The International Journal of Human Resource Management,
Vol. 19, No. 2, February 2008, 223–239
Cultural distance, expatriate staffing and subsidiary performance:
The case of US subsidiaries of multinational corporations
Saba Colakoglu* and Paula Caligiuri
School of Management and Labor Relations, Rutgers University, Piscataway, NJ, USA
This study examines the relationship between cultural distance and the use of parent
country expatriates in the wholly-owned US subsidiaries of 52 multinational
corporations. This study also investigates the link between the use of expatriates and
subsidiary performance as a function of cultural distance. Testing hypotheses based on
transaction costs theory, our results suggest that firms rely on a greater number of
parent country expatriates when they are culturally distant from the subsidiary (i.e. the
United States). This study further demonstrates the bounded rationality problem faced
by multinational corporations: cultural distance moderates the relationship between
expatriate staffing and subsidiary performance such that a higher ratio of parent
country expatriates is related to lower subsidiary performance, particularly in cases
when cultural distance is high.
Keywords: expatriates; cultural distance; subsidiary performance
Introduction
There are more than 65,000 multinational corporations with over 850,000 corresponding
foreign subsidiaries scattered around the globe (UNCTAD 2005). To maximize the
effectiveness of these subsidiaries, multinational firms must respond to opposing
demands for national responsiveness and global integration (Bartlett and Ghoshal 1988;
Doz, Bartlett and Prahalad 1981). One common method to establish and maintain both
integration and control over international expansion activities is subsidiary staffing
(Konopaske, Werner and Neupert 2002). In particular, multinational corporations
(MNCs) use parent country national (PCN) expatriates, third country national (TCN)
expatriates and host country nationals (HCNs) to balance their strategic needs for global
integration and local responsiveness (Torbiorn 1997; Briscoe and Schuler 2004; Scullion
and Collings 2005). Among these three categories of employees, PCN expatriates have
the greatest potential to influence a subsidiary’s performance because of the strategic
leadership positions they fill, the headquarters’ knowledge they transfer, and their
potential for boundary spanning between headquarters and the host subsidiaries (Edstrom
and Galbraith 1977; Bonache and Brewster 2001; Harvey, Speier and Novicevic 2001).
The reliance on PCN expatriates1 will continue to increase as the amount of foreign
direct investment and the corresponding number of foreign subsidiaries grows steadily
(UNCTAD 2005). According to a recent survey by GMAC Global Relocation Services,
65% of the MNCs expect to see an increase in the number of expatriates for the year
2007 (GMAC 2006).
*Corresponding author. Email: [email protected]
ISSN 0958-5192 print/ISSN 1466-4399 online
q 2008 Taylor & Francis
DOI: 10.1080/09585190701799804
http://www.informaworld.com
224
S. Colakoglu and P. Caligiuri
The importance of expatriates for the MNCs’ operations has been well-established in
the literature (Brewster and Scullion 1997; Bonache, Brewster and Suutari 2001). The
management of expatriates (e.g. selection, training, and compensation practices) and
the factors contributing to expatriates’ success have also been investigated in the
research literature (e.g. Tung 1982; Mendenhall, Dunbar and Oddou 1987; Caligiuri
2000a, 2000b). While past research studies provide a rich foundation for understanding
the management and contribution of expatriates, there are few research studies which
identify how expatriate levels are determined within MNCs (see Delios and Bjorkman
2000 and Harzing 2001a) and how these expatriate staffing practices relate to the
performance of subsidiaries (see Gong 2003a). Therefore, there is a need to further
understand the factors that come into play when MNCs staff their subsidiaries and
how expatriate staffing relates to subsidiary-level outcomes such as performance
(Schuler, Budhwar and Florkowski 2002). Based on the transaction costs theory, the
primary goal of this study is to assess the influence of expatriates on subsequent
subsidiary-level performance as a function of the cultural distance between the home and
host countries. Consistent with a bounded rationality argument, this study posits that
while cultural distance will increase the propensity to staff subsidiaries with expatriates,
cultural distance may also magnify the disadvantages of using expatriates leading to
lower subsidiary performance.
Transaction costs theory, expatriate staffing and cultural distance
Coase (1937) and Williamson (1975, 1979) suggest that minimizing the transaction costs
related to an exchange between two parties is the basic determinant of organizational
structure. In the case of MNC-subsidiary relations, MNCs will strive to configure
the structure of the subsidiaries such that transaction costs related to internationalization
and controlling the operations in the host environment will be minimized (Buckley and
Casson 1976; Erdener and Torbiorn 1999; Gong, Shenkar, Yadong and Mee-Kau 2001;
Harzing 2003). Such costs relate to searching for relevant information in that location,
enforcing the performance of subsidiary employees, and controlling and monitoring
subsidiary operations (Rugman and Verbeke 2003). Given that ‘an MNC consists of a
group of geographically dispersed and goal-disparate organizations that include its
headquarters and the different national subsidiaries’ (Ghoshal and Bartlett 1990, p. 603),
controlling subsidiary operations so that they act in line with overall MNC objectives is a
central issue for optimizing the transaction costs of internalization.
