Towards Strategic HRM for SOEs in China: the BestFit approach based on the SLAP model

Towards Strategic HRM for SOEs in China: the BestFit approach based on the SLAP model

by

Dongni Sun

Thesis

Presented to the Faculty of Economics and Business of University of Groningen

in Partial Fulfilment of the Requirements

for the degree of

Master of Science

University of Groningen

Oct. 2007

Copyright

By

Dongni Sun

2007

TOWARDS STRATEGIC HRM FOR SOEs IN CHINA: THE BESTFIT APPROACH BASED ON THE SLAP MODEL

APPROVED BY

SUPERVISING COMMITTEE:

_________________________

_________________________

Preface & Acknowledgement

Since China’s implementation of the ‘open door policy’ in 1978, Chinese state owned enterprises (SOEs) have encountered ever fierce competition with multinationals and other foreign enterprises. To be able to compete successfully in the global world, the Chinese SOEs need to complement their traditional Human Resourced Management Strategies by the western theories. ‘How should Chinese SOEs make use of western theories on HRM strategy’ is thus a question.

The focus of the research was on how to facilitate the change in SOEs from traditional HRM practices and systems to more modern ones currently used in West societies. Literature studies were done on the local HRM issues in China and on the international issues that need to be considered when implementing modern HRM practices that are developed elsewhere. Based on the aim to recommend a strategic approach to HRM issues, a selection was made on the best fit approach to HRM based on the SLAP model. We believe that the SLAP model is one of the best approaches to the transition being faced in HR practices in China.

I am indebted to many people for their help in the last two years as I worked towards obtaining this Master degree. First and foremost, I would like to thank prof. Henk Sol, for providing me with the opportunity to conduct this study at University of Groningen. Without his encouragement I wouldn’t even have started.

I would like to especially thank my supervisor dr. Erik Bax for his advice and guidance from the very first day I met him. His resourceful insights and never-ending flow of ideas are always with me throughout the whole study.

I would like to thank my second supervisor dr. Peter van der Meer for his review of my thesis, and for his interesting lecture of Personnel Economics.

I would like to thank my parents, my mum Xiaochun Song and my dad Wei Sun, for motivating and inspiring me to take the challenges.

Last but certainly not least, thanks to my dear husband Yan Wang for his love and

support. He is always there for me during the difficult times.

Towards Strategic HRM for SOEs in China: the BestFit approach based on the SLAP model

by

Dongni Sun, Msc

University of Groningen, 2007 SUPERVISOR: Erik Bax

Peter van der Meer

This study is undertaken to determine how Chinese State-Owned Enterprises should apply western theories in their HRM systems in order to gain back its competitive stand in the global market. Literature studies were conducted in the subjects of national and international HRM issues to be considered when implementing modern HRM theories in the Chinese context. Discussions and assessments were carried out on the current modern HRM approaches. A selection was made on the ‘best fit’

approach based on the SLAP model as a recommendation for strategic HRM for

SOEs in China.

Table of contents

Chapter one: Introduction ...1

1.1 Background of the study ...1

1.1.1 Chinese culture influence on workplace ...1

1.1.2 Economic development and the status of HRM in China ...2

1.1.3 The Chinese economic reform: a transition economy from 1978-2001 ...3

1.2 Problem formulation ...4

1.3 Aim and objectives of the research...5

1.4 Research question ...5

1.5 Scope and method of the research ...6

1.6 Significance of the research ...6

1.7 Organisation of the thesis...7

Chapter two: Human resource management in Chinese SOEs ...8

2.0 Introduction ...8

2.1 Characteristics of labour management before economic reforms ...8

2.2 Restructuring of SOEs during the economic change ...9

2.3 Impact of economic reforms on labour in SOEs ...12

2.4 Changes in organizational and management systems in SOEs ...14

2.5 Labour reform in SOEs and institutional changes...16

2.5.1 The contract labour system...16

2.5.2 The 1994 labour law...17

2.6 Current HRM practices in SOEs ...18

2.6.1 Recruitment and selection ...18

2.6.1.1 Recruitment Methods ...19

2.6.1.2 Recruitment Criteria ...20

2.6.1.3 Analysis of HRM practises in SOEs and private firms ...21

2.6.2 Labour contracts...23

2.7 Issues faced in current HRM practises in SOEs ...24

2.7.1 Dilemma of labour demand and labour supply...25

2.7.2 The lagged-behind labour management institution...25

2.8 Conclusions ...25

Chapter three: Theoretical framework for HRM ...27

3.1 Introduction ...27

3.2 Current approaches to HRM...27

3.3 The values behind modern HRM approaches ...31

3.4 Implications of modern HRM approaches to Chinese SOEs ...31

3.5 Conclusions ...33

Chapter four: The choice of a strategic HRM approach for Chinese SOEs ...34

4.1 Introduction ...34

4.2 Paradigms in strategic HRM ...34

4.2.1 The ‘Best practise’ school ...34

4.2.2 The ‘Best fit’ school...35

4.3 The strategic labour allocation process model ...37

4.4 Adapting the best-fit approach to strategic HRM in Chinese SOEs...39

4.5 Conclusions ...41

Chapter five: Conclusion and Recommendations ...43

5.1 Introduction ...43

5.2 Summary ...43

5.3 Recommendations...44

5.4 Concluding remarks ...45

References ...46

Chapter one: Introduction

1.1 Background of the study ¹

Over the recent past, discussions on China have been hot news in the economic world. After eras of communist regimes and bearing the status of a poor and less developed country, the country’s economy has been developing fast since the implementation of its “open door policy” in 1978. As a consequence of this, the traditional market has had to change its scope. Chinese enterprises are now required to take in account the new competition on both national and international level to actually be capable of being competitive and indeed become the world’s next superpower. The entrance of multinationals and other foreign enterprises has meant that the traditional Human Resource Management (HRM) strategies need to be complemented by western HRM theories, if the Chinese enterprises are to compete successfully in the global world.

The difficulty in changing the HRM strategies is seen more within the state owned enterprises (SOEs) than within other type of organizations, such as the multinationals and joint-venture operators in China. State owned enterprises, referred to in the official jargon as enterprises that are ‘owned by the people’, had been previously the main foundation of the Chinese industrial edifice since the 1950’s. They were, and still are, predominantly found in large industrial cities such as Beijing, Dalian, Guangzhou, Shanghai, Shenyang, and Wuhan (Warner, 2004). To understand the current situation of HRM in most SOEs, it is necessary to give a brief background on the Chinese culture, which has had, and still continues to have, a lot of influence on the current practices in the Chinese workplace.

1.1.1 Chinese culture influence on workplace

Generally speaking, the Chinese way of thinking is very much rooted in three systems: the philosophical system “Confucianism”, the religious-philosophical system “Buddhism” and the set of traditional ideas “Taoism” (Nissen, 2004). An overview of the three systems is given in Table A.

