Entering a Foreign Market Discussion 1

Table of Contents

Entering a Foreign Market

Imagine you are the marketing manager for a U.S. manufacturer of paper products (including paper plates, paper towels, napkins, toilet paper, and tissues). Your company is considering entering the Argentinean market. Consider the following:

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  • Should the pricing decisions in Argentina be delegated to the local managers? Why or why not?
  • Should the advertising message that has been effective in the U.S. be used in Argentina? Why or why not?
  • What are some of the considerations that might be taken into account regarding product attributes?

chapter 15 Global Production, Outsourcing, and Logistics

Entering a Foreign Market

LEARNING OBJECTIVES

1 Explain why production and logistics decisions are of central importance to many multinational businesses.

2 Explain how country differences, production technology, and product features all affect the choice of where to locate production activities.

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3 Recognize how the role of foreign subsidiaries in production can be enhanced over time as they accumulate knowledge.

4 Identify the factors that influence a firm’s decision of whether to source supplies from within the company or from foreign suppliers.

5 Describe what is required to efficiently coordinate a globally dispersed production system.

opening case Making the Amazon Kindle

When online retailer Amazon.com invented its revolutionary e-book reader, the Kindle, the company had to decide where to have it made. Guiding the decision was an understanding that if the Kindle was going to be successful, it had to have that magic combination of low price, high functionality, high reliability, and design elegance. Over time, this has only become more important as competitors have emerged. These have included Sony with various readers, Barnes & Noble with its Nook, and most notably, Apple with its multipurpose iPad, which can function as a digital reader among other things. Amazon’s goal has been to aggressively reduce the price of the Kindle so that it both has an edge over competitors and it becomes feasible to have a couple lying around the house as a sort of digital library.

Amazon designed the Kindle in a lab in California, precisely because this is where the key R&D expertise was located. One of the Kindle’s key components, the “ink” (the tiny microcapsule beads used in its display) were designed and are made by E Ink, a company based in Cambridge, Massachusetts. Much of the rest of the value of the Kindle, however, is outsourced to manufacturing enterprises in Asia.

The market research firm iSuppli estimates that when it was introduced in 2009, the total manufacturing cost for the Kindle 2 ran about $185. The most expensive single component was the display, which cost about $60. Although the display used E Ink’s technology, there were no American firms with the expertise required to manufacture a bistable electrophoretic display that will show an image even when it is not drawing on battery power. This technology is central to the Kindle because it allows for very long battery life. Ultimately, Amazon contracted with a Taiwanese firm, Prime View International, to make the display. Prime View had considerable expertise in the manufacture of LCDs and was known as an efficient and reliable manufacturer. Estimates suggest that 40 to 50 percent of the value of the display is captured by E Ink, with the rest going to Prime View.

After the display, the next most expensive component is the wireless card that allows the Kindle to connect to Amazon’s digital bookstore through a wireless link. The card costs about $40. Novatel Wireless, a South Korean enterprise that has developed considerable expertise in making wireless chipsets for cell phone manufacturers, produces this component. The card includes a $13 chip that was designed by Qualcomm of San Diego. This, too, is manufactured in Asia. The brain of the Kindle is an $8.64 microprocessor chip designed by Texas-based Freescale Semiconductor. Freescale outsources its chip making to foundries in Taiwan and China. Another key component, the lithium polymer battery, costs about $7.50 and is manufactured in China. In sum, out of a total manufacturing cost of about $185, perhaps $40 to $50 is accounted for by activities undertaken in the United States by E Ink, Qualcomm, and Freescale, with the remainder being outsourced to manufacturers in Taiwan, China, and South Korea.

  Sources: M. Muro, “Amazon’s Kindle: Symbol of American Decline?” Brookings Institute, February 25, 2010, www.brookings.edu; and G. P. Pisano and W. C. Shih, “Restoring American Competitiveness,” Harvard Business Review, July–August 2009, pp. 114–26.

Introduction

As trade barriers fall and global markets develop, many firms increasingly confront a set of interrelated issues. First, where in the world should production activities be located? Should they be concentrated in a single country, or should they be dispersed around the globe, matching the type of activity with country differences in factor costs, tariff barriers, political risks, and the like to minimize costs and maximize value added? Second, what should be the long-term strategic role of foreign production sites? Should the firm abandon a foreign site if factor costs change, moving production to another more favorable location, or is there value to maintaining an operation at a given location even if underlying economic conditions change? Third, should the firm own foreign production activities, or is it better to outsource those activities to independent vendors? Fourth, how should a globally dispersed supply chain be managed, and what is the role of Internet-based information technology in the management of global logistics? Fifth, should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity?

The example of the Amazon Kindle discussed in the opening case touches upon some of these issues. Like many modern products, different components of the Kindle are manufactured in different locations to produce a reliable low-cost product. In choosing who should make what components, Amazon was guided by the need to keep the cost of the device low so that it could price aggressively and preempt competitors in the digital reader market. For example, Amazon picked Prime View of Taiwan to make the display screen precisely because that company is among the best in the world at this kind of manufacturing. For Amazon to secure a competitive advantage against intense competition, it had to make the correct choices.

Strategy, Production, and Logistics

LEARNING OBJECTIVE 1

Explain why production and logistics decisions are of central importance to many multinational businesses.

Chapter 12 introduced the concept of the value chain and discussed a number of value creation activities, including production, marketing, logistics, R&D, human resources, and information systems. This chapter will focus on two of these activities— production and logistics —and attempt to clarify how they might be performed internationally to (1) lower the costs of value creation and (2) add value by better serving customer needs. We will discuss the contributions of information technology to these activities, which has become particularly important in the era of the Internet. The remaining chapters in this text will look at other value creation activities in this international context (marketing, R&D, and human resource management).

Production

Activities involved in creating a product.

Logistics

The procurement and physical transmission of material through the supply chain, from suppliers to customers.

In Chapter 12, we defined production as “the activities involved in creating a product.” We used the term production to denote both service and manufacturing activities, because one can produce a service or produce a physical product. Although in this chapter we focus more on the production of physical goods, we should not forget that the term can also be applied to services. This has become more evident in recent years, with the trend among U.S. firms to outsource the “production” of certain service activities to developing nations where labor costs are lower (e.g., the trend among many U.S. companies to outsource customer care services to places such as India, where English is widely spoken and labor costs are much lower). Logistics is the activity that controls the transmission of physical materials through the value chain, from procurement through production and into distribution. Production and logistics are closely linked because a firm’s ability to perform its production activities efficiently depends on a timely supply of high-quality material inputs, for which logistics is responsible.

ANOTHER PERSPECTIVE Careers in Supply Chain Management

With increased outsourcing and overseas production sites and customers, supply chain management is a growing field. The Council of Supply Chain Management Professionals (CSCMP), a professional association with more than 8,500 members worldwide, says the industry offers a promising outlook. What’s more, potential employers are everywhere—manufacturers and distributors; government agencies; consulting firms; the transport industry; universities and colleges; service firms such as banks, hospitals, and hotels; and third-party logistics providers.

