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CHAPTER 1 The Challenges of International Human Resource Management Global Challenges at ABB In 1988, a merger between ASEA of Sweden and Swiss firm Brown Boveri created one of the world’s largest engineering firms, ABB. Both companies already had extensive international operations, Brown Boveri having begun to establish subsi- diaries around the world immediately after World War II, and ASEAhaving started foreign operations during the 1960s. The newly merged company had sales of over US$15 billion and 160,000 employees. Under the leadership of its Swedish CEO, Percy Barnevik, ABB went through a rapid transformation. In Western Europe, plants were closed and the number of employees was reduced, while the firm grew its operations in Asia, Eastern Europe, and North America. Over the next 10 years, ABB bought a large number of compa- nies as it expanded geographically and diversified into new business areas, includ- ing engineering contracting and financial services. The company set up numerous joint ventures with local companies in China and other emerging markets, and established a 50–50 joint venture in power generation with the French firm Alstom. Barnevik’s vision was to create an international company that was able to deal effectively with three internal contradictions: being global and local, big and small, and radically decentralized with centralized reporting and control. 1 The key principle was local entrepreneurship, so most of the decision making was to be done at the lowest possible level, in the 5,000 independent profit centers, the business units (BUs) that became the foundation of the ABB organization. Beyond the BUs, the firm was structured as a matrix of business segments and regions. Operations within a country were controlled by influential country managers. 1

Transcript of 133762881 International HRM

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CHAPTER 1

The Challenges ofInternational Human

Resource Management

Global Challenges at ABB

In 1988, a merger between ASEA of Sweden and Swiss firm Brown Boveri created

one of the world’s largest engineering firms, ABB. Both companies already had

extensive international operations, Brown Boveri having begun to establish subsi-

diaries around the world immediately after World War II, and ASEA having started

foreign operations during the 1960s. The newly merged company had sales of over

US$15 billion and 160,000 employees.

Under the leadership of its Swedish CEO, Percy Barnevik, ABB went through a

rapid transformation. In Western Europe, plants were closed and the number of

employees was reduced, while the firm grew its operations in Asia, Eastern Europe,

and North America. Over the next 10 years, ABB bought a large number of compa-

nies as it expanded geographically and diversified into new business areas, includ-

ing engineering contracting and financial services. The company set up numerous

joint ventures with local companies in China and other emerging markets, and

established a 50–50 joint venture in power generation with the French firm Alstom.

Barnevik’s vision was to create an international company that was able to deal

effectively with three internal contradictions: being global and local, big and small,

and radically decentralized with centralized reporting and control.1 The key principle

was local entrepreneurship, so most of the decision making was to be done at the

lowest possible level, in the 5,000 independent profit centers, the business units

(BUs) that became the foundation of the ABB organization.

Beyond the BUs, the firm was structured as a matrix of business segments and

regions. Operations within a country were controlled by influential country managers.11

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ABB also established business steering committees and functional councils to coor-

dinate the different units, exploit synergies, and help transfer knowledge and best

practices across the network of local units. The firm developed a management in-

formation system called ABACUS that contained data on the performance of the

profit centers. Barnevik and his team of top managers traveled extensively to ensure

communication and knowledge sharing across units, while international assignments

helped instill all units with the corporate ethos that Barnevik was pursuing: initia-

tive, action, and risk taking.

However, after becoming one of the most admired companies in the world

during its first 10 years, ABB encountered significant problems in its second decade.

The company was affected by the economic downturn in Europe, while in the

United States it became the target for many expensive asbestos-related damage

claims linked to a firm it had acquired in 1989. Most importantly, limitations in the

firm’s management started to emerge.

Many of the smaller acquisitions—often initiated by aggressive and virtually

independent local managers—were not well integrated with the rest of the firm,

leading to different standards and systems as well as product overlap. The firm was

flexible and responsive to the contexts in which it was operating, but had failed to

achieve sufficient global synergies and efficiency. The structure did not work as in-

tended, and conflicts between business areas and national units meant that many

managers felt decision making was unclear. The local profit centers continued to

operate their own human resources management systems, which were at best

aligned at national levels but not at regional or global levels.

Barnevik’s successor Göran Lindahl (1997–2001) attempted to impose more

clarity and discipline by eliminating the regions and giving more power to global

businesses. This only aggravated the confusion, since the divisions had neither the

tools nor the experience to control the local units. Next came Jörgen Centerman, who

made even more radical changes. ABB was reorganized into seven business divi-

sions structured along user markets, with account managers for key customers, and

the previously powerful country manager positions were eliminated. Centerman’s

next key decision was to create centrally designed and operated group processes to

try to improve global control, coordination, and efficiency. However, this top-down

initiative further increased the complexity of the firm, and without country man-

agers in place to coordinate local operations, the company reached the verge of

organizational paralysis.

With the company only days away from bankruptcy, Centerman was replaced in

2002 by a veteran CEO (Hoechst and Aventis), Jürgen Dormann, who immediately

discontinued the group processes initiative, sold noncore businesses, and settled the

asbestos claims in the US. He reinstated the position of country manager and simpli-

fied the company structure around two core global divisions: power and automation.

He also became intimately involved in developing a new global ABB People Strategy,

aimed at linking HRM with the business. A key priority was to make sure that a new

corporate code of conduct would be widely shared and followed.

By the time Fred Kindle was recruited from outside the firm to become CEO in

early 2005, ABB was profitable once again but had shrunk from 213,000 employees

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(in 1997) to 102,000.2 Kindle found a firm with a high degree of local entrepreneur-

ship, creativity, and innovation, but with limited coordination and still unsatisfac-

tory global efficiency. He decided to focus on reducing complexity through common

management processes and guidelines that would help address the drawbacks in

the way the company was operating. The focus was now on improving global oper-

ational efficiency and how to better engage and energize ABB staff around the

world. Barnevik’s contradictions were back on the table.

Overview 3

OVERVIEW

From its inception, ABB wanted to be a fast-growing firm with a wide interna-tional presence. But over its 20-year history, the company faced overwhelmingcomplexity as it struggled with contradictory management challenges, trying tolive up to its corporate mantra of “acting local but thinking global.”

In this chapter, we explore the major challenges faced by ABB from theperspective of the historical development of internationalization and the con-comitant evolution of personnel management and then human resourcemanagement (HRM).

A look at the history of international business shows that the dilemmasfaced by ABB have always existed. What has changed is the nature and speed ofcommunication between a company’s headquarters and its subsidiaries aroundthe world. But the essential problems of being flexible and responsive to localmarket needs while avoiding duplication, promoting global efficiency, and co-ordinating and controlling diverse units and people remain.

In this context, theories about managing people have swung back and forth,alternating from “touchy-feely” to dispassionately scientific, and we will ex-plore the different people management theories that have evolved over time. Wewill see that leading a complex worldwide organization raises new dilemmasabout how to manage without full control over people and other resources.

Historically, firms have responded to challenges of control and coordinationin two different ways. Some adopted matrix structures, others focused on build-ing coordination capabilities at the center. We will discuss the advantages andlimitations of these two approaches and the need to align the organization withthe business strategy.

We will then discuss traditional approaches to the challenges of interna-tionalization. Some firms adopt a multidomestic strategy, with autonomous localoperations that can respond readily to local needs, while others pursue a cen-tralized, meganational strategy to prevent duplication and make global opera-tions more efficient. However, for companies that need to be simultaneouslyglobal and local, neither of these strategies is sufficient.

All this leads us to the idea that contemporary global corporations like ABBface many contradictions. They have to be simultaneously local and global inscope, centralized and decentralized, capable of delivering short-term resultswhile developing future assets, managing multiple alliances without full

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control, and responding to market pressures to do things better and cheaper andfaster. In the light of this, we examine the concept of the transnational organization,as developed by Bartlett and Ghoshal, at the heart of which is the notion of livingwith contradictions, or what they call the need to maintain “a dynamic balance.”3

DEFYING BORDERS: WHAT’S NEW?

International business is not a recent phenomenon; nor is international HRM aproduct of the 20th or 21st century. The Assyrians, Phoenicians, Greeks, and Ro-mans all engaged in extensive cross-border trade. There is evidence that Assyr-ian commercial organizations operating shortly after 2000 BC already had manyof the traits of modern multinational companies, complete with head offices andbranches, clear hierarchy, foreign employees, value-adding activities in multipleregions, and a drive to find new resources and markets.4 Roman organizationsspanning Asia, Africa, and Europe are often heralded as the first global compa-nies in that they covered the whole of the known world.

Empire building was the primary goal of Roman-style international expan-sion, with commerce a by-product of the need to clothe and feed the dispersedgarrisons.5 For centuries the dividing line between conquest and exchange, forinstance the Viking raids of the early Middle Ages, remained fuzzy. Even in thefirst half of the 20th century, internationalization was still closely associatedwith empires and colonization, and gunboats were often not far behind the mer-chants’ ships. So when can we situate the birth of international companies?

Business historians often refer to the European and American companies ofthe 19th century as early versions of today’s multinationals.6 However, some goback further, arguing that the real pioneers of international business were the16th- and 17th-century trading companies—the English and Dutch East Indiacompanies, the Muscovy Company, the Hudson’s Bay Company, and the RoyalAfrican Company.7

International Operations in the Preindustrial Era

The early trading companies exchanged merchandise and services across conti-nents and had a geographical spread to rival today’s multinational firms. Theysigned on crews and chartered ships, and engaged the services of experts withskills in trade negotiations and foreign languages, capable of assessing the qual-ity of goods and determining how they should be handled and loaded. Thesecompanies were obliged to delegate considerable responsibility to local repre-sentatives running their operations in faraway countries, which created a newchallenge: How could local managers be encouraged to use their discretionarypowers to the best advantage of the company? The trading companies had todevelop control structures and systems to monitor the behavior of theirscattered agents.

Distance makes control more difficult. This was particularly true in an erawhen the means of transport and communication were inseparable and slow.

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The risks of opportunistic behavior loomed large.8 Initially, companies de-manded not only accounts but also written records of decisions and notificationof compliance with directives from home. However, the high volume of trans-actions then led to the creation of administrative units to process receipts andaccounts and to handle correspondence at the home office. By the mid-18thcentury, the Dutch and English East India companies each employed over350 salaried staff involved in office administration.

Establishing formal rules and procedures was one way of exercising control,but this did not eliminate the temptations of opportunistic behavior for those farfrom the center. Other control measures were therefore developed, such as em-ployment contracts. These stipulated that managers would work hard and inthe interests of the company. Failure to do so could lead to reprimand or dis-missal. Setting performance measures was the next step. These included the ra-tio of capital to tonnage, the amount of outstanding credit on advance contracts,whether ships sailed on time, and the care taken in loading mixed cargoes.

Systems were also installed to provide additional information about em-ployees’ behavior and activities. Ships were staffed with pursers, ships’ captainswere rewarded for detecting illegal goods, and private correspondence wasread to minimize the risk of violations. In addition, bonds were often requiredfrom managers as insurance against private trade. However, there were alsogenerous financial incentives, such as remuneration packages comprising afixed cash component and a sizable bonus. Such a mix of control approacheswas not far from contemporary methods used to evaluate and reward manage-rial performance in large multinationals.

The Impact of Industrialization

The Industrial Revolution originated in Britain in the late 18th century. Theemergence of the factory system had a dramatic impact both on internationalbusiness and on the management of people.

The spread of industrialization in Europe and the United States providedgrowing markets for minerals and foodstuffs and prompted a global search forsources of supply. Technological advances (for example, in mining equipment)also permitted the profitable exploitation of new territories. The rising need forraw materials fueled the growth of multinational service companies (tradingand shipping companies, banks, and utilities) to support the expansion of worldtrade. British banks were already establishing branches and financing foreigntrade in Australian, Canadian, and West Indian colonies in the 1830s.9 These in-ternational companies were distinct from the trading companies in that they in-vested in assets that they controlled in foreign countries, a strategy known asforeign direct investment (FDI).

