China's Impact on MNC HR Practices

Joseph Uzah 2760575 Page 1
Table of contents
Sections Pages
Executive Summary_________________________________________2
Introduction_________________________________________________3
Main Body___________________________________________________3-10
Conclusion___________________________________________________11
Bibliography________________________________________________12-13

Executive Summary
China is the most influential of all the BRIC and developing countries in the global market. It has
displayed constant growth over the last 10 years with its Gdp reaching near double digits every
year since 2007. Every since china opened up to foreign direct business investment in 1978, it
has undergone major reforms and changes in its HR policies. With approximately 1.4 billion in
population, China has replaced many countries as the single biggest consumer in world market
for most consumer goods. According to Jim O’ Neill head of global economic research at
Goldman Sachs
“China’s economy is already about one and half times the size of the other three BRIC countries put
together, creating in economic terms the equivalent of a new India every two years”.
This has placed china as top priority for most firms seeking to go international leading
companies to view it as a dream market to enter. One of the driving factors in the past for
MNCs was the view of china as a cheap source of labour. In the past multinational companies
enjoyed a high level of freedom while investing and setting up subsidiaries in china. This
however, is no longer the case as the increasing favoritism from the Chinese government
towards local companies have seen restrictions being increasing placed on MNCs operations in
china. An example of such effect of new policies towards local companies is Google. The
restrictions and heavy censorship placed on Google has seen the rise of “Baidu” as China’s
prominent search engine. The changing institutional environment has forced MNCs to adapt
and change their IHRM polices as a result MNC’s have experienced a form of coercive or a
mimetic isomorphism. Other major Factors which have had major impacts on MNCs strategies
include censorship, Guanxi, educational system, one child policy, intellectual property rights,
culture, level of government participation in businesses and Local regional laws. The impact of
all the above factors on MNCs has determined their market entry approach, training and
development, recruitment and selection. Thirty seven years since its reform policy and all the
factors mentioned, human resource practices have been significantly altered.
This case study seeks to review the following questions:
1. To what extent has the institutional environment in china played a role on market entry
strategies for MNCs? (Green field, brown field or joint venture).
2. What are the advantages, disadvantages and limitations of using expatriates versus local
workers based on each international HRM approach? (Polycentric, ethnocentric and
geocentric).
3. What would be the best approach to adopt in China?
4. To give a hypothesis of what the future holds for MNC’s international HRM practices in
china.

Introduction
In 1980 restrictions on foreign car manufactures were passed in Beijing Limiting foreign car
manufactures to a Joint venture market entry strategy and use of local suppliers. The Chinese
government stated in the national referendum that ownership would be limited to 50 percent for the
foreign companies in the joint venture. This indicated the Chinese government’s aim at maintaining
control of the industrywhile alsoensuringChinese carcompanieslearn from the foreign car companies
and improve the local car manufactures competitiveness in the local market.
This essay will be focusing on the automotive industry in the people’s republic of china. The analysis
would particularly be focusing on joint ventures between German car manufacturers and Chinese car
manufacturers. Accordingto GeertHofstede dimensionsof culture the Chinese and Germans are quite
differentwhenmatched upagainsteachof the dimensions butverysimilarin some aspects also. So the
bigquestionswouldbe howwouldthe Jointventure work?AndwhatHRMstrategyshouldbe adopted?
To answer the above questions a specific company has been chosen to illustrate the practice of each
approach. The company would be a joint venture based in Beijing called BFDA (Beijing Foton Daimler
Automotives). It is going to be a German and Chinese joint venture producing heavy duty trucks.
Main Body
Ethnocentric approach
This approach is usually the first choice most MNCs look at as it gives firms the opportunity to dictate
the level of control they have on operations in their subsidiaries. A company adopting this approach
would have a view of having close similarities in its subsidiary to its parent company (Perlimutter H,
2001). The objective in recruitment and selection would be to fill key roles in the subsidiaries with
expatriates from the MNCs home country. One of the advantages of using extricates would be the
common interests and goals of the staff and the parent company’s corporate culture. Another
advantage would be that the parent company would have a large choice of selection from existing
employees at headquarters. One disadvantage of the use of expatriates would be cost. It is also not a
cost friendly approach andwouldrequire alotof investmentbothfinancially and direct involvement in
the expatriate’s personal life. In most cases it is difficult to find an employee willing to go on an
international assignment. The approach is also time costly as the employee would have to go on pre-
trainingbefore leaving. Another disadvantage would be a temporary shortage in man power once the
expatriate leavesoninternational assignment. Other disadvantages faced include culture shock which
may affectperformance andlead to premature return. A major disadvantage also would be the loss of
insights and local perspective/ knowledge. By adopting this approach the MNC risks the chance of the

