Chapter 18 Outline

Staffing Policy

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 corporate culture.³ By corporate culture, we mean the organization's norms and value systems. We encountered the concept in Chapter 13 when we discussed the use of "cultural controls" in businesses, noting that strong cultural controls help the firm pursue its strategy. Firms pursuing transnational and global strategies have high needs for a strong unifying culture, and the need is somewhat lower for firms pursuing an international strategy and lowest of all for firms pursuing a multidomestic strategy (see Table 18.1).

In firms pursuing transnational and global strategies, we might expect the HRM function to pay significant attention to selecting individuals who not only have the skills required to perform particular jobs but who also "fit" the prevailing culture of the firm. General Electric, for example, which is positioned toward the transnational end of the strategic spectrum, 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 US 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, which has a significant need for integration, will experience fewer problems with performance ambiguity.

The need for integration is substantially lower in a multidomestic firm. There is less performance ambiguity and not the same need for cultural controls. In theory, this means the HRM function can pay less attention to building a unified corporate culture. In multidomestic firms, the culture can be allowed to vary from national

	International Strategy
Structure and Controls	Multidomestic	International	Global	Transnational
Centralization of operating decisions	Decentralized	Core competency centralized Rest Decentralized	Some centralized	Mixed centralized and decentralized Informal Matrix
Horizontal differentiation	Worldwide area structure	Worldwide product division	Worldwide product division	Informal Matrix
Need for coordination	Low	Moderate	High	Very High
Integrating mechanisms	None	Few	Many	Very many
Performance ambiguity	Low	Moderate	High	Very high
Need for cultural controls	Low	Moderate	High	Very high

Table 18.1

Strategy, Structure, and Control Systems

operation to national operation. (Although, given the questionable viability of a multidomestic strategy in today's world, this might not be the best policy to pursue. Chapter 12 discusses the viability of this strategy.)

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.⁴ 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

An ethnocentric staffing policy is one in which all key management positions are filled by parent-country nationals. This practice was very widespread at one time. Firms such as Procter & Gamble, Philips NV, and Matsushita 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. In many Japanese and South Korean firms today, such as Toyota, Matsushita, and Samsung, key positions in international operations are still often held by home-country nationals. According to the Japanese Overseas Enterprise Association, in 1996 only 29 percent of foreign subsidiaries of Japanese companies had presidents that were not Japanese. In contrast, 66 percent of the Japanese subsidiaries of foreign companies had Japanese presidents.⁵

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, prefer 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.⁶ Procter & Gamble until recently preferred to staff important management positions in its foreign subsidiaries with US nationals who had been socialized into P&G's corporate culture by years of employment in its US 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 supporting the transfer with 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. In one highly publicized case in the United States, Mitsubishi Motors was sued by the federal Equal Employment Opportunity Commission for allegedly 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.⁷

The Polycentric Approach

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 that expatriate managers are vulnerable to. A second advantage is that a polycentric approach may be less expensive to implement, reducing the costs of value creation. Expatriate managers can be very 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 multidomestic 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 pursing a polycentric staffing policy, food and detergents giant Unilever found that shifting from a multidomestic strategic posture to a transnational posture was very difficult. Unilever's foreign subsidiaries had evolved into quasiautonomous 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.⁸

The Geocentric Approach

A geocentric staffing policy seeks the best people for key jobs throughout the organization, regardless of nationality. There are a number of advantages to this policy. 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 and transnational strategies (see Table 18.1).⁹ 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. Thus, other things being equal, a geocentric staffing policy seems the most attractive.

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 very expensive to implement. There are increased training costs and relocation costs involved in 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 18.2. Broadly speaking, an ethnocentric approach is compatible with an international strategy, a polycentric approach is compatible with a multidomestic strategy, and a geocentric approach is compatible with both global and transnational strategies. (See Chapter 12 for details of the strategies.)

While the staffing policies described here are well known and widely used among both practitioners and scholars of international businesses, recently some critics have claimed that the typology is too simplistic and that it obscures the internal differenti

	Staffing Approach	Strategic Appropriateness	Advantages	Disadvantages
	Ethnocentric	International	Overcomes lack of qualified managers in host nation Unified Culture Helps transfer core competencies	Produces resentment in host country Can lead to cultural myopia
	Polycentric	Multidomestic	Aleviates cultural myopia Inexpensive to implement	Limits career mobility Isolates headquarters from foreign subsidiaries
	Geocentric	Global and translational	Uses human resources efficiently Helps build strong cultre and informal management network	Expensive

Table 18.2

Comparison of Staffing Approaches

ation 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.¹⁰ 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 very broad geographic scope are the most likely to have a geocentric mind-set.¹¹ Thus, Coca-Cola, which is involved in about 200 countries, is by this argument more likely to have a geocentric mind-set than a firm that is involved in only 3 countries.

The Expatriate Problem

Two of the three staffing policies we have discussed--the ethnocentric and the geocentric--rely on extensive use of expatriate managers. 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.¹² Here we briefly review the evidence on expatriate failure before discussing a number of ways to minimize the expatriate failure rate.

