COUNTRY-OF-ORIGIN, LOCALIZATION, OR DOMINANCE EFFECT?

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Multinational corporations (MNCs) are argued to diffuse HRM practices across their subsidiaries. Why is this the case and what factors determine the extent of this diffusion? (Maximum 1,000 Words)

Required References (attached):

1. Edwards, Sanchez‐Mangas, Bélanger, McDonnell (2015)

2. Pudelko & Harzing (2007)

3. Collings, Scullion & Morley (2007)

you must include these references but are not limited to them please add 1-2 other references as well. Harvard format.

 

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COUNTRY-OF-ORIGIN, LOCALIZATION, OR DOMINANCE EFFECT? AN EMPIRICAL INVESTIGATION OF HRM PRACTICES IN FOREIGN SUBSIDIARIES MARKUS PUDELKO AND ANNE-WIL HARZING This article contributes to two recurring and very central debates in the international management literature: the convergence vs. divergence debate and the standardization vs. localization debate. Using a large-scale sample of multinationals headquartered in the United States, Japan, and Germany, as well as subsidiaries of multinationals from these three countries in the two other respective countries, we test the extent to which HRM practices in subsidiaries are characterized by country-of-origin, localization, and dominance effects. Our results show that overall the dominance effect is most important (i.e., subsidiary practices appear to converge to the dominant U.S. practices). Hence, our results lead to the rather surprising conclusion for what might be considered to be the most localized of functions—HRM—that convergence to a worldwide best practices model is clearly present. The lack of country-of-origin effects for Japanese and German multinationals leads us to a conclusion that is of significant theoretical as well as practical relevance. Multinationals might limit the export of country-of-origin practices to their core competences and converge to best practices in other areas. © 2007 Wiley Periodicals, Inc. or at least four decades, the international management literature has been characterized by two recurring and very central debates: on the macro (country) level, the so-called convergence vs. divergence debate, which remains a key point of controversy in cross-cultural management, and, on the meso (company) level, the standardization vs. localization debate, one of the F central questions in the literature on multinational corporations (MNCs). While on a theoretical level this latter debate mainly has been conducted with regard to management practices in general, human resource management has occupied a particularly important position in empirical studies in this field. In this article, we adopt a broad definition of HRM as the activities that a company Correspondence to: Markus Pudelko, University of Edinburgh Management School, 50 George Square, Edinburgh EH8 9JY, UK, Phone: + 44 131 651 1491, Fax: + 44 131 668 3053, E-mail: markus.pudelko@ed.ac.uk. Human Resource Management, Winter 2007, Vol. 46, No. 4, Pp. 535–559 © 2007 Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/hrm.20181 536 HUMAN RESOURCE MANAGEMENT, Winter 2007 conducts to use its human resources effectively. Since HRM deals with the management of people, it often is seen as one of the functions least likely to converge across countries and where MNCs are more likely to localize practices than to export country-oforigin practices. While our literature review below shows the considerable support for this In this context, the assumption, the question remains whether the increasing imdominance effect portance of globalization and the assumes particular ever-growing presence of MNCs will diminish the localization of importance. It practices. In this context, the dominance effect assumes particoccurs when ular importance. It occurs when management management practices of subsidiaries are shaped according to practices of neither the host country (localization) nor to the home country subsidiaries are (country-of-origin effect), but acshaped according to cording to that country that sets the standards for what are perneither the host ceived global “best practices.”* Much of the research in this country (localization) area has focused on in-depth studies of a limited number of counnor to the home tries and has prevented us from country (country-of- systematically investigating the existence of country-of-origin, loorigin effect), but calization, and dominance effects. This study, in contrast, employs a according to that very carefully matched design in country that sets the which we investigate the same three countries (the United States, standards for what Japan, and Germany) as home and are perceived global host countries. We not only study HRM practices at headquarters “best practices.” (HQ) in each of these three countries, but also the practices of the subsidiaries of MNCs from each of the three countries in the two other respective countries. As a result, we are able to compare the HRM practices of nine different groups of companies: headquarters in the United States, Japan, and