expatriate creating an atmosphere of local resentment at the foreign subsidiary. This would be as a
result of local talent being passed over for positions being filled by the expatriate resulting in staff
retention issues.
The use of this approach as a HRMentry strategy into china has to be carefully analyzed before being
adopted. The firstmajor factor to consider in BFDA is the difference between the German culture and
Chinese culture and further more it is a joint venture with a 50/50 percent ownership. What this
insinuatesisthatthe expatriate’srole wouldbe limitedintermsof decisionmaking asthere wouldhave
to be jointdecisionsmade atseniorlevel .Traditionallywithan ethnocentric strategy the MNCs usually
wouldinfluence more of the decisions made however, with recent involvement by the government in
the automotive industries the level of influence multinational companies have is decreasing. The
expatriate in this situation would be faced with many challenges such as language barriers. Limited
knowledge of local laws and suppliers and also limited “Guanxi”.
The ethnocentric approach in china could be successful in the initial stages of the joint venture due to
transference of knowledge and technology from the MNC into the subsidiary. At this stage the MNC
would have more bargaining power and influence in the joint venture by possessing the technology
neededornecessaryknowhowoverthe Chinesepartners. The approach mightbe more suitable as the
MNC would have more of a say in management of the subsidiary depending on the Chinese partner’s
willingnesstotake a back seatdue to the gap in knowledge or skill level. This stage would also require
the use of expatriatesfortraininganddevelopmentpurposes.The expatriatewould be deployed to get
the local staff skill level up in the subsidiary to the point where a more localized approach could be
adopted. The onlycriticism at this stage however, is that it is only taking into account the set up of the
manufacturing and operating processes. The limitation however, is that other departments such as
publicrelationsandevents wouldbe difficultforthe expatriatetomanage as theyrequire ahigh degree
of cultural awareness.Inchinathe businessetiquetteiscompletelydifferent from the west. One of the
majordifferences ascan be seeninfigure 1.1 below isthe informal settings for meetings. Most deals in
chinaare handledusuallyin aninformal settingparticularlyoverdinner or lunch where social protocols
rather than the actual contents of a contract determine deals/contracts. An expatriate use’s or
capabilities in this setting would be extremely limited and an increased chance of failure could be
experienced.
Figure 1.1 Business etiquette differences
Factors German Business Etiquette Chinese Business Etiquette
IDV Personal Autonomy Group preservation of harmony
Time Management Be on time and end on time Be on time but meeting can go past schedule
Analogue Straight to the point Start with small talk
Hand shakes Firm grip Light grip
Sitting Position Not important Hierarchical
Addressing people By name By title

