A study compared these practices among subsidiaries in African countries

Researcher: Emanuel Gomes

A study conducted by a group of researchers including Nova SBE’s Professor Emanuel Gomes compared the Human Resources Management (HRM) practices of Indian Multinational Enterprises (MNEs) and European MNEs operating in African countries. Their conclusions show that Indian MNEs have higher labor costs in relation to total sales, make more use of temporary labor, and invest in less training than their European counterparts. The study tests the relevance of the country-of-origin effects and shows that these are weakened if they are not consistent with host country ideology and that as economies evolve so too do their expectations of HR policy and practices.

HRM in African subsidiaries - just like back home? 

The study examines the HRM practices of Indian MNEs and European MNEs operating within four countries (South Africa, Botswana, Mauritius and Madagascar) that are part of the Southern African Development Community (SADC). The HR practices of a total of 865 MNE subsidiaries analyzed were remuneration, use of contingent labor, the recruitment of skilled labor as well as the emphasis placed on employee training.

The country-of-origin effect (COE) is the extent to which the HRM at the subsidiary level resemble practices in the home country more so than practices of local firms, which suggests that organizational decision making, leadership style and HRM practices pursued by MNEs are shaped by the nationality of the firm.

Research Findings – Differences and Similarities

The findings of the study comparing Indian and European MNEs operating in Africa highlighted:

- one area of similarity between Indian and European MNEs:
There is no significant difference between their employment of a skilled workforce. The inability to employ skilled workers is a feature of the external labor market and it is important to consider the socio-economic context of African countries.

- differences across several dimensions of their respective HRM strategies:

Indian firms investing in SADC are paying more towards their labor costs as a proportion of their turnover, they rely more heavily on contingent labor and they engage in less training when compared to their European counterparts.

The high labor costs experienced by Indian MNEs are aligned with the dependence on contingent labor – employees who are not indoctrinated may be less committed to the organization and lack the organizational overview to solve complex problems and improve practice, job-hopping is encouraged as employees seek better remuneration. Hence, firms striving for constant HR renewal place a greater strain on their HR systems boosting labor costs.
The recruitment of contingent labor creates a vicious cycle and not only obviates the need for Indian firms to invest in training but also, given the high labor cost, reduces the ability of Indian firms to afford further investment in their workforce.

The use of contingent labor is a predominant feature of Indian domestic practice as private sector firms are adept at seeking way of avoiding government regulation. This provides some evidence for the COE.

In contrast, European firms pay less towards their labor costs as a percentage of sales, recruit fewer temporary workers and invest in more training.

The COE provides even stronger support for European investment in SADC.
European firms, with more developed recruitment and selection practices, are able to recruit lower skilled employees and are able to develop them through a range of high performance-oriented HR practices. This motivates employees and enhances superior output. While such systems might be costly to introduce, they can produce a faster return on investment, minimize future costs through a reduction of labor turnover and foster learning curve effects and the internalization of organizational goals. This is a particularly useful strategy given the shortage of specialist and professional skills within sub-Saharan countries.

In addition, it is consistent with the need for greater learning opportunities which support new skills policies in some parts of SADC, and will help to counter the growing migrancy and ‘flight of skilled labor’ between African countries.

Asian-African vs European - A new model?

Scholars question whether the growing inward investment in Africa will replicate predominant Western practice or whether there will be a shift towards an Asian-African model.

Although India is both geographically and psychologically ‘closer’ to the SADC countries, the findings cast doubt on the extent to which an Asian-African HRM model is evolving.

Indian MNEs continue to create short-term expectations of high wages and high levels of exploitation within SADC. Temporary employment opportunities may make use of unskilled labor surplus in the short run, but in the long run it will only damage firm reputation. Through withholding the softer aspects of HRD, employees fail to develop skills that provide a competitive edge, this in turn reduces the potential for employee commitment and increases turnover. It is difficult to envisage how such a strategy aligns with the SADC’s growing focus on skills surveys, training plans and the payment training levies. This may determine the extent to which Indian MNEs are able to attract skilled labor in the future.

Instead, there appears a greater demand for European ‘style’ HR practices that are consistent with SADC needs and European MNEs will have fewer problems adapting to labor law changes, thus placing Indian MNEs at a distinct disadvantage when competing for the same pool of talent. Given the increasing levels of inward FDI in SADC, there is a need to differentiate MNEs through quality employment opportunities and African governments are increasingly interested in creating jobs but also safeguarding worker rights. The study shows that as SADC countries evolve economically, so too do their expectations of HR policy, and practices and while Western practices may appear ‘hegemonic’, the European model appears consistent with the aims of SADC’s long-term economic development.

This article is based on the paper "A comparison of international HRM practices by Indian and European MNEs: evidence from Africa", by Emanuel Gomes (Nova SBE), Sunil Sahadev (University of Salford), Alison J. Glaister (Aston University) and Mehmet Demirbag (University of Strathclyde), published in the International Journal of Human Resource Management in 2014.