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Learning to Manage Host-country Nationals

March 1, 1995
Related Topics: Managing International Operations, Global Employment Law, Expatriate Management, Featured Article
When Personnel Journal started our Going Global series in October 1993, we set out to discover how human resources professionals in American companies approach the issue of expatriates. We looked at: transplanting corporate culture, selecting expatriates, making an international move, handling cultural and ethnic diversity, managing performance and repatriation planning. Readers gave us positive feedback. We've received letters and requests for reprints of the entire series when we've met HR professionals in person. It's clear that we've just scratched the surface of the issue—that international HR is a growing area requiring ongoing attention.

Laura Bozich accomplished a formidable task. As the regional director of Central Europe for Chicago-based Tellabs, Inc., a designer and manufacturer of telecommunications products, Bozich was sent to Munich to open a German branch in 1994. Her primary job? To impart Tellabs' corporate culture before handing the office over to host-country nationals.

Tellabs' culture is very informal and flexible—everyone calls each other by their first names; they share information widely; and employees have direct access to senior management. In an industry that changes in the blink of an eye, Tellabs operates on the premise that all employees have a stake in the outcome of the business. Tellabs' global policy reflects the conviction that host-country nationals know the marketplace as well as the business, so most international operations are headed by locals.

Bozich had her work cut out for her. She not only had the difficult task of enticing top-notch Germans to work for a start-up operation—especially tough because American companies are viewed as having a hire-and-fire mentality—but she also faced a society whose cultural values seemed completely contrary to the corporate culture she needed to create.

Multinationals want to promote local managers.
As global companies such as Tellabs expand beyond their national borders, companies will increasingly continue to recruit and groom the talent available all over the world. On the one hand, multinationals may send expatriates to manage for many years and then transfer control to local employees (and with specific projects, such as oil exploration, expatriates may always remain in charge). On the other hand, global companies will find talent anywhere around the world and rotate employees based on expertise, not geography, and use local talent immediately.

Indeed, the number of foreign workers employed by U.S. companies has been on the rise. American companies employ 5.4 million people abroad and investment by American firms in overseas operations was at $716.2 billion in 1993, according to The New York Times. International companies of all sizes are dealing with the question of host-country nationals. Interestingly, a recent study by Drake Beam Morin Inc. and International Business magazine of 1,200 U.S. multinational companies with annual sales of $1 billion or less, revealed that 60% of mid-size firms hire primarily local nationals, 23% hire a mix of local nationals and Americans, and 17% hire primarily U.S. expatriates.

With this increasing recognition of the importance of the world-wide labor pool, what are the implications for American businesses? What are the issues HR managers—and expatriate managers—need to know? How is managing host-country nationals different? What are the challenges associated with recruitment, training and retention? What are the legal and immigration implications? What compensation and benefits questions arise?

"The whole question of how do you manage—how do you plan and staff; how do you organize, how do you lead—all these management activities have a strong cultural component that enters into the equation," says Stephen H. Rhinesmith, author of A Manager's Guide to Globalization [published by the American Society of Training and Development (ASTD] and Irwin Professional Publishing, 1993). "There are major differences in perception. For example, Americans tend to be egalitarian and look for empowerment and delegation, people taking personal initiative and responsibility. However, in places like Asia, Latin America, and the Middle East, workers look up to authority figures and expect the authority to make decisions. They've been taught it's their responsibility to be part of a group and respect authority. So there's a whole set of management activities that one has to deal with in learning to manage a joint venture abroad. And it varies by country, depending on what the cultural issues are," Rhinesmith says. Overlay cultural conditions and interweave that with corporate culture and the business agenda, and you have a maze of international HR issues as you approach host-country employees.

Tellabs, believes that localizing its global facilities is crucial in several ways. Not only are local nationals more in-tune with the quickly changing market, but Tellabs' management views it as essential to recruiting talent. Tellabs is a medium-size company that started overseas operations six years ago when it bought a company in Ireland. This year, about 800 of its 2,500 employees live outside the United States, and most of them aren't U.S. citizens. Their philosophy is to localize the operation as quickly as possible, but only after management is assured that the company culture has permeated the new location.

