Overcoming liabilities of origin: Human resource management localization of Chinese multinational corporations in developed markets

• Author: Yan Chen,Mingwei Liu,Can Ouyang,Weiping Qin,Ji Li
• DOI: http://doi.org/10.1002/hrm.21984
• Published date: 01 September 2019
• Date: 01 September 2019

SPECIAL ISSUE ARTICLE

Overcoming liabilities of origin: Human resource management

localization of Chinese multinational corporations in developed

markets

Can Ouyang

1

| Mingwei Liu

2

| Yan Chen

3

|JiLi

4

| Weiping Qin

5

1

School of Industrial and Labor Relations,

Cornell University, Ithaca, New York

2

School of Management and Labor Relations,

Rutgers University, New Brunswick, New

Jersey

3

College of Business, Idaho State University,

Pocatello, Idaho

4

Rutgers Law School, Rutgers University,

Newark, New Jersey

5

School of Business Administration, Nanjing

University of Finance and Economics, Nanjing,

China

Correspondence

Weiping Qin, School of Business

Administration, Nanjing University of Finance

and Economics, No. 3 Wen Yuan Road, Qi Xia

District, Nanjing, Jiangsu 210023, China.

Email: qwptongji@126.com

Mingwei Liu, 50 Labor Center Way, New

Brunswick, NJ 08904.

Email: mingwei@smlr.rutgers.edu,

lmwdr99@gmail.com

Funding information

Ministry of Education of Humanities and Social

Science Project of China, Grant/Award

Number: 16YJA630042; National Natural

Science Foundation of China, Grant/Award

Numbers: 71832007, 71872077; National

Social Science Foundation of China, Grant/

Award Number: 17ZDA041

Abstract

Despite the rapid growth of Chinese outward foreign direct investment in developed

markets, many Chinese multinational corporations (MNCs) suffer from liabilities of

origin (LOR)—capability- and legitimacy-based disadvantages associated with the

country of origin. This study identifies localization as a strategic mechanism through

which Chinese MNCs overcome their LOR. With a specific focus on human resource

management (HRM), we examine how factors associated with firms' perceived LOR,

including springboard intent, local competition, and host country regulatory pres-

sures, affect Chinese MNCs' adoption of local HRM practices in developed markets.

We differentiate HRM practices that managers intend to adopt from those that are

actually implemented and explore how state ownership affects the intention–

implementation gap. Based on a sample of Chinese MNCs in the United States, we

find that springboard intent, local competition, and host country regulatory pressures

are positively associated with intended, but not implemented, HRM localization. Fur-

ther examination demonstrates that springboard intent and local competition have

significant effects on implemented HRM localization among private businesses but

not in state-owned enterprises (SOEs). The managerial constraints and resource

endowment of Chinese SOEs may hinder their overseas subsidiaries from

implementing local HRM practices to address LOR.

KEYWORDS

international HRM, strategic HR, international strategy, institutional theory

1|INTRODUCTION

In recent years, multinational corporations (MNCs) from emerging

economies such as China have accelerated their expansion into devel-

oped markets. For example, the outward foreign direct investment

from China into the United States has increased to an average of 60%

each year, from $3,300 million in 2010 to $40,447 million in 2016

(Bureau of Economic Analysis, 2017). This emerging phenomenon

provides a valuable opportunity to advance our understanding of an

important topic in human resource management (HRM)—why firms

adopt standardized versus local HRM practices given that the existing

knowledge has been developed primarily from the experience of

developed economy MNCs (Cogin & Williamson, 2014; T. Edwards,

Sánchez-Mangas, Jalette, Lavelle, & Minbaeva, 2016; Pudelko &

Harzing, 2007). Although developed market MNCs tend to transfer

their standardized HRM practices to leverage home-based advantages

overseas (Almond, 2011), they are also subject to the pressures of

local adaptation—the need to adjust their HRM practices to fit into

local business norms, address changes in laws and regulations, and

accommodate the needs of local employees (Rosenzweig & Nohria,

DOI: 10.1002/hrm.21984

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1994). Therefore, HRM localization is often a strategy for developed

market MNCs to address local constraints (T. Edwards, Marginson, &

Ferner, 2013).

An emerging body of literature has applied this traditional view to

Chinese MNCs operating in other developing countries, suggesting

that these newly emerging MNCs follow similar patterns in HRM as

their predecessors from developed economies do (Cooke, 2014; Jack-

son, 2014). The motivations of Chinese MNCs to adopt standardized

versus local HRM practices in developed economies, however, may

not be fully accounted for by the extant literature. While MNCs from

developed economies often enjoy benefits brought by their country

of origin, such as highly developed factor markets, well-established

market institutions, and positive social images in the global market,

Chinese MNCs in developed economies tend to face disadvantages

that are associated with where they come from (Wilkinson, Wood, &

Demirbag, 2014). These “liabilities of origin”(LORs) emanate from

both capability-based disadvantages—lack of resources and learning

capabilities due to the underdeveloped domestic factor markets and

institutional infrastructures—and legitimacy-based disadvantages—

negative stereotypes related to the national image of the home coun-

try (Ramachandran & Pant, 2010).

