Expanding into China? What foreign employers should know about human resource management in...

Business is booming in China. In the first half of 2005, total United States trade with China grew almost 24%, to $96 billion. Foreign investors launched about 41,000 new companies in China in 2003. There were roughly 460,000 approved foreign companies in China at the end of 2003 (Zhou, Lu, and

Many of these 460,000 firms discovered that human resource management--recruiting, selecting, training, appraising, and compensating employees, and ensuring their safety and welfare--is different in China (Zhu and Dowling, Summer 2000). For example, threatened by the All China Federation of Trade Unions (ACFTU), the notably anti-union Wal-Mart recently agreed to let its Chinese workers unionize if they asked (MMR, 2004).

Surprises like these stem from two things. First, while China has moved far from central planning, vestiges of central planning remain. Examples include a government-run mandatory personnel file system, a single union, and restrictions on city migration. So, as one study concludes, "... 'Western' HR practices are becoming more prevalent in China, although the legacy of traditional practices endures and new challenges are emerging" (Zhu, Cooper, De Cieri, and Dowling, 2005). Managing people in general, and human resource management in particular is still different in China (Zhu and Dowling, June 2002).

Second, the employer will confront cultural differences when entering China, so its actions may produce unexpected results. For example, in a society that emphasizes saving face, performance feedback needs to be more oblique than in the West. Many Chinese still think of their employers more as family than as employers, and may expect employers to provide for their social welfare (Purdum, 2005). Many Chinese candidates are reluctant to sell themselves during an interview because of a strong cultural bias against boasting. Western firms' emphasis on employee empowerment may be somewhat alien to those raised in the more traditional, rule-driven Chinese business culture (Richards, June 2002a).

Understanding these differences and knowing what to expect can mean success or failure for the employer, because human resource practices affect organizational performance (Law, Tse, and Zhou, 2003). One study examined the relationship between human resource management and organizational performance in 62 Chinese-Western manufacturing joint ventures. The researchers found a positive relationship between high-performance human resource management practices and firm performance (Bjorkman and Xiucheng, 2002). In a study of human resource practices throughout the Asia-Pacific region, Watson Wyatt found that "Asia-Pacific companies with the best human capital management practices deliver significantly more shareholder value than those with poor people practices" (Watson Wyatt Worldwide, 2002). These people practices include, for example, recruiting and retention excellence, clear total rewards and accountability, and communications.

The present paper does not try to provide a comprehensive guide to managing the human resource function in China. Instead, it aims to provide foreign employers entering China with a practical understanding of the main human resource management issues they should prepare for, as well as with several important implications of these issues.

Methodology

This paper relies on a literature review of current relevant articles focusing on human resource management in China. Except where a source was needed specifically for its perspective on broad issues relating to China's overall business environment (as with Williamson and Zeng, 2004), we screened papers by "China" and by numerous variants of keywords, focusing specifically on human resource management and its functions, such as "HR," "training," and "employee training." Source papers included refereed research studies, surveys and empirical reports conducted by local offices of international HR consulting firms, and articles from professional journals and news sources.

Since the literature relating to business in China is voluminous, we used several decision rules in choosing articles. First, because China business management is changing fast, we used only sources published 2000-2005 (primarily 2001-2005), except where a paper was needed specifically for its historical perspective (as with Zhu and Dowling, 1994). Second, given our aim to provide a practical understanding of the main human resource management issues, we included, in order of priority: refereed empirical research papers that reported the results of on-site interviews or surveys of employees at facilities in China; survey results of current HR practices in China by HR consulting firms Hewitt, Mercer, and Watson Wyatt; and, for facts regarding matters such as migration patterns, as well as for some additional insights into current HR practices in China, selected articles from professional journals and news sources such as China Staff and China Business News.

To get some perspective on the current state of HR practice in China, we begin with a brief look at China's recent managerial past.

Management in China: Past and Present

There was basically no enterprise-level human resource management in China between 1949 and the 1990s. During this period, the government planned what industrial managers should produce and how. Three "iron" (fixed) practices replaced conventional human resource management. The iron rice bowl gave workers lifetime employment. The iron position meant managers kept their jobs regardless of performance. The iron wage meant enterprise managers could not control wages or benefits. Productive workers received the same pay as those who worked less hard.

Personnel departments had mostly an administrative role (Braun and Warner, 2002). For example, they compiled employee data on matters such as attendance, bonuses, and training course attendance, and maintained such information in each employee's personnel file.

As China's government began opening its markets in the 1970s, it took steps to let managers make more decisions. By 1978 managers could hire and fire employees and institute bonus plans (with restrictions). In 1985 white-collar employees in universities and government became eligible for bonuses, job-related pay, and pay based on tenure.

In 1988 China's government issued the Enterprise Law and in 1992 the "Regulations for changing the methods of operation of industrial enterprises owned by the whole people." These increased the range of business decisions managers could make and made them responsible for their own profits or losses (Zhu and Dowling, 1994). Related policy changes around this time made it easier for employees to change employers. State-owned enterprises soon faced problems attracting and keeping key employees. Joining the World Trade Organization (WTO) prompted further efforts to make China's enterprises more competitive.