For more information about the organization and careers in this field, visit the CSCMP website at www.cscmp.org and its careers site, www.careersinsupplychain.org.

The production and logistics functions of an international firm have a number of important strategic objectives.1 One is to lower costs. Dispersing production activities to various locations around the globe where each activity can be performed most efficiently can lower costs. Costs can also be cut by managing the global supply chain efficiently so as to better match supply and demand. Efficient supply chain management reduces the amount of inventory in the system and increases inventory turnover, which means the firm has to invest less working capital in inventory and is less likely to find excess inventory on hand that cannot be sold and has to be written off.

A second strategic objective shared by production and logistics is to increase product quality by eliminating defective products from both the supply chain and the manufacturing process.2 (In this context, quality means reliability, implying that the product has no defects and performs well.) The objectives of reducing costs and increasing quality are not independent of each other. As illustrated in Figure 15.1, the firm that improves its quality control will also reduce its costs of value creation. Improved quality control reduces costs by:

• Increasing productivity because time is not wasted producing poor-quality products that cannot be sold, leading to a direct reduction in unit costs.

• Lowering rework and scrap costs associated with defective products.

• Reducing the warranty costs and time associated with fixing defective products.

FIGURE 15.1 The Relationship Between Quality and Costs

Source: From “What Does Product Quality Really Mean,” by David A. Gandin, MIT Sloan Management Review, Fall 1984. Copyright © 1984 by Massachusetts Institute of Technology. All rights reserved. Distributed by Tribune Media Services.

The effect is to lower the costs of value creation by reducing both production and after-sales service costs.

The principal tool that most managers now use to increase the reliability of their product offering is the Six Sigma quality improvement methodology. The Six Sigma methodology is a direct descendant of the total quality management (TQM) philosophy that was widely adopted, first by Japanese companies and then American companies during the 1980s and early 1990s.3 The TQM philosophy was developed by a number of American consultants such as W. Edward Deming, Joseph Juran, and A. V. Feigenbaum.4 Deming identified a number of steps that should be part of any TQM program. He argued that management should embrace the philosophy that mistakes, defects, and poor-quality materials are not acceptable and should be eliminated. He suggested that the quality of supervision should be improved by allowing more time for supervisors to work with employees and by providing them with the tools they need to do the job. Deming recommended that management should create an environment in which employees will not fear reporting problems or recommending improvements. He believed that work standards should not only be defined as numbers or quotas, but should also include some notion of quality to promote the production of defect-free output. He argued that management has the responsibility to train employees in new skills to keep pace with changes in the workplace. In addition, he believed that achieving better quality requires the commitment of everyone in the company.

Total Quality Management (TQM)

Management philosophy that takes as its central focus the need to improve the quality of a company’s products and services.

Six Sigma , the modern successor to TQM, is a statistically based philosophy that aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company. Six Sigma programs have been adopted by several major corporations, such as Motorola, General Electric, and Allied Signal. Sigma comes from the Greek letter that statisticians use to represent a standard deviation from a mean; the higher the number of “sigmas,” the smaller the number of errors. At six sigma, a production process would be 99.99966 percent accurate, creating just 3.4 defects per million units. While it is almost impossible for a company to achieve such perfection, Six Sigma quality is a goal that several strive toward. Increasingly, companies are adopting Six Sigma programs to try to boost their product quality and productivity.

chapter 16 Global Marketing and R&D

LEARNING OBJECTIVES

1 Explain why it might make sense to vary the attributes of a product from country to country.

2 Recognize why and how a firm’s distribution strategy might vary among countries.

3 Identify why and how advertising and promotional strategies might vary among countries.

4 Explain why and how a firm’s pricing strategy might vary among countries.

5 Describe how the globalization of the world economy is affecting new-product development within the international business firm.

opening case Burberry’s Global Brand Strategy

Burberry, the icon British luxury apparel retailer famed for its trench coats and plaid patterned accessories, has been on a roll in recent years. In the late 1990s, one critic described Burberry as “an outdated business with a fashion cache of almost zero.” By 2012, Burberry was widely recognized as one of the planet’s premier luxury brands with a strong presence in many of the world’s richest cities, more than 560 retail stores, and revenues in excess of $2.2 billion.

Two successive American CEOs have been behind Burberry’s transformation. The first, Rose Marie Bravo, joined the company in 1997 from Saks Fifth Avenue. Bravo saw immense hidden value in the Burberry brand. One of her first moves was to hire world-class designers to reenergize the brand. The company also shifted its orientation toward a younger hipper demographic, perhaps best exemplified by the ads featuring supermodel Kate Moss that helped to reposition the brand. By the time Bravo retired in 2006, she had transformed Burberry into what one commentator called an “achingly hip,” high-end fashion brand whose raincoats, clothes, handbags, and other accessories were must-have items for younger, well-healed, fashion-conscious consumers worldwide.

Bravo was succeeded by Angela Ahrendts, whose career had taken her from a small town in Indiana and a degree at Ball State University, through Warnaco and Liz Claiborne, to become the CEO of Burberry at age 46. Ahrendts realized that for all of Bravo’s success, Burberry still faced significant problems. The company had long pursued a licensing strategy, allowing partners in other countries to design and sell their own offerings under the Burberry label. This lack of control over the offering was hurting its brand equity. The Spanish partner, for example, was selling casual wear that bore no relationship to what was being designed in London. So long as this state of affairs continued, Burberry would struggle to build a unified global brand.

Ahrendts’s solution was to start acquiring partners and/or buying licensing rights back in order to regain control over the brand. Hand in hand with this, she pushed for an aggressive expansion of the company’s retail store strategy. The company’s core demographics under Ahrendts remained the well-healed, younger, fashion-conscious set. To reach this demographic, Burberry has focused on 25 of the world’s wealthier cities. Key markets include New York, London, and Beijing, which according to Burberry, account for more than half of the global luxury fashion trade. As a result of this strategy, the number of retail stores increased from 211 in 2007 to 563 in 2011.

Another aspect of Burberry’s strategy has been to embrace digital marketing tools to reach its tech-savvy customer base. Indeed, there are few luxury brand companies that have utilized digital technology as aggressively as Burberry. Burberry has simulcast its runway shows in 3-D in New York, Los Angeles, Dubai, Paris, and Tokyo. Viewers at home can stream the shows over the Internet and post comments in real time. Outerwear and bags are made available through a “click and buy” technology, with delivery several months before they reach the stores. Burberry had more than 10 million Facebook fans as of early 2012. At “The Art of the Trench,” a company-run social media site, people can submit photos of themselves in the company’s icon rainwear.

