Local nationals (or locals) are the citizens that reside in a multinational corporation’s host country. When an organization decides to venture out into global markets, it may elect to send some of its current employees to start the business with the intent of integrating local nationals into the process. However, the management team will have to address political, economic, and cultural issues that may arise in the designated country. In order to address the different types of inequities that may arise, those in the international business arena must develop policies and procedures that address these issues and create a sense of fairness for everyone involved. Many believe that that there should be standards for social responsibility and ethics in order to make sure that developing countries are not exploited. Having a formal global approach to these types of challenges can ensure a sense of fairness for everyone involved in the process.
Organizations need to decide if it is best to establish the international business function internally or externally. It is important for organizations to assess their current workforce to determine if they will need to rely on expatriates to establish a presence in the host company or whether it is more feasible to hire employees from the host country in order to minimize cultural and language barriers.
If the organization elects to start internally, it may assign a team to set the budget, ship products, and develop the international marketing plan. However, this can become expensive, so the organization may evaluate two other options. One option is to hire employees from the host countries. Many organizations elect this option in order to minimize cultural and language barriers and secure labor that is cheaper than its current workforce. If the organization elects to hire employees from the host country, it is important that it assimilates these new hires into its corporate culture so that they will have an understanding of what the organization values and how it operates.
In 2007 Farzad Khan introduced a conceptual framework that identified four representational approaches to understanding how social inequities surface in developing countries as they attempt to venture into international business. When the model was created, it was established that there are many parties involved in the process. Since representation ranged from local workers to international mass-media organizations, each party was defined in terms of geography. The two categories introduced are locals and foreigners. Locals were defined as individuals or entities that are primarily located in the developing countries. Locals are very diverse and have different perspectives and interests. Individuals falling into the “foreign” category are those that do not fit into the “local” category. Significant players in the foreign group would include international businesses that are directly involved in specific situations and their critics.
Both of these groups are considered to be “represents” as they work to resolve issues that arise. Each situation is analyzed and evaluated on the represents’ role in the situation and the worldview of the situation. The approaches attempt to conceptualize the representation of the ethical issues involving international business in the developing world. The four different approaches are:
- Approach 1 (No-speak): Foreigners are the represents and the issue is expressed from a foreign world viewpoint. The local residents have no voice and they have no input into the worldview. Local worldviews have no place in the development of issues and the local experience is not considered relevant in social equity issues. Most of the international business research follows this approach (i.e., Hofstede’s Culture’s Consequence).
- Approach 2 (Us-speak): The commonality between this approach and the first approach is that the foreigners are the represents. However, the difference is that the worldview incorporates the local experience. This approach attempts to represent local realities (local view) in a way that the local inhabitants understand the situation. In many instances, the represented places himself in the locals’ position and attempts to articulate the viewpoint based on the locals’ perspective.
- Approach 3 (Same-speak): The locals are the represents and the worldview is the same as the foreigner’s perception. Locals represent themselves based on one or more worldviews that originate from the West (i.e., modernism, post-structuralism, secular nationalism). Many of the most influential representations of ethical issues that affect international business in developing countries are based on this approach.
- Approach 4 (Other-speak): Locals are the represents, and international business issues are explained in the context of local viewpoints. When evaluating this approach, representation is being explained by locals using local concepts.
The approaches provide an explanation as to how foreigners and locals perceive the severity of social issues, which is important to the interactions in the business community. Multinational corporations have to understand the culture and values of the countries where they do business. Otherwise, the corporation may suffer as a result of conflict on social and business ethics issues. There has to be some sense of social responsibility on the part of the multinational corporation.
