SHRM Foundation Research
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SHRM Foundation Research

Institutional Compatibility and High-Commitment HR Practices in an Emerging Economy: A Study of MNC Affiliates in China

March 2007     Completed: March 2009 

Yang Cao, Ph.D., University of North Carolina at Charlotte
Wei Zhao, Ph.D., University of North Carolina at Charlotte

Executive Summary
An important issue facing today’s multinational corporations (MNCs) is how to manage human resources in their affiliates located in different countries.  It is unclear whether HR best practices are truly best in every culture or if MNCs need to adapt their HR practices to the host country’s local environment to see positive effects on organizational performance.

Yang Cao and Wei Zhao examined the role of compatibility between global best practices and the local institutional environment in determining their adoptions and effects in China, the world’s largest emerging economy.


The institutional environment consists of cultural beliefs, social norms, and governmental regulations.  Institutional compatibility is the extent to which a global practice’s organizing principles and managerial actions are consistent with the host country’s institutional environment. 

Some of the HR practices that were identified as "best practices" were determined to be inconsistent with China's environment.  HR practices that were consistent with the cultural, social, and legal environment of an MNC affiliates were more likely to be instituted. The greater the compatibility between a best practice and the local institutional environment, the greater the extent of adoption.

●  HR managers in MNCs should make a conscious effort to understand the host country’s culture and institutional environment.
●  HR managers need to develop a sound understanding of how global HR best practices may be interpreted by local employees.
●  HR managers in MNCs need to selectively transfer global best practices based on their compatibilities with local institutions and not assume all best practices will be successful.

Organizational characteristics also affect a firm’s adoption of HR best practices.  In a distinctive institutional environment like China, an MNC affiliate’s connections with the host country have a significant impact on its HR practices, whereas connections with its home country appear less consequential.

●  Joint ventures with state-owned Chinese enterprises are least likely to adopt HR best practices.
●  An MNC affiliate that recruits local employees through emerging labor markets in China is more likely to adopt HR best practices.

Best practices that are compatible with the local institutional environment have a positive impact on organizational performance.  HR practices that are not compatible with the local environment are detrimental to performance. 

●  MNC affiliates should only adopt the HR practices that are consistent with the local environment of the affiliate or adapt the HR practices to be more consistent with that environment.
●  There are no uniform, one-size-fits-all HR practices or systems.  Unconditionally transferring HR best practices in a wholesale manner will have a negative effect on  organizational performance.
●  Aligning transferred global practices with cherished local values and beliefs are the key to fulfilling their potential and improving organizational performance.

Study Methods
Data were collected in two surveys.  The first was a survey of 79 local experts.  Compatibility ratings for the 25 HR best practices were computed from these data.  The second survey collected data on best practice adoptions, organizational characteristics, and performance from 398 MNC affiliates in China.  Interviews were also conducted with more than 20 managers and employees in 10 MNC affiliates.

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