Von Glinow and Nathan, 1991)
Multinational Companies
The growth of multinational companies is one of the driving forces of the process of internationalization.
(Edwards and Rees , 2006). Multinational companies (MNCs) are key protagonist in the
internationalization of economic activity. (Tony Edwards, 1998). They are the primary shapers of the
contemporary global economy ( Dickens, 2003:198). MNC is a company engaged in producing and selling
goods or services in more than one country. (Shapiro, 2006). Economists define multinational enterprise any
company, which owns, controls and manages income generating assets in more than one country. It also
engaged in foreign direct investment (FDI), they own or control value-adding activities in more than one
country (Dunning, 1992). MNCs consists of parent company located in the home country and at least five
or six foreign subsidiaries.
International production, undertaken by multinational enterprises (MNC’s), is the productive core of the
globalizing world economy. According to FDi magazine (2009), FDI inflows grew from just $58m in 1982
to nearly $1000bn in 2005 and to more than $1400bn in 2008. The global stock of FDI is in excess of
$15,000bn. There are more than 80,000 MNCs globally, with ownership stakes in more than 800,000
foreign affiliates employing more than 82 million people. MNCs have sales of more than $30,000bn,
exports of more than $6000bn and account for about half of the world’s total R&D expenditure and more
than two-thirds of the world’s business R&D. The countries where MNCs are growing are the United
States , Japan, Western Europe and East Asian countries. These countries are at the core of the world
economy. (Shapiro, 2006). MNCs dominate many industrial sectors, such as automotive, electronics and oil,
while they are increasingly coming to dominate parts of the service sector as well, especially Finance and
telecommunications. (Tony Edwards, 1998: 45).
Some sectors are expected to be resilient or decline due to the global recession and financial crisis. Food
and beverages generally fairly resilient during harsher economic times as demand for food is ongoing
5
Professional services and headquarters are growing strongly, with market-seeking investment to exploit the
growing markets in developing countries. In terms of the declining sectors, most of these are linked to major
declines in global demand for consumer goods and related sub-supply. Communications is typically resilient
in times of recession, but given the depth of the downturn, communications companies are expected to cut
back on their global investments. The major sector affected in the recession is the Financial sector.
The global recession is hastening the shift of focus to developing countries as they remain the only source of
growth in the world economy. At the same time that these countries have become key destinations for FDI,
their companies are rapidly internationalising and becoming multinational enterprises.
U.S is prominently been seen as one of the countries that have on of the most admired corporations, in
addition to that most of this firms are largely multinational in philosophy and operations.(Shapiro, 2006).
According to Shapiro, (2006) Overseas investment by U.S firms U.S investment by foreign firms are in the
hundreds of billions each year. The stock of foreign direct investment by U.S companies reached $2.07
trillion in 2003 while direct investment by foreign companies in the united states exceeded $1.55 trillion that
year.
The influence of MNCs is also present in the UK, this is in part due to the prevalence of Foreign MNCs in
Britain where the stock of inward foreign direct investment (FDI) as a proportion of GDP is greater than in
any other large western economy (Dunning, 1993 cited in Edwards, 1998). Employment in foreign owed
firms in UK has risen steadily, especially in manufacturing since the 1970’s and in service in the last decade.
(Marginson, 1994 cited in Edward's 1998).
6
Reasons for Investing Abroad, Becoming MNC’s.
Barlett and Ghoshal (1989) identify three leverage points that can be gained through different types of
internationalization. These are efficiency resulting from performing specific activities at the right scale in the
rights place, market access or customer responsiveness that often requires localization of some production
or service dimensions and learning/knowledge leverage. A key element of their argument is that different
organization forms are particularly well adapted to one or another of these dimensions of performance, but
that addressing all three is extremely difficult. The traditional European multinational, they argue, was
extremely good at responding to varying needs, while the Japanese firm of the 1980s did extremely well in
terms of efficiency.
One motivation for firms to internationalize is the desire to secure a stable source of raw material.(Tony
Edwards, 1998: 45). Most firms want to take direct control over the production of raw materials in order to
absorb profit margins. Not just raw materials firms want to have access to,firms want to have access to
cheap labour.