The global marketing strategy seems to be working. Between 2007 and 2011, revenues at Burberry increased from £859 million to £1,501 million, and this against the background of a global economic slowdown. Over the same period, retail sales increased from 48 percent of the total to 64 percent of the total. By March 2012, 72 percent of Burberry’s sales came through retail establishments. •

  Sources: Nancy Hass, “Earning Her Stripes,” The Wall Street Journal, September 9, 2010; “Burberry Shines as Aquascutum Fades,” The Wall Street Journal, April 17, 2010; Peter Evans, “Burberry Sales Ease from Blistering Pace,” The Wall Street Journal, April 17, 2010; and “Burberry Case Study,” Market Line, www.marketline.com, January 2012.

Introduction

The previous chapter looked at the roles of global production and logistics in an international business. This chapter continues our focus on specific business functions by examining the roles of marketing and research and development (R&D) in an international business. We focus on how marketing and R&D can be performed so they will reduce the costs of value creation and add value by better serving customer needs.

In Chapter 12, we spoke of the tension existing in most international businesses between the need to reduce costs and, at the same time, respond to local conditions, which tends to raise costs. This tension continues to be a persistent theme in this chapter. A global marketing strategy that views the world’s consumers as similar in their tastes and preferences is consistent with the mass production of a standardized output. By mass-producing a standardized output, whether it be soap, semiconductor chips, or high-end apparel, the firm can realize substantial unit cost reductions from experience curve and other economies of scale. However, ignoring country differences in consumer tastes and preferences can lead to failure. Thus, an international business’s marketing function needs to determine when product standardization is appropriate and when it is not, and to adjust the marketing strategy accordingly. Even if product standardization is appropriate, the way in which a product is positioned in a market and the promotions and messages used to sell that product may still have to be customized so that they resonate with local consumers.

As described in the opening case, the luxury fashion retailer Burberry has been dealing with these issues. Burberry’s core demographic has been the affluent, younger, fashion-conscious set. Burberry has come to view this demographic as sharing a lot of the same tastes and preferences worldwide. Accordingly, it has devoted considerable attention to building a unified global brand with a consistent marketing message and the same product offering worldwide. As part of this strategy, Burberry has bought back licensing rights from partners around the world in order to regain control over its brand, and it has aggressively expanded its own retail presence in many of the world’s richer cities, where the company’s core target demographic lives. The global marketing strategy has worked for Burberry, but it might not work for others. It depends on the extent to which consumer tastes and preferences are homogenous, and as we will see, they are often not.

We consider marketing and R&D within the same chapter because of their close relationship. A critical aspect of the marketing function is identifying gaps in the market so that the firm can develop new products to fill those gaps. Developing new products requires R&D—thus, the linkage between marketing and R&D. A firm should develop new products with market needs in mind, and only marketing can define those needs for R&D personnel. Also, only marketing can tell R&D whether to produce globally standardized or locally customized products. Research has long maintained that a major contributor to the success of new-product introductions is a close relationship between marketing and R&D.1

In this chapter, we begin by reviewing the debate on the globalization of markets. Then, we discuss the issue of market segmentation. Next, we look at four elements that constitute a firm’s marketing mix: product attributes, distribution strategy, communication strategy, and pricing strategy. The marketing mix is the set of choices the firm offers to its targeted markets. Many firms vary their marketing mix from country to country, depending on differences in national culture, economic development, product standards, distribution channels, and so on.

Marketing Mix

Choices about product attributes, distribution strategy, communication strategy, and pricing strategy that a firm offers its targeted markets.

The chapter closes with a look at new-product development in an international business and at the implications of this for the organization of the firm’s R&D function.

The Globalization of Markets and Brands

In a now-classic Harvard Business Review article, the late Theodore Levitt wrote lyrically about the globalization of world markets. Levitt’s arguments have become something of a lightning rod in the debate about the extent of globalization. According to Levitt,

A powerful force drives the world toward a converging commonalty, and that force is technology. It has proletarianized communication, transport, and travel. The result is a new commercial reality—the emergence of global markets for standardized consumer products on a previously unimagined scale of magnitude.

Gone are accustomed differences in national or regional preferences. The globalization of markets is at hand. With that, the multinational commercial world nears its end, and so does the multinational corporation. The multinational corporation operates in a number of countries and adjusts its products and practices to each—at high relative costs. The global corporation operates with resolute consistency—at low relative cost—as if the entire world were a single entity; it sells the same thing in the same way everywhere.

Commercially, nothing confirms this as much as the success of McDonald’s from the Champs Élysées to the Ginza, of Coca-Cola in Bahrain and Pepsi-Cola in Moscow, and of rock music, Greek salad, Hollywood movies, Revlon cosmetics, Sony television, and Levi’s jeans everywhere.

Ancient differences in national tastes or modes of doing business disappear. The commonalty of preference leads inescapably to the standardization of products, manufacturing, and the institutions of trade and commerce.2

This is eloquent and evocative writing, but is Levitt correct? The rise of the global media phenomenon from CNN to MTV, and the ability of such media to help shape a global culture, would seem to lend weight to Levitt’s argument. If Levitt is correct, his argument has major implications for the marketing strategies pursued by international business. However, many academics feel that Levitt overstates his case.3 Although Levitt may have a point when it comes to many basic industrial products, such as steel, bulk chemicals, and semiconductor chips, globalization in the sense used by Levitt seems to be the exception rather than the rule in many consumer goods markets and industrial markets. Even a firm such as McDonald’s, which Levitt holds up as the archetypal example of a consumer products firm that sells a standardized product worldwide, modifies its menu from country to country in light of local consumer preferences. In the Middle East, for example, McDonald’s sells the McArabia, a chicken sandwich on Arabian-style bread, and in France, the Croque McDo, a hot ham and cheese sandwich.4

ANOTHER PERSPECTIVE Toyota’s Ambitious Plan for No 1 Global Market

Yundong, or Cloud Action, is Toyota China’s first-ever strategic plan for its business in China. China is the “most important” market in the world, but the Japanese carmaker has less than 10 percent of the auto market, far behind global rivals such as General Motors and Volkswagen. The auto giant aims to become a company “that is beyond consumers’ expectations and creates happiness and fortune for consumers and the regions where it operates” emphasizing local responsiveness to Chinese customers, but still maintaining a global strategy. The Yundong plan combines the company’s global strategy and local marketing operation which will bring advanced technologies to the local market, improve the local management and marketing system, and build “exciting” products “that touch the hearts of Chinese consumers and are beyond their expectations” according to company officials.

  Source: www.chinadaily.com.cn/bizchina/2012-03/05/content_14757469.htm.

