International Human Resource Management and Labor Relations

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CHAPTER 19International

Human Resource Management andLabor Relations

Chapter Objectives

After studying this chapter, students should be able to:

1.Describe the nature of human resource management in international business.

2.Detail how firms recruit and select managers for international assignments.

3.Explain how international businesses train and develop expatriate managers.

4.Discuss how international firms conduct performance appraisals and determine compensation for their expatriate managers.

5.Analyze retention and turnover issues in international business.6.Explain basic human resource issues involving nonmanagerial

employees.7.Describe labor relations in international business.

LECTURE OUTLINE

OPENING CASE: An Emerging Voice for Workers

The opening case discusses the changing nature of the Chinese workforce, as workers become more aware of their value to employers.

Key Points

China is becoming the largest manufacturing center in the world, providing a large number of workers who are willing to work long hours for low pay.

Although this is changing, as the workers become more aware of their value to the employer.

Wages and working conditions have been improving, which in turn leads to more spending on the part of workers, serving as an economic stimulus for China.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The All China Federation of Trade Unions (ACFTU) is the only legal labor union in the country, which hopefully gives the workers something through which they can air their grievances.

For the first time workers in china are going on strike.

In 2010 and 2011, Honda Motors experienced a strike, and Foxconn, a Taiwanese owned electronic firm (based in China) also had employees committing suicide due to low wages and poor working conditions.

There has been a significant increase in labor complaints and (now) by law employers are being required to provide employees with written contracts.

Workers are no longer willing to work for minimal wages.

Many corporations are now looking at other countries such as, Viet-Nam and Cambodia, as a source for cheap foreign labor.

CHAPTER SUMMARY

Chapter 19 explores international human resource management. The chapter begins by discussing the strategic significance of human resource management, and then goes on to consider staffing needs, recruitment and selection, training and development, performance appraisal and compensation, and retention and turnover. The chapter concludes with a discussion of issues related to nonmanagerial employees.

THE NATURE OF INTERNATIONAL HUMAN RESOURCE MANAGEMENT

Human resource management (HRM) is the set of activities directed at attracting, developing, and maintaining the effective workforce necessary to achieve a firm’s objectives. Recruiting and selecting employees, providing training and development, appraising performance, and providing compensation and benefits are all part of HRM.

International HR managers face a more complex task than their domestic counterparts because differing cultures, levels of economic development, and legal systems among countries may require companies to adapt their hiring, firing, training, and compensation programs to each country.

Firms must decide whether managers will be selected from the home country, from the host country, or from third countries. Training and development in an international firm may be more complex than in a domestic firm. Finally, compensation systems must be adapted to meet the needs of each country’s labor market.

Strategic Significance of HRM

The international HRM process involves understanding the strategic context of HRM within the firm’s overall strategy, recruiting and selecting appropriate managerial


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personnel, providing necessary training and development, assessing performance, providing compensation, and evaluating managerial retention and turnover. See Figure 19.1 here.

INTERNATIONAL MANAGERIAL STAFFING NEEDS

There are two broad categories of staffing needs facing international human resource managers: (1) recruiting, training, and retaining managerial and executive employees; and (2) recruiting, training, and retaining nonmanagerial employees, such as blue-collar production workers and white-collar office staff.

Scope of Internationalization

As noted in Chapter 14, organizational structure usually evolves along the following lines: export department, international division, and global organization. As the organization evolves, so do the staffing needs.

Most firms begin their international expansion with small-scale exporting. Thus, during a firm's initial foray into foreign markets, a home country citizen, who may or may not have special training in working in foreign markets, usually manages the firm’s international transactions. Later, when the firm establishes an international department, subsidiary managers (usually host country citizens) report to the vice president of the international division (usually a home country citizen).

As a firm further expands its operations in a global organization, a team of managers with expertise in the firm’s product lines, necessary functional skills, individual country markets, and the firm’s global strategy is usually assembled.

Centralization versus Decentralization of Control

Firms that centralize decision making at headquarters typically favor home country managers while firms that decentralize decision making to the subsidiary level often employ host country nationals. Since most companies do not fall at one extreme or the other, most companies have a combination of both home and host country managers.

Staffing Philosophy

Managers can be hired from three groups: parent country nationals; host country nationals; and third country nationals. Parent country nationals (PCNs) are residents of the international business’s home country who are transferred to one of its foreign operations. Communications and coordination with corporate headquarters is typically facilitated when PCNs are employed because they normally share a common cultural and educational background with headquarters’ staff.

