The world has witnessed a phenomenal change since the nineties, following liberalization of economic policies by many countries which facilitated the entry of MNCs into international markets. Many companies manufacturing Electronic and FMCG items have benefitted from it immensely. Service providing business organizations like Banking, Tourism and hospitality have also exploited this opportunity to internationalize their operations. Globalization of business activities is the new doctrine for profitability and all Multinational companies are considering expansion strategies to gain entry into countries with promising growth opportunities.
But experts are also of the view that markets for electronic items, food and drinks and cosmetics may have reached their saturation point in countries like India and China. Companies planning to expand their operations must now investigate business potential in lesser explored markets; drugs and Healthcare being one of them. General Electric Healthcare is trying to capitalize on the fact that population in India and China are growing and drugs and medical equipment market is poised to grow proportionately. Therefore it has decided to take up drug and medical and healthcare instruments production in India and china respectively. Moreover the maturity level of healthcare products may have reached its peak in European and other western markets and therefore moving these operations to the southeast is a wise decision.
Trade Theories in support of GEH’s Strategy
The concepts that explain the motives and practices involved in international business transactions are called trade theories. Trade theories can be traced as far back as 1776 initiated by Adam Smith who proposed the free trade theory later elaborated by Ricardo. Free trade, in contrast to protection policies of domestic businesses, was advocated by both Smith and Ricardo as the means to realizing productivity at a global level (Sen, S. 2010). However Sen has observed that there have been little deviations in the new trade theories from the classical ones.
Examining the relevance of the trade theories to GEH expansion strategies in Indian and Chinese healthcare markets, the report uses two trade theories, the Heckscher Ohlin factor proportions theory of comparative advantage and the International Product life cycle trade theory that best supports the GEH strategy.
Heckscher Ohlin Theory
Heckscher Ohlin factor proportions theory of comparative advantage proposes that international commerce compensates for uneven geographic distribution of productive resources (Heckscher, E. F., & Ohlin, B. G. 1991). An explanation of this theory is attempted by Leamer, E.E (1995) which says that the commodities produced by using such factors (land, labor, capital) where they are abundant when transferred to a location where they are scarce, compensates the unequal distribution of resources. Therefore the local market of a product manufactured by using the abundant factors is transformed into a global market. Leamer has investigated the effect of globalization and removal of trade barriers on wages which in fact supports the theory that abundance of labor in populous countries like India and China results in capital investment in these countries to increase product output at cheaper rates. Thus GEH’s decision to set up drug manufacturing in India and X-ray machines in China. India also has an abundance of land, facilitating cultivation of medicinal plants used for drug manufacturing; Sorbitrate obtained from maize is used for syrup bases in all pharmaceutical industries is grown abundantly in India. India’s identification of certain areas as special Economic Zones in Himachal Pradesh and Goa has given an impetus to much international collaboration and pharmaceutical Industries are one of them. GEH has also decided to take advantage of this opportunity for its expansion strategy. China’s specialization in electronic goods attributed to skilled and educated labor (Hanson, G. H. 2012) justifies the GEH strategy of moving X-Ray machine manufacturing to China.
The Product life cycle trade theory
Originally developed by Raymond Vernon the product life-cycle theory is an economic theory that explains the concepts and practices of international trade. The theory proposes that initially all the components and labor associated in manufacturing a product come from the country in which it was invented. After a while the product may reach a stage when its sales cannot be further elevated, known as the saturation point. GEH is shifting its base from US to India and China because drugs and healthcare equipments manufacturing has reached the maturity stage. Manufacturing in US is no longer feasible. This factor when combined with comparative advantage theory establishes the fact that India and China both offer cheap labor costs, raw material and technological knowhow and qualifies as the best possible option for transferring the facilities there. Also being populous countries the demand will take time to reach the maturity stage and GEH recognizes the long term advantage of investing in these countries.
Pitfalls in implementing expansion Strategies in India and China from GEH perspective
There are certain barriers to internationalization of trade and GEH is no exception. Every country has its own typical culture, local competition, resistance to foreign entry and trade policies etc. which may make it difficult for new companies to establish themselves in a new area. India and China though have liberalized its trade policies to simplify foreign direct investment; it has certain policies that protect the interests of local manufacturers. Social groups and trade unions oppose joint ventures for the fear of losing jobs. Local business groups resist the entry of foreign competitors because they fear that foreign entrants from developed countries will introduce modern manufacturing technologies and better remuneration which may tilt the market and labor in their favor. In India there are a lot of pharmaceutical companies who export their products to developing and developed countries. GEH may expect resistance from these companies who wouldn’t like to lose their market share because of sophisticated production processes, cheaper alternatives or economies of scale achieved from mass production strategy. These companies and their distributors may form cartel that creates difficulty in product distribution.
