The International Journal of Human Resource Management,
Vol. 20, No. 6, June 2009, 1291–1308
Towards a conceptual framework for the relationship between
subsidiary staffing strategy and subsidiary performance
Saba Colakoglua*, Ibraiz Tariqueb and Paula Caligiuria
a
School of Management and Labour Relations, Rutgers University The State University of New
Jersey, Piscataway, NJ, USA; bManagement Department, Pace University, New York, USA
Staffing key management positions at host country subsidiaries is a strategic challenge
for most MNEs. While previous research in this domain explored the antecedents of
MNE subsidiary staffing decisions, strategic outcomes of different staffing patterns
(e.g., using parent, host, or home country nationals) have been mostly overlooked. Drawing
from the resource-based view of the firm, we develop a theoretical model that explains the
links between different strategies for staffing key management positions in host country
subsidiaries and the performance of those subsidiaries in their host markets and within their
MNE networks. Further, we propose contingencies that moderate the relationship
between subsidiary staffing strategy and host country and MNE network performance.
Keywords: expatriate; MNE staffing; subsidiary performance
Introduction
Multinational enterprises (MNEs) purposefully staff their host country subsidiaries with
managers from the headquarters’ country, the host country, or another country. This
nationality-based staffing decision-making serves a multitude of strategic purposes, such
as establishing and maintaining global integration and control, responding to host market
conditions, and mobilizing knowledge across national borders (Edström and Galbraith
1977; Harzing 1996, 2001a; Konopaske, Werner and Neupert 2002; Scullion and Collings
2006). Given the importance of global staffing strategy for an MNE’s global competitiveness, researchers have explored the factors affecting MNEs’ staffing decisions, in
particular, when MNEs utilize expatriates in their host country subsidiaries (Boyacigiller
1990; Downes 1996; Erdener and Torbiorn 1999; Harzing 1996, 2001a; Delios and
Bjorkman 2000). This research stream has generally demonstrated a link between host
country characteristics, home country characteristics, and MNE characteristics and the
level of expatriates that are deployed to host country units or the choice of a subsidiary
managing director (Tung 1982; Boyacigiller 1990; Welch 1994; Richards 2001;
Kessapidou and Varsakelis 2003; Thompson and Keating 2004; Tarique, Schuler and
Gong 2006; Colakoglu and Caligiuri 2008).
While these findings have increased the collective understanding of the antecedents
of global staffing strategies, the possible influence of different staffing strategies on
subsidiary-level outcomes has not been well-investigated (see Gong 2003a for an
exception). This is important given the fact that the global staffing literature clearly
acknowledges the potential influence of any given subsidiary manager as a possible
liability or asset to the subsidiary (Dowling, Welch and Schuler 1999; Bonache and
*Corresponding author. Email: sabacol@eden.rutgers.edu
ISSN 0958-5192 print/ISSN 1466-4399 online
q 2009 Taylor & Francis
DOI: 10.1080/09585190902909822
http://www.informaworld.com
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Brewster 2001; Gong 2003a; Toh and DeNisi 2003). Therefore, there is a strong need to
further investigate and theorize on the link between subsidiary staffing strategies and
subsidiary performance.
This paper seeks to address this research gap by offering a theoretical model that
explains the influence of differentially using parent country national (PCN), third country
national (TCN), and host country national (HCN) managers on subsidiary performance –
both host market and within MNE performance (e.g., the ability to attract scarce MNE
resources to the focal subsidiary) – when the staffing strategy is aligned to fit the
subsidiary’s environment (Chandler 1962; Ghoshal and Nohria 1989; Schuler, Dowling
and De Cieri 1993; Nohria and Ghoshal 1994). Focusing on key management positions is
important because these positions have a stronger potential to impact a host country
subsidiary’s effectiveness compared to positions that are purely technical or functional.