PCNs may, however, lack knowledge of local laws, culture, economic conditions, social structure, and political processes. Moreover, they may be expensive to relocate and maintain in the host country. In addition, because a host country may impose restrictions on the number of employees that can be transferred, a company may not have the freedom to hire whom it wants.


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Host country nationals (HCNs) are residents of the host country, and are the most common choice for mid-level and lower-level jobs. Employing HCNs is popular because they are already familiar with local laws, culture, and economic conditions. Furthermore, HCNs may be cheaper than PCNs because a firm can avoid the costs (such as relocation expenses) that are associated with PCNs. However, because an HCN may not be familiar with the firm’s corporate culture nor its business practices, a company could lose out on opportunities. The text provides an example of how Andersen Consulting attempts to minimize this problem.

EMERGING OPPORTUNITIESThinking Globally but Hiring LocallyAs recently as the mid-1990s, foreign firms operating in China filled most of their upper and middle management positions with home country nationals. However, now it is estimated that around 70 percent of foreign firms’ top management positions are filled by Chinese managers. The same trend is true in India. Hiring local managers is much cheaper, and they have a strong understanding of the local market and local culture.

Third country nationals (TCNs) are neither the firm’s home country nor of the host country. TCNs are most likely to be employed in upper-level or technical positions. TCNs and PCNs are collectively known as expatriates (people working and residing in countries other than their native country).

An ethnocentric staffing model may be used to help a firm choose among HCNs, PCNs, and TCNs for various positions. The model indicates that PCNs staff most higher-level positions. Other firms may follow a polycentric staffing model where, based upon the belief that HCNs know the local market best, the use of HCNs is high. Finally, firms that want to hire the most qualified person for the job, regardless of the individual’s nationality, follow the geocentric staffing model.

European firms are more likely to use the geocentric model than either U.S. or Japanese companies. In fact, Japanese companies prefer the ethnocentric model.

BRINGING THE WORLD INTO FOCUSSchlumberger Profits from Geocentric StaffingThis box discusses the staffing policies of one of the world’s largest suppliers of technology, project management, and information solutions to the oil and gas industries. They have operations in over 80 countries, assisting their customers in finding and producing oil and gas. This box discusses how they go about finding workers for Schlumberger. It is their goal to recruit and select the most qualified person for the jobs that they are seeking to staff. All of their efforts in this area are designed to attract and retain those most qualified, and with that in mind, they have developed a comprehensive training and development program for their engineers. The training centers are located throughout the world and are staffed with full-time instructors developed from within and who have an aptitude for teaching, coaching, and mentoring.

RECRUITMENT AND SELECTION


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The skills and abilities needed by international managers fall into two general categories: those needed to do the job, and those needed to work in a foreign location. See Figure 19.2 here.

Recruitment of Managers

Recruitment of Experienced Managers. Experienced managers can be recruited from within the firm itself or from other firms. In some cases, headhunters (recruiting firms that actively seek qualified managers and other professionals for possible placement in positions in other organizations) may be called on to assist in the process.

Today, as businesses globalize, the market for executive talent is also globalizing. The text notes, for example, that at Britain’s Imperial Chemical Industries, PLC, fewer than half of the 150 highest ranking executives are British.

Recruitment of Younger Managers. While most MNCs do not hire new college graduates for foreign positions, many hire graduates with the intention of sending them abroad in the future. The text provides an example of how Coca-Cola follows this strategy.

Selection of Managers

When selecting from a pool of prospective managers, HR managers typically look for those individuals who are competent managers, have appropriate training, and can adapt to new situations.

The selection process in international firms is particularly important because of the high cost of expatriate failure. Expatriate failure is the early return of an expatriate manager to his or her country because of an inability to perform in the overseas assignment. The cost of expatriate failure ranges between $200,000 and $1.2 million.

Expatriate failure rates may be as high as 19-50 percent in many U.S. companies, higher than for either European or Japanese companies. In most cases, expatriates fail to complete their foreign assignments because of an inability of the expatriate manager, or his or her spouse and family, to adapt to the new location.

Firms often spend both time and money selecting and training managers for foreign assignments in an effort to avoid expatriate failure. The text provides an example of how AT&T selects and prepares its managers for foreign positions. See Table 19.1 here.

Expatriation and Repatriation Issues

Managers sent on foreign assignments may experience culture shock, a psychological phenomenon that may lead to feelings of fear, helplessness, irritability, and disorientation. Acculturation typically proceeds through four phases. Discuss Figure 19.3 here. The four phases include honeymoon, disillusionment, adaptation, and biculturalism.

