In this time of rapid globalisation and competitive business world, firms seek to gain competitive advantages by going global via entering foreign markets. According to Chew and Horwitz, (2004), over the years, this rise in global competitive pressure has led to the growth of Multinational Corporations (MNCs) that generated the need for developing global management strategies as well as to designing International Human Resource Management (IHRM) strategies in order to gain long term competitive advantages. Subsequently, Shen, (2005, p83-102) as cited in Plessis and Huntley, (2009, p414), reports that the notion of International Human Resource Management (IHRM) can be defined as “a set of distinct activities, functions and processes that are directed at attracting, developing and maintaining the Human Resources (HR) of a Multinational Corporation (MNC).”
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Thus, the above definition clearly implies that the various Human Resource Management (HRM) practices of a Multinational Corporation (MNC) are entirely focused upon the international management strategy that it adopts in order to maintain or manage its Human Resources (HR) within its foreign subsidiaries. Moreover, Sims, (2002, p364) states that Multinational Corporations (MNCs) usually adopt one of the four major strategic approaches to planning and managing their international Human Resources (HR). In addition, Hodgetts and Luthans (1999, p253) as cited in McNally and Parry (2000, p85) also state that Multinational Corporations (MNCs) usually adopt one of Heenan and Perlmutter (1979) classifications of international staffing which include either the ethnocentric approach, the polycentric approach, the regiocentric approach or the geocentric/transnational approach to planning and managing Human Resources (HR) globally within the foreign subsidiaries.
Furthermore, according to Caligiuri and Stroh, (1995, p496), over the years, ethnocentric Multinational Corporations (MNCs) have been dominant in numbers, especially in the case of firms from developed countries like the UK and the US seeking to enter the lesser developed foreign markets within the region of Asian countries. This according to Sims, (2002, p365) is mainly due to the fact that such an approach to International Human Resource Management (IHRM) simply requires exporting the Multinational Corporation’s (MNC’s) already established Human Resource Management (HRM) practices and policies to its foreign subsidiaries via the usage of expatriates. However, Weirich and Koontz, (2007, p277) over the recent decade, various literatures published by academicians and practitioners within the field of International Human Resource Management (IHRM) have illustrated that each of these strategic approaches to planning and managing Human resources (HR) internationally has its own merits and demerits for these Multinational Corporations (MNCs).
Hence, this report seeks to critically evaluate the benefits and the drawbacks for adopting and ethnocentric approach to Human Resources (HR). In doing so, this report firstly outlines what constitutes adopting an ethnocentric approach to International Human Resource Management (IHRM) and then highlights its merits and demerits in addition to providing a brief overview of the benefits and the disadvantages of the other approaches to international staffing. This report discusses the merits and the demerits of adopting an ethnocentric approach to managing Human Resources (HR) globally within the context of a US owned Multinational Corporation (MNC) which is looking to reassessing its current ethnocentric approach to managing its Human Resource (HR). The given scenario of this report is that the Human Resource (HR) director of this US based Multinational Corporation (MNC) feels that its ethnocentric approach to managing its Human Resources (HR) globally is inhibiting the organisation’s attempt to become a global company.
Thus, by evaluating the advantages and the disadvantages of adopting an ethnocentric approach to international Human Resources (HR) strategy, this report would provide critical analysis of various academic literatures and other relevant sources in order to come to a rounded conclusion and provide justifiable recommendations. These recommendations would be in relation to whether this US based Multinational Corporation (MNC) should continue to adhere to its ethnocentric approach to managing its staff globally or whether this US based Multinational Corporation (MNC) should seek to alter its current approach to managing its staff globally in order to truly become a global company and to gain further competitive advantages in the years to come.
The evaluation of the merits and demerits of adopting the ethnocentric approach also constitutes providing a brief overview of the advantages of adopting the other approaches to managing staff globally which include the polycentric, the regiocentric or the geocentric approach. Hence, this report would not only provide valuable insights to the Human Resource (HR) director of the US based Multinational Corporation (MNC) but would also provide the general readers of the report with useful information in relation to comprehending the importance of adopting those International Human Resource Management (IHRM) practices and policies within its foreign subsidiaries which provide the Multinational Corporation (MNC) with sustainable competitive advantages over the long run.