Faced with increasing competition and now free to make their own decisions, China's managers have been modernizing their human resource and other management practices (Ding, Ge, and Warner, Spring 2004). In doing so, they face at least three strategic challenges.

Shortages of management and labor

China's employment system is straining to produce the management talent employers require. China's State Council Development Research Center recently noted that Chinese enterprises lagged in developing enterprise leaders. (Xinhua News Agency, 2004a). The Ministry of Personnel similarly said "the high level talents in enterprises remain far from enough to meet the nation's need ..." (Xinhua News Agency, 2004). In June 2004, the Chinese agency charged with overhauling China's unprofitable state-owned companies was advertising for vice presidents and other executives at 22 companies. In some cases, they were advertising for foreign managers to fill the gap (http:// channels.attbusiness.net, 2004). China's foreign enterprises are expanding their applicant pools by welcoming female staff (Asia Africa Intelligence Wire, 2004b).

Labor shortages are not confined to professional and managerial personnel. China has recently suffered sporadic but significant shortages of non-managerial personnel as well (Qiu, 2005). This may seem ironic, since one of the China's challenges is providing jobs for a rapidly expanding labor force. China's working age population will grow from 928 million in 2005 to 995 million in 2015. Meanwhile, state-owned enterprises will lay off millions of workers as they reorganize to compete in a market economy.

The problem is that most of China's new jobs are and will be in or near cities, while most of the labor force is still in rural areas (Asian Chemical News, 2005). China is therefore undergoing one of the largest human migrations in history. Between 1976 and 2001, the proportion of its people living in cities rose from 17.4% to 36.7%. This will rise to about 49.5% by 2015. Between 2003 and 2010, about 106 million people will move from China's rural areas to cities (Financial Times, 2005).

Not wanting hundreds of millions of workers to flood cities looking for jobs, China's government is managing this migration. For example, the country's hukou registration system "severely restricts labor mobility" (Financial Times, 2005). Separately, there are numerous impediments to a smoothly functioning employment services system. These include a still-inadequate recruitment infrastructure and vestiges of government controls, such as China's personnel file system. The latter requires employees to transfer their government-administered personnel files to new employers before changing jobs.

The net result is that employers are facing short-term, localized labor shortages. For example, in 2004 there was reportedly an undersupply of two million construction workers in Guangdong province (Asian Chemical News, 2005).

Rising turnover rates are exacerbating the labor shortages. Hewitt Associates (Sept 2005) found that average employee turnover rate increased from 8.3% in 2001 to 14% in 2005. Several things account for this, including labor shortages that reward job-hopping and relaxed inter-firm mobility restrictions. Inter-firm mobility is especially high among migrants, who account for a majority of workers in China's factories (Knight and Yueh, 2004).

Government influences

Government influences present a second challenge. As a communist country where state-owned enterprises still produce about one-third of the country's GNP, government has more direct influence on corporate strategy in China than elsewhere. For example, in 2005, China's State Council urged that state-owned enterprises reduce excess capacity in some industries (AsiaPulse News, 2005). Similarly, China's State Development and Planning Commission recently prepared a plan to reduce what the Beijing government saw as a growing overinvestment in steel production. Some steel enterprise managers take exception to the government's concerns. One said, "... these officials don't understand the industry--they are still using a planned economy model to oversee us" (McGregor, 2003).

As noted, vestiges of China's central planning remain. These include the hukou migration controls and remnants of the three iron practices, including the personnel file system.

Global competition

Third, managers in China face an intensely competitive global industrial environment. With revenue streams still supported by fast-growing but increasingly competitive domestic demand, Chinese firms such as Lenovo Group are expanding abroad. Lenovo's decision to buy IBM's PC unit "was driven in large part by eroding margins in the PC business and the steady encroachment of foreign brands such as Dell into Lenovo's dominance of a liberalizing Chinese market" (Dickie, 2005).

Whether expanding into or out of China, the challenge in globalization is competing with world-class businesses in their own markets. As one China executive put it, this requires "... bringing your management ability to meet or surpass international standards. If you cannot, then going global will be a trap that will lead you to bankruptcy" (Dickie, 2005).

Given this environment, we turn to the human resource management practices employers use in China today.

Recruiting and Hiring

Recurrent labor shortages and rising turnover mean that commercial success in China depends to an extraordinary degree on effectively attracting, hiring, and retaining employees. As in the West, firms with effective employee recruitment and selection systems are usually in the best position to attract top leadership candidates.

Recruitment

Recruiting in China is similar in many respects to the West. Braun and Warner (2002) conducted interviews in 12 wholly or partially foreign-owned enterprises in China. The 12 differed in their proportions of foreign ownership. There were joint ventures (JVs) with minority (less than 50%) foreign ownership, JVs with majority (more than 50%) foreign ownership, and wholly-owned foreign enterprises (WOFEs) with at least 80% foreign ownership. Braun and Warner found that most enterprises, regardless of ownership, used similar recruitment methods: job fairs, newspapers, and employment agencies for nonprofessional workers. They also used Web-based recruiting (in part because it can take nine weeks for a

print ad to appear). Web recruiting included the companies' own Web sites, as well as online recruiting agencies such as www.51 job.com (Braun and Warner, 2002). Personal contacts and referrals played a relatively limited role, although some employers tried to encourage employees to recommend friends and relatives (Braun and Warner, 2002).

