RESEARCH AND PRACTICE
IN HUMAN RESOURCE MANAGEMENT

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Edwards, C. & Zhang, M. (2003). Human Resource Management Strategy in Chinese MNCs in the UK: A Case Study with Six Companies, Research and Practice in Human Resource Management, 11(1), 1-14.

Human Resource Management Strategy in Chinese MNCs in the UK: A Case Study with Six Companies

Christine Edwards & Miao Zhang

Abstract

Little is known about the Human Resource Management strategies and practices adopted by multinational companies (MNCs) from developing countries operating in developed countries. This article aims to redress this deficit by reporting on a study of Chinese MNCs operating in the UK. The research found that the Chinese companies adopted local UK practice in the management of their employees. This localisation strategy is not only a pragmatic response to indigenous cultural and regulatory constraints, but also a strategic choice to learn about and to use modern management techniques as part of a ‘catch-up’ process of internationalisation. The findings provide some evidence of convergence in HRM practice, but also suggest there are limitations because in all firms, some elements of the Chinese system remain.

Introduction

MNCs increasingly dominate the world’s markets, and are playing a central role in the globalisation of economic activity. In turn, the internationalisation of markets for products and services is requiring multinationals to develop new forms of trans-national management organisation. Among these, the ways in which MNCs manage their personnel on an international scale are increasingly viewed as critical to the success of globalising strategies (Bartlett & Ghoshal, 1989). Research on HRM strategy in MNCs has concentrated largely on MNCs from advanced economies that use ‘home practice’ in their subsidiaries. Little is known about other strategies, in particular, the strategy adopted by MNCs from countries that are new entrants to global markets.

This article aims to redress this deficit by reporting on a strategy of ‘absorption localisation’ adopted by Chinese MNCs in the UK. The research found that these Chinese companies adopt a localisation strategy when they extend their business into global markets. This localisation is not only a pragmatic response to indigenous cultural and regulatory constraints, but also a strategic choice to learn about and to use modern management techniques as part of a ‘catch-up’ process of internationalisation which has been termed ‘absorption localisation’ in this paper. Using this strategy, these companies have been replacing their domestic management system by UK practices in order to compete globally. On this basis, it is argued that ‘absorption localisation’ could be a way for new entrants into global markets to advance their international management systems.

A substantial body of literature has examined ‘best practice’ diffusion within MNCs (e.g., Guest, College & Hoque 1996, Ferner 1997, Edwards & Ferner 2000), reflecting the significance attached to the effective management of people across national boundaries for MNC performance. However, research in the area focuses mostly on HRM strategy in which ‘best practice’ is diffused from the home country to plants in other countries (Edwards 1998), and which is almost exclusively related to MNCs from developed countries (Adler 1992, Warner 1997), predominantly the US and Japan (Chol & Beamish 1995, Brewster, Tregaskis, Hegewisch & Mayne 1996, Ferner 1997, Edwards 1998). There has been little research into other HRM strategies and practices, and empirical studies are rare. The HRM strategies that have been adopted by multinational companies from newly industrialised countries and developing countries in their internationalisation process have yet to be investigated (Edwards & Ferner 2000).

Chinese MNCs are an interesting case for study. Until the 1970s, they operated in a domestic arena characterised by a centrally planned economy with little experience of competing in world markets. When the Chinese government adopted a policy of outward investment and encouraged participation in global markets they had a great deal to learn. It is plausible to suggest that Chinese MNCs would choose a localisation strategy to absorb local advanced management practice when they operate in a developed country such as the UK. Thus, adoption of local practice would be a ‘rational’ strategic choice for MNCs to absorb mature international management experience. This article reports on research into Chinese MNCs operating in the UK. It does so by exploring the characteristics of ‘localisation strategy’ and how it has been implemented. First, is provided an analysis of the concept of localisation, then examines the internationalisation process of Chinese MNCs and the characteristics of the Chinese HRM system. Second, it reports on the findings of six case studies of HRM strategy and practice in Chinese subsidiaries in the UK. Third, it explores the factors promoting absorption localisation in these companies, and then discusses the implications of these findings for the conduct of HRM in MNCs.