Cross-border manufacturing began to emerge by the mid-19th century.The Great Exhibition of 1851, staged in London, was an early forum forinternational benchmarking, and exposed visitors to a number of US prod-ucts whose parts were built to such exacting standards that they were

Defying Borders: What’s New? 5

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interchangeable.10 Among these products were the Singer sewing machineand the Colt repeating pistol. Not surprisingly these firms established two ofthe earliest recorded US manufacturing investments in Britain: Colt set up aplant in 1853 and Singer in 1867.

Still, it was difficult to exercise real control over distant operations. The raremanufacturing firms that ventured abroad often used family members tomanage their international operations. For example, when Siemens set up itsSt. Petersburg factory in 1855, a brother of the founder was put in charge. In 1863another brother established a factory to produce sea cables in Britain. Keepingit in the family was the best guarantee that those in distant subsidiaries could betrusted not to act opportunistically.

The international spread of rail networks and the advent of steamships inthe 1850s and 1860s brought new speed and reliability to international travel.More significantly, the invention of the telegraph uncoupled long-distancecommunication from transportation. London was joined by cable to Paris in1852, and over the next 20 years to Bombay and cities in the US and Australia.Improved communication and transportation opened up new markets andfacilitated access to resources in distant locations. It became possible for firms tomanufacture in large batches and to seek volume distribution in mass markets.The rapid growth in firm size provided a domestic platform from which toexpand abroad, paving the way for a surge in international business activity inthe last decades of the 19th century.11

In parallel with developments in transport and communication, industrial-ization was also having a significant impact on the organization of firms. Theywere being reshaped by new manufacturing techniques, by the increased spe-cialization and division of labor, and by a change in the composition of theworkforce from skilled tradesmen to unskilled workers, previously agrarian,who were unaccustomed to industry requirements like punctuality, regular at-tendance, supervision, and the mechanical pacing of work effort.

Consequently, early factories experienced discipline and motivation prob-lems. To reduce these difficulties, some managers began to pay more attentionto working conditions and the welfare of employees. An early pioneer wasRobert Owen, a British entrepreneur who reproached his fellow manufactur-ers for spending heavily on machinery yet failing to invest in their human as-sets. Owen proposed a number of labor policies and even put them profitablyinto practice in a Scottish cotton-spinning factory in the 1810s. He providedworkers with housing and places to eat, increased the minimum workingwage for children, reduced working hours, introduced schooling and system-atic training for employees, and opened evening recreation centers. For thesereasons, Robert Owen has been referred to as the father of modern personnelmanagement.12

Owen’s message took hold in the US in the 1870s, when a generation ofprominent industrialists sought to apply a philosophy known as industrial better-ment in their businesses, partly inspired by religious motives, and partly trig-gered by growing labor management difficulties.

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Prelude to the Modern Era

The late 19th and early 20th centuries saw a number of developments in inter-national business and in people management practices that warrant the label“modern.” They led to a degree of internationalization that the world would notsee again until it had fully recovered from the damage to the global economycreated by two world wars.

The Golden Age Pre–World War I

By 1914, the list of companies with foreign subsidiaries was starting to have acontemporary look about it (see Table 1–1). Singer’s second Scottish sewing ma-chine factory, opened in 1885, was actually bigger than any of its domestic fac-tories in the US. The company went on to open plants in Canada, Austria,Germany, and Russia. The first cross-border merger, between Britain’s Shell andRoyal Dutch, took place in 1907.

Defying Borders: What’s New? 7

TABLE 1–1. Large Multinational Manufacturers in 1914

Number ofForeign

Factories Location of ForeignCompany Nationality Product in 1914 Factories

Singer US Sewing machines 5 UK, Canada, Germany, Russia

J & P Coats UK Cotton thread 20 US, Canada, Russia, Austria-

Hungary, Spain, Belgium, Italy,

Switzerland, Portugal, Brazil, Japan

Nestlé Swiss Condensed milk/ 14 US, UK, Germany, Netherlands,

baby food Norway, Spain, Australia

Lever Brothers UK Soap 33 US, Canada, Germany, Switzerland,

Belgium, France, Japan, Australia,

South Africa

St Gobain French Glass 8 Germany, Belgium, Netherlands,

Italy, Spain, Austria-Hungary

Bayer German Chemicals 7 US, UK, France, Russia, Belgium

American US Radiators 6 Canada, UK, France, Germany,

Radiator Italy, Austria-Hungary

Siemens German Electrical 10 UK, France, Spain, Austria-Hungary,

equipment Russia

L.M. Ericsson Swedish Telephone 8 US, UK, France, Austria-Hungary,

equipment Russia

Accumulatoren- German Batteries 8 UK, Austria-Hungary, Spain, Russia,

Fabrik Poland, Romania, Sweden

Source: G. Jones, The Evolution of International Business (London: Routledge, 1996), p. 106.

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The growth in international manufacturing sustained a flourishing service sec-tor, which provided the global infrastructure—finance, insurance, transport—topermit the international flow of goods. Multinational activity had become animportant element in the world economy. It was a golden age for multination-als, with foreign direct investment accounting for around 9 percent of worldoutput.13

In terms of management practice, one concrete legacy of the industrial bet-terment movement had been the emergence of welfare secretaries in both theUS and Europe.14 Initially concerned with health and safety, education, and so-cial issues, these welfare specialists quickly appropriated line responsibilitiessuch as handling grievances. Another new development was the establishment,first in Europe and soon after in the US, of stand-alone employment offices re-sponsible for the creation and standardization of certain employment functions,such as hiring, payroll, and record keeping.15

The beginning of the 20th century also saw the emergence of scientificmanagement, seen by some as a reaction to the paternalistic excesses of industrialbetterment (see the box “The Pendulum of Management Thought”). Scientificmanagement encouraged firms to conduct time-and-motion studies, preparejob specifications, and create wage incentive programs.16 Hence the emergence ofpersonnel management can be regarded as having a dual heritage, in the move-ments for industrial betterment and scientific management.

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The Pendulum of Management Thought

The history of management thought showspendulum swings in the amount and style of at-tention paid to people. Successive movementshave alternated in focus between the “hard”and “soft” aspects of people management.17

Industrial Betterment

This philosophical movement, setting thefoundation for modern personnel manage-ment, grew from the ideas of Robert Owen(1771– 1858). Concerned with the impact of in-dustrialization on individuals and communi-ties, it rejected the laissez-faire indifference toworking conditions and remuneration levels,showing concern for employees’ social, edu-cational, and even moral needs outside thework environment.

Scientific Management

Developed by Frederick Taylor (1856–1915)and embraced widely by industry, this move-ment emerged in the 1910s in part as a reac-tion to the underlying sentimentalism of thewelfare orientation. Taylor was highly critical ofwelfare programs, and his recommendationsfit the needs of employers who wanted to makemore efficient use of a poorly educated laborpool containing many immigrants. Taylor de-scribed how employees could be trained forrepetitive tasks, becoming easy to replace. ThePrinciples of Scientific Management18 becamethe first management best seller, and with itthe social gospel gave way to the gospel ofefficiency.

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Defying Borders: What’s New? 9

Human Relations

Criticism of scientific management for treat-ing the worker as a “living tool” triggered theemergence of the human relations move-ment.19 Elton Mayo’s classic experiments atWestern Electric’s Hawthorne plant in the1930s concluded that human interaction andpaying attention to workers’ needs couldstimulate productivity. This contravened Tay-lor’s dour philosophy of self-interest, becauseit suggested that social factors and the rela-tionship between workers and managementwere keys to performance. Initiatives to en-hance loyalty, motivation, and satisfactionflourished during and after World War II.These included shop floor compensationsystems, schemes for participatory decisionmaking and job enrichment, and the introduc-tion of attitude surveys. These developmentsbolstered the legitimacy of the personneldepartment.

Systems Thinking

The backlash to human relations started in themid-1960s. Systems rationalism—characterizedby operational research methods, such as crit-ical path analysis and the Program Evaluationand Review Technique (PERT)—was a reactionto the “touchy-feely” approaches introducedunder the human relations umbrella (includingT-groups and psychodrama). Formal personnelsystems made a comeback, with management-by-objectives (MBO), pay-for-performance,and manpower planning leading the way.

Recent Developments

The organizational culture movement in the1980s can be seen as a response to the mecha-nistic excesses of systems management, withits strong belief in planning. The emphasisturned to the management of meaning foremployees, focusing on how to influence thevalues and norms shared by people in theorganization. And in turn the emergence ofbusiness process reengineering in the 1990scan be seen as a reaction against the “culture”fashion.

Since the 1980s, however, there has beenan explosion in management research andwriting, with an increasing number of theo-ries and movements existing in parallel.Human resource management, (HRM), began toemerge as a field of study in the mid-1980s, il-lustrating how mutually consistent andintegrated HR practices could support andenhance corporate performance. The resource-based view of strategy became a dominantperspective in the 1990s, with much emphasisplaced on how the human resources of the firmcan provide a basis for competitive advantage.There were strong calls for HR professionalsto become strategic partners, closely involvedin the formulation and particularly the imple-mentation of corporate strategies.20

During the last 10 years, human and socialcapital have emerged as major new theoreticalconcepts, and most recently, emphasis is beingplaced on talent management—seen as criticalfor the competitiveness of the firm.

War and Economic Depression

The outbreak of World War I, followed by a period of economic depressionand then World War II, transformed management practices and multinationalactivity in very different ways.

These external shocks had a stimulating effect on the development of peoplemanagement practices, hastening the spread of new thinking. The sudden

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influx of inexperienced workers (many of them women) into factories in 1915 toservice war needs increased the pressure on managers to find ways to improveproductivity rapidly. Tasks had to be simplified and redesigned for novices. Tocontain labor unrest, more attention had to be paid to working conditions andemployee demands, which also meant training first-line supervisors. Theseinitiatives centralized many of the aspects of employment relations previouslydischarged by individual line managers.

During World War I, the number of companies with managers specificallyresponsible for personnel issues increased dramatically. By 1920, the NationalPersonnel Association had been formed in the US, and the National CivicFederation had started to refer to “personnel directors” instead of “welfaresecretaries.”21 This institutionalized a tension that had previously been resolvedby line managers—the competing demands of short-term efficiency (the pro-duction department) and employee morale (the personnel department). In someprogressive firms, employees began to be viewed as resources and the impor-tance of unity of interest between the firm and workers was stressed. The 1920salso saw the development of teaching and research, journals, and consultingfirms in personnel management.22

In the interwar years, economic depression increased the attractions ofunion membership. At the same time, the pendulum began to swing back as thehuman relations movement gained ground to counterbalance the harsh face ofscientific management.

The Great Depression was the start of a bifurcation in employment practicesin the US and Japan, the latter having gone through a period of rapid industri-alization and economic growth. Leading firms in both the US and Japan wereexperimenting with corporate welfarism in the 1920s.23 However, the depth ofthe Depression in the US in the 1930s meant that firms had no option except tomake layoffs and repudiate the welfare arrangements that had been establishedin many nonunionized firms. They turned instead to a path of explicit and in-strumental contracts between employee and employer, with wages and em-ployment conditions often determined through collective bargaining.24 Becauseof the militarization of the Japanese economy, the impact of the Depression wasmuch less severe on that side of the Pacific. Under legislation fostering “socialpeace” in the name of national unity, large firms maintained these welfare ex-periments, leading step-by-step to an HRM orientation built around implicitcontracts (lifetime employment, corporate responsibility for the development ofstaff, and low emphasis on formalized performance evaluation). Endorsed bythe strong labor unions that emerged in postwar Japan, these practices becameinstitutionalized, reinforcing and reinforced by Japanese societal values.

In the West, World War II intensified interest in the systematic recruitment,testing, and assigning of new employees in order to leverage their full potential.Psychological testing used by the military spilled over into private industry.25 Inaddition, the desire to avoid wartime strikes led the US government to supportcollective bargaining, strengthening the role of the personnel function as aresult.