Expatriate Failure Rates

Expatriate failure represents a failure of the firm's selection policies to identify individuals who will not thrive abroad. 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).¹³ 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.¹⁴ Although detailed data are not available for other nationalities, one suspects that high expatriate failure is a universal problem. Estimates of the costs of each failure run between $250,000 and $1 million.¹⁵ In addition, approximately 30 to 50 percent of American expatriates, whose average annual

Table 18.3

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 25 (1982), pp. 57-71.

compensation package runs to $250,000, stay at their international assignments but are considered ineffective or marginally effective by their firms.¹⁶ In a seminal study, R. L. Tung surveyed a number of US, European, and Japanese multinationals.¹⁷ Her results, summarized in Table 18.3., suggested that 76 percent of US 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 US-based multinationals experience a much higher expatriate failure rate than either European or Japanese multinationals.

Tung asked her sample of multinational managers to indicate reasons for expatriate failure. For US 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 US and European multinationals but only the number-five reason among Japanese multinationals. Tung comments that this difference is 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 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. One study by International Orientation Resources, an HRM consulting firm, found that 60 percent of expatriate failures occur due to these three reasons.¹⁸ 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 management 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".¹⁹

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 has become a much more important issue. Recent 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.²⁰ The accompanying Management Focus examines how one large multinational company, Shell International Petroleum, 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.²¹ 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.

1. Self-orientation. The attributes of this dimension strengthen the expatriate's self-esteem, self-confidence, and mental well-being. Expatriates with high self-esteem, self-confidence, and mental well-being were more likely to succeed in foreign postings. Mendenhall and Oddou concluded that such individuals were able to adapt their interests in food, sport, and music; had interests outside of work that could be pursued (e.g., hobbies); and were technically competent.

2. Others-orientation. The attributes of this dimension enhance the expatriate's ability to interact effectively with host-country nationals. The more effectively the expatriate interacts with host-country nationals, the more likely he or she is to succeed. Two factors seem to be particularly important here: relationship development and willingness to communicate. Relationship development refers to the ability to develop long-lasting friendships with host-country nationals. Willingness to communicate refers to the expatriate's willingness to use the host-country language. Although language fluency helps, an expatriate need not be fluent to show willingness to communicate. Making the effort to use the language is what is important. Such gestures tend to be rewarded with greater cooperation by host-country nationals.

3. Perceptual ability. This is the ability to understand why people of other countries behave the way they do; that is, the ability to empathize. This dimension seems critical for managing host-country nationals. Expatriate managers who lack this ability tend to treat foreign nationals as if they were home-country nationals. As a result, they may experience significant management problems and considerable frustration. As one expatriate executive from Hewlett-Packard observed, "It took me six months to accept the fact that my staff meetings would start 30 minutes late, and that it would bother no one but me." According to Mendenhall and Oddou, well-adjusted expatriates tend to be nonjudgmental and nonevaluative in interpreting the behavior of host-country nationals and willing to be flexible in their management style, adjusting it as cultural conditions warrant.

4. Cultural toughness. This dimension refers to the fact that how well an expatriate adjusts to a particular posting tends to be related to the country of assignment. Some countries are much tougher postings than others because their cultures are more unfamiliar and uncomfortable. For example, many Americans regard Great Britain as a relatively easy foreign posting, and for good reason--the two cultures have much in common. But many Americans find postings in non-Western cultures, such as India, Southeast Asia, and the Middle East, to be much tougher.²² The reasons are many, including poor health care and housing standards, inhospitable climate, lack of Western entertainment, and language difficulties. Also, many cultures are extremely male dominated and may be particularly difficult postings for female Western managers.

Mendenhall and Oddou note that standard psychological tests can be used to assess the first three of these dimensions, whereas a comparison of cultures can give managers a feeling for the fourth dimension. They contend that these four dimensions, in addition to domestic performance, should be considered when selecting a manager for foreign posting. However, current practice does not conform to Mendenhall and Oddou's recommendations. Tung's research, for example, showed that only 5 percent of the firms in her sample used formal procedures and psychological tests to assess the personality traits and relational abilities of potential expatriates.²³ Research by International Orientation Resources suggests that when selecting employees for foreign assignments, only 10 percent of the 50 Fortune 500 firms they surveyed tested for important psychological traits such as cultural sensitivity, interpersonal skills, adaptability, and flexibility. Instead, 90 percent of the time employees were selected on the basis of their technical expertise, not their cross-cultural fluency.²⁴

Mendenhall and Oddou do not address the problem of expatriate failure due to a spouse's inability to adjust. According to a number of other researchers, a review of the family situation should be part of the expatriate selection process (see the Management Focus on Shell for an example).²⁵ A survey by Windam International, another international HRM management consulting firm, found that spouses were included in preselection interviews for foreign postings only 21 percent of the time, and that only half of them receive any cross-cultural training. The rise of dual-career families has added an additional and difficult dimension to this long-standing problem.²⁶ Increasingly, spouses wonder why they should have to sacrifice their own career to further that of their partner.²⁷