investors in the U.K and U.S.A where classified as LMEs. The source of finance in these countries is the stock market, with the clear difference. The figure1 demonstrates that corporations in these different types of systems do not operate in the same market.
Figure 1. Institutions across sub-spheres of the political economy Source: Hall and Soskice, (2001)
It shows the positions of OCED countries that describe institutional character in the financial and labour market. The higher development in a stock market implies higher dependency on market coordination with emphasis on financial criteria, whereas a higher degree of protection for employees is likely to rely more on non-market criteria. The flexible labour market in LMEs is suitable to easy access to stock market capital. Due to the competitive market conditions, firms in LME markets highly emphasise the financial performance rather than long-term strategies. Nervous investors such as those from the hedge fund tend to hesitate to investing in companies with long-term and uncertain employee training that ties capital in workers’ skills. Conversely, long-term employment arrangement and long-term capital remain in the essence of CMEs.
The institutional considerations lead to different types of organisational behavior and investment patterns that shape different HRM policies and practices. Firms in LMEs emphasise short-term competition that likely treat employees as disposable resources. Employees’ performances are appraised individually with a financial incentive system so managers are empowered to control HRM with considerable autonomy. Investments in employee training and development are classified as ‘overhead.’ `In contrast, HRM polices in CMEs regard employees as valuable assets for sustaining a competitive advantage thus tend to make a greater effort in investments in product innovation and employee development encouraging employment stability. In the system, the higher degrees of job security and work force commitment are derived, since its employment regulation and laws are protected from strong trade union and government.
Moreover, different business systems across nations also significantly impact HRM issues. The issues including working hours, scheme of performance appraisal and job contract are highly influenced by local institutional arrangement. The MNCs in Japan prioritize work organisation, which contains quality oriented and flexible practice, and their HR practices are adopted to be suitable with this approach. Likewise, German MNCs, where short run financial ratio is not a greater concern, rely more on long term strategies that highly regulate the hours of work and worker participation. In this regard, the ability of MNCs to fit various institutional arrangements with the local environment is essential to have an advantage in global operations. The evidence from the survey conducted by Guest and Hoque (1996) show that MNCs in Germany do not implement their ‘best practices’ into subsidiaries in the U.K. such as long-term employment plans, union perception and employee training.
Another crucial factor managers from MNCs should consider for effective HRM is culture. It is assumed as ‘the major source of differentiation’ in managerial behavior among different nations. One of the most widely cited approaches to culture, Hofstede’s study (1980), classifies four cultural dimensions based on the survey data from 116,000 IBM employees. The study suggests possible origin and consequence for managerial behavior in different dimension contexts. Power distance reflects the dependent relationship between superior and subordinate. Companies in high power distance subordinate have high dependence to superior with greater reverence through the hierarchical structure. Uncertainty avoidance measures different degrees of preparation for future risk and ambiguity.
In risk adverse organisations, rule making and bureaucracy are placed to deal with possibilities of risk and members prefer to behave what they are expected. Individualism versus collectivism dimension reveals the different level of desire to feeling that they belong with a group. At last, masculinity versus femininity dimension presents different values that masculine and feminine society prefer differently. Highly masculine societies have a higher tendency to be competitive since high earning and challenging careers are important values for employees. In societies with femininity tendencies, values related to satisfaction, security and cooperation are emphasised. The study highlights the importance of culture to coordinate different managerial behavior for international businesses. Another cross-cultural approach, Hall’s study (1976) classifies cultures into low and high context cultures, each with distinct demands and preferences.
The culture characterizes the nature of human relationship, communication and authority. For example, the line of distinction between high and low context cultural communication has been particularly documented. According to Hall and Hall (1990), in high context communication, speakers tend to utilize relative indirect style of communication. On the other hand, in low context communication, speakers often employ more or less direct communication style. Clearly, these communication dimensions area is an overlap of the individualism-collectivism from Hofstede’s study. Collectivist societies often concern about minimizing the chances of hurting other parties.
These groups emphasise the value conformity and traditions. It is for this reason that they prefer to use high context communication. The team members of collectivists often prefer communicating directly with their leaders. They are often concerned about avoiding responses that are negative, a move that is aimed at maintaining harmony. Any form of communication is aimed at fostering interpersonal communication. The tendency is reversed in individualist societies where each member pays more attention to personal goals and interests. The different communication styles and human relationships naturally relate to the different preferences of organisational structure that shape the HRM practices and policies.