Hollinshead et al , (1999), recognized Gherman and Allen (1984) and Barrrell and Pain (1997), reasons
why companies decide to establish their own manufacturing or extraction units in foreign countries:
1.Local governments prefer to have the MNC’s invest in their counties rather than export to them. Their are
benefit in terms of local employment and an outflow of foreign currency can be avoided, resulting in a
better trade balance for the host country.
2. Within MNC’s local managements prefer the parent company to set up a manufacturing plant in the host
country because this makes the subsidiary more important within the group and at the same time facilitate
relations with the host country.
3.The role played by knowledge-based firm specific assets. This term refers to assets such as managerial or
marketing skills or reputation and process or product innovations that are firm specific and may be panted.
Dunning (1993), examine different kinds of foreign production MNCs companies undertake. The resource
seekers are prompted to invest abroad to acquire particular and specific resources at a lower real cost than
could be obtained in their home country. There are three main types of resource seekers. First are those
seeking physical resources. The second group of resource seeking MNCs are those seeking cheap unskilled
or semi-skilled labour. The third type of resource seeking is the need of firms to acquire technological
capability, management or marketing expertise and organizational skills.
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Strategies Choices by MNCs
Firstly what is strategy ? Many authors have different interpretations, Johnson and Scholes (1999), define
Strategy as the direction and scope of an orgnaisation over the long term : which achieves advantage for the
organizations through its configuration of resources within s changing environment, to meet the needs and
to fulfill stakeholder expectations. The two authors explain strategies exit at a number of levels in an
organization. The corporate strategy which is concerned with the overall purpose and scope of the
organization to meet expectations of owners or major stakeholder and add value to different parts of the
enterprise. Corporate strategy aims to establish sustainable competitive advantage that includes superiority
regarding cost position and product/service quality and ability regarding meeting customers demand. Tatli
A, (2005).
Business Unit strategy is about how to compete successfully in a particular market. The third level of of
strategy is at the operating end of the organizations, there are operational strategies which are concerned
with how the component parts of the organization in terms of resource, processes, people and their skills
effectively deliver the corporate and business level strategic direction. This is important to MNC’s and
should be integrated with operational decisions and strategy. The two authors define strategy in perspective
of business and management.
With the conceptual shift from personnel management to human resource management, the strategic
approach has become prominent.Tatli A, (2005). Human resource strategy basically concerns how human
resources may be utilized in order to achieve the objectives of a firm. The link between corporate strategy
and management of human resource has started to be considered Tatli A, (2005).
Foot and Hook (1996) argue that in contrast to the tactical and rather short-term focus of PM, HRM is
strategic and long term. Armstrong (1992: 47) argues that strategic orientation is a vital ingredient in human
resource management. It provides the framework within which coherent approach can be developed to the
creation and installation of HRM policies, systems and practices.
Human resources is one of the strategic dimensions in the portfolio of a firm and needs to be allocated
effectively for fostering success and competitive advantage. Tatli A, (2005)
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Storey (1989) identifies four features of HRM which distinguish it from traditional personnel management:
- it is explicitly linked with corporate strategy;
- it seeks to obtain the commitment of employees rather than their compliance;
- employee commitment is obtained through an integrated approach to human resource policies (for
example, reward, appraisal, selection, training); and
- unlike personnel management, which is primarily the domain of specialists, HRM is owned by line
managers as a means of fostering integration.
As Boxall and Purcell (2008), defined strategy making a distinction between the strategic problems firms
face in their environment and the strategies they adopt to cope with them. This definition is more rooted
with human resource management, In their view they see firms will face problems in markets and
regulations form the state and also they have to have approaches to deal with the strategic problems they
face.
Firm’s strategy, as defined by Boxall and Purcell (2008 : 42), are set of strategic choices that includes critical
choices about ends and means. Johnson and Scholes (1991 : 20), explained strategic choices as
understanding the underlying bases guiding the future strategy, generating strategic options for evaluation
and selecting from. Firms need an effective configuration of choices involving all key dimensions of
business to be successful. A key issue with the strategic choice perspective is the extent of choice available
to firms.
