In the face of globalization, organisations struggle to develop the human resource management strategy (HRMS) between global integration and local differentiation. This is regarded as a critical concern for multinational enterprises (MNEs) since they suffer from cultural and institutional differences to integrate HRM practices and shape HRM activities to operate abroad. Regarding that, each cultural and institutional factors are developed over its history with unique insight into managing the organisation, the appropriate HRM practice would vary. The differentiation in national culture and institution call the different management practices that need to be concerned significantly especially for multinational companies’ managers. Researchers highlight the congruence between these factors and HR practice for higher organsational performance. When the HRM practice fits with the basic value shared by employees, the job satisfaction, employee motivation and commitment will be attained. This comes with the implication that cultural and institutional factors are pivotal in shaping the decisions and policies of managers of organisations. In this essay, it will explain what is the institutional and cultural factor with theoretical approach. After that it will suggest implications of institutional and cultural perspective for International Human Resource Management to answer how these factors influence in implementing management policies and practices.
According to Hofstede (1991), Culture refers to the “shared sets of beliefs, values and norms” that is programmed into an actor’s mind. It is regarded as the psychological ‘software’ and sets of informal rule, while institution is more ‘hardware’ of modified and negotiated legal systems that actors follow. The institutionalism emphasises the legitimacy, which organsations struggle to acquiring and maintaining in relation to the environment. One of the new institutionalist theories, the ‘Variety of capitalism’, treats the corporation as a relationships network that locates organisation in its stakeholders with employees and with competitors. The approach highlights the importance of institutional complementarities that argue the success of an organisation depending on the capability to coordinate effectively. The theory draws two types of political and economic structures across nations. One is the liberal market economic orientation (LME) and the other is the coordinated market economic orientation (CME). Companies in some North-Western European countries including Germany and Switzerland with CMEs tend to have highly structured arrangements in labour market that form strong trade union. Banks in these countries are highly coordinated with firms and have long-term capital. In contrast, there are loose hire and fire labour market regulations and dispersed international investors in the U.K and U.S.A where classified as LMEs. The source of finance in these countries is the stock market, with the clear difference. The figure1 demonstrates that corporations in these different types of systems do not operate in the same market.
Figure 1. Institutions across sub-spheres of the political economy Source: Hall and Soskice, (2001)
It shows the positions of OCED countries that describe institutional character in the financial and labour market. The higher development in a stock market implies higher dependency on market coordination with emphasis on financial criteria, whereas a higher degree of protection for employees is likely to rely more on non-market criteria. The flexible labour market in LMEs is suitable to easy access to stock market capital. Due to the competitive market conditions, firms in LME markets highly emphasise the financial performance...