The culture influences multiple aspects of HRM, thus it is likely to be effective when HR practice and policy fit with the culture. In regard to recruitment, collectivistic cultures prefer network based recruitment method like employee referrals. The method is supposed to enhance employee commitment and loyalty that strengthens the social network. Since collectivism highlights cooperation rather than individual achievement, it more considers candidates’ ascribed statuses more than personal skills and knowledge. Conversely, employers in an individualistic organisation select candidates based on necessary abilities through highly structured methods such as bureaucratic interviews. Similarly, the organisation with high uncertainty avoidance index prefers open recruitment with the use of more structured selection method as it is highly correlated with formalisation.
In terms of performance appraisal, individualised appraisal and rewards are highly correlated with individualism and lower degree of uncertainty avoidance. Regarding that various reward practices based on individual performance would result in uncertainty it is less likely to emerge in risk adverse society. The incentive scheme may also not be needed in high power distance cultures since subordinates are more likely to be motivated by superiors’ direction. The merit-based selection and promotion, which consider individual performance and contribution to the organisation is related to individualism and low level of power distance. It is opposed to the value from collectivism and femininity that emphasise group harmony and cooperation.
In conclusion, institution and culture significantly influence in managerial behavior. It is needed to take institutional and cultural factors into consideration in shaping and adopting management policies and practices. Cultural and institutional factors are so varied that they integrate all the factors oriented towards social and ethical responsibilities, which is a major focus for contemporary organisations. Cultural values demands that decision and policies that managers make reflect the interests of the society, including those of the institutions. Since the inappropriate management concept may trigger misunderstanding and conflict among subsidiaries it is vital for effective management.
Clearly, Institutional and cultural researches contribute to analysing and understanding various manifestations of HR across a border. However, managers should take careful consideration before implementing specific HR practices or policies to prevent overly deterministic connection from the theoretical context. In order to achieve successful performance, MNCs have to adjust and moderate management practice in accordance with the local environment. The differences in a business system, local environment and culture between home and host countries are the significant determinants for both evolutions.
 Aycan, Z. (2005), ‘The interplay between cultural and institutional/structural contingencies in human resource management practices’, International Journal of Human Resource Management, 16(7), pp. 1083-1119.
 Earley, P.C. (1994), ‘Self or group? Cultural effects of training on self-efficacy and Performance’, Administrative Science Quarterly, 39(1), pp. 89-117.
 Gomez-Mejia, L.Y & Welbourne, T. (1991), ‘Compensation strategies in a global context’, Human Resource Planning, 14. pp. 29-42
 Guest. D. & Hoque, K. (1996) ‘National Ownership and HR Practices in UK Greenfield Sites’, Human Resource Management Journal, 6(4), pp. 50-74.
 Hall, E.T. (1976), Beyond culture, New York: Anchor Books
 Hall, E.T. & Hall, M.R. (1990) ‘Understanding Cultural Differences’, Yarmouth, MA: Intercultural Press.
 Hall, P.A. & Soskice, D. (2001) ‘An introduction to varieties of capitalism’ in Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford: Oxford University Press
 Hofstede, G. (1980), Culture’s Consequences: International Differences in Work-related Values, California: Sage Publications
 Hofstede, G. (1991), Cultures and Organizations: Software of the Mind, Berkshire: McGraw-Hill
 Tsui, A.S., Nifadkar, S.S. & Ou, A.Y. (2007) ‘Cross-national, cross-cultural organizational behaviour research: Advances, gaps and recommendations’, Journal of Management, 33 (3), pp. 426–478.
[ 1 ]. Earley, P.C. (1994), ‘Self or group? Cultural effects of training on self-efficacy and Performance’, Administrative Science Quarterly, 39(1), 89-117 [ 2 ]. Hall, P.A. & Soskice, D. (2001) ‘An introduction to varieties of capitalism’ in Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford: Oxford University Press, Page 1. [ 3 ]. Hall, P.A. & Soskice, D. (2001) ‘An introduction to varieties of capitalism’ in Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford: Oxford University Press, Page 4. [ 4 ]. Tsui, A.S., Nifadkar, S.S. & Ou, A.Y. (2007) ‘Cross-national, cross-cultural organizational behavior research: Advances, gaps and recommendations’, Journal of Management, 33 (3), pp. 426–478. [ 5 ]. Aycan, Z. (2005), ‘The interplay between cultural and institutional/structural contingencies in human resource management practices’, International Journal of Human Resource Management, 16(7), pp. 1083-1119. [ 6 ]. Gomez-Mejia, L.Y & Welbourne, T. (1991), ‘Compensation strategies in a global context’, Human Resource Planning, 14. pp. 29-42