Figure 1.1 is justa snap shotof an argumentagainstthe adoptionof this approach. It calls into question
the effectiveness of using an expatriate in a completely different environment which social protocols
and interactions are dimedtobe veryimportant.Itwould alsocall intoquestionthe re-evaluationof the
employee’s performance criteria. The final thing to be called into question is the choice of not using a
hostcountry national.The ideabehindthiswouldbe that the individual would be working in a familiar
environment and culture. Where social protocols determine success of a project the Host country
national would have a higher chance of success than the expatriate.
Polycentric approach
The polycentric approach is adopted by an MNC when its knowledge or influence of its subsidiary’s
countryis limited. The approachisquite differenttothe ethnocentric approach in the sense that rather
than seeking more control over the subsidiary there is more of a mutual trust and agreement. The
approach is likely to adopt a localized HRM practice. It would also have a tendency to affect the
recruitmentandselection stage.The MNCis likelytorecruitmore hostcountrynationalsthan the use of
expatriatesintopmanagement positions.Forthe approachto be successful itwouldrequireahighlevel
of trust from the MNC in its subsidiary ability to plan its operations, hire its staff and set its own goals
and targets.
One of the major advantages of this approach is that it takes into account local staff member’s
abilities/skills in the subsidiary. In this approach local staff members in the subsidiary are given the
opportunity to guide the company on local market politics, culture and laws. Local labour would also
cost less than the use of an expatriate as the company would save on relocation costs and incentives
used to encourage expatriates to go on international assignments. This approach however, is more
successfully in subsidiaries with access to highly skilled labour. One of the disadvantages is that the
employee’s values and interest may not be in line with their parent company. The other disadvantage
would be the difficulty in implementing any standardized company policy or practice from the parent
company in its subsidiary.
The polycentricapproachinthe jointventure inchinawouldbe more advised atthe market entry phase
and growthphase also.The reasonfor thissuggestionisthatthere isa need for more engagement with
the customersand local governmentofficials. Due tothe institutionalenvironment the adoption of this
strategy would be more coercive in nature. The 50/50 ownership rule imposed by the Chinese
government is a strong diving force towards the polycentric approach. MNCs entering the automotive
industry should be particularly aware of the favorable government policies towards local Chinese car
manufacturesandpoliciesaimedatreducingthe dominance of foreign car manufacturers. Most MNC’s
affectedbythe institutional environmentinchinawouldundergoacoercive isomorphism and gradually
by the adoptionof a localized approachexperience amimeticisomorphismphase (DiMaggioandPowell
1983). If BFDA were to experience these typesisomorphismthen its key to success would lie in its Host
national employees and extensive knowledge of the Chinese market.

The expatriate’simpactinthissituationwouldbe extremelydiminished orlimited and there would be a
threatof pre-mature repatriation. Figure 1.2 shows the comparison between china and Germany using
Geert Hofstead’s cultural model.
Figure 1.2 Geert Hofstead’s cultural Dimensions
As itcan be seenthere are several differences however, both cultures are very similar in terms of long
termplanningwhichwouldsee bothculturesputtingtheirdifferencesaside andhavingaview sustained
growth for the future.

Geocentric Approach
A geocentric approach could be seen as a more attractive approach than the ethnocentric and
polycentric approach. The approach seeks to recruit the best people for key jobs throughout the
organization, regardless of nationality. The adoption of this staffing practice however could lead to
problemssuchas increasedemploymentquotas placedonorganizations by the government and use of
their immigration laws to require the employment of local nationals.
The approach would also be difficult to implement because of increased training, compensation and
relocation costs. The approach would require a more centralized control from the parent company on
staffingprocesspossiblyresultinginreducedautonomyof subsidiarymanagement.The approach is also
the most costly of all three approaches and has two major advantages.
The first advantage is that it enables a multinational firm to develop a pool of senior international
managers and the second advantage is that it reduces the tendency of national identification of
managerswithsubsidiaries of the organization.The approachthusencouragesthe “best fit HR practice”
by miles and snow allowing the MNC to adapt and align its IHRM goals with the organization’s
competitive strategy more effectively. The major criticism against this approach is that firms often
confuse the terms international and global strategies together. In an attempt to have a global appeal
MNCs might hire third country nationals but might not necessarily integrate them into the decision
making process (Perception versus actuality).
Thisapproach if adoptedinchinabasedon the analysisabove wouldbe counterproductive especially in
the automotive industry.The imposed50/50percentownership of the jointventurecouldleadtoissues
when a third country national is introduced.
Basedon figure 1.2 above it can be seenthat both China and Germany although culturally different do
share some cultural similarities which could help in building a sustained relationship however, the
additionof a thirdcountry national for example Saudi Arabia in figure 1.3 below would have a notable
impacton the culture of the organization. This could also lead to cases of cultural insensitivity, culture
shock and cultural clashes resulting in a breakdown in communication. Another point against this
approach in the automotive industry in china is that it would be difficult to implement based existing
corporate culturesalreadyinplace.A thirdcountrynational inthissituationwouldhave ahigher chance
of failure ashe/she wouldhave tobe familiarwith both the German and Chinese cultures. Most MNC’s
have sort to fix this problem by setting up divisions which consist of an international cadre of talent
awaiting deployment on demand to international assignments. The only issue is this can be seen as
companies creating “corporate mercenaries” whose cultures are similar to the parent company’s
country with the sole purpose of dispatching the organizations plans and strategy.