Our theoretical model draws mainly from the resource-based view of the firm which
posits that firms need to possess valuable, scarce, inimitable, and non-substitutable
resources in order to create and sustain competitive advantage (Barney 1991). Different
types of knowledge possessed by different national categories of subsidiary managers
(e.g., host market knowledge of HCNs, firm-specific knowledge of PCNs and TCNs) is
such an organizational resource that has the potential to create competitive advantage in
the host market. Related, the network of relationships that expatriates have access to at
MNE headquarters (e.g., their social capital) and the resources available to them through
these relationships as a potential organizational resource that can aid a subsidiary achieve
competitive advantage within its MNE network (Nahapiet and Ghoshal 1998; Kostova and
Roth 2003).
Second, we draw from the differentiated fit framework (Ghoshal and Nohria 1989;
Nohria and Ghoshal 1994) to explain why contingencies need to be considered when
studying these relationships. In this framework, it is recognized that the structure of an
MNE is not homogeneous throughout the organization but needs to be systematically
differentiated so as to ‘fit’ the different environmental contingencies faced by different
subsidiaries (Nohria and Ghoshal 1994). The contingencies explored in the model include
psychic distance between home and host countries and the business strategy, mode of
entry, and the role of the host country subsidiaries. The choice of these contingencies is
also consistent with the most widely-accepted models of strategic international human
resource management (Adler and Ghadar 1990; Milliman, Von Glinow and Nathan 1991;
Schuler et al. 1993; Taylor, Beechler and Napier 1996).
This paper advances global staffing literature in three specific ways. First, it attempts to
fill the research gap in this area by providing a theoretical model of the relation between
staffing of managerial positions and performance in host country subsidiaries taking into
account contingencies that operate at different levels. The model is based on the premise
that PCN, HCN, and TCN managers possess unique knowledge bases. These knowledge
bases, in turn, have a differential value under the various strategic, operational, and
competitive conditions surrounding a given subsidiary and its unique need for knowledge
transfer and local integration.
Second, the model considers two different aspects of subsidiary performance,
performance in the host market and performance within the MNE network – a differentiation that has not been considered in previous global staffing literature. This is an
important issue to consider given that past research has been criticized for paying
inadequate attention to internal organizational politics within the MNE, despite the
importance of power and politics for an MNE’s internal operations (Edwards and
Kuruvilla 2005). Given that subsidiaries compete simultaneously in the host market
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against host-country competitors and in the MNE network against their sister subsidiaries
(Birkinshaw, Hood and Young 2005), discussing the implications of subsidiary staffing on
both types of performance is the second contribution of this paper.
Finally, six testable research propositions are presented that may serve as a stimulus
for future empirical research. Collectively, these contributions may further the conceptual
and empirical understanding concerning the subsidiary staffing strategy-performance
relationship. Subsequent sections describe the independent variable ‘subsidiary staffing
strategy’ and discuss the relation between subsidiary staffing and the two types of subsidiary
performance in light of the contingencies moderating this relationship. Theoretical, empirical,
and practical implications are discussed at the end.
Subsidiary staffing strategy
MNEs configure the staffing composition of a subsidiary by utilizing different national
categories of employees at different rates (Tarique et al. 2006). They have the option of
choosing from PCN expatriates, TCN expatriates, or HCNs to staff the key management
positions in host country units. In this categorization based on nationality, PCN expatriates
are defined as employees of the MNE who are citizens of the parent country where the MNE’s
headquarter is located and HCNs are defined as employees of the MNE who are working in
the foreign subsidiary and are citizens of the host country where the subsidiary is located.
Finally, TCN expatriates are employees of the MNE who are neither citizens of the
parent country nor citizens of the host country, but are from a third and distinct country1.
This paper defines subsidiary staffing strategy based on Perlmutter’s (1969)
categorization of the attitudes of top managers of MNEs towards building their
worldwide operations – a categorization that is widely accepted and used in the global
staffing literature to refer to different staffing strategies. According to Perlmutter (1969),
such attitudes also dictate the global staffing strategy such that key positions in host
country units are differentially filled with PCN, HCN, or TCN managers based on such
overarching managerial attitudes.