Choices about competitive strategy; market to enter , financial strategy; how to fund the business over time,
operational strategy ;what supplies, technology and methods to use to producing the goods and services, and
human resource management; how to recruit, organize and motivate people have to be effectively
configured for business success. (Boxall and Purcell 2003:5).
9
In defining strategic international personnel and development , (Taylor et al., 1996;960) identify strategic
international HRM used to explicitly link IHRM with the strategic management process of the organization
and emphasize coordination congruence among the various human resource management. In addition,
strategic international HRM concern creating and implementing HR practices that help achieve an MNE’s
international vision and objectives, that is, its international strategy (Briscoe and schuler, 2004 :38).
For firms to manage strategic issue internationally involves competition in industries that extend across
national boundaries among firms with different national home bases, and that firms that operate across
boundaries and may tap into strategic resources in more than one location. (Lessard, 2003).
Approaches
Barlett and Ghosal (1989) categorized MNC’s into four main types, each type being determined by how far
it had developed over time. Hollinshead et al , (1999 : 102 -103)
- Multinational firm : they tend to build a strong presence in each countries in which they invest and
therefore toward being decentralized, with local autonomy and little strategic direction from the
headquarters.
-Global firm: these companies have a more centralized and global approach to markets and in such firms the
HQ would adopt a strong role in determining policy for each subsidiaries.
-International firm: this form of MNC has a more federal structure; the center coordinates rather than
imposes or instructs. Firms use a vast array of alternatives to internationalize their operations. Some are
better fitted than others to serve the objectives of the international ventures of the firms.
-Transnational firm: it exhibit more flexible structures and traditional hierarchy, responsibility is devoted to
lower levels and national teams, knowledge is shared and coordination is achieved through the sharing of
values, corporations and teamwork.
10
Managerial Orientation
Of the world’s estimate, 120 million are recent international migrants a quarter are thought to be legally
admitted workers, another quarter illegally resident aliens, one quarter spouses and children and the
remainder refugees and asylum seekers (widgren, 1987 : cited in Castles and miller 1999). The UK is home
to around 430,000 illegal immigrants, and possibly up to 570,000, according to government estimate.
Today, global corporations are transforming themselves into transnational or multinational firms moving
work to the places with the talent to handle the job and the time to do it at the right cost. The threat of a U.S.
recession only makes such efforts at lowering expenses and grabbing the best talent even more urgent.
Moving people across borders and ensuring that workers' visas and permits are compliant with local
immigration rules are also vital to the tasks of globalization.
Management strategies in multinational companies will vary greatly. The processes, practices, systems and
structures developed to implement those strategies will likewise vary. (Caligiuri and Stroh: 1995).
Caligiuri and Stroh: 1995 identify Heenan and Perlmutter (1979) MNCs' management strategies In Heenan
and Perlmutter's (1979) language, four such management strategies are: ethnocentric, polycentric,
regiocentric and geocentric. In general, these correspond to the Transnational , International and
Multinational and Global.
- Ethnocentric: Staffing subsidiaries with expatriates in key management positions will centralize the parent-
company control in decision making more than when subsidiaries are managed by host-country nationals
(Egelhoff,1988; Kobrin, 1989). This ethnocentric management practice is common in start up ventures and
when rare technical skills are needed which cannot be found in the local labour force ('lung and Punnett,
1993). IHRM is responsible for finding suitable expatriates who will be successful abroad. . Financial (i.e. .
expatriates are quite expensive) and legal limitations i.e, foreign employment laws) often interfere with
companies operating from this strategy. Ethnocentric multinational corporations expect their expatriate
managers to transfer headquarters' cultures and philosophy by working with host nationals (Edstrom and
Galbraith 1977: Eglelhoff, 1988; Torbiorn, 1985).
