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Lecture 3 – Institutional and Organizational Contexts

Institutional contexts
WHAT ARE INSTITUTIONS
 Structures and activities that provide stability to a society
 They consist of:
o Family system
o Education system
o Economic system
o Religious systems
o Social systems
o Political systems
 These sets of systems altogether provide the set of conditions of which organizations take action on
o Rules of the game which allows organizations to compete with each other in a national context
o Non-conformity results in increased costs and risks, and decreases legitimacy
 Costs like fines or penalties; risks like learning how to fit in; legitimation is following the rules of the game, which
is defined by institutional contexts
 Institutions are largely defined by the legal system of a society  laws and regulations

HOW INSTITUTIONAL CONTEXTS INFLUENCE ORGANIZATIONS AND THEIR HRM


 Associations/ correlations between institutions and HRM
 Coercive mechanisms
o Institutions have coercive power, which means that HRM should follow institutional contexts
o Can be through:
 Legislation and government policies regarding HRM
 Influence of trade unions and works councils
o Pressure coming from institutions that are more powerful than the organizations
 Organizations feel pressured to follow the rules and regulations from institutions because it is explicitly stated by
laws and regulations
 Mimetic mechanisms
o Tend to imitate what other organizations do
 If see that other competitors are still following the rules and you are trying to benchmark against their actions in
the market, tend to imitate other similar and successful organizations
o Organizations’ response to uncertainty
o You follow other organizations similar to you
 Normative mechanisms
o Engagement with professional bodies, employers’ associations, etc
o Adopting standards associated with a particular context (eg industry)
o Normal mechanisms is where you follow rules and norms by listening to third party/ professional body within the industry/
market

DIFFERENT ECONOMIC SYSTEMS


 An indicator of the level of economic freedom of a society
o Ease of doing business in the society
o The level of intervention by the state
 The above factors determine each of the 3 types of economic systems:
o Liberal market economy
 Uses calculative HRM models
 Freedom to manage;
 Emphasis on short-term competition;
 Flexible deployment of staff  layer of stand down employees based on contracts;
 Pay linked to individual performance;
 Training regarded as an overhead
o Coordinated market economy
 Uses collaborative HRM models
 Constraints on managerial freedom through state regulations and other influences;
 Longer-term orientation;
 Investment in training;
 Relative job security;
 Employee involvement and participation
o State socialism (and communism)
Institutional sphere Liberal market economies Coordinated market economies State socialism
Weak industry associations; Strong industry associations; industry-specific
Education and training State-controlled
transferable skills skills

Weak trade unions; lower Strong trade unions; higher employment Labour collective (workers have
Industrial relations employment protection; fluid labor protection; less fluid labour markets; longer rights to jobs & associated benefits);
markets job tenure state-controlled labor market

Contractual relationships; a lot of Wages coordinated by trade unions;


Firm-employee relations State-controlled
authority for managers consensual style of decision making

Based predominantly on market Connected through cross-shareholding and State-controlled (bureaucratic


Inter-firm relations
transactions and licensing membership in strong employer associations control)

Large equity markets, access to Access to capital is based on reputation as


Financial markets State-controlled
finance depends on market valuation opposed to share value

Austria, Germany, Japan, Finland, Denmark, Former Soviet Union, Cuba, North
Examples USA, Canada, UK, Australia, NZ
Belgium, Netherlands, Switzerland Korea

HRM models Calculative Collaborative State-controlled

 Examples:
Practical work in a company and accompanying instruction at a vocational
school – these are the two pillars of the German dual vocational training
model.

The fact that participants receive a monthly salary is particularly attractive for
the apprentices.