Figure 1.3 China versus Germany versus Saudi Arabia
Best Approachfor Jointventures in the automotiveindustry
To decide the bestapproachto adoptin the automotive industry the followingfactorswere looked at in
this essay and will have the most impact in the case of BFDA:
1. Changing institutional environment-50/50 joint venture rule and use of local suppliers
2. Cultural differences- Germany versus China
3. Skill level in the host country-technology and manufacturing process
4. Interaction with the community-customers , suppliers and local government officials
Based on all 4 points the best approach would not be only one approach but rather a combination of
two( The Ethnocentricandpolycentricmix).The initial entry into china based on a joint venture would
be ethnocentric as the expatriate role in management would be more important in setting up the
business, traininganddevelopmentof local staff membersandensuringstandardsagreedbythe parent
companiesare attainable andachieved. Figure 2.1showsthe breakdownof the strategiesbased on key
activities performed by the expatriate and home country national in the market entry stage.

Figure 2.1
In the initial stage alocalizedapproachwouldalsobe adoptedandthe appointmentof aHome country
national wouldbecome necessary.Thiswouldbe due the limitedabilitiesandcultural differences
betweenthe expatriate andlimitsof his/herabilitytodeal withthe public(PR),customersandlocal
governmentofficials. Figure 2.2belowshowsthe eventual progression of the EPmix basedona more
localizedapproachtomanagement.
Figure 2.2
Entry Phase
(EP mix percentage)
Etchnocentric
Polcentric
Growth Phase
(EP mix Percentage)
Ecthnocentric
Polycentric
Expatriate’s use 70 %
Manufacturing processes
Strategic Planning
Training and development
Transfer of skills and knowledge
Home Country National’s use 30%
Dealing with the community
Handling and ensuring laws and
regulations are adhered to in the
joint venture.
Expatriate’s use 40%
Transferring of knowledge
Home Country National’s use 60%
Cost cutting measures.
Analysis of market and competitors
Interaction with local government
officials and community
After sales service
Motivation of staff

Conclusion
This essay has focused on the automotive industry and investigated by applying each approach to the
joint venture to establish the effect of each choice on the use of expatriates versus the use of home
country nations.
By establishingthe effectsof eachapproacha trendcan be seenasto the future of international human
resource management practices based on the institutional environment (government intervention),
culture,andskill level anduse of expatriatesoralocalizedapproach.Aneducated hypothesis could see
the future of IHRMin 3 ways:
 Using figure 2.1 and 2.2 the future approach in the automotive industry would be more
polycentric in nature and the use of cross border and virtual teams would become more
consistent.
 The importance of the expatriate in the automotive industry in china would become less
important once the Chinese car manufactures catch up to their western counterparts.
 MNCs would eventually based on point 2 experience a more mimetic isomorphism
Above all successinthe industrywill be basedonhow well the IHRMstrategies are integrated with the
organization’s chosen corporate strategy (Innovation, cost reduction or quality enhancement) in the
joint venture? (Randall S. Schuler 1987).