Germany, subsidiaries of Japanese *In the following we frequently use the term best practices. In this article we do not wish to imply that companies apply (objective) best practices, but what they (subjectively) perceive to be best practices. and German MNCs in the United States, subsidiaries of U.S. and German MNCs in Japan, and subsidiaries of Japanese and U.S. MNCs in Germany. This design will enable us to disentangle the country-of-origin, localization, and dominance effects to a far greater extent than has been possible in other studies. In the remainder of this article, we first provide an overview of the convergence vs. divergence and the standardization vs. localization debate, paying special attention to the dominance effect. We then integrate the various perspectives and discuss our rationale for focusing on HRM practices in the United States, Japan, and Germany as the subject of our empirical study. Subsequently, we review our methodology and present the results of our study. We come to the surprising conclusion that a function generally considered to be the most local of business functions shows very strong signs of converging to a dominant model, regardless of the home or host countries involved. Both German and Japanese subsidiaries appear to embrace the U.S. HRM model, a finding consistent with other recent studies. In our discussion, we suggest that German and Japanese MNCs might limit export of management practices to what they consider their core competences and converge to what they regard as best practices in other areas. Future research might assess whether this result holds true for MNCs from other countries as well. Theoretical Framework The Convergence vs. Divergence Debate1 Authors following the convergence approach assume that in management, best practices can be defined that are universally valid and applicable, irrespective of national culture or institutional context. Efficiency imperatives and an increasingly similar global competitive environment are perceived to force companies to adopt such best practices in order to increase their competitiveness. From this follows a cross-national convergence of management practices (see, e.g., FentonO’Creevy & Gooderham, 2003; Kerr, Dunlop, Human Resource Management DOI: 10.1002/hrm Country-of-Origin, Localization, or Dominance Effect? Harbison, & Myers, 1960; Levitt, 1983; Toynbee, 2001). Due to the dominance of American business schools in the development and dissemination of new management knowledge, the dominance of American consultancies in further spreading this knowledge and, most importantly, the strength of the American economy and American MNCs, best practices in management are often, explicitly or implicitly, equated with management practices employed by successful American MNCs (C. Smith & Meiksins, 1995). By contrast, scholars subsumed under the divergence or nonconvergence school emphasize the embeddedness of national management methods in their cultural and institutional context and, therefore, are more skeptical about the possibility of cross-national learning from best practices. The literature in this area is divisible into two schools of thought: the culturalist and the institutionalist orientation. The culturalist tradition leans heavily on the work of Geert Hofstede, and in particular the indices of national cultural dimensions he developed (Hofstede, 1980). Authors who developed similar cultural dimensions are Trompenaars and Hampden-Turner (1998) and House, Hanges, Javidan, Dorfman, and Gupta (2004). The institutionalist school sees the institutional environment as the key determinant of organizational characteristics (DiMaggio & Powell, 1991; Scott, 1995). In the field of international comparative management, the institutionalist approach is exemplified by the “business systems” approach (Whitley, 1992, 1996, 2000), the societal effect approach (Maurice, 1979; Maurice, Sorge, & Warner, 1980; Sorge & Warner, 1986), and, more recently, the analysis of “varieties of capitalism” (Hall & Soskice, 2001; Hollingsworth & Boyer, 1997; Kitschelt, Lange, Marks, & Stephens, 1999; Streeck, 2001a). Both the cultural and the various incarnations of the institutional approaches see little scope for cross-national convergence of management practices. A country frequently referred to in this context is Japan. Its management model, and in particular its HRM model, has at least until recently been depicted as very different from Human Resource Management DOI: 10.1002/hrm 537 Western-style management, yet competitive (Dore, 2000; Kono & Clegg, 2001; Ouchi, 1981; Vogel, 1979). Deep-rooted and unique cultural and institutional characteristics usually are cited as the key reasons for these differences (Ballon, 2005; Inohara, 1990; Pudelko, 2006b). However, important and persisting differOn the company ences in management methods have been identified even among level, the question of Western countries, mainly bewhether global tween the United States and Europe (Brewster, 1995; Brewster & management Bournois, 1993; Guest, 1990). According to Warner and Campbell, practices