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Expatriate Adjustment On Subsidiary Performance In Mnes Management Essay

Multinational enterprises (MNEs) often assign expatriate senior executives overseas to manage their subsidiaries. One of the primary tasks of an expatriate senior manager is to transfer his/her own specific technical and managerial knowledge to the members of the subsidiary, in order to build up the subsidiary team. Drawing from the resource-based view of the firm and international strategy literature, it is posited that the expatriate senior managers’ utilization will depend on their adjustment to a variety of foreign conditions. This will affect the subsidiary performance and the knowledge transferred into the subsidiary through the expatriate will mediate the relationship between expatriate utilization and subsidiary performance. Thus it is argued that there is an effect of expatriate adjustment on subsidiary performance via knowledge transferred into the subsidiary.

KEYWORDS: expatriate adjustment, HQ-subsidiary knowledge transfer

INTRODUCTION

In today’s globalized corporate world, large multinational enterprises (MNE) have many subsidiaries spread across the globe. Although management teams in subsidiaries now comprise an increasing number of locals or host country nationals (HCN), most of these subsidiaries are still led by expatriate senior managers sent from the home country. Since the expatriate managers are fully responsible for transferring their own specialized subject matter and managerial knowledge to the other members in the subsidiary, providing an overall leadership to their subsidiary, and for keeping the headquarters (HQ) updated with the latest happenings in their subsidiaries, their own adjustment to a wide variety of environmental factors including climate in host county, economic factors, government regulations of both the host and home countries, exchange rate risks, and political risks affect the use, processes, and effectiveness of knowledge transfer between the home country and subsidiary and vice versa. This in turn affects the subsidiary’s financial performance, thereby affecting the subsidiary employees’ remunerations and career aspirations.

As noted by Werner (2002), linkages between expatriate management an HQ - subsidiary relations is one of the glaring gaps in International Management (IM) literature. This paper focuses on the relationship between the expatriate managers inability to adjust to the foreign country conditions thereby generating turnover intentions that may lead to actual turnover in a few cases, and the resulting impact on the HQ-subsidiary knowledge transfer process, which ultimately ends up affecting the subsidiary’s financial performance. This paper focuses on the indirect effects of expatriate managers’ adjustment on the subsidiary’s financial performance.

LITERATURE REVIEW

As organizations are become integrated into the global economy, employees in multinational corporations are moving around the world continuously; a fact indicated by the increasing frequency at which firms are sending their employees on expatriate assignments (Caligiuri, 2000). With increase in the number of expatriates sent abroad, understanding the different behavioral outcomes associated with expatriate assignments is becoming critical. Given this continuing trend toward the use of expatriates, the consequences of expatriates’ international assignments are of great importance to the employing organization (Garonzik, Brockner, & Siegel, 2000). Expatriate failure, defined as the premature return (or its antecedent, premature return intention) of an expatriate employee (Black & Stephens, 1989; Dowling, Welch, & Schuler, 1999; Shaffer & Harrison, 1998), is a frequently studied outcome. The importance of expatriate employees’ premature return as a topic of study can be partly attributed to the significant costs associated with it.

Expatriate adjustment has been described by Black and scholars (Black, 1988; J. S. Black & B. H. Gregersen, 1991; J. S. Black & H. B. Gregersen, 1991) as having three dimensions: adjustment to work (job requirements), adjustment to interacting with individuals in the foreign country (socializing with host country nationals -- HCNs), and general adjustment to the foreign culture (living conditions abroad). Exploratory factor analyses done by the scholars (Black, 1988, 1990; Black & Stephens, 1989) supported a multidimensional adjustment construct for American and Japanese expatriates. Several relational and perceptual skills, such as willingness to communicate, cultural flexibility, and social orientation, have been found to be significantly related to expatriate adjustment (Black, 1990), although such skills difficult to measure, but they also tend to vary across cultures (Harris & Moran, 1987).

