The Role of Human Resources Management:
The Case of Post-Soviet Subsidiaries of MNCs in the 1990s
January 31st, 1990, in Pushkin Square, Moscow. 30,000 people line up for their first foray into capitalist territory: the first McDonald’s to open on thawing Soviet land. This marked the beginning of global corporations turning to Russia in hopes of establishing meaningful and successful business relationships.
Image Source:Alexander Zemlianichenko/AP
This article will concern itself with the human resources obstacles that multinational corporations (MNCs) establishing subsidiaries and entering joint ventures in Post-Soviet Russia faced in the 1990s. I will begin by providing a concise summary of the political context during this period to highlight the significant heritage of Communism and the Soviet establishment. Taking these cultural elements into account, I will identify the key human resources practices which allowed global MNCs to build successful partnerships and provide quality employment to their Russian employees during the 1990s. I will be examining these practices using three of Hofstede’s cultural dimensions: collectivism, uncertainty avoidance, and power distance.
The Role of Culture in Business
The main aim of this article is to highlight the indispensability of adapting human resources practices to the cultural backdrop against which they are set. The use of Hofstede’s cultural dimensions in this article serves not only as a contextualizing tool but is also intended to encourage readers to turn to his seminal work Culture’s Consequences on cross-cultural management as an essential point of reference when navigating culture in a business context. If there is one thing, I hope you take away from reading this article: successful human resources practices need to be sensitive to the cultures in which they are embedded.
Brief Overview of the State of Human Resources in the Soviet Union
The Communist party came to power in Russia in 1922. The Union of Soviet Socialist Republics was comprised of fifteen Socialist Republics, Russia being the largest. This historical period was characterized by the highly bureaucratic structure that governed all decisions made outside the realms of the family and of the individual. The Soviet Union’s structural legacy of human resources was derived from their “Cadre department” or “Personnel Department,” which fulfilled administrative and technical roles. As a result, multinational firms establishing themselves in this transitioning Russian economy needed to build their human resources departments from the vestiges of the Soviet system. While many firms pulled out of the Russian market because they failed to adapt, others thrived. The following paragraphs will examine how the firms that thrived managed to successfully establish themselves.
Successful human resources practices need to be sensitive to the cultures in which they are embedded.
Collectivism in the Russian Context
Collectivism as a cultural dimension refers to a culture where members of a family or group rely on each other and think of themselves collectively as opposed to individually. Historically, compensation in Russia consisted of the following elements: base salary, incentive pay, and fringe benefits (non-monetary benefits). However, these elements were not divided equally. In fact, a small portion of compensation was represented by base salary. Incentive pay, or bonuses, were not used as individual performance motivators but rather consisted in lump sum amounts divided equally among firm employees and guaranteed. In fact, Western managers who attempted to reward individual rather than group performance were met with resistance. This is not surprising when we consider the collectivistic nature of the Russian culture. We will return to fringe benefits later.
Global corporations with Russian subsidies addressed the issue of motivation through training and modified incentive pay. As Hofstede concluded in one of his studies, collectivist countries place a high value on work-related training to improve or acquire skills (2010). In Russia, this proved to be true. In fact, not only was training valued by Russian employees, but it is was also perceived as a sign of the firm’s dedication to their country. Given collectivist tendencies to think within in-group/out-group terms, this gesture eased them into moving away from perceiving the company as “the other.” Moreover, training was shown to be significantly related to performance, becoming an alternative to incentive pay.
In addition to training, firms who preserved incentive pay moved away from rewarding individual performance to instead rewarding the performance of specific work groups. By introducing monetary incentives based on group performance, firms played on the collectivist features of the culture. They brought employees to think of group productivity and, in turn, firm profitability. As a result, modifying existing Russian work traditions instead of replacing them with the firm's and introducing highly valued training proved essential in increasing and maintaining employee motivation and performance.
Russian employees benefited from clearly defined compensation schemes, hierarchical structures, systems of performance evaluation, and employment security.
High Uncertainty Avoidance: Hierarchy and Structure
Uncertainty avoidance refers to the degree individuals feel uncomfortable with uncertainty and ambiguity in a specific environment. Characterized by high uncertainty avoidance, Russian culture benefits from human resources structures comprised of clearly defined policies and procedures. Beginning with compensation, base salaries were kept by MNCs since they represented a guaranteed source of income. Moreover, they devised systems that determined base salaries based on seniority and skill, which are favourable in uncertainty avoiding cultures. Fringe benefits were also carried over to the newly established human resources departments. There were two reasons for this: their familiarity was welcomed by Russian employees and, in the context of an economy characterized by high inflation, their value did not fluctuate. Examples of such benefits are free transportation and meals, housing allowance, and medical insurance.
The highly bureaucratized Soviet public administration featured a strict organizational structure and clearly defined authority levels. Consequently, since Russian employees were uncomfortable with ambiguities and loss of authority, MNCs insured that corporate hierarchy was clearly outlined as well as the chain of command. Once such elements were laid out and formalized, it was possible to establish a system of formalized performance appraisal and feedback. Such systems reinforced hierarchical standing and validated the chain of command. In fact, Russian managers of MNC subsidiaries deemed them as highly desirable.
Finally, the Soviet system of full employment and lifetime tenure was replaced by permanent job contracts. In keeping with tradition, a large majority of firms provided their employees with employment security. In order to adapt lifetime tenure to the market economy, some MNCs used employee leasing to respond to market fluctuations. In sum, Russian employees benefited from clearly defined compensation schemes, hierarchical structures, systems of performance evaluation, and employment security.
High Power Distance: Post-Soviet Trust Issues
Power distance in the Russian context refers to the high level of acceptance and expectation of employees that power is unequally distributed between themselves and their superiors. The Soviet management structure has been characterized by researchers as “authoritarian paternalist,” where directors had absolute authority. In response to this system, MNCs hired Russian managers who knew how to manage firmly. In order to mitigate the risks of reproducing the constraining Soviet system, delegation was introduced to Russian managers. Unsurprisingly, they struggled with what to delegate, how much to delegate, and how to supervise the work they had delegated. Their low level of trust made adopting such practices very challenging. However, successful MNCs realized that by granting their Russian managers considerable freedom and delegating “radically,” the latter showed less reticence to doing the same with their employees. Through effective communication channels, Russian managers gained the ability to delegate and to make full use of the labour power at their disposal.
In addition to enhanced communication, multinational corporations learned the importance of building relationships to establish trust, which relates back to the collectivist nature of the Russian culture. As a result, social events and other opportunities for employees to socialize were commonly used to build trust among employees, thereby facilitating delegation. Thus, power distance in Russian subsidiaries was addressed by selecting Russian managers and teaching them the importance of delegation for firm productivity.
An awareness of the cultural dimensions central to Russian culture proved indispensable in securing Russian employees and providing them with adequate employment conditions.
Conclusion: Navigating the Thaw
The ability to adapt and build from Soviet vestiges of human resources have proved essential for a firm’s survival on thawing territory. The radical shift from communism to capitalism in Russia resulted in a transitioning economy favourable for foreign investments. Multinational corporations established subsidiaries in Russia and the successful ventures showed great adaptability of their human resources practices. An awareness of the cultural dimensions central to Russian culture proved indispensable in securing Russian employees and providing them with adequate employment conditions. The case of successful Post-Soviet Russian subsidiaries is a testament to the importance of considering culture when configuring human resources practices. Whether it be human resources, negotiating an agreement or traveling, adapting to different cultures has large implications. What works here does not necessarily work elsewhere because acknowledging and respecting culture matters.
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