Expatriate Management in MNCs as Knowledge Management

Expatriate Management in MNCs as Knowledge Management Expatriate Management in MNCs as a Form of Knowledge Management and its Applicability in Reduction of Soaring Turnover Rates: a Case Study Approach Abstract This dissertation in International Human Relations addresses the potential of expatriate management as a tool of knowledge management and its applicability to the reduction of turnover rates in a global economy. Companies today cannot survive and prosper without some form of globalisation. When an appropriately planned expatriate program is utilised, the flow of information supports knowledge transfer, which can enhance the entire functionality of the company. The specific vehicle for knowledge transfer will be cross-cultural training, with its generalisable lessons for the global corporations. In this research, the case study approach is utilised along with the study of archival materials. After extensive research into the United States Peace Corp and its handling of expatriates, Tyco Flow Control/KTM Company of Japan and Electrolux of Sweden, supported by an extensive review of current literature, this dissertation reaches the conclusion that the decision on whether or not to use expatriates and in what fashion they should be used must be based on a combination of the needs of the company and the companys organisational structure. Expatriation is expensive and companies should plan for success if they intend to utilise an expatriate program. However, the knowledge gained from the study of expatriate programs can be successfully utilised to mange the spread of knowledge throughout the organisation and to develop interventions, which will lower the overall rate of turnover within an organisation. Certainly, we cannot afford to ignore these lessons. Chapter One Introduction 1.1 Chapter Introduction There are a number of challenges involved in the development of multi-national corporations (MNCs) in todays era of globalisation. Increasingly the trend has been for companies to utilise expatriates on tasks that are critical to the companys operation or continued success. MNCs use expatriates for a number of reasons. In general, the perception exists that it is easier to control an employee from the home office, carefully chosen and indoctrinated in the companys culture. Thus, the concept of corporate control plays a large role in the selection and the use of expatriates, but it is certainly not the only reason. Many times, expatriates have specialties that the company believes it can export when developing the global market. In addition, expatriates who have been thoroughly trained in the companys procedures can be very valuable during the process of entering new markets and setting up the office and administrative under structure that inevitably follows such expansion. Human resources management inevitably becomes more complex in an international venue. Companies must consider not only the corporate culture and the national culture of their home country, but also the national culture of the country or countries which they are expanding into. Expansion into other nations also brings with it a myriad of laws and regulations that may well conflict with the home countrys laws or rules. The situation becomes more complex with each additional field office or subsidiary that the company acquires or develops. 1.2 Context There is a great deal of research that suggests that the way companies manage their human resources contributes to whether or not the company will succeed or fail (Tung, 1984). International human resources management can make or break a new expansion, and poor management of expatriates within established MNCs can send the company into a crisis. Companies must be able to communicate with their employees and to coordinate actions, activities, and regulatory compliance between a number of corporate and governmental entities. Failure to do so successfully can affect the bottom line of any multi-national corporation or company, and can destabilise a company that is not experienced in dealing with international human resources. Financially, there is a great deal at stake for the MNC which utilises expatriates. The obvious cost, of course, occurs if the project that the expatriate is assigned to fails. Such a significant financial blow can, as pointed out, destabilise a company. There are many other costs associated with expatriate management, however, that may not be obvious on the surface. Employees must be recruited into the programme and trained. Their families should receive training regarding the area of assignment. Moving or relocation costs are significant even if the family travels light. Many companies provide housing assistance in the country of assignment, and trips back to the home country on a scheduled basis. All of these expenses add up. One additional expense that must be considered is the replacement of the employee who enters the expatriate programme. If the employee is already a member of the organisation, his or her transfer to a foreign office will leave an internal position that must be filled. MNCs must also consider the ramifications to the company if their expatriate behaves in a fashion that the host country members consider improper. The amount of ill will that can be generated throughout the host community can be nearly incalculable. Even though it is an indirect cost, it can be as devastating as a more direct financial loss. Even in the best of cases, when the expatriation fails without loss of business and the expatriate returns quietly to the home base, the expatriate may leave the company. When this happens, the company loses a valuable employee and the investment that went along with that employees training. When the problem of failed expatriation is looked at from these perspectives, it becomes clear that the financial repercussions may be greater than they appear at first glance, but the loss of money is only a small part of the overall problem of expatriate loss. Indeed, the operation of the entire organisation can be threatened, along with the investments from the companys stakeholders and employees. This provides a great deal of impetus for investigation of the issues related to expatriate management and reduction of turnover both nationally and