Bibliography
Books
1. Torrington, Hall & Taylor (2002) Strategic Human Resource Management (7th
edition),
Essex: Pearson Education Limited.
2. Dreher, G. & Dougherty, T. (2001) Human Resource Strategy: A Behavioral Perspective,
New York: McGraw-Hill Higher Education.
Journals
1. Zhang M., (2003) ‘Transferring human resource management across national
boundaries, emerald, volume (25) page 614.
2. Bjorkman I, Smale A, Sumelius J, Suutari V and Lu Y, ‘Changes in institutional
environment and MNC operations in China Subsidiaries practice in 1996 versus
2006’.,Elsevier review 17 pp. 146-158.
3. Barney J, ‘Firm resources and sustained competitive advantage’ , Texas A & M vol 17
no 1 pp 99-120
4. Perlmutter, H, ‘The tortuous evolution of the Multinational Corporation’ Columbia journal
copyright 2001.
5. Schuler S, Jackson S, ‘Linking competitive strategies with human resource
management practices’ the academy vol 1 pp.207-219.
6. Schneider C, ‘national vs., corporate culture implications on management’ John Wiley &
sonsinc.vol 27, pp 231-246.
Internet
1. O ‘Neil J,‘winnersandlosersinthe global economyof 2025’ available at:
http://europesworld.org/2014/10/09/winners-and-losers-in-the-global-economy-of-
2025/#.VR7gcHzF-kF
(Accessedmar23rd
2015)
2. Hofstede G.‘The Hofstede’scenterstrategy –culture-change’available at:
http://geert-hofstede.com/china.html
(Accessed Mar25th
2015)
3. ShenJ,Edwards V, ‘internationalhuman resourcemanagementin Chinesemultinationals’
available at:
https://books.google.ie/books?id=Prp_AgAAQBAJ&pg=PA55&lpg=PA55&dq=why+would+compa
nies+adopt+an+polycentric+approach+in+china&source=bl&ots=cZo7SxxaJm&sig=vuTw_aMqPd
Kf9NOWUNbxSd9uxPU&hl=en&sa=X&ei=SyYcVe7aKaKK7Qbk8oG4BQ&ved=0CC0Q6AEwAg#v=o
nepage&q&f=false
(Accessedmar26th
2015)

4. Study.comglobal staffingapproachesavailable at:
http://study.com/academy/lesson/global-staffing-approaches-ethnocentric-regiocentric-
polycentric-and-geocentric.html
(Accessed27th
mar 2015)
5. Facts and details- foreigncarcompaniesinchinaavailableat:
http://factsanddetails.com/china/cat9/sub61/item360.html
(Accessedmar30th
2015)
6. Hansel Janise M,‘ Institutional elements’availableat:
https://books.google.ie/books?id=tUkxUMFicLMC&pg=PA28&dq=coercive+isomorphism&hl=en
&sa=X&ei=l1EcVcfpI4Kt7Abw74C4CQ&ved=0CD4Q6AEwBA#v=onepage&q=coercive%20isomorp
hism&f=false
(Accessedapr2nd
2015)
7. Grin – the prosand cons of international staffingavailable at:
http://www.grin.com/en/e-book/13039/the-pros-and-cons-of-international-staffing-policies
(Accessedapr3rd
2015)
Video
1. Human resource inthe people’srepublicof Chinaavailable at:
https://www.youtube.com/watch?v=DkuXrgB5sgAA
(Accessed mar1st
2015)

China's Impact on MNC HR Practices

Recommended

Recommended

More Related Content

Viewers also liked

Viewers also liked (6)

Similar to China's Impact on MNC HR Practices

Similar to China's Impact on MNC HR Practices (20)

China's Impact on MNC HR Practices