Collaboration between the company and the government sector (education


system)  tend to collaborate with each other and invest resources, time and
training for their workforce

People in North Korea do not have the freedom to choose their occupations 
once you’re assigned a job from the government, it is your lifelong job; it is fixed
by the government as a means of exerting control over the people

The reason the government assigns jobs is very simple: As part of strict control
over all kinds of resources under its collectivism system, the government
researches how many people are needed in each industry and location, and
assigns people accordingly

DIFFERENT LEGAL SYSTEMS


 Rules for behaviour, enforced through a set of institutions
o Shapes government, economics and society
o When issues arise among different parties, primary social mediator of:
 Relations between people
 Relations between people and organizations
 Rules are a tool to help mend these issues
 Three major systems:
o Common law, Civil law, Religious law (Sharia)
 IHR Managers from MNEs need to develop policies and practices that stay within the laws and regulations of each country in which
they operate
o Legal systems is an institution that has coercive power, normative power and mimetic influence
o Need to follow what other people and other organizations are doing, or need to follow what is required to be done
o A reference point to begin with when developing policies in specific countries

Common law Civil law Religious law


General legislations and statutes, based on All-inclusive system of written rules with Explains the “way’ individuals should live or
Characteristics a few long-standing traditions stated in the 3 types of codes – commercial, civil, and the “path” they must follow. The scope of the
Constitution criminal law covers almost every aspect of human life.

Traditionally, jurisprudence interprets and


Focus on interpretations of law
refines the law. In modern days, judges apply
Roles of court Focus on application of the law the law.
Judges have substantial power to interpret
the law according to circumstances
Application varies from country to country

Islamic law (Sharia), most of Middle East,


Examples Commonwealth countries, US Roman law, Napoleonic Code, France
North Africa
LAWS AND REGULATIONS RELEVANT TO GLOBAL HRM
 Laws MNEs need to navigate – national, supranational, extraterritorial
 National laws
o MNEs need to comply with national laws in each of the countries they operate
o Employment laws are concerned with:
 Workers’ rights
 Wages and compensation
 Working time and conditions
 Employee representation (eg trade unions)
o Other national laws relevant to global HRM:
 Immigration and visas
 Personal data privacy and protection
 Anti-discrimination
 Termination and reduction in workforce

From left to right; indicates the


ease of terminating workers,
lesser amounts of paperwork
involved for lower scores


 Intellectual property
 Supranational laws and standards
o Internationally agreed-upon regulations and standards
o Agreements, standards, and legal frameworks developed by:
 International organizations
 Eg UN, OECD, ILO (International Labor Organization)
 International economic treaties
 Eg EU, NAFTA, Mercosur, ASEAN, APEC
o Different levels of validity
 Directly binding
 Obligation to implement the agreement through national law
 Strictest way
 Indirectly binding
 Obligation to implement the agreement but not directly passed into law
 Non-binding
 Guidelines and recommendations only
 No legal obligation for implementation

An example of an agreement among countries 


when it comes to work and employment, there is
formal guidance by the UN in relation to human
and labor rights

Some countries have explicitly included these


principles in their law  will be directly binding

Other countries may not have direct laws, so will


be indirect binding or simply recommendations

Agreement by international organization (ILO)

Principles set out by ILO regarding working


environment – includes many regulations and
guidelines
 Extra-territorial laws
o MNE’s home country laws applied in foreign subsidiary locations
o Laws of a subsidiary location applied to operations beyond this location  law is not only limited to one country but can be
extended
o Exceptions to the general rule in which foreign subsidiaries of MNEs are accountable to the local laws
o Application of MNE’s parent/home country laws, typically to parent-country nationals
 Anti-discrimination legislations
 Anti-bribery laws
 Foreign Corrupt Practices Act (FCPA)
 US law that prohibits US firms and individuals from paying bribes to foreign officials to further business
deals
 Contains 2 main articles: 1) anti-bribery provisions, and 2) books, records, and internal control
provisions, which speaks to accounting practices
 FCPA applies to prohibited conduct anywhere in the world and extends to US publicly traded
companies  although not in US, must follow this rule if working for US firm
 Laws against fraudulent financial activities
 Sarbanes-Oxley Act
o Application can be extended to a foreign subsidiary operating in other foreign locations

Organizational context of global HRM


ORGANIZATIONAL STRUCTURE
 Organizational structure represents how decisions are being made within the organization
 Depicts locations where decisions are made to achieve business goals
 Described in 3 ways:
o Differentiation (extent of complexity)
 Highly differentiated  means high degree of complexity exists
 Vertical differentiation
 The number of levels in the hierarchy
 Horizontal differentiation
 The number of different types of jobs that exist
 Spatial differentiation
 The extent which physical facilities and personnel are geographically dispersed

