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The International Journal of Human
Resource Management
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Informal institutional constraints and
their impact on HRM and employee
satisfaction: evidence from China's
retail sector
Qihai Huang a & Jos Gamble b
a Lancaster University Management School, Lancaster, UK
b School of Management, Royal Holloway, University of London,
Surrey, UK
Available online: 05 Apr 2011
To cite this article: Qihai Huang & Jos Gamble (2011): Informal institutional constraints and their
impact on HRM and employee satisfaction: evidence from China's retail sector, The International
Journal of Human Resource Management, 22:15, 3168-3186
To link to this article: http://dx.doi.org/10.1080/09585192.2011.560879
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Informal institutional constraints and their impact on HRM and
employee satisfaction: evidence from China’s retail sector
Qihai Huanga* and Jos Gambleb
aLancaster University Management School, Lancaster, UK; bSchool of
Management, Royal Holloway, University of London, Surrey, UK
This paper seeks to assess whether informal institutions can affect human resource
management practices. Specifically, we examine whether the social norm of respect for
authority, an important informal social institution in countries like China, constrains
employee participation, and whether this affects employee satisfaction in foreign-
invested and state-owned retailers in China, respectively. Data are derived from
questionnaires completed by almost 1900 employees at 22 foreign-invested and state-
owned retail stores in nine Chinese cities. We indicate that a norm such as respect for
authority can operate as a constraint on human resource management practices such as
employee participation with related impacts upon satisfaction levels in foreign-
invested and state-owned retailers, but that these play out in unexpected ways.
Keywords: China; HRM; institutions; participation; respect for authority; retail
Introduction
Effective human resources management can bring competitive advantages to firms and is
often considered as a critical determinant of organizational performance and profitability
(e.g. Huselid 1995; Fey and Bjo¨rkman 2001; Bjo¨rkman and Fan 2002; Lau, Tse and Zhou
2002; Law, Tse and Zhou 2003; Sun, Aryee and Law 2007). Meanwhile, it is widely
believed that powerful institutions, which include both formal organizations – social,
economic and political bodies – and the social norms and rules that these organizations
articulate (North 1990; Scott 1995), can constrain the style of management, such as the
form of human resources management, as institutional inertia may drive firms’ choices of
human resource management (HRM) practices (Buck, Filatotchev, Demina and Wright
2003; Warner 2008). Although researchers increasingly examine the importance of
institutions in shaping business practices in transitional economies (e.g. Child and Tse
2001; Law et al. 2003; Peng 2003; Meyer and Peng 2005), much remains to be done,
especially with respect to the role and impact of informal institutions.
Much research has focused on the influence of formal institutions on management,
such as legislation, ownership and regional development (e.g. Tang 1993; Child 1994;
Warner 1996; Lau et al. 2002; Law et al. 2003; Meyer and Peng 2005; Bjo¨rkman, Fey and
Park 2007). While formal institutional changes have been implemented, though, informal
institutions may lag behind. North (1990) argues that informal constraints come from the
cultural transmission of values, underpinned by ideological reinforcements. Developing
ISSN 0958-5192 print/ISSN 1466-4399 online
q 2011 Taylor & Francis
http://dx.doi.org/10.1080/09585192.2011.560879
http://www.tandfonline.com
*Corresponding author. Email: qihai.huang@lancaster.ac.uk
The International Journal of Human Resource Management,
Vol. 22, No. 15, September 2011, 3168–3186
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norms of behaviour that will support and legitimize new formal rules is a lengthy,
incremental process (North 1994). The inertia of informal institutional structures is likely
to inhibit the application of new management prescriptions (Gooderham, Nordhaug and
Ringdal 1999; Child and Tse 2001).
So far, much less attention has been paid to the role of informal institutions, which may
constrain management practices and accordingly firm performance. Our study aims to fill
such a gap by assessing the constraints of informal institutions with specific reference to
the norm of respect for authority on employee participation and satisfaction in retailers in
China. Employee participation is reported to be a key element of high performance HRM
systems (e.g. Huselid 1995; Pfeffer 1998; Boxall and Purcell 2003). In the Chinese
context, respect for hierarchy has been built into the social structure of organizations
(Farh, Earley and Lin 1997), which still guide individual actions and attitudes in modern
Chinese societies (Hofstede and Bond 1988). Such a norm may constrain or at least affect
the styles of communication across organizational hierarchies and employee participation,
which in turn may have an impact on employee satisfaction. In exploring this dimension,
the current paper also tests assumptions about the impact and efficacy of participative
management styles in a non-Western context.
The contribution of this paper is twofold. First, it constitutes an early attempt to assess
the impact of informal institutions on human resources management, which is poorly
understood in both China and other transitional economies. Transitional economies are not
only an ideal laboratory to assess the impact of formal institutional changes, but also of
informal institutions on management and performance. As Peng (2000) postulates, for
instance, China’s social institutions remain central to understanding how firms operate and
perform in this country. Second, it uses a unique large survey database collected in the
retail sector in China. Research examining the influence of institutions in transitional
economies tends to focus on the manufacturing sector (e.g. Lau et al. 2002; Law et al.
