Human Resource Management In Eastern Europe Essay

, Research Paper

1. INTRODUCTION 2

2. ENVIRONMENT 3

History 3

Political and economical context 4

Educational system 5

Cultural aspects 6

Business environment 7

3. EASTERN EUROPEAN HR PRACTICES 9

Recruitment 9

Compensation 9

4. EU ENLARGEMENT 11

5. AN EASTERN EUROPEAN HRM MODEL? 13

6. CONCLUSIONS 15

Ideas for future research 16

7. BIBLIOGRAPHY 17

1. Introduction

Many Western firms are rapidly investing in, or forming joint ventures with, firms in Eastern European countries. Despite the growth in Direct Foreign Investment (DFI) in Eastern Europe, Western managers know relatively little about the Human Resource Management (HRM) practices of these countries. In this paper HRM practices are discussed in Eastern European states, such as Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Russia. Although there are both historical and cultural differences between these countries, these countries will be dealt with together, as they all have numerous elements in common that enable managers or researchers to see them as a whole.

The purpose of this paper is to analyze if an Eastern European HRM model can be constructed on the basis of an analysis of Eastern Europe on several areas. First, the environment is analyzed, in which several aspects are covered, such as political context and history. The emphasis lies on culture and (possible) implications for business, and HRM specifically. Secondly, specific Eastern European HR practices are dealt with in chapter three. Here too, several topics are analyzed. In the fourth chapter the implications of EU enlargement are considered in relation to Eastern Europe. As many of these countries are potential candidates for a membership of the EU, the necessary changes and implications are investigated. Based on all the forgoing, an attempt is made to establish an Eastern European HRM model in the fifth chapter. Finally, in chapter six, conclusions are given followed by directions for future research.

2. Environment

The analysis of the environmental aspects of Eastern Europe include the following aspects:

+ History

+ Political and economical context

+ Educational system

+ Cultural aspects

+ Business environment

History

Looking at Eastern Europe’s history, several main events can be identified that have an impact on today’s business or cultural situation. First, the two World Wars had a major impact on the creation of the political and economic gap between Eastern and Western Europe, especially the Second World War. Eastern Europe came under the influence of the former Soviet Union, which implied that all countries were under direct political, military and economic control resulting in a very centralized economy. This type of economy had a profound impact on the HRM practices that were used in those countries, which is further explained in the next chapter. Secondly, under Gorbatsjov as the president of the former Soviet Union, contact with Western Europe was sought, resulting in the break-up of the Soviet Union and the start of a new era for Eastern Europe. Slowly, but gradually a shift was realized from a central towards a market economy, again with the necessary implications for (HR) management.

The qualities that were required by managers of Eastern European enterprises were the ability to bargain, the possession of a network of suppliers and purchasers, and the ability to manipulate production and financial data. This style of management was driven by the response to the allocation of resources by a centralized bureaucracy in which rivalry between enterprises for resources led to unnecessary hoarding of materials.

The history of Eastern Europe still impacts today’s business operations. Many personnel directors and executives have their jobs because of Party connections rather than technical expertise. Creativity and original thinking was not encouraged or reinforced under the centralized government control. Top down communication was the norm. Common US practices such as MBO or 360-degree feedback, or Western European structures such as strong employee involvement or self-management work teams will not be easily transferred to the Eastern European work environment. Business practices that stem from political corruption or organized crime activities are still realities and may violate other countries’ laws and ethical norms. Despite the great changes that have occurred in Eastern Europe, western managers must patiently accept these differences and strive to form successful business relationships given environmental and political constraints.

Political and economical context

As mentioned before, the dominant political system in Eastern Europe was communism. This implied that a lot of the large companies were state-owned and the government heavily influenced trade unions. The view projected to the outside world by communist governments, was that of in a worker’s state, such as the Soviet Union and its Eastern European satellites, the interest of the workers were as one with the government, because the government was controlled by a dictatorship of the proletariat. The problem with such a unitarist system is that it allows for little realistic criticism that might afford changes and reforms to meet real challenges. In theory trade unions were a separate entity from the Communist Party, but in reality they were often controlled by Party members. This meant that under communism, unemployment was unknown due to manipulation with statistical data and hidden unemployment (a certain job is being done by more people than necessary, just in order to provide more people with a job).

The transition from a central to a market economy was initiated together with the transition from a communist to a capitalist political regime, and was started in 1989 after the fall of ‘the iron curtain’. This transition had several consequences. First, due to the hidden unemployment and in an attempt to make organizations more efficient and to cut costs, unemployment rose. Still now a major problem faced by Eastern European countries is persistent structural unemployment. Secondly, after a couple of years a lot of state-owned companies were privatized. In these companies usually an employee culture of the planned economy remained.