Turnover may be categorized as external or internal, voluntary or involuntary, and functional or dysfunctional. External turnover occurs when an individual leaves an organization to seek employment elsewhere. Internal turnover occurs when an individual changes positions but remains in the same firm. Research has indicated that many expatriate managers find the repatriation process much more stressful and frustrating than the initial expatriation and repatriation experiences may be a cause of subsequent turnover (Adler, 1980; Harvey, 1989). Also, many expatriates may develop an intention to quit while on foreign assignment and view the transfer "home" as simply an intermediate step to leaving the firm (Harvey, 1989). Turnover may also be voluntary or involuntary (from the employee's viewpoint). Voluntary turnover occurs when the employee quits or requests and receives a transfer. Involuntary turnover occurs when an employee is fired or transferred at the will of the organization.

The turnover model given by Mobley, Griffeth, Hand and Meglino (1979) suggested that characteristics of the organization, the individual, and the environment shape an individual's perceptions and satisfaction leading to the formation of intentions to stay or quit. The model given by Steers and Mowday (1981) added additional constructs of job performance level, efforts to change the situation, and non-work influences. The satisfaction, commitment, and involvement of an individual would lead to the formation of intentions to stay or quit. Together, these models have been empirically validated. Thus, it appears that constructs central to these models may be generalizable to the international environment and help explain expatriate turnover. By incorporating theoretical models from the area of applied psychology, the criticisms frequently voiced in literature (Black, Mendenhall, & Oddou, 1991; Kyi, 1988; Newman, Bhatt, & Gutteridge, 1978) that the international business literature often is not integrated into a theoretical framework and appear piecemeal and ad hoc, have been addressed to some degree.

In literature, three categories of predictor variables have received general empirical support as being important elements of the employee turnover process: job/task characteristics, organization characteristics, and worker characteristics. These three groups of variables collectively influence an expatriate's degree of job satisfaction, commitment to the organization, and involvement in the achievement of the organization's goals. These attitudes are formed with respect to the parent organization, and, since most expatriates are initially transferred from domestic positions, the attitudes have probably been formulated predominantly in a domestic environment. The expatriate's general satisfaction with, commitment to, and involvement in the organization may be moderated by perceptions of the career path resulting from the international assignment or by the overall level of cross-cultural adjustment. The expatriate's satisfaction, commitment, and involvement may also be moderated by the employee's family situation and the family's overall satisfaction with the international experience or by the characteristics of and general living conditions in the country to which the expatriate is assigned. Collectively these factors will lead to the modification of satisfaction, commitment, and involvement with respect to the organization in the foreign assignment. However, these attitudes toward the organization in the foreign assignment may result in the expatriate clarifying the intent to change employers, stay with the same employer but transfer "home," or stay in the international assignment. The expatriate's intentions may be modified by perceptions of both external and internal employment alternatives. The intentions may result in explicit search behavior, ultimately resulting in an initial turnover decision. The turnover decision, even if the choice is to stay, may result in changes in the employee's job and career expectations and influence subsequent performance. A decision to leave may not be manifested for an extended time period and may result in other withdrawal cognitions.