Indian Culture is conservative in its orientation and does not approve of the liberal ways of American Society. This may result in harboring an inherent resistance to the establishment of GEH’s production unit in India by the local residents.
Pharmaceutical Companies from abroad often wrongly believe that Food and Drug control laws in India are comparatively lenient. GEH must not entertain any such misconception and follow Government regulations regarding the processes, Quality control tests and internal audit. Until recently India’s policy on FDI in the manufacturing sector did not encourage setting up manufacturing plants of MNCs here (Hoda, A., & Rai, D. K2014). The political structure of Chinese Government is communistic whereas America’s political framework is capitalistic. There are going to be ideological difference between the Chinese and American orientation. GEH must satisfy all administrative and legal stipulations before embarking on production to avoid controversies in the future. Similarly Chinese culture is traditional in its orientation as compared to American modern culture. There may be clashes of values which may hinder smooth implementation of strategies. Before starting full scale production GEH must address these pitfalls to ascertain an uninterrupted functioning due to labor unrest or legal hassles.
Solutions to the pitfalls
Before actually commencing production, the HRM of GEH must structure its organization in such a way that there is room for minimum conflict. This can be achieved by appointing middle level managers who are local and can communicate better with local workers. This strategy would also affirm removal of resistance of the local workforce against changes in case of acquisition of a domestic plant. Secondly, GEH can appoint its own medical representatives or distributors for overcoming resistance from local manufacturers and distributors. A good advertising campaign that involve endorsement of the products from renowned personalities from medical field or outside, can build the market for GEH product. Another effective way of beating competition is product differentiation or value addition to the products manufactured. GEH can use its advanced knowledge in the pharmacy field to achieve this.
Appointing expert corporate lawyers to address legal and administrative issues will equip GEH to deal with legal regulations in healthcare field of both countries. Health care being a sensitive field has to adhere to many strict laws for the protection of people; these laws have to be followed to get a legal as well as an ethical sanction in any country.
Human resource Strategy of GEH for India and China
All multinationals venturing abroad for expanding their operations have to formulate a strategy for mobilization of human resources to effectively manage the diverse work force. Diversity management is a critical issue for Multinationals and the HR strategy should be formulated to address the situations that emerge from internationalization of functions. The integration of both cultures can accomplished only through a thoughtful deployment of personnel from cultures. All functions of HRM, from recruitment to change management need equal attention to avoid any pitfalls at a later date.
Human resource Strategy in India
Selection and recruitment of staff need careful planning so as to accommodate a diverse workforce as well as to fulfill the functional requirements. GEH must recruit local people at higher and middle levels to interact with the workers who are mostly local. Experience gained from previous expatriate management showed that a local human resources manager can acquire and retain local talent (Nian, Y. J., & Dan, L. I. U. 2007) but it must also provide for the functional knowhow in production processes from the parent company without raising conflicts. Equity of wages and salaries must be maintained at all levels to motivate the employees and ensure cooperation from them. Discriminatory practices on basis of race color or gender should be avoided strictly. All legal requirements regarding employment of local people must be complied with. Performance appraisal procedures should be just and transparent.
GEH should also design an effective training and development strategy to equip the employees with the necessary skills to adapt themselves to the new internal and external culture in India as well as to learn the new technologies to enhance performance and get a competitive edge in India. Adequate training should be provided to adapt to the changes in organizational structure, culture and leadership.