In an ethnocentric staffing strategy, strategic decisions for the host country subsidiaries
are managed at corporate headquarters, subsidiaries have limited autonomy, and key
positions are filled by PCN expatriates. Such a staffing strategy helps an MNE facilitate
and maintain control and coordination, and also is an assurance that the subsidiary
complies with the MNE’s overall objectives and policies (Dowling et al. 1999). The second
staffing strategy is the polycentric approach in which subsidiaries can act as distinct
national entities with considerable decision-making autonomy. Typically, HCNs are in
charge of the subsidiary operations and utilization of either PCN or TCN managers is kept
at a minimum. The polycentric approach aids the MNE in dealing with cultural and
language barriers in the host location and continuity of management in its host country
units (Dowling et al. 1999). Finally, in a geocentric staffing strategy, PCNs, HCNs, or
TCNs can all be found in key positions anywhere in an MNE’s worldwide operations.
In this respect, a geocentric staffing approach would indicate a diverse staffing composition and would range from less heterogeneous to more heterogeneous based on the
number and ratio of different national categories of employees present in the key
management positions of a subsidiary (Gong 2003a).
Different staffing strategies result in different types of knowledge stocks to emerge in
the upper echelons of host country units. This is because regardless of the different
motivations for deploying expatriate managers to host country subsidiaries, (Edström and
Galbraith 1977), an emergent outcome of any expatriate assignment is the transfer and flow
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of tacit knowledge (i.e., best practices, core competencies, technical or managerial knowhow) from the headquarters and sister subsidiaries to the focal subsidiary (Bonache and
Brewster 2001; Hocking, Brown and Harzing 2004; Novecevic and Harvey 2004; Riusala
and Suutari 2004; Bonache and Zarraga-Oberty 2008). Use of expatriates are related to the
flow of tacit knowledge within MNE units rather than the flow of explicit or more
codifiable knowledge because MNEs tend to rely on other means such as manuals and
knowledge management systems to disseminate explicit knowledge and rely on
expatriates to transfer tacit knowledge (Bonache and Zarraga-Oberty 2008).
For example, when expatriates are used to fill technical and functional management
positions in the host location (Edström and Galbraith 1977), they can transfer product,
process, technical, and functional know-how from other units in the MNE to a focal
subsidiary. If the motive is to expose the expatriate manager to international experience
and thus prepare him or her for future executive positions, MNE’s cultural values and
managerial know-how is the type of knowledge that can be transferred along with such
expatriates. When expatriates are used as part of a coordination and control strategy
(Edström and Galbraith 1977), MNE-specific tacit knowledge such as core competencies
and strategic values are transferred to the foreign subsidiaries. While MNE-specific
knowledge (e.g., product, process, technological, and managerial know-how) would be
possessed typically by PCN expatriates, TCN expatriates carry sister subsidiary-specific
knowledge (e.g., process and marketing know-how of sister subsidiaries, best practices)
that may bring diversity into the focal subsidiary’s knowledge stock. Finally, HCN
managers possess in-depth knowledge about host country environment regarding
competition, cultural norms, institutions, regulations, and the like. The implications of
different knowledge flows associated with different staffing strategies in relation to
subsidiary performance are discussed in the following sections.
Subsidiary performance
The MNE subsidiary can be conceptualized as ‘a semi-autonomous entity with
entrepreneurial potential, within a complex competitive arena, consisting of an internal
environment of other subsidiaries, internal customers and suppliers, and an external environment consisting of customers, suppliers and competitors’ (Birkinshaw et al. 2005, p. 227).
That is, host country subsidiaries of MNEs are unique organizational units in the sense that
they are faced with an institutionally dual environment and need to conform and adapt
simultaneously to their internal and external environments in order to be competitive in both
(Kostova and Zaheer 1999; Hillman and Wan 2005).
According to this conceptualization of MNE subsidiaries, a subsidiary’s host market
performance is related to its competitive position in the external environment in which it
deals with host country suppliers and customers and competes against host country
competitors. Such performance can typically be inferred from the financial-, customer-,
and accounting-based performance results of a subsidiary such as profitability, return on
investment, sales revenues, and market share (Andersson, Forsgren and Pedersen 2001).