According to Balgia and Jaeger (1984), MNCs use two types of control over their
subsidiaries: bureaucratic and cultural control. Bureaucratic control utilizes an extensive
set of rules, regulations and procedures that clearly limit the subsidiaries’ role and
autonomy. Cultural control utilizes a set of shared values and norms for work processes,
behaviours and the like (Ouchi 1980; Balgia and Jaeger 1984). Cultural control may be
achieved by placing a number of expatriates who may either directly control subsidiary
operations by acting as mini headquarters or indirectly control the subsidiary based on
socialization (Harzing 2001b). Thus, the number of expatriates present in a subsidiary
reflects the level of cultural control an MNC wants to exert on that subsidiary (Konopaske
et al. 2002).
The need for cultural control is often perceived to be greater in the subsidiaries where
the national cultural distance (or difference) is great. According to Gong (2003a, p. 729),
greater cultural distance will result in greater information asymmetry between the
headquarters and the subsidiary, reducing knowledge of the given subsidiary’s
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225
environment, actions and performance. Gong states that ‘as cultural distance increases,
complete and accurate information about subsidiary actions and performance becomes
more difficult and expensive to obtain, and subsidiary activities thus become harder to
interpret, making behavioural and outcome controls by the headquarters difficult’ (2003a,
p. 729). In addition, cultural distance has been recognized as a crucial factor in the
management of transaction costs in subsidiaries (Buckley and Casson 1976; Gatignon
and Anderson 1988; Harzing 2003). Cultural distance increases the uncertainty, risk and
information asymmetry between the home country and the host country, increasing the
transaction costs of operating in that environment (Coase 1937; Buckley and Casson
1976). Thus, following from transaction cost theory, the greater the cultural distance, the
greater the need for cultural control (Balgia and Jaeger 1984; Boyacigiller 1990; Kogut
and Zander 2003).
Given that PCN expatriates are utilized as a form of cultural control, consistent with
transaction cost theory, it follows that greater cultural distance should be related to a
greater use of PCN expatriates. In fact, previous research has found that greater cultural
distance between home and host countries increases the propensity of MNCs to use more
expatriates in the host subsidiaries (Boyacigiller 1990; Harzing 1996, 2001a; Gong
2003a). Consistent with transaction cost theory and past research findings we propose
hypothesis 1:
Hypothesis 1: The greater the cultural distance between the parent company country and
the host national subsidiary country, the higher the ratio of expatriates in the
subsidiary workforce.
Bounded rationality, expatriate staffing and subsidiary performance
While the relationship between cultural distance and expatriate staffing is hypothesized to
be linear, the effect of expatriate staffing on subsidiary performance is hypothesized to be
nonlinear: increasing the use of expatriates may not always result in an increase in
subsidiary performance. Past research has found that the influence of expatriates
on subsidiary performance can be either positive or negative (or potentially neutral)
depending on the context. On one hand, some researchers found possible benefits of
staffing host national subsidiaries with expatriates. Expatriates can control and coordinate
subsidiary operations, transfer MNC-specific knowledge to the host location, and assure
that the subsidiary is performing in line with the expectations of the parent MNC (Edstrom
and Galbraith 1977; Dowling, Welch and Schuler 1999; Harzing 2001b; Riusala and
Suutari 2004). On the other hand, researchers also found potential liabilities from staffing
host national subsidiaries with expatriates. Expatriates may cause interpersonal friction
due to poor intercultural communication and they may produce an ‘us versus them’
mentality between the local and expatriate employees (Kopp 1994; Gong 2003b).
In addition, host nationals may also perceive inequality in terms of their compensation
compared to expatriates (Toh and DeNisi 2003) and a perceived lack of promotional
opportunities caused by expatriates occupying the more senior or key roles within the host
national subsidiary (Dowling et al. 1999). These disadvantages may have direct and
indirect implications for subsidiary-level performance as they may reduce the motivation
and performance level of host national employees.
