STANDARDIZE OR CUSTOMIZE:

THE INTERACTIVE EFFECTS

OF HRM AND ENVIRONMENT
UNCERTAINTY ON MNC
SUBSIDIARY PERFORMANCE
JULIE A. COGIN AND IAN O. WILLIAMSON

This study examines the impact of customizing (as opposed to standardizing)

human resource management (HRM) practices on subsidiary performance
in multinational corporations (MNCs). We examine how this relationship is
inuenced by environmental uncertainty. Hypotheses were tested using data
from 92 subsidiaries of a large MNC operating in 27 countries. The results
showed an interactive relationship between the customization of HRM prac-
tices and subsidiary environmental uncertainty on both nancial (net prot)
and nonnancial (customer satisfaction) objective measures of subsidiary
performance. The results of this study provide important empirical insights
for researchers and practitioners into how HRM can be best congured to
drive multiple performance outcomes for MNC subsidiaries. 2014 Wiley
Periodicals, Inc.

Keywords: international HRM, business-level strategies, environmental

uncertainty, strategic HR

Introduction developed countries in 2008 fell by almost 17

percent to US $1.5 trillion, FDI flows to

T
he rise of foreign direct investment
(FDI) by multinational corporations
(MNCs) over the past three decades
has been astounding. Since 1980
1985, FDI flows have grown by a
factor of 40, to surpass US $2.1 trillion in
2007 (Sauvant, Maschek, & McAllister, 2011).
Even the recent global financial crisis has not
stopped this trend. While FDI flows to
emerging markets still rose in 2008 and 2009
(Sauvant et al., 2011).
In most cases, FDI by an MNC leads to
the creation of a set of subsidiaries, defined
as value-adding entities in host countries
(Birkinshaw & Hood, 1998, p. 774). In theory,
subsidiaries can provide MNCs with several
competitive advantages, such as economies
of scale and economies of scope (Hansen

Correspondence to: Julie A. Cogin, School of Management, Australian School of Business (incorporating the
AGSM), University of New South Wales, Sydney NSW 2052, Australia, Phone: +61-2-9385-9719,
Fax: +61 2 9662-8531, E-mail: julie.cogin@unsw.edu.au, julie.cogin@agsm.edu.au.

