HR Connect Asia Pacific

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1 HR Connect Asia Pacific Volume 4, Issue 2 March 2011 Comparative Employment Risks in the BRIC Countries By Dr. Awie Foong, Associate Director, Aon Hewitt Global Research Center and Tabitha Lim, Research Assistant, Aon Hewitt Global Research Center In the previous issue of HR Connect, Asia Pacific, we presented the first of our three-part series examining the People Risk encountered by companies operating in BRIC countries i. In Part 1, we discussed the People Risk associated with recruitment in BRIC countries. This month we present Part 2 in our series and focus on the People Risks encountered in employing and redeploying people in BRIC. Employment Risks The risks of employing people in BRIC countries can best be understood by taking a close look at employment regulations, labor relations, workforce productivity, and employee engagement and retention in these countries. Among the BRIC cities analyzed in our research, the Russian cities appear to have substantially higher employment risk when compared to the other three countries while China has the lowest risk. Figure 1 shows the overall employment risk for the major cities in each of the BRIC countries. Government Effectiveness, Laws and Regulations Among factors affecting employment risk, government effectiveness and the legal and regulatory system appear to be the most important. All four countries are plagued by corruption and opaque government policies and regulations. Consequently, high risks in employing people in these locations arise due to the lack of clarity and inconsistencies in employment regulations. Often times, external counsels or consultations are required in order for companies, especially the foreign ones, to navigate their way through myriad complicated and inconsistent employment laws. While ineffective government is often a norm in most developing countries, some developing countries are making it an exception, counting on government effectiveness to improve their overall development. Chile, for Health & Benefits Aon Inc

2 instance, has both an investor-friendly policy as well as an effective government. The small African nation of Botswana is another example of a lowly developed country with a less corrupt and much effective government than their neighbors. Nationalism. Nationalist sentiment is another issue that could work against foreign companies in BRIC, where foreign companies may find themselves at a disadvantage as compared with local firms. Such sentiment seems stronger in Russia, which has a long history of strong nationalism as reflected in a series of violent anti-migrants incidents in recent months. Nevertheless, nationalist sentiment is almost as worrying in other BRIC countries. In India, for instance, regional political power sometimes pressures companies to hire sons of the soil ahead of workers from other regions. China has also witnessed public protests aimed at foreign businesses under the pretext of nationalism. In addition, politically-motivated interference in labor disputes is also common in BRIC. Overall, current evidence of corruption and government ineffectiveness is considered to be most prevalent in the Russian cities; whereas Mumbai, Shanghai and Beijing received lower risk ratings (see Figure 2). Health & Safety. A poor regulatory framework and weak enforcement of the occupational health and safety laws also leads to suboptimal protection for the workers. This consequently brings down productivity and puts the company s reputation at risk. While labor laws in all the BRIC countries stipulate the provision of occupational safety and health regulations, enforcement is often patchy due to limited resources and corruption. In addition, the lack of proper infrastructure, tools, and devices to improve workplace safety and health conditions adds to this overall risk. In this regard, Moscow and St. Petersburg carry a higher risk rating compared to other major BRIC cities (see Figure 3). A recent industrial accident at its largest hydroelectric power station put the spotlight on Russia s ageing infrastructure. Aon (Singapore) Pte. Ltd. Co. Reg. No.: G 2

