Determining the Mix of Host-Country and Expatriate Employees
Once a firm passes from the exporting stage (stage 2) to the stage in which it opens a foreign branch (stage 3)—either a wholly owned subsidiary (the foreign branch is fully owned by the home office) or a joint venture (part of the foreign branch is owned by a host-country entity: another company, a consortium of firms, an individual, or the government)—it must decide who will be responsible for managing the unit. A survey of 151 executives representing 138 large companies identified the choice of management for overseas units as one of their most crucial business decisions.24
There are three approaches to managing an international subsidiary: ethnocentric, polycentric, and geocentric.25
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▪ In the ethnocentric approach , top management and other key positions are filled by people from the home country. For instance, Fluor Daniel, Inc., has 50 engineering and sales offices on five continents and construction projects in as many as 80 countries at any given time. The firm uses a large group of expatriate managers, including 500 international HRM professionals who are involved in recruitment, development, and compensation worldwide and who report directly to a corporate vice president.
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▪ In the polycentric approach , international subsidiaries are managed and staffed by personnel from the host country. For instance, General Electric’s Tungsram subsidiary in Hungary runs eight factories and employs 8,000 people, almost all of whom are Hungarian nationals.26
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▪ In the geocentric approach , nationality is deliberately downplayed and the firm actively searches on a worldwide or regional basis for the best people to fill key positions.27 Transnational firms (those in stage 5) tend to follow this approach. For example, Electrolux has for many years attempted to recruit and develop a group of international managers from diverse countries. Rather than representing a particular country, they represent the organization wherever they are. Most important to Electrolux is the development of a common culture and an international perspective, and the expansion of its international networks.28
As Figure 17.2 shows, there are both advantages and disadvantages to using local nationals and expatriates in foreign subsidiaries. Most firms use expatriates only for key positions such as senior managers, high-level professionals, and technical specialists. Because expatriates tend to be very costly (approximately $150,000 to $1,000,000 per person per year depending on location, in 2014 figures), it makes little financial sense to hire expatriates for positions that can be competently filled by foreign nationals. In many locations an expatriate costs 3,000 to 5,000 percent more than a local employee in 2014 figures.29 In addition, many countries require that a certain percentage of the workforce be local citizens, with exceptions usually made for upper management.
In general, reliance on expatriates increases when:30
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▪ Sufficient local talent is not available This is most likely to occur in firms operating in developing countries. For instance, top managers of Falconbridge and Alcoa (both mining companies operating in Latin America and Africa) are almost always expatriates.
Local Advantages Disadvantages -
• Lowers labor costs
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• Demonstrates trust in local citizenry
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• Increases acceptance of the company by the local community
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• Maximizes the number of options available in the local environment
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• Leads to recognition of the company as a legitimate participant in the local economy
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• Effectively represents local considerations and constraints in the decision-making process
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• Greater understanding of local conditions
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• Makes it difficult to balance local demands and global priorities
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• Leads to postponement of difficult local decisions (such as layoffs) until they are unavoidable, when they are more difficult, costly, and painful than they would have been if implemented earlier
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• May make it difficult to recruit qualified personnel
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• May reduce the amount of control exercised by headquarters
Expatriates Advantages Disadvantages -
• Cultural similarity with parent company ensures transfer of business/management practices
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• Permits closer control and coordination of international subsidiaries
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• Gives employees a multinational orientation through experience at foreign subsidiary
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• Establishes a pool of internationally experienced executives
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• Local talent may not yet be able to deliver as much value as expatriates can
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• Provides broader global perspective
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• Creates problems of adaptability to foreign environment and culture
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• Increases the “foreignness” of the subsidiary
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• May involve high transfer, salary, and other costs
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• May result in personal and family problems
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• Has disincentive effect on local-management morale and motivation
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• May be subject to local government restrictions
FIGURE 17.2
Advantages and Disadvantages of Using Local and Expatriate Employees to Staff International Subsidiaries
Source:Based on Society for Human Resource Management (2014). Make global assignments a win/win for company, employee, www.shrm.org ; Amobs, B., and Schlegelamilch, B. (2010). The New Regional Manager. New York: Palgrave-McMillan; Deresky, H. (2013). International Management. Upper Saddle River, NJ: Prentice Hall; Hamil, J. (1989). Expatriate policies in British MNNs. Journal of General Management, 14(4), 20; Sheridan, W. R., and Hansen, P. T. (1996, Spring). Linking international business and expatriate compensation strategies. ACA Journal, 66–78; Hill, C. W. (2012). International Business. Chicago: Irwin McGraw-Hill; Bozionelos, N. (2009, January/February). Expatriation outside the boundaries of the multinational corporation: A study of expatriate nurses in Saudi Arabia. Human Resource Management, 48(1), 11–134.
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▪ An important part of the firm’s overall business strategy is the creation of a corporatewide global vision For example, Whirlpool Corporation has operations in 40 countries and is deeply committed to the notion of one global company with one global vision. The company has a worldwide leadership program involving extensive use of expatriates, conferences that bring together top executives from different subsidiaries around the world, and global project teams that tackle common problems and facilitate a total international integration process.31
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▪ International units and domestic operations are highly interdependent For example, IBM, HP, and Xerox have specialized manufacturing facilities in different parts of the United States and the world. The outputs of these different facilities (computer chips, software) must be closely monitored and integrated to produce highly sophisticated products such as computers, medical equipment, and photocopying machines. Linking production processes generally calls for greater reliance on expatriate managers and specialists, who can bridge the gaps and tie the units of the organization together.
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▪ Technology has dramatically reduced the need for expatriates to link the international units of the firm to the home office For instance, a Wal-Mart outpost opens every week somewhere outside the United States, managed primarily by local employees. Wal-Mart can rely on local employees because it has 1,000 full-time information technology developers in the United States who develop systems that allow close monitoring of the stores from corporate headquarters in Bentonville, Arkansas.
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▪ The political situation is unstable Corporations tend to rely on expatriates for top management positions when the risk of government intervention in the business is high, when actual or potential turmoil within the country is serious, when the threat of terrorism exists, and when there has been a recent history of social upheaval in the country. Although expatriate top managers may increase tensions between nationalistic groups and a foreign firm, they do provide some assurance to the home office that its interests are well represented locally. Expatriates are also less susceptible to the demands of local political forces. At the same time, as discussed in the You Manage It! feature “Coping with Terrorism,” one of the most stressful aspects of an international assignment for many expatriates is precisely the fact that they can become scapegoats when caught in the middle of political and ethnic conflict.
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▪ There are significant cultural differences between the host country and the home country The more dissimilar the cultures, the more important it is to appoint expatriates who can serve as interpreters or go-betweens. Because this boundary-spanning role demands much cross-cultural sensitivity, the MNC needs to select and carefully train individuals suitable for these positions. This may require considerable career planning.32