The market forces resulting from globalization have led to establishment of an immense number of multinational firms. Therefore, MNEs and globalization are two closely-knit phenomena. The escalating magnitude of MNEs is a prime ingredient in the globalization process. Besides, the MNEs need to remain more competitive to survive in the immeasurably globalizing world economy. A firm’s global presence provides some valuable opportunities for the firm to adapt to local market differences, exploit global economies of scale, exploit economies of global scope, and maximize knowledge and experience transfer between locations. As the significance of MNEs grows continuously, so do the perpetual conflict amid local responsiveness and global integration, in other words, centralized integration and local adaptation. To optimize the aforementioned opportunities, a multinational enterprise (MNE) needs to coordinate and balance the two approaches. However, herein lays the factual challenge of management of the MNEs. This entry examines the coordination and balance of the approaches of centralized integration and local adaptation and their implications on international human resource management.
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Multinational Enterprises and Centralized Integration versus Local Adaptation
The roots of the approaches of centralized integration and local adaptation date back to 1969 in the works of Jay Lorsch and Paul Lawrence (Stahl & Bjorkman 2006). The two defined a principal management predicament as that of attaining requisite international differentiation, predominantly in response to environmental instability and complexity, while at the same time establishing sufficient integrating means of coordinating an organization’s activities. The mechanism, they applied to organizations in general. However, soon after Prahalad, Barlett, and Doz applied it to multinational enterprises (Taggart 1997). Their chief argument was, ‘Global competitive pressures versus host country demands: managing tensions in multinational corporation’ (Stahl & Bjorkman 2006; p. 36).
Multinational enterprises compose of a set of organizations operating in their respective home environments (Stahl & Bjorkman 2006). It comprises companies or complementary entities set up in more than one country and so connected that they may coordinate their operations in numerous ways. The MNEs have to be sufficiently differentiated to cater for the requirements of the locales. If the MNE fails to respond appropriately to local diversities, conceivably in a misguided credence that being global calls for doing similar things ubiquitously, it may be unable to compete successfully against more sensitive and dexterous rivals. Besides, MNE has to coordinate its remote operations to capture completely the advantages of scale and scope. However, if it fails to realize these benefits, it emerges as an anthology of independent local entities and gives up most of the potential benefits.
Centralized integration versus local adaptation is a terminology most commonly applied to refer to the area of human resource management (Pudelko & Harzing 2007). Centralized integration of MNEs refers to standardization of management practices of the overseas subsidiaries toward the headquarter practices to generate efficient operation networks while taking advantage of similarities across locales (Johnson 1995). On the other hand, local adaptation is overseas subsidiaries adoption of the management practices generally employed by the domestic companies within their host countries.
Challenge in Centralized Integration versus Local Adaptation
The key challenge facing MNEs is the requirement to pursue a global vision whilst meeting the local demands. The dilemma is on how the MNES can resolve tension amid their necessity to integrate globally, with the equal requirement to respond to local conditions for every market (Spender & Grevesen 1999; Bao & Analoui 2011). On the one hand, some individuals argue that this achievement calls for a firm’s ability to adapt to its local environment. In this context, firms need to adapt their resources to fit the novel local environments (Berchtold, Pircher & Stadler 2010). The rationale behind this is to adjust to the variations in culture, consumer preferences, legal frameworks, and labor markets. Contrary, some argue in support of global integration. Szulanski (as cited in Berchtold, Pircher & Stadler 2010) argues that adaptation is counterproductive since it enhances stickiness. Instead, he proposes creation of numerous outlets, which perform the same services or deliver same products. In a broader perspective, the complex challenge can be described as that of simultaneously achieving centralized integration and local adaptation, which Pudelko and Harzing (2007) refers to as harmonizing the forces of standardization and localization. This balance remains the distinctive mission of the MNE firms. In order to remain competitive, MNEs ought to transfer resources, that is, products, technologies, management approaches, and knowledge to multiple locations (Berchtold, Pircher & Stadler 2010). While this proves to be a challenging task, hurdles are predominantly high when there is a need to transfer resources to countries where firms had no preceding engagements.
