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HR Magazine, January 2004 - Setting Up Overseas

By Mary E Medland  1/1/2005
 
HR Magazine, 
January 2004 Vol. 49, No. 1

Step carefully and get local help when expanding overseas.

When it comes to travel and commerce, the world has been shrinking for a while now. But add in technology’s lubrication of international communications and financial services, the high cost of the U.S. workforce and an increasing demand for goods both here and abroad, and it’s not surprising that many U.S.-based companies are seeing fewer logistical barriers and more financial incentives for establishing overseas operations. Whether their aim is to be closer to new markets or to tap into a less-costly labor force, many companies are considering setting up offices or manufacturing facilities in other countries.

But it can be a daunting challenge to work through all the tasks necessary to open an operation overseas, including acquiring the necessary licenses, dealing with local tax authorities and other governmental agencies, and negotiating business and cultural practices that often are profoundly different from the ways that Americans work.

There is simply no one-size-fits-all method of doing things. What works well in one country may be inappropriate in another, says Bill Kaser, human resource director for the Caribbean and Latin America at Lucent Technologies, based in Murray Hill, N.J.

Getting Started

Perhaps the greatest error is not to involve HR from the very beginning. Once location decisions and financial investments are made, HR may be in the difficult position of making the best of a poor decision, says John P. Millikin, visiting professor of management and academic director for Global Strategic Human Resources Programs at Thunderbird, the American Graduate School of International Management in Glendale, Ariz.

Lisbeth Claus, associate professor of global human resources with the Atkinson Graduate School of Management at Willamette University in Salem, Ore., advises: “Many of the decisions that have to be made will be based on the company’s strategy, human resources’ involvement in the international process and the broader environment of the specific country. An HR environmental scan will be extremely important to assess the quantity and quality of available labor and the context in which work is done in that country.”

HR should shoulder the task of taking a close, careful look at the labor pool, says Millikin. “It is important that HR participate in the site selection decision to help management understand the availability of qualified people to hire, the degree of local training resources that are there to provide a steady stream of qualified applicants, the degree of unionization and local requirements for labor participation, if any, and health and security issues for employees,” he says. “For instance, if you are a technology firm, are there sufficient engineers and engineering graduates available to hire local people? Or will you have to bring in a sizable number of expatriates?”

Furthermore, Millikin points out that before a decision to enter a country is made, it is essential for management to have a good understanding of the local hiring practices and labor relations regulations. Among the questions he says should be considered: Is the local labor environment “congruent with the operating philosophy and strategies of your companies? Is it better to have a joint venture with a local company that achieves the target business objectives?”

Attorney Darryl A. Weiss, managing partner of Global HR Solutions of San Diego, a consultancy specializing in assisting companies in opening foreign facilities and related HR issues, draws on his 24 years of experience working in 12 countries as diverse as Canada, Hong Kong, Japan and Ireland. He says HR must always educate itself about the status of the new country’s trade unions, pension requirements, pay practices, statutory benefits such as paid vacation and sick time, whether an employment contract is required, what may and may not be asked in an interview, the local customs pertaining to recruiting workers, and whether there are works councils. In some countries, company works councils—committees of employees and managers—make certain decisions.

At Lucent, HR and the legal team work together to iron out details involved with labor law, unions, work permits, employee nationality, benefits, unions and so forth, says Kaser. He adds that HR staff should begin planning early and take into account policies and costs for expatriate employees and immigration issues.

Find Knowledgeable Locals

Understanding all those details can be a mammoth task, particularly for HR generalists in smaller companies. That’s why experts agree it is important to work with someone who knows the culture and the legal system of a given country. “This could ideally be an employee from this new country who has joined your company elsewhere and therefore is also socialized in your organizational culture,” notes Millikin, adding that this is a rare occurrence. It’s more likely, he says, “that you will have to identify and retain a local person who is knowledgeable about these matters.”

Weiss advises establishing credibility with overseas vendors through referrals by U.S. firms with which you do business. “For example, contact your corporate banker to determine with which bank it has a relationship in the country where your firm will be doing business and ask for an introduction,” he says. “In many countries, if you do not have a referral, you will get nowhere fast.”

He adds that competent legal and accounting services are crucial, and he recommends that unless your company is very large, it is advisable to look for small or medium-size companies for assistance. “Otherwise you may get lost in the customer service pile,” he says. “I like the small-to-medium firms because they know the local rules and usually offer a payroll service to their clients. That removes some liability and makes sure that taxes are paid on time.”

Taking advantage of any U.S.-based contacts that your corporation has with overseas vendors is a good start, but having an on-site professional consultant is almost mandatory. Ames Gross, president of Pacific Bridge Inc., an international recruiting and consulting firm based in Washington, D.C., points to his experience conducting business in China. To do business there legally, for instance, one must work with the Ministry of Foreign Trade and Economic Cooperation, among other government agencies, and complete a number of forms for setting up an office. “In order for a company to properly report taxes to the Chinese authorities, it is necessary to register for taxation,” says Gross, who adds that a health certificate, resident permit and a labor permit will be required for the company.