The Reasons for Localising Management Practice

The degree to which companies operating overseas are encouraged to adapt their management practice in response to local conditions has been the subject of much debate. It has been argued that the substance of a HRM strategy will be shaped and constrained by an MNC’s position in the world economic system, and by cross-national differences (Perlmutter 1969). These differences are said to constrain the implementation of home practice in overseas subsidiaries. Localisation is seen as a pragmatic strategy of compliance with local constraints, and usually occurs in areas of high regulation and where cultural conflict between the country of origin and host country exists. Local laws and regulations often demand specific practices, thus limiting a firm’s discretion in this area. Host-countries may respond negatively to imported policies that violate cultural or social norms. Furthermore, economic conditions may not support practices that work well in the firm’s home country (Dedoussis 1995, Jain, Lawler & Morishima 1998). These factors, variously referred to as ‘national differential pressures’ by Martinez and Jarillo (1991), ‘different local preference’ by Adler (1992), and ‘local somorphic’ pressure by Ferner (1997), as well as Ferner and Quintanilla (1998), force MNCs to localise their HRM practices. For example, very large institutional and cultural differences oblige Western MNCs operating in China to adopt localisation in many areas of HRM (Child 1994). Ferner (1997) points out that this kind of localisation is normally partial, only concerning areas subject to local regulation, and ‘rank and file’ or lower level staff rather than those at management level. As this localisation is positively related to the strength of local institutional and cultural systems, it can be termed ‘compliance localisation’ (Muller 1998).

A wider form of localisation may be found in those MNCs whose business relies on the demands and tastes of local markets or customers. Recruitment of staff with local expertise and knowledge becomes crucial to gain competitive advantages in local markets. Consequently, they apply the practices and policies of the host country in order to use local labour resources. This kind of localisation may vary considerably within MNCs with individual subsidiaries making adjustments according to their local conditions. Localisation in this context may not only mean compliance with local institutional/cultural constraints, but also the utilisation of the comparative advantages of a local labour force. Thus, it could be termed ‘utilisation localisation’.

Another kind of localisation identified in recent research involves the ‘reverse diffusion’ of employment management practice. Edwards (1998), and Ferner and Varul (1999) have found that some UK multinationals operating in Japan, and some German MNCs in the UK, absorb local practices, and then diffuse them back to home firms and other subsidiaries. In this case, MNCs absorb local advanced international management experience as part of their internationalisation process. From this point of view, localisation gives competitive advantages in the global economy (Edwards & Ferner 2000). Local practice is a source of standard or best practice which can be absorbed by a subsidiary, and then transferred to home firms or other subsidiaries. Thus, it could be termed ‘absorption localisation’. This last form of localisation may be particularly appropriate for MNCs from less developed countries operating in more advanced economies.

Thus, localisation may have different orientation owing to an MNC’s position in the world economy and national differences. Compliance localisation is likely to take place in those MNCs that have comparative advantages in the global economy or have a competitive strategy dependent on domestic products and technology, but with a large difference in national culture and institutions from the host-country. Utilisation localisation is more likely to be adopted by MNCs that largely rely on local product and technology to gain local competitive advantages. In the case of MNCs from countries that are less economically advanced and inexperienced internationally, and which operate in a country with experience and success in the global economy, an absorption localisation is more likely. The main difference between compliance, utilisation and absorption localisation is that local constraints or local competitive pressure cause the first two and global competitive pressure causes the latter. Furthermore, no diffusion activities are involved in the first two forms. While diffusion is a main element in absorption localisation, in particular, a reverse diffusion of local practice back to the country of origin may be involved.

Chinese MNCs, Internationalisation and HR Strategy

China has moved away from the centrally planned economy that existed before the 1970s. Radical economic reforms have introduced competition into the domestic market and the loss of market share at home combined with government incentives has encouraged companies to internationalise (Warner 1993). Young, Huang and McDermott (1996) describe the way in which Chinese MNCs’ business strategies are moving on from only exporting products and materials to investing in developed countries in order to use local advanced product technology and management knowledge to achieve competitive advantage. Other studies have found a strategy of ‘total participation’ in international competition is emerging in some Chinese MNCs (Duan 1995). One of the critical factors in the success of Chinese MNCs operating in developed countries will be whether or not Chinese HRM can meet the requirement of this internationalisation process.