It's never very easy. In fact, success of the German company's operations is the result of lessons learned from the Irish facility, which didn't get closely tied into the corporate culture. "There was no cross-pollinization of resources—of the Irish coming to the States and learning our culture and no one going to Ireland to learn their culture," says James Coppens, Tellabs' manager of international HR. So when an American executive went to Ireland, the Irish would appear to agree with his suggested changes, but when it came down to implementing them, they didn't always proceed in the anticipated manner. "It seemed to be its own separate company. The impact on business in this type of situation can take a while to correct," he says. The corporate headquarters, therefore, believed it would benefit business to approach another acquisition differently.

With that goal in mind, Tellabs spent $70 million to acquire Helsinki-based Martis Oy, in 1993. It employs 230 Finns. "When we acquired Martis Oy, we wanted to maintain the entrepreneurial spirit that made it successful, but also tie employees into the corporation so they weren't out there by themselves," says Coppens. "We sent the vice president of Europe, the Middle East and Africa to tie into the corporate culture as well as provide leadership and direction and also (serve as) the link back to headquarters. We also sent a marketing manager who had started in the Irish operations. Everyone else were local nationals."

Tellabs issued company stock to local nationals as another way to get them to buy-in to the corporate facility. They also sent many of the Finnish engineers to the States—and to the Irish plant—to learn to interface with the other employees.

"I've been with this company for eight years, and never considered many of these questions myself. —Laura Bozich, Tellabs

"Our problems with cross-cultural sensitivity became apparent when our corporate people went overseas," says Coppens. For example, midway through one sales presentation in the Netherlands, an American marketing representative addressed the company president by his first name and asked him what he thought. Even though the American was met with stonefaced silence, he didn't realize the major faux pas until he lost the sale and several local salespeople informed him that it's rude to call company presidents by their first names.

This led Coppens and others to institute cross-cultural counseling throughout the organization, with particular emphasis on Finland. All executives—vice presidents, directors and managers—and anyone else who might interface with the Finnish people were given cultural training. Learning from previous experience, the employees in the Irish facility were included.

The executives examined the basic cultural differences between Americans, Finns and Irish, and identified the differences that would play into the business arena. "We focused on how to conduct business meetings, the components of the supervisory relationship, how to communicate effectively," says Coppens.

For example, they learned that employees in Finland prefer written communication to face-to-face interaction. Consequently, everything is sent by letter or by fax. In interactions, the Finns tend to be more reserved than Americans. Managers, therefore, had to realize they would have to overcome communication barriers because they weren't dealing with highly expressive Americans. Were managers unaware of this cultural difference, it would impair their ability to judge situations and read their employees. But when you realize you want to approach people differently and need to establish a relationship first to get past the cultural barriers, it enhances the work situation.

Learning the cultural differences while infusing corporate culture is paying off. Tellabs has doubled sales at the Martis Oy facility. Building on that success, the company headed into Germany.

Culture and government affect recruitment, performance evaluation and training.
Tellabs' success in Germany attests not only to the company's ability to be sensitive to cultural differences, but to adapt when necessary. Although Bozich's casual style and determination to create a flexible team environment is working, she also had to change recruitment techniques. For one thing, Coppens and Bozich knew it was critical for the local facility to be headed by a host-country national as soon as possible—and that the transfer of leadership be promoted when recruiting. It sends a message that Tellabs will promote local people to their highest positions. This is extremely important since local talent wants to know it can reach the top.

"It took seven months to hire a sales manager," says Bozich, who found the candidate through a search firm. The German she hired had worked for another American company for eight years and already was attuned to the atmosphere and culture of an American firm. "It's incredibly difficult to attract Germans to an American company, particularly because they don't think they'll get the top positions. That's how we sell this job. They know they'll get my job in a few years. We have evidence of that throughout Europe because all of the offices are run by local people."