Samsung:
In 2013 – more vertical differentiation for
CE, IM and DS departments

In 2015 – structure looks mostly the


same, but now more horizontal
differentiation; now have 5 main
departments, vertical differentiation also
reduced under each of the departments
o Formalization
 Structure represents how formalized the organizational hierarchy is
 Vertical & hierarchical structures
 Means that organization’s decision making is highly formalized
 Horizontal structures
 More informal decision making
o Centralization
 Hierarchical structures
 Decision making is centralized
 Decisions are usually made by senior leaders/ those at the top
 Horizontal, highly dispersed, team-based structure
 Structure is decentralized; decision making can happen anywhere
 Design – 2 archetypes of organizational structure

o Mechanistic structure
 More traditional type of structure
 Organized by functional or divisional, more horizontal differentiation
 Organized in a hierarchical manner – decision making tends to be highly centralized and formalized, from top
down
o Organic structure
 4 different structure types that are interconnected to each other
 Low levels of differentiation, no hierarchy
 No separated or differentiated functions; meaning that decision making happens anywhere
 Everyone is interdependent on each other, decentralized authority
 Determining organizational structure
o Role of institutions
 A broader context
 Provide ground rules of a society to which organizational have to comply
 Political, social, and legal rules
 Eg governance structure should follow the institutional context
o Role of societal/national culture
 More informal
 Provide more direct effects on organizational structure
 Subconscious influence on value orientations of leaders of the organization
 Subconscious influence on the extent to which members/employees of organization accept the
structure

FORMAL VS INFORMAL ORGANIZATION


 Organizational structure
o Formal context
o A formal depiction of where decisions are made within an organization
o Explicitly given in the information about how authority within the organization is divided or represented
o Within institutional contexts
 Organizational culture
o Informal influence on conducts within the organization
o Cannot really be seen
o A set of assumptions shared by organization members that guide behaviour
o A set of normative behaviours of employees and managers and relationships between these individuals
 Represents what the required/ desired behaviour is in certain situations
 How they should act in a given situation/ perform in their job
o Is a tool that can be used to resolve any conflicts between employees
o Can be positive and negative
 Positive  increases business outcomes
 Important to share and form positive/ functional culture within the company, bc it facilitates decision
making in formal structures by supporting the structure
 Negative  dysfunctional; when culture is too strong, prevents organizations from changing/ being proactive
 Culture is shared beliefs, and if it is strongly formed in our value system it becomes very hard to make
changes
 Formal and informal organizations; structure and culture are closely related and entangled with each other
o Because culture reflects the degree to which the members approve/ support the organization’s structure
o Culture supports structure
o Both as a whole act as a strong mechanism to influence organizations’ decision making

ORGANIZATIONAL CULTURE
 Effects on members
o Gives a sense of belonging and oneness (identity) to members
o Provides a mechanism through which members’ behaviours are shaped to achieve organizational goals
 Explains why group members behave in similar ways – bc culture sets a norm, sets behaviour standards whereby
people have to comply or follow to support their business goals so that they can improve business outcomes
together
o Becomes a major obstacle for organizational change
 Shaped not just by societal/national culture
o Industry characteristics can also be important; aids in shaping norms and values
o Eg one organization in construction, the other in service/ IT  both cultures would be very different
 Construction industry – involves a lot of physical work, depends on customers’ needs, highly values safety and
order
 IT industry – being flexible, fast, importance around data security
 4 archetypes of organizational culture  Family, Eiffel tower, Guided missile, Incubator
STRATEGIC CONTEXT
 Strategy is how businesses achieve their goals, missions and values so that they can increase their business outcomes
 Two conflicting strategic directions in managing international operations that shape a different set of MNE strategies:
o Direction for differentiation
 Emphasis on local adaptation
 Focus on responding to local environments
 Adapt to local consumers needs
 Local culture and institutional contexts
o Direction for internal consistency
 Emphasis on integration of international activities
 Need to be consistent between HQ and subsidiaries
 Less focused on local culture and institutional context, more interested in how to transfer their HQ systems and
knowledge towards their subsidiaries
 Why do firms want to integrate their international operations?
o Organizational replication logic
 Tendency of firms to duplicate existing structures and procedures that are effective
 Taking successful management in home operation to overseas
o Imperative for control
 Want to have control over subsidiaries
 Standardization of policies and procedures
 To reduce complexity and uncertainty involved in controlling overseas subsidiaries and offices
 Subsidiary full of uncertainty bc they have not been in that overseas market yet
 In reality, it is a balancing act
o Cannot escape pressures for local adaptation
o Depends also on the industry
 Some industries (eg food) tend to adopt certain strategies in other countries