Because an expatriate suffering from culture shock may be less effective and productive, companies typically take measures to limit its effects, such as providing pre-departure language and cultural training.


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Firms are now beginning to pay more attention to repatriation – bringing a manager back home after a foreign assignment has been completed. Individuals that successfully adapted to the foreign environment may experience culture shock upon returning to their own country.

Firms can minimize problems associated with expatriation and repatriation by providing organizational career development programs for managers. Managers tend to be more successful in foreign assignments if they can freely decide whether or not to accept a foreign assignment, if they have a realistic understanding of the new job and assignment, if they have a realistic expectation of a repatriation assignment, if they have a mentor in the parent firm who will look out for their careers, and if there is a clear link between the foreign assignment and the manager’s long-term career path.

TRAINING AND DEVELOPMENT

Training is instruction directed at enhancing specific job-related skills and abilities. Development is general education concerned with preparing managers for new assignments and/or higher-level positions.

Assessing Training Needs

Firms assess training and development needs by determining the difference between what managers and employees can do and what the firm feels they ought to do. This assessment should take place before training or development programs are implemented. The text notes that firms that underestimate the need for training can run into serious problems in foreign markets. Discuss Figure 19.4 here.

Basic Training Methods and Procedures

Firms must decide whether to use standardized training and development programs, such as language courses, or to develop their own programs. Developing a customized program, although more expensive than using a standardized program, may better meet the needs of the firm.

Developing Younger International Managers

Most MNCs now recognize the importance of internationalizing their managers early in their careers. The text provides several examples of how various firms including GE, American Express, Johnson & Johnson, PepsiCo, Raychem and Samsung are handling this process.

PERFORMANCE APPRAISAL AND COMPENSATION

Assessing Performance in International Business

Performance appraisal is the process of assessing how effectively a person is performing his or her job. Performance appraisals have several important objectives. It is a source of feedback to individuals as to their performance, it provides a basis by which top performers can be rewarded, it highlights areas


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where additional training and development may be required, and it identifies problem areas that may require changes.

In many cases, firms must employ different standards when evaluating the performance of subsidiaries and their employees because each subsidiary is likely to have a unique set of circumstances and outcomes. Performance appraisals in international firms may not be conducted as frequently as in a domestic firm.

Determining Compensation in International Business

Competitive international firms provide prevailing compensation packages for their managers in each market. The text provides examples of common components in a compensation package in Germany, Japan, Britain, and the U.S.

Compensating Expatriate Managers. Compensating expatriate managers can be a complex process because factors such as differences in currency valuation, standards of living, lifestyle norms, and so forth must be taken into consideration. See Figure 19.5 here.

A cost-of-living allowance may be given to managers to offset differences in the cost of living in the home and host countries. A hardship premium (also known as a foreign service premium) may be paid to managers that accept assignments in relatively unattractive locations.

EMERGING OPPORTUNITIESHow About Moving to India?

Businesses have identified a need to develop strategies in order to increase labor productivity overseas, by integrating foreign workers into the company’s workforce. There is now an awareness of the need to outsource, in order for business to remain competitive.

IBM has developed a program to address this issue called Professional Marketplace, a Web based database of people and expertise. This allows managers to match the right people with the right skills need for the job that they are seeking to fill.

They also have another program called “Project Match” which is designed to help workers locate potential job opportunities in growth markets where their skills are in demand. IBM offers financial assistance to offset moving costs, providing immigration support, such as visa assistance, etc. However, this program also requires workers that are willing to work on local terms and conditions.

A tax-equalization program is a means of ensuring that the expatriate’s after-tax income in the host country is similar to what the person’s after-tax income would be in the home country. The text illustrates this concept with a discussion of how one major oil company creates compensation packages for its expatriates. See Figure 19.6 here.

Benefits Packages for Expatriate Managers. Special benefits packages that may be provided to expatriate managers include housing, education, medical treatment,


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travel to the home country, and club memberships. The text provides specific examples of how and why firms provide these benefits.

Equity in Compensation. In many cases, the total compensation package offered to an expatriate is much more lucrative than the package offered to his or her local counterpart.

RETENTION AND TURNOVER

Retention is the extent to which a firm is able to retain employees. Turnover, the opposite, is the rate at which people leave a firm. Turnover can be controlled by reducing expatriate failure and repatriate failure.

An exit interview is an interview with an employee who is leaving a firm. Exit interviews can be a source of important information as to why an individual decided to leave the firm. Such information can be used to minimize future employee departures.

