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The Impact of Conflicting Institutional Pressures on the HRM Integration Strategy: A Study in MNC Subsidiaries in Indonesia

Huub Ruel*, Jennifer Tsu, Neil Rupidara#

* Windesheim University of Applied Sciences hjm.ruel@windesheim.nl

#Satya Wacana Christian University, Indonesia nrupidara@staff.uksw.edu

Abstract:

HR systems in organizations are constantly shaped by the interplay of opposing pressures for

internal consistency and for isomorphism with local institutional environments and there is a

need to understand the dynamics of such processes. This study aims to understand more

systematically the impact of conflicting institutional pressures on the integration strategy for

core HR policies and practices in multinational subsidiaries. It examines how subsidiaries

individually interpret the multiple contradictory pressures and how it affects

the firm’s

decision to adopt certain HR policies and practices despite efficiency. In this exploratory

study, data was collected through interviews with HR managers, HR directors or HR experts

of MNC subsidiaries in Indonesia. To identify and classify the conflicting institutional

pressures per core HR function, a matrix is used to classify the sources of pressure based on

the theory by Scott (2001). This study identifies the types of conflicting institutional pressures

at the individual level of various HR core functions and shows how HR managers try to

balance the interest of the MNC as well as the interest of the various institutions. The findings

support the notion that conflicting institutional demands have significant impact on HRM

policies and practices.

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The impact of Conflicting Institutional Pressures on the HRM Integration Strategy: A Study in MNC Subsidiaries in Indonesia

Introduction

Increasing attention has been paid to international human resource management (IHRM) over the past few decades (Björkman & Stahl, 2006). Strategic HRM (Human Resource Management) literature has also argued that transnational HRM policies and practices are becoming more crucial to Multinational Corporations (MNCs) because they can act as mechanism for coordination and control of international operations (Bartlett & Ghoshal, 1991; Myloni et al., 2006). However this optimistic view has been challenged as the pace of globalization accelerated with evidence that MNCs often approach constraints when dealing with pressures to conform to cultural, institutional and legal expectations both in the host as well as the home country (Tan &Wang, 2010). On the subsidiary level, this debate about the impact of conflicting institutional pressures derived from the MNCs strategic intent, culture, politics and geography and a host of other normative factors is sometimes referred to as institutional dualism (Farndale & Paauwe, 2007; Kostova & Roth 2002; Rupidara & McGraw, 2008).

Research has indicated that HR systems, which are defined as the bundle of HRM policies and practices within a firm, are constantly shaped by the interplay of opposing pressures for internal consistency and for isomorphism with the local institutional environment (Rupidara & McGraw, 2011). The impact of regulatory, normative, and cognitive institutional pressures on HR practices in MNCs has been extensively recognized (Björkman & Lervik, 2007; Gooderham et al., 1998; Kostova, 1999; Rosenzweig & Nohria, 1994). However, while research has primarily advanced by focusing on the MNC as the unit of analysis, there is still a need to focus on the subsidiary. The adaptation, routines, modifications and changes to the HR system are evidently worked out by HR (country) managers, who influence the decisions within the MNC subsidiary in the host country (Rupidara & McGraw, 2011).

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The rational view, for instance, underestimates the various institutional logics and mechanisms on the managers. The institutional perspective, on the other hand, which over emphasizes the deterministic power of institutions, discounts the intentional and entrepreneurial actions of the HR manager. For example, a high demanding institutional environment can limit the agentic power of the managers irrespective of any personal power they might mobilize (Rupidara & McGraw, 2011). Based on this argument, they proposed the blended view perspective in which they argue that the process of configuring HR systems blends together the rational perspective with the institutional perspective. To legitimize this blended view perspective one have to create a deeper understanding of the process on how individuals deal with the tensions and pressures originating from the highly complex and multi-institutional settings.

As research progressing, there is still a need to look at the impact of conflicting institutional pressures on the integration and development process for each individual HR policy and practice. In this study, constructing fit with the internal and external environment, referred to as the configuration of HRM is acknowledged as a key important process in determining the best integration strategy for the various HR policies and practices. In identifying this process one can also contribute to one of the current debates in the International HRM field; “the standardization and localization debate.” The standardization vs. localization debate refers to the extent practices in subsidiaries should resemble their parent company or global practices (standardization) vs. the extent they should be adopted to fit the host environment (localization) (Pudelko & Harzing, 2007).

The dynamic and competitive environment and the reactions of individuals within it may be part of the explanation why it has been so difficult to identify transnational organizations that remain successful. Key stakeholders in organizations should be aware of this process of dealing with these conflicting pressures in their search for a good IHRM configuration (Dickmann et al., 2009).

Indonesia, the fourth most highly populated country in the world that has the largest economy in Southeast Asia is considered one of the world’s emerging market economies. Due to the dramatic political, economic and social changes that have taken place in the 21st century, regional political and business leaders continuously emphasize on strengthening institutional capabilities to develop and implement effective strategies and practices for a fundamental human resource development as a response to the globalization.

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interesting to study whether the highly diversified institutional environment of Indonesia subsidiaries has significant influences on the choice of integration strategy for the subsidiary HRM policies and practices. Importantly is to identify institutional influences that can cause certain HRM policies and practices to standardize or localize.

This study aims to identify new insights on the existing conflicting institutional pressures facing MNC subsidiaries in Indonesia. The practical relevance of this study is to examine how subsidiaries individually interpret the multiple contradictory pressures and how it affects the firm’s decision to adopt certain HR policies and practices despite efficiency. In order to provide a more in depth understanding of the impact on the HRM integration strategy, this study will focus on core individual HR functions. The results may also serve to guide MNCs towards a successful cross-cultural HRM strategy integration in Indonesia.

Based on the existing theoretical background, this study aims to understand more systematically the impact of conflicting institutional pressures on the integration strategy for core HR policies and practices in the subsidiaries, which as a result, will help in contributing to the standardization and localization debate in international business. The following research question is proposed: “How can conflicting institutional pressures impact the integration strategy of the MNCs HRM policies and

practices in Indonesia?”