On the other hand, Levitt is probably correct to assert that modern transportation and communications technologies are facilitating a convergence of certain tastes and preferences among consumers in the more advanced countries of the world, and this has become even more prevalent since he wrote. The popularity of sushi in Los Angeles; hamburgers in Tokyo; hip-hop music; Burberry apparel among young, affluent, fashion-conscious consumers worldwide; and global media phenomena such as MTV all support this contention. In the long run, such technological forces may lead to the evolution of a global culture. At present, however, the continuing persistence of cultural and economic differences between nations acts as a brake on any trend toward the standardization of consumer tastes and preferences across nations. Indeed, that may never occur. Some writers have argued that the rise of global culture doesn’t mean that consumers share the same tastes and preferences.5 Rather, people in different nations, often with conflicting viewpoints, are increasingly participating in a shared “global” conversation, drawing upon shared symbols that include global brands from Nike and Dove to Coca-Cola and Sony. But the way in which these brands are perceived, promoted, and used still varies from country to country, depending on local differences in tastes and preferences. Furthermore, trade barriers and differences in product and technical standards also constrain a firm’s ability to sell a standardized product to a global market using a standardized marketing strategy. We discuss the sources of these differences in subsequent sections when we look at how products must be altered from country to country. In short, Levitt’s globally standardized market is some way off in many industries.

Market Segmentation

Market segmentation refers to identifying distinct groups of consumers whose purchasing behavior differs from others in important ways. Markets can be segmented in numerous ways: by geography, demography (sex, age, income, race, education level, etc.), sociocultural factors (social class, values, religion, lifestyle choices), and psychological factors (personality). Because different segments exhibit different patterns of purchasing behavior, firms often adjust their marketing mix from segment to segment. Thus, the precise design of a product, the pricing strategy, the distribution channels used, and the choice of communication strategy may all be varied from segment to segment. The goal is to optimize the fit between the purchasing behavior of consumers in a given segment and the marketing mix, thereby maximizing sales to that segment. Automobile companies, for example, use a different marketing mix to sell cars to different socioeconomic segments. Thus, Toyota uses its Lexus division to sell high-priced luxury cars to high-income consumers, while selling its entry-level models, such as the Toyota Corolla, to lower-income consumers. Similarly, personal computer manufacturers will offer different computer models, embodying different combinations of product attributes and price points, precisely to appeal to consumers from different market segments (e.g., business users and home users).

Market Segmentation

Identifying groups of consumers whose purchasing behavior differs from others in important ways.

When managers in an international business consider market segmentation in foreign countries, they need to be cognizant of two main issues: the differences between countries in the structure of market segments and the existence of segments that transcend national borders. The structure of market segments may differ significantly from country to country. An important market segment in a foreign country may have no parallel in the firm’s home country, and vice versa. The firm may have to develop a unique marketing mix to appeal to the purchasing behavior of a certain segment in a given country. An example of such a market segment is given in the accompanying Management Focus, which looks at the African Brazilian market segment in Brazil, which as you will see is very different from the African American segment in the United States. In another example, a research project identified a segment of consumers in China in the 50-to-60 age range that has few parallels in other countries.6 This group came of age during China’s Cultural Revolution in the late 1960s and early 1970s. This group’s values have been shaped by their experiences during the Cultural Revolution. They tend to be highly sensitive to price and respond negatively to new products and most forms of marketing. Thus, firms doing business in China may need to customize their marketing mix to address the unique values and purchasing behavior of the group. The existence of such a segment constrains the ability of firms to standardize their global marketing strategy.

In contrast, the existence of market segments that transcend national borders clearly enhances the ability of an international business to view the global marketplace as a single entity and pursue a global strategy—selling a standardized product worldwide and using the same basic marketing mix to help position and sell that product in a variety of national markets. For a segment to transcend national borders, consumers in that segment must have some compelling similarities along important dimensions—such as age, values, lifestyle choices—and those similarities must translate into similar purchasing behavior. Although such segments clearly exist in certain industrial markets, they are somewhat rarer in consumer markets. As the opening case illustrates, however, they do exist. Thus, Burberry has been successful by gearing its offering toward a young, affluent, fashion-conscious, tech-savvy demographic. Burberry believes that consumers in this target segment clearly have much in common with each other, whether they live in Beijing, London, or New York.

One emerging global segment that is attracting the attention of international marketers of consumer goods is the so-called global youth segment. Global media are paving the way for a global youth segment. Evidence that such a segment exists comes from a study of the cultural attitudes and purchasing behavior of more than 6,500 teenagers in 26 countries.7 The findings suggest that teens and young adults around the world are increasingly living parallel lives that share many common values. It follows that they are likely to purchase the same kind of consumer goods and for the same reasons.

chapter 17 Global Human Resource Management

LEARNING OBJECTIVES

1 Summarize the strategic role of human resource management in the international business.

2 Identify the pros and cons of different approaches to staffing policy in the international business.

3 Explain why managers may fail to thrive in foreign postings.

4 Recognize how management development and training programs can increase the value of human capital in the international business firm.

5 Explain how and why performance appraisal systems might vary across nations.

6 Understand how and why compensation systems might vary across nations.

7 Understand how organized labor can influence strategic choices in international business firms.

opening case MMC China

It had been a very bad morning for John Ross, the general manager of MMC’s Chinese joint venture. He had just gotten off the phone with his boss in St Louis, Phil Smith, who was demanding to know why the joint venture’s return on investment was still in the low single digits four years after Ross had taken over the top post in the operation. “We had expected much better performance by now,” said Smith, “particularly given your record of achievement; you need to fix this, Phil. Our patience is not infinite. You know the corporate goal is for a 20 percent return on investment for operating units, and your unit is not even close to that.” Ross had a very bad feeling that Smith had just fired a warning shot across his bow. There was an implicit threat underlying Smith’s demands for improved performance. For the first time in his 20-year career at MMC, Ross felt that his job was on the line.

MMC was a U.S. based multinational electronics enterprise with sales of $2 billion and operations in more than 10 countries. MMC China specialized in the mass production of printed circuit boards for companies in the cell phone and computer industries. MMC was a joint venture with Shanghai Electronic Corporation, a former state-owned enterprise that held 49 percent of the joint-venture equity (MMC held the rest). While MMC held a majority of the equity, the company had to consult with its partner before making major investments or changing employment levels.

John Ross had been running MMC China for the past four years. He had arrived at MMC China after a very successful career at MMC, which included extended postings in Mexico and Hungary. When he took the China position, Ross thought that if he succeeded he would probably be in line for one of the top jobs at corporate headquarters within a few years. Ross had known that he was taking on a challenge with MMC China, but nothing prepared him for what he found there. The joint venture was a mess. Operations were horribly inefficient. Despite low wages, productivity was being killed by poor product quality, lax inventory controls, and high employee turnover. The venture probably employed too many people, but MMC’s Chinese partner seemed to view the venture as a job-creation program and repeatedly objected to any plans for cutting the workforce. To make matters worse, MMC China had failed to keep up with the latest developments in manufacturing technology, and it was falling behind competitors. Ross was determined to change this, but it had not been easy.

To improve operations, Ross had put in a request to corporate HR for two specialists from the United States to work with the Chinese production employees. It had been a disaster. One had lasted three months before requesting a transfer home for personal reasons. Apparently, his spouse hated China. The other had stayed for a year, but he had interacted so poorly with the local Chinese employees that he had to be sent back to the United States. Ross wished that MMC’s corporate HR department had done a better job of selecting and then training these employees for a difficult foreign posting, but in retrospect he had to admit that he wasn’t surprised at the lack of cultural training; he had never been given any.