All 12 enterprises used headhunters for recruiting key managerial staff. Because of the shortage of managers, job-hopping is common, as is poaching (more on this later), and rising salaries (Braun and Warner, 2002). Expatriates often fill the void caused by what Mercer Human Resource Consulting calls "an acute shortage of high-level talent for senior positions." These expatriates include "returnees"--Chinese nationals who went abroad for education or work experience (Mercer, 2005).

Lewis found that recruitment in one state-owned enterprise was minimal. Technical and administrative candidates made direct, unsolicited applications, and the employer then interviewed them at monthly recruitment fairs. It recruited production employees directly from schools (Lewis, 2003).

The main recruiting problem is that a sizable discrepancy remains between China's need for employee recruitment and related services and the availability of those services. For example, in America, employers typically recruit entry-level management talent through colleges and universities, but doing so is still a challenge in China. College placement services were unnecessary under the old labor allocation system. Today, many but not all schools have converted their "job allocation offices" into "student employment centers." These offer career planning seminars and recruitment fairs.

Similarly, as of 2004, relatively few employment agencies had emerged to replace China's old job allocation offices. And the agencies that do exist mainly focus on placing senior-level managers, rather than entry- or lower-level employees. The employer preparing to expand into China should expect to have difficulty finding the necessary recruitment services (Chang, 2004).

China's personnel file system is another recruiting impediment. These files record the person's education and work experience as well as comments from former employers. Personnel departments, but not the employees themselves, have access to these files. Government document centers charge the individual employees an annual fee to administer each file. It is difficult or impossible for individuals to sign a contract with a new employer without giving that employer their personnel files. Therefore, fee nonpayment and file transfer delays reduce employment mobility (China Staff, March 2003). Changing residence also complicates the process. Moving to a new city to take a job may require having the state labor bureau check the individual's qualifications (Lewis, 2003).

Poaching employees

Poaching employees--enticing them from their current employers--is a serious matter in China. Under article 99 of the People's Republic of China Labor Law (Labor Law), an employer who does so is liable for economic damages to the former employer. In general, the new employer should verify that the candidate's past employment has ended before the person signs a new employment contract or begins work or receives any compensation (including sign-on bonuses).

Two local legal experts suggest several ways to verify this. (China Staff, November 2002). Ideally, obtain a letter from the past employer verifying that the employment relationship is over and also a copy of the personnel file. If the new employee must start first, he or she should at least provide a letter and warranty certifying that the past employment has been terminated. Employees generally must give at least 30 days notice when resigning.

Selection

Braun and Warner (2002) found that the dominant employee selection method involved analyzing the applicant's resume and then interviewing the person. Employers used psychometric personnel tests sparingly. Most questioned the validity of transferring such tests to China. Some firms used assessment centers, but usually just for the internal development of management staff. Similarly, another researcher found that job interviews were the most important screening tool. He found little use of psychometric tests because few locally validated versions were available (Chow, 2004). Several employers improved interview validity by asking questions based on the specific skills the job required. At the other extreme, interviewers in several firms received no training at all (Braun and Warner, 2002).

Providing Career Development and Training

People in China seek employment in firms with superior training and development programs, and such firms find it easiest to recruit. Employees readily switch employers for better career development opportunities. Even in a state-owned enterprise, "the level of ambition and commitment to learning and self-improvement among the younger employees ... was quite remarkable" (Lewis, 2003).

In response, many employers have instituted sophisticated training programs. Some firms, such as Siemens China, also create career plans for each employee. The plans take into account the employee's career interests and aspirations, as well as his or her performance (Asia Africa Intelligence Wire, 2004). However, overall, there is surprisingly little evidence of career-related activities such as career-oriented appraisals, career workshops, and outplacement services.

Training and management development

Training and development is a huge issue in China, for two reasons. First, for many firms, transforming recruits into skilled employees is a challenge. It takes extensive training over a year or more to socialize new employees into the firm's values and ways of doing things and to provide them with the skills they need to do their jobs. For example, since 1998, new college graduates joining the local China offices of L'Oreal have entered a one-year training program. Each college graduate has a mentor to help him or her "learn the ropes" and attends training courses on topics such as communication skills (Wells, 2003).

Second, training is a tangible sign of commitment to the employee's career success, and, to that extent, is a valuable employee recruitment and retention tool. For example, Siemens, which established its Management Institute in China in 1997 to provide training and development programs, received over 50,000 job applications between October 2003 and February 2004 (Asia and Africa intelligence Wire, 2004).

Like L'Oreal and Siemens, hotel group Shangri-La, with 17 properties in China, recently opened a training center near Beijing for staff working at its Chinese hotels. Their center provides voluntary residential courses for all staff, from housekeepers to management, including seminars for managers, of five to 12 weeks duration (Caterer and Hotelkeeper, 2004).