Human Resource Management, SeptemberOctober 2014, Vol. 53, No. 5. Pp. 701721
2014 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI:10.1002/hrm.21602
702 HUMAN RESOURCE MANAGEMENT, SEPTEMBEROCTOBER 2014
& Nohria, 2004). Subsidiaries may also pro-
vide MNCs with a portfolio of options for
hedging risks and improving performance by
providing a means to shift activities across
national borders in response to changes in
local demand, competitors actions, foreign
exchange rates, and other environmental
contingencies (Reuer & Leiblein, 2000). One
of the ways MNCs attempt to realize these
potential benefits is to engage in cross-unit
transfer and implementation of standard
business practices across their subsidiar-
ies (Kostova, 1999). The implementation of
common business practices across an MNC
can create a cohesive worldwide presence and
support clients with global opera-
tions (Prahalad & Doz, 1987) and
Despite the potential enhance synergy and efficiency,
importance of while also potentially bringing
firm-specific knowledge to a for-
standardized eign market that can be a source
of competitive advantage (Bartlett
business practices & Ghoshal, 1987).
Despite the potential impor-
within MNCs,
tance of standardized business
there is substantial practices within MNCs, evidence
exists that standardization may
evidence that not always generate performance
benefits for subsidiaries. There are
standardization may
a profusion of examples where
not always generate MNC subsidiaries underperform or
fail to generate a profit. Starbucks
performance struggles in Australia, Wal-Mart
and Carrefours difficulties in South
benefits for
Korea, and Googles challenges in
subsidiaries. China provide high-profile exam-
ples of how businesses can battle
to implement highly developed
standardized practices in foreign locations.
As such, an evolving body of research has
examined the factors that influence subsid-
iary leaders decisions to implement MNC
practices and the performance implications of
these decisions (e.g., Birkinshaw & Morrison,
1995; Cantwell & Mudambi, 2005; Frost,
Birkinshaw, & Ensign, 2002; Kostova, 1999;
Rugman & Verbeke, 2001).
The goal of this article is to build upon
prior research by focusing on human resource
management (HRM) decisions made by sub-
sidiary leaders. In particular, our investigation
examines the question of how subsidiary
leaders decisions to adopt standardized or
customized HRM practices influence subsid-
iary performance. There is growing agreement
among scholars and practitioners that HRM
practices play an important role in shaping
how effectively firms utilize the human and
social capital embedded within their employ-
ees (Barney, 1991; Coff, 1997; Collins & Clark,
2003; Nahapiet & Ghoshal, 1998; Wright,
Dunford, & Snell, 2001). Thus, while there
are several factors that impact subsidiary
outcomes (e.g., subsidiary type [Birkinshaw
& Morrison, 1995], industry [Bartlett &
Ghoshal, 1998], and products produced
and markets served [Wilkinson, Gamble,
Humphrey, Morris, & Anthony, 2001]), a key
proposition of our article is that subsidiary
leaders decisions to implement standard-
ized or customized HRM practices influence
the knowledge, skill, and behaviors of their
workforces, which in turn impacts subsid-
iaries operational and financial outcomes.
However, to date, there is limited research
examining this issue. Schuler, Budhwar, and
Florkowski (2002) suggest that international
HRM research has traditionally overlooked
the need to link the implementation of dif-
ferent HRM practices with behavioral and
financial outcomes. In a review of the litera-
ture, Rosenzweig (2006, p. 46) states that if
a link to performance can be established then
the value of the standardizationlocalization
framework would get a new breath of life. As
such, there are several unanswered questions
about the benefits subsidiaries may or may
not receive should they pursue standardized
or customized HRM practices. Thus, there is
a need for empirical research that provides
evidence-based recommendations on how
to manage the HRM function and the con-
ditions that lead to superior performance in
subsidiaries of MNCs.
We theorize that the performance benefits
associated with implementing customized or
standardized HRM practices are contingent
upon the attributes of subsidiaries external
environment. This logic builds upon prior
research that notes that MNC subsidiaries are
embedded within institutional and social con-
texts that may impact the value subsidiaries
Human Resource Management DOI: 10.1002/hrm
 INTERACTIVE EFFECTS
derive from the knowledge embedded within
an MNCs standardized practices (Kostova,
1999). Subsidiaries often face different insti-
tutional environments, which can create a
tension between being locally sensitive and
globally integrated (Birkinshaw & Morrison,
1995). As a result, leaders of subsidiaries may
or may not decide to implement particular
practices or they might customize the imple-
mentation, tailoring certain aspects of prac-
tices to their setting while ignoring the rest
(Kostova, 1999).
In particular, we theorize that the level of
environmental uncertainty within a subsid-
iarys external environment can increase the
importance of customizing HRM practices to
maximize performance. We define environ-
mental uncertainty as the extent to which
managers cannot predict the future com-
petitive situation, its possible effects, and/or
the consequences of their firms behaviors
(Milliken, 1987). We contend that environ-
mental uncertainty can stem from multiple
sources. Uncertainty can emerge from coun-
try variance in economic conditions. For
example, subsidiaries spread out across devel-
oped, developing, and emerging economies
are likely to face different institutional con-
texts that place different pressures on subsid-
iaries. However, we also contend that focusing
solely on country classifications fails to con-
sider the substantial level of environmental
variance that can exist across different indus-
tries within one country. It is common for
multibusiness MNCs to have multiple subsid-
iaries within the same country that compete
in different industries (Birkinshaw & Hood,
1998), each of which may face different envi-
ronmental challenges. For example, the chal-
lenges faced by manufacturing subsidiaries in
India from technological advancements are
very different from the major challenge of
equipping firms with trained people who can
cross-sell services and attract new business
experienced by Indian professional services
firms. Thus, we contend that environmental
uncertainty as experienced at the subsidiary
level of analysis (regardless of source) may
increase or decrease the value of the knowl-
edge embedded within MNCs standard-
ized practices, in turn moderating the link
Human Resource Management DOI: 10.1002/hrm
OF CUSTOMIZED HRM AND UNCERTAINTY ON MNC SUBSIDIARY PERFORMANCE 703
between the customization of HRM practices
and subsidiary performance.
The source of standardized HRM prac-
tices can come from a variety of directions
within MNCs, including transfers from the
parent company to foreign subsidiaries or
from subsidiaries to the rest of
the organization. However, the
underlying focus of this article is We contend that
not the source of the standard-
environmental
ized HRM practices but the extent
to which subsidiaries custom- uncertainty as
ize their HRM practices relative
to the standardized practices in experienced at the
the MNC. As such, we examined
how the extent to which a subsid- subsidiary level of
iary adopts a system of standard- analysis (regardless
ized HRM practices (recruitment/
selection, training, performance of source) may
appraisal, and remuneration) as
suggested by the MNC corporate increase or
headquarters versus customized
decrease the value
HRM practices developed by a
subsidiarys local management of the knowledge
influences subsidiary financial
and nonfinancial performance embedded within
and how this relationship is mod-
MNCs standardized
erated by the subsidiarys external
environment (e.g., perceived envi- practices, in turn
ronmental uncertainty).
The level of analysis for this moderating the
study is that of the subsidiary. We
link between the
tested our predications by exam-
ining HRM practices in subsid- customization of
iaries of a large European MNC
with business units operating in HRM practices
27 countries across four different
industries. All of the subsidiaries and subsidiary
in our sample had responsibility performance.
for both costs and revenues and
had a profit-creating mandate. As
such, the subsidiaries in our sample are best
categorized as being profit centers (Gitman &
Zutter, 2012).
This study promises to extend HRM
research by providing new evidence on
how HRM decisions influence performance
in an MNC setting. The preponderance of
prior international human resource manage-
ment (IHRM) research has largely examined
US MNCs or US affiliates of foreign-based
704 HUMAN RESOURCE MANAGEMENT, SEPTEMBEROCTOBER 2014
MNCs (Bjorkman, Fey, & Park, 2007; Ferner
et al., 2004; Fey, Morgulis-Yakushev, Park,
& Bjorkman, 2009; Gunnigle, Murphy,
Cleveland, Heraty, & Morley, 2002; Rosenzweig
& Nohria, 1994). In addition, a limitation of
prior IHRM research that has examined the
HRM-performance link in MNCs is the use of
subjective measurements of firm performance
obtained from company employees (e.g., Fey
et al., 2009). Our empirical setting provides
important insights into the generalizability
of the standardization-customization HRM
framework to non-US settings. Furthermore,
our sample allows us to use uniform mea-
sures of objective subsidiary financial perfor-
mance, in addition to capturing nonfinancial
measures of customer satisfaction
from actual customers. This is
The results of consistent with key performance
measures adopted in a balanced
this study provide
scorecard approach (Kaplan &
important empirical Norton, 2001). Thus, the results
of this study provide important
insights for empirical insights for practitio-
ners into how HRM can be best
practitioners into configured to drive multiple per-
how HRM can be formance outcomes.
best configured
Theory and Hypotheses
to drive multiple Lawrence and Lorsch (1969) out-
lined a fundamental management
performance
challenge of achieving internal
outcomes. differentiation in response to envi-
ronmental complexity and insta-
bility while at the same time
developing adequate integration mechanisms
to coordinate firm activities. For example, in
their study, Lawrence and Lorsch showed that
an organizations market and technological
environments have a major impact on organi-
zation design. Consequently, they argued that
an organizations internal structural arrange-
ment is contingent upon the demands of the
external environment. Implicit in this formu-
lation is a contingency perspective that holds
that the best way to organize and manage
people depends on the situation (Donaldson,
2001). Lawrence and Lorschs (1969) frame-
work did not explicitly discuss MNCs; how-
ever, Doz, Bartlett, and Prahalad (1981) began
a long line of inquiry extending the work of
Lawrence and Lorsch (1969) to the consider-
ation of standardization versus customization
of management practices within MNCs.
Building upon extant research, we theo-
rize that external environment attributes may
impinge upon an MNCs management of its
human resources and its efforts to be locally
responsive and adaptable while remaining
globally coordinated and governed. Drawing
upon institutional theory, we predict that
there is likely to be variance in the social
context of an MNCs subsidiaries (Scott,
1995). This variance can stem from various
sources, including such things as the regula-
tory environment (e.g., laws and rules), cog-
nitive schemes of relevant stakeholder groups
(e.g., organizational categorizations), and/
or normative beliefs (e.g., norms of appro-
priate competition) (Kostova, 1999). Thus,
given variance in the social contexts across
MNC subsidiaries, there is the possibility that
an MNCs standardized HRM practices may
be more or less relevant for a particular sub-
sidiarys institutional environment. This, in
turn, may affect the ultimate benefit of imple-
menting standardized HRM practices across
the MNC (Datta, Guthrie, & Wright, 2005).
Thus, to better understand the relation-
ship between implementing standardized
versus customized HRM practices and subsid-
iary performance, it is important to consider
how relevant characteristics of a subsidiarys
environment may enhance or constrain the
value generated by the subsidiarys HRM strat-
egy. One environmental characteristic that
may be particularly relevant in understand-
ing the relationship between HRM practices
and performance is the level of environmen-
tal uncertainty encountered by a subsidiary.
The predictability of the environment within
which a firm competes (Dess & Beard, 1984)
may be an important factor for understand-
ing the relationship between customization
(versus standardization) of HRM practices
and firm performance because the level of
uncertainty can influence the importance of
top managers discretion in shaping organiza-
tional performance (K. G. Smith et al., 1994).
Just as Lawrence and Lorsch (1969) argue
that organizational structure is contingent on