To better understand the context under which the influence of expatriates on subsidiary
performance can be either positive or negative, past research has examined a variety of
contextual variables – including mode of entry, institutional differences, and cultural
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S. Colakoglu and P. Caligiuri
differences – and their role in determining the direction of expatriate staffing – subsidiary
performance relationship (Konopaske et al. 2002; Gong 2003b; Gaur, Delios and Singh
2005). For example, Konopaske and colleagues (2002) found support for an interactive
effect of mode of entry and staffing approach on the subsidiary performance of Japanese
MNCs. Specifically, they found that ethnocentric staffing in joint ventures relates
negatively to subsidiary performance, and ethnocentric staffing in wholly owned
subsidiaries relates positively to subsidiary performance. Richards (2001), in her
comparison of the subsidiaries of US MNCs in the UK and Thailand, reported that locally
managed subsidiaries in Thailand were more successful than expatriate-run ones because
of the higher cultural distance between the US and Thailand, compared to the UK and US.
Gaur et al. (2005) found that a higher proportion of expatriates in institutionally distant
environments hindered the performance of subsidiaries, while the employment of PCN
managing directors aided performance in the same type of environments. Gong (2003a)
found that expatriate staffing has a positive effect on subsidiary performance as cultural
distance increases, and that this effect diminishes over time as the subsidiary learns from
the parent company.
The present study will focus on the contextual variable of cultural distance because of
its influence on both organizational structure (i.e. reducing transaction costs through
expatriates) and organizational decision-making. March and Simon (1958) argue that
some environments are so complex – such as the global business environment –
that organizations must rely on simplified decision-making to function. These simplified
decision making processes reflect the cognitive limitations of individual decision-makers.
MNCs’ rational decision-making is bounded by the fact that information, resources,
networks, etc. are often culturally limited when operating in a foreign environment.
Rugman and Verbeke (2003) who applied the bounded rationality argument to the global
context argue that MNCs are not always capable of making correct decisions on behalf of
the subsidiaries. They both lack sufficient insight about the context in which subsidiaries
operate and also have limited information-processing capabilities. Consistent with this
bounded rationality argument, this study posits that while cultural distance will increase
the propensity to staff with expatriates, cultural distance will also magnify the
disadvantages of using expatriates by inhibiting expatriates’ ability to effectively control
subsidiary operations, transfer knowledge, and manage relations in the host country,
leading to lower performance. Consistent with this bounded rationality approach, we
propose hypothesis 2:
Hypothesis 2: The relationship between the ratio of expatriates and subsidiary
performance will be moderated by cultural distance – whereby greater
(versus lower) cultural distance is related to lower subsidiary
performance when a high (versus low) ratio of expatriates are in the
subsidiary workforce.
The present study will predict subsidiary performance among subsidiaries based in
the United States. The focus on US-based host national subsidiaries is important because
of divergent findings, suggesting that the case of US-based subsidiaries is unique. For
example, studies have found that the performance of host national subsidiaries is superior
to that of domestic firms because subsidiaries have broader firm-specific resources from
their parent company (Globerman and Meredith 1984). This relationship, however, does
not hold when foreign MNCs operating in the United States are compared to their local
counterparts. Empirical evidence suggests that financial performance of foreign MNCs in
the US are consistently lower than US-owned firms (Kim and Lyn 1990), an indication that
The International Journal of Human Resource Management
227
the US market poses specific challenges even for MNCs that are successful elsewhere.
Jones and Galvez-Munoz (2001) reveal that falling market shares, declining profits, and
the sudden removal of foreign-owned companies from the S&P 500 are not unique to a few
MNCs, but that many of the world’s leading MNCs experience acute control, managerial
and performance problems in the US. Furthermore, they argue that one of the major
challenges that contribute to the performance problems of these foreign MNCs is that they
find it particularly hard to transfer knowledge from the outside world to the US. Given
these unique challenges for US-based subsidiaries, and that research to date on this topic
has not included US-based subsidiaries, the focus seemed logically justified.
Method
Sample
The 2004 edition of The Directory of Foreign Firms Operating in the US was used as the
main source for selecting companies to be included in this study. Out of 3,500 firms from
86 countries that were listed in the directory, 300 were selected using a random numbers
table. The selected companies were contacted via telephone to identify the name of their
HR Managers in order to personalize the invitation letters, which is suggested to increase
response rates (LaGrace and Kuhn 1995; Harvey 1987). Out of the 300 companies contacted,
contact names for 237 companies were identified. The letters were sent to the ‘Director of
Human Resources’ when a name was not identified and to the ‘Managing Director’.
Survey procedure
An online survey was created and the initial mailings included the link to the online
survey. One week after the first letters were sent, reminders were mailed including similar
information contained in the first letter. One week after the second letter, another set of
reminders was sent to those companies where a contact name was not available, and
follow-up phone calls were made to the rest of the companies. This approach is in line with
the suggestions of Dillman (2000).