As opposed to the external competitive environment in which the subsidiary operates,
within its MNE network, the subsidiary competes against sister subsidiaries for the
allocation of MNE’s scarce resources (e.g., new investment, positive attention from MNE
top management team) (Birkinshaw et al. 2005; Bouquet and Birkinshaw 2008). For
example, Bouquet and Birkinshaw (2008) suggest that positive attention received from
MNE headquarters is one such scarce commodity that is allocated across a portfolio of
countries. Positive attention can be received in the form of: (1) level of perceived
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recognition and credit given to a focal subsidiary in comparison to other subsidiaries; (2)
provision of discretionary resources that are in limited supply to facilitate a subsidiary’s
development relative to other subsidiaries; and (3) explicit recognition (e.g., expressed in
media) of a subsidiary’s existence and achievements in comparison to other subsidiaries
(Bouquet and Birkinshaw 2008). Therefore, it becomes inevitable for the subsidiary to
develop influencing strategies and tactics that will enhance its competitive position within
the MNE and attract scarce MNE resources to the subsidiary (cf. Andersson et al. 2001).
Performance, then, can be inferred from the extent to which a focal subsidiary receives
such resources compared to other subsidiaries in the MNE network.
Subsidiary staffing and performance within the MNE
Harzing (2001b) suggests that PCN expatriates act as bumble-bees and spiders within the
MNE and that they weave an informal communication network by ‘flying from plant to
plant and creating cross-pollination between the various off-shoots’ (Harzing 2001b,
p. 369). By possessing a network that spans boundaries, having frequent, multiple, and
longer-tenured contacts with the headquarters, such expatriates build high levels of private
social capital within the MNE (Kostova and Roth 2003; Björkman, Barner-Rasmussen and
Li 2004) which Nahapiet and Ghoshal (1998, p. 243) define as ‘the sum of actual or
potential resources embedded within, available through, and derived from the network
of relationships possessed by an individual or social unit’. According to Kostova and Roth
(2003) such private social capital possessed by boundary-spanners (i.e., PCN expatriates)
will in turn evolve into a public good through social information processing, benefiting
the subsidiary as a whole. In the case of PCN expatriates, the social capital they possess within
the MNE may be valuable when it is used to influence MNE top management team in favor of
decisions that benefit the subsidiary operations. In other words, social capital possessed
by PCN expatriates becomes a valuable, scarce, non-substitutable, and inimitable subsidiary
resource that has the potential to create competitive advantage within the MNE network.
Other than having the necessary social capital within the MNE, PCN expatriates are
also subject to dual levels of organizational commitment and identification (Gregersen and
Black 1992). This dual organizational commitment puts them in an ideal position to
understand the dynamics of ‘institutional duality’ (Hillman and Wan 2005). They can
identify both with the unique objectives of the subsidiary and also with the overall
objectives of the MNE. Therefore, they can be in a better position to understand how to
align the interests of both parties and thus be successful at influencing MNE top
management team’s decision-making process.
Overall, PCN expatriates that are present in a subsidiary’s management team may
make the subsidiary more cognizant of the political processes within the MNE (Carpenter,
Sanders and Gregersen 2001). Having valuable contacts at the headquarters and an
awareness of the strategic decision-making process of the MNE will provide the subsidiary
with an understanding of how to influence organizational decision-makers. Neither HCNs,
nor TCN expatriates would be as valuable as PCNs in influencing such performance due to
their lack of social capital within the MNE. Therefore, we argue that the more PCN
expatriates are present in a subsidiary’s key management team (i.e., ethnocentric staffing
strategy), the better the subsidiary’s performance within its MNE network will be:
Proposition 1:
All things equal, ethnocentric staffing strategy will lead to more
favorable subsidiary performance within the MNE compared to a
polycentric or a geocentric staffing strategy.
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Role of the subsidiary
The role of the subsidiary within the MNE network is likely to moderate the effect of
subsidiary staffing strategy on subsidiary performance within the MNE network. Although
an ethnocentric staffing strategy can lead to stronger within MNE network performance in
general, its real impact and the impact of other staffing strategies on this type of
performance may depend on the role that was imposed on the subsidiary by the corporate
headquarters such that different staffing strategies can lead to better performance under
different roles.