The cultural distance between the HRM in China and the Western oriented societies has been documented by several studies (Hofstede 1980, 1991, 1997, Adler 1992, Warner 1993, 1997, 1998, Child 1994, Benson & Zhu 1999). The few that directly compare HRM in the UK and China (Kao, Hong & Chan 1990, Hofstede 1993, Easterby-Smith, Malina & Yuan 1995), have found significant differences. Management cultural values in the UK have been described as high on individualism, moderately low on both uncertainty avoidance and power distance, and moderately high on masculinity (Hofstede 1993, 1997). In contrast, Chinese culture has been described as high on power distance, low on individualism, moderate on uncertainty avoidance and masculinity, and high on long-term orientation. Thus, there are major differences in management culture between the two countries with a strong emphasis on collectivism and obedience in China, and on individualism and equality in the UK. Consequently, conformity to the organisation and harmony in management-worker relationships are encouraged in Chinese organisations while individual responsibility and adversarial relationships are apparent in UK institutions. Prior to the 1970’s reforms in China, there was no labour market, jobs were centrally allocated by the state and employees were not free to move between provinces (Zhao & Wu 1988, Goodall & Warner 1997). The managers of a Chinese organisation had no part in the recruitment, selection and reward of employees. Party members controlled trade unions, and union officials’ duties were confined to resolving employee’s welfare and family problems. They had no role as employee representatives as there is no system of collective bargaining as operated in the UK. The personnel department was in charge of administration, control, conformity, discipline, punishment and records of employees’ personal details (Ding, Fields & Akhtar 1997). This contrasts with a much broader role in the UK that typically includes recruitment, selection, reward, performance management, training, and employee relations. In the light of these substantial organisational and cultural differences, some authors have concluded that it would be extremely difficult to transfer Chinese HRM to other countries (Easterby-Smith et al. 1995, Warner 1997).

There is evidence, however, of some change in HRM practice following economic reforms designed to move China from a ‘command economy’ to one more responsive to the market (Chan 1993, Warner 1993, 1997, 1998, Child 1994). These have led to the introduction of new employment policies and to the development of new employment relationships in many firms including state owned enterprises. Employment law now sanctions a wide set of practices, previously more commonly found in joint venture firms, such as fixed-term labour contracts, performance-based rewards systems, as well as greater individual contributions to social security arrangements (Warner 1993). Performance appraisal systems are being used by many Chinese enterprises to weaken the old practice of egalitarianism and to facilitate the abolition of the ‘iron rice bowl’.

Increasing adoption of the preceding practices show that there is recognition in China that Western management techniques can confer competitive advantage and their acquisition will enhance the process of economic development. A number of factors, therefore, strongly suggest that a localisation strategy in HRM would likely be adopted by Chinese MNCs in the UK. Clearly, cultural differences between the UK and China would render the implementation of Chinese HR practice in the UK difficult and a significant degree of compliance localisation might be expected. More potent is the fact that Chinese MNCs, as new entrants to global markets and with a government remit to internationalise, need to learn advanced management practice in order to compete globally. Further, increasing competition from Western firms and the adoption of some Western HR practice at home also adds to the motivation to acquire such expertise. Thus, the conditions for utilisation and absorption localisation are also present. This proposition, however, has yet to be subjected to empirical investigation. In the following sections is reported the findings of six case studies of the HRM strategic choice and practice in Chinese MNCs in the UK.

Methodology

Participants

In-depth case studies of HRM strategy and practice in six UK subsidiaries of Chinese MNCs were conducted between 1997 and 1999. They are subsidiaries of China’s leading and largest state-owned enterprises and started their international expansion in the early 1980s. Four are from the financial sector and two are in international trade. Employee numbers in the companies range from 30 to 200. They are all located in London which, as an international financial and trading centre, provides both the opportunity for, and pressure on, these companies to use and absorb advanced management practices.

The parents of these subsidiaries are leading companies in the trading or financial sectors of the Chinese nation. When the government decentralised the management of enterprises in international trading and services they obtained more autonomy and were given the freedom to start their international expansion. In short, in terms of their establishment/expansion process, these subsidiaries have obvious potential to absorb and diffuse UK management practice. However, it was also apparent that the potential varied in each company owning to differences in the financial position and corporate strategy of the parent company.