HUMAN RESOURCE ISSUES FOR NONMANAGERIAL EMPLOYEES

Recruitment and Selection

In most MNCs, nonmanagerial employees are HCNs. Employing HCNs is cheaper than employing PCNs or TCNs, and may enable firms to avoid laws limiting opportunities for PCNs or TCNs.

Firms hiring HCNs must adapt to laws in the host country. The text notes that Toyota had to select and hire its U.S. workers in accordance with U.S. law.

Training and Development

Training and development required by a host country’s workforce depends in part on the location of the foreign operation. For example, training needs are typically higher in underdeveloped regions, and lower in developed country locations. The text provides an example of how Quality Coils, Inc. handles this complex issue.

Compensation and Performance Appraisal

International firms normally adapt their compensation and performance appraisal systems to local laws, customs, and cultures. The text notes, for example, that while U.S. workers appreciate feedback from an appraisal system, German workers are resentful of feedback.

Firms must make their wage skills consistent with local norms if they expect to attract workers. In most cases, firms must not only pay wages, but also provide incentive programs and/or benefits packages. The text notes that depending on the country in question, wages may make up between 56 and 85 percent of workers’ total compensation packages.

LABOR RELATIONS


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In many companies, a separate organizational function is established for labor relations.

Comparative Labor Relations

A country’s laws, culture, social structure, and economic conditions may impact labor relations. The text notes, for example, that the role of unions varies greatly among countries. In the U.S., membership in unions has been steadily decreasing, but over half the world’s workforce outside the U.S. belongs to unions.

Unions in European countries tend to be aligned with political parties, but in Japan are created and run by the firms themselves. In fact, labor relations in Japan are so cordial that strikes are rare.

Collective Bargaining

Collective bargaining is the process used to make agreements between management and labor unions. The text notes that while collective bargaining in the U.S. is highly regulated, the government plays a relatively benign role in establishing labor agreements. In contrast, government officials take a much more active role in the process in some European countries.

Union Influence and Codetermination

The premise of industrial democracy – the belief that workers should have a voice in how businesses are run – is an important influence in labor unions in Europe. In fact, in Germany an approach called codetermination provides for cooperation between management and labor in running a business.

The EU has advocated codetermination for all members, but at this point in time, most member countries are unlikely to adopt it. In fact, some countries have little or no mandated labor participation.

The EU’s implementation of its social charter (or social policy), whereby employment conditions and practices will be standardized throughout the community, is addressing issues such as maternity leave, job training, and pension benefits.

CHAPTER REVIEW

1. Along what dimensions does domestic HRM differ from international HRM?

International HRM differs from domestic HRM in several ways. First, firms may have to adapt hiring, firing, training, and compensation practices on a country-by-country basis to fit with local cultures, levels of economic development, and legal systems. Second, firms must decide whether employees will be recruited locally, from the home country, or globally. Third, training and development may be more complex for international firms as compared to domestic firms. (LO 19.1; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)


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2. How does the degree of centralization or decentralization affect international staffing?

Firms that are highly centralized (decision making is mainly done at corporate headquarters) typically hire home country managers, while firms that are very decentralized (decision making is delegated to subsidiaries) tend to favor hiring host country employees. (LO 19.1; AACSB Skills: Analytic; Learning Outcome: Identify and discuss the components of the global human resources management process)

3. What are the basic issues involved in recruiting and selecting managers for foreign assignments?

When recruiting and selecting managers for foreign assignments, firms must initially identify a pool of employees with the necessary skills and abilities for the assignment. Potential employees may be identified within or outside the firm. Firms must then decide which candidate is best qualified for the position. Key considerations in the selection process include managerial competence, appropriate training, and adaptability to new situations. (LO 19.2; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)

4. What issues are at the core of expatriation and repatriation problems?

A primary concern of firms with expatriate managers is culture shock. Culture shock may affect employees who are working in and coping with a foreign culture and may reduce an employee’s effectiveness and productivity. In some cases, culture shock may result in a failure to complete a foreign assignment. Employees who have grown comfortable with a foreign culture may encounter culture shock when they return to their home country at the end of their foreign assignment. In fact, the repatriation period can be as troublesome for some individuals as the expatriation period. (LO 19.2; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)

5. Why is performance appraisal important for international firms?

Performance appraisal is important for international firms because it indicates how well an individual is performing his or her job. The process not only identifies areas where additional training and/or development are needed, it is also a source of feedback for individuals. In addition, performance appraisal identifies problem areas that require attention, and provides a basis for rewarding outstanding employees (LO 19.4; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)

