Emerging HRM issues in China

The following essay will discuss some of the emerging HRM issues in China and analyse the implications for multi-national enterprises (MNE’s). Initially, a brief overview of the China’s economic landscape will be given and the role that China plays in the global environment will be highlighted. For the purposes of this essay, in-depth discussion and analysis will be on two of the main emerging issues which are the management of culture integration and HRM knowledge transfer in modern China and secondly, addressing the lack of skills and highlighting the importance of retention in China through modern HRM practices.

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Background information concerning current issues.

Prior to the 1970’s, much of the economic landscape in China was dominated by State-Owned Enterprises (SOE’s) (Liu, 2003). However, reforms concerning the economy, labour relations, ownership and other social systems in the late 1970s through to the 1980s opened the door to an increase in foreign investment, which mainly occurred through the joint ventures with domestic enterprises (Lewis, 2003). Since then, further reforms developed the opportunity for privately owned enterprises, and wholly foreign owned enterprises to exist in China.

Due to these significant reforms, the last twenty to thirty years in China has seen its society shift in a number of ways, firstly, from the country being primarily rural farming and agricultural to urban and industrialised, secondly the economy itself shifting from being ‘rigid’ and centrally planned to very market orientated. Thirdly, the transition of domestic enterprises from being state owned allocations systems to representing private and collective forms of ownership. Next, there was an evident shift in the culture in China moving from being a socialist mentality dominated by Confucianism to a more diverse society with emerging capitalist values and greater openness to the global community (Wang & Wang, 2006)

These changes according to Selmer (2002) have meant that China has grown into an attractive and important market for international business and this attractiveness has been boosted by China’s vast population and its entry into the World Trade Organisation. As China has become inevitably linked to the international economy, it increasingly faces the challenges of globalization which mean enterprises have to adapt to a new, fast-changing environment (Warner, 2008). As such, this type of significant growth for China may hold many implications for managers, because aided by the injection of technology and managerial expertise into China’s economic development, China has experienced a significant economic leap forward with increased complexities in people management that have been strongly influenced by political factors, economic factors, and social systems, as well as national culture (Wang & Wang, 2006) .

 Managing culture integration and knowledge transfer.

The first significant emerging HRM issue that will be discussed is the extent to which cultural differences in China influence the management behaviour of multi-national enterprises(MNE’s) and moreover, the importance of cultural integration in a dynamic society. Firstly, organisational “culture” is defined as the norms, values and shared beliefs by employees and refers to individual behaviours which make up how work gets done in an organisation (Hill, 2007). Essentially, it is how a business outcome is achieved by the behaviours of people, and the drivers which produce desired behaviours. Beechler and Yang (1994) suggests that as the gap between the parent country culture and host country culture widens, the likelihood of the MNE conforming is reduced. However, other research by Gamble (2003) suggests that with a cultural gap, MNE’s themselves conform to local customs and practices to bridge that gap. In regards to modern China, through analysis of companies such as Orica who have changed areas like recruiting practices to conform to Chinese cultural influences, it can be said that the latter HRM theory by Gamble (2003) holds true in China.

Communist philosophies such as reliance on the government are also still prevalent in China and this combined with other Chinese cultural concepts such as and ‘guanxi’ and ‘danwei’ can be a siginificant barrier for MNE’s trying to achieve business outcomes (Fan, 2002). Guanxi is a measure which reflects feelings in an interpersonal relationship, the moral obligation to maintain that relationship, and, the idea of being perceived as a morally correct whilst holding ones place in society (Fan, 2002). What’s important to note is that ‘guanxi’ influences business interactions such as employment represents and financial transactions and not just casual social interactions. The issue for MNE’s here is that where in the home-country HR practices such as selection may have been based on knowledge, skills and competencies as well as pay and merit, ‘guanxi’ influences become a barrier to strategic recruitment and selection as local HR practices are guanxi-based and require that relationships to be built ahead of time (Zhu, Thomson & DeCieri, 2008). Another example of this barrier is that of state-owned enterprises (SOE’s) which still heavily rely on state agencies to assign jobs from the labour market. This is due to historical and cultural roots which are derived from communist philosophies and relations of ‘guanxi’ built over a long period of time (Zhu, Thomson & DeCieri, 2008).