The six subsidiaries were chosen as their parent companies had endorsed similar expansionary strategies. In all six cases the establishment or expansion of these subsidiaries was a response of the parent company to the Chinese government’s ‘open-door’ policy that provided an opportunity to expand their business into international markets. A further factor was that with the introduction of a market economy in China, these MNCs started to lose their monopoly position at home. Therefore, they needed to learn how to compete effectively in an open market and also to expand their international operations in order to compensate for increasing competition at home.

Procedure

The research started with interviews in all six companies. Initially open-ended interviews were used because of the complexity of the phenomenon under study and the relative scarcity of previous work in this area. Then semi-structured interviews were conducted with the majority of senior managers and middle managers, and a cross section of employees. In total, there were 181 respondents. Reports and information on company performance, work force data, and other business documents were also collected. The interviews with senior managers and middle management focused primarily on the relationships between HRM strategic choice and the MNC’s internationalisation process, the extent of localisation of HRM, and the influence of the external and internal environment on HRM practice.

Analysis

Quantitative data are not given in this paper. Rather, an overview of the responses is provided in a descriptive format.

Results

Localisation Strategy

Interviews with the chief executives in the six companies confirmed certain key factors had indeed led to a strategy of HR localisation. All stated that their companies wish to learn and use UK management practices although the reasons they gave for doing so varied. In particular, there were differences in the degree to which they saw positive benefits in adopting UK HRM rather than merely a requirement to comply with local regulation and practise. One Chief Executive Officer (CEO) from a finance company clearly took the latter view, explaining that they have to depend on local expertise if they want to extend their markets into the UK and they could not attract and retain local talent if they did not follow local labour management practices. For him a localisation strategy was the only way the company could retain the local expertise it required. The CEO from another financial company, on the other hand, indicated that it was formed to establish an international business and viewed learning modern techniques on how to manage people as integral to its success. He said that business and people management was totally different in China, but that their parent company was changing and learning modern management techniques from the West. Its overseas subsidiary, in adopting a localisation strategy in management, provides a good opportunity to master new approaches and knowledge.

While all the companies studied currently follow a localisation strategy, this has not always been the case. One with a long history in the UK evidently used home HR practices until the 1980s when there was a major shift in business direction. These examples demonstrate a clear relationship between the shift of these MNCs’ position in their national economy and their HRM strategies. They also suggest that while the cultural distance between Chinese and Western HRM persists, Chinese firms wanting to compete internationally will adopt localisation strategy.

The main mechanism for localisation was through increasing the proportions of local employees in the company, especially at the management level. All six organisations have local employees at the middle manager level. In four of the investigated subsidiaries, all middle managers are local and in the other two subsidiaries, 70 per cent of the middle management cadre are local. Three subsidiaries have local managers at the top level. In two of the companies, locals comprise one quarter of senior management, and in one of the studied subsidiaries, 75 per cent of the senior manager cadre are locals. In the other three cases, all senior managers are Chinese expatriates. The personnel managers in the three largest firms are from the UK.

There appears to be a relationship between the stage of Chinese economic reform at which companies were established and the use of local staff. In the two companies that were set up in the UK before the ‘open door’ policy, over 90 per cent of staff below the level of management were expatriates or local Chinese. Those established after 1980 as part of the process of internationalisation have the highest proportions of local staff, notably at management level. This model facilitates the utilisation of local advantages. It could also serve the purpose of learning and absorbing local practices.

The Adoption of UK HRM Practice

In order to establish the degree to which UK HRM practice had been adopted, senior general and personnel managers were asked about company policy in relation to specific areas of personnel management and employee relations. UK middle managers and key staff were asked for their opinion on the extent to which the company’s practices are similar to that of local companies, and Chinese expatriates were also asked to assess the extent to which the company’s practice is different to that of the parent company. Responses from senior managers all indicated that UK HRM policies and practices are extensively used in their companies. The majority of, but not all, middle managers also think UK HRM practice is widely applied.

Nonetheless, in all cases some elements of the Chinese management system endure and localisation is not complete, and there were differences between the six cases. For example, in response to the question, “Do you think that this company is like a UK or a Chinese company?” a third of non-managerial staff in one case said that their company is more like a Chinese company. However, all other interviewees, both British and Chinese, said their firm was more like a UK company. The findings, therefore, revealed a significant implementation of UK HRM practise in five of the firms.