Coordinating and Balancing the Approaches of Centralized Integration and Local Adaptation
The forces for centralized integration and local adaptation exert different pressures by industry (Johnson, Mirchandani & Tsang 2008). Whilst some companies offer high benefits for integration due to scale of economies in research and manufacture, they do not need extensive local adaptation. Conversely, some companies stipulate exceptionally elevated attention to local needs but do not offer elevated benefits for centralized integration due to lack of economies of scale. Moreover, the pressures for centralized integration and local adaptation could shape the numerous functions within a business. While the upstream functions portray an immense requirement for centralized integration, the downstream functions demand for local adaptation. Hence, over the decades, the centralized integration versus local adaptation approach has become well ingrained within the field of international business.
A chief criterion in classifying MNEs is the degree to which they optimize global integration and local responsiveness in tandem (Kasper, Lehre, Muhlbacher & Muller 2008). While both approaches have received significant attention, the coordination and balancing of the two approaches remains insignificant. Yet, there is a need to reconcile them through an anthology of strong personal relationships and standardization of processes and products. Various studies have portrayed that a chief determinant of MNEs efficiency is the extent to which their numerous operating units are differentiated and as well integrated, coordinated, and controlled (Paik & Sohn 2004; Fan, Zhu & Nyland 2012; Fan, Nyland & Zhu 2008; Yunshi & Jiancheng 2007).
The swift shifting external global environment, for instance globalization of markets over and above the acceleration of technology and product life cycles, obliges that MNEs generate a global strategy. Tsai, Huang, and Ma (2009), Venaik, Midgley and Devinney (2004), and Paik and Sohn (2004) emphasize the intensification in global competition demands for maintaining a critical balance between centralized integration and local adaptation in MNEs. These enterprises attempt to apprehend economies of scale and scope via integration and coordination of operations around the globe by producing highly standardized goods and market approaches. In most industries, though, consumers persistently demand for locally differentiated goods that reflect substantial variance in tastes, standards, and perceived needs. Moreover, there is a need to adapt internal managerial practices to fit local cultural and lawfully authorized expectations. Consequently, efforts to employ operational procedures and standardized policies across the entire global operating units may totally disregard the exceptional needs of a subsidiary or the particular roles it embarks on for the profit of the entire organization within an international context. Accordingly, the overall performance of a given organization may dwindle. Thus, for MNEs to deal effectively with these variations, they ought to assume a multi-domestic strategy emphasizing on local adaptation and global integration.
To generate a competitive advantage, organizations ought to find activity configurations that are not merely internally consistent, but are also suitable given the organization’s current environment (Siggelkow & Levinthal 2003). In MNEs, the legal and economic units do not necessarily coincide. However, every unit of the business operates, to a given extent, in the interests of either one or more other units, or the entire corporate group. One or more of the entities are in a position to exercise a substantial influence over the others’ activities. The enterprise finally adopts a multidivisional structure. Divisionalisation, in MNEs, implies that the operating functions of the various legally separate auxiliaries are performed within a single subunit of the firm, and divisional operating functions are set up within the separate subunits of the firm (Mantysaari 2005). However, the extent of autonomy within the enterprise tends to vary broadly from one firm to another. For instance, Mantysaari (2005) states that the degree of autonomy varies depending on the nature of the associations between the entities, the fields of activity, and diversities in the form of size, ownership, location, and nature of the enterprises concerned. In this context, the balance between local adaptation and centralized integration involves two dimensions (Taggart 1997). First, the integration of activities, which is international organization’s response to pressures to trim down overall costs while maximizing returns via market exploitation. Besides, the market and regulatory forces in a firm’s numerous locations necessitates the firm to satisfy the rigors of standardization for the organization to become more locally responsive. These two dimensions enable international firms to adjust their positions to generate and sustain a competitive advantage.
While introducing goods in international markets, weighing the advantages of standardizing products across local markets versus acclimatizing them to the market differences is a significant concern for MNEs (Subramaniam & Hewett 2004). Standardizing products across the local markets is not merely desirable owing to efficiency considerations, but also practicable owing to the rising homogenization of the local markets. However, both standardization and adaptation are equally important and firms should maintain a balance between them in international product designs, the logic being that the balance enables MNEs to harness the benefits of responsiveness and efficiency. Equally, they can integrate the inputs of both foreign and headquarters subsidiaries into their products for a better competitive advantage. Inputs from headquarters are vital since headquarters managers are always in a fundamental position to synthesize inputs from their universal networks. Likewise, inputs of the overseas subsidiaries are as well critical since subsidiary managers’ positions enable them to possess and absorb knowledge pertaining to local market conditions.