1

This part is based on the essay: “The Challenge of Chinese State Owned Enterprises” written by

Maartje Crul, Steven Marshall and Dongni Sun, for the course of Advanced Human Resource

Management in the University of Groningen.

Basis Emphasis Confucianism Moral, harmony, social

value

Family, society, rite

Buddhism Suffering Samsara

Taoism Yin & Yang, action by non-action

Nature

Table A. Three systems that form the basis of Chinese culture

Among these three systems, Confucianism is the most influential in Chinese society. This may explain why it is said that Chinese culture is influenced more by philosophy than by religion. Grounded on these systems, “guanxi” and “face” are the two most important concepts that influence the behaviours of the Chinese in daily life and work. Guanxi denotes a network of humans, with a strong emphasis on personal relationships. It boils down to exchanging favours, which are expected to be done regularly and voluntarily (Judith, 1996). Face is about the confidence of the society in the moral integrity of a person, and it is about prestige that is won by a person through personal success (Hwang, 1982). The protection of ones own face and that of others, is called face work (Leung & Wong, 2003).

Guanxi and Face cannot be separated from everyday Chinese life both in and out of the workplace. On the contrary, these two concepts should be taken into consideration by any Chinese or foreigner who has the intention to integrate into the Chinese society. As long as the status quo is maintained, these concepts do not pose problems. However, with the change towards a more open economic society and influences from foreign enterprises, the status of HRM in China has been rapidly changing, and there is a need to provide human resource managers with approaches that may be used to plan their migration towards the modern practices as applied in the western world. To put this discussion further into context, we present a discussion on the economic development in China with the aim of showing how it has affected the development of practices HRM in China over the past years.

1.1.2 Economic development and the status of HRM in China

Contemporary China’s economy and the development HRM practices can

generally be divided into three phases as illustrated in table B. As we can see,

during Mao’s leadership, a kind of planned economy was adopted. Almost all

processes for enterprises, such as selection of products, selection of high-level

personnel, and structure of the organization are under the control of the

communist party (Nissen, 2004). Since all the management activities were

centralized at that time, HRM practices did not exist. The government’s Labour

Bureau was an administrative unit with the objective of implementing the policies

and procedures issued by the government (Wang, 2002).

Time period Main Issues Form of Economy

HRM Status

1949-1978 Mao’s Leadership Centrally Planned Economy

No HRM Practices

1978-2001 Chinese Economic Reforms

Market Economy (Transition)

Beginning of HRM Practices

(Personnel Administration) 2001-Present WTO Entry Market Economy Development of

HRM with Chinese Characteristics

Table B. Phases of economic development in China

With the ‘Open Door Policy’, which was introduced in 1978 after Mao’s leadership, China started its path on economic reforms, i.e. Chinese Economic Reforms (CERs). China is then in a transition to a free-market economy, opening its market to the world. Changes in personnel management became necessary for the new economy system. The ‘Iron Rice Bowl’ had to be abolished, incentive schemes added into the wage system, and a labour market that was open to both Multinational Enterprises (MNEs) and SOEs established (Chen, 1995; Warner, 1995). The practice of HRM at the early age of CERs in China is in fact the personnel administration in work unit rather than HRM (Goodall and Warner, 1997).

At the end of 2001, China officially jointed the World Trade Organization (WTO).

It marked a milestone of Chinese approach to economic reforms, meaning that China’s free market economy was emerging and more and more foreign investment came in. On the other hand, with the entrance to WTO, the business competition started increasing in certain sectors and some problems arose, especially in SOEs. For example, wages for jobs requiring low qualifications remained constant or decreased. For jobs requiring highly qualified people, wages increased because business strategy could be enabled only with highly qualified people (Xu & Zou, 2000). There is an urgent need for China to solve such problems effectively in accord with its membership in WTO. Holding a perspective from HRM, we follow Nissen (2004), and argue that this situation stresses the importance of the need for strategic HRM. To that end, we look at the Chinese economic reform in details next.

1.1.3 The Chinese economic reform: a transition economy from 1978-2001 It has been more than two decades since China underwent the market-oriented transition in 1978. The adoption of liberal economic reforms and the ‘open door’

policy has consequently transformed one of the most isolated centrally planned

economies in the world into a market-oriented economy. Furthermore, China’s transition economy has successfully maintained fast economic growth over the past two decades. As companies in the industrial sectors in the 1990s were increasingly subjected to international competition, human resource management in (mainly SOEs) was also undergoing dramatic changes or reorientation.

It is widely accepted that China’s two decades (1978-1997) of economic reforms drastically changed the country’s landscape. The centrally planned economy, mainly in the form of state ownership, gave way to the market economy. A plural structure of ownership of the economy was established, with a fast growing non- state sector and a declining state sector. During this period, China achieved enormous economic successes. Some basic indicators of the impressive achievement on the economy are shown in table C.

1978 1997 Average yearly % increase over 1979 - 1997

Population (million) 962.6 1,236.3 1.3 Labour force (million) 406.8 705.8 2.9

GDP* (rmb billion) 362.4 7477.2 9.8

GDP per capita * (RMB) 397.0 6079.0 8.4 Total exports and imports (US$

billion)

20.6 325.1 15.6 Individual saving deposits (RMB

billion)

21.1 4627.9 32.8 Average wage incomes of

workers*(RMB)

615 6470.0 4.2

Unemployment rage (%) 5.3 5.7 n.a

Table C. Selected indicators of China’s transition economy (Source: SSB 1998:26; 38-40, 55,127,620; 1997:41)

Over the two decades, the country’s GDP growth averaged 9.8 percent, among the

highest growth rates in the world. Housing space per person more than doubled in

the first decade of the reform, and doubled again in the second reform decade of

1988-1998. Individual ownership of consumer durable goods rose by three to

fourfold (SSB: 20-26, 1998). Private savings per capita remained at 40 and a

growth of 15 percent was registered between 1980 and 1997. By 1995, China’s

economy was four times as large as it had been in 1980, five years earlier than the

government goal of lifting 200 million Chinese people our of poverty, without

major increases in inequality among residents. As a result, a steady improvement

in living standards was widely shared among a majority of Chinese people (World

Bank, 1997). Particularly, the sustained high growth rate has generated millions of

new jobs for newly grown labour entrants since 1978 (SSB, 1998: 156).

It should be noted that China’s sustained economic growth relied to a large extent on the rapid expansion of the non-state sector. The restructuring of SOEs resulted in a sharp decline of the state ownership enterprises relative to the non-state firms during the period of 1979-1997. By 1997 the contribution of SOEs as a whole to the total industrial output dropped to around 25 percent, from the height level of 78 per cent in 1979. Whereas non-state firms, that consist of collectives owned by communities or their own employees and, other categories of non-state firms (that had not even existed before 1978), rose to the share of three fourths in 1997.