The data show that a market-led managerial structure has been established in all six companies. Business is no longer centrally planned by their parent companies and subsidiary managers have some autonomy. Three of the six companies can undertake their own business planning without interference from the parent company. Moreover, a single-line decision-making system has replaced the traditional dual-line system in all the companies, and the chief executive is responsible for both business and personnel. As to the HR function, all have extended their HR from purely personnel administration to take on some strategic aspects. Line managers are also involved in some HR activities.

Market-led recruitment, labour contract and remuneration systems are emerging. The traditional Chinese ‘job for life’ and ‘egalitarianism’ system is no longer dominant. Five of the six companies recruited largely from the local market and used employment contracts for all local employees. The companies also adopt the local remuneration structure and criteria for the salary and benefits of local staff.

The data on work organisation and industrial relations shows that these companies are moving towards structures and processes typical of UK practice. All six companies have moved towards flatter organisational structures with some delegation to line managers, and for individuals there are clear descriptions of jobs and responsibilities. Moreover, formal systems of appraisal have been introduced in most of companies. Some of them use the system for performance improvement, some for training purposes, and some for performance-related pay. The majority of local respondents interviewed think that work organisation and employee relations are similar to other UK organisations, and the expatriates feel overwhelmingly that it is substantially different from Chinese practice.

Cross-Organisational Learning Activities in the Six Companies

The survey found that some cross-organisational activities have been taking place in the six subsidiaries. Four main diffusion activities were identified: (a) providing formal training programmes for the managers from home firms and other subsidiaries, (b) training home firm managers in the subsidiaries, (c) sending local staff to parent companies in China to train the managers there, and (d) introducing and exchanging ‘best practice’ though conferences or management meetings. There was significant variation in the scope and extent of these activities. In all cases, UK management systems have been diffused to both domestic firms and overseas subsidiaries, but three were more heavily involved and had large training programs directly planned and controlled by the parent company. The significance attached to these operations by the parent company shows that they are an integral part of the internationalisation process rather than an accidental phenomenon, as Ferner and Varul (1999) suggest in their research on German MNCs.

Discussion

From these observations, it is apparent that localisation in HRM in the six cases has been shaped by the changes in the MNCs’ business strategies. However, the research has also revealed variation in the type and extent of localisation. In particular, it was clear that the appearance of absorption localisation and its extent are promoted or constrained by organisation structure and managerial characteristics. The most important structural factor promoting localisation in these six companies is government ownership. With the financial support and encouragement of the Chinese government, these state-owned companies could engage in totally new international business areas and pay a high price for local labour resources. Part of the remit set by the government was to learn and diffuse back expert practice. Moreover, the well-established central control systems in these companies facilitate cross-learning activities and reverse diffusion.

The second method of localisation uses a mixed model of both expatriates and locals at the managerial level, but with the top management positions held by the expatriates. A staff composed of both expatriates and locals could provide opportunities for the learning and diffusion of local practices (Edwards 1998). However, where the top management consists mainly of expatriates, this could promote the influence of the country of origin on subsidiary practice (Ferner 1997). Thus, it is not clear whether the employment of local staff alone is sufficient to ensure localisation. It is, therefore, necessary to look for more detailed evidence of localisation through the examination of actual HR practice in the six cases. In terms of the characteristics of absorption localisation, two-types of evidence are needed. One is the use of local practices in a subsidiary and the other is cross-organisational learning activity diffusing practice throughout the MNCs.

It was also evident from the study that market position and business integration affect the extent and nature of localisation and diffusion. The more the company depends on a local market for its services, the more localisation in HR practice is apparent. The greater the degree of business integration between the subsidiaries and HQ, and other subsidiaries, the more diffusion activities are found. The scope of localisation and diffusion also reflects the extent to which they are dependent on local or international markets. For example, one company intended to use all local staff in order to acquire international expertise in the financial sector when it was set up in the UK. However, the main business of the company has been to assist European firms investing in China, therefore they had to recruit some Chinese staff in order to facilitate communication with China and HQ. In contrast, another company initially used all Chinese expatriates who had difficulty in understanding the UK markets and customers. Eventually, it had to recruit local staff in order to operate effectively.