WHY DOES STRATEGY MATTER


 MNE’s strategy influences:
o The nature of HQ-subsidiary relationship
 About where the primary authority is to make decisions
 Location of decision-making authority – HQ, subsidiary or both
 Centralization vs decentralization
 If companies want centralized power, then will focus on HQ having more control
 If companies want decentralized power distribution, then decision making authority will be equal
across HQ and subsidiaries
o Role of HR functions
 Strategy defines the HQ-subsidiary relationship
 Roles expected at the global (HQ) and local (subsidiary) levels will then be determined
HQ-SUBSIDIARY RELATIONSHIPS
Strategies Multinational Global International Transnational
Core competencies
Decentralized; nationally Dispersed, interdependent &
Assets & capabilities Centralized; globally scaled centralized; others
self-sufficient specialized; working together
decentralized
Differentiated contributions by
Role of overseas Sensing and exploiting Implementing HQ Adapting & leveraging HQ
national units to integrated worldwide
operations local needs strategies competencies
operations
Development &
Developed & retained Developed & retained at Developed at the centre & Developed jointly by multiple units &
diffusion of
within each unit the centre (HQ) transferred to overseas units shared worldwide
knowledge

Goal in relation to Focus on global


Focus on local adaptation Focus on transferring HQ Balancing the two principles through
the adaptation consistency & integration
& responsiveness technology to foreign units maintaining the global standard
integration principle for the sake of efficiency

In the middle, not extremely


Not interested in Power comes from HQ to interested in either Want to do both integration and
transferring systems from the subsidiary; little integration or differentiation; differentiation, HQ and subsidiaries
Note
HQ, so strength of the coming from subsidiary to relationship weaker than are interdependent on each other to
relationship is very weak HQ global but stronger than build better systems
multinational

MNE STRATEGY AND GLOBAL HR


Strategies Multinational Global International Transnational
Global HR
Decentralized Centralized Centralized Decentralized
structure

Relationship
Dependent (on the
between local HR Independent Dependent (on the corporate HR) Interdependent
corporate HR)
functions

Influencing; using
Implementing; control over all Process champion; formal &
informal processes Coordination & integration; small
high-grade positions via informal influence on local
Corporate HR role to integrate; limited HQ HR function; guardians of the
career management & activities via career management
to dealing with the organizational culture
international mobility & international mobility
corporate elite

Most HR functions HQ processes adapted & Aligned to HQ via formal &


Subsidiary HR role One-way relationship to HQ
devolved transferred informal systems

Focus on local Do not strive for efficiency or local Focus on both local adaptation
Goals Focus on global efficiency
responsiveness responsiveness to same degree and global efficiency

HOW CAN CONTROL BE EXERCISED IN MNEs


 Formal control
o Organizational strategy
 Explicitly states the focus of the company as an MNE
 Defines the relationship between HQ and subsidiary  this influences their operation models
o Reporting systems
o Budgets
o Organizational structure
 Decision-making protocol; depicts where decisions are made
 Informal control
o Organizational culture
o Social capital
 Intangible asset based on social networks
 The networking between HQ and subsidiary or between subsidiary and local institutional contexts
 Developed through interpersonal communication and relationships

GLOBAL HR FOSTERS INFORMAL CONTROL MECHANISMS


 Since strategy can define the relationship between HQ and subsidiary and formal mechanisms can be determined by structure and
strategy, HR should help and support informal control mechanisms to help facilitate the operational business
 Managing international mobility
o Cross-border project teams and expatriation
o Assigning jobs to promote boundary spanning activities
o Providing resources to project team leaders as to foster personal networks
 Planning and implementing corporate events  these are good ways to get connected between subsidiary & HQ
o Global training programs
o Meetings and conferences
o Information sharing and knowledge transfer
Tutorial 3
DISCUSSION QUESTIONS
Discussion activity:
Which company reflects which type of strategy?