For Chinese MNCs that suffer from LORs in developed econo-

mies, we argue that HRM localization serves a strategic function

beyond facilitating local adaptation—overcoming competitive disad-

vantages associated with country of origin. Specifically, HRM localiza-

tion enables Chinese MNCs to establish procedures and routines that

support organizational learning and gain legitimacy in the eyes of local

communities, compensating for their disadvantages in capability and

legitimacy in developed markets. As such, HRM localization is deter-

mined by the extent to which Chinese MNCs face LOR—that is, their

capability- and legitimacy-based disadvantages. From a capability per-

spective, Chinese MNCs are more likely to adopt local HRM practices

when pursuing the springboard intent, which refers to the use of

internationalization as a springboard to compensate competitive dis-

advantages (Wang, Luo, Lu, Sun, & Maksimov, 2014), or competing

directly with local firms in developed countries. From a legitimacy per-

spective, the motivation to adopt local HRM practices increases as

Chinese MNCs experience strong regulatory sanctions from devel-

oped economies.

The intention of HRM localization, however, may not necessarily

transfer into actual implementation. Over the last decade, scholars of

strategic HRM have distinguished between what the decision-makers

intend to adopt and what is implemented (Lepak, Liao, Chung, &

Harden, 2006; Wright & Nishii, 2013). While the distinction between

intention and implementation has been recognized in the transfer of

standardized HRM practices (Ahlvik, Smale, & Sumelius, 2016;

Björkman & Lervik, 2007), the understanding of whether and why

such a gap exits in the adoption of local HRM practices remains rather

limited. In this study, we explore the role of state ownership, which

captures the extent to which a Chinese MNC is influenced by its

home country institutions, in explaining the potential different effects

of springboard intent, local competition, and home country regulatory

pressures on intended versus implemented HRM practices. Compared

to private businesses, state-owned enterprises (SOEs) suffer from low

strategic flexibility to adapt their organizational structure, as well as

high pressures from home country institutions to remain internally

consistent. Besides, the privileged access of SOEs to home country

resources, which protects them from environmental uncertainty and

provides alternative strategic options, reduces their incentives to

address LORs via HRM localization. We test our hypotheses using

survey data collected from a sample of subsidiaries of 100 Chinese

MNCs in the United States.

This study contributes to the literature in three important ways.

First, we advance the existing knowledge of HRM standardization ver-

sus localization by demonstrating a strategic motivation of localization

beyond addressing local constraints—to overcome competitive disad-

vantages in the global market. In so doing, we contribute to a more

comprehensive view of the country of origin effect. While the extant

literature based on developed market MNCs often focuses on advan-

tages derived from home country business systems and the transfer

of home-based HRM practices (Harzing & Noorderhaven, 2008), our

findings suggest that the country of origin can also create liabilities,

particularly for emerging market MNCs operating in developed mar-

kets, and thus provide incentives for HRM localization. Second, we

contribute to the strategic HRM literature by advancing the under-

standing of why the intention–implementation gap exits. Existing

accounts, which are developed mainly from research that examines

domestic operations, emphasize the role of line managers or human

resource (HR) managers in implementing HRM practices (Trullen,

Stirpe, Bonache, & Valverde, 2016). Our findings, however, shed light

on how the characteristics of parent firms affect subsidiaries' transla-

tion of HRM design into actual implementation. We develop two pos-

sible mechanisms to explain the influence of parent firms—managerial

constraints that hinder firm actions and resource endowment that

reduces firm incentives to implement HRM practices. Third, we pro-

vide important quantitative evidence with regard to how factors

shape HRM practices of Chinese MNCs, adding to the existing litera-

ture that is largely based on qualitative case studies (Cooke, 2014).

Our empirical analysis, which focuses on the Chinese investment in

developed economies, contributes to a more comprehensive under-

standing about how Chinese MNCs decide on their HRM practices

overseas.

2|THEORETICAL ARGUMENT

2.1 |The standardization versus localization debate

The debate of standardization versus localization has been a central

research theme in the international management literature

(Tregaskis & Brewster, 2006). While the debate covers a wide range

of management decisions, those on the adoption of HRM practices

have been prominent in terms of empirical evidence (Farndale, Brew-

ster, Ligthart, & Poutsma, 2017; Pudelko & Harzing, 2007;

Rosenzweig & Nohria, 1994). When expanding abroad, MNCs strive

to achieve a balance between standardization and localization. On the

one hand, MNCs tend to diffuse standardized HRM practices across

544 OUYANG ET AL.