converge it is German management that or remain different has, within the Western world, the symbolic status “as antithesis due to persisting to the Anglo-American approach” (1993, p. 92; see also Lawrence, differences in 1993). German HRM is met by cultural and American scholars with some, though limited, interest (e.g., Pfeffer, 1998; S. Smith, 1991; Wever, institutional contexts 1995). is closely related to More recent writings abandon the strict dichotomy between one of the oldest convergence and nonconverdebates in the gence in order to depict a more differentiated picture. Frenkel literature on MNCs: and Peetz (1998) describe a globalization-induced trend toward the standardization increasing convergence, which vs. localization/ finds a counterbalance in national culture, the role of the naadaptation or tion-state, and national industrialization strategies. Similarly, Katz integration vs. and Darbishire (2000) observe a responsiveness growing convergence of several patterns of HRM practices among debate. industrialized countries that coexist with an overall increasing divergence of employment practices within each country, a phenomenon they call converging divergences. Frenkel and Kuruvilla (2002) perceive employment relations patterns determined by the interplay of what they label three distinct “logics of action”: the logic of competition, resulting in the pursuit of best practices and ultimately convergence; the logic of industrial peace, 538 HUMAN RESOURCE MANAGEMENT, Winter 2007 achieved in unique national solutions and encouraging nonconvergence; and the logic of employment-income protection, which stands in between convergence and nonconvergence. The Standardization vs. Localization Debate On the company level, the question of whether global management practices converge or re…all too often main different due to persisting differences in cultural and instituneglected in the tional contexts is closely related MNC to one of the oldest debates in the literature on MNCs: the standardstandardization vs. ization vs. localization/adaptation or integration vs. responsivelocalization debate ness debate. The terms integration is that vs. responsiveness mostly are used to characterize general MNC standardization can strategies (e.g., Bartlett & Ghoshal, 1989; Prahalad & Doz, also take place 1987), while standardization vs. loaround another calization/adaptation are more commonly employed to refer to pole: the national functional areas such as marketmanagement model, ing and HRM. The link between the convergence vs. nonconverwhich is considered gence controversy and the standardization vs. localization deto be particularly bate is chiefly established by MNCs that are the main object of competitive and, analysis of the latter debate, and therefore, assumes as already established, one of the main reasons for assumed converthe function of a gence in the context of the former debate. role model. One of the central questions in the literature on MNCs is the extent to which their practices resemble those of the parent company (standardization) versus the extent to which their subsidiaries act and behave as local firms (localization). In the light of globalization, HRM has evolved from a support function to a function of strategic importance. HRM increasingly is viewed as a crucial component of the firm’s overall strategy (Schuler & Rogovsky, 1998). Some have even identified it as the glue that holds global organizations together (Teagarden & Von Glinow, 1997), and hence many MNCs attempt to transfer their HRM practices to their overseas subsidiaries. As a result, HRM practices at the subsidiary level will resemble practices in the home country more so than practices of local firms (country-oforigin effect). Country-of-origin effects have been shown to be persistent in many areas of management (see Harzing & Noorderhaven, in press; Harzing & Sorge, 2003). However, previous research also has shown that national cultural and institutional characteristics limit the transfer of HRM practices (Beechler & Yang, 1994; Ferner, 1997; Khilji, 2003; Myloni, Harzing, & Mirza, 2004; Schuler & Rogovsky, 1998). As a result, many MNCs adapt their practices to the host environment, hence showing localization. The Dominance Effect In the standardization vs. localization debate, the concept of standardization mostly is understood as standardization of MNCs’ management practices around those management practices employed by headquarters and therefore frequently reflect the specific patterns of the headquarters’ home country (country-of-origin effect). However, all too often neglected in the MNC standardization vs. localization debate is that standardization can also take place around another pole: the national management model, which is considered to be particularly competitive and, therefore, assumes the function of a role model. In this case, management practices of subsidiaries are shaped in accordance to neither the host country (localization) nor the home country (country-of-origin effect), but according to the country that sets the standards for what