Moreover, when Bozich talked with recruits and new hires, she had to be much more flexible and specific about benefits than she'd ever been before. For example, most German firms offer 25 to 30 days off for vacation. Tellabs initially offered 15 vacation days, which is Germany's legal requirement. But now, the company offers 25, plus one more day each year. When she did performance evaluations, she had to write down in detail what would happen every step of the way. What if a new product wasn't introduced? What if the company didn't make the amount of money it projected? Because German companies offer great security, she was asked extremely detailed questions. Sometimes they were about disability insurance, travel insurance, pension plans or other issues that hadn't occurred to her before. "I was impressed," she says. "I've been with this company eight years, and never considered many of these questions myself. But because companies are very paternalistic in Germany, we had to provide much of the same (benefits)."

Cultural differences aren't the only factors in the labyrinth of human resources issues that multinational companies face. Often, even straightforward tasks such as training are complicated by legal and immigration tangles.

Global HR issues aren't exclusive to American companies.
Multinationals around the world face similar global challenges. ANZ Bank (Australia and New Zealand Banking Group Ltd.), headquartered in Melbourne, Australia, is one example. With $100 billion in assets, ANZ employs 40,000 people in 41 countries around the globe, predominantly in the Asian Pacific basin. With a strong base of 28,000 employees in Australia and New Zealand, the bank has only about 500 to 600 expatriates. The rest of their employees are local nationals, with large numbers in India and the Arab world as well as in money centers such as Singapore, Hong Kong, Malaysia, Tokyo and Taiwan.

"When you're talking about Tokyo and Hong Kong, the whole idea of managing local nationals is going to be different than if you have greenfield [start-up] operations in Vietnam or China," says Arie Veenman, chief manager of succession planning.

In the latter instances, where unemployment is high and foreign firms are seen as employment opportunities, concerns center around the basic educational level of the local people, knowledge of English [which ANZ Bank uses as a minimal requirement for employment since it's the company language], training and the more troublesome matters of local industrial relations and specific government controls.

Case in point. ANZ needed 28 people to open its Vietnam facility. Although senior management positions were going to be filled by expatriates, they needed locals to fill clerical and top supervisory positions. The main criteria wasn't to find people with financial services experience since they didn't exist; the main concern was to hire those with English-language ability so they could be trained. The company tested about 400 people during a three-hour language exam at a local university.

Once selected, three Australian trainers took about three months to teach the Vietnamese employees about credit analysis, money transfers and general financial responsibilities. These financial experts were already briefed in Vietnamese culture at one of Melbourne's leading universities, which draws on its large Asian faculty to help prepare up-and-coming expatriate managers.

With this fundamental background, the Vietnamese were able to open the doors. "Fortunately, there isn't an onslaught at the beginning, so you get a bit of time to do the processing and continually take stock and upgrade the skill sets of your staff," says Veenman. It's been in operation for 12 months, and the bank is just starting to make a profit.

Initially, most countries don't mind if you have a large contingent of expatriates. But, with experience, countries want progression for their own staff.

But Veenman had more to worry about than just making a profit. As part of the agreement for getting the license, he had to guarantee the government of Vietnam that the same number of Vietnamese would come to Australia to be trained about Australian banking techniques.

"In countries like Vietnam and China, people are very keen to work for foreign national companies. The difficulty isn't getting people to come work, the difficulty is with the government relations, the language skills and standards of education. You've got to support the employees with a lot of training," he says.

Increasingly, U.S. and other global companies are exporting their management development and training systems, according to J. Stewart Black, associate professor of international management at Thunderbird, The American Graduate School of International Management in Glendale, Arizona. In other words, they are offering educational courses abroad that used to be offered only on home ground. They are making strong commitments to training opportunities—in technology, management techniques, culture—either alone or in cooperation with universities and colleges. "Traditionally, they haven't offered these types of opportunities before," Black says.