Although in the heavy industry, as well as in areas of strategic importance such as energy and defence-related production, SOEs remain dominant. Non-state firms are present in almost all the lucrative areas of consumer industries such as pharmaceuticals and telecommunication (Child, 1994).

1.2 Problem formulation

The feeling of the necessity to change the current HRM practices in SOEs is growing. The main reason for this is the increase in competition among both the national and international markets. The increasing amount of competitors for the SOEs is primarily the organizations that are implementing practices based on western HRM theories (Warner, 2004). They all have a competitive advantage over the traditional Chinese HRM system, which forces the SOEs to react and change their ways of working.

In addition, an aspect that is inevitably of influence on the SOEs and their strategies and organizations is the introduction of new systems. This is a consequence of the international competition and foreign direct investment in China. Not only is the ‘hardware’ such as modern plants and equipment introduced by the foreigners, but also ‘software’ including advanced management expertise and human resource management systems and practices.

However, as indicated in the previous section, a number of challenges need to be overcome for SOEs to adapt the western practices in HRM. One challenge is, for example, due to the fact that until recently the SOEs were not market-oriented, but more resource-constrained (Braun &Warner, 2002).

Another challenge faced in adapting western HRM practises in China lies in the slowly diminishing Iron Rice Bowl system. As we have indicated in 1.1, this system existed during Mao’s era, and is characterised as a system of unified job allocation, guaranteed life-long employment and cradle-to-grave welfare. (Ding et al, 2000). As a result of this system, SOE’s are often overstaffed The over staffing in many SOEs lead to low productivity and ineffective personnel management, but it is not easy to change the system because of its rigidity and that employees feel that they are largely in charge

Thus the question is raised regarding whether the state-owned companies should

adapt their HRM strategy to western standards, and if so, to what extent. This

preceding discussion forms the statement of the problem and is the main problem studied in this work.

1.3 Aim and objectives of the research

In sections 1.1 and 1.2, we presented a broad discussion of the context of HRM in China. We noted some of the challenges that will be faced by organizations that are striving to apply modern HRM practises in China.

The focus of this work is not on change issues, but on how we can facilitate the change from the traditional Chinese HRM practises and systems to the more modern ones. Specifically, we deal with the problems faced and pertinent challenges in Chinese SOEs when translating the HRM strategies using the best fit approach, based on strategic labour allocation process (SLAP) model for strategic HRM. The challenge lies in applying the main paradigms in strategic HRM to the situation in Chinese SOEs. Deriving from this discussion, the aim of this research is to study the current issues in human resource management and to determine the underlying reasons and directions for reform in HRM practises in China. The objectives of this work are threefold:

1. To find a perfect balance between the ‘old’ and the ‘modern’ strategies for HRM that can be applied in Chinese state owned enterprises.

2. To develop a strategic HRM approach for SOEs in China that enables them to be ready for the future era of being the superpower of the economic world.

3. To provide guidance on how to implement the best fit approach to strategic HRM based on the SLAP model

The output of this research is a best fit approach based on the SLAP model for strategic HRM for SOEs in China. In fulfilling the aim and objectives, we believe that the cultural and environmental context should be considered in anticipating how workers interpret and respond to HR practices and strategies.

1.4 Research question

The research is aimed at improving the HRM systems currently used in Chinese SOEs to enable them to become more competitive by providing them with an approach that can be used to implement strategic HRM practises. In order to provide such an approach, we came up with a research question that enabled us to study the main issues and challenges to consider in general in HRM in SOEs, and the implications of adapting western HRM systems in Chinese SOEs that are heavily governed by cultural aspects.

The question that is tackled this dissertation is: How should Chinese state-owned

enterprises make use of western theories on HRM strategy?

In answering this question, we come up with a best fit approach based on the SLAP model for strategic HRM for SOEs in China. The approach is expected to facilitate the Chinese SOEs to migrate to modern HRM practices in a structured manner. Several questions were developed to guide the study, and to enable us to meet the research objective and answer the main research question. The next question was aimed at providing a general insight into the problem domain of the need for HRM reform in SOEs in China, thereby allowing us to learn about existing issues in strategic HRM and how they are tackled by other researchers.

These issues are presented in chapter 2, which also present the general current state of HRM in Chinese SOEs. To assist in analysing the main issues, we came up with the following questions:

1. What are the current issues in human resource management in state-owned enterprises?

2. What are the underlying reasons for the reform in human resource management in China?

3. What can we learn from modern (western) HRM theories in respect to HRM reform for SOEs in China?

These questions are derived from a review of the challenges to migration from the traditional HRM practices to the modern HRM systems, as presented in section 1.2. Finding answers to these questions helps us to identify and place into context the key issues to be considered in implementing strategic HRM in Chinese SOEs.

The aim is to enable the SOEs to become more competitive by applying best fit HRM approaches. These key issues are presented and discussed in chapters 2 and 3 of this work. The answers to this question led us to recommend the use of the best fit approach based on the SLAP model.

1.5 Scope and method of the research

The scope of the research is limited to facilitating Chinese SOEs in the move from traditional HRM practices to modern systems using theories from the western world i.e. from determining the need for HRM reform in Chinese SOEs, up to the recommendation of the best fit approach based on the SLAP model to provide the solution. The thesis introduces a possible solution, namely the adaptation of more modern strategic HRM theories. Nevertheless, this solution opens numerous difficulties and challenges for the SOEs which can be handled in future work.

The research is literature based and studies the conditions necessary to ensure that

China migrates effortlessly to the more modern HRM practices. We study

literature in which issues discussed include the increase in national and

international competition, the education of the modern managers, and the

diminishing cultural traditions in China. We also study literature in which the

restraints to adapting western HRM strategy are identified.

1.6 Significance of the research

The scientific contribution of this research lies in the result, which is a best fit approach for strategic HRM for SOEs in China based on the SLAP model. To show the importance of this contribution, it is necessary to highlight some of the other factors that prohibit easy implementation of western HRM systems, including the principle of guanxi. The principle of guanxi is of high influence on SOEs HRM strategy, more specifically, on the recruitment and selection practices.

Guanxi is of enormous impact within organizations, and it cannot be easily diminished, as it is rooted into the behaviour of the Chinese people. This makes it difficult and challenging to implement western policies that try to go beyond the guanxi. However, due to the changes in HRM systems, it is expected that the importance of guanxi will diminish with time as the legal infrastructure and regulatory regime improves and firms are forced to become more competitive (Ahlstrom et al, 2005).

The social significance of this work is based on the fact that research on strategic HRM has been conducted for the most part from a Western perspective, which has restrained the implementation of modern HRM systems emanating from outside China. Theories of what is ‘good’ HRM strategy are not similarly useful when applied in a Chinese cultural and organizational context, so the approach used by Chinese SOEs should focus more on successful private firms in China that have already implemented the western strategies. The SOEs will however, have to be careful when examining and comparing HR strategies to be used from multinationals and joint ventures, even if these are the direct competition.

