Academic journal article SAM Advanced Management Journal

Foreign Firms in China: Facing Human Resources Challenges in a Transitional Economy

Academic journal article SAM Advanced Management Journal

Foreign Firms in China: Facing Human Resources Challenges in a Transitional Economy

Article excerpt


China is now well into the process of transitioning from an economy with heavy state intervention to one with a market orientation. This transition has required the creation of market-oriented enterprises -- both domestic and foreign ventures. The growth of these private businesses has been immense, from almost none in the mid-1970s to 1.04 million registered private firms in 1999 employing some 14.6 million people (Lawrence, 1999).

While a significant private sector has been created, private firms in China still face a number of problems in the conduct of their day-to-day operations. Despite the government's declaration that private businesses are an important component of the socialist market economy, the playing field is not yet level. This can be particularly acute for foreign private firms (including both joint ventures and wholly owned firms) that are still acclimating to the local commercial and institutional environment (Wong, Maher, Jenner, Appell & Herbert, 1999).

One area in which foreign ventures face a number of challenges is human resource management. China's long isolation and command economy virtually eliminated the HR function until recently. In addition, because the central government sees private firms as the answer to declining employment in the state-owned sector, private firms are often encouraged to take on large numbers of workers, many of whom have inadequate skills or training. This creates several problems for firms in staffing and developing human resources in an environment where human resource management has not been a priority (e.g., Puffer, McCarthy & Zhuplev, 1998; Wong & Maher, 1997; Wong, et al., 1999). In this article, we consider a number of common human resource management problems related to China's market transition and consider ways in which foreign private firms have been meeting these challenges. [1]

To build these insights, we interviewed top managers, consultants, and venture capitalists in 10 private firms operating in China. All interviewees were part of organizations that had significant operations in China. [2] Using past research as a guide, we asked interviewees to discuss human resources challenges they face in China and the solutions they pursue to those challenges. [3] This article contributes by focusing on common operational human resources issues in China and how foreign firms have solved them -- approaches that may be valuable to foreign firms meeting some of the same challenges in a number of transitional economies (Puffer, McCarthy & Zhuplev, 1998; Kiriazov, Sullivan & Tu, 2000).


The attitudes of the workforce in China have been shaped in no small way by the iron rice bowl policy of China, which was incorporated into law during the 1950s. This policy centered on the belief that employees had the right to lifetime employment and to wide ranging social programs run by their factory or work unit, including housing, nurseries, schools and medical care (Takahara, 1992; Warner, 1995). Although many of the iron rice bowl policies have been largely abandoned, it is fair to say that they still affect the management of human resources of firms doing business in China (Weldon & Vanhonacker, 1999).

Under the economic reforms initiated in 1978, acquiring new management techniques and technology became the primary goal of the government's open door policy (Warner, 1995). Foreign firms that entered China in those early days, however, found that worker expectations continued the iron rice bowl mentality; employees did not come to work on time, there was little concern for performance, quality, or customer service. Additionally, the concept of human resource management was largely absent (Child, 1994; Gittings, 1995). The result was that foreign firms faced extensive initial human resources problems that ranged from the selection of employees and inflexible appraisal and rewards to difficulties in the socialization and control processes (Child, 1994; Tomlinson, 1999; Wong et al. …

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