ANZ is attempting to train and develop local people, and then transfer them across borders as needed. But the company is encountering government controls on both sides. "Part of our development plan had been hindered by immigration controls," says Black. "We had a real breakthrough when we recently reached an agreement with the Australian immigration authorities to bring employees from other countries into Australia. Now we can bring 180 people—middle management—into the corporate center and then turn them out again back into different countries."

It works both ways, though. "Initially, most countries don't mind if you have a large contingent of expatriates. But, with experience, host countries want their companies to be managed by local people. They want progression for their own staff," Black says.

This is happening more and more often. Recently, ANZ encountered this in Taiwan. Three years ago, it was almost an automatic rite of entry to bring in expatriates to manage; but today, the company has to show need of high educational qualifications, language criteria, indications that very senior-level responsibility is needed. The country is making sure that there's fair and equitable progression opportunities for its people. Beyond that, says Veenman, you have to get approval from local central banks. They have to concur that there aren't local nationals who could take the position. How do companies learn to navigate the tangle? Veenman, Rhinesmith and others suggest cultural interpreters. "If you're operating in the business environment, you develop cultural mentors from your business contacts," explains Veenman. These mentors are individuals who are host-country nationals who can explain the host culture to the newcomer, whether that's an expatriate or an individual considering new operations in the country. These interpreters know enough about the host culture and expat's culture to explain why things occur and where the individual may encounter surprises or difficulties. "We relied fairly heavily on individuals to understand all the complexities. It's important to do your homework; to do as much preparation and learning about the government agencies as you can."

Compensation and benefits is a maze unto itself.
Any time you're moving somebody from one country to another, or when you have local regulations to consider, it's ten times more complex than moving somebody domestically, according to Coppens. There are tax structures on each side, government programs of social benefits, hospitalization, unemployment insurance, retirement accounts and innumerable agreements between countries.

Normally, U.S. expatriates are maintained as if they are still in America, and in addition, they're given other perks to be sure they're not disadvantaged because of housing and cost-of-living differences. "By definition, the compensation package will be very different for local nationals in the same location," explains Doug Morris, international consultant with Chicago-based Hewitt Associates. "We need to realize that there are more ways of doing things than just the U.S. way," he says. For example, in Singapore, people receive 13 months pay rather than 12. In addition, cultural differences affect compensation. In the United States, individuals are paid based on performance directly related to their own activities. In Asian and many South American countries that are group oriented, to pay an individual for superior performance could actually embarrass an individual and demotivate people.

"The best result is to design compensation packages to recognize cultural differences," he says. "You might develop an incentive plan based on the performance of the group rather than the individual."

Clearly, you can't go it alone. Consulting firms, as well as industry associations, are good initial sources of information about taxes, immigration, compensation and benefits package development. In the international arena, compensation and benefits can be more intricate than for domestic employees. There are medical benefits to consider, for example. When Americans travel outside the United States, they have to have the continued support of their U.S. medical benefits. When you're handling employees from other countries, that's not always the case. For example, the United Kingdom and Finland have a reciprocal health care agreement because they both have socialized medicine. This means that when people from either country travel, they use the health care facilities of the host country. Companies don't have to provide additional benefits for foreign employees when their host governments already cover them. But, many countries don't have reciprocal agreements. Human resources professionals who send expats across borders need be aware of these innumerable options.

The situation can be even further complicated by the local medical coverage. Mexico has socialized medicine, for example. It's considered fairly good although it may take two to three days to see a doctor. "We can't have our people who are traveling all over to customers in South America be out of our offices for two days if they need to get treated for a cold," says Coppens." We need them to be more productive than that." So Tellabs issues supplemental medical coverage that allows its employees to visit private medical-care providers. "It's more expensive," he says, "but it keeps the business moving."