Respondents
There were 19 undeliverable surveys and the total number of usable surveys was 52,
yielding a response rate of 18.5%. The final response rate of 18.5% compares favourably
to the 10– 12% response rates typical for mailed surveys to top executives of American
firms (Hambrick, Geletkanycz and Fredrickson 1993).
The mean size of the subsidiary workforce in the sample is 278 (s.d. ¼ 633.21) and the
mean age of the subsidiaries is 24.2 years (s.d. ¼ 22.2). A total of 44% of the subsidiaries
has managing directors who are expatriates, and subsidiaries in the sample have an
average of 7.8% (s.d. ¼ 1.1%) expatriates in their workforce.
Table 1 shows the distribution of respondents in terms of their country-of-origin and
Table 2 exhibits the industries that were represented in the sample. The subsidiaries were
from 18 different countries, and the random sampling allowed for a representative
distribution among countries in terms of their investment in the US. The subsidiaries that
were involved in manufacturing made up 49% of the population and the service sector
made up 51% of the sample. An analysis of the industries in terms of Kobrin’s (1991)
measure of global vs. multi-domestic showed that most of these industries can be classified
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S. Colakoglu and P. Caligiuri
Table 1. Countries represented in the sample and their scores on cultural dimensions and cultural
distance from the US.
Country
Frequency
%
PD
UA
MAS
IND
CD
2
1
7
1
1
1
4
5
2
1
9
2
1
2
1
4
1
7
52
3.8
1.9
13
1.9
1.9
1.9
7.7
9.6
3.8
1.9
17
3.8
1.9
3.8
1.9
7.7
1.9
13
100
11
36
39
80
18
33
68
35
13
50
54
31
80
60
57
31
34
35
70
51
48
40
23
59
86
65
81
75
92
50
68
85
86
29
58
35
79
61
52
66
16
26
43
66
47
70
95
8
52
39
42
5
70
66
55
90
80
20
74
63
71
67
54
76
46
69
38
18
51
71
68
89
1.44
0.02
0.12
2.91
2.17
1.37
1.54
0.41
1.64
0.55
2.63
2.40
2.28
3.39
1.78
2.73
0.34
0.08
1. Austria
2. Australia
3. Canada
4. China
5. Denmark
6. Finland
7. France
8. Germany
9. Israel
10. Italy
11. Japan
12. Norway
13. S. Arabia
14. S. Korea
15. Spain
16. Sweden
17. Switzerland
18. UK
TOTAL
PD: Power Distance;
Avoidance; MAS: Masculinity; IND: Individuality; CD: Cultural Distance
P4UA: Uncertainty
2
from US CDj :
i¼1 ðI ij 2 I iu Þ =V i =4.
as multi-domestic since intrafirm transactions account for less than 25% of international
sales in these industries. The only industries that can be classified as global within the
sample are ‘chemical manufacturing’ and ‘electronics and components manufacturing’
industries which make up 5.7% of the sample.
Measures
Expatriate staffing
Based on Gong (2003a), Konopaske et al. (2002) and Boyacigiller (1990), expatriate
staffing is measured as the ratio of expatriates in the workforce. In the survey instrument,
an expatriate was defined as ‘a parent country national that has been transferred to the US
operations from the headquarters or from another subsidiary for an extended period of
time’. As MNCs are increasingly opting for localizing expatriates and thus lowering their
high compensation costs (Dwyer 2004), respondents were also instructed to include those
employees that stay in the US operations for a fixed period of time with a typical expatriate
contract, and those employees that have been localized in the US operations.
Subsidiary performance
Based on Taggart (1999), and Andersson, Forsgren and Holm (2002), respondents were
asked to report on the subsidiary’s performance against industry norms with respect to
sales volume, profitability, and market share on a scale of 5 (1 ¼ well below industry
norm; 5 ¼ well above industry norm). Respondents were also given a ‘not applicable’
option in case a performance dimension is not relevant for that subsidiary’s goal. By
asking the respondents to assess performance with respect to industry norms, the effect of
the industry on performance was also controlled for. Respondents were also asked to
The International Journal of Human Resource Management
229
Table 2. Industries represented in the sample.
Industry
Frequency
%
Beverage & tobacco
Primary metal
Machinery
Computer & electronics
Wood
Petroleum & coal
Chemicals
Nonmetallic mineral
Electrical equipment, appliance & component
Transportation equipment
Apparel
2
2
5
4
1
1
5
1
2
1
1
25
3.8
3.8
9.6
7.6
1.9
1.9
9.6
1.9
3.8
1.9
1.9
48
Financial services
Agriculture, forestry
Mining
Construction
Wholesale trade
Retail trade
Transportation
Information
Professional, technical, & scientific services
Management of companies
Administrative support
2
2
4
1
2
3
2
2
7
1
1
27
52
3.8
3.8
7.6
1.9
3.8
5.7
3.8
3.8
13
1.9
1.9
51
Manufacturing
Total manufacturing
service
Total service
TOTAL
report on the subsidiary’s performance against the parent company’s expectations on a
scale of 5 (1 ¼ well below expectations; 5 ¼ well above expectations). The performance
measure was an average of all the applicable dimensions. Cronbach’s alpha for this measure
was .86, indicating high reliability.