2003), with data often drawn solely from the surveys of managers (e.g. Law et al. 2003;
Bjo¨rkman et al. 2007). In China, Child and Tse (2001) claim that the entry of foreign
ventures in the retail sector has engendered fundamental and far-reaching changes.
However, with few exceptions (e.g. Gamble 2003, 2006) there is little empirical research
that examines whether foreign retailers have adopted different HRM practices compared
with indigenous firms and none that focuses on employee participation. Our data include
both managers and shop-floor employees in indigenous and foreign-invested retailers.
In the following sections, we first outline the research context, followed by a review of
the literature on institutions, and the potential impacts of the norm of respect for authority
on employee participation and employee satisfaction with these practices. We then
propose a number of hypotheses and test them using survey data, followed by a discussion
of the findings. We draw out the implications for both management and theory before a
brief discussion on future research and a conclusion.
Research context
Since China’s ‘open door’ and reform policy began in the late 1970s, substantial
institutional changes have dismantled many barriers to modern business operations
(Child 1994; Warner 1996; Child and Tse 2001; Warner 2008). For example, the
introduction of labour contracts in the late 1980s and the ‘three systems’ reforms
introduced in the early 1990s gave firms greater autonomy to hire, promote and even fire
workers (Warner 1996). To a considerable extent, a labour market has been established
through formal institutional changes. Since transition is a path-dependent transformation
The International Journal of Human Resource Management 3169
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(Child and Tse 2001), it is likely that both formal and informal institutions can inhibit
firms from adopting institutional solutions which conventional economic theory would
regard as optimal. In fact, informal institutions may lag behind. As North (1994) points
out, developing norms of behaviour that will support and legitimize new formal rules is a
lengthy, incremental process.
The retail sector is of great economic and social significance not only in the developed
world but also in the developing countries. In the case of China, the overwhelming focus
on its role as a global manufacturing base neglects the importance of the service sector in
that country. According to the People’s Daily (2004), the proportion of China’s GDP
accounted for by the service sector increased from 21.4% in 1978 to 33.7% in 2002. In the
same period, the number of people employed in this sector rose from just 48.9 million to
over 210 million. It is estimated that the contribution of this sector to China’s GDP will be
50–60% in 2020. As a major component of the service sector, the retail industry is of
considerable importance.
Since China’s retail sector began to reopen to foreign involvement in 1992, it has
witnessed an influx of multinational retailers eager to take part in its ‘consumer
revolution’. By 2005, the 18 largest foreign-invested chain stores in China already
operated 4502 outlets (Ernst and Young 2006). According to the management consulting
firm Kearney (2007), foreign retailers are fuelling the rapid growth of China’s retail
market. However, China’s retail market is becoming saturated, limiting expansion
opportunities for overseas retailers. Competition among retailers has also become
increasingly fierce (Wang 2010). How to develop and retain competitive advantage is
essential for the success of both foreign and domestic retailers.
Institutional constraints and employee participation
Informal institution: the norm of respect for hierarchy
According to North (1990), institutions include formal rules (laws, regulations) and
informal constraints (customs, norms, cultures). Scott (1995) conceptualized institutions
as composed of three pillars: regulative, cognitive and normative. Regulative institutions
consist of regulative rule systems and enforcement mechanisms which centre on rule-
setting, monitoring and sanctioning activities, with national laws, inspection routines,
police and courts – along with organizational counterparts such as workplace rules,
monitoring and incentives. Normative components introduce legitimate means to pursue
valued ends. According to this institutional approach, the basis of regular behaviour stems
from broad social agreement, which is often implicit, on what binding expectations apply
to the members of the society. Cognitive institutions centre on shared conceptions of social
reality and frames for meaning, which are taken-for-granted beliefs and values that are
imposed on, or internalized by, social actors (DiMaggio and Powell 1983).
The traditional Chinese value of social order and customs in this aspect overlaps with
both normative and cognitive institutions. This is evident in the teaching of Confucius,
where the social system is defined not in terms of individuals or organizations, but in terms
of dyadic ties between individuals, what Confucius called the principles of wu-lun (‘five
cardinal relations’). Lun is a system of social roles with distinct status differences, which
stress the differentiation between individuals: prince and subject, father and son, husband
and wife, elder brother and younger brother and friend and friend. For each dyadic wu-lun
relationship, role prescriptions specify what should and should not be done by the actors
(Baker 1979). All these relationships are intrinsically hierarchal, involving superior and
subordinate except for friend to friend. Moreover, even the latter relationship is still
Q. Huang and J. Gamble3170
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constructed on a hierarchical basis, with the senior member having a wide range of
prerogatives and authority over the junior.
