Human Resource Strategies in Multinational Corporations in China

Human Resource Strategies in Multinational Corporations in China
YU Jian Nian, LIU Dan
Economics and Management School of Wuhan UniversityWuhan University, P.R. China, 2007
Industrial & Commercial CollegeWuhan Polytechnic University, P.R. China, 2007
Abstract: Today a multinational corporations' success largely depends on the human resource strategies
that will help companies face the challenges of business globalization. There also emerge some new
strategies on human resource management in the multinational corporations (MNCs) in China. This
article systematically depicts important changes and then explores three potential reasons behind them.
It points out that interaction between external environment and internal demands have caused these new
strategies.
Key Words: Human resource management, Strategy, Multinational corporations in China
1. Introduction
Since China becomes a magnet for foreign direct investment (FDI), more and more multinational
corporations have established branches in China. They have realized that successes in Chinese market
call for a focus on human resource management (HRM). However, previous researches on international
HRM have widely accepted both issues of psychological adjustment (Jan Selmer, 2004), cross-cultural
conflicts based on cultural dimension theory (G.Hofsted, 1973,2001;Hall,1966; Kluckhohn,1961) or
cultural adjustment theory (Black S , Mendenhall M, Oddou G, 1991), and as well communications
(Tung,1981; Child,1994; Warner, 1995;Goodall and Warner, 1997; Jan Selmer 2001, Hutching, 2003),
while very few studies have touched on the strategies of international human resource management in
MNCs in China, and discussions of human management strategies in organizational level, including the
very important strategies of staffing expatriate, recruitment and training local employee are
unsystematically. Furthermore, very little effort has been made to describe the innovations of employee
management in China during recent years and conclude the reasons for these shifts. According to the
data from the recent years’ reports and researches about management, this article tries to depict two
strategies of international human resource management: localizations and expatriate management
strategies in MNCs in China and potential reasons for these are explored in the final section.
2. Localization Strategies
Recent years, many MNCs in China have found that human resource management with higher
degree of localization tends to have higher profits. Thus, localization appears to be a logical and
effective human resources strategy.
Localization includes two ways: one is expatriate localization; the other is recruitment or
promotion of local staffs in the corporate management system.
2.1. Expatriate Localization
During 1980s or 1990s, expatriates are all on short-term assignment, following the single path
out-and-back. In 1986, Organization Resources Counselors made an investigation and found that as for
American expatriates sent to China, the average length of assignment time was 16 months. But now the
traditional temporary assignment model is being turned into the localization pattern. The number of
local foreign-nationality employees is rising. A local foreign-nationality employee is the expatriate who
chooses to stay in China after his two-or-three-year assignment contract is completed. These staff either
signs a new contract with their companies, or works in another Chinese subsidiary of another MNC, and
they even apply to Chinese state-owned enterprises for a job. Many expatriates get the admission to
work and live in China for a long time by acquiring Chinese green cards. In April of 2005, Shanghai
government has, once for all, entitled 18 foreigners including 10 expatriate in MNCs to Chinese green
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cards. Beside this, there are several hundreds of expatriates applying for it.1
2.2 Finding Qualified Local Staff
Since 1995, more and more MNCs in China began to hire experienced, English-speaking, local
human resource experts as organization’s managers, for instance as human resource managers.
Experience accumulated from previous expatriate management supported the notion that a local human
resources manager can find and retain great local staff, and in essence, this was the beginning of true
localization: it was not until a local human resources manager was hired that localization could be
implemented at higher management levels.
The localization policy in many MNCs in China is being integrated into the company's business
plan, so that corporations can response quickly and easily to teams' hiring requirements. These
requirements vary widely, depending upon the company and the position being filled.
In many cases, this policy is working well. Now most of MNCs in China are finding qualified local
staff more easily, and try to fill all positions with local employee, even including the president or CEO
of their China operations, with PRC nationals.