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- Polycentric or Regiocentric: In a polycentric MNC host nationals manage subsidiaries with some
coordination from headquarters on how the subsidiary should operate. For these organizations, host-national
employees manage the foreign subsidiaries, and expatriates are rarely used. Host nationals have no language
and culture barriers, and are less costly than expatriates. However, parent-company employees are unable to
gain the valuable global perspective from working abroad. Likewise, host nationals are not socialized to the
parent companies' organizational culture through either contact with host nationals or transfers into the
parent country. Host nationals are able to develop as managers in their own country, but their own careers
will be limited because they are never able to reach the corporate level. In polycentric organizations, there is
little concern for a common corporate culture (Heenan and Perlmutter, 1979).
A management strategy similar to polycentric is regiocentric. From this perspective, host-country nationals
and third-country nationals are recruited selected and developed on a regional basis. Regions are consistent
with some natural boundary, such as the European Economic Community or the Middle East. In
regiocentric MNCs, the communication and integration systems must be highly sophisticated for
headquarters to maintain control over the regions. As in the polycentric perspective, the likelihood of host
nationals' career advancement is greatest within the region, but still may be limited in headquarters. As in
the polycentric perspective too, however, the host nationals are given the opportunity to manage their own
subsidiaries.
- Geocentric MNCs adopt this strategies when they desire an integration of all of their foreign subsidiaries
and the melding of a worldwide corporate culture (Heenan and Perlmutter, 1979). MNCs adopting this
strategy will staff positions worldwide such that the best people are recruited for positions, regardless of
nationality (Heenan and Perlmutter, 1979; Kobrin, 1988). Since headquarters and the foreign subsidiaries of
any geo- centric MNC will view themselves as integrated parts of a global organization, the corporate
culture will be highly unified - but not necessarily dictated by headquarters. The geocentric organization has
the most complex organizational structure, requiring the greatest amount of communication and integration
across national boundaries (Edstrom and Galbraith, 1977). This strategy 'permits the greatest amount of
local discretion and the greatest amount of decentralization while maintaining overall integration' (Edstrom
and Galbraith. 1977: 251). MNCs adopt strategic socialization processes so that their employees will have
increased knowledge of the MNCs' entire networks, and not just the networks within their own countries'
subsidiaries Bird and Mukada. 1989).
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Caligiuri and Stroh: 1995, have noted the above literature review to provides a framework for examining
the construct validation of Heenan and Perlmutter's work on international management strategies, and also
make known of the fact that expatriate are immigrants and this strategical approach for multinational
companies would be suitable for some practices and not fit with others.
Strategic international HRM and overall economic Success (Caligiuri and Stroh: 1995)
From a human resources perspective, the case of ethnocentric, the expatriates are expensive, and in the
current economic climate it might be expensive for MNCs to adopt that strategy. Geocentric MNCs have an
increased talent pool front which to draw, given that they will recruit and select the best from their
worldwide talent to fill key positions (that is, within legal restrictions). This approach to human resources is
more strategic, and will give these geocentric MNCs a competitive advantage. In addition, these employees
will gain global perspectives and international skills which will further strengthen the MNC's competitive
edge (Edstrom and Galbraith, 1977; Kobrin, 1988; Tung and Miller, 1990).
Geocentric. regiocentric and polycentric MNCS will show more profitability and growth in their respective
industries than MNCs who manage from an ethnocentric perspectives Despite the many benefit, of
managing from a geocentric strategic perspective, companies may have legal, political or cultural
constraints, given the foreign context, which may prevent them from operating geocentrically (Tung and
Punnett, 1993). It is the responsibility of international human resources groups to develop practices which
are consistent with the legal, political and cultural restrictions of the host countries. Involving human
resources during both the formulation and the implementation of the strategic plan will enable IHRM to
provide recommendations for operating effectively in a global context.
In conclusion strategy is a set of strategic choice. Dyer (1984) a firms patterns of strategic choices in labour
management as its too human resource strategy. Adopting a strategic choice perspective means that we see
the firms as experiencing a varying blend of constraint and choice between the two extremes. There are
always strategic choices associated with labour management and these choices are inevitably connected to
firms performance. Management strategies of MNCs, Geocentric. regiocentric and polycentric are more
better strategy approach for MNCs.
13
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