Human Resource Management DOI: 10.1002/hrm
 INTERACTIVE EFFECTS
industrial setting, we speculate that perfor-
mance of a subsidiary is contingent on envi-
ronmental uncertainty at the subsidiary level.
Environmental uncertainty at the subsidiary
level can simultaneously stem from attributes
in countries institutional and political envi-
ronments and/or from industry attributes
within a particular country (Furman, 2000;
McGahan & Porter, 1997; Rivkin, 1997). As
such, different subsidiaries may face similar
levels of environmental uncertainty; how-
ever, this uncertainty may or may not stem
from different factors. Regardless of source,
underestimating uncertainty can lead to
strategies that neither defend against the
threats nor take advantage of the opportu-
nities that higher levels of uncertainty may
provide. Therefore, the efficacy of the people
management strategy adopted by a subsidiary
depends on the level of uncertainty in the
subsidiarys relevant surroundings.
Subsequently, we theorize that in envi-
ronments with low uncertainty, leaders are
able to manage by relying on established
routines. Standard operating procedures can
create habitualized actions and routines that
can be a central ingredient for creating reli-
ability across an organization (Scott, 1995).
Thus, standardization of HRM practices has
the potential benefit of reducing subsidiar-
ies costs by streamlining development time
(Hout, Porter, & Rudden, 1985). Thus, in situa-
tions of low environmental uncertainty, a key
role for subsidiary leaders is that of executing
standardized organizational systems (Aldrich,
1979). For example, McDonalds, which is
regarded as part of the stable food chain
industry with lower levels of environmental
uncertainty (Henderson, Miller, & Hambrick,
2006), has reduced duplication costs of host
countries designing and implementing staff
training programs by successfully diffusing a
global training strategy across all operations
(Royle & Towers, 2003). The McDonalds case
highlights the efficiency gains subsidiaries
can derive from using standardized practices.
Further, an MNC could elect to use a largely
standardized performance management sys-
tem across all of its business units, reducing
time and costs of each subsidiary developing
its own performance management system.
Human Resource Management DOI: 10.1002/hrm
OF CUSTOMIZED HRM AND UNCERTAINTY ON MNC SUBSIDIARY PERFORMANCE 705
This reduction in cost can enhance subsidiary
profitability.
Conversely, when uncertainty is high,
leaders must vigilantly scan the environ-
ment for information, effectively synthe-
size the information gathered, and quickly
use this information to make strategic deci-
sions about firm operations before the envi-
ronment changes again (Eisenhardt, 1999;
Rindova & Kotha, 2001). In terms of hiring,
high environmental uncertainty may mean
sourcing new pools of talent or altering
employee selection criteria from a standard
approach. These types of adapta-
tions may provide access to new
capabilities and enhance the Subsidiary leaders
operational effectiveness of a sub-
within MNCs are
sidiary; thus, improving its finan-
cial performance. Theoretically, in likely to have a
order to perform these tasks suc-
cessfully, leaders must customize much greater
HRM practices of their subsidiary
understanding of
to best address environmental
changes. Subsidiary leaders within the local external
MNCs are likely to have a much
greater understanding of the local factors impacting
external factors impacting their
their operations
operations than individuals in
a corporate function. Therefore, than individuals in a
when subsidiary leaders utilize
these insights to customize HRM corporate function.
practices in high-uncertainty
environments, this should gener-
ate superior financial performance compared
to the implementation of standardized HRM
practices. Based on this logic, we predict:
Hypothesis 1: The relationship between custom-
ized HRM practices and subsidiary nancial per-
formance is positively moderated by the level of
uncertainty in a subsidiarys environment, such
that the higher the uncertainty in a subsidiarys
environment, the greater the positive impact of cus-
tomized HRM practices on nancial performance.
Several scholars have reported that the
implementation of a customer or market ori-
entation strategy is in part shaped by firms
HRM practices (Jackson, Schuler, & Rivero,
1989). For example, in a study of call centers
in the United States, Batt (2000) found that
706 HUMAN RESOURCE MANAGEMENT, SEPTEMBEROCTOBER 2014
implementation of HRM practices should
vary according to the characteristics of the
customer. In addition, Peccei and Rosenthal
(2001) found an association between HRM
practices (e.g., performance appraisal and
rewards systems) and positive customer-ori-
ented behaviors. The authors assert that HRM
can cultivate prosocial employee behaviors
toward customers. For example, customer-
centered behaviors can be inculcated and
reinforced through incentives
related to customer satisfaction
We theorize and retention as well as training
that by virtue of that gives employees the skills
and enthusiasm they need to keep
their geographic doing the right things for the cus-
tomer and the firm.
proximity and The marketing literature con-
firms that customer preferences,
narrower cognitive
language diversity, and differences
foci, subsidiary in consumers lifestyles act as
major obstacles to implementing
managers, a universal advertising/marketing
strategy (Kanso & Kitchen, 2004).
compared to leaders
Furthermore, in highly uncertain
in MNC corporate environments, customer prefer-
ences are much more likely to
headquarters, will change (Sanzo & Vzquez, 2011).
For example, an increase in the
have greater access
economic uncertainty of an envi-
to information about ronment significantly impacts
consumer preferences in the form
changes in their of higher levels of online buying
and a move from being brand-
customers needs oriented to price-focused (Rust
and preferences. & Lemon, 2001). We argue that
HRM practices cannot be stan-
dardized to deliver superior cus-
tomer outcomes when customers needs and
values are difficult to predict during periods of
high uncertainty. We theorize that by virtue
of their geographic proximity and narrower
cognitive foci, subsidiary managers, compared
to leaders in MNC corporate headquarters,
will have greater access to information about
changes in their customers needs and prefer-
ences. Therefore, we predict that the extent
to which they use this knowledge to imple-
ment customized versus standardized HRM
practices (assuming they motivate customer-
centric behaviors) will generate higher levels
of customer satisfaction and that this relation-
ship will be strongest in environments with
high (compared to low) uncertainty, which are
likely to place more importance on responsive-
ness and adaptation to customer preferences.
Hypothesis 2: The relationship between custom-
ized HRM practices and subsidiary customer sat-
isfaction is positively moderated by the level of
uncertainty in a subsidiarys environment, such
that the higher the uncertainty in a subsidiarys
environment, the greater the positive impact of cus-
tomized HRM practices on customer satisfaction.
Methodology
Characteristics of the Subject Firm
Becker and Gerhart (1996) suggest that com-
parisons across different firms with diverse
measures of performance produce question-
able results. They note that a benefit of sin-
gle-firm studies is they provide the best means
of identifying the mechanisms by which
HRM creates value. Specifically, single-firm
studies allow HRM to be empirically linked
not only with standardized financial mea-
sures such as profit, but also with other mean-
ingful nonfinancial measures of firm
performance such as customer satisfaction
(Becker & Gerhart, 1996).
The research setting for this study is a large
European MNC with established operations in
27 countries. The MNC has well-established
divisions operating in relatively mature mar-
kets. The firm has four diverse divisions plus
a shared services unit. Division 1 is a manu-
facturing business with a large market share
following a history of monopolistic condi-
tions. It offers a limited range of products and
has a strong focus on efficiency and process
improvement to produce profit. Division 2 is
a service-based business. Division 3 is a prod-
uct-based business that has a heavy empha-
sis on new product and service development.
Division 4 is a consulting business that con-
centrates on product offerings and expand-
ing market opportunities to retain customers,
resulting in a high level of innovation and a
broad market and product line.
The level of analysis for this study is
that of the subsidiary. In considering the
Human Resource Management DOI: 10.1002/hrm
 INTERACTIVE EFFECTS
most appropriate measure of subsidiary per-
formance, we evaluated the strategic role
assigned to each subsidiary and the level
of responsibility given to its management
(Gitman & Zutter, 2012; M. Smith, 2002).
For example, if the role assigned to a particu-
lar subsidiary only requires it to produce as
much as possible at a specified level of qual-
ity with a fixed amount of resources, then
it would be treated as a cost center and the
main focus is cost control (Gitman & Zutter,
2012). If subsidiary managers are expected to
determine product prices, market the prod-
ucts, and achieve sales growth, then their
responsibilities are greater. In this case, the
subsidiary has responsibility for both costs
and revenues, and as such should be evalu-
ated as a profit center (Gitman & Zutter,
2012). If, in addition to managing costs and
revenues, the subsidiary manager were also
given the responsibility for making invest-
ment decisions, then such a subsidiary would
be treated as an investment center (Gitman
& Zutter, 2012). All of the subsidiaries in the
subject firm have a profit-creating mandate.
Furthermore, drawing on Birkinshaw and
Morrisons (1995) typology of MNC subsid-
iaries, the subsidiaries within each division
could be best described as local implement-
ers with limited geographic scope, operat-
ing out of a single country (Birkinshaw &
Morrison, 1995, p. 733). None of the sub-
sidiaries had a world mandate with world-
wide or regional responsibilities (Birkinshaw
& Morrison, 1995, p. 733) or could be clas-
sified as centres of excellence (Ambos &
Reitsperger, 2004).
One of the authors worked with the MNC
in a consulting role for several years before
the study and through in-depth conversa-
tions with senior business leaders identified
several relevant characteristics of the firm
and their people management strategy. First,
the MNC had low levels of interfirm trade,
making it a suitable case for analyzing and
comparing financial performance across sub-
sidiaries. Second, the MNC made clear distinc-
tions between the management of expatriate
executives versus the management of the
local workforce. Subsidiary leaders (the major-
ity of which are expatriates) are employed
Human Resource Management DOI: 10.1002/hrm
OF CUSTOMIZED HRM AND UNCERTAINTY ON MNC SUBSIDIARY PERFORMANCE 707
under standardized global employment con-
ditions (e.g., worldwide talent management
strategy, succession plans, and remuneration
structures). Second, there are some manda-
tory, global people management practices in
subsidiaries for the local workforce related to
pension, safety training, induction, and social-
ization programs. However, it was revealed
that subsidiary leaders had high levels of dis-
cretion and autonomy in the management
of local workforces, which we empirically
verified by this studys survey results (reported
later). This research focuses only on the man-
agement of the local workforce in subsidiaries,
not senior subsidiary executives.
Data Collection
Taylor, Beechler, and Napier (1996) empha-
size that top management are instrumental in
realizing the value derived from HRM in
MNCs. Given that the level of analyses in this
study is the subsidiary, we targeted each sub-
sidiarys general manager and deputy general
managers to participate in the study. The gen-
eral managers are the most senior leaders of
each subsidiary and report directly to MNC
corporate headquarters. These senior leaders
are responsible for multiple or single sites in
their subsidiary. For example, in Germany,
one subsidiary had more than ten offices;
conversely, an Egyptian subsidiary had only
one office. We obtained survey responses
from the general manager in every subsidiary
across each of the 27 countries in which the
MNC had operations. Surveys were com-
pleted by respondents while they attended a
company-sponsored leadership program in
April 2009.
A total of 289 surveys were distributed,
and 213 useable responses were returned, giv-
ing a response rate of 73.7 percent. Sixteen
responses were received from general manag-
ers in the shared services unit, which is part of
the companys corporate headquarters. These
16 responses were discarded because the
shared services unit does not register finan-
cial performance data comparable to those of
the other four divisions, nor do they collect
satisfaction ratings from external customers.
Table I details the manager sampling frame.
708 HUMAN RESOURCE MANAGEMENT, SEPTEMBEROCTOBER 2014