Cultural distance
Cultural distance between the US and the country-of-origin of the parent company was
measured using Kogut and Singh’s (1988) established measure of cultural distance.
In order to calculate the cultural distance index, Hofstede’s (2001) country scores on the
dimensions of power distance, uncertainty avoidance, individualism and masculinity were
used. The cultural distance index is formed based on the deviation along each of the four
cultural dimensions of each country from the US ratings. The deviations are corrected for
differences in the variances of each dimension and then arithmetically averaged.
Algebraically, the following index is formed:
CDj :
4 X
ðI ij 2 I iu Þ2 =V i =4
ð1Þ
i¼1
where CDj is the cultural distance of the jth country from the USA, Iij stands for the ith
cultural dimension of the jth country, Vi is the variance of the index for the ith cultural
dimension, and u indicates the host country, the USA.
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S. Colakoglu and P. Caligiuri
Control variables
Two control variables were used in the prediction of expatriate staffing: age of the
subsidiary and the complexity of subsidiary operations. Age of the subsidiary was
measured as the number of years a subsidiary has been present in the US. Complexity of
subsidiary was based on Thompson and Keating (2004). A simple summated rating was
created by adding the number of functions a subsidiary has. The functions included in the
list were:
1.
2.
3.
4.
5.
6.
Production/manufacturing
Sales
R&D
Regional headquarters
Call centre
Shared services.
Even though some functions may be strategically more important or complex than others,
there is no natural ordering of these functions and therefore they have not been considered
in the creation of the index. The possible values of this index ranged from 1 to 6. The
average complexity score for the subsidiaries was 1.76 (s.d. ¼ 1.4).
Power analysis
Power analysis exploits the relationships among sample size, significance criterion and
population effect sizes (Cohen 1992). A review of the reported correlations among the
variables of interest suggests a population effect size that is considered to be medium by
Cohen (1992). For example, Gong (2003) reported a correlation of .42 between subsidiary
performance and expatriate staffing and Boyacigiller (1990) reported a correlation of .15
between cultural distance and expatriate staffing. In order to achieve the desired power of
.80 with three variables at a ¼ 0.05, a sample size of 76 is required (Cohen 1992). In cases
where the desired sample size is not achieved or when the study is an exploratory one,
Cohen (1992) suggests using a ¼ 0.10 as appropriate.
At a ¼ .10, with three variables, and a medium population effect size, our sample
size of 52 results in a power of .60 (Cohen 1977). This indicates that we have a 60%
chance of detecting the effect that we believe to exist in the population, and a 40% chance
of engaging in a Type II error by not finding evidence against the false null hypothesis.
Although this power is lower than the desired power level of .80, it still compares
favourably to the median power of published studies in the behavioural sciences, which is
estimated to be around .37 (Seldmeier and Gigerenzer 1989).
Results
Preliminary analyses
Using the ratio of expatriates as the dependent variable in an ordinary least squares
regression may violate the regression assumption of normality of distribution (Cohen
and Cohen 1983; Tabachnick and Fidell 2001). To avoid this as a potential problem and
stabilize the variance in this variable, Kleinbaum, Kupper, Muller and Nizam (1998)
suggest using an ‘arcsin’ transformation of such variables. Thus, the arcsin transformation
of the ratio of expatriates was used in subsequent analyses. Table 3 presents the means,
standard deviations and zero-order correlations of the variables included in the analysis.
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231
Table 3. Descriptive statistics and zero-order correlations.
Variable
Mean
s.d.
1
2
3
4
1. Subsidiary age
2. Subsidiary complexity
3. Cultural distance
4. Ratio of expatriates a
5. Performance
24.19
1.76
1.41
.08
3.39
22.19
1.40
1.15
.11
.83
.17
.03
2 .18
.15
2.21
2.21
2.15
.29*
2 .01
2.14
5
N ¼ 52; aThe correlation coefficients are based on the arcsin transformation of the variable; *p , .05;
Two-tailed significance tests.