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If these external shocks had some salutary consequences for the develop-ment of personnel practices, they had quite the opposite effect on multinationalactivities. With the loss of direct investments in Russia in the wake of the 1917Communist Revolution, firms began to think twice about foreign investment. Inan environment of political uncertainty and exchange controls, this caution wasreinforced by the Great Depression at the end of the 1920s, followed by the col-lapse of the international financial system. Trade barriers were erected as coun-tries rushed to support local firms, effectively reducing international trade. Theadverse conditions during the interwar years encouraged firms to enter cross-border cartels rather than risk foreign investments. By the late 1920s, a consid-erable proportion of world manufacturing was controlled by these cartels—themost notorious being the “seven sisters” controlling the oil industry.26 Similarlyin pharmaceuticals, electric lightbulbs, steel, and engineering industries, elabo-rate arrangements were established among national champions allowing themto focus on their home markets and to suppress international competition.27

World War II dealt a crushing blow to these cartels, and after the war, the USbrought in aggressive antitrust legislation to dismantle those that remained. Bythen there was little incentive for American firms to enter into cartels. While USfirms emerged from the war in excellent shape, European competition was dev-astated, and Japanese corporations (known as zaibatsu) had been dismembered.The war had stimulated technological innovation, and American corporationshad no desire to confine their activities to the home market. A new era of inter-national business had begun.

THE MODERN MULTINATIONAL

Although Europe had a long tradition in international commerce, it was theglobal drive of US firms after World War II that gave birth to the multinationalsas we know them today. American firms that had hardly ventured beyond theirhome markets before the war now began to flex their muscles abroad, and bythe early 1960s, US companies had built an unprecedented lead in the worldeconomy. “American companies have spent the past decade running a helter-skelter race to get located overseas . . . What US business was seeing, in thewords of Chairman Frederic G. Donner of General Motors, ‘is the emergence ofthe modern industrial corporation as an institution that is transcending nationalboundaries.’”28 Throughout the 1960s, US industrial productivity was the high-est in the world, accounting for 40 percent of world manufacturing output.29 TheUS accounted for almost 70 percent of the R&D undertaken in the OECD.30

American firms also found faster ways of entering new markets. Manymoved abroad through acquisitions, followed by investment in the acquiredsubsidiary in order to benefit more fully from economies of scale and scope.31

This was the approach taken by Procter & Gamble (P&G), which established apresence in continental Europe by acquiring an ailing French detergent plant in1954.32 An alternative strategy was to join forces with a local partner, as in the

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case of Xerox, which entered global markets through two joint ventures, withthe English motion picture firm the Rank Organisation in 1956, and with FujiPhoto Film in Japan in 1962.

American service firms followed their clients abroad, but internationaliza-tion strategies varied. The advertising agency J. Walter Thompson had an agree-ment with General Motors that it would open an office in every country wherethe car firm had an assembly operation or distributor.33 In professional services,McKinsey and Arthur Andersen scrambled to open their own offices in foreigncountries through the 1950s and 1960s. Others, such as Price Waterhouse andCoopers & Lybrand, built their international presence through mergers with es-tablished national practices in other countries. For most others, the route wasvia informal federations or networks of otherwise independent firms.

Advances in transport and communications—the introduction of commer-cial jet travel, the first transatlantic telephone link in 1956, then the developmentof the telex—facilitated this rapid internationalization. More significant still wasthe emergence of computers as business tools in the late 1950s. By the mid-1970s, computers had become key elements in the control and information sys-tems of industrial concerns, paving the way for later complex integrationstrategies. Taken together, the jet plane, the new telecommunications technol-ogy, and the computer contributed to a “spectacular shrinkage of space.”34

Alongside these technological drivers of internationalization, powerful eco-nomic forces were at work. The Marshall Plan, established to support the re-building of war-battered Europe, set the tone. Barriers to trade and investmentwere progressively dismantled with successive General Agreement on Tariffsand Trades (GATT) treaties. Exchange rates were stabilized following the Bret-ton Woods Agreement (July 1944), and banks started to play an internationalrole as facilitators of international business. The 1957 Treaty of Rome establishedthe European Community. US firms, many of which already perceived Europeas a single entity, were the first to exploit the regional integration, laying thefoundations for a European market of a size comparable to that in the US.European companies were spurred by “the American challenge” (the title ofa best-selling, call-to-arms book by the French journalist and politician Jean-Jacques Servan-Schreiber in 1967), encouraging them to expand beyond theirown borders.

Staffing for International Growth

In the decades following World War II, virtually all medium- and large-sizedfirms had personnel departments, typically with responsibility for industrial(union) relations and for the functional and operational aspects of employment,including staffing subsidiaries abroad.35 The newly created international person-nel units focused on expatriation, sending home country managers to foreignlocations.

The largest 180 US multinationals opened an average of six foreign sub-sidiaries each year during the 1960s.36 This rapid international expansion opened

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up new job possibilities, including foreign postings. While US firms in theimmediate postwar period had been “flush with veterans who had recentlyreturned from the four corners of the globe [and who] provided a pool of eagerexpatriates,”37 more managers were now urgently needed. People had to bepersuaded to move abroad, both those with much needed technical skills andmanagers to exercise control over these expanding foreign subsidiaries. In mostcompanies at the time, this meant paying people generously as an incentive tomove abroad.

In the late 1970s, horror stories of expatriate failure gained wide circulation—the technically capable executive sent out to run a foreign subsidiary beingbrought back prematurely as a borderline alcoholic, with a ruined marriage, andhaving run the affiliate into the ground. Academic studies seemed to confirmthis problem,38 which for some companies became a major handicap to interna-tional growth. It was no longer just a question of persuading people to moveabroad; it was a question of “how can we help them to be successful?” While thereluctance to move abroad was increasing, often for family reasons but also be-cause of the mismanagement of reentry to the home country, concern over therising costs of expatriation was growing.

At the same time, back home (particularly in the US and Scandinavia), ini-tiatives in people management continued to multiply—participative manage-ment, training initiatives ranging from “sensitivity training” to the “managerialgrid,” the organizational development (OD) movement with its focus onplanned organizational change, work redesign, and the sociotechnical and in-dustrial democracy movements in northern Europe, to name but a few. Whilesome academics argued that people were resources rather than just costs, in theUS the term “human resource management” grew as much as anything out ofthe need to find a home for these burgeoning initiatives within the firm.39 Thiswas the intention of AT&T, which in 1971 created a new role of senior vice pres-ident in human resource development. Others followed suit, although initiallythis often amounted to no more than relabeling the personnel department witha more fashionable term.

International business also became a subject of academic study during thisperiod. In the early 1980s, the challenges of expatriation started to attract the at-tention of researchers, reinforced by the newfound legitimacy of HR and theconcern of senior managers anxious about growth prospects abroad. While itwas too early to talk of an international HRM field, international growth wasleading to new challenges beyond expatriation that were to shape this emergingdomain.

Organizing for International Growth

Rapid international growth brought with it the problems of controlling and co-ordinating increasingly complex global organizations. Here we should point outthat, while many authors use these terms interchangeably, we make an explicitdistinction between control and coordination. We use the term control to refer

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to visible and hierarchical processes and structures, and coordination to refer totools that facilitate alignment through lateral interactions and adjustmentsacross different parts of the multinational (such as cross-boundary project teamsand informal social networks). As we will show later in the book, this distinc-tion has important implications for people management.

The awareness that international HRM is crucial not just for internationalstaffing but also for building corporate cohesion and interunit collaborationgrew and matured between the 1960s and 1990s. In April 1963, a special reportin BusinessWeek stated, “Shaped in the crucible of complex foreign competition,the largest of US corporations have found themselves changing into a new form:the multinational corporation. . . . The term serves as a demarcation line betweendomestically oriented enterprises with international operations and trulyworld-oriented corporations.”40 It was becoming increasingly apparent that thetraditional structures were not sufficient to cope with the growing complexitiesof managing international business.

This transition was captured by research on the Harvard Multinational En-terprise Project, initiated in 1965, which raised the question of how to organizeeffectively for international growth.41 At an early stage, when foreign sales were oflimited volume and scope, an export department tacked onto sales was sufficient.As foreign sales grew, the export department would become an internationaldivision within the divisional structure (which was replacing the functionalorganization to become the predominant organizational form).42 However, whenthis international division reached a certain size, it triggered a transformation ofthe company into a “multinational structure.”43

Many firms selling a wide range of products abroad opted for a structure ofworldwide product divisions, whereas those with few products but operatingin many countries would typically organize themselves around geographicarea divisions, as did IBM. The tricky question was how to organize when thefirm had many different products sold in many different geographic markets. Itwas not at all clear how companies should deal with this zone of maximumcomplexity.

In practice, two responses emerged. Some firms implemented matrixorganizations involving both product and geographic reporting lines; othersincreased the number of headquarters staff in coordinating roles. Both of theseroutes were ultimately to show their limitations, but the two paths gave rise toa growing understanding of the potential role of HRM in dealing with thefundamental problems of cross-border coordination and control.

The Matrix Structure Route

By the early 1970s, several US and British companies (Citibank, Corning, Dow,Exxon, and Shell, among others) had adopted the idea of the matrix as a guid-ing principle for their worldwide organization. Right from the start, some man-agement scholars urged caution. One study of nine British matrix organizationsdemonstrated that implementation was hindered by traditional managementbehavioral styles,44 and it was also pointed out that a matrix was much more

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complex than reporting lines and structural coordination. A matrix had to bebuilt into leadership development, control and performance appraisal systems,teamwork, conflict resolution mechanisms, relationships, and attitudes, antici-pating the later insight that a matrix has more to do with HRM than it has to dowith structure.45 Few of the companies that opted for the matrix solution hadsuch supporting elements in place.

Our example, ABB, had a formal matrix organizational structure, com-plemented by cross-boundary teams and steering groups. The firm needed tocontrol and coordinate its hugely complex operations, with numerous andoften distant foreign subsidiaries, without being paralyzed by slow, centralized,bureaucratic decisionmaking. Each time top management made changesin the structure to address these challenges, the reorganization led to unin-tended side effects and new challenges. A focus on reporting lines, the firstdimension of coordination, was not sufficient. Attention also had to be paidto the second dimension of coordination, social architecture—the consciousdesign of a social environment that encourages a pattern of thinking andbehavior supporting organizational goals. This includes interpersonal rela-tionships and interunit networks, the values, beliefs, and norms shared bymembers of the organization, and the mindsets that people hold. Barnevik inparticular was conscious of the importance of the social elements of theinternational firm, and thus the need for extensive communication, travel,and relocation of people across units.

A third means of coordination, common management processes, includesprocesses for managing talent (including recruitment, selection, development,and retention of key personnel), performance and compensation management,and knowledge management and innovation. As ABB’s problems compounded,it became increasingly obvious to executives that they had to develop andimplement global management processes, although it was less clear how todo this. Many of their efforts were not successful.

Many companies found matrix structures difficult. Managers were uneasyabout the separation of authority and accountability. The new arrangementsgenerated power struggles, ambiguity over resource allocation, buck-passing,and abdication of responsibility. Worse still, the traditional dimensions of productand geography in many multinationals were overlaid with additional matrixlayers, such as functions, market segments, customer accounts, and globalsuppliers. In theory, a manager reported to two bosses, and conflicts betweenthem would be reconciled at the apex one level higher up. However, it was notunusual to find companies where managers were reporting to four or fivebosses, so that reconciliation or arbitration could only happen at a very seniorlevel. The matrix initiative, originally introduced to help cope with complexity,seemed to be contributing to it.

The difficulties with implementing an effective matrix solution togetherwith the growing importance of speed in global competition sounded the deathknell for the matrix structure in a number of firms. Although a matrix mightensure the consultation necessary for sound decision making, it was painfully

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slow. By the time the firm had decided, say, to build a new chemical plant inAsia, nimbler competitors were already up and running.

By the early 1980s, the call was for clearer accountability, a notion increas-ingly present in management jargon. Many firms reverted to structures whereclear accountability lay with the product divisions, although some (such asABB) retained a structure with many matrix features.46

But if matrix structures were gradually going out of fashion, the matrix prob-lem of organization was more alive than ever. Both practitioners and researchersturned their attention to how lateral interaction, adjustment, and teamworkcould provide the flexibility of matrix without its disadvantages. Research re-views had shown that there were two dimensions of matrix management:47

• The dual or multiple authority relationships (formal reporting lines) reflectedin the structure.

