Information, control, and human resource management in multinational firms

Imbrma*n, Control, and Hunzan Remume lManagernent in

Multinational Firms

Vladimir Pucik and Jan Hack Katz

INTaODUCTIOM

From a coprate pempdive the dominant feature of today’s world economy is the increased ghbdization of market competition. Fonnerly isolated geographically bounded markets are being tmdormed, if not always into a global market, then into a set of intercmmckd markets where the competitive m&tim in one may heavily inhence the competitive outcomes in most of the others. More than ever before, multinational corpomtions (MNCS) must moNtor and coordinate their global research, production, and marketing capabilities to gain a global mm- petitive advantage. Tfds requires not only the identificaiibn of optimal investment pattern, but afso the movement of remwces, including technology, capital, and personnel, across national tmmdaries. With this expansion of global resoume transfer, the issue of effective control in a multinational firm has p w n as well.

The effectiveness of global souTci”g, global marketing, globally rationalized production, and technology transfer are all c o n w e d by the ability of multinational h s to set up an effiaent infomalion p m s s - ing network and coo** and mntrol its highly comp€ex activities. An information processing system in a MNC must be capable of h d l i n g multiple types of information, and its control system has to reflect the complexity of its global competitive environment. However, the MNC must also consider the human side of the inbmmtim processing and control, since without an appropriate configuration of the human resource management system, the information processing system and the corporate control system are k l y to fail. This paper therehe discusses the interdependenaes of three global organizatknd systems-control, information tromsfer, and human resources--based on a linkage between the information processing view of organizatiod control and human resource management Merature.

HUM RGWU~C.~ M a t ~ ~ t , spring 1986, VO~. 25, Number 1,Q. 121-132 8 1986 by John Wiley 6r Sons, Inc. ccc ~ l o l 2 1 - l ~ . m

CONTROL SYSTEMS IN MULTINATIONAL FIRMS

Organizational control systems represent mechanisms that convey information to initiate and regulate individual activities. They are needed to integrate individual goals and organizational diversity to create order and coordination out of potentially diffuse individual behaviors and diverse interests (Tannenbaum, 1968). Two distinct "ideal" modes of control, bureaucratic and cultural, emerge from the literature on organizational control (Child, 1973,1984; Edstrom and Galbraith, 1977, Ouchi, 1980).

The bureaucratic mode of control is based on the utilization of a limited and explicit set of codified rules and regulations that specify desired performance in terms of output and/or behavior (Child, 1973). Etzioni (1980) notes that the power and authority exercised in a bureaucratic control system is focused on control over resources, and personal in- volvement is relatively limited. In MNC's, bureaucratic control exists when headquarters manages the operations of subsidiaries primarily through a clearly defined set of rules and procedures. These rules may be enforced through budgets on-site inspections, and control of the management process (Doz and Prahalad, 1984).

In organizations characterized by cultural control, control is based on a broad organization-wide culture, although explicit formal control mechanisms are also present (Balliga and Jaeger, 1984). Cultural control mechanisms are less explicit and rely more on common values and meanings than on explicit auditing and regulation required by a bureaucratic control mechanism. For example, in MNC's, headquarters may place trustworthy expatriates in upper and middle management positions of subsidiaries, socialize new employees into the firm's culture, deemphasize formalization, and promote frequent informational exchange between headquarters and subsidiaries (Edstrom and Galbraith, 1977).

Naturally, no organizations employ one of the two "ideal" modes of control in a pure form. Some kind of control mix is essential, combining elements of both bureaucratic and cultural control systems. However, it was also proposed that a contingency approach to control may be appropriate and that the selection of the control mode that should govern the control system in a multinational firm should be based on task characteristics, environmental uncertainty, and cultural proximity between the headquarters and the subsidiaries (Balliga and Jaeger, 1984).

This contingency viewpoint is based on an implicit assumption that factors influencing the choice of the control mode are constant at the subsidiary (country) level. In other words, all functions within a given subsidiary can be managed through a similar control mechanism, although there may be differences in the application of control among subsidiaries based on differences in the exogenous contingency factors. Similarly, human resource management practices aligned with the pre-

122 I Human Resource Management, Spring 1986

vailing control system are expected to be relatively homogeneous at the subsidiary level, but may differ across the whole firm.