Hypothesis 1 suggested that cultural distance would be positively related to the use of
expatriates in staffing subsidiaries. Observation of the zero-order correlations indicates
that the correlation between ratio of expatriates and cultural distance is significant
(r ¼ .29, p , .05), providing preliminary support for hypothesis 1. Hierarchical
regression analysis was used to further test hypothesis 1. Models 1 and 2 in Table 4
present the regression results to test hypothesis 1. In step one, control variables subsidiary age
and subsidiary complexity were entered. None of the control variables significantly predicted
expatriate staffing. In step two, cultural distance was entered in the regression. The coefficient
of cultural distance variable and the overall model were significant. Thus, hypothesis 1 was
supported (F ¼ 2.91, p , .05). The final model with the three predictors explained 16% of
the variance in the arcsin transformation of the ratio of expatriates.
Hypothesis 2 suggests that cultural distance would moderate the relationship between
subsidiary staffing and performance, such that a higher ratio of expatriates in the
workforce would lead to lower performance when cultural distance is high. In order to test
this hypothesis, the variables cultural distance and the arcsin transformation of ratio of
expatriates were centred to decrease collinearity between these variables and their
interaction term (Cohen and Cohen 1983; Aiken and West 1991). The moderation effect is
present when the addition of the interaction term to the model that contains the
independent and the moderator variables significantly increases R2, and the coefficient of
the interaction terms is significant. Table 5 presents the results of this moderated
regression analysis to test hypothesis 2. In step one, the independent and moderator
variables were entered. None of the variables had a main (direct) effect on performance.
After entering the interaction term in step 2, the change in R2 was significant.
Table 4. Hierarchical regression analysis results for hypothesis 1a.
Variables
Intercept
Subsidiary age
Subsidiary complexity
Cultural distance
Model F
R2
Change in R2
Model 1
Model 2
.30 (.05)
2.001 (.001)
2.03 (.02)
.21 (.06)
2 .002 (.001)
2 .02 (.02)
.06 (.02)*
2.91*
.16
.09*
1.78
.07
n ¼ 52; aDependent variable: Arcsin transformation of the ratio of expatriates; *p , .05; Two-tailed
significance tests.
232
S. Colakoglu and P. Caligiuri
Table 5. Moderated regression analysis results for hypothesis 2a.
Variables
Intercept
Ratio of expatriates
Cultural distance c
Ratio of expatriates
F
R2
Change in R2
b,c
b,c
£ Cultural distance
c
Model 1
Model 2
3.39 (.12)
2 .63 (.54)
.03 (.11)
3.45 (.12)
2 .68 (.58)
.01 (.11)
2 .93þ(.54)
.26
.08
.06þ
.571
.023
n ¼ 52; aDependent variable: Subsidiary performance.
b
The coefficients are based on the arcsin transformation of the variable.
c
The coefficients are based on centered variables.
þ
p , .10; Two-tailed significance tests.
The coefficient of the interaction term was also negative and significant (ß ¼ 2 .93, p
, .10), lending support for hypothesis 2.
In order to increase the interpretability of the interaction effect, the regression
equation was solved for high and low levels of cultural distance and then plotted on a
graph (Aiken and West 1991). For two-way interactions, regions of significance are
values of the moderator for which the simple slope of the dependent variable on the
independent variable is statistically significant (Preacher, Curran and Bauer 2006).
According to Curran, Bauer and Willoughby (2006), computing regions of significance
can be more powerful than picking arbitrary values of the moderator at which to examine
the significance of simple slopes. Calculation of the significant region (Preacher et al.
2006) revealed that the slope of subsidiary performance on the ratio of expatriates was
significant between cultural distance values of 1.17 and 2.48. Figure 1 shows that the
slope of subsidiary performance on the ratio of expatriates decreases at a higher rate
when cultural distance is high. Overall, as cultural distance increases by one unit, the
slope of subsidiary performance on the arcsin transformation of ratio of expatriates
decreases by .93 units.
Figure 1. Moderating effect of cultural distance.
Regions of Significance: Lower Bound CD: 1.17; Upper Bound CD: 2.48; Performance ¼ 3.45 2
.68 (Ratio of PCNs) þ.011 (Cultural Distance) 2 .93 (Ratio of Expatriates £ Cultural Distance)
The International Journal of Human Resource Management
233
Discussion
Research implications
The primary contribution of this study for the subsidiary staffing literature has been to
show that while MNCs have a propensity to adapt an ethnocentric staffing approach
(Perlmutter 1969) in culturally distant locations; such a tendency simultaneously hinders
the performance of the subsidiaries. This finding is in line with Rugman and Verbeke’s
(2003) arguments that MNCs have a bounded rationality problem when managing their
foreign subsidiaries. They have limited insights about the context in which subsidiaries
operate, have limited information processing capabilities due to the complexity of operations
(Fiske and Neuberg 1990), and thus may make mistakes in calculating the transaction costs of
a given decision.