After this failure, Ross had taken a different tack. He had picked four of his best Chinese production employees and sent them to MMC’s U.S. operations, along with a translator, for a two-month training program focusing on the latest production techniques. This had worked out much better. The Chinese had visited efficient MMC factories in the United States, Mexico, and Brazil and had seen what was possible. They had returned home fired up to improve operations at MMC China. Within a year they had introduced a Six Sigma quality control program and improved the flow of inventory through MMC’s factory. Ross could now walk though the factory without being appalled by the sight of large quantities of inventory stacked on the floor or bins full of discarded circuit boards that had failed postassembly quality tests. Productivity had improved as a result and after three tough years, MMC China had finally turned a profit.

Apparently this was not good enough for corporate headquarters. Ross knew that improving performance further would be tough. The market in China was very competitive. MMC was vying with many other enterprises to produce printed circuit boards for large multinational customers that had assembly operations in China. The customers were constantly demanding lower prices, and it seemed to Ross that prices were falling almost as fast as MMC’s costs. Also, Ross was limited in his ability to cut the workforce by the demands of his Chinese joint-venture partner. Ross had tried to explain all of this to Phil Smith, but Smith didn’t seem to get it. “The man is just a number cruncher,” thought Ross. “He has no sense of the market in China. He has no idea how hard it is to do business here. I have worked damn hard to turn this operation around, and I am getting no credit for it, none at all.”•

  Source: This is a disguised case based on interviews undertaken by Charles Hill.

Introduction

Human Resource Management (HRM)

Activities an organization conducts to use its human resources effectively.

This chapter continues our survey of specific functions within an international business by looking at international human resource management. Human resource management (HRM) refers to the activities an organization carries out to use its human resources effectively.1 These activities include determining the firm’s human resource strategy, staffing, performance evaluation, management development, compensation, and labor relations. None of these activities is performed in a vacuum; all are related to the strategy of the firm. As we will see, HRM has an important strategic component.2 Through its influence on the character, development, quality, and productivity of the firm’s human resources, the HRM function can help the firm achieve its primary strategic goals of reducing the costs of value creation and adding value by better serving customers.

The opening case described what can happen when the HRM function does not perform as well as it might. MMC sent two expatriates to MMC China to help the beleaguered boss of that unit, John Ross, but neither expatriate was successful. Apparently, the HR department had picked two employees who were well qualified from a technical perspective but were not suited to a difficult foreign posting. This is not unusual. As we shall see, a large number of expatriates return home before their tour of duty is completed, often because while they have the technical skills to perform the required job, they lack the skills required to manage in a different cultural context or because their spouses do not like the posting. To his credit, Ross came up with a solution to the problem: send Chinese employees to the United States to be trained in the latest manufacturing techniques. The MMC case also illustrates another problem in international HRM: how to evaluate the performance of expatriate managers who are operating in very different circumstances from those found in the home country. It is apparent from the case that John Ross was being evaluated on the basis of the performance of his unit against corporatewide profitability criteria, but these criteria failed to account for the difficult conditions Ross inherited and the problems inherent in doing business in the Chinese market. The most skilled multinationals have found ways of dealing with this problem and adjust performance appraisal criteria to take differences in context into account. MMC apparently did not do this.

Irrespective of the desire of managers in many multinationals to build a truly global enterprise with a global workforce, the reality is that HRM practices still have to be modified to national context. The strategic role of HRM is complex enough in a purely domestic firm, but it is more complex in an international business, where staffing, management development, performance evaluation, and compensation activities are complicated by profound differences between countries in labor markets, culture, legal systems, economic systems, and the like (see Chapters 2, 3, and 4). For example,

• Compensation practices may vary from country to country, depending on prevailing management customs.

• Labor laws may prohibit union organization in one country and mandate it in another.

• Equal employment legislation may be strongly pursued in one country and not in another.

Expatriate Manager

A national of one country appointed to a management position in another country.

If it is to build a cadre of managers capable of managing a multinational enterprise, the HRM function must deal with a host of issues. It must decide how to staff key management posts in the company, how to develop managers so that they are familiar with the nuances of doing business in different countries, how to compensate people in different nations, and how to evaluate the performance of managers based in different countries. HRM must also deal with a host of issues related to expatriate managers. (An expatriate manager is a citizen of one country who is working abroad in one of the firm’s subsidiaries.) It must decide when to use expatriates, determine whom to send on expatriate postings, be clear about why they are doing it, compensate expatriates appropriately, and make sure that they are adequately debriefed and reoriented once they return home.

This chapter looks closely at the role of HRM in an international business. It begins by briefly discussing the strategic role of HRM. Then we turn our attention to four major tasks of the HRM function: staffing policy, management training and development, performance appraisal, and compensation policy. We will point out the strategic implications of each of these tasks. The chapter closes with a look at international labor relations and the relationship between the firm’s management of labor relations and its overall strategy.

The Strategic Role of International HRM

LEARNING OBJECTIVE 1

Summarize the strategic role of human resource management in the international business.

A large and expanding body of academic research suggests that a strong fit between human resources practices and strategy is required for high profitability.3 You will recall from Chapter 12 that superior performance requires not only the right strategy, but the strategy must also be supported by the right organization architecture. Strategy is implemented through organization. As shown in Figure 17.1 (which is based on Figure 12.5), people are the linchpin of a firm’s organization architecture. For a firm to outperform its rivals in the global marketplace, it must have the right people in the right postings. Those people must be trained appropriately so that they have the skill sets required to perform their jobs effectively and so that they behave in a manner that is congruent with the desired culture of the firm. Their compensation packages must create incentives for them to take actions that are consistent with the strategy of the firm, and the performance appraisal system the firm uses must measure the behavior that the firm wants to encourage.

FIGURE 17.1 The Role of Human Resources in Shaping Organization Architecture

As indicated in Figure 17.1, the HRM function, through its staffing, training, compensation, and performance appraisal activities, has a critical impact upon the people, culture, incentive, and control system elements of the firm’s organization architecture (performance appraisal systems are part of the control systems in an enterprise). Thus, HRM professionals have a critically important strategic role. It is incumbent upon them to shape these elements of a firm’s organization architecture in a manner that is consistent with the strategy of the enterprise, so that the firm can effectively implement its strategy.

In short, superior human resource management can be a sustained source of high productivity and competitive advantage in the global economy. At the same time, research suggests that many international businesses have room for improving the effectiveness of their HRM function. In one study of competitiveness among 326 large multinationals, the authors found that human resource management was one of the weakest capabilities in most firms, suggesting that improving the effectiveness of international HRM practices might have substantial performance benefits.4

In Chapters 12, we examined four strategies pursued by international businesses: localization strategy, international strategy, global standardization strategy, and transnational strategy. Firms that emphasize localization try to create value by emphasizing local responsiveness; international firms, by transferring products and competencies overseas; global firms, by realizing experience curve and location economies; and transnational firms, by doing all these things simultaneously. In this chapter, we will see that success also requires HRM policies to be congruent with the firm’s strategy. For example, a transnational strategy imposes different requirements for staffing, management development, and compensation practices than a localization strategy. Firms pursuing a transnational strategy need to build a strong corporate culture and an informal management network for transmitting information and knowledge within the organization. Through its employee selection, management development, performance appraisal, and compensation policies, the HRM function can help develop these things. Thus, as we have noted, HRM has a critical role to play in implementing strategy. In each section that follows, we will review the strategic role of HRM in some detail.