INFORMATION AND CONTROL SYSTEMS

In contrast to the above "macro" view of organizational control, this article proposes that a variety of control strategies has to be applied within a single subsidmy based on differences in information processing requirements of the function. This would also imply that human resource management 0 practices aligned with a specific control system may have to vary even within a single subsidiary in order to achieve optimal effiaency of the infomation transfer. The HRM practices effective, for example, within the global R&D function may have to differ from HRM practices effective in managing global production or sales.

The information processing view of control in MNCs alludes to the fact that the nature of MNC's operations requires them to deal with two fundamentally distinct types of information that differ in their suitability for transfer across national boundaries. The cause of this difference in transferability of information is its content. One type of information, labeled technical information, can be transferred with little risk of misunderstanding to a foreign location and is mainly associated with various technical tasks performed in multinational firms. The other information type, associated with social tasks that are inherent in any human organization, is less suitable for transfer across national boundaries and is labeled social information (Katz, 1984). Technical information is "objective" information, that is, information

that is understandable to persons with the appropriate professional training, regardless of their national origin. Design drawings, test results, and currency data are all forms of technical information. The risk of misunderstanding this type of information is low, since the communication symbols and language of a global profession or discipline provide the medium for exchange. In contrast, social information is bound to the cultural context in which it is developed. Interpersonal interaction, for example, embodies social information that is difficult to understand for someone not sensitized to its cultural origin. Social information is a culturally relevant compression of infomation, whereas technical information is a discipline or function-relevant compression.

The multiplicity of information transfer systems clearly has implications for the control systems of the organization. As the locus of information gathering and use moves toward the subsidiaries, so too does it push for decentralization. At the same time, the dependence of subsidiaries on headquarters for strategic resources such as technology, capital, management, and access to markets may be reduced as the subsidiaries mature and become more autonomous with respect to these strategic

Pucik and Katz Information, Control, and HRM / 123

resources. The headquarters’ ability to control them through resource allocation is thus significantly reduced (Prahalad and DOZ, 1981), and the issue of control over information transfer gains in importance. The decentralized MNC must strive to organize an efficient network that embraces its subsidiaries and divisions all over the world in order to ensure that employees are performing in a manner that will further the corporation’s objectives.

This is a difficult task. True, subsidiary personnel might be told exactly which information to collect and exactly how to use it, but unpre- dictable variation in the information sources and types can make such specificity unfeasible. In centralized organizations, the bureaucratic controls such as organizational structure, supervision by superiors, written rules, strict input and output monitoring, and monetary and nonmone- tary rewards and punishments are cited as generally effective means for sustaining power over organizational members and maintaining the in- tegrity of the information exchange. Moving to an international context where environments are less well known, and perhaps less stable, where close supervision is physically impossible, and where performance measures are fuzzier due to ambiguities in means and ends rela- tionships necessary to accomplish information transfer objectives, presents a complicated problem of control for the multinational companies.

Decentralization of decision making is essential if the companies are to survive, yet it threatens the very existence of the multinational corporations as cohesive, purposeful entities. As Fayerweather (1969) has pointed out, however, decentralization does not necessarily mean frag- mentation. Rather, the corporation can exert control, as mentioned above, either through the standard bureaucratic control techniques or with the integration of members into a cultural control system. Never- theless, efficiency trade-offs may occur in either case.

In the first case, it is quite well known that multinational bureaucratic control mechanisms suffer from the difficulties of identdymg appropriate goals for foreign markets, accurate measures of performance, and culturally relevant reward systems (Hymer, 1976; Robbins and Sto- baugh, 1973). One of the reasons for this is an inappropriate processing of sbcial information. Two dangers are faced in attempting to centralize control over tasks that depend on social information. One commonly discussed danger is that the social context of information is interpreted by home country employees according to their own cultural system rather than that of the host country. The other problem, which is far more subtle, is that even if some of the information underlying the social context is selected as a control measure, because of its culturally relevant compression, it will most probably be biased.

Cultural control systems, on the other hand, develop a social context of their own that works to expedite internal communication. In some cases, then, corporate culture may overcome the problems associated


with international transfer of social information and seems better suited to control tasks where social information is relevant. It cannot s p e w actual operations, because by doing so, the culture would remove the flexibility needed across cultures, to be sensitive to local norms, and over time, to respond to variation in data sources and types. It can, however, provide corporate members with values that will serve as a general guide for their behavior (Edstrom and Galbraith, 1977).