internationally. In the past, one might make the argument that expatriates and local employees are not in the same category. After all, expatriates face other cultures on a routine, day to day basis. As a matter of fact, they are immersed in their home culture. As Hofstede (2003) points out, every culture defines its own version of being socially correct. These constraints govern how cultures do business. It has become big business to help companies and individuals understand the different ways that host companies interpret what we may consider average, day to day gestures. The various governments recognised this concept long ago. Virtually every country provides some form of training in culture applications for ambassadors and members of the state and foreign service divisions. Nevertheless, business has been slow to adopt that concept. Even when MNCs recognise the need to provide this training, they may not fully understand the impact that the difference in culture has on the employee. The employee generally travels with family, and it is as important to acknowledge that family members and their success at adaptation have a large input into whether or not the employee adapts successfully. Thus, MNCs that fail to include all the family members in a culture immersion programme fail in their handling of expatriates. Today, all companies operate in a multi-cultural environment. Even small mom and pop operations are exposed to customers, suppliers, or regulators who are from other cultures. Nearly every country is now a cultural melting pot of residents, and those that are relatively homogenous still have influx from visitors and tourists. While it is easy to downplay the importance of a single tourist who has wandered off the beaten path, it is impossible in this day and age of modern technology to estimate the importance of that single customer. Placed in context, an unfortunate interchange with an individual who turns out to an important stakeholder in his or her professional community can be devastating. Attitudes of employees to customers or suppliers can cause supply chains to dissolve, large numbers of customers to disappear, or contracts to be cancelled. In a sense globalisation has caused a return to small town front porch mentality where everyone either knows everyone or knows his or her cousin. The Internet and global communications offers such anonymity that it is now possible for a companys largest customer to conduct a surprise visit and not be recognised. Given the right – or wrong – circumstances, the impact on business can be devastating. It is this concern, the concern for the international aspect of all business today, that ties together large MNCs and small, at-home operations and cautions us to develop a greater understanding of other cultures, whether we manage expatriates, or merely serve customers in our tiny walk-in. How a company treats its customers and stakeholders affects the survivability of the business, and retention of well-qualified and well-trained employees is part of that survivability, especially when it relates to cultural aspects of functionality. This paper, then, addresses the system of business that relates to intercultural communication and impacts management of expatriates as well as the home office. At the present time, there is a great deal of research that shows the difficulty that expatriates face on assignment and on repatriation, and there is significant research that indicates that cross-cultural training offers possibilities for helping these employees adapt. There is a gap in the research between these issues and the types of cross-cultural training that may lead to a decreased turnover rate. Additional research may be most helpful. When we review what types of cross-cultural training may be most useful, there is also indication that successful expatriates who return from assignment and remain with their companies may be able to add to the knowledge base of successful adaptation. It is this concept that successful expatriates contribute to knowledge management that I address in this research. Successful management of this knowledge may contribute not only to a lowered turnover rate among expatriates, but may offer suggestions to how business can lower the turnover rate overall. I suggest the concept that expatriate management tends to overlook one extremely important concept: that turnover EVERYWHERE is extremely high, and it will be no different in the expatriate population if we treat regular employees in the same manner that we treat expatriates, assuming the expatriate programme is successful. Thus, development of a plan to manage and retain expatriates has great generalisability for the companys population as a whole with regard to retention. This concept has been touched on in the available research but is not fully developed. A work developing this concept can truly add to the field. 1.3 Aims and Objectives The aims and objectives of the research will be to explore why some MNCs are successful at increasing retention of expatriates and what role cross-cultural training plays in that success; to explain the steps that successful MNCs take in utilising the knowledge they gain in working with expatriates as a form of knowledge management, and to describe how this information can be utilised by other companies to lower the overall general turnover rate. A number of research questions evolved that will be useful in determining why some companies are so successful with expatriates while others are not. The questions will guide the research: How do some MNCs lower the rate of turnover of expatriates? How do companies that lower the rate of turnover of expatriates utilise what they have learned as a form of knowledge management? What role does cross-cultural training play in successful retention of expatriates? What is the generalisability of the success of expatriate management in the MNC as a form of knowledge management and its application to the reduction of soaring general turnover rates? 