• The horizontal communication linkages and teamwork (for example,between product and country managers) that a matrix organization fosters.

Most of the disadvantages appeared to stem from the former, while most of theadvantages originated in the latter. This observation found support in new ideasin organizational theory about the growing demands of information processingand decision making in complex firms.48 The argument here was that the tradi-tional hierarchical tools of control (rules, standard operating procedures, hier-archical referral, and planning) could not manage the growing complexity ofinformation processing. Organizations required strong capabilities in two areas:first in information processing and second in coordination and teamwork. Therewas an explosion of interest in how to improve coordination while keeping thereporting relationships as clear and simple as possible.49

Gradually it became clear that the matrix challenges of coordination in com-plex multinational firms were essentially issues of people and information tech-nology (IT) management rather than a question of strategy and structure.Matrix, as two leading strategy scholars were later to say, is not a structure; it isa “frame of mind” nurtured more than anything else by careful human resourcemanagement.50

The Headquarters Coordination Route

Not surprisingly given all the implementation difficulties, only a small numberof leading-edge companies adopted a matrix for any length of time, althoughmany tried. Most organizations took the well-trodden path of keeping controlof international activities with central staff. This was particularly true forGerman and Japanese companies, but it was also the dominant organizing pattern in Anglo-Saxon firms. As with the matrix, this approach was initiallysuccessful but eventually led to inefficiencies and paralysis, as the staff func-tions at corporate and divisional levels overexpanded in an attempt to cope withgrowing coordination needs. Again, speed was shown to be the Achilles heel.

It took a long time to work through decisions in German Zentralebereiche(central staff departments), and particularly in Japanese nemawashi51 (negotiation)

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processes of middle-up consultative decision making. However, multinationalsfrom both of these countries were largely export oriented with sales subsidiariesabroad, and the disadvantages were initially outweighed by the quality ofdecision making and commitment to implementation that accompanied the con-sensus-oriented decision making. Moreover, the complex consultative processesworked reasonably well as long as everyone involved was German or Japanese.52

The strains of staff bureaucracy began to show in the US in the early 1980sas companies started to localize, acquiring or building integrated subsidiariesabroad. With localization of the management of foreign units, the coordinationof decisions by central staff became more difficult, slowing down the process ata time when speed was becoming more important. Local managers in lead coun-tries argued for more autonomy and clearer accountability, while the costlyoverhead of the heavy staff structures associated with central coordination con-tributed to the erosion of competitiveness.

Faced with the second oil shock and recession in the late 1970s, Americanfirms were the first to begin the process of downsizing and de layering staffbureaucracies, followed by Europeans in Nordic and Anglo-Saxon countries.The Japanese and Germans followed more slowly. After decades of postwarinternational growth, attention in HRM shifted to the painful new challenges ofdealing with organizational streamlining and job redesign, layoffs, and manag-ing change under crisis. At a deeper level, this was an apprenticeship in howto master a new contradiction—maintaining loyalty and commitment whileengaging in successive rounds of corporate reorganization.53

The pain of restructuring often started at headquarters, although the conse-quences quickly spilled over to subsidiaries. In many firms, the pendulum swungfrom central bureaucracy to decentralized local accountability, deemed cheaperand faster. Foreign subsidiaries transformed themselves into independent“kingdoms”—but the not-invented-here syndrome took hold, and a few yearslater the pendulum swung back to centralization. Why? Because the underlyingproblem of how to coordinate foreign subsidiaries remained unresolved.

Firms that had pursued the headquarters coordination route came to thesame conclusion as firms that had invested in a matrix structure: They had todevelop nonbureaucratic coordination and control mechanisms by building lat-eral relationships facilitated by human resource management.54 The control andcoordination problem became another important strand in the development ofinternational HRM.

HRM Goes International

In the 1980s, the idea that HRM might be of strategic importance gained ground(see the box “HRM Hitches Up with Strategy”). The insight that strategy is imple-mented through structure had taken hold—and it was then logical to argue thatstrategy is also implemented through changes in selection criteria, reward systems,and other HR policies and practices. In turn, this challenged the notion that theremight be a “best” approach to HRM—the approach would depend on the strategy.

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HRM Hitches Up with Strategy

In the early 1980s, two significant conceptualdevelopments in the US gave HRM an iden-tity as a field, rather than just an umbrella formultiple initiatives to do with people and theHR department. They suggested in differentways that HRM could contribute to the per-formance of the firm. Underlying both wasthe idea from the emerging contingency the-ory that there is no right way of organizing ormanaging people—it all depends on fit withstrategy, specific tasks, and the environment.These are known respectively as the conceptsof “internal” and “external” fit or consistency.

The first concept originated from the Har-vard model of managing human assets, whichemphasized the importance of configuringdifferent HRM policies to ensure internal con-sistency.55 Research evidence and theoreticalarguments presented between the mid-1980sand mid-1990s suggested that strong internal fitis associated with organizational performance,even convincing those European scholars whowere initially skeptical about Americanevangelical rhetoric.56

The second concept was the birth of strate-gic human resource management, based on theconcept of external fit between the strategy ofa firm and its HRM policies and practices. Theorigins lay in the idea of implementing strategythrough changes in reward and other HR sys-tems. Building on this, Fombrun, Tichy, andcolleagues developed the notion that strategyshould guide the selection, appraisal, reward,and development activities of the firm,thereby influencing performance in a future-oriented direction.57

Strategic HRM was eagerly embraced inthe US, at least within the professional HRMcommunity. In the battleground for status, itprovided a rationale for elevating the influence

of the HR function. The discipline of humanresource planning, involving detailed method-ologies to link HRM to strategy formulation,came into being.58 During the next 10 years, allself-respecting American firms spent consid-erable efforts on developing their humanresource strategies.

The idea of strategic HRM was reinforcedand popularized by the 7-S model from earlymanagement best seller, In Search of Excel-lence.59 The authors set out to distill the char-acteristics of leading American firms. Theyconcluded that competitive success stemmedfrom a tight configuration between the peopleside of the organization (style, skills, sharedvalues, and staff) and the hard side (strategy,structure, and systems). In making this fitargument, they were implicitly placing theHRM dimension on a par with the dimensionsof strategy and structure that had dominatedorganization theory since the earlier writingof Chandler.60

Although intuitively appealing, the no-tion of external fit proposed by strategicHRM proved difficult to put into practice. In-deed, in an age of increasing discontinuities,the whole notion of strategic planning wasquestioned, especially when the focus ofpractical attention in HRM shifted to thepainful nitty-gritty of downsizing and re-structuring.61 Strategic HRM had perhapsmore to do with change than with detailedlong-term planning. However, the funda-mental tenet of the strategic HRM movementis still valid, namely that firms can benefitfrom putting in place practices that lead to therecruitment, development, and retentionof the type of people needed to carry out astrategy in ways superior to those of theircompetitors.

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Perhaps appropriate HRM practice also depends on cultural context? This ques-tion was prompted by the difficulties that expatriates had experienced in trans-planting management practices abroad, and was supported by growingresearch on cultural differences, pioneered by Geert Hofstede’s study based onthe global IBM opinion survey. This showed significant differences in the un-derstanding of management and organization, even among employees withinthe same company.62

The emergence of “the Japanese challenge” in the 1980s as both threat andicon further highlighted the issue of cultural differences, as well as the strategicimportance of soft issues such as HRM. Numerous studies attempted to explainhow the Japanese, whose country was destroyed and occupied after World War II,had managed to rebound with such vigor, successfully taking away America’smarket share in industries such as automobiles and consumer electronics. Howhad they managed to pull this off with no natural resources apart from people?A large part of the answer seemed to lie in distinctive HRM practices that helpedto provide high levels of skill, motivation, and collective entrepreneurship, aswell as collaboration between organizational units.63 This was a shock for Westernmanagers, who suddenly realized that different approaches to managementcould be equally successful. It could no longer be assumed that a companyexpanding abroad necessarily had superior management practices.

New international human resource challenges were emerging. Many gov-ernments began to apply pressure on foreign firms to hire and develop local em-ployees. The combination of government pressures and the cost of expatriationpersuaded some multinational firms to start aggressively recruiting local exec-utives to run their foreign subsidiaries. This often required extensive trainingand development, but as one observer pointed out, “The cost must be weighedagainst the cost of sending an American family to the area.”64 At Unilever, forexample, the proportion of expatriates in foreign management positionsdropped from 50 percent to 10 percent between 1950 and 1970.65

However, there was a Catch-22 in localizing key positions in foreign units:The greater the talent of local people, the more likely they were to be poachedby other firms seeking local skills. Consequently localization was a priority foronly a minority of multinational firms until well into the 1990s, except for oper-ations in highly developed regions such as North America, Europe, and Japan.66

There were exceptions to this trend, and these tended to be firms that usedexpatriate assignments for developmental reasons rather than just to solve animmediate job need. In these corporations, high potential executives would betransferred abroad in order to expose them to international responsibilities.The assumption was that with growing internationalization, all senior execu-tives needed international experience, even those in domestic positions. For ex-ample, the vice president of P&G had already pointed out in 1963, “We neverappoint a man simply because of his nationality. A Canadian runs our Frenchcompany, a Dutchman runs the Belgian company, and a Briton runs our Italiancompany. In West Germany, an American is in charge; in Mexico, a Canadian.”67

This meant that P&G was able to attract the very best local talent, quickly

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developing an outstanding reputation around the globe for the quality of itsmanagement. For local firms in France, Singapore, Australia, and Brazil, P&Gwas the management benchmark, and not only in the fast-moving consumergoods sector. Other firms started to adopt the P&G approach, although this cre-ated new challenges for international HRM. How does one manage the identi-fication, development, transfer, and repatriation of talent spread out acrossthe globe?

The link between international management development and the prob-lems of coordination and control was established by the landmark research ofEdström and Galbraith. They studied the expatriation policies of four multina-tionals of comparable size and geographic coverage in the mid-1970s, includ-ing Shell.68 The research showed that these companies had quite different levelsand patterns of international personnel transfer.69 There were three motives fortransferring managers abroad. The first and most common was to meet animmediate need for particular skills in a foreign subsidiary. The second wasto develop managers through challenging international experience. However,the study of Shell revealed a third motive for international transfers—as amechanism for control and coordination. The managers sent abroad weresteeped in the policies and style of the organization, so they could be reliedon to act appropriately in diverse situations. Moreover, frequent assign-ments abroad developed a network of personal relationships that facilitatedcoordination.

It appeared that Shell was able to maintain a high degree of control andcoordination while having a more decentralized organization than other firms.Indeed, one of the basic principles of the Royal/Dutch Shell Group of Companies(the official title of the corporation until 2006) was to allow subsidiaries a highdegree of local autonomy. This suggested that appropriate HRM practices couldallow a firm to be globally coordinated and relatively decentralized at the sametime. Global control and coordination, it appeared, could be provided throughsocialization, minimizing the necessity for centralized headquarters control orbureaucratic procedures.

These findings drew attention to expatriation, mobility, and managementdevelopment as a vital part of the answer to the matrix/bureaucracy problem ofcoordination. In truth, the concept was not entirely new—the Romans hadadopted a similar approach to the decentralization dilemma two millenniabefore.

By the mid-1990s, with globalization deepening, surveys consistently showedthat global leadership development was one of the top three HRM priorities inmajor US corporations.70 In some companies in Europe and the US, internationalmanagement development was seen to be so critical that this department wasseparated from the corporate HR function and reported directly to the CEO.

These developments also lent substance to an earlier research by Perlmutter,suggesting that multinationals varied in the “states of mind” characterizingtheir operations.71 The first was the ethnocentric orientation, where each subsidiarywas required to conform precisely to parent company ways regardless of local

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conditions. The second was the decentralized polycentric corporation, where eachsubsidiary was given the freedom to develop with minimal interference,providing it remained profitable. The third was the geocentric orientation, where“subsidiaries are neither satellites nor independent city states, but parts of awhole whose focus is on worldwide objectives as well as local objectives, eachmaking its unique contribution with its unique competence.”72 Perlmutter hy-pothesized that people management practices built this geocentric orientation.As in P&G, this meant that an individual’s skills counted more than his or herpassport, and there would be a high degree of mobility not only from head-quarters to subsidiaries, but also from subsidiaries to headquarters and betweenthe subsidiaries themselves, as with Shell. Perlmutter saw the route from initialethnocentrism to geocentrism as tortuous but inevitable.