3 Discrimination. Workplace discrimination is another important risk factor related to employment in BRIC. Discrimination based on gender, race, religion, minority status or other factors not only contributes to a reduced pool of talent, it also increases the possibility of conflicts and grievances in the workplace. The BRIC countries are subject to different sorts of discrimination issues. The public sector in India reserves a large proportion of public service jobs (sometimes amounting to two-thirds of all such jobs) for socially and educationally backward communities and Scheduled Castes and Tribes. The intention is to counteract discrimination and prejudice based on differences in caste or community. The unintended consequence though is that such large-scale reservation of jobs can have a damaging impact on efficiency and productivity. Within India s private sector such reservations do not exist and companies hire staff largely based on experience and education regardless of the person s community or caste. Nevertheless, caste and community can play a large part in determining the experience and education of an individual. Reports of racial, gender and religious discrimination are not uncommon in Russia, either. The issue of minority discrimination is less alarming in China s coastal cities, but these cities face a different type of tension between local people and migrant workers. A large part of the problem stems from the hukou system, a residency registration system which ties access to various social services, such as education and healthcare, to where an employee was born, not where he is living and working now. A series of suicides committed by young migrant workers in a large manufacturing plant in Shenzhen, eventually forced the company to make a host of changes, including hefty pay rises and relocations to places closer to migrant workers hometowns. Such incidents have heightened the risk implications implicit in this situation. Crime. Another important risk factor that can affect work productivity, albeit indirectly, is the crime situation in the city. The prevalence of high crime rates in an area increases the cost of security needed to protect employees and property. It also affects workplace morale. Locations with high crime rates are less likely to attract and retain talent. Among the BRIC, Brazil and Russia present higher crime risks, while China, especially Beijing and Shanghai, offer a much safer living environment. The Aon (Singapore) Pte. Ltd. Co. Reg. No.: G 3

4 high crime rates in Brazil have forced companies to invest in additional resources for crime prevention. The presence of organized crime and corruption in Russia has also led to increased costs and risk for firms operating there. Employment Practices and Labor Environment Holding the issue of laws and regulations aside for the moment, companies in BRIC also face the risks involved in engaging and managing their workers expectations on a sustainable basis. Unlike some developing countries like Malaysia and Thailand, labor environment in the BRIC countries can be quite contentious. Companies in Brazil face a higher risk of not being able to make downward adjustments to their wages and benefits, even when facing financial difficulties and struggling to continue as a viable business (see Figure 4). India also imposes a rigid regulatory framework prohibiting wage reduction. The risk for major cities like Mumbai, Chennai and Delhi is somewhat moderated through the establishment of special economic zones, governed by a separate Special Economic Zone policy, wherein companies enjoy some exemptions from the rigid labor laws. The laws pertaining to wage determination are less restrictive in China and Russia, although companies in these countries are feeling the pressure to raise salaries across the board due to workers expectations and a tight employment market. Labor relations. A harmonious labor relations environment facilitates better relations with employees and thus lowers risk for employers in terms of worker productivity. Brazil and India present a high-risk environment. Labor relations are often a political issue in both places. The current administration in Brazil rose to power through the labor movement and so is unlikely to affect any major reform of the labor market. The politically-motivated labor shutdowns in India (called bandh) can be extremely disruptive to businesses, yet they often achieve little improvement in the workers conditions. Union movements, particularly against foreign enterprises, are showing more signs of activism lately. Clearly, firms need to make a strong effort to manage labor relations in each country of operation, as it can severely impact the company s productivity and reputation. Russia is perhaps less restrictive in its labor laws. Aon (Singapore) Pte. Ltd. Co. Reg. No.: G 4

5 Nonetheless, the labor environment in Russian cities is still rated at the same level of risk as Brazil or India due to the uncertainties and inconsistencies surrounding labor law interpretations, especially when there is interference from either government authorities or political figures. Staff turnover. Another key employment risk factor is the high voluntary turnover rate, especially in India and China. Employee turnover is an important consideration in terms of employment risks as it directly impacts work productivity and efficiency. High turnover will most certainly mean more work disruptions, as a firm will have to spend time on training whenever a new employee joins. High turnover will also drive up salaries as companies seek to attract and retain suitable candidates leading to a vicious cycle of unrealistic salary growth. China and India have seen double-digit increases in salaries in recent years due to the tight employment and talent market. China is facing turnover rates as high as 16.7% ii and salary increases due to the rise in minimum wages over the past year amounted to as much as high as 27.9% iii. India s IT and financial services industries are also facing high attrition rates and the corresponding labor costs are putting pressure on firms profit margins. Talent Development The availability and quality of training and development resources in a particular city also impacts the overall employment risk of a city. Companies operating in locations with little or no training facilities run the risk of having to train their employees in-house. This can be difficult and resource consuming, especially when it involves training in specialized fields. Again, the Russian cities present a higher risk than other BRIC cities. Russia has the lowest rating in terms of local availability of specialized research and training services, according to the World Economic Forum s Global Competitiveness Report. India, on the other hand, has established a strong training and development corporate culture, characterized by strong collaborations between companies and education or training institutions. The quality of training facilities in major Chinese cities like Beijing and Shanghai also is fast catching up with the norm in developed cities. Aon (Singapore) Pte. Ltd. Co. Reg. No.: G 5

