Thite Final Report 4-11

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Internationalization & HRM Strategies across Subsidiaries in MultinationalCorporations from Emerging Economies A Conceptual Framework

Mohan Thite*

Department ofEmployment Relations and Human Resources,Griffith Business School

Griffith University,

170 Kessels Road, Nathan, QLD 4111, AustraliaEmail: [email protected]; Phone: +61 7 373 57643

Fax: +61 7 3735 7177

Adrian Wilkinson

Centre for Work, Organization and Wellbeing,Griffith University,

170 Kessels Road, Nathan, QLD 4111, AustraliaEmail: [email protected]; Phone: +61 7 373 56792;

Fax: +61 7 3735 7177

Dhara Shah

Department ofEmployment Relations and Human Resources,Griffith Business School,

Griffith University,

170 K l R d N th QLD 4111 A t li
http://www.griffith.edu.au/cgi-bin/phone_search.pl?format=browse&group=Business&school=Department%20of%20Managementmailto:[email protected]://www.griffith.edu.au/cgi-bin/phone_search.pl?format=browse&group=Business&school=Centre%20for%20Work,%20Organisation%20and%20Wellbeinghttp://www.griffith.edu.au/cgi-bin/phone_search.pl?format=browse&group=Business&school=Centre%20for%20Work,%20Organisation%20and%20Wellbeingmailto:[email protected]:[email protected]://www.griffith.edu.au/cgi-bin/phone_search.pl?format=browse&group=Business&school=Department%20of%20Managementhttp://www.griffith.edu.au/cgi-bin/phone_search.pl?format=browse&group=Business&school=Department%20of%20Managementmailto:[email protected]://www.griffith.edu.au/cgi-bin/phone_search.pl?format=browse&group=Business&school=Centre%20for%20Work,%20Organisation%20and%20Wellbeingmailto:[email protected]://www.griffith.edu.au/cgi-bin/phone_search.pl?format=browse&group=Business&school=Department%20of%20Management


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170 K l R d N th QLD 4111 A t li

ABSTRACT

The rapid rise of multinational Corporations (MNCs) from emerging economies has led

to greater interest and urgency in developing a better understanding of the deployment

and diffusion of managerial strategies from their perspective and without assuming the

prevailing Western ethnocentric orthodoxy. This paper develops a conceptual framework

of global HR strategies and practices in MNCs from emerging economies across their

subsidiaries in both developed and developing markets. Using data from a pilot study of

an Indian MNC, it provides insights and guidance into the motives, strategic

opportunities and constraints in cross national transfer of HR policies and practices in a

multi-polar world.

Key Words: New Multinationals; Emerging Economies; India; Internationalization

St t i Gl b l HR St t i


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1. Introduction

In the coming decades, China and India will disrupt workforces, industries,

companies, and markets in ways that we can barely begin to imagine (Engardio,

2008: 23)

Research on MNCs has tended to be focused on those from developed countries

establishing subsidiaries either in other developed economies (e.g. U.S. to the UK) or into

developing economies (e.g. the U.S.A into Latin America). U.S. firms invested in

Europe from before 1939 but the major push came after World War Two (Ferner,

Almond, Clark, Colling, Edwards, Holden, & Muller-Camen, 2004). Japanese MNCs

began to locate in advanced economies, particularly in the 1980s. While, there has been a

rich stream of MNC research in this area, there has been relatively less research on newer

industrialized (e.g. Taiwan, India and South Korea) to the more industrialized economies


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how HRM strategy of the MNCs in emerging economies is formed and how it operates in

practice. First, we outline the issues relating to emerging MNCs. Second, we develop a

conceptual framework of global HR strategies and practices in MNCS from emerging

economies. This provides managerial insights and guidance into the motives, strategic

opportunities and constraints in cross national transfer of HR policies and practices. It

uses the data from the pilot study of an Indian multinational company to test the

conceptual framework and propositions. The paper concludes with a discussion of how

our findings relate to existing research and identify directions for future research.

This paper helps identify and analyze the travel of ideas (Delbridge, 1998;

Garrahan & Stewart, 1992) between the East and West, in terms of the motive and

opportunity behind cross-national transfer of HR policies and practices. Such an

understanding of corporate management thinking and practice in Asian MNCs helps


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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.