6. What special compensation and benefits issues arise in international HRM?

There are several special compensation and benefits issues in international HRM. For example, because of differences in standards of living, currency valuations, lifestyle norms, and so on, most firms find that it is necessary to provide international managers with differential compensation. In addition, because home country nationals frequently receive larger compensation packages than their host country counterparts, firms must deal with


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equity issues. (LO 19.4; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)

7. How does international HRM for nonmanagerial employees differ from that for managerial employees?

A primary difference between international HRM for managerial employees and international HRM for nonmanagerial employees is the fact that nonmanagerial employees are typically recruited on a local basis. Thus, firms must comply with local regulations regarding hiring and firing and so on. In addition, compensation and performance appraisal practices for nonmanagerial employees are typically conducted on a country-by-country basis. (LO 19.6; AACSB Skills: Analytic Skills; Learning Outcome: Identify and discuss the components of the global human resources management process)

QUESTIONS FOR DISCUSSION

1. How does HRM relate to other functional areas such as marketing, finance, and operations management?

Most students will probably recognize that HRM is strongly interrelated with other functional areas such as marketing, finance, and operations management. Each of the other functional areas will be directly impacted by the overall strategy followed by the firm. In turn, the HRM strategy will be affected by the strategies followed in each functional area. For example, if the firm were to follow an overall strategy of product differentiation, the HR manager may hire an individual from the foreign market to provide input on the likes or dislikes of consumers in the foreign location. (LO 19.1; AACSB Skills: Analytic Skills; Learning Outcome: Identify and discuss the components of the global human resources management process)

2. Why and how does the scope of a firm’s internationalization effort affect its HRM practices?

A firm’s internationalization effort affects its HRM process in several ways. When a firm initially begins its internationalization effort, a citizen of the home country typically handles international activities. However, as the firm continues its foreign expansion and becomes a global organization, a team of managers may be assembled to handle international sales. (LO 19.1; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)

3. How are the different approaches to recruiting and selecting managers for foreign assignments similar and dissimilar?

Managers for foreign assignments can be recruited in several ways. Potential managers may be found within the firm, at another firm, or with the assistance of a headhunter. Regardless of where potential managers are found, a pool of managers will probably share certain characteristics including managerial competence, appropriate training, and adaptability to new situations. In some cases, inexperienced managers may be selected; however, at the present time, most managers that are recruited and selected for a foreign


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assignment have experience. (LO 19.2; AACSB Skills: Analytic Skills; Learning Outcome: Identify and discuss the components of the global human resources management process)

4. Which are easier to assess, business skills or international skills? Why?

Most students will probably agree that it is far easier to assess business skills as compared to international skills. Business skills refer to technical knowledge, marketing knowledge, and so forth. International skills refer to the ability to work and function effectively in a foreign culture. As such, business skills are much more definable than international skills, and therefore can probably be more easily measured. (LO 19.4; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)

5. If you were being assigned to a foreign position, what specific training requests would you make of your employer?

Most students will probably suggest that foreign language skills and information on the foreign country would be helpful. Some students will probably suggest that a program that focuses on how to conduct business in the foreign country would be invaluable. Still other students may suggest that language and culture training be extended to their spouse and family. (LO 19.3; AACSB Skills: Multicultural and diversity understanding; Learning Outcome: Identify and discuss the components of the global human resources management process)

6. Do you agree or disagree with the idea that some international assignments require special compensation?

Students will probably agree that, in some cases, a hardship payment is necessary, but might be rather vague about what constitutes hardship. Instructors should try to get students to nail down exactly which situations require special compensation and which do not, and what form the special compensation should take. (LO 19.5; AACSB Skills: Dynamics of the global economy; Learning Outcome: Identify and discuss the components of the global human resources management process)

7. How easy or difficult do you think it is to handle the equity issue in international compensation?

The equity issue in international compensation refers to whether expatriate managers and HCN managers with the same responsibilities should receive the same compensation. Most students will probably agree that the issue is a complicated one, with no clear solution. (LO 19.4; AACSB Skills: Analytic Skills; Learning Outcome: Identify and discuss the components of the global human resources management process)

8. What does the high cost of replacing an international manager suggest regarding staffing philosophy?

Most students will probably agree that the high cost of replacing an international manager suggests that the recruiting and selection process be done very carefully, and that the firm


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should devote resources to ensuring that management turnover is minimized. Students may note that turnover is frequently associated with expatriation, and could cost a firm between $40,000 and $250,000. Programs devoted to reducing expatriate failure, such as career development counseling or cross-cultural training, could help to minimize turnover as a result of expatriation or repatriation. (LO 19.6; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)