are perceived as global best practices. Following C. Smith and Meiksins (1995), we label this form of standardization of management practices the dominance effect. Consequently, the standardization argument of the standardization vs. localization debate comprises two distinct effects: the country-of-origin effect and the dominance effect. C. Smith and Meiksins state: Human Resource Management DOI: 10.1002/hrm Country-of-Origin, Localization, or Dominance Effect? It is clear from history that there has always been a hierarchy between economies, and those in dominant positions have frequently evolved methods of organizing production or the division of labour which have invited emulation and interest. These “dominant” societies are deemed to represent “modernity” or the future, and act, either in total or through aspects of their system, as a measure of “progress” and “development.” (pp. 255–256) One reason a country is accorded dominant status is superior economic performance. More specifically, if the strengths of a successful economy are concentrated in industries characterized by intense international competition—for example, sophisticated mass production sectors like automobiles and electronics—the attention and the readiness to learn from it will be particularly strong. Such industries are often the focal point for defining best practices and the place where global standards of management practice are set. Taylorism, or “scientific management,” has been the prime example for a management concept claiming universal validity. Other examples are lean production, kaizen, reengineering, and management by objectives. According to C. Smith and Meiksins (1995, p. 243), the United States, Japan, and Germany are most frequently referred to as role models, “as they provide ‘best practice’ ideals from which other societies can borrow and learn.” As economic performance and growth paths vary over time, however, the role of a “dominant” economy also rotates among countries. In the 1950s, 1960s, and most of the 1970s, the American management style clearly was dominant and a common expectation was that it would spread around the world, gaining application in many foreign countries. From the late 1970s to the early 1990s, this argument increasingly was applied to Japan (Mueller, 1994) and, to a lesser extent and limited to the European context, Germany (Albert, 1991; Thurow, 1992). Since the implosion of the Japanese economy, the stagnation of the German Human Resource Management DOI: 10.1002/hrm 539 economy, and with the advent of globalization, the conventional wisdom over the last one-and-a-half decades has been that the American management model is particularly well suited to provide the necessary flexibility to cope with rapidly evolving economic and technological conditions. Consequently, the United States again became the dominant role model (Edwards, Almond, Clark, Colling, & Ferner, 2005). However, it must be acknowledged that, more recently, economic growth in both Japan and Germany is on the rise again. On a micro level, this growth might possibly be accredited in part to learning from the dominant management model. One major agent in diffusing Consequently, in this best practices globally is MNCs, as they are considered to be particu- study, the dominance larly effective in transferring effect is defined as knowledge across national borders (Bartlett & Ghoshal, 1989). standardization With the intensification of interaround American national competition and the increased global integration of ecomanagement nomic activities, the importance of the concept of learning from practices commonly best practices defined by domiperceived as nant economies has increased. Consequently, globalization can representing best be interpreted as promoting standardization around dominant practices. economies. As best practices frequently develop under the specific cultural and institutional context of the country of origin, adoption of those practices will be particularly difficult for countries that operate under very different sociocultural contingencies. The actual outcome of the transfer process also depends on the relative openness or receptiveness to dominant best practices of the receiving country. How global standards from a dominant model will be implemented in practice can therefore only be determined ex post, and not a priori (C. Smith & Meiksins, 1995). Institutional theory (DiMaggio & Powell, 1991; Meyer & Rowan, 1977) can help explain how dominance effects develop. Subsidiaries of MNCs are part of the same population facing the 540 HUMAN RESOURCE MANAGEMENT, Winter 2007 same set of environmental conditions. Uncertainty in the environment might lead to mimetic isomorphism, where organizations adopt seemingly successful best practices. Companies conform to increase their legitimacy as a successfully run organization, to impress shareholders, and thus to increase their survival prospects. HR directors, in turn, feel a need to espouse the dominant model of HRM practices (for example, to attract …
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