• QUICK STUDY

1. Outline the relationship among HRM, strategy, and organization performance.

Staffing Policy

LEARNING OBJECTIVE 2

Identify the pros and cons of different approaches to staffing policy in the international business.

Staffing Policy

Strategy concerned with selecting employees for particular jobs.

Corporate Culture

The organization’s norms and value systems.

Staffing policy is concerned with the selection of employees for particular jobs. At one level, this involves selecting individuals who have the skills required to do particular jobs. At another level, staffing policy can be a tool for developing and promoting the desired corporate culture of the firm.5 By corporate culture, we mean the organization’s norms and value systems. A strong corporate culture can help a firm implement its strategy. General Electric, for example, is not just concerned with hiring people who have the skills required for performing particular jobs; it wants to hire individuals whose behavioral styles, beliefs, and value systems are consistent with those of GE. This is true whether an American is being hired, an Italian, a German, or an Australian and whether the hiring is for a U.S. operation or a foreign operation. The belief is that if employees are predisposed toward the organization’s norms and value systems by their personality type, the firm will be able to attain higher performance.

TYPES OF STAFFING POLICY

Research has identified three types of staffing policies in international businesses: the ethnocentric approach, the polycentric approach, and the geocentric approach.6 We will review each policy and link it to the strategy pursued by the firm. The most attractive staffing policy is probably the geocentric approach, although there are several impediments to adopting it.

The Ethnocentric Approach

Ethnocentric Staffing Policy

A staffing approach within the MNE in which all key management positions are filled by parent-country nationals.

An ethnocentric staffing policy is one in which all key management positions are filled by parent-country nationals. This practice was widespread at one time. Firms such as Procter & Gamble, Philips Electronics NV, and Matsushita (now called Panasonic) originally followed it. In the Dutch firm Philips, for example, all important positions in most foreign subsidiaries were at one time held by Dutch nationals, who were referred to by their non-Dutch colleagues as the Dutch Mafia. Historically in many Japanese and South Korean firms, such as Toyota, Matsushita, and Samsung, key positions in international operations have often been held by home-country nationals. For example, according to the Japanese Overseas Enterprise Association, only 29 percent of foreign subsidiaries of Japanese companies had presidents who were not Japanese. In contrast, 66 percent of the Japanese subsidiaries of foreign companies had Japanese presidents.7 Today, there is evidence that as Chinese enterprises are expanding internationally, they too are using an ethnocentric staffing policy in their foreign operations.8

Firms pursue an ethnocentric staffing policy for three reasons. First, the firm may believe the host country lacks qualified individuals to fill senior management positions. This argument is heard most often when the firm has operations in less developed countries. Second, the firm may see an ethnocentric staffing policy as the best way to maintain a unified corporate culture. Many Japanese firms, for example, have traditionally preferred their foreign operations to be headed by expatriate Japanese managers because these managers will have been socialized into the firm’s culture while employed in Japan.9 Procter & Gamble until fairly recently preferred to staff important management positions in its foreign subsidiaries with U.S. nationals who had been socialized into P&G’s corporate culture by years of employment in its U.S. operations. Such reasoning tends to predominate when a firm places a high value on its corporate culture.

Third, if the firm is trying to create value by transferring core competencies to a foreign operation, as firms pursuing an international strategy are, it may believe that the best way to do this is to transfer parent-country nationals who have knowledge of that competency to the foreign operation. Imagine what might occur if a firm tried to transfer a core competency in marketing to a foreign subsidiary without a corresponding transfer of home-country marketing management personnel. The transfer would probably fail to produce the anticipated benefits because the knowledge underlying a core competency cannot easily be articulated and written down. Such knowledge often has a significant tacit dimension; it is acquired through experience. Just like the great tennis player who cannot instruct others how to become great tennis players simply by writing a handbook, the firm that has a core competency in marketing, or anything else, cannot just write a handbook that tells a foreign subsidiary how to build the firm’s core competency anew in a foreign setting. It must also transfer management personnel to the foreign operation to show foreign managers how to become good marketers, for example. The need to transfer managers overseas arises because the knowledge that underlies the firm’s core competency resides in the heads of its domestic managers and was acquired through years of experience, not by reading a handbook. Thus, if a firm is to transfer a core competency to a foreign subsidiary, it must also transfer the appropriate managers.

Despite this rationale for pursuing an ethnocentric staffing policy, the policy is now on the wane in most international businesses for two reasons. First, an ethnocentric staffing policy limits advancement opportunities for host-country nationals. This can lead to resentment, lower productivity, and increased turnover among that group. Resentment can be greater still if, as often occurs, expatriate managers are paid significantly more than home-country nationals.

Second, an ethnocentric policy can lead to cultural myopia, the firm’s failure to understand host-country cultural differences that require different approaches to marketing and management. The adaptation of expatriate managers can take a long time, during which they may make major mistakes. For example, expatriate managers may fail to appreciate how product attributes, distribution strategy, communications strategy, and pricing strategy should be adapted to host-country conditions. The result may be costly blunders. They may also make decisions that are ethically suspect simply because they do not understand the culture in which they are managing.10 In one highly publicized case in the United States, Mitsubishi Motors was sued by the federal Equal Employment Opportunity Commission for tolerating extensive and systematic sexual harassment in a plant in Illinois. The plant’s top management, all Japanese expatriates, denied the charges. The Japanese managers may have failed to realize that behavior that would be viewed as acceptable in Japan was not acceptable in the United States.11

ANOTHER PERSPECTIVE Recruiting Entry-Level Staff in China

Education and training have improved in China in recent years, such that there are more locals available to perform management jobs, particularly at the entry level. Adding to the pool of talent are those who are educated abroad—“returnees”—who are ideal for middle- and upper-level management roles. Recent years have shown rapid expansion in higher education in China. Between 1995 and 2000, undergraduate enrollment in China doubled from 1.84 million to 3.76 million. In addition, last year there were over half a million applicants for post-graduate study within China. These figures do not count the tens of thousands of Chinese studying abroad, who are generally the “cream of the crop” in China. Foreign firms are helped by the fact that many university students are interested in employment with a foreign firm. A recent study of students at Beijing’s top universities showed that 63.9 percent of students hope to work for foreign firms upon graduation.

  Source: www.globalhrnews.com/story.asp?sid=99.

The Polycentric Approach

Polycentric Staffing Policy

A staffing policy in an MNE in which host-country nationals are recruited to manage subsidiaries in their own country, while parent-country nationals occupy key positions at corporate headquarters.