Birkinshaw and Morrison (1996) developed a useful typology that differentiates
between three types of roles that are imposed on MNE subsidiaries. Accordingly, a
subsidiary that is a ‘local implementer’ has limited geographic scope, as well as limited
product or value-added scope within the MNE. Such a subsidiary’s role is to adapt
global products to the needs of the local market. A ‘specialized contributor’ has
considerable expertise in certain functions or activities, but its activities are tightly
coordinated with the activities of other subsidiaries. Thus, it is characterized by a narrow
set of value activities and high levels of interdependence with the rest of the MNC.
‘The world mandate’ works with the headquarters to develop and implement strategy.
Such a subsidiary has worldwide or regional responsibility for a product line or entire
business and typically has unconstrained product scope and broad value-added scope.
As noted by Birkinshaw and Morrison (1996), role suggests a deterministic process
whereby the subsidiary is required to fulfill the function ‘imposed’ by the headquarters.
Therefore, successfully fulfilling the imposed role can have implications for the
subsidiary’s performance within the MNE network. A subsidiary which fulfills its role
successfully and meets the expectations of the corporate headquarters will in turn be in a
better position to negotiate with the headquarters for its own interests and influence them.
Because the role of the local implementer is to adapt the global products to local needs,
the amount of local knowledge that resides in the subsidiary is more important in terms of
getting favorable performance outcomes against headquarters’ expectations. HCN
managers are the kind of employees who have the critical tacit knowledge to tailor
products and services according to local customer needs. The ability to modify
global products and services into localized ones that match the needs and wants of
local customers will also meet the expectations of the headquarters. Subsidiaries will
in turn have better negotiating power with the corporate headquarters and influence
decision-makers.
In the case of a specialized contributor, the interdependence between other subsidiaries
requires the subsidiary to effectively coordinate its activities with the rest of the
organization. One of the purposes for utilizing expatriates is to achieve this coordination
role by building effective informal networks throughout the MNE (Edström and Galbraith
1977; Harzing 2001b). In addition, this subsidiary role requires the presence of human
capital that is aligned with the special expertise that is needed in such centers of
excellence. Therefore, a subsidiary staffing strategy that utilizes expatriates either in an
ethnocentric or a geocentric form is aligned with the specialized contributor subsidiary
role as long as the expatriates present in the subsidiary are the ones who have a social
network spread around the globe (not confined to social capital in the headquarters) and
have the specific type of know-how required by the subsidiary role. By managing the
coordination of activities with the rest of the MNE network through the use of expatriates,
it is possible for the subsidiary to successfully fulfill its role imposed by the headquarters
and influence the MNE political processes for its own interests in return.
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Finally, the world mandate can be considered as a mini-replica of the MNE, a diverse
range of capabilities and competencies are needed within the subsidiary so that subsidiary
learning that is needed to realize the high value-added role can be achieved. Therefore a
geocentric subsidiary staffing is in line with this subsidiary role. PCNs, TCNs, and HCNs
all bring diverse perspectives and competencies into the subsidiary and can bring about the
innovative energy into the subsidiary. In line with the argument for the two previous roles,
successfully fulfilling the role imposed by the MNE will have a positive impact on the
performance of the subsidiary within the MNE.
Proposition 2:
The role of the subsidiary will moderate the relation between subsidiary
staffing and performance within the MNE such that polycentric staffing
will lead to more favorable performance in local implementers; geocentric
staffing will lead to more favorable performance in world mandates; and
either ethnocentric or geocentric staffing will lead to more favorable
performance in specialized contributors.
Subsidiary staffing and performance in the host market
According to the resource-based view of the firm, having valuable, scarce, inimitable, and
non-substitutable firm resources is the most important source for creating and sustaining
competitive advantage (Barney 1991). Among the many resources an MNE may have,
firm-specific knowledge that is valuable, rare, inimitable, and non-substitutable has the
greatest potential to provide global competitive advantage (Hymer 1976; Caves 1982;
Kogut and Zander 1993; Grant 1996; Buckley and Carter 2004). Therefore, we argue that
the impact of subsidiary staffing strategy on host market performance largely results
from the different types of knowledge that resides in HCN, PCN, and TCN managers and
the creation of unique knowledge stocks that emerge from different strategies for staffing
subsidiary management positions. Yet, the stock of knowledge that would be conductive to
a host country subsidiary’s competitive advantage could be different under different
circumstances. Therefore, we argue that the relationship between subsidiary staffing
strategy and their associated knowledge flows and subsidiary host market performance is
not linear but depends on the environmental contingencies surrounding the subsidiary.
