Country Of Origin Effects On Subsidiaries Management And Human Resources Practices

How can the country of origin of a multinational corporation impact on management practice in their foreign subsidiaries and what other factors may impact on the implementation of HRM and IR practices in MNC subsidiaries?

Regarding the country of origin (COO) effect, I have focused on the strong impact that multinational corporations have on management practices in their foreign subsidiaries, through their ethnocentric or national systems strategy. According to Van Tulder (1995; cited by Harzing and Noorderhaven) "even the most global MNC's in many respects still appear to be strongly rooted in their country of origin". The ethnocentric approach by MNCs is an example of "cross national isomorphism" (Ferner, 1997), which occurs when MNCs successfully transfer COO management practices into host country operations. Despite the impact of the globalization process, which increases the connectivity and interdependence of the world\\\\\\\\\\\\\\\'s markets and businesses ( Scholte, 2000), the ethnocentric strategy is still used nowadays by MNCs.

Another detactable COO effect is the use of expatriates by the parent company. The continued hiring of home country nationals for key management positions aids in preserving the COO effect. According to Ferner (1997; cited by Harzing and Niels, 2003) the management preferences of the home country nationals will become embedded in organizational cultures, procedures and processes in their foreign subsidiaries.

The standardization of management policies is another COO effect. According to Kopp (1994; cited by Ferner, 1997) American MNCs can measure and reward manager's perfomance in their foreign subsidiaries.

Other than COO effect there are other factors which may impact the implementation of human resource management (HRM) and industrial relations (IR) practices in MNC subsidiaries. My focus was on local institutional pressures, cultural distance, trade unions and geographical distance.

Concerning local institutional pressures, according to Rosenzweig and Nohria (1994; cited by Ferner, 1997) HRM and IR issues are to transmit local isomorphism, in order to resemble the practices of the local environment

.

Regarding cultural distance is what Dulfer (1990) calls 'Degree of strangeness', and the greater the cultural distance between the home country and the host,the harder it will be for the MNC to transfer home country practices.

About trade unions, Rosenweig and Nohria (1994; cited by Myloni et al, 2004) argue that if a union represents subsidiary employees, subsidiary HRM and IR practices may be close to those of local firms.

Concerning geographical distance, according to Harzing and Noorderhaven (2005) the geographical isolation of nations such as Australia/New Zealand creates constrains in the tranfer of knowledge,impeding the transfer of HRM and IR knowledge in MNC subisdiaries. In addition, i have also included language standardization and

subsidiary characteristics.

Ethnocentric Strategy

An ethnocentric strategy is what Whitley (1992; cited by Ferner,1997) calls a 'national business system'.The COO effect attempts to illustrate how the headquarters (HQ) of a multinational corporation may influence the overall management practices of their foreign subsidiaries. First of all, a MNC is an enterprise that manages production establishments or delivers services in at least two countries (Dowling and Welch, 2004).

The ethnocentric approach by MNCs is based on the concept that approaches to management can be extended from the COO to foreign subsidiaries. Through the ethnocentric apoproach the MNC parent company may gain direct control over the management practices of its foreign subsidiary. This is reflected in centralization of managerial authority. As described by Hollinshead and Leat (1995) the creation of management knowledge is done in the COO and is transferred

to MNC subsidiaries.

The management board of most MNCs is made up of nationals of the home country. To imagine to what extend this is true,according to Ruigrok and van Tuilder (1995; cited by Ferner,1997) only "Five of the largest 30 US MNCs had a foreigner on their board". In this way,the culture ,managerial traditions and education and training of managers in the country of origin impact management practices in their foreign subsidiaries.

According to Buckley and Cason (1985; cited by Ferner and Edwards 2002) "The multinational is an effective mechanism for transferring knowledege across borders". In other words, managerial goals and organizational structures are being transferred across borders by MNCs to their foreign subsidiaries. MNCs will seek to utilize their home country management practices in their foreign subsidiaries. HQ may set policies on

" Wage system, collective bargaining, union recognition and training policies" (Bartlett

and Ghosal, 1989; cited by Ferner, 1997)

According to Taylor (1996; cited by Liu 2004) MNCs that adopt an "Exportive orientation seek to transfer HRM practices that are seen as successful in the parent company to its subsidiaries" . For instance, if Sony, a Japanese MNC transfers all its business processes to its British subsidiary, it's an example of the impact of Japan's national business system.

In an ethnocentric strategy according to Yuen and Kee (1993; cited by Ferner and Edwards, 2002 ) there is a "Strong central control ". Centralization is frequently used by American multinationals in their foreign subsidiaries. The implication of strong central influence is a detectable COO effect in American MNCs. In general "Strategic decisions tend to be made in the home nation " (Ruigrok and van Tulder 1995; cited by Ferner 1997). In other words, MNCs strategic management decision making is largely centralised at Headquarters ( HQ ) and HQ managers strive to ensure that subsidiaries follow the parent company management practices. If this is not the case, then HQ managers can pursue disciplinary action against subsidiary managers to end such behaviour, directly influencing subsidiaries management style.

Furthermore,the Ethnocentric approach by MNCs is an example of "Cross national isomorphism"(Ferner,1997).Cross national isomorphism occurs when MNCs successfully transfer country of origin management practices into host country operations. For example, French and German MNCs are likely to adopt cross-national policies that are isomorphic