(Ahlstrohm et al, 2005).

1.7 Organisation of the thesis

The report is divided in five chapters. The first chapter gives an overview of the

factors that have influenced the development of the Chinese work environment as

it is presently. We present the problem that is tackled in this research, together

with the aims and objectives of the research. The past and current practise of

human resource management in China is discussed win chapter 2, after which we

present theoretical concepts on human resource management obtained from the

literature. In chapter 4, we make a choice to use a strategic approach to HRM

based on the SLAP model. In chapter 5, we present conclusion and

recommendations for further work.

Chapter two: Human resource management in Chinese SOEs

2.0 Introduction

In this chapter, we present a review of the literature that enables us to provide background to the current state of HRM in Chinese SOEs. This chapter is purely based on literature, and we begin by outlining some of the general elements in Chinese society as presented in the literature, that have effect on the practise of HRM in SOEs especially before and during the restructuring that was occasioned by economic change. We follow this with a discussion on the main driving forces for the changes being experienced in HRM before discussing the problems faced in the current HRM practises within SOEs. We then shed light on how these problems can be solved by the application of modern HRM practises as used in the western world.

2.1 Characteristics of labour management before economic reforms

Previous research including the work of Chen (2001) identifies the following key scenarios in labour and management in SOEs before the economic reforms:

The role of labour: Prior to 1978, labour played a role of factor-input and stakeholder in SOE. Workers were praised as “masters of the house”. They were assigned to the enterprise by outside Labour or Personnel Bureau, according to the state plan. Neither workers nor enterprises had much say our job assignments.

Workers expected to spend their lives in the assigned enterprise when they left school. Their welfare benefits were provided by their enterprise that ranged from housing, medical care, kindergarten, and pension (Guanhaw, 1985). For the enterprise labour became a fixed cost, since workers could not be fired without special reasons. Because workers were guaranteed life-long jobs, they were not worried about losing jobs except for political reasons or gross negligence. The tool of dismissal or firing could not be used as the form of managerial control (Lockett, 1990). As a result, a rigid employment relationship evolved between the employees and their enterprise.

The role of managers: Managers or factory directors had no autonomy over

operations of their firms. What they were expected to do was to follow directives

from government supervising agencies (Lockett, 1983). State agencies provided

state firms with the needed production inputs according to state plans, and outputs

were then controlled by the state. There was no room left for entrepreneurial

activities (Walder, 1986). Managers’ salaries were fixed above but not much

higher than those of skilled workers. Although some managers were appointed

from outside the firm, most of them spent long periods of time with one firm

(Laaksonen, 1988). As such, managers tended to identify themselves with the

workers’ interest through the provision of a wider range of social welfare (Warner,

1985; Walder, 1987).

Means of motivation: Pay was not an effective motivating factor as wage scales were fixed nationally (Guanhaw, 1985). Promotions from one grade to another followed fairly strict national guidelines (Liu and Child, 1996). Skill related training was rare, and if any, usually organized by the local Industrial Bureau (Warner, 1985). Enterprise management had limited control over rewards, either through housing distribution based on seniority, or by granting a status for model workers that included some material benefits such as higher pensions and free trips (Gao, 1996). Attempts to motivate workers through ideology and politics were less and less effective as material incentives were more valued, in most cases, managers had to rely on Normative commitment sot overall goals of development (see Table D). The lack of labour discipline and motivation gave rise to widespread job shirking, low morale, and high absenteeism at workplace (Lockett, 1990).

Employment Life-time employment for urban workers; ‘cradle-to - grave’ welfare coverage; enterprises not permitted to sack

Incentives and rewards Egalitarian but: age, length of service, loyalty carrying weights; non-material rewards but spiritual motivation;

8-grade system for labour and 16-grade for management; enterprise provision of housing, schooling, medical care

Performance management

Moral exhortation; group rewards

Social security Administered by enterprise; non-contributory for workers

Trade union Controlled by party, role of “transmission belt”

Workers congress Controlled by party members; workers as ‘master of the house’

Personnel department Administration; control of personal files, conformity, discipline, punishment

Labour market No labour market; controlled planned job allocation

Table D. Characteristics of the employment system before economic reform (“iron rice bowl”) Source: Chen (2001) with reference to Goodall and Warner (1997:571)

2.2 Restructuring of SOEs during the economic change

Organizational theory and managerial wisdom imply that to survive and flourish,

organizations must be compatible with their environments, which consist of all

external social, economic, and political conditions that influence their operations

(Sun, 2000). That is especially the case for China, where the economic and social

work environment differs so much from the western world. Increased competition

has forced the SOEs to change and adapt in order to survive, despite the fact that

the very nature of change is not the preferred value in China. It is documented that

the dominant Chinese culture values are high power distance, high uncertainty

avoidance, and low individualism (Hofstede, 1993) which are completely opposed

to those of most western multinationals: low power distance, low uncertainty avoidance, low masculinity, and medium individualism (Sun, 2000). During China’s economic reform, restructuring of SOEs was the central task.

The strategy for restructuring SOEs was to introduce liberalization into the state sector without changing state ownership. The reform within SOEs was mainly aimed at improving poor performance of the majority of SOEs, making SOEs financially accountable under hardened budget constraints; and promoting market transactions guided by market signals instead of state plans. China’s sustained economic growth relied to a large extent on the rapid expansion of the non-state sector. The restructuring of SOEs resulted in a sharp decline of the state ownership enterprises relative to the non-state firms during the period of 1979- 1997. By 1997 the contribution of SOEs as a whole to the total industrial output dropped to around 25 percent, from the height level of 78 per cent in 1979. The economic reforms were a major driving force for the change in the management of labour in China.

Briefly, restructuring of SOEs has experienced four stages; each with different policy focuses as shown in see Table E.

Phase Reform focus

1978 – 1983 Increase enterprise autonomy

1984 -1986 Reforming internal incentives systems

1987-1992 Contractual management

1992 - Merger, acquisition, and corporatization

Table E. Stages of SOE Restructuring (Source: Warner, 1997)

The first stage 1979-1983 started with enlargement of the enterprise autonomy.

The main reform measures introduced at this stage included the delegation of some management powers from external government departments into the enterprise, and the introduction of the Profit retention program (Fan, 1994). The retained profits above the quota delivered to the state could be used to reward workers in bonuses, benefits such as housing and health care, and investment in new plants. These measures unveiled the beginning of China’s nationwide urban industrial reform.