9. Which do you think is easier, HRM for managerial employees or HRM for nonmanagerial employees? Why?

Most students will probably suggest that HRM for managerial employees is more difficult than HRM for nonmanagerial employees. Students taking this perspective are likely to point out that HRM for managerial employees involves recruiting, selecting, and training an individual to work in another country (except when a local manager is hired), whereas HRM for nonmanagerial employees involves recruiting, selecting, and training nonmanagers to work in their own country. While the latter case does require a firm to adapt to local practices, there is much more potential for problems in the former case since it involves an individual working in a foreign country who may have problems speaking the local language, adapting to the local culture, and so forth. (LO 19.6; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)

BUILDING GLOBAL SKILLS

Essence of the exerciseThis exercise asks students to assume the role of a top human resource manager for an international firm. The manager must make a quick decision as to who might best fill the position of head of the Japanese operations.

Answers to the follow-up questions:

1. Working alone, carefully consider the strengths and weaknesses of each of the four leading candidates for the job. Select the individual that you think is the best qualified candidate.

Students will probably have differences of opinion regarding who is the best qualified individual. For example, some might suggest that Henderson’s long and distinguished tenure with the firm clearly puts him ahead of the other candidates, while others may suggest that his plans to retire shortly make him an unsuitable replacement. Similarly, some students will argue that Moin’s international experience sets him apart from the pack, but other students may feel that he is overqualified for the position. (LO 19.4; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)

2. Form small groups of four. Share with each other your individual choices for the job in Japan, along with the reasons for making those choices.


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Students will probably get involved in considerable debate as they share their views of who should be selected for the post in Japan. Professors may encourage each group to come to a conclusion as to who should be offered the position. (LO 19.2; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)

CLOSING CASE

“Training for the World”

The closing case examines the process many Japanese companies use to staff their American operations.

Key Points

All firms that open new facilities in foreign countries must determine how many employees they will need to run the operation, what skills they should have, where they will be hired, how they will be compensated, and so forth.

Japanese companies are thought to be the most careful and thorough companies in the world when it comes to staffing foreign operations. For example, when Toyota staffed its plant in Kentucky, it wanted to hire individuals that would conform to the Japanese tradition of company loyalty, teamwork, and flexibility along the production line.

To ensure that the right type of employees were found, Toyota subjected applicants to a battery of tests, simulation exercises, and still more tests. Individuals who made it through the process were invited for an interview. Finally, prospects were required to take a physical exam and a drug test.

The hiring process is so extensive that by the time an individual is hired, the company has spent $13,000. About one in 100 applicants eventually gets a job, although the entire evaluation process and time spent on the waiting list can stretch to two years before the individual actually starts working.

Case Questions

1. How does HRM in the United States differ from HRM in Japan?

HRM refers to the activities directed at attracting, developing, and maintaining an effective workforce to achieve an organization’s objectives. Students will probably conclude that, American HR managers spend less time both in recruiting and selecting managers and preparing them for their jobs than their Japanese counterparts. As a result, turnover is very high in the U.S. as compared to Japan. The case does provide information regarding how employers in Japan stress lifetime employment generating strong employee cohesiveness and company commitment. (LO 19.1; AACSB Skills: Communication Abilities; Learning Outcome:


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Identify and discuss the components of the global human resources management process)

2. What do you see as the basic advantages and disadvantages of each system?

Most students will probably suggest that the extensive effort that appears to go into selecting and training Japanese workers and commitment to lifetime are clear advantages of the Japanese system. Students taking this perspective are likely to support their contention by pointing to the high turnover rate in the U.S. as compared to Japan. Finally, most students will probably agree that the quality product compensation package combined with the lifetime commitment received by Japanese workers is far more likely to improve employee morale than the package received by American workers. (LO 19.1; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)

3. If Toyota truly wants to emphasize growth over quality, what changes to its HRM system would be needed?

A primary issue that would have to be addressed is a change in compensation packages that were previously offered by Toyota. In the past when the focus was on producing high quality products compensation programs were designed to reward employees for producing high quality products. With the emphasis now on innovation and growth, programs would need to be redesigned to reward innovation. On the other hand quality is also important, so the better approach is to reward employees for quality, and at the same time provide additional rewards to workers for being both creative and innovative. (LO 19.1; AACSB Skills: Reflective thinking skills; Learning Outcome: Identify and discuss the components of the global human resources management process)

4. Why don’t all multinational firms use the same approach as Toyota?

Most students will probably suggest that the issues of quality and growth are both important. One area that might be different is that the U.S. auto manufacturer’s workforces are unionized and it might be difficult to negotiate these issues in a labor agreement. (LO 19.1; AACSB Skills: Reflective thinking skills; Learning Outcome: Identify and discuss the components of the global human resources management process)

PART FOUR CLOSING CASES


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CASE 1: The Aramco Advantage

The closing case describes the so-called Aramco advantage that allowed the Aramco consortium of companies to make enormous profits, and the Internal Revenue Service’s efforts to collect taxes

on the revenues.

