Maintaining an expatriate manager on an overseas assignment is very expensive. Estimates are that a middle- to upper-level expatriate can cost an organization anywhere from two to three times what it costs to maintain him or her on a domestic assignment. 60 These higher costs are often due to the compensation practices of many multinational organizations.
One of the most popular international compensation approaches for U.S., European, and Japanese firms is known as the balance-sheet approach . The objective here is to ensure
that the expatriate maintains a similar standard of living (i.e., is “kept whole”) as in the home country and to ensure employee mobility by providing some financial incentives to accept the global assignment. The major components include assistance with home and host country income taxes, host country housing, goods and services (e.g., food, clothing, medical care), and a reserve for contributions to savings, benefits, pensions, and the like.
In addition, expatriates are often provided with a variety of “extras” as incentives for relocation and to make sure they are able to maintain their home country standard of living.
According to Milkovich and Newman, 61 there are three broad categories of allowances:
1. Financial Examples include company-paid children’s education allowance, home leave allowance, mobility premium, and assignment completion bonuses.
2. Social adjustment Rest and relaxation leave, language and cross-cultural training, club memberships, and assistance with locating a new home.
3. Family support Child care providers, assistance locating spousal employment, and assistance locating schools for children.
One of the most popular financial allowances, expatriate premiums, sometimes referred to as “foreign service premiums,” are adjustments made to the expatriate manager’s base salary for the inconvenience that an international assignment causes both the manager and his or her family. 62 Foreign service premiums usually vary in size according to the perceived hardship that the host culture causes. For example, foreign service premiums paid to American expa- triates at Amoco (BP) range from nothing for an assignment in Canada to 25 percent for an assignment in Thailand to a full 50 percent if the expatriate is stationed in Azerbaijan.
The actual cost of living in many foreign settings is extremely high. In 2010, the five most expensive cities in the world include Luanda (Angola), Tokyo (Japan), Ndjamena (Chad), Moscow (Russia), and Geneva (Switzerland). 63 The expatriate’s compensation will usually include a cost-of-living premium to offset these differences. These premiums might be further supplemented with a home maintenance allowance, a home furnishings allow- ance, assistance with maintaining or selling the expatriate’s home before leaving for the overseas assignment, transportation differential allowances, educational allowances, and hardship premiums in difficult or hazardous environments.
When all of the costs incurred with an expatriate are added together, a company is faced with spending as much as five times the manager’s domestic salary to maintain him or her and the family overseas for just one year. 64 To combat these costs, some firms have shifted to using more short-term assignees. 65 Interestingly, even short-term expatriate assignments can be expensive for companies as illustrated in Exhibit 4–8.
In spite of the costs, many corporations continue to rely heavily on short- and long-term expatriate managers. The importance of expatriates can be summed up by the comments of John Pepper, former chair of the board of Procter and Gamble, who believes that inter- national assignments were one of the most powerful development experiences in shaping him as an effective global leader. 66
EXHIBIT 4–8 Sample Costs*
for Short-Term Expatriates in Major Cities
Source: Reprinted by permission of The Wall Street Journal
© 2007 Dow Jones & Company, Inc. All rights Reserved Worldwide. License number 2764991401612.
City Apartment Rental for Family Meal at a Restaurant (per person)
Mumbai $6,400 per month $100
Beijing $3,500–8,000 per month $25
London $4,000 per month $80–125
Tokyo $12,000 per month $65 to 85
Moscow $10,000 per month $60
Dubai $8,000 per month $35
*Costs (approximate and in U.S. dollars) are subject to change based on British pound–U.S. dollar exchange rate.
