Similarities between Domestic and International HRM

HRM plays a key role in any organisation. It is the core of corporate strategy as HRM could help company improve their performance, form sustainable competitive advantages, and have a guiding role in the enterprise management. To quote from Dowling, et al. (2008: p2),

‘General HRM refers to those activities undertaken by an organization to effectively utilize its human resources’.

This concludes the first similarities between the two. As basic functions such as procurement, allocation, utilization and motivation are the same whether they are specific in one country or several countries. Both domestic and international HRM have same major functions and activities in HR planning, recruitment, performance management, training and development, compensation, and industrial relations.

Another similarity is related to the environmental forces that influence the function of HRM. These external constraints include political, economical, legal, and cultural have significant impact on how the HR functions are carried both in domestic as well as global environment (Aswathappa and Dash, 2008).

Finally, both of them have similar basic human resource management objectives. Firstly of all, is to ensure organization having maximum satisfaction in the human resource demands. Another objective is to ensure effectiveness in the organisation through interventions. And then is to promote sustainable development of firms by maximizing the development of internal and external human resource management. The final similar objective is to maintain and encourage human resources within the company to upgrade the potential human capital.

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Differences between Domestic and International HRM

The differences between domestic and international HRM are more striking than their similarities. In the context of globalization, HRM activities are differ materially from its domestic operations. This is because DHRM is only dealing with one national employee while IHRM is operating across national boundaries (Boxall, et al., 2007). In an article by Sparrow and Hiltrop (1997), national patterns of HRM are different from country to country due to the factors of HR roles and competence, culture, institution, and business structure. Thus, differences are mainly referring to how they complete administrative functions in different environments.

Many literatures about HRM have indicated the differences between domestic and international HRM. According to Claus (2003), the main differences in HRM essentially come from the interconnection between culture and structure of a particular society. Bratton and Gold (2007) state that IHRM distinguished from DHRM in the core activities such as recruitment and selection, training and development, rewards, performance management and expatriate management require cultural sensitivity and effectiveness in cross-cultural multinational environment. However, the work of Dowling, et al. (2008) point out that the key variable that differentiate IHRM from DHRM is the complexity of operating in different countries and employing different national categories of employees, rather than any major differences between HRM activities performed.

According to Morgan (1986), the International Human Resources Management is defined as the interaction among these three dimensions: Human Resource Activities, Type of employees and Countries of operation.

Source: Morgan (1986)

It can be clearly seen from the above diagram that the Morgan’s model of IHRM indicates international HRM is more complex than the domestic HRM. It is complicated due to the following six factors that differentiate domestic and international HRM: more HR activities, the need for a broader perspective, more involvement in employees’ personal lives, changes in emphasis as the workforce mix of expatriates and locals varies, risk exposure, and broader external influences (Dowling, 2008).

More HR Activities

IHRM requires a number of additional activities, which are unnecessary in a domestic context. Typical examples are the consideration of international taxation, relocation and orientation, administrative services, host-government relations and language translation services (Dowling, et al., 2008).

Taxation systems differ significantly from different countries. For example, the tax rate in developed countries such as UK and Australia is up to 25% depending on employee’s income level, which is very high. Conversely, in some developing and less developed countries, the tax rate is much lower. For domestic HRM, managers only need to consider one national taxation system. However, in an international environment, expatriates in the MNCs often have tax liabilities both in home country and host country. Thus, international HR managers have to consider international taxation with its complicated tax equalization policies to ensure no tax incentive or disincentives existed in the international assignment. Meanwhile, IHRM requires attention to resolve potential problems in the international relocation and orientation activities, such as arranging for pre-departure training, providing housing, recreation, medical care and immigration information, and finalizing compensation details. HR department also need to provide administrative services such as acquisition of visas and work permits for expatriates and maintain the relationship with relevant government officials. In fact, host-government relations are an important activity in MNCs, especially in developing countries. For example, it is crucial for people, who doing business in China, to have a good personal relationship (known as ‘Guanxi’) with relevant government departments and multinational managers as it will be really helpful for them to resolve potential problems. However, US-based multinationals must be careful to cope with such relations to avoid violate the US Foreign Corrupt Practices Act. Thus, international HR managers have to ensure they are compliance with the procedures and regulations that mandated by the government of the host country. Another additional activity in IHRM is providing language translation services for expatriates whenever they needed.

Broader Perspective

Due to the diversity of employees in an international environment, HR managers are required to have broader perspective on all the HR activities to ensure equity of treatment for different groups (Aswathappa and Dash, 2008). For instance, a broader view that all expatriate employees should receive special benefits such as health insurance and expatriate premium for taking on international assignments.

More Involvement in Employees’ Lives

For domestic HRM, involvement with employee’s personal lives is only confined to issues such as providing employee insurance programmes and offering assistance in relocating. However, the involvement with staff’s family member is limited. This is unlikely for firms operating internationally. IHRM must involve broader compensation, including transportation, recreational programmes, housing, children education, spouse employment and family healthcare for expatriate and local staff.