The growing importance of emerging economies has lead to an upsurge of

strategy research on the topic (Wright, Filatotchev, Hoskisson, & Peng, 2005). Research

on global HRM has not paid enough attention to MNCs from emerging economies

despite of all the management domains, HRM is most sensitive to local context


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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 MNCs manage their foreign subsidiaries and

concluded that the main influence on the MNCs 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.

There is empirical evidence that suggests that almost all MNCs have a trace of


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country of origin on the IHRM practices. This work draws on the work of Hall (1976)

and his distinction between situations where things are less explicit where the context

exerts more influence (high context) and those that are much more explicit where the

context is less of an influence (low context). Western countries are seen as generally low

on cultural context whereas Eastern countries are mainly seen as high on cultural context

(Hofstede, 1984). The interplay between national and organizational culture is a

significant factor in the success of global mergers, acquisitions and alliances (Thite,

2004).

As stated before, there is relatively little research on the internationalization of

emerging economy firms either into other emerging economies or into developed

economies (Wright, Filatotchev, Hoskisson, & Peng, 2005, p.25). The strategy literature

on emerging economies predominantly use institutional theory followed by resource-


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tend to use exporting and FDI as combined and simultaneous strategy, rather than being

distant alternatives (Contractor, Kumar, & Kundu, 2007).

Although in absolute terms the MNCs from emerging economies are not very

large, they are gaining importance and many companies are now globally diversified.

The key advantages for these MNCs are access to the most dynamic growth markets in

the world with a vast pool of low cost resources like production workers, engineers and

natural resources (Engardio, Arndt, & Geri, 2006). Besides being small, most of the

emerging market MNCs are in their early stage of internationalization with limited

international experience (Contractor, Kumar, & Kundu, 2007). Correspondingly within

the MNCs from the emerging economies, organizational culture, decision making and

control on subsidiaries can be noticeably different as compared to their counterparts in

developed markets due to national culture and economic differences (Hofstede, 2007).


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According to Taylor et al. (1996), there is a growing consensus that a key

differentiator between the corporate winners and losers in the 21 st 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 IHRM, Ngo, Turban, Lau and Liu

(1998) found strong support for the hypothesis that country of origin influences the firms

HRM practices. Taylor et al.s (1996) model of IHRM considers that the transfer of HRM

policies and practices can go in any direction, not just from home to host countries.

Similarly, American and European HRM systems influence and are influenced by East

Asian HRM systems (Chew & Zhu, 2002). Empirical studies on the diffusion of HRM

practices by MNCs 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,


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it requires higher levels of control and coordination (Taylor, Beechler, & Napier, 1996).

With regard to external influencing factors, the MNCs 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 MNCs 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 MNC, organizational culture, leadership, decision making and


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1999). Control refers to the processes by which an MNC 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 MNCs engaging in forward diffusion of superior

home country practices into developing country subsidiaries, emerging economy MNCs


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Proposition 2: MNCs from emerging economies adopt a predominantly

adaptive or polycentric approach to manage their subsidiaries in developed

markets.

4.3. Control of subsidiaries in emerging markets:

Due to the paucity of empirical literature in this area, we hypothesize that MNCs 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 MNCs are more likely to adopt an adaptive or polycentric approach in developed

i h l d l d i d h il bili f i l


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headquarters and subsidiaries in both developed and developing markets. As the data

collection is still underway, we report the findings from a pilot study conducted at one

Indian MNC. Before reporting these findings, we provide a brief overview of Indian

MNCs as representatives of emerging economy MNCs so as to provide some context for

our work.

5. Indian Multinationals

Between 2004 and 2007, Indias outward flow of FDI rose sharply from $2 billion to $14

billion (UNCTAD, 2008). As a result, in 2008, seven Indian multinationals featured in

Global Fortune 500 and twenty in Boston Consulting Groups BCG 100 new Global

Challengers (Sirkin, Hemerling, & Bhattacharya, 2008, p.23). The services sector

constituted 38% of Indian FDI stock in 2006 mainly in IT, communications and software.