1.4 Rationale The overall turnover rate of employees throughout the world is soaring. The problem is particularly high in America. The cost to companies of employee turnover is so high that one sometimes wonders how the companies stay afloat. At the same time, there are a number of difficulties with expatriate management. As the rate of expatriate attrition increases, so does the cost to the multi-national company in both financial terms and in terms of morale. In researching problems with international human resources management, particularly problems associated with the management of expatriates, a link between increasing rates of general expatriate turnover and generally high rates of employee turnover seemed to present. Gaps in the research indicate there must be more research into the process of repatriation and knowledge management, for this is the point at which the greatest knowledge exchange back to the company in terms of cultural knowledge should occur. Research must determine what contributes to success repatriation and why some expatriates choose to terminate contracts early. All of these areas will be investigated. The next step, then, is to investigate why some companies seem to manage expatriate programmes successfully, and why some programmes fail. By reviewing successful expatriate management, we may learn general lessons of human resources management that may well contribute to the base of knowledge for the reduction of overall turnover rates throughout the working world. 1.5 Methodology Qualitative research seeks to address the why and how of occurrences, making it ideally suited for a project of this nature. Though there are many forms of qualitative research, two forms seem particularly applicable to the nature of this investigation. A literature review will be conducted, of course, to place the state of the knowledge of expatriate management in the context of general management of human resources. An archival investigation, however, will take and utilise the literature review as a starting point. Through a thorough investigation of archival materials available, additional research information will be gleaned. The case study method will also be utilised to investigate three specific multinational companies or organisations that have had a great deal of success with the expatriates that they managed. Case study approach allows me as the researcher to concentrate on details that might otherwise be overlooked in a traditional literature review. Archival review materials will also contribute to details of the case studies. 1.6 Chapter Outline Chapter One of the dissertation consists of an introduction to the study and places the study in context, the aims and objectives, rationale, and methodology of the paper are reviewed. Chapter Two reviews literature related to the topics of international human resources, expatriate management, turnover, and knowledge management. The literature review presents various perspectives of the research topic and reveals how previous researchers have investigated the topics. The literature review is expected to reveal gaps in the research and suggests areas that this research will explore. It is guided by the aims, objectives, and research questions, but can also provide an indication for modification of those aims, objectives, and questions if changes are needed. Finally, the chapter provides a framework for the overall research. Chapter Three discusses methodology of the research and details the strategies that were undertaken during the research, including data collection methods and methods of analysis. Methodology describes methods that were utilised to conduct the research and defines the reasons they were selected. Chapter Four provides the analysis or the synthesis of the research. It ties together the research questions, the theories behind the research, and the methods of doing the research. Finally, in a good research project, the analysis will actually raise questions that will be guidelines to future research in the field. Chapter Five details the main findings of the paper, gleaned from the analysis, and describes how the results are similar to prior research, but also how they differ. The contribution of the research to the knowledge base of expatriate management and reduction of general turnover rates will be provided, and the limitations of the research will be defined. Suggestions for future research will be provided and ways to reduce limitations of future research will be discussed in the context of the experience of myself as the researcher for this project. The paper will be concluded with a bibliography of works utilised in the preparation of the paper, and if necessary, supporting materials will be provided in appendices. 1.7 Chapter Summary This chapter has set the stage for the research project and dissertation. The subject matter was introduced, and the study was placed in context of international business and human resources. The aims and objectives of the research were described and the rationale for the dissertation was produced. A summary of the methodology of the paper was provided, and a chapter outline of the work was also presented. In summary, Chapter One set the stage for the research and provided an overview of the project. Chapter Two Literature Review 2.1 Chapter Introduction Today, all companies have retention problems (Ramiall, 2004). In 2005, the United States had an overall turnover rate of employment of 23%. Companies face fierce competition in the quest to retain employees (Mitchell, Holtom, and Lee, 2001). Hay (2002) reports that in the past 10 years, employee turnover increased by 25%, making the problem of retaining employees the number one employment problem in the United States (Kaye Jordan-Evans, 2000). With a shortage of potential labour until approximately 2012, the pool of qualified and available labour is small, making the problem of retention much more intense. Clearly a need exists to lower the rate of turnover in companies. While the presented references above are in evidence of a turnover rate in American companies, the issue is global, especially in this day of large multi-national companies. The problem is, perhaps, even more pronounced with expatriates due to the large amount of money it takes each MNC to recruit, train, and support expatriates and their families. A retained expatriate can be an asset to the company; a lost expatriate represents a significant financial drain. It makes sense, then, to explore how expatriates can be retained, and to utilise the knowledge gained to lower the overall turnover rate of the company, thereby increasing retention