Although recent discussions have focused on the suctess of cultural control where bureaucratic control mechanisms are impossible (Ouchi, 1979; Deal and Kennedy, 1982), within the multinational firm, corporate cultural and bureaucratic controls may face many of the same difficulties. Cultural control mechanisms may also suffer from home country biases since values that reflect home country priorities and conditions are selected as corporate values. In addition, if common terminology is used to describe cultural values, integration may not occur because each member of the organization is likely to continue to apply his or her own existing, culturally-bound definition of the terms used in communica- tions.

Compared with the control problems associated with social information tasks, technical information tasks seem to pose lesser problems. The discipline-based terminology of technical information generally carries with it disciplhebsed norms on which both bureaucratic and cultural control mechanisms may be based. Technical information tasks are relatively easy to identify, monitor, evaluate, and reward, suggesting that bureaucratic control mechanisms will be relatively effiaent. We can therefore hypothesize that, where technical information is dominant, the information transfer system should be centralized and bureaucratic control most desirable. Where social information is dominant, the information transfer system should be decentralized and cultural control most desirable.").

INPORMATiON, CONTROL, AND HUMAN RESOURCE MANAGEMENT SYSTEMS

The effectiveness of the control system is heady dependent on the alignment of the direction of control and the human resource management functions designed to support it (Ouchi, 1979). Given that the direction of control is driven by the information-processing needs of the multinational firm, the effectiveness of the control system depends on the fit between the HRh4 practices and the underlying information-processing requirements. The variety of information-processing subsystems

* The differences in information type dominant within a MNC may also be affected by a number of factors not discussed here, such as the degree of uncertainty in its envhnment, its industry, or its technol0P;ical maturity.

Pucik and Katz: Information, Control, and HRM I 125

Table I. The HRM areas and information characteristics *

Technical information Social information bureaucratic control cultural control

Selection Locally focused Globally focused Open staffing Restricted pod Emphasis on technical

skills cation skills Development Selective access Wide access

Promoting rules Promoting socialization Formal training Planned transfers

Appraisal Localized MBO No explicit monitoring Short- and medium- Congruence with long-

term objectives term objectives Explicit feedback Limited direct feedback

Financially oriented Opportunity structure Immediate rewards Indirect rewards

Emphasis on communi-

Rewards Local performance Global performance

within multinational firms then calls for a corresponding variety of human resource management systems.

Table I summarizes the differences in the key human resource management areas-selection of personnel, personnel development and training, the appraisal process, and the reward system-aligned with the two types of information, technical and social, and the related mode of control. The emphasis is on information characteristics of tasks, rather than on geographical location of the subsidiary.

Managing Technical Information

Multinational firms relying on bureaucratic control to manage those functions in a subsidiary where technical information dominates generally fill open managerial positions as their staffing needs arise. This does not imply a lack of human resource planning. It merely indicates that the focus of the planning process is restricted to one or relatively few subsidiaries. Candidates for the position may come both from within or outside of the organization, with the two major qualifying criteria being functional/technical expertise and, to some degree, cross-cultural managerial skills. An extensive understanding of the parent company style and culture is, however, not necessary since control over the subsidiary's function is being exercised through an explicit set of rules. It is perceived that because of the technical nature of information processed, this kind of communication ought to be understandable to a relative newcomer with minimal difficulties. When expatriates are dispatched to staff the function in the subsidiary, they are used as technical experts rather than as monitors of culture.

A short formal training program is then usually considered sufficient


to equip new employees with an understanding of rules and regulations that comprise the core of the information transfer and control system for the particular function ( a "crash course" focused on developing a cross- cultural sensitivity is often added to this). Such programs are selective in the sense that they are targeted to a specific individual or a group of managers. Similar training experience is not shared by a majority of others with whom the functional managers are expected to interact, be it their peers in the subsidmy or contacts in the parent firm outside the direct reporting line. However, the explicitness of rules is expected to prevent any confusion about their interpretation.

The key link between the human resource management system and the bureaucratic control mechanisms applied to guide the exchange of technical information is the appraisal process. In most cases, appraisal is based on an MBO-type evaluation targeted on performance of the subsidiary. Since most subsidiary managers, especially if they are expatriates, are expected to remain in their position for relatively limited length of time, the goals specified in the MBO process are primarily short termed, and expliat feedback based on the comparisons of goals with performance is given. fn many multinationals, such MBo objectives are primarily quantitative and financial in nature (e.g., performance against budget, ROI, ROS), partly driven by the measurement system used in the parent company, and partly driven by a desire to maintain consis- tency and clarity across national boundaries. However, nonfinandal objectives (market share, new product introduction rates, etc.) are also consistent with bureaueratic control.