Overview of the Merits and Demerits of the Four Major Strategic
Approaches to International Human Resource Management (IHRM)
As mentioned earlier in this report, there are mainly four major approaches that most Multinational Corporations (MNCs) adopt in relation to managing their Human Resources (HR) globally. According to Caligiuri and Stroh, (1995, p496), these have been categorised by Heenan and Perlmutter (1979 as a Multinational Corporation’s (MNC’s) global management strategies of being ethnocentric, polycentric, regiocentric or geocentric/transnational in its approach to managing its Human Resources (HR) within its foreign subsidiaries. Plessis and Huntley, (2009, p417) defines the ‘ethnocentric’ approach as “the approach where the cultural values and business practices of the home country are predominant as it is the Head Office (HO) of the Multinational Corporation (MNC) which develops a managing and staffing approach and applies it consistently around the world”.
According to Pattanayak, (2005, p416), Multinational Corporations usually adopt such a strategy in the early stages of internationalisation process in order to ensure that the corporate values of the parent company are instilled within its foreign subsidiaries so that the same corporate standard and reputation is maintained all over the globe. For example, McNally and Parry, (2000, p85) asserts that such an ethnocentric predisposition allows a global company to control the strategic direction of all its foreign subsidiaries and that it is a very nationalistic approach as it highly regards the parent company’s Human Resource Management (HRM) practices and policies as the ‘best-way’ for managing the Human Resources (HR) globally as well as to attaining the overall corporate goals of the Multinational Corporation (MNC).
Furthermore, Sims, (2002, p365) states that Multinational Corporations (MNCs) usually adopt this strategy via sending expatriates to fill all the senior management posts within it foreign subsidiaries as a result of which these Multinational Corporations (MNCs) can withhold tight control over all their foreign counterparts. According to Ferner, etal, (2004, p364), the Head Quarters (HQs) of these Multinational Corporations (MNCs) not only send expatriates but also plays a crucial hand in outlining or highly dictating the policy on other aspects of Human Resource Management (HRM) which include factors like “compensation and reward systems, collective bargaining, communications, union recognition, and welfare and training policies, etc”.
The benefits of adopting an ethnocentric approach is able to be seen when a firm needs to produce extremely standardised products or when the host-country lacks technological expertise in which cases employing staff from the Head Quarters (HQs) can guarantee consistency to a great extent (Francesco and Gold, 2003, p166). Thus, from these statements, it can be clearly deduced that those Multinational Corporations (MNCs) who seem to adopt such an ethnocentric approach or strategy to managing its staff globally mainly seek to centralise its Human Resource Management (HRM) practices and policies which are mainly designed and implemented at the Head Quarters (HQs) of such Multinational Corporations (MNCs) with the view to maintain total control over its foreign subsidiaries.
However, adopting such an ethnocentric approach to managing Human Resources (HR) has its own drawbacks despite of the merits of being able to hold onto the cultural values of the Head Quarter (HQ) of a Multinational Corporation in addition to being able to yield the benefit of maintaining a tight control over its foreign subsidiaries (Decenzo and Robbins, 2009, p5). In addition, Francesco and Gold, (2003, p166), asserts that sending expatriates to foreign subsidiaries also limits the promotion opportunities of host-country staff which could lead to demoralisation of the staff at these foreign subsidiaries in addition to loosing advantages that could be gained from competencies of local members of senior management staff.
Thus the above statements clearly imply that an ethnocentric approach to Human Resources (HR) can be highly rigid which can inhibit the flexibility that contemporary firms require in order to gain competitive advantages in this era of rapid globalisation of markets and growing competition. On the other hand, McNally and Parry, (2000, p85) reports that the polycentric approach to managing Human Resources (HR) are based on strategic decisions which are adapted to suit the cultural context of the countries within which these Multinational Corporations (MNCs) operate. This implies that within a polycentric approach, the Human Resource Management (HRM) policies and practices within the foreign subsidiaries are adapted to meet the cultural and other environmental circumstances of the countries in which these Multinational Corporations (MNCs) operate.