In certain circumstances, MNE-specific knowledge that typically resides in PCN
managers can be particularly critical since MNEs exist to transfer and exploit
MNE-specific knowledge and advantages across borders (Kogut and Zander 1993).
MNE-specific knowledge stock can be valuable since different types of know-how, mostly
tacit (i.e., hard to codify, record), that made the MNE successful in its home market and
abroad is embedded in it. This type of knowledge is also inimitable since its transfer is a
causally ambiguous and socially complex process making the knowledge-based advantage
hard to imitate by competitors in the host country (cf. Reed and DeFillipi 1990;
Barney 1991; Kogut and Zander 1993). Moreover, this type of knowledge is scarce and
non-substitutable because it is MNE-specific and not possessed by host country
counterparts. In other circumstances, a diverse knowledge base that is associated with a
geocentric staffing strategy can be a source of competitive advantage for host country units
against host country competitors. A diverse knowledge base that results from combining
and integrating knowledge that resides in PCN, HCN, and TCN managers can also be
valuable, rare, inimitable, and non-substitutable leading to favorable performance results.
Both ethnocentric and geocentric staffing strategies require the transfer, sharing,
integration, and combination of individuals’ tacit knowledge within the host country unit
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to have an impact on subsidiary performance. However research on knowledge suggests
that although it is relatively easier to transfer explicit (i.e., codified) knowledge, tacit
knowledge is more difficult to convey, and its transfer requires greater effort, time,
resources, and stronger ties between the parties in which knowledge transfer and
integration takes place (Polyani 1966; Hansen 1999; Reagans and McEvily 2003). Such
transfer and integration is even harder to realize when the degree of homophily – the
degree to which individuals are similar in certain attributes such as beliefs and values – is
low. Because the presence of different national categories of managers lowers the degree
of homophily within the subsidiary management team, it also lowers the ability of PCN,
TCN, and HCN managers to share common meanings, a mutual sub-cultural language, and
relationship specific heuristics that ease the knowledge transfer and integration process
(Hansen 1999).
Thus, knowledge transfer and integration at the subsidiary level is a costly and risky
endeavor due to motivational (e.g., expatriates ‘dragging their feet’ or HCNs engaging
in ‘not-invented-here’ syndrome), knowledge related (e.g., lack of absorptive capacity in
HCN managers such as their lack of ability and motivation to learn from expatriates),
and/or coordination related problems (e.g., lack of understanding of PCN, HCN, and TCN
managers of complementary knowledge bases) (Cohen and Levinthal 1990; Szulanski 1996;
Buckley and Carter 2004; Bonache and Zarraga-Oberty 2008). For example, a geocentric
staffing strategy may enhance the learning, innovation potential, and performance of a
subsidiary by facilitating the knowledge integration process if these issues are adequately
dealt with (Gong 2003a). However, if the motivational, knowledge-related, and coordination
problems are not effectively managed, it may also lead to nationality-based social
categorization and identification that may work against knowledge integration by creating
conflict (Kopp 1994; Gong 2003a; Toh and DeNisi 2003). The differentiated fit perspective
(Ghoshal and Nohria 1989, 1994) supports the argument that the cost-benefit ratio of using
different staffing strategies needs to be taken into account.
Differentiated fit perspective
Ghoshal and Nohria (1989, p. 1994) argue that managing host country subsidiaries
requires an understanding of the different contingencies that each host country context
presents. Accordingly, an MNE is not a collection of homogeneous units – but rather – it
needs to be systematically differentiated so as to fit the environmental contingencies
faced by different host country units (Ghoshal and Bartlett 1990). In this respect, the
differentiated fit perspective adopts an economizing approach to managing subsidiary
operations in its specification of structural elements by which each subsidiary should be
managed (Ghoshal and Nohria 1989; Nohria and Ghoshal 1994). Conditions of fit are said
to be obtained when optimal trade-offs exist between the cost of each structural element
and its efficacy in the context of the subsidiary under consideration (Ghoshal and Nohria
1989; Nohria and Ghoshal 1994).
