Localization of Human Resource Management Practices in China: A Qualitative Comparative Analysis Approach

Abstract

The purpose of this study was to investigate under what combinatorial factors of institutions and power relations within the multinational corporation (MNC), localization of human resource management (HRM) practices occurs. I conceptualize localization as modifications of headquarters-transferred practices that foreign subsidiaries undertake to respond to the local environment. By incorporating a power perspective into institutional theory, I aim to advance institutional analysis of practice transfer in a configurational manner. I conducted a multiple case study with thirteen subsidiaries that were operating in China and owned by Finnish MNCs. Qualitative Comparative Analysis (QCA) was applied as a research approach and crisp-set QCA as an analytical tool to the case study.The configurational nature of QCA and its ability to draw causality while keeping some degree of causal complexity are well suited to investigate the research phenomenon. A key contribution of the present study is the very configurational explanation that sheds light on why and how various constellations of institutions and headquarters-subsidiary power relationships lead to localization of HRM practices. The configurational explanation captures the specific context of practice transfer from a developed market economy to a transition economy. Moreover, this study applies QCA at the micro-level analysis which is a novel approach in International Business research. I specified four causal conditions: labour market mobility, location, monitoring by headquarters and strategic role of subsidiary. The localization of compensation as an HRM practice resulted from the combination of these four conditions with pressure from high labour market mobility, unattractive location of the subsidiary, weak monitoring by headquarters and the strategic role of the subsidiary. No single factor alone played a decisive role. Further, four different configurations that led to localization of compensation were identified, highlighting alternative pathways to achieve the same outcome. The study demonstrates that while institutional differences between host and home country induced the need for localization, power relationships between headquarters and subsidiary also played an important role. The combined effect explains why a practice is either localized or standardized. The study shows a high propensity to transfer of compensation and performance management practices from Finland to China among the Finnish MNCs. However, the subsidiaries were generally rather loosely monitored by their headquarters, reflecting the relatively decentralized management style employed. The study also provides up-to-date empirical evidence that high labour mobility in China is a significant driving force for localization. Similarly, an unattractive location increases the need for localizing corporate practices, which demonstrates the importance of sub-national institutions in China. Furthermore, the rapid changes of values and the growing heterogeneity of the Chinese workforce call for localization of HRM practices.