International Staffing Research Results
This article is presented in four parts. The first installment covers the arguments over international staffing decisions from a resource-based perspective. The second installment takes on the agency perspective of international staffing decisions. The third deals with the transaction costs perspective of international staffing decisions. In the fourth, and final, installment (this installment), we present research results and discussion of international staffing choices.
Our contribution here is to summarize the arguments, findings, and discussions of a 2002 research paper entitled An Empirical Investigation Of Expatriate Utilization: Resource-Based, Agency, And Transaction Costs Perspectives, professors Danchi Tan, Chengchi University, Taipei, Taiwan, and Joseph T. Mahoney, University of Illinois at Urbana-Champaign.
International staffing is one of the important categories of International Expansion, so please check back frequently for additional articles on this subject.
RESEARCH RESULTS AND DISCUSSION OF INTERNATIONAL STAFFING CHOICES
Although the researchers predicted, from an international staffing resource perspective, that a multinational firm tends to rely more on expatriates in consumer goods industries, this did not follow from the premise first developed by the same researchers. Moreover, they also found that empirical data did not support their suggestion. In trying to explain that, they returned to their earlier premise that, in consumer goods industries, local knowledge and local business connections are crucial for the success of multinational firms and hence the opportunities for organizational learning are great. Japanese multinational firms may have sent expatriates to the US subsidiaries in order to develop their managers. It is hard to see how they could have expected their data to prove otherwise.
They correctly predicted, from an agency perspective, that industry globalization would lead to higher expatriate utilization. An analysis of the data confirmed their prediction and suggested that when the level of international linkage of a US industry is high, Japanese multinational firms tended to send more expatriates to their US subsidiaries, and that when the level of integration of value added activities of a US industry is high, Japanese firms tended to appoint a Japanese top manager (also an expatriate) to the US operations.
Next, the researchers predicted, from a transaction cost perspective, that a firm’s utilization of expatriates is likely to be influenced, both positively and negatively, by the level of uncertainty about the target market. They found that Japanese firms sent more expatriates to US subsidiaries in highly uncertain industries, but tended not to appoint a Japanese national as the top manager to the US subsidiary in highly uncertain industries. Perhaps such findings are due to the need for both expatriates and local managers in the presence of high uncertainty.
They also predicted, from a transaction cost perspective, that a Japanese firm with greater multi-nationality is likely to rely more on expatriates. The empirical findings are consistent with the argument that a firm with higher multi-nationality is likely to be endowed with greater international managerial resources, which allows the firm to employ expatriates to manage its foreign operations.
Further, from a transaction cost perspective, they predicted a positive association between the tacitness of knowledge of an industry, and expatriate utilization, but the data did not support this. One possible reason is that the measure for tacitness captures the extent of tacitness of both product and process innovations in US industries. It is likely that the product knowledge is location-specific (for example, product innovations developed in the US subsidiary are based on the preference of US consumers), and hence is transferred to a lesser extent than process knowledge. If this is true, the association between tacitness and expatriate utilization is likely to be valid only when process, rather than product, knowledge is considered. To test such a conjecture, they replaced the measure for tacitness with alternative measures relating to process and product, and re-run the model. Then, the empirical results are partially consistent with initial conjecture, as the process measure correlates with more expatriates while product does not. This empirical finding suggests that when the process knowledge is tacit, a firm is likely to utilize more expatriates to facilitate knowledge sharing and learning. They also performed the same analyses for top managers and found that neither process nor product by itself correlated with Japanese top managers. Perhaps it takes a group of managers, rather than one top manager, to facilitate tacit knowledge sharing within a multinational firm?
Finally, from a transaction cost perspective, they predicted that a firm transferring proprietary resources such as R&D or reputation (e.g., through extensive advertising) is likely to utilize more expatriates in foreign subsidiaries. Findings suggested that Japanese firms with high R&D intensity have sent more expatriates to their US affiliates. At the same time, the likelihood of using Japanese nationals as the top managers of the affiliates was not higher for these firms. It may be possible that protecting proprietary technologies requires a group of trusted managers. There is also some indication that the importance of a firm’s reputation and brand names correlate with the use of more expatriates, but when reputation is location-specific, it is not easily transferred across national borders, and hence, does not require expatriate involvement. In addition, promoting reputation and brand names in foreign countries may need to be coupled with local knowledge and distribution, and thus local managers can make valuable contributions.
Irrespective of perspective, the researchers also studied the impact of foreign market entry methods, time of arrival, and size of subsidiary. They found that Japanese firms that entered into the US industries by acquisition may have relied less on expatriates to avoid potential employee resistance from acquired companies. Similarly, they found that utilization of expatriates is greater in older Japanese subsidiaries. It may be possible that early Japanese investors in the US had poor information about the US managerial labor market and thus had relied more on expatriates to manage their international operations. Another potential reason is that early Japanese investors had greater tendency to rely mostly on expatriates in every situation. Finally, they surmised, from the data, that for larger US subsidiaries, Japanese firms sent more expatriates, but tended to appoint non-Japanese nationals as the top managers.
The researchers conclude, on a practical note, that empirical analyses indicate that managerial contractual incompleteness problems may influence a firm’s international staffing decisions. In conditions where the contractual problems are likely to prevail, such as in global industries, in highly uncertain industries, in industries characterized by tacit process knowledge, transferring proprietary technologies, Japanese multinationals are found to have sent more expatriates to their US subsidiaries. They also found that the need for local resources affect the staffing decision; as in highly uncertain US industries where local resources are important for buffering risks, Japanese multinationals are found to have assigned non-Japanese nationals as the top managers.
Further, they indicate that due to the cost of contracting with local managers, a multinational firm may over-rely on expatriates even when expatriates may fall short of expectations. Accordingly, reducing contractual costs of utilizing local hires may improve efficiency in human resource utilization. The detailed discussion of the sources of contractual concerns over international employment contracts pointed out earlier in this set of articles could serve as a starting platform for exploring how to develop mechanisms to reduce contractual concerns.
And finally, they note that human resources are one of the more important strategic resources of a multinational firm, too important to be limited to human resource management scholars, and that international staffing deserves more attention from a wider audience, particularly from international strategy researchers.