and decreasing costs. Retention of expatriates contributes to the companys knowledge management capacities and to retention of trained employees in the MNCs, and cross-cultural training seems to offer one of the most promising avenues to encourage retention of qualified employees. The literature review served as a basis of study during the preliminary phases of the project and was supplemented a great deal in the final paper. As the research developed, it was clear that there were many avenues that needed to be explored to gain a holistic understanding of the issues relating to international human resources management and successful administration of expatriation programmes. Through the course of the initial review of the literature, a link became clear between lessons learned by companies that have successful expatriation programmes and companies that could utilise this knowledge in lowering their turnover rates. All businesses today, it is clear, have a multi-cultural aspect that must be addressed. The issue then becomes how multi-culturalism will be addressed and how knowledge gained from successful expatriation can contribute to the overall knowledge of successful MNCs (Sizoo, Plank, Iskat, and Sernie, 2005). This project will help bridge the gap between l arge MNCs with offices in other nations, and smaller companies that may benefit from their knowlege. 2.2 Importance of International Human Resources Management Tye and Chen (2005) state that capturing and maintaining a competitive advantage is not the most important issue for many organisations. At its lowest common denominator, the purpose of business is to make a profit. Friedman (1970) even argued that business has a social responsibility to make a profit for its investors. Friedman argued that business leaders needed to do whatever it takes to acquire and maintain that profit. Tye and Chen (2005) point out that there is now a general consensus that larger companies must operate successfully on a global level in order to capture and maintain the competitive advantage which leads to profit. As businesses have an increasingly international role, how to manage the people in the business on a global scale becomes a huge challenge (Lee and Liu, 2006). Businesses cannot operate without people, despite an increasing dependence upon technology. In order to retain people, there must be adequate human resources management systems. For large international companies, then, the human resources managers and their systems must aim towards acquiring and maintaining people who are competent not only in business, but in functioning in the international environment (Liu and Lee, 2006). For many years, the tendency was to believe that management was the same whether the company being managed was in the managers home country or a foreign land. This universal approach to management is considered an ethnocentric approach (Dowling and Welch, 2004), in which the values established in a corporations home country are the values that predominate through every field office. In this form of management, all of the practices of the business stem from practices and values of the home office, and all of the employees that become managers in field offices are hired and trained at the home office. While this approach offers certain advantages (for instance, the level of corporate control), it is not the most beneficial model of operation if one hopes to expand the business significantly in the targeted areas of other nations (Kuhn, 2000). Indeed, as Kuhn points out, ethnocentric organisations have essentially no advantage in local market areas. What difference is there between a human resources manager that deals with employees within the bounds of one nation, and one that deals with international situations? The basic difference is that when dealing with international human resources issues, the level of complexity between the rules, regulations, and operating mechanisms between different countries can be overwhelming, especially when more than one group of national workers is involved (Dowling and Welch, 2004). The difference may well be less pronounced in the nations of the European Union, where laws and operating regulations have been standardised to a degree, but national identities of workers complicate the issues. Indeed, even strong cultural identification roles can impact the path that international human resources managers must take. In addition, employees who will be fulfilling an expatriate role must be carefully matched to the job. In 1998, Stone suggested that the selection of expatriate employees is much more difficult than selecting personnel who will remain in the home office. This contention, however, is one of the concepts that will be investigated in the research. While Dowling and Welch argue that the selection of expatriates with personal issues such as low capacity to adapt, poor emotional stability, or bad attitude leads towards failure of the match to the expatriates job, one might argue just as easily that a bad attitude, immaturity, and refusal to adapt are indicative of poor selection of any employee, not just an employee who will be expatriated. It may seem simplistic, but a good, stable expatriate employee will make a good employee. On the other hand, a good employee will not necessarily make an adequate expatriate. It is this rule that led to my decision to explore a potential link between expatriate retention and retention of the average employee. Sizoo et al. (2005) concluded that adequate c ross-cultural training of any employee in a MNC greatly increases employee effectiveness and can lead to increased promotions and pay raises, which cut turnover rates. The argument could also be made that the same would apply in smaller companies, especially those in areas with a high cross-cultural population component. An expatriate who has negative attitude, poor emotional stability and maturity, lack of language ability, and a low level of adaptability also is a poor choice in host nations, where the chance of culture shock already exists (Dowling Welch, 2004). 