Literature Review

Configuring the HR system in MNC Subsidiaries

HRM configuration which stands for the processes of constructing and reshaping HR systems within subsidiaries of multinational enterprises iteratively during the strategy implementation phase of a firm are as important as understanding the architectural components of HR systems and/or strategy formulation (Brewster et al. 2005). It involves incorporating HR practices in organizations which are internally and externally fit (Björkman & Lervik, 2007). Externally fit concerns the degree to which company strategy and HR strategy are aligned (Miles and Snow, 1984; Snell et al., 1996), whereas internal fit (or internal integrated) concerns whether various HR practices such as HR planning, recruiting, development, and compensation are aligned and work in concert (Delery & Doty, 1996).

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management will influence the outcome of the process. The role of the HR manager, as will be explained in the next section, is crucial to the configuration process. The process of configuring HR systems mainly involves decision-making of HR managers in the use or change of HR policies and practices. E.g. whether to export practices of MNC Headquarters’ or to source locally or the mimicking global best practices in order to achieve the organizational goal (Rupidara & McGraw, 2011).

When analyzing the HR configuration process it is important to illustrate all the various influences on MNC subsidiary. The model (Fig.2) proposed by Rupidara & McGraw (2011) for configuring HR processes on subsidiary level shows this by interpreting all the connections within the MNC-Subs network. HR managers are connected to wide sources of institutional contexts which facilitate their introduction to alternative logics. These come from within the organization boundaries of the MNC and from the operational and normative environment of subsidiaries. Some of these include the MNC parent, local regulative institutions, other MNCs, local firms, consulting firms, educational institution and other professional networks.

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Fig. 2: HRM configuration process within MNCs subsidiary (Rupidara & McGraw, 2011).

Institutional theory

Institutional theory generally assumes that institutions provide constraints to choices and actions of individuals (Rupidara & McGraw, 2011). Institutions can be defined as a set of rules that structure social interactions in particular ways (Knight, 1992). Language, money, table manners, law, system of weighs and measurements are all institutions (Hodgsons, 2006). The new institutionalism, one of the latest variants within institutional analysis, assumes that the actions of organizations are not only a result of rational decision-making processes with the goal of maximizing effectiveness, but that they are also influenced by the social, institutional context in which the organization exists (Westney, 1993). The theory focuses on the cognitive processes which creates taken for granted structures that establish legitimacy around certain ideas and lead to their diffusion. MNCs and subsidiaries are considered to exist under conditions of institutional duality which means that they experience pressure both from internal legitimacy from the MNC and external legitimacy from their external local networks (Kostova & Roth, 2002; Rosenzweig & Singh, 1991; Westney, 1993). This view implies that adaptation of structures and practices to the local environment is key to organizational survival.

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authority or on account of its resource dependency. An example of the mimetic isomorphism can be referred to as a diffusion of best practice in the environment. MNC subsidiaries copying certain practices of other similar organizations that are perceived to be successful or that subsidiaries copy practices of the MNC that are viewed as successful and useful within the organization. Finally the normative isomorphism involves the development of similar norms and methods of work due to the receiving of similar formal education and involvement in the same professional networks (Tregasksis et al., 2001).

Institutional theory has been used extensively used in the IHRM research. Paauwe & Boselie (2007) still argue that it has still great potential to increase the understanding of various aspects of subsidiary HRM. Two key criticisms on institutional theory by Kostova et al. (2008); acknowledged by Rupidara & McGraw (2011) is that it is difficult to first clearly define the institutional field on an MNC. “The field of MNC subsidiaries contains multiple and overlapping environments both internal to the organization and external in the country of operation. Secondly, because no one dominant isomorphism force exist facing a subsidiary, the possible presence of competing isomorphic forces suggest the need to look at the micro-decisions of HR managers in the subsidiaries. Rupidara & McGraw (2011) adopts here the micro-political perspective. Organizational micro-politics has been defined in general terms as “an attempt to exert aformative influence on social structures and human

relations” (Dörrenbächer & Geppert, 2006), but is suggested more specifically to focus on “bringing

back the actors and examining the conflicts that emerge when powerful actors with different goals,

interests and identities interact with each other locally and across national and functional borders.”

The micro-political perspective can be used here to evaluate how a subsidiary manager acting as a problem solver of the tension between competing isomorphic forces.

Acknowledging the fact that individuals and organizations are not only passive receivers in the institutional context but are also able to change the institutional setting and or re-interpret ideas at their own discretion, one can argue now that individuals have the primary role in shaping and constructing HRM policies and practices within organizations. “Surrounded by inter and intra-organizational institutions, regulations from the local environment and policies derived from the MNC network, and also confronted with uncertainties from the business context, HR managers may act in accordance with local institutional pressures to gain legitimacy” (Rupidara & McGraw, 2011). Their role is now considered a gatekeeper, interpreter and judge of the most appropriate HRM configuration stemming from ideas in the institutional fields.

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a study by the Development Dimension International HR benchmark group (Rioux et al. 2000) has indicated that variations in social, political and economic circumstances are the highest with 50% challenges facing the HR practices among the perceived value (40%) of the HR function and the resistance to change (48%). For example, in the local context, labor laws and regulations can restrict the range of possible HRM practices. Similarly to the institutional forces at play in the host country environment, MNC headquarters can also exhort coercive/regulatory, mimetic/cognitive and normative pressures on foreign subsidiaries (Björkman et al. 2008).

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HRM Integration Strategy: Standardization vs. Localization

In the face of globalization, the success of an MNC lies in their balance between global efficiency, local responsiveness and worldwide learning (Bartlett & Ghoshal, 1989).

The central question in the standardization vs. localization debate is to what extent subsidiary practices should resemble their parent company (Standardization) vs. the extent they should act as local firms (Localization). Recently Pudelko & Harzing (2007) have extended this debate by incorporating the term best practice, so called dominance effect. Standardization not only refers to the adoption of HQ practice, but can also refer to the adoption of Global best practices. In the field of HRM, Pudelko & Harzing (2007) argue that although MNCs do seek and strive to promote global effective practices the transfer of HRM practices is still limited by the differences in national cultural and institutional characteristics, which might force MNCs to localize their HRM practices. The challenging task for an MNC is to find a balance between localizing and standardizing HRM practices.