George England and the Meaning of Working (MOW) International Research Team conducted a study that explored what work meant to people all over the world. Participants came from countries such as Japan, Yugoslavia, Israel, the United States, Belgium, the Netherlands, Britain, and Germany. The meaning of work was evaluated on three core concepts, which were work centrality, societal norms about working, and work goals. Work centrality measured the importance and value of work as it related to the individual’s life. Societal norms about working addressed beliefs and expectations regarding special privileges and duties associated with work. Work goals explored the work-related outcomes that were preferred by the participants across the span of their career. The researchers discovered that the higher the mean work centrality score, the more motivated and committed the workers are in society. Looking from a global human resource planning initiative, the results of the study provide organizations information about why employees value work and what they need in order to be satisfied with their jobs.
However, management teams have to be cautious with these results and explore other research that deals with global workforces. One will need to assess the importance of work as it relates to having a quality of work life. For example, Americans are known to work the longest hours in a year and value job duties over family responsibilities. However, that practice is not the norm in all cultures. Therefore, organizations will have to determine what is important to the local nationals in each country that they desire to enter.
There are different levels of international employees around the world. An expatriate is an employee who is sent by a company in one country to manage the operations of the same company in another country. There are three types of expatriates: parent country nationals (PCNs), host country nationals (HCNs), and third country nationals (TCNs).
Parent country nationals (PCNs) are employees who are born and live in the parent country. These employees tend to be responsible for starting up operations at locations in another country. A hiring manager is responsible for staffing these operations with employees who can adapt to the new environment and be self-motivated. Some of the highly desired characteristics of a candidate include work experience with other cultures, knowledge of multiple foreign languages, and extensive overseas travel. However, some multinationals are concerned about hiring too many PCNs given the additional expenses that are incurred by the company. For example, the multinational will have to consider costs such as relocation expenses, cultural training, housing assistance, taxation allowances, incentives and rewards, and family issues.
Host country nationals (HCNs) are employees who are born and raised in the host country. Multinationals have found that hiring managers from the host country is an opportunity to build good public relations with the natives of that country. This approach shows an economic commitment on the part of the multinational by providing locals with the opportunity to gain employment and fueling the local economy. Another incentive is that hiring an HCN is not as costly as hiring a PCN.
Third country nationals (TCNs) are employees who were not born or raised in either the host or parent country, but work in the host country. These candidates tend to be sought when there are jobs that require a certain level of expertise and skills to perform certain jobs.
Different countries will utilize different combinations of these employees to staff their international operations. Four of the major approaches utilized include the following:
- Ethnocentric staffing approach: The staffing plan is dictated by the multinational’s values, attitudes, practices, and priorities. The corporate office is responsible for establishing human resource policies and practices as well as selecting candidates who are equipped to provide leadership to the subsidiaries in other countries.
- Polycentric staffing approach: Although the corporate office may make all of the hiring decisions, there is consideration for the needs of the local subsidiaries. In addition, the policies and practices are developed at the local level to meet the needs of the locals filling the jobs. Although locals are selected for managerial positions, it is rare for these individuals to be promoted to the corporate office. These employees tend to be promoted to positions at the local level only.
- Regiocentric staffing approach: Human resource policies and practices are dictated by the needs of the region. The approach utilized is similar to what occurs in the polycentric staffing approach. However, there is a broader territory—it is regional versus local. Therefore, there are opportunities to hire and promote workers to regional levels.
- Geocentric or global staffing approach: The multinational’s focus is to look at the “big picture” and develop a plan that provides optimal utilization of all resources, not just human resources. Local and regional concerns are not given priority; rather, they are given equal weight as some other factors in the decision-making process.
Staffing practices are developed at the corporate level and the selection process is based on a global pool without regard to a person’s country of origin or cultural background.
When considering these approaches, the organization must consider issues such as the following:
- National concerns: Multinationals are expected to work within the legal parameters of the host country. Therefore, it is essential to be aware of the local employment law policies and practices.
- Economic concerns: The multinational has to consider cost of living expenses (i.e., housing, food, incentives, and rewards).
- Technological concerns: Given the increased use of technology in business operations, multinationals need to determine if the host country’s workforce has a skilled pool of potential candidates.
- Organizational concerns: The multinational’s level of internationalization as well as the product life cycle are two important factors evaluated when determining staffing needs.