Effects of Expatriates and Local Workforce Mix

The complex workforce mix is another factor that contributes to the complexity of IHRM. HR managers in MNCs must deal with the issues of political, economical, cultural, ethical, religious and legal differences (Alrawi, 2008). Moreover, they are also required to focus on various HR activities change. For example, since more well trained local staffs and managers available, companies are encouraged to bring high-potential local workers to corporate headquarters.

Risk Exposure

Expatriate failure is a high-cost problem for MNCs. Due to the changeable foreign exchange rate and location of assignment, the direct costs such as salary, travel, training and relocation expenses can be over three times higher than the costs spend in domestic environment. Indirect costs such as reputation damage and loss of market share are also with high cost risk. Other aspects of risk exposure are terrorism and political instability. For example, the tragic 9/11 attack in New York, civil and social upheavals, and military conflicts. In order to ensure physical safety of employees, HR department also have to consider dynamic political and environmental risk when arranging international meetings and may design emergency evacuation procedures for highly volatile working locations.

Broader External Influences

IHRM activities are also influenced by more external forces. For example, government factors such as Malaysia force HR managers to set affirmative action to provide equal employment opportunity for the workforce and intend to increase employment and skill level of nationals (Dowling, et al., 2008). State economy is an important factor for HR department to consider. Issues include expensive labour cost in developed countries but cheap labour in developing countries. HR managers operating activities in an international environment also need to concern their ways of conduct. For instance, they have to understand the local ways of doing business and follow local government regulations when dealing with the issues regard to labour relations, health and safety, and taxation.

In addition to complexity, there are still some additional important considerations in IHRM. As Dowling, et al. (2008) point out, there are five variables that moderate the differences. The diagram shown below is a model of five variables that explains such differences between domestic and international HRM.

Source: Dowling (1999)

Detail explanations of these four additional variables are interpreted below.

Different Cultural Environment

Recruiting workers with different cultural backgrounds requires international HR managers to coordinate policies and procedures to manage their employees from the firm’s parent country as well as its subsidiaries around the world. Culture is important in HRM as conflict may easily arise. For example, recruit staffs from family members who may not have required working competence could be seen as a good example in Indonesia to satisfy local expectations (Dowling, et al., 2008). However, in the western people’s view, this could be seen as nepotism. Another problem may faced is culture shock such as psychological disorientation and strong desire to return to one’s home country which let expatriate unable to adjust emotionally to a new cultural environment. Consequently, it will influence the performance of employees. Thus, helping expatriates to prepare working and living in a new cultural environment become an important activity for HR department.

Type of Industry

For firms in a multi-domestic industry such as distribution, retailing and insurance, HRM is basically domestically oriented in structure and orientation as the competition is essentially national. IHRM services may occasionally require.

For global industries such as aircraft and semi-conductor industries have competition in multinational environment. Thus, it requires HRM to deliver the international support and takes more strategic approach to the HRM’s roles. HRM in these industries has to reflect both local and global environments ideally.

Reliance of MNCs on Domestic Market

The extent of reliance on domestic market may have considerable influence on multinational’s behaviour and HR practices. For example, small countries such as Sweden, Netherlands and Switzerland may have outward-looking in HR practices. Thus, they are largely reliant on the foreign markets for their growth. However, MNCs in large domestic markets have quite different position due to the inwardly-oriented HR practices such as USA often offering the benefits of high consumer demand. It shows that the size of domestic market is important while large size may have significant impact on all aspects of MNCs’ operation ways in its international activities.

Senior Management Attitudes

The final variable that distinguishes domestic and international HRM is the attitudes of senior management. Managers are suggested to think globally when operating globally. However, several reasons such as ethnocentrism, inward-looking, inadequate information and cultural insensitivity may lead to the failure of develop international orientation among staff managers. In such situations, managers may tend to minimize the differences between domestic and international environment and mainly focus on the domestic issues. However, HR managers with the goal of developing globally oriented staffs may contribute to the internationalization of their company.

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Conclusion

Similarities between DHRM and IHRM are referred to the major functions and activities, which normally including HR plan, recruitment, people management, performance evaluation, compensation, training and development, industrial relations and motivation. However, differences between the two are mainly due to the complexity of operating in several countries and having different cultural background employees. The complexity involved in more human resource activities, broader perspective, more involvement of employees’ personal lives, workforce mix, risk exposure and more external influences. Explain the variables that distinguish IHRM from DHRM by using Dowling’s Model could interpret clearly about these differences. In addition to the complexity of operating in a multinational environment, four other variables also need to consider. These are cultural environment, industry types, extent of reliance on domestic market, and senior management attitudes. It is recommended that HR managers in the MNCs have to focus on the interaction of different cultural attitudes and social values, concern about the difference between legal and economic as well as different learning styles due to social and cultural differences.