Human Resource Strategy in China
In the recent years China has shown remarkable progress in skill development in the area of electronic goods. This factor has to be taken into consideration while formulating a HR strategy for China to use the expertise in the area for manufacturing X ray machines here. Also HR strategy should use the vast population of China to its advantage. China’s own HR management functions until now were restricted to hiring and dismissal. Introducing other functions like talent management, leadership, performance appraisal etc. in its framework may prove to be a bit challenging but must be included in the strategy. China’s political orientation is communist and hence the work force still believes in permanence of employment. The iron rice bowl policy in China before labor reforms characterized the approach consisted of a system of HR practices in which companies took care of employees needs throughout their lifetime (Wright, P. M., et al; 1998). This mindset still persists in the local people’s attitude. Also the laws do not prohibit the labor from forming unions; disciplinary action against employees for offences become very difficult. The labor laws in china prohibit foreign representative offices, financial institutions and economic organizations from hiring employees directly; specially designed HR agencies act as mediators. The official version of the labor contract must be in Chinese and only two fixed-term contracts are allowed. All these factors have to be considered while designing a human resource Strategy.
Training Expatriates for their assignments in India and China
Training and development of the expatriates to handle their assignments with ease is one of the most challenging tasks that confronts the Human Resource Management of any Multinational contemplating relocation in a foreign country. The magnitude of this task becomes all the more crucial when the countries selected for setting up a unit is in South East Asia known for its typical oriental culture. GEH has chosen India and China as the destinations to move its drug and X- ray manufacturing plants respectively. In order to ensure the commencement of production without any interruptions, the first and foremost task that confronts them is preparing the expatriates from the west for the move. This can be achieved by drafting out an intensive training and development program to adapt the expatriates to an entirely new surrounding within the organization and outside.
Both India and China have typical cultures which need to be familiarized with before taking up the expansion. The first step towards accomplishing this is learning the basics of the local languages Hindi and Chinese respectively. This is essential not only for communicating but also to win the confidence of the local people. The HRM must train the expatriates to not only get an idea of the local language but also the local gestures of greeting, welcoming, thanking and apologizing for feeling comfortable in an alien country. Offending the local cultural sense can prove to be detrimental for business.
Both India and China have a male dominated organizational hierarchy and the expatriates must be trained to respect the local organizational culture. Any change introduced must be gradual and in confidence with the local work force. The expatriates must be trained to introduce a participative trend in decision making process.
The expatriates who are brought in to implement new technologies in production processes must be trained to impress upon the local workers the advantages without challenging them in any way to ascertain their cooperation. Transparency and openness must be practiced in the workplace to adopt any new method.
The expatriates must also be trained on the laws of the countries regarding recruitment, termination and compensation of employees. Laws on discrimination, wage equity and equal opportunities for everyone must be abided by the expatriate in managerial and leadership roles.
The expatriates will confront many changes in the organizational culture which may cause an initial shock and could produce stress. They may have to suffer bullying and harassment from the local people. The training should prepare them to deal with these experiences. Any documentaries or visuals that can supplement the training process can prove to be very effective in adapting the expatriates to the change.
Conclusion
The choice of India and China as target countries for expansion can be justified owing to the large population that leverages labor costs and economies of scale and also ensures a booming market which has the potential of long term elasticity. However there is a vast difference in cultures and political orientation of workforce in eastern and western regions and these differences are to be addressed effectively to get an acceptance from the local people. Also the labor laws and other legal regulations relevant to healthcare products must also be followed to avoid controversies for long term sustainability.
The human resource strategy should provide for the cultural differences and formulate a plan to accommodate the difference yet implement the performance procedures and standards smoothly without any resistance from the local people. Managing the diversity of workforce is a challenging task and should be undertaken with utmost tact to ensure cooperation and smooth implementation of new processes.
References
Hanson, G. H. (2012). The rise of middle kingdoms: Emerging economies in global trade (No. w17961). National Bureau of Economic Research
Heckscher, E. F., & Ohlin, B. G. (1991); Heckscher-Ohlin trade theory The MIT Press
Hoda, A., & Rai, D. K. (2014); Trade and Investment Barriers affecting International Production Networks in India, ICRIER Working Paper 281, July
Leamer, E. E. (1995). The Heckscher-Ohlin model in theory and practice
Nian, Y. J., & Dan, L. I. U (2007) Human Resource Strategies in Multinational Corporations in China
Sen, S. (2010). International trade theory and policy: A review of the literature.
Vernon, R. (1979). The product cycle hypothesis in a new international environment., Oxford bulletin of economics and statistics, 41(4), 255-267.
Wright, P. M., Mitsuhashi, H., & Chua, R. S. (1998); HRM in multinationals' operations in China: building human capital and organizational capability. Asia Pacific Journal of Human Resources, 36(2), 3-14.