In the study of Pudelko & Harzing (2008) where they examined a large-scale sample of multinationals headquartered in the U.S., Japan and Germany the authors concluded that an overall dominance effect exists on the meso-level of firms. MNCs only tend to seek standardization around best practice. If home-country practices are highly successful, this competitive advantage should be carefully exploited throughout the entire organization but if foreign practices appear to be superior, consequently it seeks to localize or even implicate a reverse knowledge transfer.

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Significant progress has been made in the understanding of standardization and localization strategy for best practice. However, there is little evidence concerning the underlying impact of the institutional demands on the standardization or localization strategy for HRM, in other words, how standardization or localization is being justified by the individual’s decisions and interaction with the institutional environment (Festing & Eidems, 2007). This study will contribute to this debate by zooming in on the practice level of firms and combining the institutional perspective in adapting and changing management practices in order to conform to the organizational context. This study will not only contribute to the standardization and localization debate in international business but will also contribute the study on IHRM.

Research Proposition

Up to this part, it is important to acknowledge the following; first, that the integration process of HR policies and practices is a continuing process between the HQ and the subsidiary and the local context. Second, this social process is continuously challenged by various conflicting institutional pressures within the international environment of MNCs. The HR manager’s key role in the process is derived from their decision-making role which is the main source for shaping and directing the configuration. The Indonesian context is currently undergoing major changes continuously impacting HRM policies and practices of MNCs.

The previously discussed theories do not offer a ready to use model to test the relationship between conflicting institutional pressures in the environment with the integration strategy of HR policies and practices of MNCs. In fact, along the way of collecting data, this study tries to gain new insights on conflicting institutional pressures and identifies how HR managers systematically perceive impact the way the HR system is integrated in the subsidiary to conform to the environment. The data collection method will cover the three core sources of institutional pressures: the regulatory, the normative and the cultural regime by Scott (2001).

Based on the institutional theory, the role of the HR manager will be as a mediator and adaptor of the HRM policies and practices within the organization as well as an ambassador for change in the institutional environment itself (Rupidara & McGraw, 2011). The empirical findings of this study is presumed to provide a systematic approach in dealing with conflicting institutional pressures and will serve as a practical guide to determine the most suitable integration approach of HRM for MNCs in Indonesia.

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HRM policies and practices are commonly found in many well performing organizations and are widely acknowledged by other IHRM studies (Rosenzweig & Nohria, 1994; Bennington & Habir, 2003). These include: recruitment and retaining, training and development, performance management and remuneration. Retrenchment and employee retirement is added in addition to the study to consider the highly regulative power in HR policies of MNCs in the Indonesian context.

Indonesia & HRM

Prior to collecting data for this study, it is important to recognize the existing literature about HRM in Indonesia. HRM in Indonesia have been facing many changes and developments in the field of HRM. This analysis will serve as a guideline for our methodology.

Recruiting and retaining talents in Indonesia

The search for talent is a major challenge for HR managers especially in the public sector. The major shifts that have occurred in the labor force, including the shift from the agriculture to the industrial and service industry did not succeed in alleviating the shortage of adequate and capable employees in Indonesia. Recruitment methods in Indonesia are fairly different than Western countries. Newspaper advertising is less effective. Furthermore, recruitment factors such as age, education, sex, marital status are more important than the training and experience.

The hiring of expats entails several risks such as the costs for relocation, foreign business practice and culture acclimation. Hiring host country or third country nationals may also imply several issues. In order to overcome the shortage of skilled managerial employees, some MNCs engage in the development of qualified local staff through in-house or on-the-job training. However, this process has proven to be really expensive and there is always a possibility that competitors will lure away the trained employees. For growing local companies in Indonesia, pirating staff from multinational companies offers an easy solution to the skills shortage. Pirating (hijacking) has helped local companies get the level of education they need from their candidates, as many multinational have strong in-house training programs (Bennington & Habir, 2003). This competitive labor market creates a great concern to MNC subsidiaries.An important aspect of HRM in these conditions is to find a way to minimize the loss of skilled individual to other firms (Sutiyono, 2007).

Training and Development in Indonesia

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used to cement an attitude of support for the governance regime or at least minimize opposition to it. For privatized enterprises, training and development programs mean fostering quality of outputs and productivity of inputs which are essential for the organization’s goal.

Performance Management in Indonesia

According to Sutiyono (2007), performance appraisal in privatized companies in Indonesia is more open and conducive to the conduct of performance review and appraisal than SOE’s. Employees in privatized companies are asked to conduct self-evaluation in addition to appraisal by their supervisors. Some even work within the framework of global best practice such as Total Quality Control (TQM) which entails that managers have to communicate organization goals to various levels of the workforce which in turn helps them translate clear tasks to subordinates.

Remuneration in Indonesia

Remuneration in privatized companies in Indonesia is clearly linked to the performance appraisal system. The level of employee performance measured against business related criteria directly determines the following year’s salary as well as year-end bonus and simultaneously career development needs involving training or counseling (Sutiyono, 2007). In SOE’s, the annual bonus of the company is shared equally among employees in proportion to their basic salary. Although annual bonus is not productivity related, this arrangement have created a sense of de-motivation among employees, because those who work hard that contribute to the companies ‘performance are de-motivated by seeing their fellow free riders enjoying the fruits of their labor. Remuneration also requires considerable attention to privatized and MNC subsidiaries in Indonesia due to the fierce competition for professionals and the changing labor regulation. The question that strikes MNC subsidiaries the most is how to manage their remuneration systems in a highly demanding and competitive environment?