Educational system

The educational system has been and still is rather good. An analysis of 256 Russian CEO’s from all over the country, the overwhelming majority (91,4 %) of them had college or graduate degrees. In the Eastern European labor markets a clear emphasis is put on a technical background, more than a formal management education. This was also backed up by the analysis: about 60 % had engineering and other technical backgrounds, whereas only around 20 % had a formal management degree.

However, due to this strong emphasis on a technical background, there is a significant shortage of local executive talent. Expatriates remain a key component of the management market – an estimated 25 percent of all managers in Eastern European firms are expatriates. On the other hand, this lack in education is rapidly changing. Also due to the efforts to prepare for EU enlargement, a shift in education is clearly noticeable. More and more professional management studies are initiated and further developed, sometime through the help of an exchange program (for instance CEMS). Therefore, we also see a shift in recruitment: more sophisticated methods of attracting managers – such as the use of university recruiting and executive search – are on the upswing for senior-level managers, gradually replacing newspaper advertising and word-of-mouth.

Cultural aspects

This part of the environment is analyzed with the theory of Hofstede’s (1980, 1993) framework of cultural dimensions. He defined five dimensions along which he studied the cultural specificity and its impact on leadership and management practices:

1. Power distance

Power distance is the degree of inequality between people that the population of a country considers to be normal.

2. Individualism versus collectivism

Individualism is the degree to which people in a country prefer to act as individuals rather than as members of groups.

3. Masculinity versus femininity

Masculinity is defined as the degree to which such ‘masculine’ values as assertiveness, competition, and success are emphasized as opposed to such values as quality of life, warm personal relationships, service, and so on.

4. Uncertainty avoidance

Uncertainty avoidance is the degree to which people in a country prefer structured to unstructured situations.

5. Long-term versus short-term orientation

This element refers to the degree of planning in terms of time in an organization.

Regarding Eastern European managers, Hofstede hypothesized that they would be characterized by a high power distance (in other words, they would display high tolerance toward inequality in the society and business relationships), high uncertainty avoidance, medium individualism, and low masculinity. As a comparison point, the United States are characterized by a low power distance, high individualism, high masculinity and low uncertainty avoidance. These hypothesizes were further backed up by study performed by Bollinger, who found the exact same results.

Analyzing these results, we see that the Eastern European culture differs from Western cultures, depending on what country. For instance Western European countries, such as Germany and the Netherlands have more similarities with this culture than United States culture or Japanese culture. In order to develop and manage adequate HR policies, the factor culture plays an important role in this process. This Eastern European culture is still influenced by the past of communism and central economy.

Business environment

The eastern European business environment is very complex and very different from the western business environment. Despite Eastern Europe’s large consumer base and natural resources, western businesses have not been very eager to invest in these countries on a large scale, such as in China. As knowledge increases about Eastern Europe and its business opportunities, and as countries in this region join the EU, increasing western attention will focus on conducting business in this region. Yet, relatively little has been written to guide western managers in Eastern Europe.

The system of Human Resource Management and industrial relations in Eastern Europe has been undergoing enormous change since 1989 and will continue to do so for some time to come. The fundamental problem is the transition from a unitarist system, very tightly controlled by communist governments that influenced every corner of the economy, to a more pluralist system operating in some type of free market. It is obvious to most observers that some form of pluralistic balance needs to be achieved to contain uncontrolled free market forces. At present most Eastern European countries are stuck in the transitional phase between these two states. For instance, work habits have changed dramatically – with 50-hour weeks and taking work home more and more the norm. At the same time, absenteeism is low, indicating a strong commitment to the job.

3. Eastern European HR practices

In this chapter the following current Eastern European HR practices are analyzed: recruitment and compensation.

Recruitment

Attempts by Eastern European firms to modernize their workforces by recruiting young graduates and contract staff have left older employees on the side. Underqualified graduates and disabled people are also suffering as a result of Eastern Europe’s drive for free-market flexibility. Firms in former socialist nations need to embrace diversity if they are to avoid repeating Western bad employment practices. In comparison to the West, Eastern European HR practices are not mature. Eastern European countries focus more on personnel practices than the integration of HR practices with corporate strategy. At the same time, managerial practices are becoming more westernized – an ‘East Goes West’ trend that is expected to continue. The sleepy, bureaucratic firm of pre-reform days is a thing of the past.

