Human resource strategies in post-WTO ChinaE

H 263 Human Resource Strategies in Post- WTO China David Ahlstrom � Sharon Foley � Michael N. Young � Eunice S. Chan Executive Summary China’s rapid economic growth has presented numerous opportunities and challenges for foreign firms there. As firms have increased their presence in China, their concerns are increasingly focused on implementing successful human resource management (HRM) practices. To shed light on effective HRM for foreign firms in China, we con- ducted interviews with senior managers, private equity specialists, and management consultants there. Using a framework of human resources deliverables, we propose sev- eral keys to successful HRM in China. HRM is crucial for firms’ success in post-WTO China, and managing human resources there poses distinctive challenges to common- ly held “Western” assumptions about effective HRM. © 2005 Wiley Periodicals, Inc. INTRODUCTION ow do firms maintain their competitive and operational edge when doing business and hiring workers in the challenging environment of a transition economy? More and more managers of foreign firms and joint ventures are facing this test as com- panies increasingly globalize their operations (Ahlstrom, Bruton, & Chan, 2001; Peng, 2000; Shleifer & Treisman, 2001). China’s entry into the World Trade Organization (WTO) has sparked additional interest in this question as well. The set of challenges faced by foreign firms entering China today differs from those faced by the first wave of foreign firms entering China in the late 1970s (Ahlstrom et al., 2001; Peng, Lu, Shenkar, & Wang, 2001; Wong & Maher, 1997). Whereas Thunderbird International Business Review, Vol. 47(3) 263–285 • May–June 2005 © 2005 Wiley Periodicals, Inc. • Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/tie.20052 David Ahlstrom is a professor of management at The Chinese University of Hong Kong. He teaches organizational behavior and international relations for global managers. His research interests include strategic alliances and entrepreneurship in Asia (ahlstrom@cuhk.edu.hk). Sharon Foley is an assistant professor of management at Drexel University where she teaches organizational behavior and human resource management. Her research interests include diversi- ty in organizations, workplace fairness, and work-family conflict (sf46@drexel.edu). Michael N. Young is an assistant professor at The Chinese University of Hong Kong where he teaches strategic management. His research interests include corporate governance in Asia and state- owned enterprise reform in China (michaely@baf.msmail.cuhk.edu.hk). Eunice S. Chan is a senior consultant with Cap Gemini Ernst & Young, where her work centers on organizational change and implementing new business systems. Her research interests include cor- porate turnaround and human resource management (eunice.chan@cgey.com). the earlier set of concerns tended to focus on “hard” issues such as infrastructure and a lack of foreign exchange (Harding, 1987; Mann, 1997), recent emphasis has been placed on “softer” human resource challenges (Bjorkman & Lu, 1999; Schlevogt, 2000; Wong & Law, 1999; Wong & Maher, 1997). Researchers and consultants working in China have recently argued that human resource management (HRM) problems represent an increasing concern for Chinese senior executives in the PRC (e.g., Ahlstrom et al., 2001; Hoon-Halbauer, 1999), perhaps outweighing other problems (Bjorkman & Lu, 1999; Chen, 2001, p. 170). China’s entry into the WTO has increased the urgency for further legal and commercial reform (Ahlstrom, Young, Nair, & Law, 2003; Becker, 2000; Panitchpakdi & Clifford, 2001). This historic event has ushered in a major “third wave” of growth and reform, following those of the 1980s and 1990s (Schlevogt, 2000). China’s top leaders hope that China’s WTO accession will speed up economic and legal reform and prevent progress from stalling (Powell, 2001), forcing firms to adjust more rapidly in several areas (Nolan, 2001; Panitchpakdi & Clifford, 2001). Managers need to understand the challenges emerging from China’s increasingly rapid economic tran- sition, particularly in the area of creating effective HRM systems in order to compete at home and abroad (Chen, 2001; Powell, 2001; Schlevogt, 2001a, 2001b; Wright, Mitsuhashi, & Chua, 1998). Indeed, in a recent survey of senior executives from multinational corporations with substantial experience in China (BASF, IBM, PricewaterhouseCoopers, and others), respondents cited localization of management and developing employee skills as their main HRM challenges (Chen, 2001, p. 170). Managing this localization process is quite important, as firms in China will likely hire many new employees with little exposure to a market economy, including numerous laid-off state-owned enterprise (SOE) employees and sur- plus rural labor (Ding & Warner, 2001; Naughton, 1996; Panitchpakdi & Clifford, 2001; Steinfeld, 