Retrenchment and Retirement in Indonesia

The increase in technology, increasing global competition and minimum wage are some of the key factors causing many companies to downsize. This mainly involves however high cost for dismissal which entails 1 month’s wage for each year of service up to 4 months of wages. Employee separation in the public sector is much more difficult but is continuously developing with new regulation imposed to by the General Ministry of Home Affairs. The retirement policy in Indonesia is fairly different than in West countries. In Indonesia, the retirement age is for instance 56 which is a difference of almost 10 years with the Europe and U.S. retirement age of 65 (Sutiyono, 2007).

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This research can be classified as an exploratory study because it adds new insights to the existing conflicting institutional pressures facing MNCs in Indonesia. Furthermore, it adds to the existing knowledge about the integration strategy of HRM policies and practices and the standardization and localization debate.

The qualitative research method is used here because it effectively helps in obtaining new culture specific information on the value, opinion and behaviors as well as the social context of a certain population (Silverman, 2004). In this study, the unit of analysis is the Multinational subsidiaries in Indonesia and the key informants will be subsidiary HR managers.

Data for this research was collected through interviews with the HR managers. An interview can produce a good representation of the interviewee’s opinion about a particular phenomenon or reality (Silverman, 2004). The interviews were conducted in a semi-structured manner because it allowed the possibility to interview more times when necessary (Bryman, 2002) and allows the researcher to gain deeper information and wider interpretation about the subject.

Sample

The unit of analysis in this study is MNC subsidiaries in Indonesia. The MNCs subsidiaries are chosen based on several criteria’s. First of all, the MNCs headquarter should be based in a Western or Asian country. The MNCs should have significant operations in Indonesia and employs a full-time HR Country Director responsible for the HR system in Indonesia. Finally, the MNCs should employ at least 50 employees in Indonesia and should have the following HR core practices in place: recruitment, retaining, training and development, performance management and remuneration programs. In order to identify these MNCs, the website: www.google.nl as well as the companies’ website was used.

The interviewees in this study were HR managers, HR directors or HR experts of MNC subsidiaries in Indonesia. The use of HR managers can be considered as power since they are experts in the field, also known as key informants (Anderson, 2004). Each decision they produce has a direct impact on the HR management of the subsidiary (Briscoe et al. 1995). The HR managers were identified on a purposive sampling matter. These were identified and selected based on their experience and function within the subsidiary. The information was available on their public profile on the professional network website: www.linkedin.com.

Data Collection Process

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to collect data from the HR managers is through phone and email interviews. Despite the disadvantages offered by this method such as long-distance, reduced reliability and high chance for refuse, it does offer some advantages such as speed and low cost. However, face-to-face interviews is found more suitable in qualitative studies because of the ability to observe the respondent to uncover other important aspects and to allow the respondent to feel more comfortable to open up which can be quite rewarding (Jacobson, 2002).

The Interview Protocol

The interviews were first conducted by email and used a telephone interview as a follow up. The interview starts off by sending an invitation letter to the potential participant. After making the initial contact and obtaining agreement to participate, the email with an introduction of the research topic and questions is send. Based on the response, a follow up interview takes place either by phone or email depending on the respondent preference in order to request clarification or to ask further questions.

Each interview begins with a general introduction to acquaint the respondent with the interview purpose and agenda. The interview consists of two sections: Part A, B and C. Part A requests general information about the company: size, industry and function of the respondent within the company. Part B introduces some open-ended questions about the type of challenges facing the five core HR practices of the MNCs in Indonesia and part C consist of open-ended questions to allow the respondent to tell their view and opinion on the integration strategy and how they see the HR system evolve. During the interview, interviewees are also asked to provide appropriate documents for triangulation purposes. The interview result is then triangulated with evidence given by the interviewed managers.

Data Analysis

To identify and classify the conflicting institutional pressures per core HR function, a matrix is used to classify the sources of pressure based on the theory by Scott (2001). The following order of the type of conflicting institutional is presented in the table of findings.

1. Pressures from the regulatory regime refer to the pressure to conform to regulation by the government or other regulatory bodies such as activists in Indonesia. Failing to conform to these pressures may risk the firm’s legitimacy and viability.

2. Pressures from the normative regime refer to the pressure to conform to the expectations stemming from the organizational context including, board members, CEO’s, labor unions, associations and other professional related contacts of the company. It constitutes appropriate behavior (way of organizing) and legitimacy of the firm.

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The interviewees are subsequently asked to interpret the HR strategy for their subsidiary and are asked how their experience in dealing with the aforementioned conflicting institutional pressures would have influenced their perception of a successful integration strategy for the core HR functions. In addition, they are asked to interpret whether the HR system should develop towards global practice or towards a national best practice. The answers obtained are summarized and categorized into the two categories, towards global best practice (standardized) or towards national best practice (localized). For this part, theory of Björkman et al. (2007) is used to examine each of the individual core HR practices with the type of integration strategy: standardization or localization.

Reliability & Validity of the data

According to Patton (2002), validity and reliability are two factors which any qualitative researcher should be concerned about while designing a study, analyzing results and judging the quality of the study. Reliability stands for the “the degree to which the finding is independent of accidental

circumstances in the research” (Kirk & Miller, 1987). The question is than whether the researcher can

obtain the similar findings (repeatable answers) by doing the same under different conditions.

In this research, the HR background of the interviewees is seen as valuable for this research; however reliability is still a challenge because each individual experiences things differently and no matter how random these participants are selected, their experience will somehow impact their view and opinion, which is then again difficult to generalize.

The interviewers control is improved especially over the reliability of the responses because questions can be explained more thoroughly to avoid any misunderstandings. However, to improve the validity of the answers, secondary data is requested from the human resource managers where the data variable behavior is gathered. In addition it can also be acquired from publications, reports and Indonesian HRM websites (www.hrmasia.com) and blogs (HRM Club or HRM Konsultasi). This is important because it may serve as comparable data to the answers initially obtained in the interview.

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In this study, all interviewees were non-English speakers; however, almost all were familiar with the English language and did not feel uncomfortable. During the interview, upon request, the questions were reframed and clarified during the interview. For one interviewee who specifically requested to be interviewed by email, requested to answer the questions in Bahasa Indonesian because he felt more comfortable this way. For the answers, an online translation tool was used to translate the data.