A polycentric staffing policy requires host-country nationals to be recruited to manage subsidiaries, while parent-country nationals occupy key positions at corporate headquarters. In many respects, a polycentric approach is a response to the shortcomings of an ethnocentric approach. One advantage of adopting a polycentric approach is that the firm is less likely to suffer from cultural myopia. Host-country managers are unlikely to make the mistakes arising from cultural misunderstandings to which expatriate managers are vulnerable. A second advantage is that a polycentric approach may be less expensive to implement, reducing the costs of value creation. Expatriate managers can be expensive to maintain.

A polycentric approach also has its drawbacks. Host-country nationals have limited opportunities to gain experience outside their own country and thus cannot progress beyond senior positions in their own subsidiary. As in the case of an ethnocentric policy, this may cause resentment. Perhaps the major drawback with a polycentric approach, however, is the gap that can form between host-country managers and parent-country managers. Language barriers, national loyalties, and a range of cultural differences may isolate the corporate headquarters staff from the various foreign subsidiaries. The lack of management transfers from home to host countries, and vice versa, can exacerbate this isolation and lead to a lack of integration between corporate headquarters and foreign subsidiaries. The result can be a “federation” of largely independent national units with only nominal links to the corporate headquarters. Within such a federation, the coordination required to transfer core competencies or to pursue experience curve and location economies may be difficult to achieve. Thus, although a polycentric approach may be effective for firms pursuing a localization strategy, it is inappropriate for other strategies.

The federation that may result from a polycentric approach can also be a force for inertia within the firm. After decades of pursuing a polycentric staffing policy, food and detergents giant Unilever found that shifting from a strategic posture that emphasized localization to a transnational posture was very difficult. Unilever’s foreign subsidiaries had evolved into quasi-autonomous operations, each with its own strong national identity. These “little kingdoms” objected strenuously to corporate headquarters’ attempts to limit their autonomy and to rationalize global manufacturing.12

The Geocentric Approach

Geocentric Staffing Policy

A staffing policy where the best people are sought for key jobs throughout an MNE, regardless of nationality.

A geocentric staffing policy seeks the best people for key jobs throughout the organization, regardless of nationality. This policy has a number of advantages. First, it enables the firm to make the best use of its human resources. Second, and perhaps more important, a geocentric policy enables the firm to build a cadre of international executives who feel at home working in a number of cultures. Creation of such a cadre may be a critical first step toward building a strong unifying corporate culture and an informal management network, both of which are required for global standardization and transnational strategies.13 Firms pursuing a geocentric staffing policy may be better able to create value from the pursuit of experience curve and location economies and from the multidirectional transfer of core competencies than firms pursuing other staffing policies. In addition, the multinational composition of the management team that results from geocentric staffing tends to reduce cultural myopia and to enhance local responsiveness.

In sum, other things being equal, a geocentric staffing policy seems the most attractive. Indeed, in recent years there has been a sharp shift toward adoption of a geocentric staffing policy by many multinationals. For example, India’s Tata Group, now a $70 billion global conglomerate, runs several of its companies with American and British executives. Japan’s Sony Corporation broke 60 years of tradition in 2005 when it installed its first non-Japanese chairman and CEO, Howard Stringer, a former CBS president and a U.S. citizen who was born and raised in Wales. American companies increasingly draw their managerial talent from overseas. One study found that by 2005, 24 percent of the managers among the top 100 to 250 people in U.S. companies were from outside the United States. For European companies, the average is 40 percent.14

ANOTHER PERSPECTIVE Women in International Assignments

Would you send a woman expatriate to Saudi Arabia, Kuwait, Japan, or Korea? How are Western women expatriates doing in foreign cultures that have traditionally limited women’s public roles? Women sent to these countries have met with substantial success. Their key challenge is to get the assignments! Once in place, women expatriates are successful. This is in part because once in the culture, women expatriates are seen first as expatriates who fall outside the local role for women. In addition, “expat” women also have salience in their new environment—they are noticed—and this can be a distinct business advantage. Locals often take pride in developing business relationships with women expatriates because by doing so they can suggest that the foreign stereotype of their culture is superficial and incomplete.

However, a number of problems limit the firm’s ability to pursue a geocentric policy. Many countries want foreign subsidiaries to employ their citizens. To achieve this goal, they use immigration laws to require the employment of host-country nationals if they are available in adequate numbers and have the necessary skills. Most countries, including the United States, require firms to provide extensive documentation if they wish to hire a foreign national instead of a local national. This documentation can be time consuming, expensive, and at times futile. A geocentric staffing policy also can be expensive to implement. Training and relocation costs increase when transferring managers from country to country. The company may also need a compensation structure with a standardized international base pay level higher than national levels in many countries. In addition, the higher pay enjoyed by managers placed on an international fast track may be a source of resentment within a firm.

Summary

The advantages and disadvantages of the three approaches to staffing policy are summarized in Table 17.1. Broadly speaking, an ethnocentric approach is compatible with an international strategy, a polycentric approach is compatible with a localization strategy, and a geocentric approach is compatible with both global standardization and transnational strategies. (See Chapter 12 for details of the strategies.)

TABLE 17.1 Comparison of Staffing Approaches

Staffing Approach

Strategic Appropriateness

Advantages

Disadvantages

Ethnocentric

International

Overcomes lack of qualified managers in host nation

Produces resentment in host country

Unified culture

Can lead to cultural myopia

Helps transfer core competencies

Polycentric

Localization

Alleviates cultural myopia

Limits career mobility

Inexpensive to implement

Isolates headquarters from foreign subsidiaries

Geocentric

Global standardization and transnational

Uses human resources efficiently

National immigration policies may limit implementation

Helps build strong culture and informal management networks

Expensive

While the staffing policies described here are well known and widely used among both practitioners and scholars of international businesses, some critics have claimed that the typology is too simplistic and that it obscures the internal differentiation of management practices within international businesses. The critics claim that within some international businesses, staffing policies vary significantly from national subsidiary to national subsidiary; while some are managed on an ethnocentric basis, others are managed in a polycentric or geocentric manner.15 Other critics note that the staffing policy adopted by a firm is primarily driven by its geographic scope, as opposed to its strategic orientation. Firms that have a broad geographic scope are the most likely to have a geocentric mind-set.16

• QUICK STUDY

1. Outline the advantages and disadvantages of an ethnocentric staffing policy.

2. Outline the advantages and disadvantages of a polycentric staffing policy.

3. Outline the advantages and disadvantages of a geocentric staffing policy.

EXPATRIATE MANAGERS

LEARNING OBJECTIVE 3

Explain why managers may fail to thrive in foreign postings.