Usually the general characteristics MNCs look for in a local managerial candidate include fluent
written and verbal English, a minimum of 5-7 years experience in a particular field, a university degree,
preferably an MBA, leadership and initiative abilities, creative problem-solving skills, and a
professional attitude.
At present there are competent local candidates in managerial fields, including finance, engineering,
human resources and sales, which can put location policy into practice more easily. However, there are
still fewer qualified candidates than positions available, which make the valuable employees change
their jobs frequently in order to gain the best benefits, financially and professionally. As a result, MNCs
often suffer from it if their strategy is not one step ahead of the volatile recruitment. For instance,
companies hiring any local candidate should have retention tools and benefits policies beyond the
minimum state-supported benefits. These may include incentive bonuses for reaching a specific target,
training abroad, the cost of MBA schooling on a part-time or a full time, and as well career-path
counseling. These strategies should be offered and monitored closely from the beginning. It is
particularly important not to renege on promises made during hiring, not only for obvious ethical
reasons but also because of gain and retaining local talents.
2.3 Reinforce HRD for Local employees
Although many multinational corporations' in China have found Chinese staffs (as opposed to
expatriate) have made prgoress, they still often notice Chinese cultural, political, and procedural barriers
are hard to surmount, and many MNCs in fact, do not clearly convey to local staffs what actually needs
to be done and why, discouraging local managers and employees from carrying out basic tasks and
bettering their performance.
More and more Western MNCs in China today try to get benefits from using human resource
development (HRD) system - a system that encompasses skills transfer, instructional design, needs
assessment, organization development, succession planning, and career development projects.
In short, HRD takes the local employees beyond compliance and can be used to enhance and build a
quality program. This is particularly important in China, where education system and management
notion have historically been exemplary at meeting (and only meeting) requirements in order to put
people to work.
HRD provide skills training to enrich the local employee's current experience and increase his or her
overall competence, and help local employee to analyze the gap between "what is" and "what should be"
in their work, which conduces to highlight the importance of satisfying customer needs.
3. Strategies of expatriate management in MNCs in China
Since China has become the hotspot of direct investment, there are a substantially increased
number of foreign business people working in Sino-foreign joint ventures, foreign representative offices,
1
China Daily (English Edition), 2005-04-13
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foreign wholly owned subsidiaries and branches of foreign firms. According to relevant reports,
expatriate management in MNCs in China has changed greatly in recent five years, which can be
pictured in the following five aspects.
3.1. Transition strategy on expatriate administration
Transition strategy on expatriate administration is closely related to MNCs’ strategy transfer.
Nowadays, when developing countries but most China have developed into important destinations for
foreign direct investment, more organizations turn their strategies from domestic policy to globalization,
and the two ends of value chain are also being moved to the developing countries. This results in the
increased number of expatriates assigned to these areas. Traditional expatriate management model
becomes not so suitable to environment of Chinese subsidiaries (Gail Reinhart 2005), which causes
problems in expatriate cross-culture management in China. From a western perspective, Chinese culture,
institution and people may appear completely baffling. It means that western managers probably can’t
handle the jobs very well which require a good grip of China such as marketing and human resource
management etc. How to adapt to Chinese political and economical systems, especially social culture
and value, how to improve expatriate performance, reduce cost, and retain good relationship with the
host country, has become a primary concern in expatriate management in China. Innovation in expatriate
management and reconstruction of expatriate management model has been brought into the agenda
(Hugh Bushnell, Rich Verhage, Sum Yee Long, 2005).
3.2. Variation in expatriate manager sources
Quick development of Chinese economy and optimistic future has attracted not only overseas
Chinese people come back home, but also excellent managers from HK, Taiwan, Thailand, Singapore
and other part of Asia willing to work in Chinese mainland. Besides, local elites also join in position
competition. Abundant supply sources of expatriates and booming international labor market enable
MNCs select expatriate from more diverse talent pools, not limited to parent country managers any
longer. Superiority that parent country expatriate managers had enjoyed in China during the last ten
years has been challenged seriously, and they have to face fierce competition to get an expatriate
assignment.