Findings

In this section, the results gained from the data collection will be presented and analyzed. The presentation of the results will be made according to the themes ranging from the five key HR functions to be influenced by institutional pressures in the environment to the configuration of the HR system of the subsidiary. What is the best strategy approach for MNCs in Indonesia for HRM policies and practices considering all the experienced challenges of a developing country? Subsequently the research problem and questions of this study will be answered. In total, 7 HR managers have agreed to share their experience in this study.

Recruitment and Retaining Employees

All of the interviewees have confirmed that recruiting and retaining talented employees is one of the biggest challenges facing companies in Indonesia. To alleviate this problem, one HR manager has indicated that his company is currently using regional resourcing as well as employee referral programs to look for talented candidates across the region.

“The company works together with a regional resourcing group to maximize to utilization of

recruitment agencies engaged in group resourcing to look for candidates” We also roll out

employee referral programs starting in February this year”

● Country HR director, Financial Institution.

Next to the limited availability of talents across Indonesia, many HR managers have expressed their concern about the legal challenges facing the recruitment practices of MNCs. Particularly when hiring expats for certain positions. The HR manager of a Logistics & Supply Company as well as an HR consultant explained that companies need to follow expat hiring regulation and other formalities for immigration.

“To hire an expat we need to follow certain regulation: manpower act number 12, 2003 and

other expat immigration formalities, such as visa etc. As far as I know, only expats on

managerial level who are only authorized by the government (because they require special

skills and knowledge) are allowed to work in Indonesia. Below that level, the only way to hire

expats is by using the term consultant, project assistant/manager or expert. But might bring

negative consequences for the company”

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“On the recruitment and selection process there are no significant challenges although it

happens for expats. The problem usually appears when the candidate has been selected. The

MNCs have to prepare a lot of administration back up such as KITAS or KIMS (Visa permits),

permission letter from Ministry of Labor and Transmigration. The requirement according to

this administration process is quite rigid and the company needs good cooperation with the

Ministry in order to obtain permission for the selected candidate. Besides that, the company

itself has to really comply with those regulations to minimize the audit findings from Ministry

of Labor and Transmigration”

● HR Consultant.

The prohibition to hire expats for certain positions within the subsidiary illustrates the pressure for the subsidiary to conform to local regulation for legitimacy. Some MNCs strategically hire expats as consultants, project assistants or experts to be able to recruit expats. However, this sort of hiring can impose risk of sanctions by the government if caught.

This type of Conflicting Institutional Pressure is considered Regulatory because there is a strong

indicative that there is a pressure to comply with governmental regulation in hiring expats for

management or other key positions in the subsidiary.

Another challenge for many MNCs is selecting talented candidates according to the HR manager of the Logistics & Supply Company. Although some companies engage in various activities such as connecting with regional and local partners to increase their talent pool many MNCs do not utilize this form of recruiting effectively. MNCs only use the talent pool as a formal tool to comply with corporate or HR association’s expectations in the industry.

“MNCs only focus on the employee that is most sell-able in the market and not so on the best

performance. “Engaging in a talent pool is considered “ceremonial” without any follow up

and almost being done in a closed process, which means without involving the employee itself,

so the talent pool is like a holy book”

● Country HR director, Logistic & Supply Company.

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This type of Conflicting Institutional Pressure is considered Normative because there is strong

indicative that there is a pressure to comply with social and corporate formalities in selecting

candidates for the subsidiary.

Many interviewees have confirmed that competition for highly talented candidates has been fierce for their company, especially in big cities such as Jakarta. Companies are willing to offer competitive remuneration packages in order to retain as well as to attract talented and trained employees to their company.

“Many talented and trained employees move to competitors each year. We lose yearly one to

three people. For our small company it is a lot. These “hijacked” (as he calls them) employees

are offered better positions with greater responsibilities as well as double the benefits by the

competitors”

● HR Manager –Engineering Company.

Another HR manager explains that employees are very much attracted by the company’s name, image and industry and not so much on the job description;

“The most attractive element for the employees in Indonesia is the name (brand), the

background and the industry of the company. We are constantly striving on creating a

competitive image on the market to attract the best employees”

● HR manager – Retail Company.

MNCs need to provide additional benefits to the employees and to invest in the companies’ image in order to maintain talented and marketable employees within the company. This illustrates the pressure on the subsidiaries to have competitive retaining practices for the sake of the company’s reputation in the labor market.

indicative that there is a pressure to comply with expectations in the labor market in order to retain

employee within the subsidiary.

In order to deal effectively with this challenge some HR managers indicate that MNCs should engage in clear communication to promote its employees motivation.

“We manage existing employee relation issues effectively by conducting regular bipartite

communication forum between management and selected employees”

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“Giving real information and genuine information to the candidate about the company’s

operational condition and objectives is also considered to be critical. Employees are often

giving tasks or projects and are in the end or in the middle of the project dismissed without

any logical reason”

● Country HR director, Logistics & Supply Company.

The current situation in Indonesia clearly illustrates some conflicting institutional pressures facing recruitment and retaining practices of MNCs. The highest concern among the HR managers is the recruitment regulation on expats, the social expectations concerning the selection practices in finding suitable candidates and the social expectations of employees concerning the retaining practices of MNCs.

Training and Development

Many interviewees have confirmed that they regard training and development programs as a key tool to promote the performance and motivation of the employees. It was evident from the responses of the interviewees that MNC subsidiaries are applying HQ and global best practices within the area of training and development. These include the use of key performance indicators and empowerment for motivation.

“We use training and development programs to develop future leaders by way of extending

people decisions as to empower them allows the company to grow motivation in their

employees”

● Country HR director, Pharmaceutical Company.

“The training program is essential to enhance the capabilities and skills of the employees. Our HQ is

very helpful in training by providing experts to train the employees' capabilities and skills in sales,

production and design, especially for efficiency in production. Training has helped us in exceeding

production targets.