6 Redeployment Risks The risks of redeploying people are mainly related to the flexibility and feasibility of redeploying staff or restructuring business operations in times of change. Among the BRIC cities, the Chinese cities present the lowest redeployment risk, while the Russian cities have the highest redeployment risk. Figure 6 shows the overall redeployment risk for the major cities in each of the BRIC countries. Many of the same factors that affect employment risk also affect redeployment risk. The risk factors related to labor relations and rigidity of wage determination (Figure 4) are also key determinants of redeployment risk. Restrictions on layoffs by local authorities significantly constrain any restructuring efforts in these locations. Brazil and India are the most restrictive, while Russia presents more uncertainty. China is generally less restrictive, but the recent global economic crisis has prompted the local authorities to impose more regulatory requirements on retrenchment and business relocation or liquidation. According to World Bank estimates, the cost for redundancy is highest in China and lowest in Russia. Government effectiveness and corruption levels (Figure 2) also indirectly affect redeployment risk by creating uncertainties for companies when dealing with government agencies. In this respect, Russia presents the highest risk with its bureaucratic and inefficient civil service that is prone to influences from parties with vested interests. Another key factor affecting the redeployment risk in a city is the availability and quality of training resources (Figure 5). Employee retooling is an important aspect of any redeployment exercise. A city with limited training resources presents fewer alternatives that a company can rely on to improve the future prospects of redundant workers. Considering the relatively restrictive nature of the labor market in BRIC, one important step toward a more open labor market would be to enhance the skill level of the local workforce so that they are more versatile in this ever changing and competitive global economy. Even though the intention of venturing into the emerging BRIC countries can be tempting, it is critical that a company s due diligence includes an assessment of the People Risk involved, along with the usual assessments of the political and financial risks involved. People Risk indeed can contribute to Aon (Singapore) Pte. Ltd. Co. Reg. No.: G 6

7 the success or failure of a venture. Companies should therefore keep in mind the risks of recruiting, employing and redeploying their employees when deciding on where to invest. Contact Dr. Awie Foong, Associate Director of Aon Hewitt's Global Research Center, can be reached at awie.foong@aonhewitt.com. Tabitha Lim, Research Assistant, can be reached at tabitha.lim@aonhewitt.com. Coming up: In Part 3 of our series on Understanding People Risk in the BRIC Countries, we will discuss possible solutions and recommendations that companies can undertake to better manage their risks in recruiting, employing and redeploying people in these locations. References: 1. Corruption Perceptions Index Transparency International. 2. Doing Business World Bank. 3. Aggregate Governance Indicators World Bank. 4. Total Compensation Measurement Study Aon Hewitt. 5. Radford Global Technology Survey, October Radford. 6. The Global Competitiveness Report World Economic Forum. 7. Aon Hewitt Country Profile eguide Brazil. February Aon Hewitt. 8. Aon Hewitt Country Profile eguide China. March Aon Hewitt. 9. Aon Hewitt Country Profile eguide India. May Aon Hewitt. 10. Aon Hewitt Country Profile eguide Russia. March Aon Hewitt. i Brazil, Russia, India and China ii Aon Hewitt TCM Study iii Increase in minimum wage for Guangzhou in 2010, from CNY860 to CNY1,100. The increment for Beijing and Shanghai is 20% (from CNY800 to CNY960) and 16.7% (from CNY960 to CNY1,120) respectively. Aon (Singapore) Pte. Ltd. Co. Reg. No.: G 7