Chapter 4 Global Human Resource Management 111
Host Country Nationals and the Global Corporation
When an organization begins to operate as a global rather than a multinational corporation, the use of expatriate managers will decrease. Part of the desire to limit the use of expatri- ates stems directly from the high cost of sending managers and their families on interna- tional assignments. Organizations are also beginning to understand, however, that managers who are host country nationals have distinct advantages over expatriates in terms of cul- tural sensitivity and understanding local employees’ motivations and needs. In order to train and develop its future Chinese managers in the areas of marketing, supply chain man- agement and engineering, Motorola has established its own corporate university in China. 67 Other companies have turned over more of the key managerial positions in their foreign operations to host country and even third country nationals. For example, companies like 3M, Intel, Merrill Lynch (Bank of America), General Electric, and Avon employ local na- tionals to head their operations in India. 68 To solve its management problem, Las Vegas–
based Bally Gaming International hired former East Germans who had lived in Russia for many years to manage its majority-owned Russian joint ventures. 69 However, some compa- nies (especially those new to international business) still have strong reservations about using HCNs. Some of the reasons most frequently mentioned for not using locals are (1) concern that the locals will not adopt the parent company’s culture and management system, (2) concern about the level of commitment to the organization that locals may have, (3) concern that HCNs may not have the expertise that expatriates have, and (4) concern about how effective communication will be between the host country and home offices.
Careful recruitment, selection, and training can reduce or eliminate many of the potential problems with using HCNs. Current estimates suggest that American corporations, for example, employ approximately 5.4 million foreign workers in overseas operations, but although many developing nations welcome foreign investments, they also want their own citizens to begin occupying more critical managerial positions in foreign-owned compa- nies. 70 Thus, it is essential for global HR professionals to understand that training for inter- national assignments is a two-sided coin—train the expatriate to be more culturally sensitive, and train the host country manager to be prepared to accept greater responsibility.
When an organization recruits HCNs, it should not assume that the same sources that it uses for domestic applicants will be effective. Its HRM policies will definitely have to be more flexible, and the organization will have to strive for a reasonable fit between these policies and cultural values. 71
Several suggestions can improve the effectiveness of HCN recruiting efforts. Overall, the best advice is for the organization to follow the example of other companies doing business in a particular country. Try to use the same methods and sources as the host country organiza- tions. 72 Specifically, a recruiting liaison can help with the details of the process. Recruitment ads should be written in ways that are consistent with local custom and jargon so there are no misunderstandings. In addition, so the company can get the best picture of an applicant’s qualifications, HCNs should be allowed to use their native language during interviews. 73
The Legal and Ethical Climate of Global HRM
When an organization decides to become an international enterprise, it will be confronted with new and potentially unique standards of legal and ethical conduct. International busi- ness is conducted in a maze of international trade agreements, parent country laws, and host country regulation of foreign enterprises. In addition, many decisions that might challenge an organization’s normal standards of ethical conduct may be encountered. For example, environmental regulation is weaker in many countries around the world than it is in the
United States. Since relaxed environmental controls can allow an organization to operate at lower cost, management philosophy about protecting the environment will inevitably have to be dealt with. Should the organization continue to meet or exceed standards used in the United States, or should it merely attempt to meet less stringent foreign standards?
Other business practices that are considered unethical or illegal in the United States might be considered part of the normal conduct of business in other countries. Gift giving is a common practice in many parts of the world. Unfortunately, in situations where there is a conflict of interest, such gift giving can be considered bribery in the United States. The Congress of the United States was so concerned with this particular issue that it passed the Foreign Corrupt Practices Act (FCPA) of 1977 .
The purpose of the FCPA was to make it illegal for employees of American corporations to induce foreign officials, by offering monetary or other payments, to use their influence to gain an unfair competitive advantage for the organization. However, it does not prohibit payments made to minor officials if the payments are intended to get the official to provide
“routine governmental actions” (e.g., processing paperwork at a customs office) in a more timely fashion. This kind of “greasing” is common in many countries, but such payments are probably not a violation of the FCPA, since they do not have a corrupt intent. At the same time, many forms of payment that are not illegal in the host country might very well be considered violations. 74
Another legal area in which many HR professionals from American corporations will find substantial differences from country to country is employment discrimination.
Although equal opportunity employment is, unfortunately, not yet a reality in all American corporations, we do have some of the more stringent antidiscrimination laws affecting HR activities such as recruitment, selection, training, and compensation. As detailed in Chapter 3, there are numerous laws designed to regulate how organizations can and should make such decisions. Many countries around the world have not, however, attempted to create this kind of enforcement.
The differences that exist can create many problems for the HR manager thrown into a new cultural and legal arena. Host country managers may not understand or accept the standards of conduct that the expatriate manager has become accustomed to. One thing is, however, very clear. The Civil Rights Act of 1991, which prohibits discrimination on the basis of sex, race, religion, color, and national origin, applies to American corporations’
overseas operations.