Currently we are focusing on training in sales; this is done to further increase sales and product

marketing. One of the development programs for employees is the work system assessment

(performance appraisal) by using Key Performance Indicator (KPI). This in terms help employees get

motivated and strive for better performance”

● HR manager – Retail Company

Despite the success of integrating training and development programs into the subsidiary, one HR manager has indicated that results were not as successful as it should have been due to the cultural differences existing in Indonesia.

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program. Not only there is need to analyze the training needs of employees, but their also a

need to carefully take into account the cultural differences. Cultural differences for instance

can have a major impact on training sessions. Foreign trainers in Indonesia have to be aware

of certain expectations about matters and ways of treating and talking to employees.

Another is the expectation for appraisal when attending training sessions. One company have

indicated that one way to improve the effectiveness and the willingness of the employee to

follow training programs is by including the training efforts (results) in the year evaluation for

performance or bonus plan”

● HR manager, Engineering Company.

The need to adapt training practices for effectiveness by using by taking into account cultural matters and to pair training with appraisal illustrates the pressure to conform to the cultural expectations of the Indonesian society to maintain a good reputation in the labor market.

This type of Conflicting Institutional Pressure is considered Cultural because there is strong

indicative that there is pressure to comply with cultural norms by the society in order to implement

effective training and development programs to the employees.

Another important challenge mentioned by one of the HR managers is the need for MNCs to comply with one of the country’s philosophy named “Pancasila” representing the culture, ethics, moral, religion, democracy and social justice within Indonesia.

“Only training subjects who are against our country philosophy or ground norm what we call

“Pancasila”: against religion, racism and communism are prohibited. This is described in

Manpower Act 13, 2003.

Manpower Act 13, 2003, c.: That in accordance with the role and position of workers,

manpower development is required to enhance the quality of workers as well as their role and

participation in national development and in improving protection for workers and their

families in respect to human dignity and values”

● Country HR director- Logistics & Supply Company.

The need to adapt training programs according to the Pancasila Ideology stated in the Manpower legislation shows a pressure for the subsidiary to conform to the local regulation to gain legitimacy.

This type of Conflicting Institutional Pressure is considered Regulatory because there is strong

indicative that there is a pressure to comply with government regulation in order to be allowed to

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The current situation in terms of providing training and development programs to employees in Indonesia clearly illustrates some conflicting institutional pressures facing these practices. The greatest concern HR managers have is to provide effective training programs to subsidiary personnel that is in line with social, cultural as well as regulatory expectations within the Indonesian society.

Performance Management

Many HRM managers confirm that performance management system is crucial for developing the employee performance within the company. One HR manager claims that the performance system can clearly guide and motivate employees to perform better within a company. It even serves as a basis to attract potential candidates to the company.

“Performance Management or management assessment is a mean to help the process of

appraisal and salary review including the process of determining a promotion. Furthermore,

it helps the company in developing individual goals that can be related to the with the

corporate business goals”

-HR manager, Retail Company.

“Our performance Management system is well in place and after 15 years in the business we

have no experience with any sort of challenges. Our company performance management

system is for us a key tool to attract the highly demanding generation. Ex. Gen Y (recent

graduates)”

The need to implement competitive performance management systems to attract employees to the company illustrates the pressure for the subsidiaries to conform to society expectations to maintain a competitive reputation in the labor market.

indicative that there is a pressure to comply with corporate policies as well as society expectations in

terms of implementing performance appraisal programs.

Another HR manager claims however, that it is still unclear for some employees why they are being evaluated in some areas. It is necessary for the HR manager to always keep record of the work evaluations as evidence for certain decisions and to avoid conflict.

“We have to make strong effort to come to a similar perception with the employee on any evaluated topics/ areas. We have to make sure that we record everything in paper and let it be

signed by the employees themselves and his/her supervisor as a relevant evidence for prove”

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Although the use of formal performance management system has become more common for many HR managers in Indonesia they are still companies struggling in using the performance management system accordingly. This illustrates the pressure for MNCs to adopt performance management systems that are “culture ready” and accepted by the employees.

This type of Conflicting Institutional Pressure is considered Cultural because there is strong

indicative that there is a pressure to comply with the expectations of the employees despite its goal to

improve performance

The current situation in Indonesia clearly illustrates that there is no unanimous perspective within the subsidiary on the role of performance management within the subsidiaries, whether performance management is used for improving personnel performance or to have a clear set of guidelines to reward employees when achieving a target.

“Not all company has implemented a suitable performance evaluation/management system.

Some of them still have their appraisal just for formality and not strategic, this means they

only use this as an appraisal tool and not to improve performance”

● HR Consultant.

This pressure illustrates the need of the subsidiary to conform to the HQ desire to use performance management policies, but yet they do not implement effectively to achieve the goal of improving the employee performance.

indicative that there is a pressure to comply with corporate policies as well as society expectations in

terms of implementing performance appraisal programs.

Remuneration

Remunerating employees is one of the most important tools for MNCs to attract potential candidates and to motivate current employee in the organization.

“The MNC should develop a remuneration system that is externally competitive in the market and internally equal”,especially, in the tight labor market in a large city, such as Jakarta”

● Country HR director, Fast moving Consumer Goods (FMCG) Company.

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indicative that there is a pressure to comply with social expectations in remunerating the employees.

Another challenge facing MNCs in Indonesia is the remuneration regulation. According to an HR consultant the government has strict remuneration regulation for MNC to comply with.

“The Government requires a minimum salary for each province in Indonesia and other

specific policies under the labor regulation Manpower Act 13, 2003. Most of MNCs use those

policies as a basic on their remuneration policy and give other benefit package to their

employees to make it to be more valuable. Some of MNC applied a different salary scheme for

the local employee and expatriate. MNCs have to obey the minimum standard for

remuneration based on the government regulation. If they have their own internal policy with

value more than government standard they can implement it in order to attract and retain

employees “

● HR Consultant.