The research of Perlmutter and Edström and Galbraith suggested that in-ternational HRM was not just a question of sending expatriates abroad and put-ting the right person in the right place in foreign environments, importantthough these tasks may be. Their ideas provided a framework for understand-ing the role of HRM in the strategic and organizational development of themultinational corporation. However, until the early 1990s, the focus of manage-ment attention, at least in the US, was on the home market problems of restruc-turing and reengineering. And most of the research (and indeed business schoolteaching) in international HRM remained heavily functional in its orientation,focused on managing expatriate and international assignments.

Accelerating global competition in the 1990s was to change that, as the seedsof another important idea were sown—that the competitive advantage of aglobal corporation lies in its ability to simultaneously balance the forces of localresponsiveness and global integration while at the same time learning across itsgeographic and other boundaries.73

ENTER GLOBALIZATION

By the end of the 1980s, the traditional distinction between domestic and multi-national companies had started to become blurred. International competitionwas no longer the preserve of industrial giants; it was affecting everybody’sbusiness. Statistics from the 1960s show that only 6 percent of the US economywas exposed to international competition. By the late 1980s, the correspondingfigure was over 70 percent and climbing fast.74

In 1985, Hedlund had noted, “A radical view concerning globality is that weare witnessing the disappearance of the international dimension of business.For commercial and practical purposes, nations do not exist and the relevantbusiness arena becomes something like a big unified ‘home market.’”75 By theearly 1990s, this was no longer a “radical” view.

Globalization surfaced as the new buzzword at the beginning of the 1990s—see the box “The Meaning of Globalization.” Many of the ingredients of global-ization had actually been around for several decades. The steady dismantling of

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trade barriers in Western Europe and in North and South America, the increasingavailability of global capital, advances in computing and communications tech-nology, the progressive convergence of consumer tastes, and, in particular, theuniversal demand for industrial products had all been under way for some time.What made a difference was that these trends now reached a threshold wherethey became mutually reinforcing.

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The Meaning of Globalization

Globalization has different meanings to differ-ent people, often with strong positive or neg-ative emotional overtones. For many peopleit implies that we are becoming all alike—globalization stands for convergence or ho-mogenization. This was the first popular useof the term, spurred by the views of mediagiant Marshall McCluhan 40 years ago. Ifglobalization did indeed mean homogeniza-tion, most of us would resist since it wouldimply loss of heritage and identity.

Indeed, globalization has a variety ofnegative meanings for various social groups,including many activist organizations, linkedtogether under the “antiglobalization” um-brella. Some protest again the negative conse-quences for the environment, others areopposed to what they see as Americanization orthe supremacy of the free market system, whilemany are against the political power of themultinational corporations, placing the rightsof investors over citizens and individuals.

But there is an alternative view ofglobalization—as a source of new opportuni-ties and increasing choice: more sources ofinformation, widening markets for talent fromanywhere, better quality and selection of prod-ucts for consumers (often at lower prices), richinfluence of other cultures.

Take access to international food as an ex-ample. In most large cities around the worldwe have access to an ever greater choice of

food—French, Japanese, Thai, Mexican, In-dian, Italian, Chinese. . . . We choose what weeat, and we enjoy having the diversity ofchoice. But we do not live in a single globalvillage, so while sushi is everywhere inCalifornia, California sushi is quite differentfrom sushi in Japan.

In this context, what many economistsand political scientists mean by globalizationis an increasing interdependence and inter-connectedness. That is the sense in whichwe employ the term globalization in thisbook. We live in villages of different sizes anddesign that are, despite their differences, in-creasingly connected.

“Globalization, global integration is awidening, deepening and speeding up ofinterconnectedness in all aspects of contem-porary life from the cultural to the criminal,the financial to the spiritual.”76 Events inthe housing market of the US have powerfulconsequences for an industrial firm inFrankfurt or a retailer in Ho Chi Minh City. Tomeet global competition, Toyota no longermakes a whole car in a single location—itmight make the front traction in China and theengine in Japan, and carry out final assemblyclose to the customer. Operations in theintegrated multinational are separate butinterdependent.

So when people use the word “globaliza-tion,” check out first what they mean by it.

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First of all, economic barriers such as national borders became less relevant(but not irrelevant!) as governments dismantled the barriers to trade and invest-ment that once segmented the world economy. At the same time, widespreadderegulation and privatization opened new opportunities for international busi-ness in both developing and developed countries. The multinational domain,long associated with the industrial company, was shifting to the service sector,which by the mid-1990s represented over half of total world FDI.77 Problems ofdistance and time zones were further smoothed away as communication by faxgave way to e-mail and fixed phone networks to wireless mobile technology.

Globalization was further stimulated by the inevitable but still unexpectedfall of communism in Russia and Eastern Europe. Together with China’s adop-tion of market-oriented policies, huge new opportunities were opened to inter-national business as most of the world was drawn into the integrated globaleconomy. Back in the 1970s, world trade was already growing nearly 20 percentfaster per annum than world output. This intensified in the 1980s, with worldtrade growing 60 percent faster than world output, and global FDI increasingeven faster than trade. That period also saw the US share of world FDI declinefrom 50 to 26 percent, bringing it much more in line with the weight of the USin the world economy. Meanwhile Japan, with a strong international rather thandomestic focus, increased its share of world FDI from 1 to 20 percent during theperiod 1967–1990.

International business was not just growing in volume; it was also changingin form. Much of the early theorizing depicted a step-by-step progression tointernational status, as mentioned earlier.78 By the late 1980s, many companieswere learning how to grow through various types of alliances, includinginternational licensing agreements, cross-border R&D partnerships, interna-tional consortia such as Airbus, and the joint ventures that were increasinglyused to expand quickly into emerging markets. The creation of the Single Euro-pean Market in 1992, which then became the European Union, triggered an un-precedented wave of cross-border mergers and acquisitions that continue toaccelerate in frequency and size.

Multinationals increasingly located different elements of their value-addingactivities in different parts of the world. Formerly hierarchical companies withclean-cut boundaries were giving way to complex arrangements and configu-rations, often fluctuating over time. The new buzzword from GE was “theboundaryless organization.”79 With increasing cross-border project work andmobility, the image of an organization as a network was rapidly becoming as ac-curate as that of hierarchy. For example, a European pharmaceutical corporationcould have international R&D partnerships with competitors in the US andmanufacturing joint ventures with local partners in China, where it also out-sourced sales of generic products to a firm strong in distribution. The newarrangements meant that companies might cooperate along some segments ofthe value chain and compete along others.

Another characteristic of the emerging competitive environment was thebreakdown of historic sources of strategic advantage, leading to the search for

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new ways to compete. Traditionally, the only distant resources that multina-tionals sought were raw materials or cheap labor. Everything else was at home:sources of leading-edge technology and finance, world-class suppliers, pressure-cooker competition, the most sophisticated customers, and the best intelligenceon future trends.80 The home base advantage was so strong that multinationalscould maintain their competitiveness while they gradually learned to adapttheir offerings to fit better with local needs (thus supporting an incrementalapproach to international expansion).

Global competition was now dispersing some of these capabilities aroundthe world. India, for example, developed its software industry using a low-coststrategy as a means of entry, but then quickly climbed the value chain, just asJapan had done previously in the automobile industry. The implication of suchdevelopments was that multinational firms, especially US firms, could no longerassume that all the capabilities deemed strategic were available close to home.

With the erosion of traditional sources of competitive advantage, multina-tionals needed to change their perspective. To compete successfully, they had todo more than exploit scale economies or arbitrage imperfections in the world’smarkets for goods, labor, and capital. Toward the end of the 1980s, a new wayof thinking about the multinational corporation came out of studies of howorganizations were responding to these challenges. The concept of the transna-tional organization was born.

The Roadmap for Managing Globalization

If there is a single perspective that has shaped the context for our understand-ing of the multinational corporation and its HRM implications, it is Bartlett andGhoshal’s research on the transnational organization.81 To this we can addHedlund’s related concept of heterarchy and Doz and Prahalad’s studies on themulti-focal organization, all of which have origins in Perlmutter’s geocentricorganization.82 We will be referring frequently to their findings and concepts inthis book, for all of these strategy and management researchers grew to believethat people management is perhaps the single most critical domain for themultinational firm. None of them had any interest in HRM by virtue of theirtraining, but all were drawn to the HRM field by findings from their research.

Doz and Prahalad began to link the fields of multinational strategy and HRMwhen researching the patterns of strategic control in multinational companies.83

As they saw it, multinational firms faced one central problem: responding to avariety of national demands while maintaining a clear and consistent globalbusiness strategy. This tension between strong opposing forces, dubbed local re-sponsiveness and global integration, served as a platform for much subsequentresearch and came to be seen as the central challenge for the multinational com-pany. It was captured by Sony’s “think global, act local” aphorism, also adoptedby ABB as its guiding motto.

These concepts were developed further by Bartlett and Ghoshal in theirstudy of nine firms in a sample of three industries (consumer electronics, branded

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packaged goods, and telephone switching) and three regions (North America,Europe, and Japan).84 They discovered that these companies seemed to have fol-lowed one of three internationalization paths, which they called “administrativeheritage”:

• One path emphasized responsiveness to local conditions, leading to whatthey called a “multinational enterprise” and what we prefer to call multi-domestic (we use the term multinational in its generic sense, as a firm withoperations in multiple countries). This led to a decentralized federation oflocal firms led by entrepreneurs who enjoyed a high degree of strategic free-dom and organizational autonomy. Close to their customers and withstrong links to the local infrastructure, the subsidiaries were seen almost asindigenous companies. The strength of the multidomestic approach was lo-cal responsiveness, and some European firms, such as Unilever and Philips,and ITT in the United States, embodied this approach.

• A second path to internationalization was that of the “global” firm, typifiedby US corporations such as Ford and Japanese enterprises such as Mat-sushita and NEC. Since the term global as used by Bartlett and Ghoshal isnow, just like the term multinational, commonly applied to any large firmcompeting globally, in this book we prefer to call such a firm the meganationalfirm. Here, worldwide facilities are typically centralized in the parent coun-try, products are standardized, and overseas operations are considered asdelivery pipelines to access international markets. The global hub maintainstight control over strategic decisions, resources, and information. Thecompetitive strength of the meganational firm comes from efficiencies ofscale and cost.

• Some companies appeared to have taken a third route, a variant on themeganational path. Like the meganational, their facilities were located atthe center. But the competitive strength of these “international” firms85 wastheir ability to transfer expertise to less advanced overseas environments,allowing local units more discretion in adapting products and services.They were also capable of capturing learning from such local initiatives andthen transferring it back to the central R&D and marketing departments,from where it was reexported to other foreign units. The “international” en-terprise was thus a tightly coordinated federation of local units, controlledby sophisticated management systems and corporate staffs. Some Americanand European firms, such as Ericsson, fit this pattern, heralding the grow-ing concern with global knowledge management.

It was apparent to Bartlett and Ghoshal that specific firms were doing well be-cause their internationalization paths matched the requirements of their industryclosely. Consumer products required local responsiveness, so Unilever had beenthriving with its multidomestic approach, while Kao in Japan—centralized andmeganational in heritage—had hardly been able to move outside its Japaneseborders. The situation was different in consumer electronics, where the central-ized meganational heritage of Matsushita (Panasonic and other brands) seemed

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to fit better than the more localized approaches of Philips and GE’s consumerelectronics business. And in telecommunications switching, the internationallearning and transfer ability of Ericsson led its “international” strategy to dom-inate the multidomestic and meganational strategies of its competitors.86

Perhaps the most significant of Bartlett and Ghoshal’s observations was thataccelerating global competition was changing the stakes. In all of these three in-dustries, it was clear that the leading firms had to become more transnationalin their orientation—more locally responsive and more globally integrated and bet-ter at sharing learning between headquarters and subsidiaries. What has beendriving this change? Increasing competition was shifting the competitive posi-tioning of these firms from either/or to and. The challenge for Unilever (like ABBin the opening case) was to maintain its local responsiveness, but at the same timeto increase its global efficiency by eliminating duplication and integrating man-ufacturing. Conversely, the challenge for Matsushita was to keep the economiesof centralized product development and manufacturing, but to become morelocal and responsive to differentiated niches in markets around the world.

