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Global Financial Storms Wreak Havoc on International HR

November 1, 1998
Related Topics: Global Business Issues, Featured Article
There was a time when the United States had the luxury to isolate itself from the rest of the world. Politics and financial storms in other countries had little direct economic impact on our own country.

That’s not the case anymore. Pick up any newspaper or listen to any broadcast, and the question on everyone’s mind is: How much—and how frequently—will world affairs impinge on our daily work and personal lives? And how will this affect us in the workplace? 

Although U.S. corporations are relatively strong, they’re not islands of sunshine unaffected by global financial storms. The immediate and most dramatic impact is felt in international HR departments.

Just a little over a year ago, the bad financial news from Asia began. For example, internal financial pressures forced the government of Thailand to lower the official exchange value of its own currency relative to other stronger currencies like the U.S. dollar. This set off a rolling economic crisis in the region. Similar actions soon followed in Indonesia and South Korea, as well as Japan and Hong Kong. Then, just a few months ago, Russia’s internal financial chaos resulted in the ruble’s fall and the country’s economic woes.

When a country like Thailand "devalues" the official exchange rate of its own currency, exports become cheaper. In theory, foreign investors looking for a bargain will buy the cheaper exports, which injects new foreign currency back into the economy and raises the value of local currency—unless foreign investors lose confidence in the region and refuse to invest their money, which could provoke social and financial unrest. The crisis eventually could lead to inflation, and later to cost cutting, salary freezes and layoffs.

International HR arenas are hit the hardest.
Although U.S. corporations are relatively strong, they’re not islands of sunshine unaffected by global financial storms. The immediate and most dramatic impact is felt in the international human resources departments. The effect is most profound on an organization’s international employees, whether expatriates or local nationals. When the host country devalues its currency, U.S. expatriates (whose employers often provide cost-of-living differential allowances that help equalize differences between costs in the home country and the host country) find that their paychecks go further. Sometimes, in response to this, firms will reevaluate these allowances, and even cut them back, says William Sheridan, director of International Compensation Services for New York City-based National Foreign Trade Council. However, inflation often follows, which moves buying power the other way and forces U.S. expatriates to scramble to make up the difference.

"Inflation can be rocketing in one direction, while host-country currency can be deteriorating in the other," Sheridan says. "While the company believes it’s just taking away supplemental payments that are unnecessary, expatriates believe they’re losing something. There’s a lag time, and it’s that lag time that’s critical."

Furthermore, the impact of the economic crisis means that jobs are threatened, and organizations wind up assessing if they’re going to keep all of their international assignees. This, in turn, may provoke early repatriations, which can put stress on the sending organization as it grapples with how to handle these employees.

Global managers scramble to keep local talent.
The upheaval hits local national employees even more dramatically. In many countries, global HR managers were previously scrambling to keep local talent because of the scarcity of people with skills. You’d hear stories of HR doing whatever it could to maintain its cadre of qualified employees who would job hop for a few dollars. This scenario put pressure on the company’s entire compensation and benefits cost structure. After losing one employee to a firm across the street, managers would be afraid of losing more—they might resort to a bribery situation, which would affect other parts of the organization. Also during this period, salaries in local currencies were rising weekly to keep up with demand.

Local national employees in these countries aren’t job hopping today. Now they’re happy just to have jobs. Indeed, the crisis has caused many layoffs. According to London’s Financial Times, unemployment in Hong Kong has now reached highs matching those of 15 years ago.

At the same time, the quality of life for many prized local national employees has dropped. "Companies want to be remembered as being good corporate citizens who stand by their local employees and local economies," says Sheridan. "They recognize the financial stress on their employees, and in isolated cases will give economic relief."

Can HR weather global financial storms?
How will these type of scenarios affect U.S. domestic HR departments? Obviously, multinational corporations that are reeling in large portions of their revenues from overseas operations or sales will feel the tempest. It’s too early to tell if events will affect benefits or even create the necessity to downsize the domestic workforce—but there are bound to be some waves.

Despite the crisis, there actually may be advantages for some industries. For instance, firms in the United States that hire highly skilled or technical individuals may find an increasingly large pool of applicants. This phenomenon may occur because individuals from other countries who study here may be less likely to return to the financial unrest in their home countries. If they can get appropriate visas, they may choose to stay is the United States.

"From a U.S. standpoint, devaluation of other currencies helps imports and hurts exports. Labor can be imported, as well," says David Smith, assistant professor of Economics at the Graziadio School of Business at Malibu, California-based Pepperdine University. "As other currencies are devalued relative to the U.S. dollar, labor becomes cheaper."

Adds Sheridan: "What we’ve heard from front-line economists, as well as human resources colleagues, is that these situations are very profound and will have widespread affects. Companies that have lived through such crises understand this could happen anywhere in the world."

These same companies are training financial management, general management and HR management about anticipating these types of events. And only by understanding the interplay of these complex elements can HR even begin to weather these storms.

Workforce, November 1998, Vol. 77, No. 11, pp. 110-112.

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