Doing business overseas can also create ethical dilemmas related to the potential conflict that exists between profits and the preservation of basic human rights. Perhaps the most fa- mous case where business, morality, and politics clashed was in the disengagement of most American corporations from South Africa during the era of apartheid. Today, similar ethical dilemmas occur around the globe in developing countries where child labor is abused and working conditions for adults may be abysmal. It is, in fact, a significant issue for the ma- quiladoras that were discussed earlier in the chapter. On one hand, the maquiladoras provide an attractive opportunity for otherwise impoverished people to earn a living. 75 Unfortu- nately, maquiladoras sometimes reveal widespread safety and health problems at the sites. 76 Resolving ethical dilemmas of this kind is not a simple task. Is it worse for an organiza- tion to be associated with labor abuses or to not invest at all in developing nations? To help answer some of these questions during apartheid in South Africa, the Reverend Leon Sullivan articulated six principles to promote racial equality in employment practices.
(See Exhibit 4–9.) Reverend Sullivan was the first African American to serve on General Motors’ board of directors. In that role, he was able to influence the direction of corporate America through his Sullivan Principles , as they are now known. The basic tenets of the principles were designed to eliminate oppressive racism in South African business. 77 This was perhaps the first major attempt by a large U.S. corporation to codify ethics in international business.
Chapter 4 Global Human Resource Management 113
EXHIBIT 4–9 Excerpts from Sullivan Principles
Source: http://www.
thesullivanfoundation.org.
• Support universal human rights.
• Promote equal opportunity for all employees.
• Respect employees’ voluntary freedom of association.
• Provide a safe and healthy workplace . • Compensate employees to meet basic needs.
• Promote fair competition and do not engage in bribery.
• Help improve quality of life in communities .
There’s a good chance that you recently have seen a blog or a newspaper article reporting that another U.S. com- pany is “offshoring” or “outsourcing” part of its back-office or computer operations to a vendor in an international location like India, China, or the Philippines. The trend is real. More and more firms are sending part of their operations—software development, call centers, payroll, loan and insurance claims processing, and the like—to an offshore location. Firms like General Electric, Hewlett- Packard, Oracle, and Prudential engage in offshore activi- ties. Opponents of offshoring argue that such decisions cost Americans their jobs. These critics claim that bottom- line-oriented American executives are too willing to lay off Americans in order to save some money in labor costs (since an individual working at a call center in Bangalore, India, makes considerably less than her counterpart in Cleveland, Ohio). They contend that exporting jobs will have the unintended effects of increasing unemployment and transferring wealth to workers in other countries.
Do the statistics support these claims? The data provide mixed results. On one hand, companies that provide outsourcing services in India like Infosys Technologies Ltd., Wipro Ltd., and Tata Consultancy Services have experi- enced very rapid growth within recent years. These and other companies make up part of the $3.5 billion call center and back-office industry in India. This high- growth (and high-profit) industry has led to a recent wave of acquisitions, including IBM, which agreed to pay
$150 million for Daksh eServices, the third largest call center and back-office service provider with revenues of
$60 million. In a similar move, Citigroup is increasing its ownership stake in another Indian outsourcing firm, e-Serve International Ltd. Certainly, one could argue that such trends will lead to job growth for Indian workers, most likely at a cost of American jobs.
On the other hand, proponents of free trade argue that outsourcing is an economically healthy and acceptable practice that should be allowed to flourish. These individu- als point out that such free trade practices have led to job growth and profits for U.S. organizations that provide such services as legal work, computer programming, telecom- munications, banking, engineering, management consult- ing, and other private services to the world market. In addition to the trade surplus argument, proponents of free trade point to the number of Indian companies that have set up large operations in the United States. For example, Tata Consultancy Services has established 47 worksites in the United States to serve customers that include American Express Co., Citigroup Inc., Chevron Texaco Corp., and Eli Lilly & Co. This translates to the creation of more U.S. jobs.