TABLE I Manager Sampling Frame by Division and Country

Country Division 1 Division 2 Division 3 Division 4 Shared Services Total
Australia 3 3 2 3 1 12
Brazil 3 4 3 4 1 15
Canada 2 2 2 2 1 9
China 4 3 3 3 1 14
Denmark 1 1 1 1 1 5
Egypt 1 1 1 1 0 4
Germany 3 3 3 3 2 14
Hong Kong 2 1 2 1 2 8
India 3 3 4 3 1 14
Indonesia 2 3 2 3 0 10
Italy 2 2 2 2 0 8
Japan 3 3 2 2 1 11
Malaysia 2 2 2 2 0 8
New Zealand 1 1 2 1 0 5
Russia 2 1 1 1 0 5
Singapore 3 3 3 3 1 13
South Africa 2 2 2 2 1 9
Taiwan 2 1 2 2 0 7
Turkey 2 1 1 1 0 5
UK 2 3 3 3 1 12
USA 3 3 3 3 2 14
Other 3 2 3 3 0 11
Total 51 48 49 49 16 213

Across the various countries, there were
several cases where multiple distinct subsid-
iaries in different business divisions operated
within a single country. Thus, the final sample
represented 92 subsidiaries from 27 countries
across the four business divisions. We were
able to obtain multiple responses from several
large subsidiaries that sent a general manager
and deputy general managers to the leadership
program. In those cases where we received
multiple responses from managers in the same
subsidiary, we averaged their responses to cre-
ate a subsidiary score. Given that the extent
of customized HRM and environmental uncer-
tainty were measured at the individual level,
within-group agreement is important for indi-
cating consensus and justifying the aggrega-
tion of these responses to be representative
scores for a subsidiary (D. Chan, 1998). The
average rwg index (James, Demaree, & Wolf,
1984) was .98 for customized HRM and .99
for environmental uncertainty, all at or above
the conventionally acceptable value of .70. We
also calculated the intraclass correlation coeffi-
cients ICC(1) and ICC(2) (Bryk & Raudenbush,
1992). ICC(1) values were .39 for custom-
ized HRM and .21 for environmental uncer-
tainty. ICC(2) values were .57 for customized
HRM and .34 for environmental uncertainty.
Overall, based on these indices we concluded
that aggregation was justified.
Measures
Firm Financial Performance
We considered several issues in developing
measures of subsidiary performance. All of
the subsidiaries in the sample had a profit-
creating mandate, and consequently, finan-
cial performance was regarded as an
appropriate measure of performance. Thus,
we used subsidiary net profit margin