Scrutiny of the business histories of the six companies showed that the way in which they had grown including methods, maturity, and size also influence the process, extent and nature of localisation. First, growth through acquisition of a UK company facilitated adaptation and utilisation localisation, while diffusion localisation was associated with mature, larger organisations. Second, where growth or establishment of the company is through acquisition, localisation is more easily accomplished. In the two companies that had expanded through taking over UK firms, the local system of management was retained almost without change. However, in another company that started from scratch by recruiting local staff from different organisations, the Chinese senior managers experienced difficulty in forming a unified management system and culture even though the majority of staff were from the UK.

Structural factors may promote or retard localisation and diffusion, but managerial process and competency have more influence on their nature and extent. As state-owned companies working with a strong central control system, the working relationship of the subsidiary manager with the parent company is critical. Managing the conflicting demands of the parent company and the need to adopt local practice is a difficult task. In the six companies, the expertise of the top expatriates in international management clearly influenced their ability to promote the absorption of local practices. Moreover, the more successful and internationally experienced subsidiary managers have greater bargaining power with the parent company. In addition, the attitudes to localisation of both expatriates and local managers make a difference. Their willingness to adopt local practice and their expertise and capacity to absorb it, are further significant factors.

Conclusion

Studies of MNCs and their management practices have concentrated on MNCs from advanced economies. Most of these MNCs follow a policy of using home practice whilst operating overseas in the belief that this maintains competitive advantage. Where they localise HR practice they do so in compliance with local constraints, or in order to utilise local expertise. In contrast, this study (one of the first examining the HRM strategies of MNCs from less developed economies) found that significant HRM localisation has taken place in all the Chinese UK subsidiaries researched. Such a finding was not unexpected because despite radical change in the economic and management systems of China, considerable institutional and cultural differences between China and Western advanced economies remain. In view of these, it was anticipated that Chinese MNCs operating in the UK would be obliged to adopt local management practice. However, not only had UK HRM practice been implemented to a substantial degree in all the cases, some UK practices have been diffused back to the parent company and other subsidiaries. HRM localisation was not a matter of expediency or compliance, but was seen as having an important part to play in the MNCs’ international and economic development.

The main mechanism for localisation was the employment of local staff, particularly at management level. This allowed the acquisition of local expertise and provided the need and the opportunity to learn local HR and management practice. A number of cross-organisational learning activities were also identified adding to the small body of research that has emphasised the significance of localisation in organisational learning (Edwards 1998). However, the research also found significant variation in the type and degree of localisation. As might be expected, compliance and utilisation localisation were evident in all six cases. But in three, a unique feature was the marked emphasis placed on the absorption and diffusion of local practice. Unlike the German companies studied by Ferner and Varul (1999), this was not an ‘accidental’ process, but a deliberate policy supported by the Chinese Government to enable Chinese MNCs to compete effectively in global markets.

The study has also shown that the process of strategic choice and the scope of localisation was promoted or constrained by organisational and managerial factors. Centralised organisational structures, state ownership, business similarities and the maturity of MNCs seem to exert a much stronger influence in the cases observed in this study than those of MNCs from developed economies. Managerial factors such as the relationship with HQ, the attitudes and abilities of top expatriate and local managers also play important roles. This observation suggests that absorption localisation is not an automatic process and that it is influenced by several different factors.

The study has shown that in the case of Chinese MNCs in the UK, the introduction of Western human resource management practice is closely linked with changes in business strategy in the wake of China’s economic reforms. Localisation in the Chinese MNCs studied is not only an adaptation to local cultural and regulatory constraints, but also a way to learn and use advanced technology and management. Mastering modern management techniques is central to China’s development policy and essential to compete in global markets. Thus, more generally, the results of the study demonstrate that competitive advantages in globalisation can be obtained from adopting local practice. More specifically, the findings show that localisation could be one way for MNCs from developing countries to standardise their international management systems and speed up their internationalisation process. The outcomes of the study also suggest that with globalisation, HRM in MNCs is moving towards convergence. At the same time, the presence of significant variation within this relatively small and undifferentiated sample of cases demonstrates that convergence is far from complete.

Authors

Professor Christine Edwards is the Head of the School of Human Resource Management, Kingston University Business School, U.K.

Dr. Miao Zhang is a senior lecturer at the School of Human Resource Management, Kingston University Business School, U.K.

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