Compensation

On this area we see a dual path. In the lesser-developed Eastern European countries, such as Russia and Rumania, foreign investors usually enjoy special privilege to import whatever materials and products they may need in their operations, and thus are more able to obtain these luxury products than domestic firms. These imports may be used to recruit, retain, and motivate workers. Therefore, western managers accustomed to providing challenging work and learning opportunities to motivate high level employees instead emphasize material over intrinsic rewards due to the lower standard of living in these countries.

On the other hand, in the Eastern European countries that have a relatively high standard of living, salary increases for local talent are high – even in the lowest categories (state-owned and manufacturing firms), they have grown by more than 25 percent in a two-year period, and in the new private firms they have nearly doubled. These increasing salaries are dictated by the difficulty in attracting good local managers. In this fluid market, many firms review salaries twice a year or more – and benefits for local managers are approaching the levels of expatriates. But, according to a new EIU report, cash alone is not the key to retention. Staff in crisis-prone countries remains fixated on salaries. But where market economies have been starting to develop, a fair salary will suffice, provided employers deliver on a package of other rewards, incentives and working conditions. Benefits packages vary from country to country, but certain perks have emerged as key motivators across the region: cars and life & health insurance. Increasing stress is being laid on enhanced job satisfaction.

4. EU enlargement

European enlargement is forcing Eastern Europe to accelerate economic reforms, and there are huge pressures on HR to step up business performance. Hungary is most likely to have the easiest accession into the European Union of all the Central and Eastern European states. Gross domestic product grew by 4 percent in 1997 and was even bigger in 1998. But the problem faced by Hungary, along with its neighbors, is persistent structural unemployment. EU membership is set inevitably to increase unemployment in the region as countries strive to meet accession targets on inflation and spending. There is reluctance by business to invest in some regions. The likes of companies as PepsiCo and Shell may be setting up headquarters in Budapest, but investment in the region is clustered and this poses a problem in recruitment. A lack of labor market mobility means that many potential investors believe that they will be unable to get the kind of skilled workforce they need in certain regions. The result is that the local workforce remains unemployed and untrained. And while the business community worries about whether mobility is possible across borders, it cannot even be achieved internally. Meanwhile, EU member states fear a mass immigration of Central Europeans seeking work.

That there are also major benefits to be achieved for western companies as well as for the Eastern European countries themselves. This is a conclusion from an ERT report executed in March 1999. The ERT is a forum of 47 European industrial leaders aiming at promoting the competitiveness and growth of Europe’s economy. Since its creation in 1983, ERT has contributed significantly to an improved dialogue between industry and governments, at both national and European levels. The ERT identifies the most important issues, analyses the critical factors and makes its views known to the political decision-makers at national and European level by means of reports, position papers and face-to-face discussions. At European level, the ERT has contacts with the Commission, the Council of Ministers and the European Parliament. Every six months the ERT meets with the government that holds the EU presidency to discuss priorities. At national level, each Member has personal contacts with his own national government and parliament, business colleagues and industrial federations, other opinion-formers and the press. The ERT has close contacts with UNICE (Union of Industrial and Employers Confederations of Europe), the official representative body of the European business and industry world vis- -vis the European institutions. The ERT can thus influence EU policies about HR both indirectly as directly.

In this report the ERT stresses that the EU should not wait with the enlargement negotiations with the five ‘first wave’ candidate countries; the Czech Republic, Estonia, Hungary, Poland, and Slovenia. They urge all parties to work together to establish an ‘East-West Training and Skills Program’ to improve skills and attitudes to work in the new free-market economies of Eastern Europe. Furthermore, members of the European Round Table are convinced that the solution to unemployment lies in the creation of new jobs and the continual transformation of existing jobs. For instance, the report reveals that companies such as Lafarge and Siemens have successfully penetrated the Czechian and respectively Slovakian market, with which they got access to a growing market and highly skilled labor. On the other hand, these countries benefited by best management practices having introduced and new career opportunities being realized.

5. An Eastern European HRM model?

In general, the HRM world is divided in three blocks: Europe, the United States and Japan. Strikingly, two of these groups are perhaps very large in economic power, but are also single countries. Inherently, cultural cohesion in these groups is much larger, because there are not divided by a difference in history, currency, politics or even religion as much as Europe. This means that even though Europe is seen as one of the three clusters in HRM, cultures and therefore management practices very widely. Therefore, due to the large differences between European countries, dealing with Europe as a whole is unjustified and will result in HRM policies that are either wrong for certain countries or get stuck at a too global level. This last option will render them unusable because they could be applied everywhere and don’t in effect give specific conclusions or implications. In order to effectively aid managers to develop and manage HRM policies, Europe can be divided into three blocks: Northwest Europe, Mediterranean Europe and Eastern Europe. Under Eastern Europe also fall Central European countries, such as Poland, Czech Republic and Hungary. Of course this division is highly subjective and can also be brought about in five areas or more, but one has to realize that on the one hand the areas’ HRM relevant characteristics must be coherent enough to be able to group and on the other hand, the division can not be realized in too great detail so that the different parts lose its significance in terms of economic and geographic size.