1998; Wong & Law, 1999). This localization challenge has come to be known colloquial- ly in China as “handling the state-owned enterprise mentality.” In this article, we focus on HRM practices in China in the face of changes brought by the accelerated reforms and the increasingly competitive environment (Liu, Liu, Wang, & Woo, 2001; Panitchpakdi & Clifford, 2001; Schlevogt, 2000). Recent research suggests that HRM practices must be modified to fit China’s unique cultural and institutional context (Ahlstrom et al., 2001; Ding, Goodall, & Warner, 2000; Ding & Warner, 2001). To examine how David Ahlstrom � Sharon Foley � Michael N. Young � Eunice S. Chan 264 Thunderbird International Business Review • May–June 2005 China’s entry into the WTO has increased the urgency for fur- ther legal and commercial reform. this can be done, we employ Ulrich’s theoretical framework of deliv- erables of effective HRM (Ulrich, 1997, 1998; Ulrich & Smallwood, 2003). This framework includes: (1) administrative efficiency, (2) employee contribution, (3) strategy execution, and (4) capacity for change. Using this framework as a point of reference, we interviewed 16 individuals for this study. These included senior managers, man- agement consultants, and private equity specialists, all working with foreign companies in China. They were asked about the HRM prac- tices there. We also asked them to discuss the main HRM challenges currently facing foreign firms in China, with a particular focus on the problems in managing numerous local employees with little or no experience working in a competitive work environment. The findings suggest that the conventional “Western model” of HRM may not fully capture the HR challenges facing firms in China (Schlevogt, 2001a) or in other transition economies (Kamoche, 2001). HR man- agers need to carefully respond to the culture and context of post- WTO China to develop effective HRM systems (Ding & Warner, 2001; Lewis, 2003; Schlevogt, 2001a, 2001b). In addressing these issues, the next section of this article provides a brief outline of China’s process of opening up to the world, with spe- cial emphasis on specific HR challenges faced by foreign firms there. Section three adds several WTO-related problems and opportunities. Section four introduces the theoretical framework used in this article, followed by a discussion of methodology in the fifth section. Section six presents the interview findings, structured around the four HRM deliverables. Finally, implications of the findings for HRM in China are discussed, and suggestions for future research are addressed. MANAGEMENT CHALLENGES IN CHINA’S TRANSITION ECONOMY In recent years, HRM challenges have increasingly taken center stage in China and in other transition economies (Ahlstrom et al., 2001; Chen, 2001; Ding & Warner, 2001; Kamoche, 2001; Schlevogt, 2001a, 2001b). Many older employees in China grew up during the upheavals of China’s Great Leap Forward and the Cultural Revolution (Chen, 2001; Tsang, 1994). The attitudes of this broad cohort were heavily shaped both by these events and the “iron rice bowl” policy of the day whereby employees had the right to lifetime employment and a range of social services (Ding & Warner, 2001). Partly as a result, Chinese organizations were often overstaffed (Glover & Siu, 2000), and employees felt they were Human Resource Strategies in Post-WTO China 265Thunderbird International Business Review • May–June 2005 In recent years, HRM challenges have increasing- ly taken center stage in China and in other transition economies. largely in charge (Ding & Warner, 2001; Mann, 1997). The Industrial and Commercial Bank of China, for example, recently had about one million employees; this was thought to be ten times the number they needed to run the bank efficiently (“U.K. Scheme Breaks China’s HR Mould,” 2000). In addition, although many of the old Statist policies have been abandoned, vestiges remain and continue to affect the attitudes of some managers and local employ- ees (Child, 1994; Ding & Warner, 2001; Weldon & Vanhonacker, 1999; Wong & Maher, 1997). The concept of HRM was largely absent in China prior to the return of foreign firms in the 1980s (Child, 1994; Ip, 1994); young people were usually assigned to jobs by the state, and the HR function was purely administrative in nature (Ding & Warner, 2001; Gittings, 1995; Lewis, 2003). When foreign firms started returning to China in larger numbers in the 1980s, they encountered many difficult HR- related problems that required immediate attention (Ahlstrom et al., 2001; Ahlstrom, Young, & Nair, 2002; Mann, 1997). For example, early reports from joint ventures in China found that employee pro- ductivity was much lower than expected; employees were commonly late, were unmotivated and difficult to train, had virtually no valuable skills, napped during work shifts, and left work early without permis- sion (Mann, 1997; Warner, 1995; Wong & Maher, 