Firms operating overseas confront mounting pressures because they not only face competition, as do their local counterparts, but also need to deal with various other challenges, such as those arising from cross-country differences in cultures, systems, and other institutions (Kogut, 1989). To overcome the “liabilities of foreignness,” multinational corporations (MNEs) need to transfer knowledge and other competencies to help their foreign subsidiaries survive the competition and gain a competitive advantage (Becerra, Juan, & oacute, 2003; Jensen & Szulanski, 2004; Kogut & Zander, 1993). Knowledge transfer is critical to MNEs’ subsidiaries in emerging economies, as knowledge supply in those countries is limited and institutions governing knowledge creation and transfer are also underdeveloped (Lane, Salk, & Lyles, 2001; Lyles & Salk, 1996; Yadong & Peng, 1999). Prior international strategy research has examined organizational vehicles and structural mechanisms as the determinants of knowledge transfer from MNE parents to their subsidiaries (Almeida, Song, & Grant, 2002; Gupta & Govindarajan, 1991; Kogut & Zander, 1993; Lyles & Salk, 1996). Because knowledge is embedded in the context of its origin and sticky (Nelson & Winter, 1982; Szulanski, 2000), it often needs to be adapted to the context into which it is transferred (Argote & Ingram, 2000; Jensen & Szulanski, 2004). Knowledge also has an important tacit element, which requires the use of personnel and human resources to facilitate the transfer process (Nonaka, 1994). To address these challenges, MNEs often assign expatriates to their foreign subsidiaries to facilitate knowledge transfer (P. Wang, Tong, & Koh, 2004). Indeed, the utilization of expatriates for knowledge transfer has long been viewed as one of the key reasons that MNEs assign expatriates overseas, in the international business literature (Edström & Gaibraith, 1977; Gong, 2003a, 2003b; Hocking, Brown, & Harzing, 2004; Tan & Mahoney, 2006; Tung, 1981, 1987). However, little research has examined the heterogeneity of expatriate characteristics among MNEs’ subsidiaries and how such heterogeneity may affect knowledge transfer as well as the subsidiary’s financial performance.

Expatriate utilization refers to the MNE’s assignment of expatriates to its overseas subsidiaries (Tan & Mahoney, 2006). Expatriates’ human capital is one of the firm’s most important resources (J. Barney, 1991; J. B. Barney & Wright, 1998), yet expatriates are also heterogeneous in their attributes and characteristics. Drawing from the Resource-based view (RBV) (J. Barney, 1991; Wernerfelt, 1984) of the firm, Wang et al. (2009) suggest that expatriates with particular characteristics are valuable and rare resources of the MNE that can provide a competitive advantage for the MNE’s subsidiary. Utilization of such expatriates helps increase the knowledge transferred into the subsidiary, which in turn should enhance the subsidiary’s financial performance, as suggested by the knowledge-based view (Grant, 1996). In line with the recommendations of RBV and the knowledge-based view, and the existing IM literature, the following relationships are proposed to study the indirect effect of expatriate adjustment on the knowledge transfer between HQ-subsidiary, thereby indirectly affecting the subsidiary’s financial performance.

Propositions

P1: Expatriate adjustment is negatively related to expatriate turnover; implying that if the expatriate manager cannot adjust to the foreign conditions, he/she is likely to consider leaving the position and have an employee turnover intention.

P2: Expatriate turnover intention is negatively related to the expatriate utilization; implying that if the expatriate senior manager leaves his/her positions, their overall utilization will suffer, since the firm would have spent significant amounts on sending the senior manager to the foreign posting but it would not benefit the parent or the subsidiary.

P3: Expatriate utilization is positively related to the subsidiary’s financial performance but this relationship is fully mediated by the HQ-subsidiary knowledge transfer; implying that the expatriate senior manager would be expected to transfer his/her specialized knowledge to the members in the subsidiary, in order to get the subsidiary’s members up to speed in their dealings with the corporate and other subsidiaries as well as with their customers, and over time, this knowledge transfer would help the subsidiary’s financial performance.

The conceptual model is given below.

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Insert Figure 1 about here

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RESEARCH METHODOLOGY

Research Design

A few large MNEs would be first identified that are spread across various industries. In each MNE, a newly formed subsidiary would be identified that had an expatriate senior manager take over its reins. The expatriate senior managers would be requested to cooperate in this academic research. A mix of primary data collected through surveys (using Likert scales having 1 through 7) and in-depth interviews with the expatriate senior managers would be used to uncover their reactions to the various environmental factors and secondary data from published annual reports and other databases namely COMPUSTAT would be used to gather the subsidiary’s financial performance. Keeping the poly-contextual recommendations given by Tsui et al. (2007), the focus would be to study the physical, historic, political, social, economic, and cultural contexts of the subsidiary’s expatriates, with emphasis on using the various methods of knowing - physical, communication and psychological means.