Two of the three staffing policies we have discussed—the ethnocentric and the geocentric—rely on extensive use of expatriate managers. As defined earlier, expatriates are citizens of one country who are working in another country. Sometimes the term inpatriates is used to identify a subset of expatriates who are citizens of a foreign country working in the home country of their multinational employer.17 Thus, a citizen of Japan who moves to the United States to work at Microsoft would be classified as an inpatriate (Microsoft has large numbers of inpatriates working at its main U.S. location near Seattle). With an ethnocentric policy, the expatriates are all home-country nationals who are transferred abroad. With a geocentric approach, the expatriates need not be home-country nationals; the firm does not base transfer decisions on nationality. A prominent issue in the international staffing literature is expatriate failure—the premature return of an expatriate manager to his or her home country.18 Here, we briefly review the evidence on expatriate failure before discussing a number of ways to minimize the failure rate.

Expatriate Failure

The premature return of an expatriate manager to the home country.

ANOTHER PERSPECTIVE The World’s Friendliest Countries

HSBC’s Expat Explorer Survey shows that New Zealand, Australia, and South Africa are the three nations where it’s easiest to befriend locals, learn the local language, integrate into the community, and fit into the new culture. New Zealand, in the top spot, had high scores in all four categories. Seventy-five percent of respondents living there reported that they were integrating well in the local community; in Australia it was 77 percent and in South Africa 79 percent. The least friendly country for expats, according to the Forbes formula, was the United Arab Emirates. And among the countries most challenging for expats overall were Saudi Arabia, Qatar, Russia, and India, according to this year’s HSBC survey results. India ranked in last place for the second year in a row. New Zealand, Australia, and South Africa were helped to the top of the list because more than half the expats surveyed there—58 percent in New Zealand, 75 percent in Australia, and 72 percent in South Africa—say they are native English speakers. Coming in just behind the top three in terms of friendliness were Canada (dropping slightly from the top spot last year) and the United States.

  Source:www.forbes.com/sites/bethgreenfield/2012/01/06/the-worlds-friendliest-countries-2/.

Expatriate Failure Rates

Expatriate failure represents a failure of the firm’s selection policies to identify individuals who will not thrive abroad.19 The consequences include premature return from a foreign posting and high resignation rates, with expatriates leaving their company at about twice the rate of domestic managers.20 Research suggests that between 16 and 40 percent of all American employees sent abroad to developed nations return from their assignments early, and almost 70 percent of employees sent to developing nations return home early.21 Although detailed data are not available for most nationalities, one suspects that high expatriate failure is a universal problem. Some 28 percent of British expatriates, for example, are estimated to fail in their overseas postings.22 The costs of expatriate failure are high. One estimate is that the average cost per failure to the parent firm can be as high as three times the expatriate’s annual domestic salary plus the cost of relocation (which is affected by currency exchange rates and location of assignment). Estimates of the costs of each failure run between $40,000 and $1 million.23 In addition, approximately 30 to 50 percent of American expatriates, whose average annual compensation package runs to $250,000, stay at their international assignments but are considered ineffective or marginally effective by their firms.24 In a seminal study, R. L. Tung surveyed a number of U.S., European, and Japanese multinationals.25 Her results, summarized in Table 17.2, show that 76 percent of U.S. multinationals experienced expatriate failure rates of 10 percent or more, and 7 percent experienced a failure rate of more than 20 percent. Tung’s work also suggests that U.S. based multinationals experience a much higher expatriate failure rate than either European or Japanese multinationals.

TABLE 17.2 Expatriate Failure Rates

Recall Rate Percent

Percent of Companies

U.S. multinationals

    20–40%

7%

    10–20

69

    <10

24

European multinationals

    11–15%

3%

    6–10

38

    <5

59

Japanese multinationals

    11–19%

14%

    6–10

10

    <5

76

Source: Data From R.L. Tung, “Selection and Training Procedures of U.S., European, and Japanese Multinationals,” California Management Review, Vol. 1.25, NO. 1, pp. 51–71.

Tung asked her sample of multinational managers to indicate reasons for expatriate failure. For U.S. multinationals, the reasons, in order of importance, were

1. Inability of spouse to adjust.

2. Manager’s inability to adjust.

3. Other family problems.

4. Manager’s personal or emotional maturity.

5. Inability to cope with larger overseas responsibilities.

Managers of European firms gave only one reason consistently to explain expatriate failure: the inability of the manager’s spouse to adjust to a new environment. For the Japanese firms, the reasons for failure were

1. Inability to cope with larger overseas responsibilities.

2. Difficulties with new environment.

3. Personal or emotional problems.

4. Lack of technical competence.

5. Inability of spouse to adjust.

The most striking difference between these lists is that “inability of spouse to adjust” was the top reason for expatriate failure among U.S. and European multinationals but only the No. 5 reason among Japanese multinationals. Tung comments that this difference was not surprising, given the role and status to which Japanese society traditionally relegates the wife and the fact that most of the Japanese expatriate managers in the study were men.

Since Tung’s study, a number of other studies have consistently confirmed that the inability of a spouse to adjust, the inability of the manager to adjust, or other family problems remain major reasons for continuing high levels of expatriate failure.26 One study by International Orientation Resources, an HRM consulting firm, found that 60 percent of expatriate failures occur due to these three reasons.27 Another study found that the most common reason for assignment failure is lack of partner (spouse) satisfaction, which was listed by 27 per cent of respondents.28 The inability of expatriate managers to adjust to foreign postings seems to be caused by a lack of cultural skills on the part of the manager being transferred. According to one HRM consulting firm, this is because the expatriate selection process at many firms is fundamentally flawed: “Expatriate assignments rarely fail because the person cannot accommodate to the technical demands of the job. Typically, the expatriate selections are made by line managers based on technical competence. They fail because of family and personal issues and lack of cultural skills that haven’t been part of the selection process.”29

The failure of spouses to adjust to a foreign posting seems to be related to a number of factors. Often, spouses find themselves in a foreign country without the familiar network of family and friends. Language differences make it difficult for them to make new friends. While this may not be a problem for the manager, who can make friends at work, it can be difficult for the spouse, who might feel trapped at home. The problem is often exacerbated by immigration regulations prohibiting the spouse from taking employment. With the recent rise of two-career families in many developed nations, this issue has become much more important. One survey found that 69 percent of expatriates are married, with spouses accompanying them 77 percent of the time. Of those spouses, 49 percent were employed before an assignment and only 11 percent were employed during an assignment.30 Research suggests that a main reason managers now turn down international assignments is concern over the impact such an assignment might have on their spouse’s career.31 The accompanying Management Focus examines how one large multinational company, Royal Dutch/Shell, has tried to come to grips with this issue.

Expatriate Selection

One way to reduce expatriate failure rates is by improving selection procedures to screen out inappropriate candidates. In a review of the research on this issue, Mendenhall and Oddou state that a major problem in many firms is that HRM managers tend to equate domestic performance with overseas performance potential.32 Domestic performance and overseas performance potential are not the same thing. An executive who performs well in a domestic setting may not be able to adapt to managing in a different cultural setting. From their review of the research, Mendenhall and Oddou identified four dimensions that seem to predict success in a foreign posting: self-orientation, others-orientation, perceptual ability, and cultural toughness.

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