Indian multinationals are largely private owned and cover a wide range of sectors in


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6. Pilot Study of an Indian Multinational

As part of a larger research project that focuses on Indian multinationals as

representatives of emerging economy MNCs, the authors conducted a pilot study of a

large Indian IT multinational company, referred to here as Alpha Services. Alpha

Services is one of the top five Indian consulting and IT services companies with a

turnover of about US$ 2.5 billion from its operations in over 44 countries that employ

around 45,000 professionals. It operates in three business segments, namely, IT services,

Business Process Outsourcing (BPO), and software products. Alpha serves a wide range

of industry segments, including manufacturing, banking and finance, insurance,

telecommunications, infrastructure, healthcare, retail and transportation. It is publicly

listed on the Mumbai and New York Stock Exchange. Its vision is to be one of the five

most valuable global integrated IT services and BPO companies in the next few years.

Alpha Services has development centers in India, North America, Europe, the Middle


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in India, subsidiary office in Melbourne, Australia (representing a developed market) and

in Shanghai, China (representing a developing market). The interviewees included 5

human resource (HR) managers and 3 business heads at the headquarters; 5 business

account managers managing key clients in Australia and the HR Head of the Asia Pacific

region based in Singapore and the country head, HR head and 3 business managers in

China. All the interviews were conducted face to face except for two telephone

interviews. The choice of locations provided a three dimensional perspective of the

companys global operations from the stand point of headquarters where strategy is

formally formulated and reviewed and subsidiaries in both developed and developing

markets where it is intended to be implemented.

The interview protocol consisted of a semi-structured questionnaire to probe

various aspects of a companys internationalization strategies, control and coordination


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the heart of Alphas organizational structure lie the Customer Facing Units (CFUs),

consisting of Vertical Business Units (VBUs) and Regional Business Units (RBUs). The

CFUs are charged with the entire spectrum of customer relationship management and in

the process are supported by Horizontal Competency Units (HCUs) that provide the

backing of appropriate resources.

The approach to leadership at Alpha is exemplified by the motto every Alphaite

(employee) is a leader. Alpha believes that it is in the business of building and

developing leaders faster than the competition. Its organizational structure and systems

are supposed to be underpinned by its philosophy of enabling leadership with its core

concepts of full life cycle business (FLCB) and full life cycle leaders (FLCL). Alpha

is said to espouse a philosophy of encouraging employees to think like CEOs whereby

every employee is encouraged to consider himself/herself as the chief executive officer


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business approach beyond organizational boundaries by involving customers and

suppliers as part of its eco-system.

According to corporate managers, Alpha is also keen to ensure that every key

stakeholder in the company, including managers, employees, customers and suppliers, get

the same One Alpha Experience (organizational culture), codified in a manual,

throughout its global operations. Its corporate leadership center is geared to groom

present and future leaders in the organizations corporate values. The centers mission is

to spread the organizational culture to every unit. Senior managers from all over the

world are given weeklong induction training at the companys headquarters in India to

attend a focused leadership immersion program spearheaded by the top management

team.

h i i i h i i b idi i i h h


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6.2. International Business Strategies:

Alpha has been seen as an ambitious and entrepreneurial organization throughout its

history. For example, Alpha understood in the late 1990s that it needed to move beyond

the established developed markets in the U.S.A and Europe and enter other emerging

markets, such as the Middle East and China where it was an early entrant along with

other Indian IT firms. Similarly, in mid-1990s, when enterprise resource planning (ERP)

was identified as a potential high growth area in the IT industry, Alpha decided to enter

this emerging field to exploit the opportunities ahead of its competitors. This paved the

way for the global leadership position that Alpha is said to enjoy today in ERP

implementation, particularly, in the telecommunications sector. As the Head of Alphas

China operations proudly pronounced it is a perfect storm- entrepreneurship, vision and

excellent domain tradition that have made Alpha what it is today.


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in becoming a truly global company. The desire of Alpha to localize its workforce is

reinforced by the statement from Alphas Head of HR in China that Alpha wants to be a

Chinese company in China but provide the same global experience to clients, no matter

where the operations are carried out. As a policy, Alpha strives to staff locally at least

20% of all positions in all of its overseas operations, 50% of entry level positions and

90% in its non-English speaking geographies, such as China, where possible.

Accordingly, today nearly 98% of Alphas workforce in China is staffed locally while in

Australia it is nearly 50%. But the senior management positions, from country head to

project managers, at both these subsidiaries are still overwhelmingly staffed by

expatriates from its Indian headquarters.