With such a diverse culture in China, cultural integration becomes a critical people issue for MNE’s in China. This was made clear in a global survey conducted by Wang & Nishiguchi (2007) that stated 67% of both Chinese and non-Chinese survey respondents agreed that cultural integration is the most important people issue and the most critical success factor for a MNE’s in China. In regards to this, differences in culture between firms are also a major source of attrition, especially after mergers, and yet according to research and surveys, these differences are rarely investigated by MNE’s. For example in mergers or acquisitions, companies may fail to even identify the nature of the “culture” that exists in the other company prior to merging (Wang & Nishiguchi, 2007).

Without defining the type of culture prevalent, it is impossible to deal properly with issues of cultural integration. In more recent times, a significant problem in China concerned company specific culture. For example, there are SOE workers that have communist philosophies that everyone is equal but when MNE’s enter the scene, they are often perplexed that managers ask them to focus on customers or implement a system where top performers are rewarded while those falling behind are punished (Bacani & Peavy-Sima, 2006). Many of these workers find it difficult to adjust to a culture where their performance is constantly graded against others and this is the modern dilemma for MNE’s. Another example is that of Philippine company Jollibee Foods whom setup in China and experienced issues with cultural alignment. Philippine managers and employees were accustomed to a democratic environment and having the freedom to raise concerns with superiors but in China, the culture is more authoritarian with a greater power distance between workers and superiors so it deemed acceptable for managers to be controlling and for workers not to raise immediate concerns (Bacani & Peavy-Sima, 2006).

MNE’s also need to see some of the implications of failing to address cultural integration issues in China. The coexistence of traditional and reformed economic, institutional, and cultural systems in China has created strong resistance to change so consequently, problems arising for MNE’s in human resource areas cover job design, leadership, motivation, performance and productivity improvement, and especially in organizational development through knowledge transfer (Wang & Wang 2006).

Knowledge transfer according to Saka-Helmhout (2009) refers the movement of knowledge, policies and practices from home countries to host countries and flow can be one-way from the parent to the subsidiary or two-ways between the parent and subsidiary. Employees in a home-country have many sources of power they can use to block the transfer of knowledge, for example, they assumingly have superior knowledge of the language and culture which can be used to promote local culture and restrict MNE impositions on them (Saka-Helmhout, 2009). It is also worthwhile mentioning that expatriates have the ability to facilitate, disseminate and transfer standardized MNE practices and knowledge into host countries. Research by Gamble (2003) suggests that companies with a high expatriate presence will abide by management practices of the MNE and be wary of traditional host country practices to close the cultural gap. This is primarily because expatriate managers play a control function role in areas such as setting overall strategy and transferring much of the administrative heritage. Expatriates also spread explicit knowledge through the adoption of employee handbooks, training manuals and standard operating procedures as well as valuable tacit knowledge of ways of managing the organisation (Taylor et al, 1996).

An example of this is evident in the UK based ‘StoreCo’ who set up operations in China named ‘DecoStore’ to serve the local market. Expatriate managers for DecoStore participated in and oversaw the entire operation and this allowed for long term dialect with Chinese employees in which cultural values and expectations, on both sides, were negotiated and this set a platform for effective knowledge transfer. Essentially, DecoStore demonstrated that even a few expatriates can have a great impact as they initially operated with two UK expatriates (Gamble, 2003)..

Implications of expatriates however are that in China, few expatriates can speak Mandarin and fewer can read it, consequently, some expatriates cannot talk directly to their staff, let alone read legislation in Chinese and this may have a detrimental impact on long term relations and business outcomes (Gamble, 2003).

Lack of skilled labour resources and retention issues.

The second major emerging HRM issue in China is the growing need for talented managers and the lack of skilled workers. For MNE’s, this is stated as by far the biggest HRM challenge in China and this applies for locally owned businesses also (Bacani & Peavy-Sima, 2006). According to the China Economic Review (2009), ‘the imbalance between business opportunities in China and qualified executives to manage them will get worse, before it gets better’. In a recent survey of US-owned enterprises in China by ‘AmCham Shanghai’, 37% of the companies said that recruiting talent was their biggest operational problem and this issue was greater than regulatory concerns, a lack of transparency, bureaucracy, or the infringement of intellectual-property rights which are all deemed as significant issues also (Bacani & Peavy-Sima, 2006) . In another survey, 44% of executives at Chinese companies surveyed by ‘ The McKinsey Quarterly’ stated insufficient talent locally was the biggest barrier to their global ambitions.

