The existence of host-country and country-of-origin effects is analysed by using the concept of fiscal federalism as a theoretical analogy. It is argued that multinationals try to minimize the costs of centralization and decentralization associated with cross-national personnel policy. The higher the costs of decentralization, the more likely is the existence of country-of-origin effects. The opposite holds true for increasing costs of centralization. This is tested empirically by comparing the human resource management and industrial relations (HRM/IR) practices of US and British subsidiaries operating in Germany with those of native German firms. Based on 297 valid cases, it is shown that the existence of decentralization costs is associated with country-of-origin effects in various areas of personnel management, such as the use of variable compensation, employee ownership and initial vocational training. In contrast, in the field of industrial relations (co-determination, compliance with collective bargaining), there are strong pressures to adapt to local norms, leading to host-country effects. These results indicate that a rationalistic cost-minimization approach is well suited to explaining the patterns of host- and home-country effects in regard to the HRM/IR practices of multinational enterprises.
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