Braun and Warner (2002) found that most employers used both external and internal training. External training consisted of specialized courses at local universities and training by local and international consultancies. Internal training included classroom programs run by in-house trainers, on-the-job training, formal mentoring, and short-term assignments abroad (three months to one year). Hewitt Associates' Outsourcing in Asia-Pacific survey found that about 18% of Greater China employers (including the PRC, Taiwan, and Hong Kong) recently planned to outsource training (China Staff, April 2003).

Training was less formalized in the state-owned enterprise Lewis studied. It had no training function for technical employees. Instead, hardware and software vendors supplied the training, outside the enterprise. There was also little evidence of formal training for managers or administrative employees. However, the enterprise made available "extensive self learning facilities" for all employees (Lewis, 2003).

Appraising and Compensating Employees

After hiring and training employees, the employer needs to appraise their performance and compensate them.

Appraising performance

Surveys suggest that almost all employers, at least in and around Beijing and Shanghai, appraise employee performance. China Staff summarized one relevant survey by Hewitt Associates (China Staff, November 2002). About 78% of employers reported having a performance management system--a system that involves setting goals for employees and then appraising and paying them based on how they accomplish those goals. About 9% lacked formal performance management systems of any kind, while about 8% reported having, not performance management, but a simple, non-goal-based performance appraisal system.

Also, based on the Hewitt survey, employees are generally involved in the appraisal process. About two-thirds of companies report that employees participate in goal setting at the beginning of the performance period, personally complete self-evaluation forms, review and discuss the evaluation form that the manager completes, and sign the completed evaluation form.

As in the West, the vast majority of responding employers use appraisals for determining salary increases, helping to coach and develop employees, assessing performance, improving performance, and communicating individual performance expectations and accountabilities.

In their study, Braun and Warner (2002) similarly found that all the firms they studied used some type of annual performance appraisal system. Consistent with the Hewitt survey, several had implemented performance management programs. These firms also generally developed training and development plans based on the appraisals for these employees. At the other extreme, several firms used non-objectives-based annual performance appraisals, sometimes without translating the appraisal forms into Chinese.

In a study of three joint ventures, the American and European companies used 360 appraisal, which meant having not just the supervisor but the employee's peers and customers appraise him as well. The Japanese joint venture used a more traditional supervisor-subordinate "one way" appraisal method (Zhou et al, 2005).

Appraisers should take culture into account and should base the feedback on facts, rather than on personal comments (Zhou et al, 2005). Objective, behavior-based feedback ("here's what you did right and wrong") is the norm in the West. However, criticism still tends to be relatively muted in China (Hempel, 2001).

Compensating employees

In the West, job evaluation and compensation surveys play key roles in compensation management. The employer links pay rates or, more usually, pay ranges, to pay grades, thus creating a wage structure. This structure reflects how job importance (measured in points) relates to pay. The employer usually gangs a number of jobs into pay grades to avoid having separate pay rates for hundreds or thousands of jobs. Job similarity--often in terms of a similar number of points--determines the grade in which the employer places a job. The employer then prices pivotal benchmark jobs based on compensation surveys.

Studies confirm that employers do use job evaluation and grading in China. In the Braun and Warner study (2002), all 12 employers used some form of job grading. Many used standardized job evaluation systems like those from Hay or Watson Wyatt. However some used simpler grading systems they developed themselves; they were growing so fast that using too formal a system didn't make sense.

Companies in China actively review compensation surveys produced by international consulting firms and benchmark their competitors' pay (Braun and Warner, 2002). Enterprises in China reported top management salary increases of 8.2% for 2004 and about 7% for manual labor (Hewitt, 2004). In China, the phrase "equal pay for equal work" often refers to trying to set local management pay levels to equal as those of expatriates (Fealy and Kompare, 2003).

Satisfaction with compensation

Surveys suggest that employees in Asia-Pacific in general, and in China in particular, tend to express low levels of satisfaction with their compensation and benefits. According to findings from Watson Wyatt Worldwide's WorkChina[TM] report, employee dissatisfaction with pay in China focused mostly on benefits and opportunities for bonus pay (Watson Wyatt, 2005). Hewitt Associates found that only 25% of the 18,000 employees surveyed in China in 2003 were satisfied with their benefits (Hewitt, July 2004).

Performance-based pay

A long history of central planning notwithstanding, employees in China like performance-based pay (Baruch, Wheeler, and Zhao, 2004). In one study of employee motivation, Chinese employees ranked their preferences (from high to low) as salary, days off, merit pay, bonuses, housing provisions, cash allowance, overtime allowance, and individual bonuses (Chiu, Luk, and Tang, 2002).

It appears that most international firms in China now have some type of performance-based pay plan. For example, among Guangdong-based international companies, Hewitt found that 90.2% of surveyed firms used variable pay as of 2005. With recruiting a challenge, Hewitt recommends more emphasis on retention-based pay, particularly in the form of deferred cash (Hewitt, Sept 2005).