Applying this perspective to the subsidiary staffing decision, the alignment between
staffing strategy and the subsidiary context has an impact on subsidiary performance not
only because of a synergistic potential (Chandler 1962), but also because it optimizes the
costs and benefits of adopting different subsidiary staffing approaches (Ghoshal and
Nohria 1989; Nohria and Ghoshal 1994). That is, due to the costs related to transferring
and combining knowledge and associated motivational and coordination problems, MNE
managers are faced with an optimization problem (Szulanski 1996; Buckley and Carter
2004). They need to analyze the costs of transferring and integrating the knowledge
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of different national categories of managers and the benefits of doing so under different
subsidiary circumstances. As a result, we suggest that the subsidiary staffing strategy
needs to fit the contingencies that are operating at different levels in order to optimize the
costs of knowledge transfer and integration and benefits of doing so (Bonache and
Brewster 2001; Novecevic and Harvey 2004; Riusala and Suutari 2004). In the following
sections, we highlight those contingencies.
Psychic distance between home and host countries
Psychic distance refers to the distance between two countries due to the differences in
culture, language, level of education, industrial development, and legal and political
systems (Johanson and Vahlne 1977). As such, it encompasses both the cultural distance
between two countries (Hofstede 1980; Kogut and Singh 1988) and the institutional
distance that is based on the regulative, normative, and cognitive aspects of the host
country environment (Kostova 1999; Kostova and Zaheer 1999). The crux of the argument
in the distance concept is that, as the psychic distance between home and host countries
increases, the uncertainty and risk related to the host environment also increases leading to
a higher perceived need to control those subsidiaries (Balgia and Jaeger 1984). Therefore,
MNEs have an urge to deploy more PCN expatriates to overcome the uncertainty that they
are facing in the host locations (Boyacigiller 1990; Harzing 1996). However, when studied
from the differentiated fit perspective, such an ethnocentric staffing strategy creates an
inherent paradox for MNEs. Although psychic distance increases the probability of
implementing an ethnocentric staffing strategy (see Boyacigiller 1990; Gong 2003b;
Harzing 1996 for empirical evidence), it will also amplify the performance inhibiting
outcomes of using PCN expatriates leading to a decrease in host market performance.
As the psychic distance increases, the ability of PCN expatriates to transfer knowledge,
cope with the demands of the host country, interact with HCN colleagues and subordinates, and manage relations with customers, suppliers, and government officials will
decrease. Therefore, the costs incurred to transfer MNE-specific knowledge of PCN
expatriates and/or attempts to combine the knowledge bases of PCNs and HCNs will be
too great to reap any benefits. Therefore, we argue that polycentric staffing strategy will
lead to better host market performance when the psychic distance between the home and
host countries is large2. In support of this argument, Colakoglu and Caligiuri (2008) found
that MNEs rely on a greater number of PCN expatriates as cultural distance increases but
that a higher ratio of PCN expatriates is related to lower subsidiary performance in cases
when cultural distance is high. Consistent with these arguments and past research findings,
we propose the following:
Proposition 3:
Psychic distance will moderate the relation between subsidiary staffing
strategy and host market performance such that polycentric
staffing strategy will lead to more favorable performance for those
subsidiaries that are located in psychically distant locations.
Subsidiary business strategy
Because host country units are semi-autonomous entities with entrepreneurial potential,
they sometimes tend to pursue their own business interests and strategies in the host
market independent of the MNE (Birkinshaw et al. 2005). Accordingly, a subsidiary that
makes a strategic decision to compete by differentiating its products or services in the host
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market needs to be high on innovation and find new ways or segments to market its
products and services (cf. Porter 1980). In this case, the value created out of knowledge
diversity can help these subsidiaries implement their strategies more effectively. Even
though the costs of combining knowledge among PCN, HCN, and TCN managers will be
large in a geocentric staffing strategy, the benefits of knowledge integration will exceed
the costs for those subsidiaries due to the innovative products and processes that result
from the emergence of a diverse subsidiary knowledge stock.
