Imagine your business is growing at a rapid pace – so rapid, in fact, that you decide to go international. Establishing retail outlets, manufacturing facilities or distribution partners abroad opens up your business to new markets, new resources and new avenues for profit.
For human resources, however, it presents certain challenges. How do you staff the company's operations abroad? How do you manage them? One option is to turn operations over to host-country managers using a staffing system known as the polycentric approach. Done properly, the polycentric model can help you reduce costs and respond to local cultures.
While it is cheaper and more successful to use local managers than to expatriate managers from the home nation, the polycentric approach has a tendency to isolate the subsidiary from the company's headquarters, and managers face an unbreakable glass ceiling.
Say that a company in the United States wants to acquire a factory in Argentina. As the business takes its first tentative steps into South America, it will initially work with representatives from outside the business to scope the new location and markets. These representatives, who may be business partners or consultants, are usually located in the host country and understand that country. Human resources do not yet present an issue on the nondomestic side.
At some point, the business opens its own operations abroad. Now, it begins to use an ethnocentric approach, where the company fills its most important positions with managers from the U.S. who move to the host country – Argentina, in this example. The headquarters remains in the U.S., and the business will not bring any Argentinian employees to its headquarters.
As the business becomes established in the host nation, it may choose to turn operations over to Argentinian nationals to manage the subsidiary. This is known as the polycentric approach to staffing. Local managers will run the subsidiary while U.S. nationals continue to oversee the global operations from the home-country headquarters. The idea is to reduce costs and help the business respond to local culture.
Finally, a fully globalized business will seek the best people for jobs throughout the international organization, regardless of their country of origin. With a true geocentric approach, both U.S. and Argentinian employees will have an equal stab at jobs in the Argentinian subsidiary and the U.S. headquarters. This policy is attractive from a best-use-of-skills perspective, but it is not always practical.
Businesses choose the polycentric approach for two reasons: it's cheaper and more successful to use local managers than to expatriate managers from the home nation. Local staff are paid at local rates, which reduces the payroll if the subsidiary is located in a region with lower pay scales compared to the parent company. Plus, there's no relocation package, which can save the company tens of thousands of dollars if home-country managers would otherwise have to be heavily incentivized to relocate abroad.
More significantly, there's a high failure rate when U.S. managers are asked to expatriate abroad. Research suggests that three quarters of all U.S. multinational enterprises adopting the ethnocentric approach have failure rates of 10 percent or more, and businesses are having an increasingly difficult time recruiting personnel for foreign postings.
The main reasons for expatriate failure are:
- The manager cannot adjust to the culture of the new country.
- The manager's partner or children cannot adjust to the new country. For example, the children do not like their new school or the spouse is suffering career harm.
- Other family problems occur, such as the division of families if children are sent to boarding school during the overseas assignment.
- The working environment is different from what the manager is used to, and these problems are exacerbated by language barriers and a limited support network.
- The manager underestimates the challenges that come with large overseas responsibilities.
There are many implications of expatriate failure, and the cost of selecting and training a replacement manager is often the tip of the iceberg. Organizations can experience huge disruption when a manager leaves, causing productivity to drop, customer relationships to falter and morale to crash. By some estimates, replacing a failed expatriation can cost between $40,000 to $1 million per manager.
Against this backdrop, you can see why the polycentric model is typically the cheaper and more successful option.
While the polycentric approach has benefits in terms of cost and longevity, for the manager himself, it can have significant downsides. First up is the thorny issue of career mobility. If the local manager is effectively chained to the host country's operations, how can he gain foreign experience? The polycentric approach restricts movement between the home country and the host nation. So, it becomes virtually impossible for a local manager to progress beyond senior positions in his own subsidiary.
If subsidiary managers and executives feel resentful about the glass ceiling, you've got a problem. High turnover rates and low morale are the natural consequence of restricted career mobility.
Since local managers are better able to understand local markets, the polycentric approach is a good way to reduce the dangers of cultural myopia. Myopia occurs when the company fails to understand cultural differences that require different approaches to marketing and operations in the host country. Keeping the polycentric management local means there are fewer language barriers and allows the multinational to develop strong cultural connections in the host nation.
The flip side is that host-country managers are essentially left to do their own thing. A gap can form between the host country and parent managers, making it hard for headquarters staff to communicate effectively with host-country stakeholders or make strategic decisions.
When it comes to integration, the polycentric approach typically fares worse than the ethnocentric approach. When home-country managers take a foreign posting, they bring the headquarters's culture and policies with them. These managers have a better chance of aligning the subsidiary with the interests of the headquarters than a manager who has never lived or worked in the home nation.
No matter the staffing model used, the company will usually take its operating policies from the parent company and adapt them so they are more in line with the requirements of the subsidiary. This ensures consistency across subsidiaries.
With a polycentric policy, economies of scale, which should be gained as subsidiaries follow the same recipe, are lost. There may be inconsistency in reporting structures across the various subsidiaries.
There's also a risk that local staff will go off on a frolic of their own. For example, they might create their own hiring and promotion standards that are biased toward the host manager's frame of reference. Suppose the HQ is hot on gender equality and is striving for female representation at all levels of the organization, right up to senior management. This policy may play out well in the United States, but countries like India historically have struggled with diversity and inclusion standards due to biases that are embedded in the country's culture.
There's a risk that conflict will arise between the subsidiary and the parent company due to the different thinking processes.