Human Resource Management DOI: 10.1002/hrm

 INTERACTIVE EFFECTS OF
to measure financial performance. This is a
measure of profit from sales (in millions of
euros) after all expenses, such as labor and
plant costs have been covered but before any
tax obligations. Financial performance of a
subsidiary, however, is complex and can be
influenced by decisions made by MNC corpo-
rate headquarters, which are often outside
the control of the subsidiary. For example,
the corporate transfer pricing policy on costs
and revenues (related to sales and purchases
from other parts of the entity) can be beyond
the control of a subsidiary but affect both the
costs and revenues of the subsidiary
(M.Smith, 2002). Further, MNCs may pursue
a tax-reduction strategy by legitimately mov-
ing activities to low-tax environments such as
the Bahamas, Switzerland, Liechtenstein, the
Cayman Islands, and Bermuda (Dharmapala,
2008). As a result of these complexities, the
actual financial performance of the subsid-
iary can potentially be distorted.
We believe that the risk of transfer pric-
ing in this study is significantly reduced for
the following reasons: (1) there is a low level
of inter-entity transactions in the subject
firm, (2) none of the subsidiaries operate in
known tax-haven countries supporting the
view that the MNC is not minimizing global
tax through transfer pricing, and (3) the cor-
porate tax rates on revenues in the sample
countries were mostly in the 2030 percent
range with only three countries with rates
under 20 percent (Germany, Hong Kong, and
Singapore) and three countries with a rate
above 30 percent (Canada, the United States,
and Brazil).1 Therefore, we are confident that
the results reported in this article are not sig-
nificantly affected by transfer pricing.
Firm Nonnancial Performance
While MNCs commonly use financial mea-
sures to evaluate subsidiary performance,
there is increasing recognition that focusing
on financial information alone is not suffi-
cient in evaluating organizational perfor-
mance. This is consistent with the move
toward a balanced scorecard approach
(Kaplan & Norton, 2001). Nonfinancial indi-
cators, such as customer satisfaction, quality
Human Resource Management DOI: 10.1002/hrm
CUSTOMIZED HRM AND UNCERTAINTY ON MNC SUBSIDIARY PERFORMANCE 709
assurance, productivity, and employee devel-
opment, determine the competitiveness of a
business as well as its ability to sustain profit-
ability in the future. Incorporation of nonfi-
nancial indicators is crucial, particularly in
the face of intense competition, shorter prod-
uct (service) life cycles, and rapid advances in
technology, all of which characterize a
contemporary business. As a result, we col-
lected customer satisfaction data for each
subsidiary. Customer satisfaction scores are
based on the customer survey
conducted biannually by the
While MNCs
firms corporate headquarters for
each subsidiary. The survey pro- commonly
duces data on levels of customer
satisfaction for each subsidiary use financial
across the MNC.
According to Paauwe (2009) measures to
and Wright, Gardner, Moynihan, evaluate subsidiary
and Allen (2005), only a few stud-
ies have explored the effect of HRM performance,
practices on firm performance in
the correct way by assessing HRM there is increasing
practices at one point in time and
recognition that
relating them to subsequent firm
performance periods. Consistent focusing on financial
with the recommendations of prior
research (Paauwe, 2009; Paauwe & information alone
Farndale, 2006; Wright et al., 2005),
is not sufficient
we used a longitudinal design to
test our hypotheses by collect- in evaluating
ing measures of firm performance
before and after surveying subsid- organizational
iary general managers and deputy
performance.
general managers so that the time-
lagged effect of customizing HRM
practices on performance could be captured
and reverse causality ruled out. Archival data
on subsidiary net profit margins were supplied
by the group chief financial officer. We gath-
ered data on net profit for the calendar years
of 2007, 2008, 2009, and 2010. We used the
average net profit margin for each subsidiary
for 2009/2010 as the dependent variable. A
two-year average was used to reduce the like-
lihood that our results were overly impacted
by any short-term fluctuations in the subsid-
iarys outcomes. A natural log transformation
was applied to the net profit margin for the
analyses in order to address skewness in the
710 HUMAN RESOURCE MANAGEMENT, SEPTEMBEROCTOBER 2014
distribution of the variable. We were unable to
obtain net profit margin data for one subsid-
iary; thus, for the net profit margin analyses,
the sample size was 91 subsidiaries.
The group chief operating officer also
provided data on annual customer satisfac-
tion ratings of each subsidiary for the finan-
cial year-ends of 2009 and 2010. We used the
average customer satisfaction score for 2009
and 2010 as the dependent variable. As with
net profit, a two-year average was used to
reduce the likelihood that our results were
overly impacted by any short-term fluctua-
tions in the firms outcomes. All customers
were external to the organization.
Customized HRM
Customization of HRM practices was mea-
sured using a ten-item scale adapted from
Hannon, Huang, and Jaw (1995) and Kim and
Gray (2005). Following Kim and Grays (2005)
approach, the following four areas were inves-
tigated: recruitment/selection, training, per-
formance appraisal, and remuneration. These
four areas have been identified as relevant
dimensions to the strategic needs of MNCs
(Dowling & Schuler, 1990). As per Hannon
etal. (1995), participants were asked to indi-
cate the extent to which HRM practices were
customized to the needs of their subsidiary
using a seven-point Likert scale where 1 =
your existing HRM practices have no similar-
ity to parent-company HRM practices and 7 =
there is a significant level of similarity of your
existing HRM practices to parent-company
HRM practices. The scale ascertains the extent
to which leaders of subsidiaries implement
parent HRM practices or the extent they might
customize a practice, tailoring certain aspects
of practices to their context. In order to ease
the interpretations of the results, we reverse-
coded the scale so that higher scores indicated
greater customization and lower scores indi-
cated greater standardization. The Cronbachs
alpha for this measure was .98. The Appendix
displays the items used.
Environmental Uncertainty
Perceived environmental uncertainty was
measured using Millers (1993) scale, which
examines commercial uncertainly on six sub-
scales: government and policies, economy,
resources and services, products, market and
demand, and competition and technology.
Millers instrument has been well validated
(see R. Y. K. Chan, 2005; Werner, Brouthers, &
Brouthers, 1996). Participants were asked to
indicate the degree of predictability in the
external environment of various attributes
using a seven-point scale where 1 = highly
predictable and 7 = highly unpredictable. In
order to ease the interpretations of the results,
we reverse-coded the scale so that higher
scores indicated greater levels of environmen-
tal uncertainty and lower scores indicated
lower uncertainty. The Cronbachs alpha for
this measure was .96. The use of perceptual
rather than objective measures of the envi-
ronmental uncertainty was considered justi-
fied, as Pfeffer and Salancik (1978) point out
that it is only what executives perceive that
informs their decision making. Previous stud-
ies have also suggested that perceptual data
are more relevant to the measure of the oper-
ating environment than archival data (Boyd,
Dess, & Rasheed, 1993).
Control Variables
In order to rule out alternative explanations
for our predictions, seven control variables
were included in the analyses. First, we wished
to rule out the possibility of reverse causality
or the potential that financially high-per-
forming subsidiaries have more autonomy to
customize HRM practices, so we controlled
for the effects of average 20072008 net profit
margin when predicting average 20092010
subsidiary net profit margin.
As described earlier, even though the
primary goal of each division is to generate
profit, each of the four divisions of the MNC
competes in very different industrial markets
and has different product offerings. Bartlett
and Ghoshal (1989) suggest that the pressures
faced by diversified corporations with multi-
ple business divisions vary according to the
industries they operate in. Further, Khanna
and Rivkin (2001) found that industry effects
are an important variable in predicting the
performance of a company in emerging
Human Resource Management DOI: 10.1002/hrm
 INTERACTIVE EFFECTS
markets. Such pressures may not only con-
strain the types of HRM practices subsidiaries
within each division may use, but also impact
the effectiveness of certain HRM strategies.
Thus, we controlled for business division by
including three division dummy variables
where Division 1 was the comparison group.
The extent to which a subsidiarys work-
force is unionized may also constrain both the
level of flexibility managers have to customize
HRM practices and the viability of a particular
HRM strategy. Some studies even suggest that
unionization is associated with poorer finan-
cial performance (Laroche & Wechtler, 2011).
Thus, we controlled for subsidiary unioniza-
tion in our analyses. Unionization was mea-
sured by asking participants a question on the
level of unionization in their subsidiary, where
1 = 020 percent membership, 2 = 2140 per-
cent membership, 3 = 4160 percent member-
ship, 4 = 6180 percent membership, and 5 =
81100 percent membership.
Subsidiary size has been found to be corre-
lated with increased resources and autonomy,
with increasing size requiring greater coordi-
nation complexity, a need for more effective
managerial experience and expertise, and
growing interdependence between the subsid-
iary and the rest of the corporation (Johnston
& Menguc, 2007). Given the potential impact
of size, we controlled for this variable by mea-
suring the number of full-time employees in
each subsidiary in 2010 (Grinyer & Yasai-
Ardekani, 1980, 1981; Johnston & Menguc,
2007). A natural log transformation was
applied in order to address skewness in the
distribution of the variable.
Given that respondents were the most
senior managers of each business unit, we
controlled for the effects of managerial experi-
ence, as we viewed this as a gauge of business-
unit expertise, which in turn could influence
subsidiary performance. The effects of mana-
gerial experience were controlled by collecting
data on years of experience in respondents
current roles, where 1 = 02 years experience,
2 = 35 years experience, 3 = 610 years expe-
rience, and 4 = 11 years or more experience.
Finally, the performance of a subsidiary
might also be influenced by the munifi-
cence of its external environment, defined
Human Resource Management DOI: 10.1002/hrm
OF CUSTOMIZED HRM AND UNCERTAINTY ON MNC SUBSIDIARY PERFORMANCE 711
as the capacity of the environment to per-
mit organizational growth (Aldrich, 1979).
We included two measures of environmen-
tal munificence: the 20092010 average
profit of the geographic region (in millions)
and the 20092010 average gross domestic
product per capita of a subsidiarys country.
The company, which divided its global busi-
ness operations into five geographic regions,
provided us with the overall profit for each
region. Gross domestic product per capita was
obtained in international dollars from the
World Economic Outlook (WEO) database.
Results
Table II contains the descriptive statistics and
correlations between the measured variables.
As recommended by Aiken and West (1991),
we used multiple regression analysis to exam-
ine the effects predicted in the hypotheses.
We used mean-centered variables for the
main and interactive terms in the regression
analysis. Separate regression analyses were
conducted for subsidiary net profit margin
and customer satisfaction. The control vari-
ables were entered into the regression in
Model 1, followed by the main effects of cus-
tomized HRM practices in Model 2, followed
by the main effects of the moderator variable
and the two-way interaction term in Model 3.
The results of the regression analyses for sub-
sidiary net profit margin are shown in Table
III and the results for customer satisfaction
are provided in Table IV.
Hypothesis 1 predicted that perceived
environmental uncertainty would moderate
the relationship between customization of
subsidiary HRM practices and net profit mar-
gin. As shown in step 3 of Table III and consis-
tent with our predictions, the customization
of subsidiary HRM practices perceived envi-
ronmental uncertainty interaction term had
a significant positive relationship with sub-
sidiary net profit margin ( = .22, p < .05).
Hypothesis 2 predicted that perceived envi-
ronmental uncertainty would moderate the
relationship between customization of sub-
sidiary HRM practices and customer satisfac-
tion. As shown in Model 3 of Table IV, the
customization of HRM practices perceived
712 HUMAN RESOURCE MANAGEMENT, SEPTEMBEROCTOBER 2014