2.3 Turnover Todays companies are faced with the prospect of continually replacing employees who have left the company. The cost of turnover is high both in direct turnover rates related to the physical process of hiring and firing and in the indirect rates of education, checking of the references, and so on. The costs are even higher if the member that leaves is a member of the expatriates, or if the member has recently repatriated at cost to the company. Thus the company cannot afford to keep replacing employees from a financial cost and a morale cost. Some turnover is caused by tension with management while other turnover is caused by having unclear job expectations. Increasingly in the international arena employees leave because they do not understand what they have to do to get ahead, or they feel they followed the companys directions and are still not appreciated for the service they have rendered. Peter Senge has identified three types of leaders: the peer leader, the line manager and the executive. Each one works to help build collaboration, to educate staff, and to strengthen the company culture. Teamwork and teaching should be utilised as a method of advancement (Senge 1990, 1996) and it is in this way that the expatriate can be particularly utilised. These employees can become leaders, and be promoted to management in the future. 2.4 Four Approaches to Management Orientation What exactly constitutes a multi-national company? Loosely defined, it is a corporation or large company that provides goods and/or services in more than one country. The MNC may have operations in a fair number of other countries. To be able to supply goods or services across national lines, the company must have significant resources. Thus, MNCs by their definition have access to a great deal of money or financial backing. The company is financially able to acquire the goods, services, and personnel acquired to function at a high level. To put it bluntly, companies with large budgets can purchase the best; few people would argue that a multi-national company as large, for example, as Wal-Mart, will have an operating budget larger than some small companies. Given that many companies have budgets that can buy the best, why is the expatriate failure rate so high? Black and Mendenhall (1990) pointed out that over 40% of all assigned expatriates return home early, and the expatriates that remain in the host nation, only 50% function effectively. Does the failure of the expatriate lie solely in the personality and training of the individual expatriate? Some evidence suggests that failure may be associated with the approach to management that the multi-national organisation chooses. Management approaches in multi-national companies can be polycentric, ethnocentric, geocentric, or electocentric. Each of the four models is discussed briefly below. Polycentric The polycentric approach to management utilises the belief that managers in host countries know the best way to approach work within their country and are the most familiar with effective ways to manage businesses within their country (Banai and Sama, 2000). Companies that adopt this attitude have generally concluded that all countries are different and that local subsidiaries should adopt policies and practices that are appropriate locally and are under the direct supervision of local managers from the local area (Banfield, 1998). Kuhn (2000) states that polycentric organisations offer the greatest local control to subsidiaries, which can be a tremendous advantage when the local manager is effective and savvy to local culture, customs, and business operations. Polycentric models are sometimes referred to as multilocal models, or even a multidomestic organisation. Ethnocentric As pointed out earlier, ethnocentric management embodies the concept that the home office manager knows best, regardless of the circumstances or culture of the host office. Dowling and Welch (2004) characterise this as a universal approach to management and believe that the main advantage of this form of management is the level of control it offers the MNC. Another advantage of this mode of operation, however, is that it presents the company with a more homogenous approach to business: no matter which office one is in, things are done the same way; managers are selected for the same reasons regardless of the location, and promotional paths remain the same regardless of where one transfers. Kuhn (2000) states, however, that this mode of operation is a distinct disadvantage if one a company wishes to expand operations in the host company. It offers no benefits when dealing with the local population, and may well be a disadvantage in terms of understanding local procedures and cultural impacts to business. Geocentric In the geocentric mode of operation, the company makes the decision that no one culture or organisation is better than another. Instead, the company concentrates on operating in as culture-free a manner as possible. Every effort is made to have a central control system, combined with a high level of standardisation. The organisation itself encourages all office to participate in decision-making based on a global rather than local context (Myloni, Harzing, and Mirza, 2004). Geocentric organisations offer one huge advantage: they are able to hire the best person for the job, without regard to nationality or national location. According to Kuhn (2000), the geocentric mode of organisation offers the best local advantage, along with the polycentric mode. Companies that embrace the geocentric view are sometimes referred to as borderless, or transnational. Electocentric / Regiocentric This model, also known as transregional model, is a model of globalisation that combines the geocentric model with the polycentric model. Companies that adopt this model of operation will frequently develop into a global or geocentric model of operation. In this mode, managers are hired locally and may be transferred within a general geographic region. The region tends to be fairly independent of the home company and does enjoy a certain amount of autonomy. This mode offers most of the benefits of the geocentric model. 2.5 Other Views of Management Approach Goshal and Bartlett (1998) present a different few of management approaches of multinational companies. They define the approaches as multinational, global, international, and transnational. In their definition, multinational companies decentralise and tend to regard their overseas offshoots as separate business acquisitions with their own autonomy