In sum, outsourcing/offshoring is a controversial busi- ness practice that represents one aspect of how the glo- balization of business across national borders is occurring in today’s global economy. In order to be effective, man- agers should understand how globalization impacts their domestic operations and influences the effective man- agement of their human resources around the globe.
Sources: Adapted from Mehul Srivastava (December 2010),
“Philippine Call Centers Overtake India,” Bloomberg Businessweek Online (accessed on June 26, 2011); Jeremy Smerd (2007),
“Addressing Outsourcing Impact Overseas,” Workforce Man- agement, Vol. 86, Iss. 21, pp. 7–9; Julie Forster (June 27, 2004),
“Universities Begin to Offer Courses on Offshoring,” Knight Ridder Tribune Business News , p. 1; Manjeet Kripalani and Steve Hamm (April 26, 2004), “Merger Fever Breaks Out in Bangalore,”
BusinessWeek , Iss. 3880, p. 56; Joanna Slater (April 8, 2004),
“IBM to Buy Indian Call-Center Firm,” The Wall Street Journal , p. B6; Jay Solomon and Elena Cherney (April 1, 2004),
“A Global Journal Report: Outsourcing to India Sees a Twist,”
The Wall Street Journal , p. A2; Michael M. Phillips (March 15, 2004), “More Work Is Outsourced to U.S. Than Away from It, Data Show,” The Wall Street Journal , p. A2.
HR Journal Outsourcing: Does It Create or Replace Jobs?
Labor Relations and the International Corporation
Both multinational and global corporations encounter a variety of labor relations issues that are different from purely domestic operations. There are many differences in the struc- ture of unions and the influence that they have over an organization’s operations world- wide. Coupled with these differences are labor laws that will be virtually unique to every nation in which an organization wishes to do business.
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Internationally, there are many important differences in labor–management relation- ships from those typically found in the United States. In Mexico, for example, there are many differences in the way unions negotiate over wages and working conditions, changes in working hours, treatment of new hires, and collective health and pension benefits. 78 Differences in how much participation employees are entitled to in setting HRM poli- cies are another critical area for the global human resource manager to understand. If an organization tries to impose policies and procedures on workers who are used to making HRM decisions along with management, then the imposed policies will be met with resis- tance. Thus, before establishing operations in a different country, one important task for the global HR manager is to research the local labor relations climate.
There are many important differences in employee participation under the American labor relations system and the labor relations systems in other countries. While it is beyond the scope of this chapter to outline all of these, several examples should help reinforce the need for understanding local labor relations before an organization becomes an MNC or a GC.
Employee codetermination is a legally guaranteed right in Germany. German law gives employees three different degrees of participation, depending on the issue in question.
German worker councils merely have to be informed and consulted for most economic decisions. But they are allowed to participate in decisions such as dismissals, work proce- dures, and the design of the workplace. At an even greater level of involvement, worker councils have approval rights over decisions such as working hours, training programs, and safety regulations. 79
Government regulation of business is another area where the American firm will en- counter vastly different systems around the world. For example, in Singapore, there is a National Wages Council that sets guidelines for annual wage adjustments; work stoppages are nearly impossible because of governmental controls; and legislation regulates working conditions to a great extent. 80
It should be obvious that there is no simple solution to the labor relations problems that MNCs and GCs are confronted with. Nor is there any simple solution for unions that must deal with these corporations. The response of labor has been to try to establish global After reading this chapter, David now knows how difficult it can be to become an interna- tional corporation. He also knows that there are cultural differences among nations that influence how business is conducted and what HRM practices will work. Finally, he has a real sense of just how expensive it can be to send an expatriate manager overseas and how difficult it is to prepare someone to be successful in the overseas assignment.
In their next meeting, David tells Michelle that he has reconsidered and decided that more careful study of the situation should be done before making any final management team decisions. Both agree, however, that one or two key people from Ohio should undoubtedly be assigned to the Asian operation at least long enough for a successful transi- tion to occur.
David So, whom should we send, Mike? There are several people who have the technical skills to do the job.
Michelle We need to fi nish our assessments before I can give you an answer. At least we now know what characteristics to focus on. And please don’t forget that you authorized money to establish the expatriate manager training program we talked about.
David Stop worrying—you’ve got the money. Just give me some expatriates who are prepared for the challenges ahead.