environmental uncertainty interaction term

.22*
.13
11
had a significant relationship with customer

satisfaction ( = .17, p = .05).
In order to interpret these results, we plot-

.02
.11
.11
10

ted the two-way interactions using values of
1.5 standard deviation to represent high and

.39*
.54*
.02
.10
low values of the variables (see Figures 1 and
9

2). As illustrated in Figure 1, a simple slope
test revealed a significant positive relation-

.07

.03
.03
.15
.01
8

ship between customization of HRM practices
and net profit margin for subsidiaries with

.32*
.09

.07
.13
.13
.11
high perceived environmental uncertainty
7

(t = 2.10, p < .05). In contrast, this relation-

ship was insignificant and negative for sub-
.56*
.07

.05
.05

.03
.17
.11
6

sidiaries with a low perceived environmental

uncertainty (t = 1.52, p = .13). These results
.41*

provide support for Hypothesis 1.

.02

.05

.04
.15

.12

.16
.01
5

As illustrated in Figure 2, simple slope

tests revealed a significant, positive relation-
.35*

.40*

ship between customization of HRM practices

.02
.08
.02

.08
.01

.10
.19
4

and subsidiary customer satisfaction scores

for subsidiaries with a high perceived envi-
.33*
.32*

.24*

.41*

ronmental uncertainty (t = 3.11, p < .05). The

.05

.03

.20
.15

.18
.01
3

relationship between customization of HRM

practices and subsidiary customer satisfaction
.29*
.24*
.53*

.31*

was insignificant for subsidiaries with a low

.04

0.03

.07

.08
0.13

0.12
0.19
2

perceived environmental uncertainty (t = .02,

p = .98). Taken together, these results are con-
.56*

.25*

.39*

.21*
.25*
.07

.02
.02
.07

.08

.16
.01

sistent with the predictions of Hypothesis 2.

1

Discussion
1.27
.42
.44
.44
.43
1.25
16,379.08

.43

1.50
.51
1.13

1.13

4,007.01

FDI is an important means of achieving stra-

SD

tegic outcomes for any MNC. However, in

order to realize the benefits of FDI, MNCs
Descriptive Statistics and Correlations

must strike a balance between standardizing

5.72

.23
.26
.25
1.25

4.85
3.68
3,881.82
4.37
3.17

5.12
6.76
24,195.10

subsidiary operations to enhance global inte-

Mean

gration and decentralizing operations in an

effort to maximize local adaptation. The need
for this balance is particularly evident when it
comes to shaping the HRM strategy of an
13. Environmental uncertainty
1. Net prot margin 2009/2010

MNC (Cogin & Fish, 2010).