In the second stage 1984-1986, the reform effort shifted to forge appropriate

internal incentives for improved performance. The profit retention program was

replaced by a profit taxation scheme after taking into account the effects of price

distortion and industry on a firm’s profitability (Walder, 1987). The profit taxation

scheme was designed to enable a firm to enjoy full marginal incentives for profit

maximization. Other reform initiatives adopted at this stage included “The

Enterprise Bill of Rights” of May 1984, which was promulgated to give enterprise

managers more precise autonomy in three key areas. These were the authority of

the enterprise manager to draw up the overall production plan inside the enterprise;

the increasing enterprise control over compensation of employees by linking total wage bill to profits; and the long-term contracting over profit remittances between enterprises and their external supervisors.

During the third stage 1978-92 the Contract Management Responsibility System (CMRS) was formulated and implemented in most large and medium size SOEs.

The purpose of CMRS was to clarify the authority and responsibility of enterprise management and their supervisory agencies for a certain period of time (three to five years). The CMRS had several variants in practice, but the essence of the CMRS involved ‘the two guarantees’, i.e. the guaranteed amount of profit remittance, the guaranteed investment and technical innovation targets, and ‘the single link’, i.e. the increase of wage bills proportionate to total profits (Fan, 1994;

Child 1994). It was hoped that relatively long-term management contracts would reduce the importance of ‘ratchet effect’ (Naughton, 1995a: 213) by establishing a quasi-legal guarantee for the enterprise manager’s autonomy over the contracted period of operations.

The fourth stage started from mid-1992 and extends up to the present. In the aftermath of the 1989 Tiananmen incident and the subsequent economic retrenchment, stagnated economic reform was picked up by Deng’s 1992 spring- tour to South China. On July 23, 1992, the State Council issued a new ‘bill of rights’ for SOEs, namely the “Regulations on Transforming the Operational Mechanism of State-Run Industrial Enterprises”. The new regulations granted enterprises more specific autonomy in fourteen areas, including setting their own output prices, rights of hiring and firing labour, and allocating investment finances and fixed capital (see Child, 1994). In November 1993, a Communist Party plenum passed a historical resolution on the “Establishment of a Socialist Market Economy” as the ultimate goal of reforms in China.

More radical reform policies at this stage were formulated in 1994 and after.

These included mergers, acquisitions, leases, corporatization, worker and management buyouts, and bankruptcies (Beijing Review, June 1-7, 1998a). In particular, the government advocated ‘strong to strong’ firm mergers, or large viable firms taking over ailing ones. This was mainly done through:

Transformation of large and medium SOEs into limited liability companies (LLCs) and limited liability shareholding companies (LLSCs) according to the Company Law

The establishment of 57 enterprises groups under central-level authority in 1991 and accelerated in 1994 (World Bank, 1997:33).

By 1996, approximately 5800 industrial SOEs had become corporations (World

Bank, 1997:24). By doing so, market forces were expected to be in full play in

promoting cooperation and competition between firms. It was also hoped that

segmentation by bilateral jurisdictions or vertical administrative hierarchies would

be broken off. In some regions, small and medium-sized SOEs were increasingly

leased out to entrepreneurs so that jobs and revenues could be maintained. In extreme cases, loss-making SOEs could go bankrupt, and scarce resources used more productively elsewhere (see World Bank, 1997: 4-9).

In the autumn of 1997, the Chinese President Jiang Zemin announced reform measures for revamping China’s doddering state sector at the 15

Communist Party Congress. These measures were further elaborated by the new Prime Minster Zhu Rongji in his work plan addressed to the National people’s Congress in the spring 1998. According to his ambitious plan, China’s 300,000 plus state enterprises that were then in the red would be restructured into profitable ones through merges, bankruptcy, and sales to employees and other private investors.

The state would then only retain control over 1,000 large state firms of strategic importance to form the mainstay of the economy (Beijing Review, 1998d).

At the same time, the focus of the reform efforts was geared towards reshaping the governance structure of SOEs into corporations. The newly advocated corporate structure attempted to clarify asset rights and assignment of liabilities, and to provide a reasonable balance of interests among owners, creditors, and managers.

The former required a clear separation legally and operationally, between the government as the owner, and the firms as business entities. The latter called for the introduction of western corporate business systems that enabled the owner to select a board of directors that, in turn, would oversee the daily operations of the professional management.

In summary, the main enterprise reform measures were in four stages – profit retention, profit taxation, the contract management system, and corporatization – all directed at giving management sufficient discretion and powerful incentives to respond to market forces. The ultimate goal of the restructuring of the state sector was to create a ‘level playing field’ for SOEs vis-à-vis non-state firms. As McMillan (1995:421) points out, “China shows the power of incentives; but it also shows that, in a transition economy, workable incentives can take surprisingly non-standard forms.”

2.3 Impact of economic reforms on labour in SOEs

In this section, we discuss some of the main impacts of the economic reforms on the human resource management practices, and present a discussion of the implications of the economic reforms on SOEs. Briefly, industrial firms in China today are operating in a changed business environment because of the economic reforms. Firms and managers have acquired the increasing autonomy over daily operations, and are responsible for the profits and losses of the organization. As a result, the role of human resources management and the way in which human resources are flexibly utilised is an important factor in determining the firm’s success in competitive product markets (Chen, 2001).

The economic reforms largely converted Chinese enterprises into individual

business decision making entities, despite the fact that several daily management

constraints remained. Some of the main impacts of the economic reforms that have had great effect on current HRM practises are related to the link between wages and bonuses to profits, wage determination, laying off of workers, and the creation of a security net. These are discussed as follows:

Wages and bonuses: Parallel to introducing the labour contract system into the state sector, the government also extended reform to a uniform nation wage setting system. State firms were permitted to use a bonus payment that was linked to the enterprise profits. The maximum of bonus payment in the firm, however, was restricted to the equivalent of the three-month employees’ wages. In 1984, absolute ceilings on bonus payments were replaced by a progressive bonus tax. If aggregate bonuses were less than 2.5 months standard wage, there was no tax.

Between 2.5 to 4 months, a 30 percent tax was imposed, and this increased to 100 percent between 4 and 6 months and 300 percent above 6 months (Jackson, 1992).

Later on, enterprises were given the freedom to determine how the bonus fund would be combined with wages within the organization, including experiments with floating wages, and piece rates. In this way, the distinction between base wage and bonus was dissolved, and a link between enterprise productivity and the total wage bill established.

Wage determination: From 1984, the government attempted to link the enterprise wage bill to its performance, using case-to-case predetermined elasticity of the linkage of productivity and the total wage bill. This led enterprise management to have the right to determine the internal wage compensation. The discretion over the internal wage compensation, however, had to conform to the sate wage policies set in the 1980s. Most enterprises adopted, for instance, floating wage systems under which some former bonuses were reclassified as part of the base wage (Naughton, 1995a). In order to control the pace of wage growth, a wage tax was required by the authority in 1986 on the percentage increase in the enterprise aggregate wage bill over the previous year. The purpose of introducing wage taxes was to lighten overgrowth of wage compensation relative to profit growth. Moreover, in order to enhance incentive compensation, managers were required to reclassify some part of the base wage as incentive pay.