Key Points:

Aramco, a consortium of four U.S. oil companies, originally controlled Saudi oil fields. Although the Saudi government eventually expropriated the oil reserves, Aramco continued to play an active role in marketing Saudi oil.

The so-called Aramco advantage began in 1979 when Saudi Oil Minister Yamani forbade the consortium to sell Saudi oil for more than the price set by Yamani’s ministry. Yamani, fearing that high prices would only increase efforts to find substitutes, wanted to keep prices low. Aramco complied with the request. However, since the directive only pertained to the price of crude oil, each company continued to sell refined products at market prices. Since they were buying the crude oil for less than the market price, the refining operations soon turned in sizable profits.

The high profits came to the attention of the Internal Revenue Service, which was quick to seek a cut. It argued that since the profits came from the marketing activities of the companies, income should be transferred from the refining end of the operations to the parent corporation, and taxes should be paid accordingly.

The consortium did not agree with the IRS, and argued that they were making the profits only as a result of complying with Yamani’s directive. The case went to court, where a ruling in favor of the companies was made.

Case Questions

1. Which unit of Texaco really “earned” the Aramco advantage? Aramco itself? Texaco’s foreign refineries? Texaco’s marketing operations? Or the parent corporation?

The unit of the company that actually earned the advantage is open to debate. Texaco argued that the benefits of the advantage would be captured by a company operating further down the production-distribution chain and that in fact, the parent company was unable to benefit from the lower crude prices because it could not sell the oil. The IRS disagreed, however, suggesting the parent company benefited from the advantage. The U.S. tax court supported Texaco's interpretation, finding that the profits generated by the advantage were earned by the company’s refining operation. (LO 14.3; AACSB Skills: Analytical Skills; Learning Outcome: Describe the role of accounting standards in international business)


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2. Had Aramco sold the crude oil to Texaco’s U.S. refineries, would Texaco have been able to avoid U.S. taxation on the Aramco advantage?

It appears that Aramco’s ability to avoid paying taxes on the income derived from the advantage is directly linked to the fact that the company earned the profits in its foreign refinery subsidiaries. However, had the company sold the crude oil to its U.S. refineries, the profits would have shown up in a U.S. corporation, which then could have led to a very different outcome. (LO 14.3; AACSB Skills: Analytical Skills; Learning Outcome: Describe the role of accounting standards in international business)

3. Since Minister Yamani created the Aramco advantage in part in response to U.S. diplomatic pressure, should Exxon and Texaco have been required to sell their allotment of Saudi crude oil to their domestic refineries?

Students may look at this question from different perspectives. Some students are likely to suggest that Aramco benefited from being in the right place at the right time, and that since it was simply following orders, the government had no say in what it did. Others, however, may argue that because the advantage was a direct result of political pressure, the government should have stepped in and required Aramco to pass along the profits to the U.S. In the end, it will probably be a debate as to whether the government has the right to tell businesses how to function. (LO 14.3; AACSB Skills: Analytical Skills; Learning Outcome: Describe the role of accounting standards in international business)

4. The IRS’s lawyers argued that the appeals court ruling amounted to a “blueprint for the evasion of U.S. taxes. [It] …. creates substantial tax incentives for United States corporations to encourage or endure the adoption of profitable foreign 'legal restrictions' that 'require' such corporations to avoid United States taxation." Do you agree with the IRS position? Or is it just being a cry-baby because it lost?

Many students will probably take a stand against the IRS simply because they feel the IRS already has too much power. Others, however, may feel that the companies involved unfairly profited from a situation, and that since the advantage was a direct result of political pressure, consumers should have benefited. Yet, they will probably agree that even if the companies were forced to pay taxes on the earnings, it is unlikely that consumers would have ever faced lower prices at the pump. (LO 14.3; AACSB Skills: Analytical Skills; Learning Outcome: Describe the role of accounting standards in international business)

Additional Case Application

The case examines the unique situation that Aramco found itself in when political posturing on the part of the U.S. and Saudi Arabia resulted in a directive to keep crude oil prices down. While it is clear that Aramco benefited from the directive, it is unclear whether the IRS should have had a cut of the pie as well. Students can be asked to play the roles of the companies involved and the IRS, then hold a court session where each side states its case. Other students can be asked to play the role of the judges involved.