Researchers (e.g., Adler, Campbell & Laurent, 1989; Hofstede, 1980) have questioned the universal application of western HR theories and models outside its territory. Research reports that differences in cultures, values and attitudes impact the transferability of HR practices across national boundaries and that these factors must be accounted for when conducting business outside western countries. An possible solution for this problem is to apply western HRM practices to Eastern Europe requires a dual perspective. A dual perspective is a mix of both domestic and imported practices, and recognizes that management practices are influenced by – and bounded by – national culture. Using a dual approach, a customized HRM model integrating both personal and domestic experiences with imported, foreign experiences can be developed.

Based on all the given information, concluded can be that Eastern European HR practices can best be analyzed by examining the impact of the regional environment (e.g., political and economic climate, culture, education system) and imported western management practices on an organization’s business and human resource strategies. Such an approach is important as it can be used as a platform for local managers to address specific managerial issues, and for HR professionals and western managers to customize imported theory and practices so that cultural differences are recognized.

6. Conclusions

Moving from centrally planned to market economies has been a hard process for Eastern European countries, and cultural differences remain a big issue for multinationals to cope with. The first stage has been largely completed, with company ownership issues settled and business lines drawn. But organizations are dealing with immature labor markets where recruitment and training needs are hard to meet, and many HR practices simply do not translate either in language or culture.

The formulation of an Eastern European model in terms of Human Resource Management seems a useful one, since significant similarities can be found in the areas of history, culture and educational system. An important point however has to be made with regard to the dual economic development that has occurred and is still taking place in Eastern Europe. The central European countries seem the ones that are on their way to a true market economy the fastest. This is also supported by the fact that these countries are the most probable to enter the EU in the coming years. This gradual entry in the EU of Eastern European countries can cause for an even stronger division between countries in this area. Since acceptance by the EU has numerous benefits for western multinationals, the drive to invest in these countries rather than in ones with less economic development is even reinforced, thereby enlarging the gap between the countries. However, if the EU succeeds in enlarging Europe without delay and involving also the countries with less economic growth, this development can make Eastern Europe also stronger as a whole, thereby intensifying the band between these countries that has existed for so long.

Ideas for future research

In this paper Europe as a separate HRM area, is further divided in three parts. However, it might be necessary to make the borders between different European clusters even more distinctive. Further research is needed to explore to possibility to deal with Eastern European as a separate area of management. In terms of Human Resource Management, emphasis should be put on how to motivate and train Eastern European workers who are accustomed to systems that neither encouraged nor reinforced quality performance and change.

7. Bibliography

Books and articles:

+ Ardichvili, A; Cardozo, R. N. & Gasparishvili, A; Leadership styles and management practices of Russian entrepreneurs: Implications for transferability of western HRD interventions, Human Resource Development Quarterly, San Fransisco, Summer 1998

+ Beardwell, I. & Holden, L; Human Resource Management: A contemporary perspective, Pitman publishing, 1994

+ Finders, keepers, Business Europe, New York, October 21, 1998, Anonymous

+ Hofstede, G; Motivation, leadership, and organization: Do American theories apply abroad?, Organization Dynamics, 1980

+ Kiriazov, D; Sullivan, S. E; Tu, H. S; Business success in Eastern Europe: Understanding and customizing HRM, Business Horizons, Greenwich, Jan/Feb 2000

+ Kiriazov, D; Sullivan, S. E; Human Resource Management in Eastern Europe, Bowling Green State University, 1999

+ Schneider, S. C. D; Implications for learning: HRM in East-West European joint ventures, INSEAD organization studies, 1996

+ The East-West Win-Win Business Experience, The European Round Table of Industrialists, Brussels, 1999

+ Thirkell, J; Scase, R. & Vickerstaff, S; Labour relations and political change in Eastern Europe: A comparative perspective, UCL Press, 1995

+ Walsh, J; Countries must solve jobs crisis before EU accession, People Management, London, April 30, 1998

+ Welch, J; Older workers excluded as Eastern Europe modernizes, People Management, London, July 15, 1999

Internet:

+ http://www.kornferry.com/hr_eur.htm

+ http://www.ert.be