From 1994 onward, the state ceased to set national wide wage quotas and scales for different categories of workers as was the case as before. Instead, the state wage guidance was applied to SOEs. With the state wage guidance, top enterprise managers enjoyed complete autonomy over the forms and scales of rewarding employees based on performance, as long as preferred compensation practices stay in line with the elasticity of wage increase linkage to profit.

Redundant workers: In most cases, the SOEs were overstaffed in comparison

with non-state firms. Results of a study carried out in 1998 and presented in (Yang,

1998) indicated that an estimated 20 percent of state employees could be reduced

without any impacts on output. The widespread problem of over-staffing floated

to the surface in the 1990s as market competition became intense. As early as

1988, state firms were encouraged to launch a “labour re-optimization” scheme to get rid of redundant workers, but failed to achieve the desired results (Warner, 1995). Beginning in 1995, and especially in 1997, the central government advocated more radical downsizing as a new labour reform policy in SOEs.

Downsizing was detailed in 1998 by the Chinese Premier Zhu Rongji into three concrete steps: laying off so as to divert redundant workers out; reducing workforce so as to increase efficiency; and implementing re-employment project within the enterprise. In response, governments at the local level urged SOEs under their monitor to implement the downsizing strategy.

Under the downsizing pressure, state enterprise managers were required to re- assess human resource needs in each workshop and supplementary activities.

Redundant workers were laid off for re-training, or declared “in-house unemployed”. Local government also needed to establish labour re-training and unemployment funds to aid enterprises to transfer redundant workers to new occupations. In most cases, laid off workers would be put on reduced wages, though they were not fired in name (Naughton, 1995a). In order to maintain social stability and fear of unrest from laying off, each enterprise engaging in downsizing of workers was required to set up the re-employment centre in their organization to help laid off workers find a paid job elsewhere. Downsizing provided state managers with an opportunity to overhaul overstaffed employment.

The social security net: The pre-reform labour insurance system was based on the state-owned enterprise that took full responsibility for paying pensions, medical care, and other labour insurance benefits to their employees. The social security and welfare functions of enterprises resulted in extreme immobility of labour since workers were tied to one enterprise. It also made bankruptcy difficult to implement in large ailing SOEs. As labour system reforms proceeded further in the early 1990s, creating a social security net was advocated at local levels. The overall objective was to establish a range of social insurance funds contributed by three parties: the State, the enterprise, and the individual employee. In the beginning the unemployment insurance fund was collected only for contract workers, who were considered of less job insecurity. The 1994 Labour Law further confirmed the intention of setting up a national social insurance system. As required, all employers and employees regardless needed to join the reform and make contribution to five separate funds, i.e. pension, accident and injury, maternity, unemployment, and medical funds.

As presented in this sub-section, it was clear that the Chinese people were

working in a changed labour environment that was rather different from the one

they were used to previously, as presented in table F.

Old model New model

Maoist strategy Dengist strategy

State ownership Diffused ownership

Resource-constrained Market-driven

Technical criteria Allocative efficiency Taylorist work organization Flexible work organization

Economic cadres Professional managers

Iron rice-bowl Labour market

Jobs for life Employment contract

Work assignment Job choice

Personnel administration Human resource management Egalitarian pay and perks Performance-related rewards Enterprise-based training Outside courses

Company accommodation Rented housing market In-house social services External social provision Free medical care Contributory medical insurance Central trade union role Weaken union influence

High institutional dependency Low institutional dependency

Table F. Characteristics of Chinese industrial organization models

2.4 Changes in organizational and management systems in SOEs The implementation of the Labour Law provided a legal framework for managing human resources in companies. Through the introduction of the labour contract system into SOEs, the ‘iron rice-bowl’ employment system eventually came to the end, leading to the emergence of market-oriented recruitment and selection that enabled workers to freely choose a job in the market. It also granted management some freedom to hire and fire personnel from external markets. The rise of various forms of incentive pay and bonuses created a link, though weak, between bonus payments and performance. Under the link scheme, managers gained the formal authority to compensate the employees for their performance. The main changes that could be seen in organizational and management systems are categorised and discussed as follows:

Labour market institutions: The establishment of labour market institutions, although premature, created a ‘level playing field’ for all types of firms to pursue a labour market approach to labour. As a result, labour management turned out to be a contractual relationship between the employee and the employer with the latter assuming more power in determining the employment of the former. Some of the other implications of the labour reform on HRM in SOEs covered the following areas:

Employment-related benefits: The changes were most drastic in the state sector

because state workers gradually lost their employment-related privileges and

security. They were exposed to labour market processes, like their counterparts in

non-state firms, as enterprise-based social welfare benefits were increasingly

shifted to external agencies. A convergent employment condition evolved between state and non-state firms. Eventually, the enterprises enjoyed astronomy of decision making for most strategic issues, including personnel.

Corporatization: The big SOEs were downsized and corporatized. Small and medium sized SOEs were sold off or leased out to private hands with the latter promising to take over the employees (World Bank, 1997). Non-state firms became increasingly present in most industries. In a broad sense, reformed SOEs and non-state firms were operating in a similar liberalized business environment.

In such an environment, goods in all sectors are basically allocated through market transactions and prices for the most part are set on markets (Pyle, 1997). As a result, both state and non-state firms began competing with each other for survival and continued operations on market.

Workforce alignment: As product market competition was further intensified in the mid-1990s, increasing market disciplines drove the management to align the workforce, i.e. human resource, with market fluctuations and put them into flexible work arrangements. In early the 1980s, for instance, when state managers faced pressure to fulfil a state quota, they tended to seek supervising agencies for more slack resources including labour (Byrd and Tidrick, 1987). In the 1990s, managers tried to seek alternatives, for instance, by hiring extra temporary staff that could be laid off as the market deteriorated (Howell, 1993; Benson, et al, 1998). Warner (1995: 51) states that “labour plays both roles as factor input and a stakeholder in the Chinese enterprise…workers want secure employment as well as decent rewards and benefits. Managers have their own agenda, seeking flexibility in the internal market in the enterprise. The desires of both parties sometimes match sometime conflict”.

Flexible employment: A shift to flexible employment lay in the fundamental characteristics of China’s labour market where two distinct labour market segments were at work and had therefore different implications for a firm’s human resource policies and strategies. One labour market was that in which unskilled labour, including a large volume of migrant labour from the rural areas, was in excess supply. In this market, the managers and firms needed to find ways to hire and fire the unskilled labour to achieve higher mobility for cost effectiveness, using time contracts and differentiated wage rages. The other labour market concerned skilled labour that was relatively scarce in China. In this market, the management needed to find ways to attract and retain smart people by developing schemes for promotion, tenure, bonus, and stock options since the mobility and employability of the skilled labour was high elsewhere. Therefore, the firm would keep smart people as the core of the workforce to elicit a long-term commitment.