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CASE: 2NUCOR Navigates the Global Economy

This closing case describes the Human Resource practices at NUCOR, a progressive mini steel mill.

Key points:

With the global recession, NUCOR has managed to avoid employee layoffs.

This is in part due to the company’s culture and Human Resource practices.

CEO Ken Iverson has shaped the company’s culture to be even handed, highly decentralized and promotes participative management.

Workers are paid below the industry average, but have productivity bonuses and profit sharing programs that allow workers to take home substantial wages.

The company has a flat structure with only four levels separating the entry level employee from the CEO.

NUCOR’S success has been attributed to its human resource practices.

Case Questions:

1. Instead of a system of individual performance appraisals, NUCOR appraises employee performance according to division-wide quality, productivity and profitability goals and targets. What are the advantages and disadvantages of this approach?

The main advantage of NUCOR’S group based performance appraisal system is that it is based on balanced or even handed principles. The appraisal system strengthens NUCOR’S participative, decentralized culture. Employees benefit when their productivity goes up and the organization’s profits go up. The disadvantage to this is the ups and downs in worker compensation. The reason for the current decline is the global recession. Workers may feel that they have no control over their earning in such a system. (LO 19.4; AACSB Skills: Analytical Skills; Learning Outcome: Identify and discuss the components of the global human resources management process)


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2. Identify the incentives, both financial and non financial, that NUCOR uses to motivate employees.

Financially, NUCOR pays bonuses that are tied to the quality and productivity of the entire shift. In addition, there is profit sharing. Bonuses and profits can triple a person’s take home pay. From a non financial point of view, there is significant employee recognition at NUCOR. There is no differentiation between executives and workers. In addition, workers' suggestions are implemented and recognized. (LO 19.4; AACSB Skills: Analytical Skills; Learning Outcome: Identify and discuss the components of the global human resources management process)

3. How does NUCOR’S flat organization structure contribute to the success of the compensation system?

NUCOR’S compensation structure is based on performance. The fact that there are just four layers of personnel between a clerk and a senior manager means that workers have a lot more freedom to control their own performance. (LO 19.1; AACSB Skills: Analytical Skills; Learning Outcome: Identify and discuss the components of the global human resources management process)

4. Many firms today use temporary, part time or virtual workers to reduce costs and gain flexibility. NUCOR has never taken this route. Should management consider it in the future? Why or why not?

NUCOR’S compensation system allows it to maintain the flexibility necessary in changing times. Their basic pay is low enough that the company is unlikely to be adversely affected during an economic downturn. Workers are not affected because they have the ability to increase their income based on performance. Since NUCOR’S compensation is tied to performance, the company has not found the necessity to go in for a temporary workforce. (LOs 19.2 and 19.3; AACSB Skills: Analytical Skills; Learning Outcome: Identify and discuss the components of the global human resources management process)

5. CEO Dan DiMicco believes that when the economy turns around, NUCOR will be “first out of the box” in the steel industry. What reasons does he have for being so optimistic?

NUCOR has fundamentally sound Human Resource practices that promote productivity. Their current problems are not due to internal causes rather they are due to external market conditions. Once market prices for steel come back, there is every reason to believe that NUCOR’s HR practices will help the company rebound quickly. (LO 19.7; AACSB Skills: Communication Abilities; Learning Outcome: Identify and discuss the components of the global human resources management process)


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6. Can NUCOR’S human resource strategy be successful in other countries or other cultures?

The process of global negotiations differs from culture to culture in language, negotiating style, approaches to problem solving, etc. One of the cultural dimensions that is used to differentiate culture is “Uncertainty Avoidance.” Uncertainty orientation refers to the degree to which members of a society feel threatened by ambiguity and are reluctant to take risks. People in cultures with high uncertainty avoidance, such as Spain, Belgium, Argentina, and Japan tend to minimize the occurrence of unknown and unusual circumstances and to proceed cautiously and follow rules, laws, and regulations.

On the other hand, in a low uncertainty avoidance culture, such as the United States, one tends to accept and feel comfortable in un structured situations or changeable environments. (LO 19.1; AACSB Skills: Analytical Skills; Learning Outcome: Multicultural and diversity understanding)


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