The 12 employers in Braun and Warner's study (2002) based bonuses on both individual and collective performance. For upper-level managers, the wholly-owned international enterprises tied bonuses more to wider, collective market-area goals. For lower-level managers and manufacturing staff, individual performance was more important. In general, the employers followed their parent firms' global or regional pay policies in determining which percent of the bonus payment to attribute to individual versus collective performance. Hua An Fund Management recently instituted a new performance-based pay plan for its 25 direct sales employees. The previous salary/bonus ratio was 60/40. The new ratio is 30/70 (Dahal, 2004).

State-owned enterprises are installing their own incentive plans. For example, under one plan, they will pay about 4% of chief executives with below-average performance annual salaries about a third of what they pay average and above-average performers (China Staff, February 2005). Lewis found that research and development engineers' pay in one state-owned enterprise had four components (Lewis, 2003). These included a monthly base pay of about 1000 yuan; a monthly production bonus (based on factory production) of 500 to 1000 yuan; an annual profit-related bonus (linked to the enterprise's profit performance) of about half the person's base pay; and an annual bonus equal to about two months' pay. The engineers earned between 26,000 and 32,000 yuan per year (Lewis, 2003).

Pensions and benefits

Some benefit payments are unique to China. For example, employers must pay relatively high percentages of wages into China's version of the Social Security system, as well as include pension and housing funds and medical and unemployment insurance payments. These payments may amount to 40% to 60% of the employees' wage (Braun and Warner, 2002).

In 1995, China's State Council called for a new unified three-part pension system. These parts are a basic government-sponsored pension, an employer-sponsored voluntary pension, and individual employee savings and investments. The government-sponsored pension aims to provide about 50% to 60% of the city average base wage. The employer-sponsored pension funds (or enterprise annuities) are voluntary plans. They generally allow both employer and employee contributions up to set maximums. Most are insured annuity products (Hewitt, July 2004).

Safety, Unions, and Employee Relations

Safety

Provisions of the People's Republic of China's Labor Law require employers to provide a comprehensive safety and hygiene system for employees, including any necessary protective measures (Bosco, 2003).

While safety may not have the same prominence in many Chinese factories as in the West, things are changing. The trend is to bring safety practices in line with Chinese legislation and to provide a safer and healthier environment for workers. For example, in some Guangdong factories that manufacture for Nike and Reebok, foreign workplace safety experts conduct training courses to help workers identify workplace hazards and prevent injuries (China Staff, June 2002).

Unions and labor relations

As Wal-Mart discovered, the union movement is alive and well in the People's Republic of China. The only union China permits is the All China Federation of Trade Unions (ACFTU) (Asia Africa Intelligence Wire, October 11, 2005). China has about 906,000 trade unions affiliated with the ACFTU, with 123 million members. About 40% of the two million private companies have trade unions, representing approximately 67% of private-sector employees. Of the approximately 460,000 foreign companies in China, 20% have trade unions (Hewitt, Nov. 2004).

A report by Hewitt Associates LLC, "Trade Unions in the Private Sector (China)" provides a picture of the trade union movement in China today (Hewitt, Nov. 2004).

China's Trade Union Law as amended 2001, its China's Company Law, and its Regulations on Collective Contracts, regulate trade unions. The Trade Union Law encompasses both foreign and domestic enterprises, as well as nonprofit organizations and government agencies. Its articles stipulate, among other things, that employees form unions on a voluntary basis but those trade unions "should be established" in enterprises with more than 25 employees.

There is some ambiguity in the Trade Union Law. For example, must firms with 25 or more employees have a union, or only if employees request one (Hewitt, Nov. 2004)? Similarly, the Trade Union Law does not specify whether it is the unions' or the employees' or the employers' responsibility to set up the union (Hewitt Nov. 2004). Some local governments publish their own Trade Union Law implementation regulations.

The Trade Union Law gives unions certain responsibilities. Unions are to represent and organize employees to participate in democratic activities, implement decisions of members, educate the workers about ideology, and protect the special interests of women workers. They can also negotiate agreements, process grievances, and monitor safety issues. Union officials may attend any meeting company management holds to discuss issues of importance to employees, including compensation and discipline. The employer must notify and consult with its unions on collective dismissals (Hewitt, Nov. 2004).

After years of nonadversarial union-management relations, unions in China are growing more aggressive. For example, in response to an increase in the number of employer-employee lawsuits, the National People's Congress (NPC) began inspecting enforcement of the Trade Union Law in August 2004. Subsequently, the ACFTU announced it would "blacklist" any foreign company refusing to let its workers unionize. It has also been more active in identifying multinationals as noncompliant and in monitoring compliance with labor standards, such as the minimum wage provisions (Hewitt, Nov. 2004).

Recently, unions have focused on two main tasks. First, because most laborers in private enterprises are migrants from outside the cities, unions are organizing these migrants. Second, they are addressing the serious problem of wage defaults by enterprises, particularly involving migrant workers. For example, they are lobbying the government's Labor Department to supervise and inspect enterprises' wage payments.

China has also taken steps in the past few years to encourage employee union representation. For example, since May 2004, the Regulations on Collective Contracts allow employees or employers to propose in writing that collective negotiations be opend (Hewitt, Nov. 2004).