The Transnational Solution

The defining characteristic of the transnational enterprise is its capacity to steerbetween the contradictions that it confronts. As Ghoshal and Bartlett put it,

. . . managers in most worldwide companies recognize the need for simultaneously

achieving global efficiency, national responsiveness, and the ability to develop and ex-

ploit knowledge on a worldwide basis. Some, however, regard the goal as inherently un-

attainable. Perceiving irreconcilable contradictions among the three objectives, they opt

to focus on one of them, at least temporarily. The transnational company is one that over-

comes these contradictions.87

However, it is not clear that all international firms are destined to move in atransnational direction. While all companies are forced to contend with the di-mensions of responsiveness, efficiency, and learning, and intensified competi-tion heightens the contradictory pressures, these features are not equally salientin all industries. Moreover, the pressures do not apply equally to all parts of afirm. One subsidiary may be more local in orientation, whereas another may betightly integrated. Even within a particular function, such as marketing, pricingmay be a local matter whereas distribution may be controlled from the center. InHR, performance management systems may be more globally standardized,whereas reward systems for workers may be left to local discretion. Indeed, thisdifferentiation is another aspect of the complexity of the transnational—one sizedoes not fit all.

Transnational pressures have been strongest in certain industries, such aspharmaceuticals and automobiles, where firms must be close to local authoritiesand consumers, while at the same time harnessing global efficiencies in productdevelopment, marketing, and manufacturing. In other industries, such as steel,paper, and printing, the pressures to be locally responsive or globally integrated

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were less strong, at least in the past. In certain environments, developing a dif-ferentiated transnational approach would not be appropriate. Indeed, researchersargued that “unnecessary organizational complexity in a relatively simple busi-ness environment can be just as unproductive as unresponsive simplicity in acomplex business environment.”88

While industry characteristics influence the strategic approach of the firm89—multidomestic, meganational, or transnational—companies also have somedegree of choice. Take the case of the brewing industry, where two neighboringfirms have taken contrasting paths. Everyone has heard of the Dutch companyHeineken through its global Heineken and Amstel brands. But how many hadheard of InBev before it acquired the iconic American Anheuser-Busch beer?Based just across the border in Flemish-speaking Leuven in Belgium, and inpartnership with Brazilians, InBev owns over 200 brands across the world, in-cluding Stella Artois, Bass, Labatt, Leffe, and Brahma. InBev is pushing someglobal brands, but continues to invest in its large portfolio of local brands. Thus,notwithstanding industry imperatives, different models may be equally viableprovided that there is good execution, consistency in implementation, andalignment between HRM and competitive strategy.

In many ways, the transnational concept drew its inspiration from the con-cept of the matrix. But transnational is neither a particular organizational formnor a specific strategic posture. Rather it is an “organizational model,” a “man-agement mentality,” and a “philosophy.”90 The transnational challenge is there-fore to create balanced perspectives91 or a “matrix in the mind of managers.”92

Ghoshal and Bartlett argue that the role of top management in the transna-tional is now less about managing strategy, structure, and systems than it wasin the past. Structure cannot cope with the complexity, while strategic initiativescome increasingly from the entrepreneurial activities of local businesses aroundthe globe rather than from the center. The challenge for senior management isinstead to build a common sense of purpose that will guide local strategic ini-tiatives, to coordinate through a portfolio of processes rather than via hierarchicalstructure, and to shape people’s attitudes across the globe.93

The early research on the transnational enterprise focused on one majorcontradiction, local versus global. Researchers then began to examine this ten-sion as it appeared in different functions within multinationals, includingHRM.94 Clearly, a relevant question was the extent to which HR policies andpractices should be adapted to fit not only the local cultural context but also lo-cal institutional rules, regulations, and norms. If the multinational decentralizedthe responsibility for HRM and adapted practices to the local environment, itcould suffer from a lack of global or regional scale advantages within the HRfunction, forgo the possibilities of interunit learning within the corporation, andfail to use HRM effectively to enhance coordination. A failure to address issuesrelated to corporate social responsibility in a globally consistent manner couldalso cost the company dearly. Siemens experienced this when a corruption scan-dal erupted in 2007, as did Nike, severely criticized for not having tightly su-pervised labor practices across its global network of suppliers.

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In another stream of research that followed Bartlett and Ghoshal’s initialwork on transnational organizations, emphasis was put on the ability of multi-nationals to identify and transfer ideas from a foreign unit to other parts of thecorporation and to leverage capabilities on a global scale. The box “From Tai-wanese Fishermen to a Global Market Opportunity” illustrates the advantagesof learning locally.

Capabilities and Knowledge as Sources of Competitiveness

Today, management, strategy, and international business scholars are increas-ingly focused on capabilities and knowledge as drivers of competitive advantage.A core organizational capability (or core competence) is a firm-specific bundlingof technical systems, people skills, and cultural values.95 To the extent that theyare firm-specific, such organizational capabilities are difficult to imitate becauseof the complex configuration of the various elements. The capabilities can there-fore be a major source of competitive advantage (although their very success canalso create dangerous rigidities).

The distinguishing feature of a capability is the integration of skills, technolo-gies, systems, managerial behaviors, and work values. For example, FedEx hasa core competence in package routing and delivery. This rests on the integrationof barcode technology, mobile communications, systems using linear program-ming, network management, and other skills.96 The capability of INSEAD or IMDin executive education depends on faculty know-how integrated with programdesign skills, marketing, relationships with clients, the competence and attitudeof support staff, reward systems, and a host of other interwoven factors that

28 CHAPTER 1: The Challenges of International Human Resource Management

From Taiwanese Fishermen to a Global Market Opportunity

A story often told at Nokia, the Finnish mobilephone manufacturer, communicates clearlythe transnational spirit and what it means tobe both local and global.

When product penetration by mobilephones was still fairly low, a Nokia sales man-ager, on holiday in Taiwan, noticed that thelocal fishermen all carried mobile phones. Itdawned on him that this might be the tip of aneglected market. Perhaps the greatest potentialfor the firm’s products was not sophisticatedurbanites, as the central marketing peoplethought, but rather people in remote areaswhere the cost of laying a network of telephone

cables was prohibitive (or impossible, in thecase of fishermen).

The Taiwanese fishermen themselves didnot represent much of a marketing opportu-nity. The strategy makes sense only on a largerscale, if the company focuses on clusters ofusers with similar needs scattered interna-tionally. It is therefore a good example of thetransnational challenge. The company has tobe sensitive to local needs in order to spotsuch opportunities in the first place; but thenit needs to be global in order to exploit theopportunity across all sorts of potentialmarkets.

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have evolved over the years. We will return to this concept extensively in thefollowing chapter.

Another crucial source of competitive advantage comes from the firm’s abil-ity to create, transfer, and integrate knowledge. At the heart of the surge of aca-demic and corporate interest in management of knowledge lies the distinctionbetween explicit and tacit knowledge. The former is knowledge that you knowthat you have, and in organizations explicit knowledge is often codified in textsand manuals. The latter is personal, built on intuition acquired through years ofexperience and hard to formalize and communicate to others. One of the main ap-proaches to knowledge management is to build collections of explicit knowledge(on customer contacts, presentation overheads, etc.) using software systems, andto make that knowledge available via an intranet. Another approach is to focus onbuilding connections or contacts between people in the organization that can beused to transfer tacit knowledge.97 Many professional firms have gone down thisroute, for instance by creating yellow page directories or internal “Facebook” plat-forms that allow consultants to find individuals who have relevant experienceand encouraging the development of informal relationships among people inter-ested in a certain topic area.98 In a world where the retention of people is more dif-ficult, it is particularly important to retain and transfer their knowledge.

Kogut and Zander have argued cogently that the source of advantage formultinational firms is this ability to transfer and recombine knowledge acrossborders.99 Corporations that do not have the capacity to do this well will in-evitably run into problems and will be defeated by those who can.

It should be added that these ideas about the source of competitive advan-tage are related to the resource-based perspective of the firm, which views it as abundle of tangible and intangible resources. If such resources are valuable to thecustomer, rare, difficult to purchase or imitate, and effectively exploited, thenthey can provide a basis for superior economic performance that may be sus-tained over time. This view quickly attracted the attention of HRM scholarsbecause its broad definition of resources could be applied to HRM-related ca-pabilities, such as training and development, teamwork, and culture. Resource-based theory helped to reinforce the interrelationship between HRM and strategy.It provided a direct conceptual link between an organization’s more behavioraland social attributes and its ability to gain a competitive advantage. This influ-ential view, based largely on research on multinational corporations, has con-tinued to play an important role in current strategy and HRM thinking.

Toward a Flat World?

The process of globalization has continued in the new century. In his influentialbook The World is Flat, Thomas Friedman suggests that the world has become“flat.”100 He argues that 10 “flatteners” (see Table 1–2) have produced a morelevel competitive playing field for individuals, groups, and companies from allparts of a shrinking world. While the process of globalization was previouslydriven mostly by countries and then by corporations striving to expand their

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30 CHAPTER 1: The Challenges of International Human Resource Management

TABLE 1–2. Friedman’s 10 Forces That Flattened the World

Flattener 1: The collapse of the Berlin Wall on November 9, 1989,

11/9/89 marked the end of the Cold War, allowing countries from

the other side of the Wall to join the world economy.

Flattener 2: The Internet (symbolized by Netscape going public on

8/9/95 August 9, 1995) has become accessible to everyone,

enabling people to communicate digital information

around the world.

Flattener 3: Machines interact and individuals from anywhere

Work-flow software collaborate on the same digital content.

Flattener 4 : The ability of individuals (and communities) to

Open-sourcing collaborate on projects online—examples include

open-source software, blogs, and Wikipedia.

Flattener 5: Parts of companies’ value chains are handled by other

Outsourcing firms (often in lower-cost countries) that can handle them

more efficiently.

Flattener 6: Firms relocate parts of their activities to lower-cost

Offshoring locations to reduce costs.

Flattener 7: Global streamlining and optimization of companies’ total

Supply-chaining supply chains.

Flattener 8: Company employees perform services, such as product

Insourcing repairs, for other firms.

Flattener 9: Rapid and wide search for information through Google

In-forming and similar search engines.

Flattener 10: Personal digital devices, like mobile phones, personal

The steroids assistants, and voice-over-Internet protocol (VoIP).

Source: T.L. Friedman, The World Is Flat: A Brief History of the Twenty-First Century (New York: Farrar, Straus and

Giroux, 2005).

influence and integrate their activities, what Friedman calls “Globalization 3.0”is driven more by the ability of individuals, groups, and firms to collaborate andcompete internationally using the tools of the increasingly virtual world—personal computers, broadband communications, and work-flow software.Developments in communications and transportation led to step changes ininternationalization in the past. As the digital revolution becomes accessible toall across the globe, this is happening all over again today.

The forces described by Friedman have contributed to many of the changesin the world economy that we have seen during the last 10 years. China has con-sistently attracted large amounts of FDI as it has become the factory for theworld,101 while India has become an incubator of new multinationals in globalbusinesses that did not even exist 10 or 15 years ago, such as IT support andprocess outsourcing contracts.