McDonalds Global
 Example of a typical TNC in the service operation (tertiary sector)
 It is the world's largest chain of hamburger fast-food restaurants with over 35,000 outlets in 119 different countries across the globe
 To cater for different cultures in different countries, local specialization is used  different types of burgers and menus are available
in different countries
 Although the product may look the same, there are differences in energy intake, fat content, protein content, serving weight and etc.
The Big Mac is also often used as a symbol for American capitalism and the price of the Big Mac in different countries is used as a
reference point for comparing the cost of living in different countries  called the 'Big Mac Index'. Currently, Switzerland is the most
expensive and Venezuela the cheapest.
 It is a TNC bc it centralizes some strategic decisions to cut costs while remaining responsive to cultural distinctions; and while their
HQ is in the US where the company was originally founded in 1940, many of their offshore operations are owned locally by host-
country franchisees that are independent businesspeople.

P&G
 Transnational company
 Puts huge focus on gaining insight into consumers’ everyday lives, focus on what consumers need and demand
 Both local adaptation and global efficiency is key
 Eg Pampers in the US  tape diapers, Japan  pull up diapers – reinvent their key products based on the target market
 P&G regularly provides training so their employees can be exposed to different environments, capabilities, people, and more
importantly, different projects  knowledge-sharing is a very important work culture in P&G
 For instance, it has sent over 50 people to its innovation centres outside of Singapore to learn and get hands-on experience so they
can come back and share their knowledge with their peers here

Microsoft
 Global
 HQ in America
 Don’t have to alter their products to meet cultural trends or preferences

CASE STUDY – FERRO & LENOVO


1. Which of the four HR approaches do Ferro and Lenovo adopt? International, global, multinational, or transnational?
2. What are the strengths and weaknesses of their HR approaches?
3. What should HRM function of these companies do to enable them to become global companies? 

Ferro multinational strategy


 Share information and technology and train and develop staff with an international outlook
 Every subsidiary is independent  ‘each foreign divisions or subsidiary operated highly independently, formulating much of its own
strategy for manufacturing, marketing, finance and human resources’
 Strengths:
o Better communicate with locals
o Customer accessibility will be high
o Highly adaptable
o High flexibility
 Weaknesses:
o Low consistency  different management controls
 Can lead to duplication of resources, lack of control
 Lose benefits of centralization
 More expensive
 Not sharing, learning from each other
 HRM function
o Acquisitions of local companies that already have the knowledge of the culture that is present

Lenovo undertakes transnational strategy


 Integrate their management team  half Chinese, half American; more female than male
 Don’t consider nationality for top management positions, focus on their skills and capabilities  merit based, less centralized, more
flexible approach
 Recruitment practices push it more towards the transnational strategy
 High internal consistency using the integrationist approach
 Strengths:
o Remain responsive to needs of people in different environments
o There is coordination and integration between HQ and subsidiaries, company uses same set of principles to guide
workforce management in all locations
o Broad principles established for easier catering of products to locals
 Weaknesses:
o Learn about different cultures in different countries before they enter the market, high uncertainty
o More time consuming, costly
 HRM function
o Acquisitions of local companies that already have the knowledge of the culture that is present

NOTES
 Coercive, mimetic, normative  ways of control, ways that an organization is pressured into behaving a certain way; standards of
practice that need to be followed
 Coercive
o Rules and regulations
o HR/ organization must comply with laws  eg minimal wage
 Mimetic
o Peer pressure
o Similar organizations behave in a certain way, so we must behave the same way
o Eg other company pays staff a certain amount, so you would want to match that to stay competitive
 Normative
o Not legal obligations, but code of practice; standards that are observed  industry associations
o Eg different industries like accounting, CPA sets standards
 Difference between low differentiation and high internal consistency
o Differentiation is external; how they look at things externally
 Companies are rarely standing still; often heading from one to another
o Highlight evidence that shows that the company is undertaking a certain approach now
o And then show how there is also evidence to suggest that they may be moving to another strategy
 Downside of global approach
o Not adaptable – harder to react to local change and forces
 Local model adapted to local context can be adapted globally by the head office and rolled out in every other country

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