In line with the majority of previous subsidiary staffing studies, this study found that
cultural distance increases the propensity of staffing subsidiaries with more expatriates
(Boyacigiller 1990; Harzing 1996, 2001a; Gong 2003a). Moreover, cultural distance
predicted the use of expatriates even after controlling for the age of the subsidiary as well
as the functions embedded in it, supporting the importance of the role that cultural distance
plays in staffing host subsidiaries (Tarique, Schuler and Gong 2006). Therefore, this study
reveals that many MNCs may be at a performance disadvantage in culturally distant
locations where a greater number of expatriates are deployed.
While this study replicates some of the earlier findings of antecedents of subsidiary
staffing in the case of foreign MNCs in the US (Boyacigiller 1990; Harzing 1996, 2001a;
Gong 2003a), it contradicts earlier findings with respect to the relation between expatriate
staffing and performance. When this relation was studied by Gong (2003a) and Gaur et al.
(2005), it was reported that the interaction between the ratio of expatriates and cultural
distance was positive and significant for the subsidiaries of Japanese MNCs. One reason
for this contradiction may be the presence of superior Japanese product, process and
management know-how that is being effectively transferred along with a Japanese
expatriate team (Johnson and Ouchi 1974; Ouchi 1981; Adler 1999; Jenkins and Florida
1999). Another reason may be the sample that we have targeted – US subsidiaries of
foreign MNCs – a target that is known to have specific control, management, knowledge
transfer and performance problems. Therefore, it is imperative to study these relations in
other host locations and in MNCs from a wide range of countries.
It is also worth noting that even though the relation between expatriate staffing and
subsidiary performance was not significant when cultural distance was not accounted for,
the overall pattern is that a greater use of expatriates in the US decreases performance.
This finding may result from the difficulty that foreign MNCs are experiencing in
transferring knowledge to their US subsidiaries (Jones and Galvez-Munoz 2001), which
increases as cultural distance increases. Even for the Japanese MNCs, which seem to be
effectively transferring knowledge through the use of expatriates in general (Gong 2003a),
there is some evidence that they encounter serious knowledge transfer problems in their
US operations (Fucini and Fucini 1990; Milkman 1991; Kenney and Florida 1993).
Therefore, future research can explicitly tap into the question of how knowledge is being
transferred via the expatriates to the US subsidiaries and the problems MNCs face in this
regard.
Another reason for this pattern may be that a greater use of expatriates is an indication
of an overall ethnocentric attitude on the part of MNCs that does not reflect well on the
performance of US subsidiaries. After all, US culture is geared toward individualism
(Hofstede 1980, 2001) and independence that may not respond well to ‘headquarter
234
S. Colakoglu and P. Caligiuri
imperialism’ (Briscoe and Schuler 2004). This tendency is also in line with Caligiuri and
Stroh (1995) who reported ethnocentric companies to be less successful than geocentric or
polycentric ones. However, as Mayrhofer and Brewster (1996) suggest, many MNCs are
having difficulty empowering their individual subsidiaries or making the transition to a
geocentric mindset.
Earlier studies also suggest that the relation between subsidiary staffing and
performance is not a direct one, but rather depends on contextual factors (Konopaske et al.
2002; Gong 2003a; Gaur et al. 2005). In this study, we exclusively explored the role of
cultural distance since we argued that it presents a dilemma for MNCs and is a
theoretically important construct. Future studies can explore the fit between staffing
strategy and other contextual variables. The fit between subsidiary staffing and subsidiaryspecific factors such as mode of entry, the role of the subsidiary, or MNC-specific factors
such as industry, strategy, and state of internationalization can be topics for future
research. As a result, our attempt to disentangle antecedents of expatriate staffing and its
relation to subsidiary-level outcomes opens the door to more interesting and fruitful
research avenues.
Practical implications
Expatriates play a significant role in transferring firm-specific tacit knowledge to the
subsidiaries, and are needed for better performance at both the subsidiary and the MNC
level (Bonache and Brewster 2001; Novicevic and Harvey 2004; Riusala and Suutari
2004). However, cultural distance between different national categories of employees can
inhibit the knowledge transfer and integration process, as the results of this study suggest.
Based on the findings of this study, there are three practical implications for MNCs.
First of all, MNCs need to find out ways to effectively transfer knowledge among
different groups of employees, especially in culturally distant subsidiaries, and take
measures to increase cooperation, coordination and communication among them. For
example, cross-cultural training that is typically offered to expatriates can also be offered
to HCNs to increase their understanding of the MNC’s home culture and increase their
awareness of cross-cultural issues. Therefore, rather than focusing exclusively on
expatriate assignment management, the focus of HR departments in MNCs needs to shift
to managing the relation between different national categories of employees as well as
developing knowledge integration practices among them.