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Even with the world deeply in recession as the first decade of the 21stcentury draws to a close, multinationals from high-growth developing andemerging markets have become major global investors. Large internationalacquisitions by firms like Tata Steel from India, which bought the Anglo-Dutchgroup Corus, among others, and CEMEX from Mexico, the world’s largestbuilding material company, have transformed industries that were traditionallydominated by firms from developed countries. The shift away from countriessuch as the US and Japan dominating lists of the world’s largest companies isclear. Out of the world’s 500 largest corporations, the US lost 26 of its 177 spotsbetween 1999 and 2008 and Japan no fewer than 55 of its 81. The winners wereemerging countries like China (from 10 to 29), South Korea (12 → 14), India(1 → 7), Taiwan (1 → 6), Mexico (2 → 5), Brazil (3 → 5), and Russia (2 → 5).102

Have these developments reduced the challenges of addressing peoplemanagement in multinationals? Our answer is an emphatic no. Multinationalfirms still face complex questions of how to enhance global coordination; howto pursue both global efficiency and local responsiveness in their operations;and how to achieve successful global exploitation of existing competencieswhile also exploring new knowledge and innovations. As we will arguethroughout this book, people management is an integrated part of how multi-nationals can deal with these issues. In today’s economy, international HRM isincreasingly a global challenge for multinationals from all parts of the world.

THE EVOLUTION OF INTERNATIONAL HRM

Looking back over time, we can detect waves of alternating theories and ideologiesin the management of people (see the box “The Pendulum of ManagementThought” earlier in this chapter). These swings reflect an underlying tensionwhereby the organization is sometimes viewed as a “community,” where peopleare team members and assets, and sometimes as a “market,” in which people areresources.103 On one side, we have the soft rhetoric of industrial betterment, humanrelations, and organizational culture, which emphasize normative control, arguingthat organizations are collectives held together by shared values and moral in-volvement and that control can be exercised by shaping the identities and attitudesof workers. On the other side, we find ideas that focus on the hard rhetoric of ra-tionalism and productivity improvement, applying methods and systems to indi-viduals who are assumed to have an instrumental rather than affective orientationto work—scientific management, systems rationalism, and reengineering. Todaypowerful computer-based applications for connecting people in global networksgo hand in hand with a renewed emphasis on shared corporate values.104

As we have seen, the challenges of foreign assignments, adapting peoplemanagement practices to foreign situations, and coordinating and controllingdistant operations have existed since antiquity. It is only during the last 50 yearsthat specialized personnel managers have begun to assume a responsibility forthese tasks. With the acceleration of globalization, these and other internationalHRM issues have developed into a central competitive challenge (see Table 1–3,

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32 CHAPTER 1: The Challenges of International Human Resource Management

TABLE 1–3. From Personnel Welfare to International HRM

Developments in People Focus

Dates International Business Practice Theory

1870s Early manufacturing Welfare programs—first Industrial betterment

FDI experiments with improving

working conditions, training

schemes, and common wage policies.

1900s Appointment of welfare (or social)

secretaries to handle grievances,

manage workers’ transfers, run the sick

room, provide recreation/education.

1910s The golden age of Time-and-motion studies, fatigue studies, Scientific management

international business job analysis, and wage administration

emerge as new tasks for the employment

manager.

1920s International cartels Employment policy setting is

increasingly centralized in a staff function

responsible for hiring and firing, keeping

performance records, and handling

disciplinary problems.

1930s Multidivisional Replicating the protective structures Human relations

organizations proposed by labor unions through

due process, disciplinary procedures,

and complaint systems. Counseling and

interviews are established as a staple

ingredient of personnel practice.

1950s US companies Manpower planning is introduced.

expand abroad The recruitment, testing, and assignment

of employees become more systematic

with a wide battery of practices spilling

over from wartime experience.

1960s Focus in US on An increased focus on leadership Systems thinking about

1970s expatriation; matrix development. Managers expect careers, organization

structures and staff not just jobs. Succession planning and

bureaucracies expatriation policies are developed.

HRM becomes the umbrella for

flourishing people management

initiatives.

1980s US faces stronger HR planning grows and dies. Strategic HRM;

competition from Involvement with corporate organization culture

Japan and Europe; restructuring, managing layoffs,

rationalization and outplacement. Greater attention

and consolidation to talent development.

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The Evolution of International HRM 33

Developments in People Focus

Dates International Business Practice Theory

1990s Globalization Greater localization. Growing Resource-based view of

awareness of the role of HRM in the firm;

providing corporate cohesion. the transnational

Global leadership development concept

becomes vital. Attention to alliances

and cross-boundary merger integration.

Focus on developing human capital

leads to interest in social capital,

supporting innovation and knowledge

management.

2000s The growth of Competitive advantage through speed Social capital; tension,

multinationals from and adaptation, differentiation rather paradox, and duality

emerging markets than imitation. Increasing emphasis on

global knowledge management. IT/

Internet-based solutions and outsourcing

drive reengineering of HR practices

and processes. Increased global reach of

the HR function. Social architecture

becomes the frontier challenge for HRM.

which traces the developments in practice and theory over the last 140 years).As Floris Maljers, former cochairman of Unilever, put it, “Limited humanresources—not unreliable or inadequate sources of capital—have become thebiggest constraint in most globalization efforts.”105 Many scholars studying themultinational firm today, whatever their discipline or background, would agree.

The centrality of these HRM issues has increased over time. For example, as thebottom-line consequences became more visible, concern over expatriation broad-ened to include the understanding that it was not just about sending managersabroad but also about helping expatriates to be successful in their roles and futurecareers. The scope of expatriation has changed—today expatriates come not onlyfrom the multinational’s home country but also from other, third countries. Local-ization of staff in foreign units became a new imperative, leading to the complextask of tracking and developing a global talent pool. As globalization started to havean impact on local operations, for example in China, it also became clear that evenlocal executives need to have international experience. Challenges of knowledgeand innovation management and implementation problems in the number of in-ternational ventures, alliances and cross-border mergers, and acquisitions furtherhighlighted how HRM influences the success of internationalization strategies.

As the ABB case illustrated, the failure of structural solutions to address theproblems of coordination and control led to an increased focus on how HR prac-tices might assist in providing cohesion to the multinational firm. HRM andstrategy came together in the transnational concept that helped to dissolve

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34 CHAPTER 1: The Challenges of International Human Resource Management

many of the traditional boundaries in organizational thinking. Today, the strate-gic importance of international HRM is widely recognized.106

The increasing centrality of international HRM issues has blurred theboundaries between this domain of academic study and others. Once no morethan an appendix to the field of personnel/HR management, international HRMhas become a lens for the study of the multinational enterprise, the form of orga-nization that dominates the world economy. Understanding the complex chal-lenges facing today’s global organizations calls for interdisciplinary work withscholars of strategy, institutional economics, organization, cross-cultural man-agement, leadership, change management, organizational culture, and others.

While this book draws on many different theoretical perspectives from mul-tiple disciplines on issues related to international HRM, as we have seen in thischapter, and as we shall see throughout the book, the last perspective is proba-bly the most critical for understanding the multinational corporation in generaland the international HRM area in particular. The manager experiences this du-ality perspective as a paradox or contradiction, and as the need for balance inresponse to the tension created by opposites. This view is at the heart of Bartlettand Ghoshal’s notion of the transnational, and is discussed by other writers onstrategic HRM in multinational enterprises.107 The tension between pursuing localadaptation, seeking global efficiency through scale advantages, and exploitingdisparities between national (labor) markets is also dominant in Ghemawat’srecent influential work on global strategy.108 We will be developing this idea fur-ther in the next chapter, where we look at the different faces of human resourcemanagement in the international firm.

OUTLINE OF THIS BOOK

Having set the stage here, in Chapter 2 we develop the conceptual frameworkthat underlines the book. We examine the relationship between strategy,organizational capabilities, and HRM, and we present the HR Wheel usedto map the domain of human resource management. Chapter 2 also outlines dif-ferent stages of HRM in multinational firms: the builder, the change partner, andthe navigator who steers through the dualities of international management.

The next two chapters review the globalization strategies of local respon-siveness and global integration in depth. Chapter 3 addresses the HRM implica-tions for firms that emphasize local responsiveness, discussing how multinationalfirms are under pressure to respond to the local cultural, institutional, and socialenvironment. Chapter 4 focuses on the strategy of global integration. Thechapter discusses the organizational control tools needed to achieve advantagesof global scale and scope and examines in detail the challenges of managingexpatriation. The control and coordination mechanisms used in multinationalenterprises are discussed in this and several subsequent chapters. Table 1–4presents these mechanisms and shows where they are discussed in the book.

We then look at the different methods of coordination. Structural coordina-tion mechanisms examined in Chapter 5 include multidimensional structures,

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Outline of This Book 35

TABLE 1–4. Control and Coordination Mechanisms

Where Discussed Control Mechanism Explanation (Chapters)

Personal Centralized decision making and 4, 5

monitoring by headquarters

management and expatriates

Formal Standardization and formalization 4, 5

of rules and processes

Output Performance measurement 4, 9

Normative Specification and diffusion 4, 6

of shared values, beliefs, and norms

Coordination Where Discussed Mechanism Explanation (Chapters)

Structural Multidimensional structures, lateral 5

governance mechanisms, global teams

Social Shared values, beliefs, and norms; 6

global mind-sets; social capital

Where Discussed

Process Explanation (Chapters)

• Talent Processes for attracting, assessing, 7, 8

management selecting, developing, and

retaining talent

• Performance Processes for establishing 9

management performance criteria and goals,

for following them up, and for

providing rewards based on performance

• Knowledge and Processes for enhancing knowledge 10

innovation acquisition and sharing, innovations

management

cross-boundary teams, cross-boundary roles and steering groups, and virtualteams. Social coordination mechanisms of social capital, shared values, andglobal mindset are discussed in Chapter 6. Four chapters (Chapters 7–10) dealwith key processes in international HRM: talent acquisition and retention, talentdevelopment, performance management (including compensation), and knowl-edge and innovation management.

Subsequently we examine three complex people management challenges inglobal firms: facilitating change through HRM, managing alliances and jointventures, and cross-border merger and acquisition integration. Chapter 11 ad-dresses one of the most salient emerging domains in international HRM: how toplan and implement large, complex processes of change. Chapters 12 and 13

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deal with the critical HRM issues in alliances and acquisitions that complementorganic strategies for international growth.

The final chapter addresses the implications of recent and future develop-ments for HR professionals in multinational firms.

The focus of this book is explicitly on international HRM in large complexmultinational firms rather than small or medium-sized enterprises, although anumber of issues that we will cover are of direct relevance for a mindset spec-trum of firms. We will present examples from firms drawn from all regions ofthe world, including eBay, GE, IBM, and Procter & Gamble from the US, Toyotafrom Japan, Haier from China, leading European multinationals like ABB, Nokia,and Shell, and companies without nationalities such as Schlumberger or Arcelor-Mittal. Each chapter starts with a short case, highlighting the issues that we willdiscuss.

As the HR contributions to internationalization increase in importance, theboundaries between the HR function and line management become blurred, asdo the boundaries with other management functions, such as strategic plan-ning, information technology, marketing, corporate communication, and oper-ations. Throughout this book, we will be taking a broad managerial perspective,addressing “the manager,” regardless of whether that manager works as a lineor general manager or as a professional in the HR function. However, from timeto time, we will also address challenges (and their implications) that are specificto HR in most firms. The convention that we use is to refer to “HR” wheneverwe mean the functional domain, and “HR practices” when referring to corpo-rate practices for managing people for which the HR function is at least partlyresponsible. When we talk about human resource management, or HRM, we areadopting a generalist perspective.

TAKEAWAYS

1. To know why international business evolved in the way it did, we need tounderstand how our predecessors resolved dilemmas such as exercisingcontrol from afar before modern transport and communication weredeveloped.

2. Industrialization drove both internationalization and the evolution ofpersonnel management. World War I had a negative impact oninternationalization but a stimulating effect on personnel practices.

3. With the emergence of the modern multinational in the expansion yearsafter World War II, the first international personnel units were set up tomanage international assignments. Until the 1990s, expatriation was thedominant focus.

4. Increasing geographical spread allied to growing product ranges led somemultinationals to adopt the matrix, a big conceptual advance but astructural solution that is very difficult to manage.

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5. In most firms, the headquarter bureaucracies grew to cope with theincreasingly complex problems of international coordination and control.With increased global competition, these bureaucracies became too costlyto maintain.

6. The emergence of the Japanese challenge represented a shock for Westernmanagers, leading to the realization that there were actually “two bestways”—and if there were two best ways, then there might be more.

