Many Western firms are rapidly investing in, or forming joint ventures with, firms in Eastern European countries. Despite the growth in Direct Foreign Investment (DFI) in Eastern Europe, Western managers know relatively little about the Human Resource Management (HRM) practices of these countries. In this paper HRM practices are discussed in Eastern European states, such as Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Russia. Although there are both historical and cultural differences between these countries, these countries will be dealt with together, as they all have numerous elements in common that enable managers or researchers to see them as a whole.
The purpose of this paper is to analyze if an Eastern European HRM model can be constructed on the basis of an analysis of Eastern Europe on several areas. First, the environment is analyzed, in which several aspects are covered, such as political context and history. The emphasis lies on culture and (possible) implications for business, and HRM specifically. Secondly, specific Eastern European HR practices are dealt with in chapter three. Here too, several topics are analyzed. In the fourth chapter the implications of EU enlargement are considered in relation to Eastern Europe. As many of these countries are potential candidates for a membership of the EU, the necessary changes and implications are investigated. Based on all the forgoing, an attempt is made to establish an Eastern European HRM model in the fifth chapter. Finally, in chapter six, conclusions are given followed by directions for future research.
The analysis of the environmental aspects of Eastern Europe include the following aspects:
Looking at Eastern Europe’s history, several main events can be identified that have an impact on today’s business or cultural situation. First, the two World Wars had a major impact on the creation of the political and economic gap between Eastern and Western Europe, especially the Second World War. Eastern Europe came under the influence of the former Soviet Union, which implied that all countries were under direct political, military and economic control resulting in a very centralized economy.
This type of economy had a profound impact on the HRM practices that were used in those countries, which is further explained in the next chapter. Secondly, under Gorbatsjov as the president of the former Soviet Union, contact with Western Europe was sought, resulting in the break-up of the Soviet Union and the start of a new era for Eastern Europe. Slowly, but gradually a shift was realized from a central towards a market economy, again with the necessary implications for (HR) management.
The qualities that were required by managers of Eastern European enterprises were the ability to bargain, the possession of a network of suppliers and purchasers, and the ability to manipulate production and financial data. This style of management was driven by the response to the allocation of resources by a centralized bureaucracy in which rivalry between enterprises for resources led to unnecessary hoarding of materials.
The history of Eastern Europe still impacts today’s business operations. Many personnel directors and executives have their jobs because of Party connections rather than technical expertise. Creativity and original thinking was not encouraged or reinforced under the centralized government control. Top down communication was the norm. Common US practices such as MBO or 360-degree feedback, or Western European structures such as strong employee involvement or self-management work teams will not be easily transferred to the Eastern European work environment. Business practices that stem from political corruption or organized crime activities are still realities and may violate other countries’ laws and ethical norms. Despite the great changes that have occurred in Eastern Europe, western managers must patiently accept these differences and strive to form successful business relationships given environmental and political constraints.
As mentioned before, the dominant political system in Eastern Europe was communism. This implied that a lot of the large companies were state-owned and the government heavily influenced trade unions. The view projected to the outside world by communist governments, was that of in a worker’s state, such as the Soviet Union and its Eastern European satellites, the interest of the workers were as one with the government, because the government was controlled by a dictatorship of the proletariat.
The problem with such a unitarist system is that it allows for little realistic criticism that might afford changes and reforms to meet real challenges. In theory trade unions were a separate entity from the Communist Party, but in reality they were often controlled by Party members. This meant that under communism, unemployment was unknown due to manipulation with statistical data and hidden unemployment (a certain job is being done by more people than necessary, just in order to provide more people with a job).
The transition from a central to a market economy was initiated together with the transition from a communist to a capitalist political regime, and was started in 1989 after the fall of ‘the iron curtain’. This transition had several consequences. First, due to the hidden unemployment and in an attempt to make organizations more efficient and to cut costs, unemployment rose. Still now a major problem faced by Eastern European countries is persistent structural unemployment. Secondly, after a couple of years a lot of state-owned companies were privatized. In these companies usually an employee culture of the planned economy remained.
The educational system has been and still is rather good. An analysis of 256 Russian CEO’s from all over the country, the overwhelming majority (91,4 %) of them had college or graduate degrees. In the Eastern European labor markets a clear emphasis is put on a technical background, more than a formal management education. This was also backed up by the analysis: about 60 % had engineering and other technical backgrounds, whereas only around 20 % had a formal management degree.