In summation, coordinating and balancing the approaches of centralized integration and local adaptation enables a company to keep a balance of its numerous pressures to emerge successful in the global industry. Grein, Craig, and Takada (2001) define both pressures for local responsiveness and global integration. While pressures for local responsiveness incorporate market structure, substitute products, and customer needs, those for global integration incorporate multinationals competitors, multinational customers, and cost reduction pressures. Hence, successful companies must devise strategies of responding to both genres of pressures in varying extents.
Applicability of Centralized Integration versus Local Adaptation Approach
The ability to balance integration and adaptation successfully is incredibly vital for companies competing in global industries. The approach is evidently applicable in international businesses experiencing intensity in technology and investment, great pressures in cost reduction, and more multinational competitors and customers. More responsiveness is fundamental where there are, for instance, more variations in distribution channels, substitute products, market structures, and customer needs. Equally, the approach proves vital in companies undertaking acquisitions. Acquisitions made by MNEs tend to influence the firm’s approach to HRM (Mufratbekova-Touron 2008). Consequent to the acquisition, firms ought to modify the manner in which they deal with the dilemma of global integration- local adaptation.
Implications of Centralized Integration versus Local Adaptation Approach to International Human Resource Management
Globalization has created a need for MNEs to operate more efficiently to attain a competitive advantage over their competitors. A considerable contributor in optimizing these firm’s effectual operations is the HRM function (Kaufman 2001). For a great proportion of the MNEs, they operate in diverse environments. Therefore, the firms efforts to remain internationally competitive is being superseded by the requirement both to manage locally, as if the universe were an enormous number of dissimilar and loosely joined markets, and simultaneously to manage globally, as if it were a single vast market (Schuler 2000). Nonetheless, the trend is generating heaps of challenges and opportunities in conceptualizing and understanding precisely how MNEs can manage to compete efficiently. The familiarization of apparent conditions within numerous countries and the knowledge of how to manage across and within them is the essence of centralized integration and local adaptation.
Many MNEs emphasize on striking a balance between centralized integration and local adaptation to aid coordination and control amid subsidiaries (Brock & Siscovick 2007). The integration of the two mechanisms helps in human resource management of differentiated firms given that the human dimension of international management within MNEs is an incredibly critical concept. Regardless of how sound the strategy of a MNE is, or how vigilantly its structure is designed, its success or failure tends to rely heavily upon the MNE’s capability to attract, deploy, develop, and retain a talented and skilled workforce, and get them work together efficiently in spite of diversities in language, culture, or location (Stahl & Bjorkman 2006).
Organizations worldwide have realized that knowledge, abilities, and skills of the employees represent a fundamental source of their competitive advantage (Hertmann, Feisel & Schober 2010). In the context of MNEs, there is a prime need to transfer the knowledge resources from the headquarters to the subsidiaries. Hence, these firms ought to take into account national difference in human resource management. Moreover, while transferring HRM practices to the subsidiaries, MNEs need to counterbalance the globally standardized HRM practices whilst concurrently responding to the local demands. Therefore, MNEs apply management approaches from the company headquarters and adjust them locally to fit the subsidiaries. In this context, these organizations design their HR systems to balance both the requirements of local responsiveness and global integration, a balance that has implications for the overall organizational performance.
MNEs have always yearned for an effectual plan to execute their significant activities whether locally, globally, or regionally. With the rising global competition, it has emerged critical for MNEs to be both locally adapted and globally integrated at the same time. However, as (Girod, Bellin, & Ranjan 2010) states, MNEs have not always been successful as international firms have constantly experienced trade-offs between modifying approaches for the dissimilar local markets and controlling their global scope.
An understanding in centralized integration and local adaptation aids in yielding a valuable and incisive perspective to the field of international business in general and is as well highly useful in understanding the concept of human resource management in MNEs. Given that the chief contributor to these firms survival is effectual competitive advantage, the greatest challenge lies in maintaining a balance between centralized integration and local adaptation. In this context, the firms mull over how to apply the overall resource management approaches from their headquarters while at the same time adjusting these approaches locally.
In encapsulation, MNEs ought to establish a system that can efficiently accommodate the two conflicting approaches. As opposed to satisfying one approach at the expense of the other, MNEs need to reconcile both approaches. The integration and localization conflict can never come to a halt by proclaiming one position more important than the other. On the contrary, to stay competitive within the incalculably globalizing world, MNEs must integrate the two opposing approaches into an overall strategy.
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