While unions are certainly becoming more active, most cooperate with management. In general, there is little practical interference by unions in company operations (Hewitt, Nov. 2004).

Employee relations and communications

The evolution of management in China is on a path similar to what America experienced from about 1890 to the present. From about 1890 to 1930, American employers focused on efficiency, addressing the human element mostly by manipulating working conditions and pay. Starting around 1930, employers turned to improving performance by building morale, teamwork, communications, and leadership effectiveness.

The evolution has been similar in China. From 1949 to the 1970s, China built its industrial base with little attention to the human element at work. Now, as China's managers deal with competition and employee mobility, issues like morale, teamwork, communications, and leadership are becoming more important. As a Hewitt study concludes, "The best employers in Asia believe that people are central to an organization's success ..." (Hewitt, Nov. 2004).

Instituting employee-centered practices will require changes in how many enterprises in China do things. One survey found that many Chinese enterprises now invest heavily in employee recruitment. However, they score lower than firms in most Asia-Pacific countries on issues that promote employee retention, such as building skills and raising morale. Chinese employers also scored low with respect to soliciting input from employees regarding work-related matters and explaining to employees the bases for their pay (China Staff, 2003a). Employee relations in some enterprises are reportedly grim, particularly as they relate to migrant workers (Yardley, 2005).

Employee involvement and interpersonal communications were weak in one state-owned enterprise (Lewis, 2003). Union representatives dealt mostly with welfare matters. Management tried to improve communication, for instance by setting up a Web-based bulletin board for employees. Many of the posted criticisms reflected poor employee-manager communications, such as a lack of praise or criticism. There was little upward or downward communication due to rigid status differences (Lewis, 2003).

Localizing the Human Resource Function in China

Which partner controls the human resource management function in China's joint ventures, and how localized is HR?

Braun and Warner (2002) found that the extent to which the foreign partner could impose its home country human resource management practices depended mainly on the size of the foreign owner's equity stake in the joint venture. In the wholly-owned foreign enterprises, and where the foreign partner had a majority joint-venture share, the foreign partner usually appointed the HR positions. When the Chinese partner had the majority stake, it typically appointed the HR positions.

In some cases, the minority foreign partners did gain control over HR, either through contractual arrangements or by informally influencing the Chinese partner or by providing transfer of HR practices as a resource for the local partner. In the local units of the wholly owned subsidiaries, there was a strong desire not only to staff the HRM functions, but also to establish standardized HRM practices.

However, regardless of who appointed the HR positions, they still generally filled these with local PRC nationals (Tam, 2001). Most of Braun and Warner's (2002) 12 companies then invested very heavily in developing these HR managers. Another study, of local affiliates of three multinationals, similarly concluded that localizing the management team rather than imposing one from abroad was very important for foreign companies in China (Zhou, et al, 2005). A third study noted, "localization of human resources has been a major objective for many transnational corporations in the People's Republic of China" (Law, Wong, and Wang, 2004).

One study aimed to determine the factors contributing to successful HR localization by studying 139 transnational corporations in China. Three factors--whether the employer had identified localization as an important goal, overall localization planning efforts, and the actual human resource management practices the employer put in place--were important (Law, et al, 2004).

HR Practices Across Companies in China

All firms in China must deal with national issues including relatively scarce employment services and an increasingly active union movement. However, how they deal with these issues, and, more specifically, how they manage their HR functions, now depends to a large extent on the ownership form of the firm. As a result, HR management practices very widely among companies in China (Chow, 2004).

Foreign investment enterprises, including joint ventures, generally try to transplant elements of their parent firms' HR practices, and therefore tend to have relatively sophisticated HR programs. These may include, for example, structured selection interview processes, participatory performance appraisals, and sophisticated employee training programs. State-owned enterprises, "... having inherited the historical burden of the planned, socialist economy" tend to fall at the opposite end (Chow, 2004).

Falling in the middle are the small collective-owned enterprises (owned by collectives outside the state run apparatus) and privately owned enterprises such as Lenovo Group Ltd. (Ding, Ge, and Warner, June-August 2004). Generally speaking, the collective-owned and privately-owned have better HR practices than the state-owned (Chow, 2004). However, all firms in China must compete for high-caliber employees. Furthermore, the government encourages state-owned enterprises to become more competitive. There is, for instance, a government-sponsored management buyout program. Therefore, even state-run enterprises are adopting HR best practices (Chow, 2004). However, companies entering China through partnerships, joint ventures, and similar arrangements can still expect to find a wide variety of HR practices among local partner firms.

Summary and Implications

As noted, this paper aims to give foreign employers entering China a practical understanding of the main human resource management issues they should prepare for, as well as to examine several implications of these issues. We summarize these issues and implications next.

* Recruiting and selecting employees

Recruiting. China's employment system is straining to produce the management talent employers require. Because of governmental and other constraints, sporadic labor shortages are not confined to professional and managerial personnel. Rising turnover rates are exacerbating the labor shortages. It is surprisingly difficult to recruit, hire, and retain good employees. Recruitment sources in China are similar in some respects to those in the West. However there is a sizable disparity between China's need for recruitment sources and services and the availability of those services.