3.3. Expatriate assignment positions
For many organizations, sending expatriates abroad to develop global competencies is consistent
with their overall strategic human resource plan. Objects of expatriate assignment are different and this
has resulted in the change of expatriate assignment positions.
Senior managers, R&D staff, administrators, various line managers of marketing department or
public relations department and problem-solution experts, have become the prominent types of
expatriates. Today, seldom expatriates in China occupy operational positions directly, instead they act as
tutors spending much working time in guiding and training local employees. For example, after moving
its refrigerator R&D center into China, GE has selected local technical elites to enhance its R&D ability.
Despite of it, GE also has chosen a few of its R&D workers and administrators as expatriates assigned to
China.
Further, due to the strategic developmental importance of Chinese market, senior managers in
corporation headquarters sometimes are directly posted to China mainland responsible for Chinese
business operations. And MNCs rarely did it so just ten years ago.
3.4 Diversity of compensation packages
Nowadays in China the traditional expatriate compensation package has been replaced with
different, leaner arrangements; the expatriate compensation packages are continuing to diversify as the
pool of expatriates grows (Hewitt2004).
Western businessmen often take high-level positions, and they enjoy generous compensation
packages well over the local level. Asian personnel and HK employees also receive high base salaries,
but unfortunately, they cannot have their medical insurance, life insurance and endowment insurance in
China. The salary level of overseas Chinese and local foreign-nationality employees has almost been
localized and much lower than other expatriates. Meanwhile, compensation package on the whole shows
a downward trend. As the latest surveys pointed out, during recent years the median of expatriates base
salary has declined from 20 percent to 15 percent. While 83 percent of MNCs have raised expatriates’
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salary in 2003, only 9 percent of companies have planned to do so in 2004.
4. Motivations for the strategies
4.1. Transition in role of Chinese subsidiary
When MNCs came to China first, the local market was undeveloped. At that time, MNCs didn’t
view China as an important market, and a Chinese subsidiary just acted as a task executive. The
competition advantages of the subsidiary mainly depended on resources of the parent company such as
management experience, products, advanced techniques and branding etc. Little effort had been made to
adjust to the local market, and little obligations or rights did a Chinese subsidiary enjoy. Domestic
policy is an important principle in expatriate relocation, mainly because it will protect benefits of
foreigners in Sino-foreign joint ventures. Chinese staff only undertakes junior jobs.
With the continuous growth of Chinese subsidiaries, Chinese subsidiaries gradually involve in
more activities in value chain, and their roles have transferred from simple executives to strategic
partners. As China becomes one of the most important markets, a Chinese subsidiary should be
responsive to the local market and be turned into a local company. To do so, a Chinese subsidiary must
have deep understanding of Chinese politics, economy, laws and culture, retain good communication
with local government, other enterprises and consumers, and make innovations in corporation products
to meet with local clients’ needs. Local staff is naturally good at these. To form continuous and local
competition advantage in Chinese market, MNCs in China should have the ability to turn these above
advantages into internal ones and combine special resources owned by parent corporations with them.
‘Expatriate businessmen are a pillar, but it can not bring true help for global opportunities. Local
relocation is the necessary choice.’ Furthermore, development of Chinese staff also creates objective
conditions for local relocation.
On the other hand, just because of strategic advancement of Chinese subsidiaries, MNCs pay more
attention in controlling Chinese branches. Expatriates, as representatives of MNCs, can ensure the
far-flung subsidiaries sharing same culture with the headquarters and making Chinese branches
accomplish global strategy2. Currently, key positions and senior management positions are still occupied
by expatriates. Therefore while MNCs try to implement localization strategy, the demand for expatriates
is brisk.