1997). It was also common for workers to ask managers to spend time and company resources helping them with personal problems (Boisot & Child, 1988; Child, 1994; Mann, 1997). One senior HR manager of a multinational consumer products firm in China commented on this mentality, which can still trouble HR managers today: Workers from state-owned enterprises still think that the factory boss should be their uncle; responsible for any and every person- al problem they have. If someone’s wife gets sick, that person will want the factory boss to help get her to the doctor. Then it is expected that the boss will call the doctor to check that things are OK. They often want time off to take care of personal affairs. Imagine how many times workers would go home early or take a day off if they can use any excuse? If the boss does not appear helpful and supportive, the workers will complain to their boss’s superior—and this can cause problems. Some workers almost feel that they are in charge of the workplace.1 These types of problems are still evident in contemporary China (Ahlstrom et al., 2003; Warner, 1999). The WTO agreement exposed China to unprecedented foreign competition in most indus- tries. The agreement covers all agricultural products, industrial David Ahlstrom � Sharon Foley � Michael N. Young � Eunice S. Chan 266 Thunderbird International Business Review • May–June 2005 When foreign firms started returning to China in larger numbers in the 1980s, they encountered many difficult HR-related prob- lems that required imme- diate attention. goods, and service areas. Industrial tariffs, for example, will fall from an average of 25% to 9% by 2005, including a reduction in the tariffs on imported automobiles from 100% to 25% by 2006, and IT tariffs will be eliminated by 2004 (Panitchpakdi & Clifford, 2001). As a result, the Chinese market is more open to competition, foreign goods, services, and investment. The WTO agreement has initiated a “new growth paradigm” that will help allocate resources more effi- ciently (Panitchpakdi & Clifford, 2001; Young & Tan, 2001). WTO entry is requiring additional reform in China, including the establishment of a modern enterprise system and commercial law (Ahlstrom et al., 2003; Liu et al., 2001; Panitchpakdi & Clifford, 2001). This has sped up the dismantling of the traditional personnel management system, causing it to be steadily replaced by an employ- ment contract system backed by a new commercial code and regula- tory regime and additional enforcement (Lewis, 2003; Lubman, 1999; Warner, Goodall, & Ding, 1999). In this more competitive and dynamic environment, the HR function will be crucial for creat- ing flexible and adaptable organizations and managing the still- problematic legal environment. Building an HRM system and developing employees in China is complicated by the fact that an increasing portion of the labor force available for foreign firms has lit- tle experience working in a competitive market environment (Warner et al., 1999; Whiteley, Cheung, & Zhang, 2000). Thus, standard “Western” models of HRM may have to be adapted to China’s cul- ture and changing environment (Ahlstrom et al., 2001; Bjorkman & Lu, 1999; Warner et al., 1999; Lewis, 2003) while capturing several effective local practices (Schlevogt, 2001a; Whiteley et al., 2000; Wong & Law, 1999). AN OUTCOMES-BASED CONCEPTUALIZATION OF HUMAN RESOURCE MANAGEMENT Given that major concerns in post-WTO China will increasingly cen- ter on “softer” issues such as organizational flexibility, adaptability, employee development, motivation, and retention (Schlevogt, 2001a, 2001b), HRM practices will need to be proactive (Ip, 2000). For this reason, we have organized our examination of Chinese HRM practices2 around the outcomes or “deliverables” of HRM developed by Ulrich (1997, 1998). This framework is designed to bridge the gap between HRM and strategic management as it focuses on out- comes as well as processes. Ulrich defines four generic deliverables for effective HRM; the first two are day-to-day or operational in nature, Human Resource Strategies in Post-WTO China 267Thunderbird International Business Review • May–June 2005 WTO entry is requiring addi- tional reform in China, including the establish- ment of a mod- ern enterprise system and commercial law. while the last two are more future-oriented or strategic in nature: (1) administrative efficiency, (2) employee contribution, (3) strategy exe- cution, and (4) capacity for change. These four deliverables represent “capabilities of competitive companies and must be championed by both line managers and HR professionals” (Ulrich, 1997, p. 19) and include the following: 1. Administrative efficiency results from organizing work such that costs are reduced while quality of HR processes is main- tained. If HR is to play an integral role in achieving competi- tive advantage, it must first oversee day-to-day HR operations efficiently and effectively (Cauldron, 1999). In addition to improving its own efficiency, HR must improve firm efficiency by causing employees to rethink how work is performed throughout the entire organization. 