Where to start a new Subsidiary: HR Considerations
Deciding where to establish a new subsidiary is also influenced by considerations of human resources, such as flexibility of labor laws in the destination country, wage levels, employer costs, the ability to retain employees and the quality of life of employees.
One day we had a meeting with the CEO of a young company for medical devices. The company made a strategic decision to establish a subsidiary in Western Europe, and was debating between two destination countries: the United Kingdom or France. The Chief Executive Officer wanted a human resources aspect comparison survey for both countries.
Even without conducting a survey, we knew what to say to that CEO – bottom line in terms of human resources: United Kingdom – Yes, France – No! To illustrate we gave the CEO the example of the British Marks & Spencer. Several years ago, the company decided to close its operations in France and dismiss the thousands of French workers. The Company faced a complex dilemma: as a British public company, it had to issue an organized message to the public and prevent any leakage of information before the message. On the other hand, French law requires a complex and long process of laying off employees. The company chose a typical British compromise: on the morning of the day it issued a message to the stock exchange – it also sent special delivery letters of dismissal to each French worker.
At the evening of the very same day, the French prime minister called a special press conference, sharply condemning the company and calling its behavior inhumane, immoral and illegal. The French press criticized the company and the French unions announced the filing of a lawsuit of huge proportions against it.
After several days of a media uproar, Marks & Spencer issued an apology and stated that it was taking back the letters of dismissal. But this was “too little, too late”. After several days the CEO and chairman had to take personal responsibility and were forced to resign. Finally the company avoided a huge compensation lawsuit by finding a buyer for its operations in France who promised not to lay off employees.
This example was enough for the medical device company’s CEO to make a decision, but it is not always so simple. Deciding on a location for a new subsidiary in a new continent or country, involves many business considerations (strategic partners, major distributors, major customers, and corporate tax), but one should also take into account, as part of the business considerations, many considerations in the area of human resources.
In this paper we detail the HR questions facing the organization when comparing a number of alternative activity areas.
– In which country are the labor laws more “comfortable”?
When considering this question you need to understand that in the Western world there are two schools of labor laws:
- The Anglo-American school: based on simplicity of employer – employee relations, clearly biased in favor of the employer, as it allows him more flexibility in recruiting, relocating and dismissing employees, and favors low statutory social insurance policies.
- The Continental Europe school: based on extensive protection of workers’ rights and securing their jobs, significantly biased in favor of the employee and favors statutory social insurance policies.
Israel, in this respect, clearly belongs to the Anglo-American school. For the Israeli manager it is difficult to understand why they can’t just give the employee whose performance is lacking over time a letter of dismissal, as is the case in countries of the Continental Europe school (such as France, Germany, Holland, Italy, Eastern Europe, etc.). Why do we need the approval of the local labor office (like in the Netherlands)? Why be limited to the beginning of the calendar quarter (Germany)? Or be bound by prior coordination and consultation with the dismissed employee’s authorized representative (France)?
It should be taken into account that not only local workers, but even Israeli workers sent to work in such countries, are protected by local labor laws in most cases. For example, an Israeli company that decided to lay off the majority of Israeli employees in France was surprised when it received a letter on their behalf from a local lawyer, claiming the dismissal was illegal because it not carried out in accordance with French law.
– Where is it easier to recruit and retain local workers?
In China there is fierce competition for English-speaking candidates for senior positions, while in India there is a huge infrastructure of English-speaking candidates. In contrast, the percentage of unwanted retirement (undesired turnover ) in India is extremely high and in professions like engineering and computers it reaches an annual rate of more than 30%!
– Where is it cheaper to hire local workers?
To answer this question you need to perform a comparative analysis between potential sites for establishing a subsidiary and avoid several common mistakes:
- Reference to averages – the average salary in Hungary is not much different than the average wage in the Czech Republic. However, the level of wages of workers in non-managerial positions or junior management positions in Hungary is higher while the level of salary of middle and senior managers is higher in the Czech Republic. One should perform the analysis of the specific groups of employees that the company is supposed to hire..
- Reference to the level of wages and the cost of wages (including provisions for salaries and salary benefits) – the wage level in the UK is high compared to France, but the high level of social provisions in France makes the cost of salary for the company higher. It is important to perform a detailed calculation of the cost to the employer in each area, including all employer costs (provisions, insurance, benefits, etc.).
- Reference to the cost of employment statically instead of dynamically – the level of wages in China increased by 48% in the last 5 years while in Japan, the level of wages in those years increased by only 10%. In 2012, the level of the average wage in China increased by 7%, while in Japan it increased only by 2%. The company must take into account the trend of the relevant wage level and not only the current situation.
– Where is it more expensive to employ expatriates?
Many cities can be very inexpensive for local residents and very expensive for foreign residents. For example, rent for expatriates in cities such as Moscow, Beijing and New Delhi can reach $3,000 to $10,000 per month.
– Where is it simpler and easier to obtain a work visa?
A company that plans to base its subsidiary’s workforce on Israelis must examine the ability to obtain work permits for them. The process of issuing work permits in countries like Spain and Italy is complex and takes many months, and many companies were forced to change their business plans in these countries due to the delay in the process of issuing work permits.
– Where is there a higher quality of life for foreign workers?
Quality of life considerations will determine the Company’s ability to move workers from Israel to the subsidiary at a reasonable price. Israeli workers stationed in Moscow will demand higher compensation for having to deal with issues of personal security. An Israeli family moving to Frankfurt would require funding for the children’s tuition at the International School. Israeli workers being placed in Seoul will face difficulties acclimating in a city where the Jewish and Israeli community is very small.
In summary, any decision concerning the establishment of a subsidiary abroad requires examining issues of human resources. HR professionals are required, therefore, to be real “strategic partners” of the organization and provide the appropriate solutions concerning this issue.