In spite of the time and cost involved, these efforts are critical for a successful venture. But in seeking expert help, make sure you find someone who has specific knowledge about how things work in a given country. Someone who has done a fantastic job opening an operation in Brazil may not necessarily be successful in China, cautions Claus.

So how does one go about finding local consultants? Resources include the SHRM Consultants Forum member directory (www.shrm.org/consultants), any American Chamber of Commerce in a particular country, U.S. agencies and international search firms such as Korn/Ferry International. Millikin says customer contacts, the U.S. embassy or consulate, and local search firms may be helpful in identifying local resources.

Consultants who earn the new Global Professional in Human Resources certification are expected to be especially knowledgeable (the first exam will be held this March). This certification will attest to a high level of professional knowledge about international HR.

Staffing Abroad

Once the decision is made to expand in a country, Claus says, HR’s primary responsibility is to staff the operations and orient and train the new employees. She advises HR to retain local legal counsel who can assist in wending one’s way through the maze of hiring local workers.

“There are some very reputable employment law firms that span the globe and have local practices in most countries,” says Claus. “They are usually able to help a company with the cultural hiring practices, and, depending on the staffing strategy, the hiring of locals can be facilitated through the use of a local employment firm.”

Just as in the United States, HR professionals serving overseas operations need to clearly understand the worker skills that are required, must develop job descriptions for support staff as well as executives and managers, and should work with local colleges and universities to locate professionals. And it bears repeating that they need to be mindful of cultural differences. For example, in the country where you’re setting up operations, does “ASAP” mean within the next hour—or within the next two weeks?

But avoiding cultural missteps can be difficult, Gross acknowledges. For example, he says: “One of the common mistakes companies make when hiring and recruiting employees in China is to judge candidates based on U.S. perceptions and criteria. Chinese employees often have different ways of communicating their interests and skills during an interview,” and they consider it unbecoming to place too much emphasis on their skills and experience. Someone not familiar with this mind-set could very well miss hiring an ideal individual.

In addition, says Lucent’s Kaser, HR professionals need to keep an eye on the needs of their expatriate employees: What difficulties do they face and what resources are available to assist them?

Staffing HR

The manner in which human resources will be handled during and after the transition phase will depend on whether there are enough employees to justify hiring a local HR manager or whether those functions can be outsourced. “If the general manager takes on the human resource responsibility [for example, in manufacturing], he or she must be supported in some way,” Claus says.

Some companies choose to hire an HR manager who reports to headquarters but who maintains some distance with regard to hiring employees, says Gross. Other headquarters offices believe it is appropriate to monitor employee selection more closely, including being involved with the entire interview and hiring process.

“One reason for not having headquarters’ HR person involved in hiring is that he knows nothing about the local customs, requirements and so forth,” says Weiss. “HR may set policy on the type of individuals wanted, but HR either doesn’t speak the language or does not know the requirements for employment contracts, statutory benefits, etc.”

On the other hand, Weiss notes that HR management is one of the easiest areas in which to run afoul of local customs, laws and practice. “In many cases where a company is opening a small office, the company will try to wing it,” he says. “The local manager may be aware of some of the local rules, but may not know all that is required. The home office HR person should make it his business to know the local requirements. They can then act as a counsel to the executive team to ensure there is compliance with local laws.”

In China, Gross notes, “HR support may not necessarily be needed from the head office, depending on the stage of setting up business in China. If no lead person has been hired, it may be necessary to send someone from the head office to first hire the proper personnel for the operation. This largely depends upon the company’s goals and strategy for hiring local employees vs. expatriate employees.”

Millikin advises that those who hire an overseas native to handle HR bring that person to the company’s headquarters for several weeks—or even months—to familiarize him or her with the company’s culture and management practices.

If there is one crucial rule for successfully doing business in other countries, says Weiss, it is to be sensitive to cultural differences. “HR should be involved in cultural training for Americans as well as those they will be dealing with in the other country,” he says. “Many a deal has been broken due to the ‘ugly American.’ The human resource person needs to work with the executive and other team members to stop thinking like an American.”

In addition, he advises HR to work with representatives from the foreign site so they understand how Americans think and gain a clearer understanding of U.S. business practices.

Time and again, HR professionals emphasize the importance of both being on the scene in a foreign company and working with established consultants there who can assist in negotiating one’s way through foreign bureaucracies and dealing with language difficulties. It is important to bear in mind, says Claus, that the work of HR is highly legal and culturally determined by the country, but the strategy and implementation plan must remain the responsibility of HR.

In the end, flexibility and creativity are keys for success.

“Be creative; you can try new things,” says Weiss. “The company I worked for in Hong Kong had a turnover rate of 24 percent a year. Since employer-sponsored dental plans are virtually unheard of in the Far East, we decided to offer each employee $1,000 a year for dental work. It was a use-it-or-lose-it policy, but our rate of attrition plummeted to about 4 percent a year as a result.”

Mary E. Medland is a freelance business writer based in Baltimore.

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