2. Employee contribution increases when employees are commit- ted, competent, and able to produce results and innovate. “High-commitment strategies” refer to relational HR practices such as employment security, high wages, and employee par- ticipation, which focus on treating employees as individuals (Wood, 1995). Enhancing the value of a firm’s human resources through factors such as increasing commitment can enhance firm performance, particularly in an environment of rapid change (Schlevogt, 2001a; Welbourne & Cyr, 1999). Effective management of people is achieved by HR practices that include empowerment, promotion from within, and selec- tivity in recruiting (Pfeffer, 1994). Firms incorporating these high-performance work practices experience increased firm profitability and market value (Huselid, 1995), which may be particularly helpful for retaining key personnel in China (Schlevogt, 2001a). 3. Strategy execution is enhanced when HR works together with managers to convert business strategy into action on the front line. The focus of these processes is on aligning all of the orga- nization’s various HR practices and policies and gearing them toward execution of the overall strategy. HRM practices can enhance firm competitiveness and performance when they are “strategic.” In simple terms, they can contribute directly to the bottom line (Beatty, Huselid, & Schneier, 2003; Huselid, 1995; Pfeffer, 1998). 4. Capacity for change is increased when an organization’s rou- tines, culture, and management encourage employees to adapt, learn, and act quickly, sometimes on their own. To achieve this, corporate cultures should advocate risk taking and speed; David Ahlstrom � Sharon Foley � Michael N. Young � Eunice S. Chan 268 Thunderbird International Business Review • May–June 2005 Effective man- agement of peo- ple is achieved by HR practices that include empowerment, promotion from within, and selectivity in recruiting. management must reward employee flexibility, responsiveness, and willingness to adapt, innovate, and learn (Dess & Picken, 2000; Schlevogt, 2001a). Our basic proposition is that foreign firms utilizing Ulrich’s basic HRM deliverables framework— with modifications to suit the Chinese environment—will be best able to make the adjustment to the post-WTO environ- ment in managing local employees. METHODS Research Design To examine how firms are managing human resources in response to China’s changing environment, we conducted 16 semistructured interviews with senior managers, management consultants, and private equity specialists, all based in China, with extensive experience with the HR function. Interviews were chosen over a survey instrument for several reasons. First, because the treatment of human resources in China is a sensitive topic, top managers, even from foreign ventures, are often reluctant to fill out questionnaires. Thus, face-to-face inter- views were conducted on conditions of anonymity. Second, it is diffi- cult to identify a random sample of foreign firms in China; the response rate from managers in such a random mailing would likely prove inadequate (Abramson & Ai, 1999). Third, interviews are less structured than surveys, allowing for an unprompted discussion of problems and solutions as they arise. This allows for follow-up ques- tions on the topic and development of recommendations that have practical value (Frey & Oishi, 1995). Fourth, interviews provide elab- orated information that can be used as a basis for action research and clear guidelines (Stringer, 1999), as well as for developing hypotheses, questionnaires, or supplying otherwise neglected details (Abramson & Ai, 1999; T. W. Lee, 1999). Finally, interviews allow for deep pene- tration into a topic. The interviews were open-ended, but a standard- ized questionnaire was used to provide commonality without overly restricting the parameters of the interviews.3 While a small sample of cases can create questions of validity, such rich qualitative information is ideal for building insight in a new and rapidly changing area such as HRM in China (T. W. Lee, 1999).4 Sample Selection Initially, we identified three foreign firms with significant operations in China. Through initial interviews with three China-based senior managers in those firms, we were able to identify 13 additional inter- view subjects. These included four HR managers, six other senior Human Resource Strategies in Post-WTO China 269Thunderbird International Business Review • May–June 2005 While a small sample of cases can create ques- tions of validity, such rich quali- tative informa- tion is ideal for building insight in a new and rapidly changing area such as HRM in China. managers with some responsibility for human resources, one China- based managemen