In any country, recruiting is always crucial to the selection process, because employers with more candidates can be more selective. In one study, for example, high-performing companies outside China had about four times the number of qualified applicants per position (36.55 versus 8.24) then did low-performing firms (Becker, Huselid, and Ulrich, 2001).

Given this and China's current employment infrastructure limitations, employers should keep several things in mind. One is that recruiting effectiveness depends to a great extent on nonrecruitment HR issues and policies. Employees are highly career oriented and gravitate towards employers that can provide the best career advancement training and opportunities. Firms like Siemens China, with impressive training and development programs, also seem to have the least difficulty attracting good candidates. Employers need to be able to publicize their attractiveness as places to work. Furthermore, the scarcity of employment services makes using the right services doubly important. The employer needs to study and benchmark which recruiting sources are working best. For example, GE Medical Systems improved its recruiting process in the U.S. by developing measures, such as "percent resumes lead to interviews," and "percent interviews lead to offers," and then choosing recruiting services based on measurable performance. Poaching employees is a serious matter in China. The employer should verify that the applicant is free to sign a new employment agreement.

Selection. The dominant employee selection method involves analyzing the applicant's resume and then interviewing him or her. Employers use psychometric tests sparingly.

The relative informality of employee selection and the dearth of testing in China is an issue employers planning to do business there should address. Studies outside China support the usefulness of employee testing: In one study, high-performing companies hired 29.67% of their employees using tests, while low-performing firms hired only 4.26% using tests (Becker, et. al., 2001).

Unfortunately, years of research in the West also shows that most employment interviews--the screening tool of choice in China--are not particularly useful for distinguishing among candidates who will or will not succeed on the job (Dessler, 2005). When the interview is just one selection tool of many, this may not be a big concern. However, where it is the predominant and, often, sole selection tool, as in China, employers need to ensure that their interview processes are effective.

The ideal way to do this is to institute a best-practice structured interview process, as several of the largest foreign firms in China have done. A structured interview is a series of job-oriented questions with predetermined answers that interviewers ask of all applicants for the job. The process shares many of the advantages of a test. Ideally: (1) Write a job description, including a list of job duties, required knowledge, skills, abilities, and other worker qualifications; (2) Rate each job duty based on its importance to the job's success; (3) Write questions that will provide concrete insights into the candidate's ability to perform the job's main job duties: Situational questions pose a hypothetical job situation, such as "What would you do if the machine suddenly heated up?" Job knowledge questions assess essential knowledge, such as "What is HTML?" Past behavior questions tie actual past behavior to the current job's main duties, such as, "What is the most significant action you ever took to help a co-worker?" Willingness questions gauge the applicant's willingness and motivation to do the job (to travel, for instance); (4) Create illustrative benchmark answers for each question, corresponding to a five-point rating scale of excellent (5 points), marginal (3), and poor (1); Finally, (Step 5), have a panel interview each candidate by asking the standard questions and assessing each candidates' answers on the 5-point benchmark answer-anchored scales for each question.

At a minimum, simply use situational, job knowledge, past behavior, and willingness questions tied to the actual duties of the job, rather than traditional but easily faked questions such as "What are your main strengths and weaknesses?"

* Training, appraising, and compensating employees

Training and development is important to both employees and employers in China, both for skill building, socialization, and as a sign of the firm's commitment to employees' careers. Most employers appraise employee performance. Many use modern goal-oriented performance management systems. Most international firms and, increasingly, even state-owned enterprises, use performance-based pay plans. Employers put relatively high percentages of wages into China's version of Social Security, and into pension and housing funds and medical and unemployment insurance payments. Hewitt found that only 25% of employees were satisfied with their benefits.

Training, appraising, and compensation practices are important for all employers. High-performing versus low-performing companies outside China provide more training (116 hours year versus 35 hours), provide a greater percentage of employees with appraisals (95% versus 41%) and pay more of their employees for performance (87% versus 23%) (Becker, et. al., 2001).

Appraising employees. Employee appraisal is particularly sensitive to the cultural realities in China. The real challenge "... comes from the Chinese emphasis on harmony, face and nonconfrontation. There are inherent difficulties in giving and receiving feedback. Employees feel upset and threatened by negative feedback and weaknesses. Even though employees are not supposed to be confrontational, it still creates the tension of a self-defensive mechanism. As a result, performance appraisal becomes part of the formalities of saving face on both sides. The perceived difficulties of conducting appraisal should not be underestimated" (Chow, 2004).

This influences how supervisors should evaluate their subordinates. The appraisal itself needs to follow the formalities of saving face and avoiding confrontational, tension-producing situations (Chow, 2004). In general, it's best to talk in terms of objective work data (as opposed to personal comments like "you're too slow.") For example, in terms of objective work samples, the manager can frame the appraisal in terms of nonpersonal data regarding things like absences, tardiness, quality records, inspection reports, scrap or waste, orders processed, productivity records, material used or consumed, timeliness of tasks or projects, cost compared to budget, product returns, and accident reports.