Chinese strategy transfer has caused organization regional structure change in Asia-Pacific
branches. Many MNCs choose Shanghai or Beijing as one of their global strategy centers. Due to little
attention that headquarters have paid to those expatriates who have finished overseas assignments3,
many foreign managers worry that their overseas experience will be ignored and feel negative about
career development. Since more and more MNCs move their headquarters or strategic centers of
Asia-Pacific into China, expatriate business managers choose to stay in China after accomplishment of
their assignment in order to obtain a brighter career future. This is probably the main reason that why the
number of local foreign-nationality staff is rising.
4.2. Growth of local employees
Good understanding of China, familiarity with culture and beliefs of foreign corporations through
long-term work at the Chinese subsidiaries of MNCs, as well as gradual capability improvement in
management, business and learning and mastery of professional knowledge, these all usually make
Chinese staff excellent in job performance and qualify them taking junior management positions.
However, Local employees not only expect further career advancement, but also have confidence in
their competencies to undertake much more responsibilities. If they get frustrated in promotion to a
higher position, they probably become less aggressive in their job performance or quit, which will
undermine corporation productivity. Under this pressure, MNCs have to consider career advancement of
2
Ruixu Wang, Xiao Lin zhang. Environment Analysis and Model Choice of Human Resource Localization of
Multinational Corporations. Economic Management-New Management, 2003,4: 55-59
3
Shuming Zhao, Peter J Down, Dennis E Welch, Human Resource Management of Multinational Corporations,
Publication of Renming University of China, Beijing: 2001:183
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local staff, which causes the change of expatiate relocation. Nowadays, expatriates are not responsible
for operational tasks any longer, but offer help and guidance to local staff in difficulties. However, since
expatriates have the benefits of familiarity with corporate culture and the ability to transfer it into
Chinese subsidiaries, many organizations still prefer to select expatriates especially parent country
nationals to be senior managers or administrators of non-product department.
4.3. Pressure of low cost
Expensive compensation packages of expatriate business managers are a heavy burden of
international enterprises. Usually, the amount of an expatriate manager’s salary and the cost of housing
allowance, vacations and children education will reach to 250,000-350,000 dollars. In 1998, a famous
MNC compared the cost of expatriates in branches of some Asian countries (except Japan) and found
that among these countries (Malaysia, Singapore, Thailand, Korean and China), the overall cost of
expatriates in China was obviously the highest. Some companies with high profits also found that they
had to spend a great part of profits in paying expatriates’ salaries, which would unavoidably hurt
corporation good performance4. The heavy cost burden has already forced MNCs to find low-cost but
suitable substitutes. Human resource localization is a wise choice. Besides, attracted by the optimistic
development future of China, many HK managers and Asian managers are rushing into Chinese
mainland. Comparing with western foreigners, these people are presumed to have a better understanding
of China and thus succeed in expatriate assignment more easily; comparing with local staff, they have
more international management experience and they are willing to accept local salary level or reduce
their salary automatically. By comparison, MNCs more like to choose these businessmen instead of
western expatriates to fill in senior positions in Chinese subsidiaries.
5. Conclusion
The paper has shown the innovation trend of expatriate management of multinational companies in
China. From the extensive experience of expatriate management of MNCs in China recent five years,
we can see that the significant issues and ways of expatriate management that MNCs handled have been
change. These changes including transition strategy on expatriate administration, variation in expatriate
manager sources, expatriate assignment positions, expatriates localization model and compensation
packages diversity are discussed.
The changes of expatriate management of MNCs indicates that China mainland is developing into a
modern international business metropolis and meeting the challenge of expatriate management is the
subject of a MNC to be maintain competitive in China. It is critical for the organizations to identify and
develop their future expatriate management strategies in response to the changing corporate needs.
This paper also discusses the importance reasons for the change trend, and finds that interaction
between external environment and internal demands have caused these change or innovations: the
transition and growth in role of Chinese subsidiary, pressure of low cost and the growth of local
employees are wheels driving for change trend of expatriate management of MNCs in China.
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