Contract workers: the management feared suffering the loss of core workers

whose skills were vital to the firm’s success, and avoided shedding them in the

event of market downturn. Instead, firms tended to hire more contract workers

who could be made redundant easily if there was a seasonal or cyclical drop in

demand. A tendency of the enterprises was to hire wage-workers from outside the

firm to bear the burden of adjustment to adverse conditions, leaving the core group of workers intact. McMillan and Naughton (1996:171) observed that when the firms’ autonomy increased, managers responded by strengthening the discipline imposed on workers. They increased the fraction of workers who being on fixed-term contracts were, in principle, possible to fire.

The preceding discussion has clearly shown that in less than one generation the Chinese manager had been faced with the need to be both entrepreneurial and skilled in business decision making, and they had to do so within the context of demanding social and welfare obligations and within greater inherent constrains in employment, redundancy and reword systems (Brawn and Branine, 1996:192).

We shall now discuss the major reforms that played the biggest role in shaping the HRM practise in organization and management systems.

2.5 Labour reform in SOEs and institutional changes

According to Chen (2001), labour reform in SOEs started in the mid-1980s. It was inspired by the success of the more flexible employment relations in non-state firms (Howell, 1993). The work of Chen (2001) identifies four key reform measures adopted: the introduction of labour contract system, linking wages and bonuses to both the enterprise and individuals’ performance, wage determination within the enterprise, and cutting redundant workers. Along with these reform measures are substantial changes in labour institutions. The ultimate goal of the reform was to establish market-based labour allocation and wage-setting mechanism in SOEs, representing a sharp break with the orthodox state socialism.

In this research, we shall only discuss two of the reforms identified by (Chen, 2001) since these are the one that are of direct relevance to our research problem.

These two reforms are the contract labour system and the labour law.

2.5.1 The contract labour system

The contract labour system, first pioneered in the Shenzhen Special Economic Zone (SSEZ) in 1983, was designed to smash the ‘iron rice bowl’ in the state sector (Warner, 1995). The city of Shenzhen was chosen as an experiment site because it could comfortably take the lead in this reform as it had no pre-existing workforce which could resist the reform (Howell, 1993: 211). Initially, a contractual employment program of five-year contracts was mainly applied to some newly hired ‘permanent’ workers in SOEs, whereas the existing employees in the state sector retained their status quo of lifetime jobs. As such, a ‘two-track’

employment system was created in SOEs (Naughton, 1995a). Striking progress was made in 1992-93 as the labour contract system was extended to cover the existing employees in state firms and collective firms. This was mainly carried out by converting the previously permanent employees into contract workers. The duration of contract could vary from one to five years, corresponding to workers’

previously accumulated service years. The principle of contract applied to both

workers and managerial staff, thus leading to the demolition of the demarcation

line between manual workers and managerial cadres.

From 1994 onwards, most SOEs began to abolish the permanent worker system through converting all of the workforces onto a contract basis. Subsequently, the number of contract workers grew rapidly. By 1997, over half the industrial workers were on the contract system as can bee seen from table G. The pace of the labour contract implementation had clearly been much faster in the SSEZ and in non-state firms than in the state or collective sectors.

SOEs Urban

collectives

Other Total

1985 3.32 (3.7%) 0.72 (2.2%) 0.05 (11.4%) 4.09 (3.3%) 1990 13.72 (13.3%) 2.78 (8.1%) 0.43 (26.3%) 17.02 (12.1%) 1995 43.96 (40.1%) 11.49 (37.4%) 5.51 (62.8%) 60.96 (40.9%) 1996 55.49 (50.7%) 13.94 (47.2%) 6.37 (67.6%) 75.80 (051.1) 1997 55.57 (51.6%) 14.24 (50.5%) 7.27 (67.8%) 77.08 (52.6%)

Table G: Number of contract workers from total employees (in million an percentage) Source: SSB, 1998:150

It was hoped that the widespread implementation of the contract system would add some flexibility to the employment relation, because contracts would not necessarily be renewed after five years. Obviously some extent of flexibility in quits and fires could be achieved as a contract expired. Another related purpose of introducing labour contract was to change the nature of the relationship linking state firms and workers in the category that had previously been labelled

“permanent” (Naughton, 1995a:210). The ultimate purpose was to create a ‘level playing field’ between state and non-state firms in the field of HRM.

2.5.2 The 1994 labour law

As labour contract systems further extended in the1990s, the government enacted

a new Labour Law in July 1994 that was effectively on January 1, 1995. the law is

intended “to protect the legal interests of labour, regulate labour relations,

establish and maintain a labour system compatible with a socialist market

economy, and promote economic development and social progress based on the

Constitution” (Clause 1). The new Labour Law contained 13 chapters, and 107

detailed clauses. It comprehensively codified legislation of all categories of

enterprises, and covered employment rights, individual and collective contracts,

redundancy, health and safety, dispute procedures, and arbitration as shown in

table H. The Labour Law “is applicable to all enterprises, individual economic

organizations and workers involved in labour relations” (Clause 2).

1. Principles

2. Employment promotion

3. Labour contracts and collective contracts 4. Corking hours and holidays

5. Wages

6. Labour safety and hygiene

7. Protection of women and young workers 8. Vocational training

9. Social security and welfare 10. Labour disputes

11. Monitoring and inspection 12. Legal obligations\

13. Supplementary

Table H. Main headings of the 1994 Labour Law contents (Source: the1994 Labour Law, p.1 (see also, Warner’s Appendix 1, 1995))

Under the Labour Law, the labour contract system was legally recognized as a formal employment system. It stated clearly that: a labour contract is an agreement which defines the employment relations between the employing unit and its workers and clarifies the fights and obligations of both parties (Clause 16). It includes both individual labour contracts and collective contracts. A labour contract shall be made in written form and have the following items (Clause 19):

Period of validity of the contract Work content

Labour protection and conditions Labour remuneration

Labour discipline

Conditions for termination of the contract Obligations for violating the contract

The length of a labour contract “can fixed, unfixed or terminated at the completion of a certain task” (Clause 20). If “a worker has worked in the same employment unit continuously for over ten years and both the worker and the unit agree to renew the contracts, indefinite contracts shall be made if demanded by the worker” (Clause 20). “Probationary periods can be regulated in the contract, which cannot exceed six months at the longest” (Clause 21).

In a broad sense, the Labour Law laid a legal foundation for governing labour

relations between the employer and the employee. It attempted to protect all legal

rights of workers. At the same time, the Labour Law sought to protect the

enterprise’ interests from the negative effects of increased labour turnover made

possible through the contract system. For instance, workers who had received

training from the enterprise but failed to work to for the stipulated period

afterwards were required to compensate the firm for the training costs according

to the contract. However, there was clearly a potential contradiction in the Labour Law, on the one hand between a commitment to protect the interests of the workers and on the other the desire to strengthen the discretion of the enterprise over its workforce (Warner, 1997).