In order to assure an effective processing of technical information in the context of bureaucratic contrd system, the outcome of the appraisals must be directly lirtked to the reward structure. This seems to be the weakest element of the HRM system utilizing bureaucratic control to manage technical information. At least nominally, the reward system in most MNCs is based on a linkage between performance and financial incentives. In practice, however, eompensation management in multinational firms is often driven by tax and global equity considerations (Pudk, 1984). As a result, managerial salaries are relatively inelas- tic to performance, thus weakening the performance-reward link. This problem is not limited to M"s, since there are other causes of reward inelasticities, but when appraisal and rewards are the two major compo- nents of a control system, such decoupling may render control ineffec- tive.

Managing Social Informatian

When social information dominates the information exchange and the preferred mode of control relies on cultural norms, the management staffing process must change its focus and emphasis. Managers for the

Pucik and Kak Information, Control, and HRM / 127

functions are selected primarily for their ability to transmit the attitudes, values, culture, and ideology of the parent firm. Familiarity with a company culture can develop only over a long period of time, and thus the pool of candidates is restricted to those already thoroughly socialized into the firm. At the same time, the inability to recruit from the outside forces a MNC that uses cultural control to carefully structure its human resource deployment. The HRM planning acquires a much more global character since staffing needs of individual subsidiaries must be bal- anced with each other.

In congruence with globally focused but internally restricted selection strategies, multinational firms that rely on cultural control emphasize a longitudinal process of socialization as the primary vehicle for managerial training. Its purpose is to ensure that future managers thoroughly internalize the corporate culture and related information-processing rules and norms before assuming managerial responsibilities in a subsidiary. The main vehicle for socialization is a job-rotation policy, calling for periodic, semilateral, interdepartmental transfers. As managers ro- tate from job to job, they become increasingly socialized into the organization, immersed in its culture, and knowledgeable about getting things done in an informal way. Consequently, most managerial jobs cannot be occupied by relative newcomers who lack the knowledge of the necessary cultural context.

The more thorough the socialization of managers, the less need for the parent firm to explicitly monitor performance in the subsidiaries and the related exchange of social information. It is felt that a well-socialized manager, who has held positions in various functions and locations within the company, has a feel for the needs of the organization and for the appropriate course of action. It is generally considered to be the parent-country nationals who are the most well socialized. Zeira and Harari (1977) note, for example, that the dominant structure of MNC's throughout the world is that most key positions at headquarters and in the subsidiaries are reserved for parent-country nationals. The common assumption is that the loyalty of a local national will lie mostly with the host country, whereas the loyalty of a parent-country national will lie mostly with the MNC (Youseff, 1975). In addition to increased loyalty, parent-country nationals often possess an advantage over host-country or third-country nationals in communicating with headquarters personnel. They share a common language, a common culture, and often a common way of thinking and thus facilitate not only technical but also social information transfer. Also, when the expatriate takes over a key position in a subsidiary, he/

she increases the capacity of the communication channel between headquarters and the subsidiary and allows for greater local discretion and responsiveness. For example, in a study of European MNC's by Galbraith and Edstrom (1976), it was found that multinational corporations transfer expatriates for a variety of purposes: for managerial devel-


opment, to transfer speafic knowledge and technical skills to subsidiaries where qualified nationals cannot be found, and as a strategy to increase worldwide coordination, communication, and control.

Edstrom and Galbraith also note that expatriates can function as a bureaucratic, as well as a social, mechanism of control. Although multinational firms may use expatriates for surveillance, and thus as organs of bureaucratic control, these parent-country nationals may also be used as agents of a cultural control system. When the functional behavior and rules for determining them are learned and internalized by individuals, bureaucratic mechanisms such as procedures, surveillance, and hierarchical comunication are unnecessary because individuals chose to do what the hierarchy would have prescribed by the procedures. The use of expatriates as a form of cultural control permits a greater amount of discretion and a greater degree of decentralization while maintaining overall corporate integration (Edstrom and Galbraith, 1977).