7. International firms have always muddled through dilemmas andcontradictions, often in a pendulum fashion. These contradictions becameapparent as firms were pushed to be responsive to local needs and globallyintegrated at the same time. Such contradictions are the hallmark of thetransnational organization.

8. All multinationals face transnational pressures, but not with equal force.Firms started to realize that HRM could help them combine localautonomy with a high degree of global coordination.

9. As more emphasis was placed on capabilities and management ofknowledge as sources of competitiveness and the resource-basedperspective on strategy took hold, HRM came to be seen more and more asone of the keys to building sustainable competitive advantage.

10. The complexity of issues in the international HRM domain requires us totake an interdisciplinary perspective.

NOTES

1. Barham and Heimer, 1998.

2. Kindle left ABB in February 2008 after disagreements with the company’s new

chairman.

3. Bartlett and Ghoshal, 1989, p. 174.

4. Moore and Lewis, 1999.

5. Moore and Lewis, 1999, p. 230.

6. Wilkins, 1988.

7. Carlos and Nicholas, 1988. On the other side of the world, southern Chinese clans

spread their hold across Southeast Asia in the 14th and 15th centuries.

8. In academic terms, this is known as “agency problems” and concerns the extent to

which self-interested agents will represent their principal’s interest in situations

where the principal lacks information about what the agent is doing. According to

agency theory, principals can invest in collecting information about what the agent

is doing or seek to design an incentive system such that the agent is rewarded when

pursuing the principal’s interests.

9. G. Jones, 1996.

10. Wren, 1994.

11. Wilkins, 1970.

12. George, 1968.

13. Even by the early 1990s, foreign direct investment had rallied to only around 8.5 per-

cent of world output (G. Jones, 1996). The latest data show the stock of FDI to be

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22.4 percent of global GDP in 2007 (World Investment Report 2008, UNCTAD—

available at http://www.unctad.org/Templates/WebFlyer.asp?intItemID=4700

&lang=1).

14. In Britain, the first industrial welfare worker was appointed by Rowntree in 1896

(Crichton, 1968). In the US, the National Cash Register Company established an of-

fice for welfare work in 1897. For some, these appointments mark the official start of

the history of HRM (Springer and Springer, 1990).

15. Kaufman, 2007.

16. Tead and Metcalf, 1920.

17. Barley and Kunda, 1992; Ouchi, 1989.

18. Taylor, 1911.

19. Child, 1969; Donaldson, 1995; O’Connor, 1999.

20. Ulrich, 1997.

21. Baritz, 1960.

22. Kaufman, 2007.

23. Moriguchi, 2000.

24. Kaufman, 2007.

25. Jacoby, 1985.

26. Sampson, 1975.

27. Vernon, Wells, and Rangan 1997. Of course, not all sectors were equally amenable to

such collusion. Cartels were rare in industries with a wide variety of products or a

large number of producers, such as most finished consumer goods—or in dynamic

industries like automobiles (G. Jones, 1996).

28. “Multinational Companies: Special Report,” BusinessWeek, April 20, 1963, p. 16.

29. G. Jones, 1996.

30. Dunning, 1988.

31. Chandler, 1990.

32. Schisgall, 1981.

33. G. Jones, 1996, p. 173.

34. Vernon, 1977.

35. Kaufman, 2007.

36. Vaupel and Curhan, 1973.

37. Hays, 1974.

38. Tung, 1982.

39. Use of the term “human resources” began to creep into the vocabulary in the 1960s—

perhaps the earliest systematic use of the term was in Japan, where the word jinzai

(the combination of characters for “human” and “material”) gained currency in the

1950s. The Japanese did not have the capital or physical resources of the Americans—

all they had was jinzai. Economists had for some time spoken of the productive “re-

sources” or “factors” of the firm, although attention focused more on capital and

physical resources. Edith Penrose was particularly influential, arguing that both in-

tangible assets such as people and tangible assets such as capital or machinery are

the basis for productive output (Penrose, 1959). The research on human capital by

the Nobel prize–winning economist Becker reinforced the focus.

40. “Multinational Companies: Special Report,” BusinessWeek, April 20, 1963, p. 63.

41. Stopford and Wells, 1972.

42. The transition from the functional to the M-form divisional structure was assessed

by Alfred Chandler (Chandler, 1962, 1977). Between 1949 and 1969, the number of

Fortune 500 US firms organized along functional lines dropped from 63 percent to

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11 percent (Rumelt, 1974). As Chandler put it, “Although not all integrated industrial

enterprises became multinationals, nearly all industrial multinationals evolved from

such enterprises.” (Chandler, 1986, p. 409).

43. The threshold as a percentage of sales that would trigger this transformation from a

divisional to a multinational structure was hotly debated.

44. Argyris, 1967.

45. Davis and Lawrence, 1977.

46. It would be misleading to say that the matrix structure is dead. Some organizations

introduced matrix organizations in the late 1980s and 1990s. The matrix structure

that ABB employed until 1998 is perhaps the most well-known example. But, as

we will see in Chapter 5, this was a different form of matrix than those introduced in

the 1970s—a matrix built around a structure of clear accountability. Research sug-

gests that a matrix structure can be appropriate as a transition organization, facili-

tating the development of a “matrix culture,” although typically it will ultimately

lead to a more unitary structure now made flexible by coordination mechanisms that

the matrix introduced (Ford and Randolph, 1992).

47. Ford and Randolph, 1992.

48. Galbraith, 1977.

49. Martinez and Jarillo, 1989.

50. Bartlett and Ghoshal, 1990.

51. The nemawashi process in Japanese firms is an informal process of consultation, typ-

ically undertaken by a high potential individual, involving talking with people and

gathering support for an important decision or project.

52. Many German international firms had an unusual structure abroad, where the sales

subsidiary was run jointly by a local general manager with a German commercial

manager on a primus inter pares basis, facilitating this consensual approach.

53. This fueled a new question for HRM around the world: Since the old psychological

contract of “a fair day’s pay for a fair day’s work . . . with a generous pension at the

end” was now under threat, what was the nature of the new psychological contract

for the future (Greller and Rousseau, 1994; Rousseau and Robinson, 1994)?

54. Although we know of no research directly on the point, our observation is that firms

that took the matrix route generally learned more quickly the importance of lateral

relations and “normative integration” than those that took the headquarters coordi-

nation route. Indeed, researchers have described matrix structures as an apprentice-

ship in building lateral teamwork (Ford and Randolph, 1992). For example, when

Dow Chemicals abandoned its matrix structure, it was partly because it no longer

needed it since the necessary “matrix culture” mechanisms were solidly in place to

ensure coordination. Companies taking the headquarters route appear more typi-

cally to oscillate between centralization and decentralization, sometimes getting

stuck in protracted pendulum swings.

55. Beer et al., 1984.

56. Legge, 1995.

57. Galbraith and Nathanson, 1979; Fombrun, Tichy, and Devanna, 1984.

58. Walker, 1980.

59. Peters and Waterman, 1982.

60. Chandler, 1962.

61. Mintzberg, 1994. In the US, the Human Resource Planning Society emerged as the

first strategic human resource professional association and was later to regret its

choice of name. While the idea of linking strategy and HRM initially generated a lot

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of enthusiasm among HRM scholars, one article in 1985 accurately described the

outcome as “somewhere between a dream and a nightmare” (Golden and

Ramanujam, 1985).

62. Hofstede, 1980a. See our discussion in Chapter 3.

63. Pucik and Hatvany, 1981, and Pucik, 1984. The success of Japan threw the spotlight

on HR ingredients such as long-term employment, intensive socialization, team-

based appraisal and rewards, slow promotion, and job rotation. Distinctive features

of Japanese management that received attention in the West included continuous im-

provement, commitment to learning, quality management practices, customer-

focused production systems, and consultative decision making. Some observers saw

these HRM practices as amounting to a third way of organizing, based neither on

command-and-control (Theory X) nor on participative management (Theory Y), and

which were dubbed “Theory Z” (Ouchi, 1981).

64. Oxley, 1961.

65. Kuin, 1972.

66. Even today, localization, discussed in Chapter 3 (how to develop the talent of local

staff), remains one of the most neglected areas of international human resource

management.

67. “Multinational Companies: Special Report,” BusinessWeek, April 20, 1963, p. 76.

68. Edström and Galbraith, 1977.

69. “Three times the number of managers were transferred in Europe at [one company

rather than the other], despite their being of the same size, in the same industry, and

having nearly identical organization charts” (Edströ and Galbraith, 1977, p. 255).

70. See the SOTA (State of the Art) surveys run annually since 1995 by the Human Re-

source Planning Society, reported each year in the journal Human Resource Planning;

see also a survey undertaken in Fortune 500 firms by Gregersen, Morrison, and Black

(1998).

71. Perlmutter, 1969.

72. Perlmutter, 1969, p. 13.

73. Kogut and Zander, 1993.

74. Prescott, Rothwell, and Taylor, 1999.

75. Hedlund, 1986, p. 18.

76. Held et al., 1999.

77. FDI refers to investments in units abroad over which the corporation has control,

thus excluding purely financial (portfolio) investments.

78. Vernon, 1966; Stopford and Wells, 1972; Johanson and Vahlne, 1977.

79. Ashkenas et al., 1995.

80. Such clusters of critical factors helped particular nations to develop a competitive

advantage in certain fields—such as German firms in chemicals or luxury cars, Swiss

firms in pharmaceuticals, and US firms in personal computers, software, and movies.

81. Bartlett and Ghoshal, 1989.

82. See Hedlund, 1986; Prahalad and Doz, 1987; and Perlmutter, 1969.

83. Doz, Bartlett, and Prahalad, 1981; Doz and Prahalad, 1984, 1986.

84. Bartlett and Ghoshal, 1989.

85. Since the term is generic, we use “international” when referring to Bartlett and

Ghoshal’s (1989) use of the term.

86. Although NEC clearly had the grand vision, with its notion of combining comput-

ers and communication (long before the emergence of Cisco), it was unable to

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implement that vision. A big part of the problem is that it was never able to global-

ize and go where the talent was.

87. Ghoshal and Bartlett, 1998, p. 65.

88. Nohria and Ghoshal, 1997, p. 189. In terms of theory, it is the principle of “requisite

complexity” that underlies the appropriate fit between organizational environment

and form—the internal complexity of the firm should reflect the complexity of the

external environment. Requisite complexity is a concept borrowed by management

theorists from the field of cybernetics (Ashby, 1956).

89. See Nohria and Ghoshal (1997) for a classification of the business environments of

multinational firms.

90. Bartlett and Ghoshal, 1989.

91. Doz and Prahalad, 1986.

92. Bartlett and Ghoshal, 1989.

93. Ghoshal and Bartlett, 1997.

94. Rosenzweig and Nohria, 1994; Björkman and Lu, 2001.

95. Hamel and Prahalad, 1994; Leonard, 1995.

96. This example is taken from Hamel and Prahalad (1994, Chapter 9) who provide a

more complete definition, emphasizing that core competencies should be gateways

to the future.

97. Polanyi, 1966; Nonaka and Takeuchi, 1995.

98. So-called communities of practice are discussed in Chapters 6 and 10.

99. Kogut and Zander, 1992.

100. Friedman, 2005.

101. At the same time, Chinese outward FDI also increased dramatically. In 2008, Chinese

outward FDI amounted to US$52 billion, almost double that of the US (K. Davies,

2009. “While Global FDI Falls, China’s Outward FDI Doubles,” Columbia FDI Per-

spectives, No. 5: http://www.vcc.columbia.edu/pubs/documents/DaviesPerspec-

tive-Final.pdf.).

102. See http://money.cnn.com/magazines/fortune/global500/2008/full_list/.

103. Legge, 1999.

104. The need for global shared values is discussed in Chapter 6 and also in Chapter 8.

105. Cited by Bartlett and Ghoshal (1992).

106. Even in the mid-1980s there was speculation about whether international HRM was

“fact or fiction” (Morgan, 1986).

107. See, for example, De Cieri and Dowling (1999, p. 321).

108. Ghemawat, 2007.

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