These two have a significant impact on the current practise of HRM in SOEs.

2.6 Current HRM practices in SOEs

The literature review carried out in this research revealed that HR systems in SOEs in China were concerned with five aspects of HR policies and practices, namely: 1) recruitment and selection, 2) labour contract, 3) reward systems, 4) training and development, and 5) social benefits (Warner, 1995; Han and Morishima, 1992; Ganhaw, 1985). The presumed consistency of the firm’s HR system is expected to facilitate management’s ability to recruit from the external labour market, to develop workers’ skill, and to prevent human capital losses and erosion. We discuss each of these aspects based on the work of Chen (2001).

2.6.1 Recruitment and selection

In the past, recruitment and selection was subject to the state labour planning, and performed by the government Labour Bureau, according to the state plans. Firms, especially SOEs, could not freely recruit and select manpower from labour markets. The firms, when faced with a personnel shortage, had to report to the local Labour Bureau for approval and then waited for assignment (Warner, 1991).

There was no Western sense of recruitment and selection activities in the state firms. The labour assignment practices through government agencies continued even long after labour contracts were introduced in the mid-1980s (Korzec, 1992).

It was until 1992 that open recruitment and selection of new recruits on market became a rule in all types of firms, state and non-state (Warner, 1997, 1999; Ding and Warner, 1999).

In the recent past, most of the Chinese firms have moved steadily away from state labour assignment practices, towards market-oriented recruitment and selection.

The market oriented recruitment and selection includes: 1) hiring through a wide base of selection from labour markets; 2) different job positions are filled in on different market segments. Frequently, new production workers are completely recruited from external labour markets, while managerial positions are not always exposed to market-based selection.

However, some salient differences exist between the state firms and the private

firms, with respect to labour market approach to managerial staff. Private firms

show a reliance on external specialist personnel markets for high-ranking

managerial staff or executives. This implies that private firms are still more

actively engaged in a market- oriented recruitment and selection. By contrast,

most of the state firms continue to rely on the local governments or their agencies

for the appointment of top managers, rather than on market-based selection. Even

for middle or lower levels of managerial positions open to market-based selection,

filling in is very rare and at most times appointment through the above-mentioned supervisory agencies is applied. Even in many joint ventures with the state involvement, top management members rely on the government for appointment, instead of on open selection. This signifies a strong impact of the government on the appointment of top management in corporatized state firms.

Another striking difference between the state and private firms in recruitment and selection is that the state firms are occasionally forced to accept personnel assignments through the government as a political task, regardless of the state firms’ actual personnel needs. Such personnel assignment mainly applies to retired army men who finished military services, and the disabled who may otherwise find it hard to get jobs elsewhere. Private firms are, however, not obliged to obey personnel assignment.

The remaining personnel assignment practices in state firms indicate continuity of the old personnel system in the changed business environment. It also poses a hurdle on consistency. In particular for assigned personnel, once accepted, SOEs cannot dismiss them at their own discretion. This can also be used to explain why redundant workers are hard to layoff in the state sector.

Besides, local labour market conditions strongly influence the firm’s recruitment and selection practises. This is evident in cities like Shenzhen, where migrant workers constitute the majority of the labour supply. Hiring of migrant workers usually encounters resident permit restrictions. This is so because the government imposes residence permit conditions on job applicants in order to restrict the size of urban population (Mallee, 1994). Recruiting a new managerial job applicant without a regular residence permit must be reported to the local Personnel Bureau for the approval of an immigrant quota each year. As a result, the company adds extra conditions such as high educational attainment and professional titles for exotic job applicants. Usually, job applicants with the university graduate level or a middle level of a professional title can easily obtain the government approval for immigration.

In short, the labour market approach to recruitment and selection enables firm

managers to select desired personnel from a broader source. In particular, the

labour market approach has basically, although not completely, freed state

managers from accepting the government’s administrative assignment of

personnel into their organizations. Despite this, contrasting approaches exist

between the SOEs and the private firms in the recruitment and selection of

managerial personnel. While the former is still subject to management

appointment practice by the government, the latter relies on market-based

selection of managerial personnel. Inconsistency of HRM systems arises in SOEs

where the continued personnel assignment by the government contradicts the

labour market approach. Besides, the local labour market conditions also affect the

firm’s recruitment and selection policy, especially when the government imposes

discriminate employment policies on migrant labour. Nevertheless, it shows that

market-oriented recruitment and selection indeed help management adjust the volume and the components of the existing personnel. The disadvantage pertaining to the labour market approach is that it likely gives rise to labour turn over.

2.6.1.1 Recruitment Methods

A most common method used in many firms to select job applicants is through job interviews. Job interviews conducted in most of the firms are unstructured, rather than structured. Sometimes, a panel interview is applied in which the interviewee faces a panel of interviewers from related functional departments simultaneously.

Although the reliability and validity of job interviews vary substantially due to cognitive and evaluative biases of the interviewers, a job interview at least provides the interviewer with an opportunity to observe the applicant’s verbal and nonverbal actions. Meanwhile, a job interview can facilitate the applicant’s self- selection through so called realistic job previews, which communicate the good and bad things about the job and the organization (Baron and Kreps, 1999: 352).

Besides job interviews, direct psychometric and technical skill tests to job candidates are usually held to evaluate their suitability for particular jobs. In most SOEs written tests are sometimes held for a close examination of the applicant’s skills levels, attitudes and qualities/competencies after the first round of interview.

Basically, managerial and technical recruits are required to take written tests besides the interviews, while production workers are exempted from a test. In many foreign-invested joint ventures, English language is included in the written test for managerial candidates. In some private firms, a psychological test is held for all administrative and managerial candidates.

However, co-worker referral is frequently employed, particularly in private firms investigated. Usually, hiring through such informal channels can result in savings on search costs, and enhance selection reliability (Baron and Kreps, 1999). Co- worker referrals presumably will also have a reputation stake effect on the success of new hires. This is quite prevalent among private firms, in which senior employees’ recommendations for their acquainted friends, or classmates in sought as a source for some key managerial positions, such as accountants, and sales managers. It is assumed that referred friends, relatives, or university classmates by the incumbent for new recruits, can save on screening costs or at least help enhance the reliability of selection. By contrast, the government supervising agencies occasionally recommend suitable candidates for key middle managerial positions in SOEs. The purpose is to minimized the widespread misconduct and corruption associated with some key functional positions in SOEs.

2.6.1.2 Recruitment Criteria

In the west, employers sometimes screen on credentials of job applicants before

offering employment. This is simply because educational credentials can help

employers to identify good potential employees from the applicants (Baron and

Kreps, 1999). On the other hand, individual applicants, by showing the credentials,

signify that they possess certain talents or skills that may be valuable to their