In the oil and gas industry however, it is still a challenge for many members to come to an agreement with the government over the official remuneration policies. According to a recent report 2010-2011 by IPA Human Resource Committee (Largest HR committee of Oil & Gas Industry companies in Indonesia) it is still unclear what the guidelines are for remunerating employees. (See also Appendix: 3);

“Guidelines should be developed and written for clarification both to the PSC (Product Sharing Contract between Oil and Gas companies) companies in Indonesia and Government

auditors on the total remuneration programs in line with PSC terms and industry concern and

support BPMIGAS. BPMIGAS stands for “Badan Pelaksana Kegiatan UsahaHulu Minyak Dan Gas Bumi ” which is the Indonesia’s Oil regulator that stands behind the philosophy that

PSC initiative.

Guidelines should be implemented to recognize different conditions and philosophy of

companies for global perspective in light of the current competition for talents across

countries and regions”

● IPA Human Resource Committee members, Oil & Gas Companies.

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“We believe that by good communications we can go through the challenges and be in the

common ground to reach our ultimate objective to have a healthy Indonesia. The

pharmaceutical company presents itself in a number of approved associations within

respective functions. For example we are a member of “Apindo” a member of IPMG (International Pharmaceutical Manufacturer Group)”

The need to comply with remuneration policies by the government illustrates the pressure for the MNCs to conform to local regulation for legitimacy.

This type of Conflicting Institutional Pressure is considered Regulative because there is strong

indicative that there is a pressure to comply with governmental regulation in terms of remunerating

employees.

A final challenge interpreted in the interviews is the power of labor unions concerning employee’s rights and authority over remuneration policies.

“Partnership relationship with unions should be encouraged into a positive direction by

enhancing mutual understanding, benefit and improve communication. In terms of salary

increase (other than those below the limit set by the government) or termination of

employment under the authority of the company, should be implemented properly and be

transparently communicated to the trade unions and as well as employees. Every actor who

has a part in an organization must comply with applicable laws and regulations”

● HR manager, Retail Company.

The need to use remuneration policies that are positively accepted by the labor union illustrates the need to conform to the union expectations for legitimacy and for the sake of the company’s reputation in the labor market.

indicative that there is a pressure to comply with labor unions expectations in terms of

remunerating employees.

The current situation in Indonesia clearly illustrates some conflicting institutional pressures facing remuneration practices of MNCs. The highest concern among the HR managers is the Employers weak remuneration regulation and the expectations of the employees as well as of the labor unions connected to the organization.

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The interviewees have confirmed that terminating an employee contract is very difficult for MNCs in Indonesia. According to some of the interviewees, the labor regulation does little in promoting the company interest. Instead, it protects the employees despite the existing reasons for the breach of contract.

“The spirit on labor regulation in Indonesia is to avoid retrenchment or termination. We have to

understand the long process in the labor court“

“Regulations and policies are highly challenging especially in terms of employment rights due to different point of view, approach and interest of business, government and community. Therefore

understanding each party's point of view and interest is very important in dealing with that kind of

challenges. We do this through the representatives of Public Affairs and Policy who communicates to

our stakeholders on a regular basis about our vision and organization intent.

“The regulation on retrenchment are good and applicable but sometimes we have to give clarification and fight to come to similar understanding”

The need to follow retrenchment procedure stated in the manpower legislation by the government illustrates the pressure for MNC to conform to the expectations of the government for legitimacy.

indicative that there is a pressure to comply with governmental regulation in retrenching employees.

Another challenge confirmed by the interviewees is the political power of the labor union. This is also evident in the case of retrenching employees. According to two of the interviewees, companies should value the informal leader as well as the formal leaders within the Indonesian society.

“Establishing a good relationship with employee union can avoid a case being raised by employees which does not do good for the banks reputation”

● Country HR Director, Financial Institution.

“Company should understand the local value on how to treat the informal and the formal

leader. Not all cases should be settled in the court. Sometimes we have to deal with informal

community leader. An example is the Islamic Leader called “Ulama“maintains a harmonious

relationship with labor unions because that is the Indonesian’s philosophy. Maintaining a

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● Country HR Director, Logistic & Supply Company.

Labor unions also put pressure on subsidiaries by executing their political power in protecting employee rights concerning retrenchment policies and practices. The need to use retrenchment practices that are positively accepted by the labor union illustrates the need to conform to the union expectations for legitimacy and for the sake of the company’s reputation in the labor market.

indicative that there is a pressure to comply with labor union expectations in retrenching employees

from the subsidiary.

In terms of retirement policies, one of the biggest issues confirmed by the MNCs in Indonesia is the retirement age. The retirement age of 56 is for some companies still a challenge. In a recent report of IPA Company members (members of the Multinational Oil & Gas Industry of Indonesia) the human resource committee called plan of activities in 2010 and in 2011 plans, they explain that the effort companies make, specifically in the oil and gas industry is of little use.

‘’Different PSCs have different operational needs and therefore the implementation of each

PSC will be managed differently. Several PSCs may not have a business case to adopt the

extension of retirement age at this time.

● IPA Human Resource Committee members, Oil & Gas Companies.

According to the HR manager of the Engineering Company, it is difficult for companies to come in general agreement with the government institutions.

“The process to clarify and to fight to come to a similar understanding with government is

difficult. The political sphere is still a challenge for many MNCs in Indonesia “

● HR Manager, Engineering Company.

The government can often impose pressures on MNCs by executing their governmental power, especially in terms of protecting employee rights concerning retirement policies.

indicative that there is a pressure to comply with governmental regulation in terms of retirement

policies for employees in order to avoid problems.

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managers is the retrenchment and retirement regulation and the expectations of the employees as well as of the labor unions connected to the organization.

Integration Strategy HRM

Interviewees were asked what their opinion is about the HR strategy of their HQ for their subsidiary. The majority of the interviewees have stressed the importance of having more authority and flexibility in their respective HR systems. In identifying and discussing the various challenges experienced in the Indonesian market, they say that it is important for the companies to continuously re-evaluate their current state and efficacy of the HR system and if needed change it to fit with the internal and external environment of the company.