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With a population of`1.3 billion people, one would assume that labour resources are freely available and skills abundant in China but this is not the case currently and this is due to China’s history. One reason historically is due to the ‘iron rice bowl’ approach of managing people in China prior to the reforms of the 1970’s. Essentially, from a HR perspective, the ‘iron rice bowl’ approach involved cradle to grave welfare coverage, no layoff/firing policies, egalitarian pay systems, and group based rewards which coincided with lack of organizational autonomy and discretion due to the centrally planned economy at the time. (Wright, Mitsuhashi & Chua, 1998). To add to this, the government controlled all resources and centralized the allocation of the material supplies, filling quotas assigned by the state, rather than improving productivity and quality. Consequently, there was no incentive for organisations to reduce costs, alter work processes for productivity or improve products. No incentive system in organizations meant that employees were not motivated and this had a detrimental impact on organisational competitiveness (Goodwall & Warner, 1997).

A second reason historically for the lack of skilled human capital in China was the absence of higher education in general and management training which is primarily linked to the ‘Cultural Revolution’ from (1966-76) where universities and educational institutions were closed and a whole generation of potential managers were lost (Wright et at, 1998). This action by those in power meant that the cohort of workers entering work came without the benefit of quality education and consequently, created human capital shortages.

Therefore, a huge HR dilemma exists in that MNE’s in China face a workforce supply that is synonymous with low skills, degraded motivation at both management and employee levels. To coincide with this, the growth of enterprises in China has exponentially increased demand for skills and motivated workers (Ke. et al, 2006).

Another implication of these historical events are that many managers’ existing knowledge, skills and abilities have become obsolete and inadequate to cope with competitive business environments because of the state run systems and their lack of exposure to competitive markets. This is especially true for older managers, particularly in SOE’s who hold no education beyond a high school diploma and have been appointed or promoted to existing positions because of cultural reasons or status (Lau & Roffey, 2002). Under a market-oriented economy, there would be emphasis on performance, individual accountability and strategic decision making but this was not to be as these managers followed and implemented decisions made by state and local governments (Zhu & Nyland, 2004).

Evidently, there is a significant gap between organizations’ requirements and managers’ competencies and skills, especially in areas such as HR, marketing, and organizational analysis, which appear as relatively new concepts in China.

Interestingly, organisations that successfully address the skills shortage in China stand out in a number of ways. According to Shen & Edwards (2004), the most effective organisations have a clear strategic view of their labour talent needs four to five years ahead, segment their executives and identify gaps at all levels of the organization. They develop and adopt sophisticated external-recruiting techniques coupled with internal-development and training programs adapted to the local Chinese environment. As such, to address this issue, managers of MNE’s in China might need to know more about simplifying products, that is, localise techniques that have worked elsewhere globally and look into finding low-capital solutions, managing strategic alliances and government relations. A higher level of cultural openness may be necessary as well. MNE’s in China must therefore be prepared to recognize and address the differences between their talent needs in that country and in the rest of the world which again highlights the importance of cultural integration.

At telecommunications company Motorola, employees are provided with tailored offerings such as the ‘China Accelerated Management Program’, for promising local managers; the ‘Motorola Management Foundation Program’, to train new managers in such areas as problem solving and communication; and the ‘Motorola high-tech MBA program’, a partnership with Arizona State University and Tsinghua University, which allows high-performing employees in China to earn an MBA (China Economic Review, 2009). Incentives like these also contribute to the retention of valuable skilled employees and essentially demonstrate that the MNE see “human capital” as a valuable resource, requiring investment and sound management in order to receive the best possible returns. Another example of an organisation retaining skilled talent is of Lenovo who promote young talent aggressively within, with three of its seven most senior executives are under 40 years old. (China Economic Review, 2009.

Ultimately, China proves to be a juggling act for MNE’s that choose to invest into a market of extremes, with imbalances in supply and demand of skilled talent and exposure to frequently changing corporate and social domains that pose distinct challenges. Therefore, MNE’s hoping to compete in China need to raise talent to the top of their agenda in order to create a sustainable source of competitive advantage.

Essentially, the two of the major HRM issues occurring currently in China include culture integration issues and the problem of skilled labour shortages in contrast to rising labour demands. Ultimately, it can be said that the political and economical changes that have occurred in China’s past has led to these significant issues and for the modern day HRM manager of an MNE in China, it is imperative not to not assume that home-country HRM practices can be applied to Chinese enterprises and ensure that the global implications of what they can learn in the Chinese context are applied. In a dynamic and ever-changing environment such as China’s, MNE’s must thoroughly analyse this environment in which they are in and look to set long term goals and address each issue through the amalgamation of Western HRM practices and Chinese HRM practices.

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