- Cultural concerns: It is imperative that the corporate office considers the differences between the corporate and subsidiary cultures when making staffing decisions and policies.
Localization has different meanings depending on the audience. Some view the concept to mean the removal of expatriate allowances but retention of the home-country base salary and long-term benefits, whereas others believe that it means to remove expatriate allowances as well as shift the employee’s base salary to the host-country levels while the long-term benefits remain the same as the home country’s plan. When creating a compensation system for international employees, one must take four basic components into consideration: base salary, indirect monetary compensation (benefits), equalization benefits, and incentives.
The base salary is the foundation of an international compensation system because it represents the minimum rate at which a candidate will work for your company. Some organizations have elected to develop an international compensation system based on the policies and procedures of the parent company’s country, whereas others have created an international compensation program based on the host country. Regardless of which practice is utilized, it is important for the compensation professional to consider what happens to the employee’s pay once they leave that assignment. On average, the typical international assignment usually lasts from three to five years.
Indirect monetary compensation means benefits. Although most benefits packages are the same as what is offered in the home country, organizations must consider how to address situations where a host country may require certain benefits that are not offered in the home country. It may be in the organization’s best interest to consider offering such benefits in order to keep employees motivated and maintain positive attitudes.
Equalization benefits are those benefits offered in an effort to minimize any financial hardships that an employee may experience as a result of considering an international assignment. Some of these benefits include housing allowances, educational allowances, language and culture training, employment opportunities for spouses, and emergency leave.
Some organizations have found that it is beneficial to offer incentives to expatriates. Some of these incentives include an assignment completion bonus, cash bonuses, stock options, and performance-based bonuses.
One of the most popular theories addressing the compensation field is equity theory. Equity theory implies that individuals evaluate whether or not they are being treated fairly by comparing their situation to others. In this scenario, it is common for an employee to compare his/her pay to the pay of other employees, especially those coworkers performing the same duties. Many researchers and practitioners in the field strongly believe that work attitudes and perceptions are based on whether or not an employee believes he/she is being fairly compensated in comparison to the perception of what other employees are being paid. This theory applies to both internal and external structures.
Organizations tend to address these concerns via market pay surveys (external equity) and job evaluations (internal equity). In order to ensure that external equity and internal equity issues are addressed, human resource professionals should consider the following tools when preparing an international compensation package: (1) an international compensation management grading system that is comparable to the domestic grading system; (2) a base salary delivery process that is integrated into the home country’s base pay system but that also takes local country laws into consideration; (3) an incentive and reward system that motivates employees worldwide; and (4) a performance management system that rewards employees regardless of their geographic location.
- Ando, D. Rhee, and N. Park, “Parent Country Nationals or Local Nationals for Executive Positions in Foreign Affiliates: An Empirical Study of Japanese Affiliates in Korea,” Asia Pacific Journal of Management (v.25/1, 2008);
- Gowan and C. Ochoa, “Parent-country National Selection for the Maquiladora Industry in Mexico: Results of a Pilot Study,” Journal of Managerial Issues (v.10/1, 1998);
- Herrmann and J. Werbel, “Promotability of Host-Country Nationals: A Cross-Cultural Study,” British Journal of Management (v.18/3, 2007);
- Khan, “Representational Approaches Matter,” Journal of Business Ethics (v.73, 2007);
- Robert T. Moran, Philip R. Harris, and Sarah V. Moran. Managing Cultural Differences: Global Leadership Strategies for the 21st Century. Managing Cultural Differences Series (Elsevier/Butterworth-Heinemann, 2007);
- Toh and A. DeNisi, “Host Country National Reactions to Expatriate Pay Policies: A Model and Implications,” Academy of Management Review (v.28/4, 2003);
- Vance and Y. Paik, “Forms of Host-country National Learning for Enhanced MNC Absorptive Capacity,” Journal of Managerial Psychology (v.20/7, 2005).
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