“Thereshould be more flexibility in the HR system, so that it can suit the local needs”

● Country HR director, FMCG Company.

“With the right strategy and always adjusting to the local policies, HRM in Indonesia would

be able to guide and become a bridge between MNC management and the local employees’’

● HR Consultant.

“Parent companies must understand the local culture, values and issues prior to set up compact and standard policies. The unique and diverse tribe of Indonesia must be put into

consideration by parent organization during the transfer of knowledge, skill etc.”

“The parent company should first assess the effectiveness of current model and review this for

centralization/decentralization of HR functions between country and the region in question”

● Country HR director, Financial Institution.

“It is important for the development of HR in a company to first learn the cultural values in the

environments where the company carries on its activities, because the design of a good HR system

(adopted from outside Indonesia) may not be necessarily applied in accordance with the concept, due

to culture that exists in the Indonesian society. After digging more deeply about the behavior and

culture, all systems can be implemented in stages and can also with a few modifications of course, suit

the conditions (tailor made)”

● HR manager, Retail.

There is strong indicative that MNC subsidiaries would like the HR system of their subsidiary to be

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In examining the integration strategy over the core HR functions of the HR system, interviewees have claimed, that for the two core areas of HRM performance management and training and development, there is a clear indication that HR programs and policies in Indonesia are leaning towards corporate identity/ standardization. Majority of the interviewees have indicated that the most effective action parent companies have taken for the HR policies and practices to meet corporate policies is by introducing standardized assessment programs, common evaluation and training programs. Even in the field of remuneration. The HR director of a Financial Institution mentioned for instance the introduction of Flexi benefits system. This is a modern approach in remunerating employees which is also considered a form of standardization.

The current state of affairs in the HRM world assessed Indonesia as clearly giving signs of a development towards a national best practice due to the various institutional pressures experienced. Interviewees have indicated that they are more inclined in developing the HR system towards a National Best Practice when considering employee relation policies; but they are very much open and willing to learn more about global best practices.

“The HR system of the subsidiary can develop towards national as well as global best

practice. When dealing with employee relation, government regulation and benefit, the

national best practice is applicable. While for learning and organizational development, the

global best practice is much better used as reference”

● Country HR Director, Financial institution.

There is strong indicative that MNC subsidiaries have found standardization to be successful when

it leads to high organizational performance. Particularly in areas such as performance

management systems, training and development programs as well as in parts of remuneration

programs.

On the other hand, there is strong indicative that MNC subsidiaries have found localization to be

more successful in practices that are subjected to government regulation and employee relational

aspects including remuneration.

According to some HR managers, future events however, will have significant impact on the HRM policies and practices of subsidiaries in Indonesia. The opening of the free market is one of the major shifts in the Indonesian economy that will require MNCs to be well prepared in managing diversity.

“Challenges in the HR development in the future will be greater and truly extraordinary. The opening

of the free market allows a broader number of opportunities for foreign employees to work in

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industrial relations. HRM’s must be prepared in order to create a strong employee in the face of a very complex challenge between individuals and between firms in the future”

● HR manager, Retail Company.

Conclusions & Discussion Conclusions

The aim of this study was to identify new insights on the impact of conflicting institutional pressures on the HR system of MNC subsidiaries in Indonesia. The central research question proposed for this study was: “How can conflicting institutional pressures impact the integration strategy of the MNCs’ HRM policies and practices in Indonesia”.

In order to answer this research question, the following sub-questions are answered in a consolidated matter in order to provide an overall response to the central research question.

What kind of conflicting institutional pressures do HR managers perceive in core areas of HRM in

MNC subsidiaries in Indonesia?

The different conflicting institutional pressures that HR managers perceive are summarized and presented for each HR core area (see table 2.0). The conflicting institutional pressures follow the order from regulatory, normative and the cultural regime.

The most obvious conflicting institutional pressures found in the study stemmed from the regulatory and the normative environment. The pressure to conform to the manpower regulation has pushed MNCs to adopt certain HR policies and practices. This was evident in the areas of recruitment, retaining, training and development, remuneration as well as retrenchment and retirement. The pressure to conform to the manpower regulation stems from the need to gain legitimacy and the government power to impose sanctions.

Currently some MNC subsidiaries are working together with different HR associations to promote changes in the legislation, such as the legislation over expat hire regulation, compensation and benefits, retirement age and employee retrenchment.

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Furthermore, the need to stay competitive in the tight labor market, forces MNC subsidiaries to use competitive HR practices to attract talented candidates to the company.

The pressure to conform to cultural expectations was evident in the areas of training and development programs and the performance management. This could be due to the criticism and uncertainty avoidance behavior of the employees as well as their preference for oral communication rather than a documented procedure of evaluation (Bennington & Habir, 2003). Furthermore, the cultural ideology goes as far as in the Manpower legislation. The extent performance management and training and development programs are adapted to fit the local cultural environment of Indonesia depends highly on the acceptance level of the employee as the local government.

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●Cultural

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institutional characteristics force MNCs to localize their HR practices (Pudelko & Harzing, 2007). The search to gain legitimacy and viability in the Indonesian environment has led MNC subsidiaries to prefer a localization strategy.

Limitations

This study has a number of limitations. The main limitation of this study was related to the choice of methodology. The qualitative study was only limited to interview data. The reliability of the responses can be considered weak because the responses are based on experience. A multiple in-depth case study approach would have uncover more in detail the impact of the conflicting institutional pressures on the HR policies and practices of the MNC subsidiaries in Indonesia. Also the long-distance factor in the interview has also impeded the researcher to observe other key important aspects such as the organizational culture.

The sole use of a one respondent to represent the MNC subsidiary has had implications for the validity of the responses. Although this key informant approach (Anderson, 2004) is considered as power, the use of multiple respondents such as other employees or regional and headquarter personnel would have serve to validate the response of the HR manager, however, such an approach was not feasible. And finally, as it is common with master’s theses, time constraints is inherent which does also prevent the study to expand into future depths and amount of research participants.

Future Research