Many Multinational companies must make a decision whether to manage their subsidiaries based on a host country's principles, or to be managed by a different set, and furthermore decide which route is more effective and efficient for them. MNCs are perceived as tools that convey globalization, managerial knowledge, and spread best practices around the world (Martin and Beaumont 1998). These MNCs face the complexity of institutional factors in host countries that counterbalance the effect of standardization (Quintanilla and Ferner 2003). In other words, Farley et al. (2004) explains that MNCs deal with 'push-pull' influences.
Push effects can be described when a parent company pushes its policies and practices to the subsidiaries. As we widen the limit by categorizing and scrutinising critical factors that multi-national corporations (MNCs) should take into consideration when deciding on the extent to which they should centralise or localise HR functions in a new foreign national location. HR functions being referred to are Recruitment and Selection, Training and development, Promotion, Pay and Compensation, Performance Appraisal.
Centralization is the attentiveness of authority and decision making toward the top (HQ) head-quarters of an organization whereby localization is referred to a comparatively new approach to expat which is a person temporarily or perpetually residing in a country other than that of the person's upbringing compensation. This approach is being used to address problems of high cost and perceived inequity among staff in foreign subsidiaries Briscoe and Schuler (2004).
R Chiller said several subsidiaries in our study purchase machineries or raw materials from their parents' networks located external to China. For example, in the newest Chinese subsidiaries of the APPLIANCE sources its core components from a sibling subsidiary located in France which eventually leads to centralization. The supplies of hardware components to IT and SYSTEM are also controlled and coordinated by their respective HQs. Several factors affect the purchasing/sourcing of components from corporate networks. Quality is a primary reason for the subsidiaries' dependence upon their corporate networks for sourcing; product technology immovability also affects subsidiaries' ability to develop local supplies. Technology sovereigns are another factor.
Joplin (2007) Multinational corporations (MNCs) play a critical role in the global economy. It has been noted that productions by multi-national corporations can comprise of one-fourth of the world's output and one-third of world trade. It is also believed that foreign direct investments, has valuable effects on economic growth, such as providing capital. Individuals have even suggested that some foreign investors seek after countries who encourage cheap labour to maximise profits. It is unfortunate that there would be severe environmental damages, where a reduction to removal of natural resources along with offensive labour practices which are not welcomed in the developed world.
Transnational corporations are facing progressively diverse, amalgamated risks, as a result they will not have the assets in place to manage them effectively, according to Aon's first Global Risk Management Survey. According to Joplin (2007) some risk concerns are rated by survey respondents such as business interruption, third party liability, distribution or supply chain failure. Joplin says that that the Americas is the only region where technology failure and loss of data are cited as a major risk concern, while Europe uniquely cites mergers/acquisitions/restructuring and Asia/Pacific is highly concerned with weather/natural disasters.
Bruce A. Blonigen (2006) stated there is increasing recognition that understanding the forces of economic globalization requires looking first at foreign direct investment (FDI) by multinational corporations (MNCs) that is, when a firm based in one country locates or acquires production facilities in other countries. While real world GDP grew at a 2.5 percent annual rate and real world exports grew by 5.6 percent annually from 1986 through 1999, United Nations data show that real world FDI inflows grew by 17.7 percent over this same period! For example, Bernard, Jensen, and Schott find that 90 percent of U.S. exports and imports flow through a U.S. MNC, with roughly 50 percent of U.S. trade flows occurring between affiliates of the same MNC, or what is termed ntra-firm trade.
Varun Naik (2014) Factors which push MNCs into centralisation are culture differences, host country incentives, isomorphic factors in the home country, strengths of business networks in the host country. Culture differences particularly national culture at the headquarters, plays a role in determining IHRM practices. Culture may affect Head Quarter decisions in two ways where some cultures are merely more comfortable than others in taking an ethnocentric approach to management and the mix of cultures in the subsidiaries of an MNC and the level of cultural difference among the subsidiaries of an MNC will restrict the IHRM approach taken.
The economic factor narrates to the straightforward economic position and gradation of the pecuniary development of a country or countries in a province from the belvedere of investment by the MNE (Schuler et al. 1993). A clear decisive indicators of the economic factor are specific affluence and purchasing command. Paauwe and Dewe (1995) have argued that the adaptations in purchasing power and competition in the local or regional labour market should be taken into account in IHRM.