From the interviews it was recognized that the recruitment and selection process,

career management and performance management were similar across the global


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The main talent management issue or challenge identified was brand value or

recognition of the company across the world, which was one of the major concerns

identified by the HR managers. While the company was pleased with its employer brand

in China where Indian IT companies are held in high esteem for their quality standards

and offshoring business process efficiency, the Australian managers generally believed

that the global image of the company needed to be strengthened as a high quality services

provider. This highlights the constraints that the MNCs from emerging economies face of

the liability of foreignness and liability of country of origin, as pointed out before.

7. Managerial Relevance

Our pilot study of an Indian MNC offers some interesting insights into the way MNCs

from emerging economies strategize and manage their operations in different parts of the

world. While Western MNCs have traditionally taken their domestic strengths outward


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With regard to Proposition 1, our case study illustrates that Indian MNCs do face

multiple hurdles in furthering their internationalization strategies. For example, despite

their growing global reputation, Indian IT companies still have problems recruiting talent

at higher levels due to poor perception of their employer brand. Despite its desire to

localize its management team in Australia, Alpha seems to be unable to attract the best

local talent and therefore, forced to send expats from India. Accordingly, its corporate

control and coordination mechanisms are influenced by the multiple hurdles that it faces

as an MNC from an emerging economy.

Similarly, with regard to proposition 2, alphas adoption of performance metrics

from its key U.S. client and making it a central part of its performance management

system is a clear sign of an adaptive approach in managing subsidiaries in developed

markets. At the same time, Alpha, along with other top Indian IT companies, has

pioneered the art of global offshoring business process and the global services delivery


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different countries organize business activities and more specifically, the management of

employees (Brewster, Sparrow, & Harris, 2005; Ferner, 1997). The cultural values

framework pioneered by Hofstede (1980) demonstrates the limitations of universalistic

models of IHRM that emphasize one-best-way. Even though some have contested the

emphasis placed on national culture in international management at the cost of

organizational differences (Ericksen & Dyer, 2005; Gerhart & Fang, 2005), the

importance of country of origin is a consistent theme in the research in this area (Harzing

& Sorge, 2003).

Our conceptual framework adopts a broad approach by examining the key factors,

such as cultural differences, institutional differences, organizational differences and the

interplay between them (Schuler, Budhwar, & Florkowski, 2002). Any study on MNCs

from emerging markets also needs to take into account sectoral variables (Colling &


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economies strategize and act in diffusing and coordinating management practices. For too

long, international HR management literature and practice have been embedded in

Western thinking and concepts with little cross-pollination (Wright, Snell, & Dyer, 2005,

p.876) and an over emphasis on expatriate management, reflecting the ethnocentric bias

of North American scholars (Schuler, Budhwar, & Florkowski, 2002). It is clear that the

universal or U.S. model does not have applicability to the emerging MNCs. If the East

becomes, in popular jargon, the new West we need to develop newer models to aid the

understanding of how Asian MNCs, particularly from China and India, are going to

exercise corporate control in an increasingly multi-polar world (Pudelko & Harzing,

2007, p.553).

In the 21st century knowledge economy where services and creative industries

dominate the economic landscape that is tilting more towards developing and transition


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DomesticOperations

Subsidiariesin developedcountries

Subsidiariesindevelopingcountries

Global HR Strategies & Practices

Direct Indirect

Attract Develop Retain

Personal Impersonal Personal Impersonal

Figure 1: Diffusion of Global HR Strategies & Practices across

Subsidiaries in a Multinational Corporation from an Emerging

Economy

Internal Influencing Factors

1.Strategic framework (business,corporate, international, co-operative)

2.Organizational culture/ leadership3.Importance of subsidiaries to

MNCs bottom line & strategy4.Mode of subsidiary set-up

(Greenfield, M&A )5.Headquarters diffusion capacity6.Subsidiaries absorptive capacity

7.Subsidiaries resourcedependency on the headquarters

8.Availability, ability & choice ofexpatriate managers

External Influencing Factors

1. Home Country Factors(Economic strength; global image;national culture )

2. Host Country Factors(Perceived relative strength ofhome & host country mgt.

practices; Environmental factors(openness of business systems,legal framework, institutions )

3. Industry-specific Factors(Degree of product integration;level of integration betweenheadquarters & subsidiaries )

Hypotheses

Adaptive Exportive

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