In this study, we examined this tension by
2. Customer satisfaction

investigating how the relationship between

10. Manager experience
9. Net prot 2007/2008

customization of subsidiary HRM practices

12. Customized HRM

and financial and nonfinancial performance

8. GDP per capita
3. Division Dum1
4. Division Dum2
5. Division Dum3

7. Subsidiary size

11. Prot region

was moderated by the attributes of a subsid-

6. Unionization

iarys external environment. Our findings

II

make numerous contributions. We note that

Note: N = 91.
Variable
TABLE

external environmental uncertainty plays

*p < .05.

an important role in shaping how compa-

nywide HRM practices influence subsidiary

Human Resource Management DOI: 10.1002/hrm

 INTERACTIVE EFFECTS OF CUSTOMIZED HRM AND UNCERTAINTY ON MNC SUBSIDIARY PERFORMANCE 713

TABLE III Results of Business Unit Net Prot Margin Regression Models
Model 1 Model 2 Model 3
unstd SE std unstd SE std unstd SE std
Constant 3.74 1.20 3.88 1.26 4.03 1.23
Division 1 .55 .35 .21 .53 0.36 .20 .49 .36 .18
Division 2 1.01 .33 .40* 1.01 0.33 .40* .88 .33 .35*
Division 3 .54 .34 .21 .52 0.35 .20 .51 .34 .20
Unionization .02 .31 .01 .01 .00 .00 .13 .32 .05
GDP .00 .00 .05 .00 .00 .05 .00 .00 .05
Manager experience .02 .26 .01 .03 .26 .01 .09 .26 .04
Region prot .00 .00 .07 .00 .00 .07 .00 0.00 .07
Net prot 2007/2008 .43 .12 .43* .08 .11 .41* .38 .13 .38*
Unit size .08 .11 .09 .04 .09 .09 .07 .11 .08
Customized HRM (CHRM) .04 .09 .05 .05 .09 .07
Environmental uncertainty (EU) .18 .24 .08
CHRM EU .35 .15 .22*
2
R .27 .27 .33
F 3.36* 3.01* 3.17*
The unstandardized and standardized regression coefcients are shown with standardized errors.
Note: N = 91.
*p < .05 (one-tailed test).

TABLE IV Results of Customer Satisfaction Regression Models

Model 1 Model 2 Model 3
unstd SE std unstd SE std unstd SE std
Constant 1.13 1.32 .61 1.29 .55 1.27
Division 1 .15 .38 .05 .05 .37 .02 .13 .38 .04
Division 2 1.01 .36 .36* 1.03 .34 .36* 1.04 .34 .36*
Division 3 1.08 .37 .37* .93 .36 .32* .82 .36 .28*
Unionization .23 .34 .08 .41 .33 .14 .58 .34 .20^
GDP .00 .00 .16 .00 .00 .14 .00 .00 .10
Manager experience .03 .28 .01 .13 .28 .05 .16 .27 .05
Prot region .00 .00 .16 .00 .00 .10 .00 .00 .12
Subsidiary size .48 .11 .47* .43 .11 .42* .41 .11 .41*
Customized HRM (CHR) .24 .08 .28* .24 .08 .28*
Environmental uncertainty (EU) .31 .25 .13
CHR EU .30 .16 .17*

R2 0.28 0.34 .38

F 3.95* 4.72* 4.36*
The unstandardized and standardized regression coefcients are shown with standardized errors.
Note: N = 92.
*p < .05 (one-tailed test).

performance. Specifically, we found that the by perceived environmental uncertainty.

relationship between customized HRM prac- For example, high (compared to low) cus-
tices and firm performance was moderated tomization of HRM practices in subsidiaries

Human Resource Management DOI: 10.1002/hrm

714 HUMAN RESOURCE MANAGEMENT, SEPTEMBEROCTOBER 2014

7.0 4.5

6.5
Subsidiary Net Profit Margin 4.0

Customer Satisfaction
6.0
3.5
5.5

5.0 3.0

4.5
2.5
4.0
2.0
3.5

3.0 1.5
Low Customization of High Customization of Low Customization of High Customization of
HRM Practices HRM Practices HRM Practices HRM Practices

Customization of HRM Practices Customization of HRM Practices

Low Environmental Uncertainty Low Environmental Uncertainty

High Environmental Uncertainty High Environmental Uncertainty

FIGURE 1. Plot of Interaction Between Customiza- FIGURE 2. Plot of Interaction Between Customiza-
tion of HRM Practices and Environmental Uncer- tion of HRM Practices and Environmental Uncer-
tainty on Subsidiary Net Prot Margin tainty on Subsidiary Customer Satisfaction

experiencing high levels of environmental capital embedded within their workforce to

uncertainty produced a 29 per- meet the needs of customers when there is a
cent greater net profit margin and high level of environmental uncertainty.
Customized HRM These results highlight the importance
a 105 percent increase in customer
practices may satisfaction. of adopting an external orientation when
The results suggest that cus- designing HRM practices. The finding is par-
be particularly tomization of HRM practices can ticularly interesting given that our data were
play an important role in building collected in one organization, and empha-
beneficial to adaptation and customer-oriented sizes the importance of acknowledging and
behaviors within subsidiaries. accounting for differences between subsidiary
subsidiaries with
The customization of HRM prac- environments when crafting a people man-
high uncertainty tices may enable subsidiary lead- agement strategy for an MNC. Customized
ers to create a culture that satisfies HRM practices may be particularly beneficial
because they customers. This could be under- to subsidiaries with high uncertainty because
taken by crafting hiring strategies they increase the capability of such subsidiar-
increase the
unique to subsidiary contexts that ies to adapt their processes and products to
capability of such attract the right people, imple- the specific needs of their environment.
menting tailored training pro- Across subsidiaries there was a great deal
subsidiaries to adapt grams that build skills specific to of within-country variance (average SD =
markets, developing employees .41) on managers perceived environmental
their processes
via performance appraisal prac- uncertainty. This was due to the fact that the
and products to the tices that account for local cus- sample firm was a multibusiness MNC and
toms and offering rewards that that the industry dynamics varied greatly
specific needs of local staff value for behaviors that within each country across the firms four
foster customer satisfaction. Thus, major businesses. Thus, our findings high-
their environment. light the value of considering subsidiary-level
the customization of HRM prac-
tices to local external environ- environmental factors when evaluating sub-
mental conditions may enhance the ability of sidiary performance as opposed to relying on
subsidiaries to utilize the human and social country-level categorizations of developing,