Methods

The constructs would be operationalized as described below. Most measures have been used in previous research and thus reliabilities, external and internal validities of the measures are not likely to be a problem.

Lyles and Salk (1996) and Lane et al. (2001) have created several measures of performance, such as business performance and general performance. In this study, these two measures would be used to capture various aspects of the subsidiary’s financial performance. The first measure of subsidiary performance is the level of satisfaction, which would be measured by the extent to which the respondent would be satisfied with the subsidiary’s performance. The second measure is an overall performance index, which would be an average of the extent to which the subsidiary had improved in the following five aspects: management capabilities, technological capabilities, management localization, growth, and profitability.

Expatriate adjustment would be measured with the scale developed by Black and his colleagues (Black, 1988; Black & Stephens, 1989). This scale assesses three dimensions of adjustment and consists of 7 items for general adjustment, 4 for interaction adjustment, and 3 for work adjustment. General adjustment items would examine the expatriates' adjustment to living conditions, housing, and food. Interaction adjustment items would investigate the expatriates' adjustment to socializing with HCNs. Work adjustment items would examine the expatriates' adjustment to the requirements of the new position. For each item, respondents would indicate their degree of adjustment on a 7-point scale (1 = very unadjusted to 7 = very adjusted).

Turnover intention would be measured by the self reported measure – the response to a direct (Y/N) question, asking whether the expatriate senior manager is considering quitting his/her job or going back from the foreign posting.

Knowledge transferred, would be measured based on Lyles and colleagues’ work (Lane et al., 2001; Lyles & Salk, 1996). Lyles and colleagues focused on six aspects of the knowledge acquired by the subsidiary: technological expertise, marketing expertise, product development, knowledge about foreign cultures and tastes, managerial techniques, and manufacturing/service processes. The mediating variable, knowledge transferred, therefore, would be measured by the extent to which the subsidiary has acquired knowledge in the following seven aspects: manufacturing/service-related technology, product-related technology, managerial skills, marketing skills, human resource management skills, corporate culture and values, and strategy analysis techniques.

Control variables:

A number of control variables would be included in the analyses. (1) A control for the size of the subsidiary in terms of the total amount of investment. A log transformation of the investment amount would be required to remedy positive skewness (Tabachnick & Fidell, 1996). (2) A control for the age of the subsidiary, which would be measured as the log of the number of years since the subsidiary would be established. (3) A control for the number of expatriates (Lyles & Salk, 1996), which would be also log transformed. (4) A control for the subsidiary’s learning capacity, which the literature suggests to be an important determinant of knowledge transfer and superior financial performance (Hamel, 1991; Kogut & Zander, 1993). The subsidiary’s learning capacity would be measured by asking the respondents to report the extent to which the subsidiary uses employees who possess the competencies to acquire knowledge, are eager to accept new ideas and concepts, and meet the MNE parent’s overall requirement. (5) Four dummy variables would be introduced that classify the MNE’s country of origin into Asia, Europe, the United States, and others, to control for any macro country - and institution-level influences. (6) A control variable would be incorporated to measure the level of industry competition (Appleyard, 1996) by asking the respondents to assess the intensity of rivalry among competitors in their industry (1 = very low; 7 = very high).

DISCUSSION AND conclusion

In this paper, the relationship between expatriate executives assigned to work in the subsidiary (their adjustment to foreign conditions) and the subsidiary’s performance is examined, and it is posited that this relationship is mediated by the knowledge transferred into the subsidiary due to expatriate utilization. At a broader level, this paper suggests the notion that human resources, expatriate senior managers in this case, can provide a source of competitive advantage for the firm (J. Barney, 1991; J. B. Barney & Wright, 1998), and they also highlight the critical role that knowledge transfer plays in MNEs’ utilization of expatriates.

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