In other words, Sims, (2002, p365), reports that such a strategy makes a subsidiary independent from its Head Quarter (HQ) as mainly local managers are given the responsibilities for managing their Human Resources (HR). Myloni, etal, (2004, p; 519) reports that such an approach to staffing and managing Human Resources (HR) is seen to be less expensive as Multinational Corporations (MNCs) do not need to send expatriates for managing its foreign subsidiaries as required in the case of adopting an ethnocentric approach. In addition, it also resolves the issues of adapting to cultural changes when expatriates are sent to foreign subsidiaries and also eliminates the costs that can be incurred from failed expatriate assignments (Monks, etal, 2000, p541).
However, Pattanayak, (2005, p417) states that “such an approach also presents the challenges for Multinational Corporations (MNCs) in relation to maintaining understanding between the corporate and the subsidiary management in addition to imbibing the original culture of the company”. On the other hand, Hannon etal, (1995, p536) report that the regiocentric approach to Human Resources (HR) strategy highly focuses on grouping of subsidiaries based on specific regions instead of countries. Furthermore, according to Sims, (2002, p365), “these subsidiaries are usually staffed by managers from any of the countries within the region which poses the drawback of limiting communication between the region with their Head Quarters (HQs)”.
Subsequently, Edwards and Rees, (2006, p113) asserts that with the geocentric/transnational approach, Multinational Corporations (MNCs) seek to create a synergy of best practices. According to Kelly, (2001, p538) these best practices are adopted from both the Head Quarters (HQs) of Multinational Corporations (MNCs) and from their respective subsidiaries in order to develop consistent global Human Resource Management (HRM) practices and policies which can eventually yield long term organisational competitive advantages for both the Multinational Corporations (MNCs) as well as for their subsidiaries. For example, Buzzle, (2009) reports that within such an approach, suitable managers are hired centrally for taking key managerial positions within the foreign subsidiaries from a global pool of talent , chosen in accordance to their abilities to meet the global corporate objectives in addition to being responsive to local needs.
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Myloni etal, (2004, p521) claim that this approach to Human Resource (HR) strategy enables a Multinational Corporation (MNC) to develop core competencies in the form of competent managers which can be a crucial source of gaining competitive advantages for a global firm. However, according to Pattanayak, (2005, p417), such an approach also has its own demerits in the form of being expensive to recruit the best talents in addition to completing the paper formalities associated in relation to hiring these foreign nationals to work at different parts of the globe for specific subsidiaries of Multinational Corporations (MNCs). Despite of these drawbacks, by far, from the discussions made above, it can be clearly deduced that the geocentric or the transnational approach to Human Resource (HR) strategy would suit the global corporate goals of most Multinational Corporations (MNCs).
Thus, from all the above discussions, it can be stated that even though each of these different strategic approaches to International Human Resource Management (IHRM) strategies have their own merits and demerits, the ethnocentric approach to Human Resource (HR) strategy seems incompatible towards attaining the flexibility that is needed in order to gain competitive advantages in this era of global competition. Subsequently, the geocentric or the transnational approach seems to be the most relevant and to be the most useful approach that a Multinational Corporation (MNC) should seek to adopt in this era of contemporary business world. However, for substantial evaluation of the appropriateness of these strategies the following other factors which highly influence International Human Resource Management (IHRM) also need to be taken into consideration.
Other factors that influence the approach that is adopted to International Human Resource Management (IHRM)
According to Muratbekova-Touron, (2008, p335), in this era of rapid globalisation and competitive business world, one of the major growing concerns facing such global companies or Multinational Corporations (MNCs) is that how such companies can attain the right balance between the local autonomy of their subsidiaries and the extent to which these are controlled by the corporate headquarters of these Multinational Corporations (MNCs). Furthermore, Reade, (2003, p208) illustrates that the statement that greater collaboration between all the subsidiaries of a Multinational Corporation (MNC) is not only highly desirable but is also completely essential in order to effectively cope with the global competitive pressures and towards becoming successful in attaining global competitive advantages.