The socialization process used in inculcating company norms and values in expatriates and other managerial personnel also stimulates the emergence of long-term goals that are shared within an organization. The establishment of long-term objectives is encouraged because short- term “bottom-line” performance is not emphasized in the evaluation process. Such a goal congruence provides one of the principal defenses against opportunistic behavior by employees (Ouchi, 1980) and thus eliminates one of the fundamental obstacles to unbiased information exchange.

The orientation toward long-term objectives is reinforced by the reward structure. The passive control mechanism puts emphasis on an individual’s contribution to the global performance of the firm, rather than on its performance in a single country or region. The actual rewards are often indirect and are not limited to financial compensation. An important component of the reward system is the control of access to global career opportunities that are critical to a manager’s progression through the organization. In this respect, the underlying philosophy of a reward system linked to cultural control is to reward employees by providing more challenging opportunities rather than according the past achievements. Such reward policy is expected to encourage innovative behavior, foster flexibility, and aid the firm’s performance in the long run.

IMPLICATIONS FOR MULTINATIONAL mRMS

The notion that human resource management practices should vary not only across but also within subsidiaries in order to increase efficiency of the information processing system and thus its adaptation to the complex and rapidly changing environment runs counter to the

Pucik and Katz: Information, Control, and HRM / 129

tendency of many multinationals to reduce the complexity embedded in their basic tasks by increasing homogeneity of their internal control mechanism. However, given differences in information-processing needs across subsidiaries and functions, such effort may be misguided. As discussed above, different information types require different information transfer and control strategies: social information calling for cultural control and technical information requiring bureaucratic control. Each control strategy then has to be aligned with an appropriate set of human resource management practices.

The need to establish multiple human resource management subsystems within the multinational firm poses numerous coordination problems. No organization deals with only one of these information catego- ries. All firms have areas where technical information is critical, such as R&D or finance and accounting, as well as areas where social information dominates, such as labor relations and external affairs. International expansion can only increase this information processing complexity since technology transfer and rationalized productions must be com- bined with political risk management and global personnel planning. The challenge is therefore to combine both bureaucratic and cultural control systems with the appropriate human resource management practices in such a way that all information can be handled with mini- mum distortion and maximum efficiency.

At the same time, the argument can be made that as firms move across national boundaries and as their subsidiaries mature and become relatively autonomous with respect to strategic resources, they will confront more and more social information, and so will be pushed toward cultural mechanisms of control. In other words, the potential dominance of social information may make it advisable to many multinationals to rely on the cultural control and related human resources management practices as the fundamental control strategy, supplementing it when necessary with various forms of bureaucratic control.

The feasibility of such an alternative is supported by research findings indicating that, in many instances, the two forms of control may comple- ment, rather than substitute, each other (Egelhoff, 1984). The same personnel policy can be used to foster both types of information exchanges. For example, managers dispatched from headquarters to the subsidaries can be used to transfer both technical and social information. Develop- mental programs can be launched that combine technical training with cross-cultural communication skill building. Appraisal and reward systems should encourage managers to pay attention to the multiplicity of information-processing needs by using multiple evaluation criteria and incentives.

Nevertheless, the difficulty of designing human resource management systems across informatiodcontrol types is indeed formidable. The HRM executives in multinational firms are facing a fundamental challenge that cannot be met by traditional means of compartmentaliza-

130 i Human Resource Management, Spring 1986

tion of HRM practices within the country subsidiaries. Instead, the emphasis should be on aeation of an integrated human resource management system that encourages AexMity of action and predictability of behavkr-both essential for the development of an effective global management infrastructure.

Vladimir Pucik is Assistant professor of lnternational Business and Organiza- tional Behavior at the Graduate School of Business, The University ofMichigan. He was born in Prague, Czechoslmki~ where he studied international eco- nomics, law, and political science as well as worked as computer system analyst. Later, he received his master's degree in international afiirs-specializing in East A s i a n n d his Ph. D. in business administration from Columbia Univer- sity.

His research interests include the linkage of competitive strtztegies with human resource management, issues in management of multinational f i rms, management of innovations, and comparative management with a particular emphasis on Japan. He has published extensively in academic and professional journals, such as the Academy of Management Review, Columbia Journal of World Business, Human Resource Management, Organizational Dynamics, and Japan Economic Journal.

He has conducted workshops and seminarsfor a number ofcurpations worldwide, including AT&T, Ford, General Motors, IBM, and 3M. He also consults to firms in the U.S., Japan, and in Europe.

Jan Hack Katz is an assistant professor of management and international business at New York University's Graduate School of Business Administration.

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