Confucian values that emphasize the importance of education, obedience to authority
and interpersonal harmony are considered to still guide individual actions and attitudes in
modern Chinese societies (Hofstede and Bond 1988), with values and norms ‘both
internalized and imposed by others’ (Scott 1995, p. 40). The defining characteristics
of Chinese traditionality are said to be respect for authority, fatalism, a general
sense of powerless and obedience (Chen, Tsui and Zhong 2008). Using the concept of
traditionality, Farh et al. (1997) suggest that traditional Taiwanese employees were less
sensitive to injustice than were the less traditional employees. Therefore, the norm of
respect for authority is still a key aspect of an informal institution in China, which is ‘a
pattern of collective action (social practice), justified by a corresponding norm’
(Czarniawska 2010, p. 423). Such social institutions, which can act as ‘internalized
cognitive constraints on sense-making (taken-for-grantedness)’ (Weber and Glynn 2006,
p. 1640), then, have been built into the social structure of organizations (Farh et al. 1997).
The national institutional embeddedness of firms can play an important role in shaping
HRM practices (Gooderham et al. 1999).
Relatively, little attention has been devoted to the extent to which such informal
institutions may constrain the implementation of HRM practices. This paper attempts to
fill the gap by assessing how the norm of respect for authority might impact upon HRM in
China. In particular, we focus on employees’ responses to participative management style
in state-owned enterprises (SOEs) and foreign-invested enterprises (FIEs) in the retail
sector, respectively, and assess whether this practice affects employee satisfaction.
Institutional constraints and employee participation
Employee participation has been a key research theme within the context of strategic
HRM since the 1990s (Huselid, Jackson and Schuler 1997; Parnell 2002) and in the
literature on ‘high involvement work practices’, ‘high commitment management’,
‘high performance practices’ and ‘best practice’ HRM (e.g. Huselid 1995; Pfeffer 1998;
Boxall and Purcell 2003). According to Huselid et al. (1997, p. 175), there are two HRM
outcomes within a firm, namely strategic and technical HRM outcomes. Technical
outcomes describe ‘how well the HRM function performed activities traditionally
associated with personnel management’, whereas strategic outcomes describe ‘how well
the HRM function developed a firm’s employees to support its business needs’. Employee
participation takes different forms, for example, direct and indirect participation
(Poole, Lansbury and Wailes 2001; Bryson 2004). Direct employee participation means
that individual employees are involved in certain decisions, which have traditionally been
taken by management alone. By contrast, indirect participation refers to the participation
of employees collectively in decision making through reliance on union or non-union
representatives to deal indirectly with management on their behalf (Poole et al. 2001).
In Western firms, employees have been found to prefer participative management styles to
autocratic styles (Marchington 2001), and some researchers suggest that direct
participation can be more effective in eliciting managerial responsiveness than
representative (i.e. collective or union) approaches (Bryson 2004). Furthermore, direct
participation is more likely to be associated with higher levels of satisfaction or
commitment (Cox, Zagelmeyer and Marchington 2006).
Chinese people are often reported to respect authority and to accept hierarchical
structure (Kirkbride, Tang and Westwood 1991). As indicated above, the Confucian
The International Journal of Human Resource Management 3171
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values of obedience to authority and interpersonal harmony are still said to guide
individual actions and attitudes in modern Chinese societies (Hofstede and Bond 1988).
The contemporary relevance of Confucian ideas in China is evident in the way that the
Chinese president, Hu Jintao, stressed the value of order, balance and a ‘harmonious
society’ (Economist 2007, May 19). In a study comparing workers’ participation in
Germany and Taiwan, Han and Siu (2000) argue that ‘Chinese culture’ impedes employee
voice in Taiwan because of a high degree of distance in terms of power relations,
subordination and docility of the managed. Strong hierarchical and authoritarian traditions
within Chinese society mean that managers are likely to feel threatened by participatory
styles of management, and employees might not want to involve themselves in decision
making for fear of having their views rejected (Hutchings 2005).
The extent of participation by employees has been low in most Chinese organizations
(Huo and Von Glinow 1995). In his analysis of a survey of 1200 respondents from 120
factories in four cities, Tang (1993) found that a majority of Chinese workers would rather
leave decision making to the firms’ leadership and government departments. Similarly,
foreign managers in early joint ventures often complained that Chinese workers were
unlikely to exercise initiative to get things done (Holton 1990). According to Huo and Von
Glinow (1995), there have been several attempts, championed by China’s central
government, to increase workers’ participation in performance appraisal. However, they
argue that such attempts have not been successful, because ‘the system contradicts
Chinese culture and tradition’ (Huo and Von Glinow 1995, p. 10). More recently, in an
effort to overcome Chinese employees’ reluctance to question authority and encourage
them to speak up when confronted with a bad idea, Kodak tested teams by suggesting a
controversial idea and asking the team members for an opinion. Even though the team
members knew it was a bad idea, none was prepared to state this out loud (Hulme 2006).
In general, the norm of respect for authority has been found to constrain management
practices and employee participation in particular. However, the extent to which it can
influence state-owned and foreign-invested firms may be different. We turn to this point in
the following section.
Ownership and employee participation
There is evidence that
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