Moreover, Liu, (2005), also confirms the notion that Multinational Corporations (MNCs) face the dilemma of optimising the balance between standardisation and localisation of Human Resource Management (HRM) policies and practices. This according to Liu, (2005) is because of “the desire of Multinational Corporations (MNCs) to develop global brands by thinking globally and acting locally and by developing the right balance between local responsiveness and global consistency and control”. Subsequently, Markus and Harzing, (2007) state that contemporary Multinational Corporations (MNCs) should not opt for standardisation in terms of adopting the home country practices but should seek to adopt the strategies which underline the ‘best practices’ in relation to Human Resource Management (HRM).
Furthermore, Reade, (2003, p208) reports that the Head Quarters (HQs) of Multinational Corporations (MNCs) have the responsibility of identifying and transferring relevant skills and expertise from different parts of the corporation as well as of disseminating it to all its foreign subsidiaries in order to attain its global as well as local corporate objectives (Reade, 2003, p; 208). For example, Markus and Harzing, (2007) state that if the home country practices of a Multinational Corporation (MNC) are highly effective then all the subsidiaries of that company should be yielding competitive advantages provided those practices are applicable in different cultural and other environmental contexts.
This is because, according to Francesco and Gold, (2003, p166), although the overall international corporate strategy of a firm determines which strategic approach to International Human Resource Management (IHRM) it adopts, other environmental factors should also be taken into consideration while determining which strategy a Multinational Corporation (MNC) should adopt in relation to managing its Human Resources (HR) globally. Such factors include “the political and legal factors, level of development in foreign locations, technology and nature of the product, organisational life cycle as well as cultural differences” (Francesco and Gold, 2003, p166).
Moreover, Markus and Harzing, (2007) states that ethnocentric approaches to managing Human Resources (HR) globally are no longer valid in this era of competitive and globalised business world and that the geocentric or the transnational approach to managing Human Resources (HR) internationally is more contemporary towards attaining competitive advantages and towards becoming truly global by implementing the ‘best’ Human Resource Management (HRM) practices within contemporary Multinational Corporations (MNCs) and in their respective foreign subsidiaries around the globe.
4.0 Conclusions
From the critical analysis of various literature sources made above, it can be concluded that the US based Multinational Corporations (MNC) should change its approach from an ethnocentric one to a geocentric or a transnational approach to managing its Human Resources (HR) globally in order to gain more flexibility in terms of adapting Human Resource Management (HRM) practices according to subsidiaries’ cultural and environmental contexts. This is because contemporary firms can gain competitive advantages only by adopting Human Resource Management (HRM) strategies that find the right balance between standardisation versus localisation of such practices and policies.
Recommendations
The following recommendations have been drawn for the US based Multinational Corporation (MNC) based on the critical evaluation of the benefits and the drawbacks of adopting an ethnocentric approach to managing Human Resources (HR):
The Multinational Corporation (MNC) should adopt a geocentric approach to Human Resource (HR) strategy rather than an ethnocentric one in order to gain competitive advantages as the ethnocentric approach pose certain limitations which inhibit companies from going truly global in terms of failing to adopt the best practices in relation to International Human Resource Management (IHRM).
However, the firm should also take into consideration whether the environmental factors mentioned earlier in this report support it to alter its approach to International Human Resource Management (IHRM). For example, if this US based Multinational Corporation (MNC) produces highly technological or standardised products then it might need to continue with its ethnocentric approach. Nevertheless, the firm could still opt to adopt a geocentric approach to staffing and hire the best expertise from around the world in order to gain competitive advantages over the long run.
Thus, it can be stated that the US based Multinational Corporation (MNC) should seek to alter its approach from an ethnocentric to a geocentric/ transnational one in order to manage its Human Resources (HR) more effectively globally.
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