Another practical implication that may alleviate this performance problem can be to
focus on effectively localizing subsidiaries in culturally distant locations. One goal for
such subsidiaries can be to speed up the process of transferring MNC-specific knowledge
to the HCNs such that the subsidiary is no longer dependent on expatriates. Effective
localization means that local talent that has an understanding of the MNC’s ways of doing
business is being developed. Such an objective of mentoring and developing local
successors can be incorporated in the performance management process of expatriates.
In addition, the use of inpatriates from culturally distant locations can help MNCs cope
with such performance problems without sacrificing from either global integration or local
responsiveness (Harvey, Kiessling and Novicevic 2003).
Third, even if compressing the pay levels between HCNs and expatriates is not a
feasible objective, the perceived opportunities to advance in the MNC can decrease the
level of frustration of the HCNs, and facilitate increased communication among these
groups. Therefore, geocentric and regiocentric approaches to staffing can be better in
terms of utilizing different knowledge bases of expatriates and local nationals.
The International Journal of Human Resource Management
235
Limitations
Although this study has important contributions to make to the subsidiary staffing
literature, it is not without its limitations. First of all, even though the sample is
representative of foreign MNCs in the US, the modest sample size poses some problems in
terms of the power of the statistical analysis. Future studies can replicate the findings of
this study on a larger sample of the same population. Second, only foreign MNCs
operating in the US were included in the study. Therefore, its generalizability to other
MNCs operating in other countries is also limited.
Another limitation is that while our measurement of expatriate staffing construct is in
line with previous research (e.g. Boyacigiller 1990; Konopaske et al. 2002), the ratio of
expatriates in the subsidiary workforce provides only an overall assessment of the
construct without capturing the expatriates’ ability to influence subsidiary performance.2
Given that senior level expatriate managers may have larger impact on subsidiary’s
performance compared to technical or functional expatriates, future research may measure
this construct at multiple levels (Gong 2003).
The cross-sectional design of the study may also pose some limitations. The positive or
negative impact of expatriate staffing on performance may not always be immediate, but
may take time to materialize. Therefore, the results should be interpreted with this
alternative possibility in mind, and future attempts may use a longitudinal design to
capture the effect over time.
While this study is not an exception in terms of excluding TCNs from analysis, the
negligible amount of TCNs that were present in subsidiaries makes the analysis of
the antecedents and outcomes of using geocentric staffing patterns not meaningful.
While the lack of TCNs in subsidiaries may indicate that many of the foreign MNCs in the
US are not at an advanced stage of internalization, it is important for future studies to focus
on their presence. Using a geocentric staffing pattern may have different antecedents (such
as a global or a transnational strategy) than the extent of the ethnocentricity of staffing.
Moreover, a geocentric staffing pattern may have more positive performance outcomes
than ethnocentric staffing patterns because of the diversity created out of this diverse
staffing composition.
In future studies researchers can try use alternative measures that capture cultural
distance. The use of a cultural distance index, as developed by Kogut and Singh (1988),
has been criticized by several researchers due to the methodological properties of the
index, which assume corporate and spatial homogeneity (Shenkar 2001; Harzing 2003;
Kirkman, Lowe and Gibson 2006). While the use of a cultural distance index by Kogut and
Singh (1988) improves the comparability of findings with previous international staffing
research that has relied primarily on this measure, future studies can try to incorporate
suggestions to improve the measurement of the cultural distance concept. Such
suggestions include supplementing the index by using cognitive cultural distance
measures (e.g. Boyacigiller 1990) or conjunction measures that do not assume linearity
(e.g. Ronen and Shenkar 1985).
Conclusion
The complexities and challenges of staffing a MNE’s global operations are widely
acknowledged. In this study, we have attempted to contribute to the subsidiary staffing
literature by responding to the calls that urge international HR researchers to examine the
links between international HR practices and organizational performance (Schuler et al.
2002). First, we have shown that established frameworks of subsidiary staffing also apply
236
S. Colakoglu and P. Caligiuri
to the US context and that MNCs take into account transaction costs of operating in the US
when staffing their subsidiaries. We also showed the bounded rationality problem faced in
this regard when MNCs staff their culturally distant subsidiaries.
Acknowledgements
We thank David Lepak and Jean-Luc Cerdin for helpful comments on previous versions of this
manuscript.
Notes
1. This study exclusively focuses on parent-country national expatriates. The term ‘expatriate’ will
be used in this paper to refer to the PCN expatriates.
2. We thank a reviewer for suggesting this point.
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