However, due to this strong emphasis on a technical background, there is a significant shortage of local executive talent. Expatriates remain a key component of the management market – an estimated 25 percent of all managers in Eastern European firms are expatriates. On the other hand, this lack in education is rapidly changing. Also due to the efforts to prepare for EU enlargement, a shift in education is clearly noticeable. More and more professional management studies are initiated and further developed, sometime through the help of an exchange program (for instance CEMS). Therefore, we also see a shift in recruitment: more sophisticated methods of attracting managers – such as the use of university recruiting and executive search – are on the upswing for senior-level managers, gradually replacing newspaper advertising and word-of-mouth.
Regarding Eastern European managers, Hofstede hypothesized that they would be characterized by a high power distance (in other words, they would display high tolerance toward inequality in the society and business relationships), high uncertainty avoidance, medium individualism, and low masculinity. As a comparison point, the United States are characterized by a low power distance, high individualism, high masculinity and low uncertainty avoidance. These hypothesizes were further backed up by study performed by Bollinger, who found the exact same results.
Analyzing these results, we see that the Eastern European culture differs from Western cultures, depending on what country. For instance Western European countries, such as Germany and the Netherlands have more similarities with this culture than United States culture or Japanese culture. In order to develop and manage adequate HR policies, the factor culture plays an important role in this process. This Eastern European culture is still influenced by the past of communism and central economy.
The eastern European business environment is very complex and very different from the western business environment. Despite Eastern Europe’s large consumer base and natural resources, western businesses have not been very eager to invest in these countries on a large scale, such as in China. As knowledge increases about Eastern Europe and its business opportunities, and as countries in this region join the EU, increasing western attention will focus on conducting business in this region. Yet, relatively little has been written to guide western managers in Eastern Europe.
The system of Human Resource Management and industrial relations in Eastern Europe has been undergoing enormous change since 1989 and will continue to do so for some time to come. The fundamental problem is the transition from a unitarist system, very tightly controlled by communist governments that influenced every corner of the economy, to a more pluralist system operating in some type of free market.
It is obvious to most observers that some form of pluralistic balance needs to be achieved to contain uncontrolled free market forces. At present most Eastern European countries are stuck in the transitional phase between these two states. For instance, work habits have changed dramatically – with 50-hour weeks and taking work home more and more the norm. At the same time, absenteeism is low, indicating a strong commitment to the job.
In this chapter the following current Eastern European HR practices are analyzed: recruitment and compensation.
Attempts by Eastern European firms to modernize their workforces by recruiting young graduates and contract staff have left older employees on the side. Underqualified graduates and disabled people are also suffering as a result of Eastern Europe’s drive for free-market flexibility. Firms in former socialist nations need to embrace diversity if they are to avoid repeating Western bad employment practices. In comparison to the West, Eastern European HR practices are not mature. Eastern European countries focus more on personnel practices than the integration of HR practices with corporate strategy. At the same time, managerial practices are becoming more westernized – an ‘East Goes West’ trend that is expected to continue. The sleepy, bureaucratic firm of pre-reform days is a thing of the past.
On this area we see a dual path. In the lesser-developed Eastern European countries, such as Russia and Rumania, foreign investors usually enjoy special privilege to import whatever materials and products they may need in their operations, and thus are more able to obtain these luxury products than domestic firms. These imports may be used to recruit, retain, and motivate workers. Therefore, western managers accustomed to providing challenging work and learning opportunities to motivate high level employees instead emphasize material over intrinsic rewards due to the lower standard of living in these countries.
On the other hand, in the Eastern European countries that have a relatively high standard of living, salary increases for local talent are high – even in the lowest categories (state-owned and manufacturing firms), they have grown by more than 25 percent in a two-year period, and in the new private firms they have nearly doubled. These increasing salaries are dictated by the difficulty in attracting good local managers. In this fluid market, many firms review salaries twice a year or more – and benefits for local managers are approaching the levels of expatriates.
But, according to a new EIU report, cash alone is not the key to retention. Staff in crisis-prone countries remains fixated on salaries. But where market economies have been starting to develop, a fair salary will suffice, provided employers deliver on a package of other rewards, incentives and working conditions. Benefits packages vary from country to country, but certain perks have emerged as key motivators across the region: cars and life & health insurance. Increasing stress is being laid on enhanced job satisfaction.