Compensation. Incentive pay is a second HR practice that is particularly sensitive to the cultural realities in China. "In a collective society, being equal and avoiding competition or conflict are popularly accepted values" (Chow, 2004). Under such circumstances, it is difficult to have sharp distinctions in performance and substantial wage differentials (Chow, 2004). Therefore, group awards have an important influence on Chinese social and work life (Chow, 2004). Although many managers endorse performance-based pay in China, "to preserve group harmony, [individual] incentives should not comprise a significant portion of the package" (Chow, 2004).

As in other parts of Asia, including Japan, team incentives are advisable. They reduce jealousy and encourage a sense of commitment and cooperation. The main disadvantage is that a worker's pay may not be proportional to his or her individual efforts; this may discourage industrious workers. Solutions include having team members commit in writing to putting the goals of the team before their own, and perhaps basing part of each worker's pay on individual (not just team) performance. Team-based incentive firms such as Toyota also traditionally work hard to capitalize on employees' inclinations toward teamwork by encouraging teamwork through their selection, orientation, socialization, and training policies.

* Employee and labor relations

After years of nonadversarial union-management relations, unions in China, while still cooperative, are becoming more aggressive. China's Labor Law requires employers to provide a comprehensive safety and hygiene system for employees. Employers are improving safety and hygiene conditions. Overall, the evolution of management in China is on a path similar to what America experienced, with employers increasingly turning to improving performance by building morale, teamwork, communications, and leadership effectiveness. This is not surprising and reflects growing competition for labor, loosened governmental migration rules, more emphasis on knowledge work, and employees who, like their employers, are better educated and increasingly world class.

Instituting employee relations philosophies, leader training, and communications and morale programs will mean changing the culture and practices at many firms. Employers new to China need to factor in the need for a more Westernized type of adverserial union-management relations, an increasing attention to safety and health issues, and the need for a more human relations-type approach to two-way communications, leadership training, and building morale.

Conclusion: The China HR Situation in Context

The current HR management situation in China reflects broad challenges foreign companies entering China must deal with. These include infrastructure issues, fragmented markets and partnerships, higher costs, and cultural differences. They impact everything managers do in China, not just HR.

First, foreign firms often find that the infrastructure their managerial knowledge depends on is insufficient in China (Williamson and Zeng, 2004). For example, to capitalize on their world-class marketing expertise, multinationals require extensive market research, but market research is often scarce outside major cities (Williamson and Zeng, 2004). China's commercial legal and enforcement system is in flux (Ahlstorm, Young, Nair, and Law, 2003). Similarly, HR best practices (e.g., selective hiring and equitable pay) require infrastructure elements such as employment services that supply high caliber candidates and accurate compensation surveys, elements poorly developed in China.

Second, provincial trade barriers and other institutional and governmental constraints mean that companies entering China face highly fragmented markets. For example Otis elevator found it needed production facilities in several regions of China because of local authorities' buying preferences (Williamson and Zeng, 2004). Market fragmentation undercuts companies' abilities to obtain economies of scale. In HR, it makes it more difficult to centralize certain HR functions (such as recruiting), or to implement standardized HR procedures across facilities.

Third, as two writers put it, "A mix of government regulations and opportunism has often resulted in China operations composed of an unwieldy collage of joint ventures, representative offices (whose function is to explore opportunities and build relationships), partnerships and wholly-owned subsidiaries ..." (Williamson and Zeng, 2004). This fragmentation of relationships further erodes the potential for economies of scale. For example, local firms vary widely in their use of HR best practices. Their foreign partners, therefore, find themselves dealing with or trying to upgrade a disparate set of HR policies.

Fourth, companies entering China also have relatively high local costs. For instance, their need to implement international corporate standards may put them at a competitive disadvantage with local rivals that merely match Chinese norms for things like worker safety (Williamson and Zeng, 2004).

Finally, companies entering China face local competitors who already understand their country's cultural nuances. This is true in marketing, for example, when choosing products and marketing plans that resonate with Chinese consumers. Similarly, Chinese firms are already accustomed to adapting their HR practices to the cultural realties, as in ensuring that their appraisals adhere to the formalities of saving face on both sides (Chow, 2004).

Many foreign firms entering China find themselves at a disadvantage vis a vis their local rivals. The foreign firms' modern production and information technology is available to all; fragmentation of markets and relationships erodes economies of scale; in some respects the local firms' managerial knowledge and competencies may be superior; and, Chinese firms can more easily adjust their HR and other policies and practices to China's culture. Many employers entering China find the local competition more fierce than they expected, and that a cost-effectiveness strategy is more important than they anticipated (Williamson and Zeng, 2004). Having HR practices that are effective in China is crucial in that regard.

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Gary Dessler, Florida International University

Dr. Dessler's best-selling Human Resource Management, 10th edition (Prentice Hall 2005) is available in 10 languages, including Chinese. He has written a number of other books and published articles on employee commitment, leadership, and quality improvement. In 2006, he was a visiting professor at Renmin University of China's School of Labour Relations and Human Resources in Beijing. In addition to teaching, he consults in human resource management and strategic planning.