Human Resource Management DOI: 10.1002/hrm

 INTERACTIVE EFFECTS
developed, or emerging. While these catego-
ries hold value when making comparisons at
the country level, they may have less value
when evaluating an MNC with multiple types
of business units within different countries.
While our findings provide insight about
the conditions under which MNC subsidiar-
ies can realize performance benefits from cus-
tomizing HRM practices, it is also important
to point out that, consistent with contingency
theory, there are some situations where the
standardization of HRM practices is appro-
priate for MNC subsidiaries. Specifically, low
levels of customization appear optimal for
those subsidiaries that have low levels of
environmental uncertainty. Subsidiaries with
low customization of HRM practices and low
environmental uncertainty had 30 percent
higher net profit margins than subsidiaries
with low customization of HRM practices and
high levels of environmental uncertainty.
Our results advance the literature by fur-
ther opening up the so-called black box
between HRM practices and firm perfor-
mance. There have been calls for a greater
understanding of the mechanisms underly-
ing the relationship between HRM and firm
performance (Batt, 2002; Bowen & Ostroff,
2004; Cappelli & Neumark, 2001; Collins &
Smith, 2006; Fey et al., 2009; Sun, Aryee, &
Law, 2007; Takeuchi, Lepak, Wang, & Takeuchi,
2007). In particular, scholars have raised the
concern that the linkage between HRM prac-
tices and firm performance may not be a sim-
ple linear relationship, but rather one that
consists of numerous moderating variables.
The results reported here suggest that is par-
ticularly relevant in the MNC setting.
From a practical perspective, our findings
have important implications for the types of
individuals who may be best suited to lead cer-
tain types of foreign subsidiaries. Subsidiaries
with high environmental uncertainty ben-
efited the most from the customization of
HRM practices, suggesting that effective
managerial discretion is most important in
this setting. As such, the selection or develop-
ment of subsidiary leaders with both a high
level of local knowledge and the disposition
and ability to innovate may be most appro-
priate for subsidiaries in high-uncertainty
Human Resource Management DOI: 10.1002/hrm
OF CUSTOMIZED HRM AND UNCERTAINTY ON MNC SUBSIDIARY PERFORMANCE 715
situations. Conversely, when environmental
uncertainty is low, MNC subsidiaries may
be better off with leaders who are skilled at
the implementation and execution of global
MNC practices and policies. Thus, MNCs
may want to give special consideration to the
environmental setting of a subsidiary when
filling subsidiary leadership roles. A failure to
consider the attributes of a subsidiarys envi-
ronment can lead to a less productive work-
force, thus reducing the value created by FDI.
Limitations and Future Research
While this study provides a more complete
understanding of how customization of HRM
practices influences subsidiary
performance, it does not examine
The selection or
the whole range of complex fac-
tors that can shape performance development of
within an MNC. As such, there is a
whole array of additional ques- subsidiary leaders
tions that could be addressed in
with both a high
future research in order to get a
better understanding of how sub- level of local
sidiary HRM practice decisions
impact unit performance. knowledge and
First, while our study exam-
ined the business performance of the disposition
subsidiaries across four different and ability to
businesses in 27 different coun-
tries, our data were collected from innovate may be
a single MNC. Thus, it would be
of value for future research to most appropriate
examine whether our pattern of for subsidiaries in
results generalizes to other types
of MNCs and different types of high-uncertainty
subsidiaries (e.g., mandated or
competency-creating subsidiar- situations.
ies). It would be of particular inter-
est to see whether other attributes such as an
MNCs organizational structure play a role in
shaping the benefits of customized subsidiary
HRM practices.
In this study, we measured how subsid-
iary senior managers perceptions of discre-
tion in implementing HRM practices and the
external environment interacted to influence
subsidiary performance. A possible extension
of this research would be to complement the
subjective evaluations of top managers with
716 HUMAN RESOURCE MANAGEMENT, SEPTEMBEROCTOBER 2014
objective subsidiary attributes, such as actual
implementation of specific HRM practices
to predict subsidiary performance. This type
of examination may provide insight into
the types of barriers subsidiaries face when
attempting to implement particular HRM
strategies. This type of analyses could also pro-
vide guidance on the types of HRM practices
optimal for certain environmental conditions
across subsidiaries. It would also be of value to
examine whether customization of subsidiar-
ies HRM practices has a greater value if it leads
to the mimicking of the practices
used by local competitors or differ-
Data on employee entiating the subsidiary from local
behaviors would competition. A central assumption
of our theory is that HRM prac-
further illuminate tices influence performance by
shaping the behaviors of a subsid-
the precise benefits iarys workforce. However, in our
study, we were not able to gather
associated with
data on the mediating behaviors
customized HRM of employees. Data on employee
behaviors would further illumi-
practices. nate the precise benefits associated
with customized HRM practices.
While each subsidiary in the subject firm
had a profit-creation mandate, measuring
customization of HRM practices and its rela-
tionship with subsidiary performance does
not address the point that one incentive to
standardize HRM practices is to reap benefits
that may be realized elsewhere in an MNC
or across the MNC as a whole. Thus, future
research may build upon this research by
simultaneously examining the relationship
between customization of HRM practices and
performance at multiple levels of analyses
(e.g., whole firm and subsidiary). Such analy-
ses would likely require collecting data from
multiple MNCs and their subsidiaries in order
to have variance on key variables at the differ-
ent levels of analyses.
In this study, we focused on HRM strat-
egy. However, subsidiary performance may
JULIE A. COGIN is an associate professor in the Australian School of Business at the
University of New South Wales. Her research interests surround the HRMperformance
relationship. This includes understanding how components of an HRM strategy can be
be influenced by other company functions
(e.g., marketing). For example, subsidiary
performance could be shaped by the level of
discretion managers have to customize sub-
sidiary marketing activities. Future research
could extend this study by conducting cross-
disciplinary research that examines multiple
functions (e.g., HRM, marketing, sales, etc.)
in combination.
A potential limitation of any study exam-
ining financial performance of subsidiaries of
an MNC is the possible distortion of results
due to transfer pricing. Given the low level
of intercompany transactions and the test-
ing of national tax rates on the dependent
variables, we are confident that the results in
this article are not significantly affected by
transfer pricing.
These limitations notwithstanding, our
study makes an important contribution to
the IHRM literature. By using a global, multi-
divisional sample of subsidiaries, this study
provides evidence that a customized HRM
strategy can have important performance ben-
efits for MNCs in uncertain environments.
Furthermore, our study addresses calls for
research that contextualizes the HRMperfor-
mance relationships by illustrating how uncer-
tainty in the business environment plays an
important role in determining the performance
benefits of HRM practice. We believe these
insights extend our understanding of MNC
subsidiary performance and provide a founda-
tion for future exploration in this domain.
Note
1. To further rule out the possibility that our results
were biased by transfer pricing, we conducted
additional analyses where country corporate tax
rate was included as a control variable. Results of
this analysis showed that corporate tax rate was
not a signicant predictor of either dependent
variable, nor did the inclusion of this variable
change the results of our hypothesis tests.
Human Resource Management DOI: 10.1002/hrm
 INTERACTIVE EFFECTS OF CUSTOMIZED HRM AND UNCERTAINTY ON MNC SUBSIDIARY PERFORMANCE 717

congured to realize superior organizational outcomes (in both prot and not-for-prot
sectors) as well as the impediments to HRM professionals operating as true strategic
partners. She is also interested in HRM research methods, the progress of the eld, and
designing research that does not suffer from major methodological problems.

IAN O. WILLIAMSON is the associate dean of international relations in the Melbourne

Business School (Australia). He also serves as director of the Asia Pacic Social Impact
Leadership Centre, where his focus is on developing effective partnerships between
business schools, not-for-prot, for-prot, philanthropic, and government entities to ad-
dress intractable social issues. His research examines how the development of effec-
tive talent pipelines inuences organizational and community outcomes. Specically,
he examines how the recruitment, selection, and retention of employees inuence rm
performance, talent management in small businesses, the management of diverse work-
forces, and the role of human resource practices in driving rm innovation.

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APPENDIX
Participants were asked the extent to which they customized the following HRM practices to their
subsidiary.
Selection practices such as selection criteria, method, etc.
Recruitment method such as internal versus external
Training volume
Types of training programs
Purpose of performance appraisal
Performance appraisal criteria
The use of multiple performance appraisers
Remuneration criteria (performance versus seniority)
Pay-for-performance
Remuneration structure

Human Resource Management DOI: 10.1002/hrm