Some companies use their benefits to enhance retention. San Francisco-based Bechtel Corporation is one of them. Bechtel has been operating in the international arena for more than 80 years. Philip Hidalgo, a human resources supervisor for the Latin America Organization, sees retention as one of the emerging problems when addressing the issue of local staff. "There is a tendency of the expatriate employer to essentially throw money at the problem," he says. "But, it's not just a case of paying the highest salary and blowing the market out-of-whack. You need to look at some of the benefits programs."

Salaries in Hong Kong are skyrocketing, for example. The region's turnover rate has been tremendously high. But according to Thomas K. Fuegner, human resources manager, project operations, Bechtel has been relatively successful managing through that. One reason? A company-adopted retirement plan for local nationals. This is especially appealing because Hong Kong doesn't have mandated retirement funds.

Furthermore, the company has developed a dental plan for Hong Kong. Another example of innovative benefits: Bechtel put together profit sharing for its local nationals in Thailand (a country that only recently started its social security program).

"I think you need to be a more sophisticated, more market-oriented, more innovative employer so you foster some of these other allegiances that are important to retaining a long-term work force," says Hidalgo. "You need to put together a good package and not just overpay the market."

Bechtel has recently restructured its organization to establish four regional centers to use local talent and execute work more efficiently. These centers are located in North America, Latin America, the Asian Pacific and a group referred to as EAMS—Europe, Africa, Middle East and Southwest Asia. In the Asian Pacific, for example, the company has 470 employees, about 250 of whom are local nationals; 250 national staff in Latin America; almost 1,300 in EAMS. In addition, the company has joint stock companies in Indonesia and Taiwan with limited expatriate management. These organizations will become independent operating units as quickly as possible.

"About 20 years ago, Bechtel was an American company that worked overseas. Now, we're developing more of a global perspective; we're moving toward a commitment to establish ourselves as regional companies and get even more local," says Fuegner. "The motivation is two-fold. One is cost-driven. The other is that it just makes good business sense; there are talented labor pools in the regions who are familiar with the markets and business customers."

Companies who try to retain their staff with old techniques might be unsuccessful, anyway. For example, in countries that tend to have periods of hyperinflation, such as Argentina and Brazil, compensation and retirement savings plans lose their value, and therefore, these types of benefits have to be structured differently.

Finally, Bechtel has also instituted a year-end bonus program to a large segment of its worldwide staff. An executive communication goes out to all Bechtel employees. "Whether it's one of our Thai nationals, one of our Chilean nationals or one of our employees working in our Houston office, they all get the same letter, and to varying degrees get a bonus check," says Fuegner. "We recognize all of our employees as contributing to the success of the company and regardless of individual performance, if the company has done well, there's the opportunity to share in the rewards."

Managing people from countries other than the United States presents continual questions and complicated situations. Cultural, political and legal factors come into play as well as social problems prevalent in the country. International HR professionals who support their company's global business objectives face more questions than ever before: How do you supervise people? Do you do it on an individual or group basis? What are the implications for a hierarchical society when your organization flattens and eliminates titles like vice president and director? When do you need to call in cross-cultural counselors and cultural interpreters? What kind of legal, tax and compensation advice do you need?

Everyone is looking for answers. As Rhinesmith puts it, "Globalization has arrived in the world, but not in most of the world's organizations." As he says, although conventional wisdom focuses on our inadequate spending in technology and equipment as fundamental restraints to our effective competition, there's evidence that the real problem, "... may lie in the lack of global mindsets in key managers."

Black, co-author of Global Assignments: Successfully Expatriating and Repatriating International Managers (Jossey Bass, 1992) puts it this way, "You still have to have certain business results. The key is to make sure that you don't insist on the same means to the same result. If a different approach will get it done in a different country, that's the way to go. You have to care about the results more than the method."

The caveat: HR practitioners have to understand effective approaches and allow the host-country nationals to use them.

Personnel Journal, March 1995, Vol. 74, No. 3, pp. 60-67.

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