HR functions are being discussed in relation to the extent to which they are standardized or localized by the factors presented are training and selection, recruitment and selection, performance appraisal. Anne-Wil Harzing and Joris Van Ruysseveldt (2003) indicated that some organisations encourages spouses within the selection processes, even though some individuals may interpret this as an obstacle to personal freedom.
In staff selection multinationals use three sources; their home country, a subsidiary's respective country and other affiliates' countries. While recruiting some organizations perform operational tests and psychometric records in their selection process to warrant that the individual is suitable for the job. The Human Resource manager works with their assistants to aid them in selecting someone in terms of skills and personal attributes.
The Performance appraisal factor refers to training and development where needs are identified, and compensation decisions are made. Another factor which involves two distinct processes denote to observation and judgement (Cascio,1991). Selection and Recruitment in some organizations perform operational tests and psychometric inventories in their selection process to ensure that the individual is fit or the job Glasgow(1994).
In training and development when an expatriate is selected, pre-departure training will make the expatriate more efficacious or perhaps, not a disappointment. Only a fragment of this training is cultural cognizance, a well-designed cultural training program can be extremely helpful as it seeks to foster an appreciation of the host countries culture so the expatriates behave accordingly, Peter Dowling (1999) goes on to cite an example of the Middle East, in this region emphasis is placed on personal relationships, trust and respect; couple this with an emphasis on religion that permeates every aspect of life.
Anne Harzing (2003) Expatriate Failure is considered as an early recall of an expatriate from an assignment. For instance if an expatriate is assigned to a subsidiary in France for three years and the family is unable to adapt to the new lifestyle, which in turn affects the employee's performance at work, he or she may be recalled after one year. Hence the need for expatriate performance management at multinational organisations.
This issue becomes more complicated in that the expatriate may now be reporting to someone in the Host Country subsidiary. Performance appraisal of Host Country Nationals is another concern of IHRM. The cultural differences of the parent and host countries may make the use of the standard appraisal system unworkable. J. V. Kiovisto (1992) explains a likely appraisal of a French employee by a Japanese manager; the Japanese manager can not directly criticize an employee's work. He may start by discussing all the good work the employee is doing on a general level.
The localization process of multi-national corporations (MNCs) is still at an early stage where there are still many activities needed to put in place to strengthen its operation. MNC's need to look beyond its coverage of IHRM studies in the area of training and development. One of the influences framework is it presupposes that countries that possess dominance through economic or political power will have their practices replicated by other countries. For example 'MNCs which originated in 'dominant' countries may seek to utilise their home-country practices in their foreign subsidiaries.
During the late 1960s and the 1970s, international organisations such as the World Bank and the International Monetary Fund, and a range of non-??government organisations devoted to improving the economic lot of Third World peoples, debated strongly that Western governments should 'liberalise' economic activity and reassure international economic interaction through lowering tariff barriers and allowing imports from low?? wage countries.
One of the influences framework is it presupposes that countries that retain dominance through economic or political power will have their practices simulated by other countries. For example 'MNCs which originated in 'dominant' countries may seek to utilise their home-country practices in their foreign subsdiaries.
In conclusion in a new foreign national location one of the central questions in the literature on MNCs is the degree to which their various foreign partners (or subsidiaries) act and behave as local firms versus the degree to which their practices appear to those of the parent corporation or another global standard. In a seminal paper on this topic, Perlmutter  described three types of MNCs: ethnocentric, polycentric and global. According to this typology, the management practices in foreign affiliates of MNCs could resemble those of the MNC's home country (ethno- centric), could conform to local practices of the affiliate's host country (polycentric), or could adhere to a worldwide standard (global).
Subsidiaries from the three home countries seem to function differently. Though the US model is defined as the prominent model, US subsidiaries are localizing their HRM practices to some extent in Japan and more so in Germany. Furthermore, even though US subsidiaries are the only ones exhibiting some level of localization, they are also the only ones dominating a degree of transfer of their home country HRM system, especially in Japan, where local HRM practices are significantly different from home country practices
Source: ChinaStones - http://china-stones.info/free-essays/business/how-manage-subsidiaries.php