On the other hand, successfully competing based on costs requires organizational
practices and policies that are aimed at maintaining a low cost structure (Porter 1980).
On average, expatriates cost employers two to five times as much as home-country
counterparts and frequently 10 or more times as much as local nationals in the country to
which they are assigned (Reynolds 1997). Therefore, using TCN or PCN expatriates will
diminish the ability of those subsidiaries to compete on low cost. This means that
the payroll costs will increase at least 10 times the number of expatriates present in the
subsidiary and the value their knowledge will add to a low cost strategy is questionable.
Therefore, polycentric staffing strategy will lead to better performance for this type of
business strategy.
Proposition 4a: Business strategy of the subsidiary will moderate the relation between
subsidiary staffing strategy and host market performance such that
polycentric staffing will be related to more favorable performance for
those subsidiaries competing on low cost and geocentric staffing will lead
to more favorable performance for those subsidiaries competing on
innovation/differentiation.
However, the impact of a geocentric staffing strategy in subsidiaries with a differentiation/
innovation strategy will take time to materialize. Based on social identification theory
(Tajfel and Turner 1986), Gong (2003a) suggests that a heterogeneous staffing
composition (e.g., geocentric staffing strategy) will lead to lower cohesion and higher
emotional conflict in MNE subsidiaries. Such outcomes, in turn, may block the innovative
potential of different nationalities of managers working for the same subsidiary.
The innovative potential of a geocentric staffing strategy will be unleashed once the
managers develop positive attitudes towards each other through continued contacts over
time. As the managers learn to draw from each other’s diverse sources of knowledge,
innovation and subsequent subsidiary performance will follow. Based on this argument,
we propose a three-way interaction between geocentric staffing strategy, differentiation/innovation strategy, and host market performance.
Proposition 4a: The proposition that geocentric staffing will be more strongly related to
subsidiary performance that competes on innovation/differentiation (per
proposition 4a) will be stronger for subsidiaries with more experience in
the host market.
Mode of entry
MNEs can choose from a number of different options when entering into a new market.
They can either choose to enter with a wholly owned entry mode (e.g., greenfield
investments) or opt for equity based entry modes (e.g., international joint ventures and
mergers and acquisitions). In wholly owned entry modes, the MNE maximizes the amount
of control it can exert on the subsidiary while limiting the local resources it can gain access
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1301
to (Konopaske et al. 2002; Woodcock, Beamish and Makino 1994). In equity based entry
modes, the MNE has less control on the subsidiary operations but have rapid access to new
markets and can operate effectively by partnering with local companies (Schuler, Jackson
and Luo 2004). Equity based entry modes facilitate organizational learning and enable
MNEs to capitalize on the existing competence and resources of their alliance partners
(Makino and Delios 1996).
When the MNE chooses to enter a new market with a wholly owned entry mode, it
relies mostly on the MNE-specific knowledge residing in its own employees to compete
effectively in the local market. Therefore, it is important that PCN managers be deployed
to the subsidiary to engage in an extensive knowledge transfer process and control the
uncertainty surrounding the subsidiary based on lack of local competence. Firm specific
know-how, then, will be a differentiator for the subsidiary in the host country and a source
of competitive advantage against local competitors and in turn, enhance performance.
For example, Konopaske, Werner and Neupert (2002) documented that wholly owned
subsidiaries of Japanese MNEs performed better when they utilized an ethnocentric
staffing strategy.
In the case of equity based entry modes, the level of control the MNE can exert on the
subsidiary is limited and is shared by its partners. Because learning is a stated goal of such
an entry strategy, an ethnocentric staffing strategy can create a sense of hostility or a
perceived attempt to dominate the subsidiary operations on the part of the host country
partners which can increase knowledge costs. In such entry modes, the staffing approach
chosen needs to reflect the level of control and equity each partner has on the subsidiary so
that the costs of knowledge transfer and combination is minimized by reducing conflict
and tension. If the partner is a local one, a staffing strategy oriented towards polycentrism
is more appropriate and can lead to more favorable host market performance. Such an
orientation can facilitate and ease communication and coordination among existing PCNs
and HCNs and lead to a less costly knowledge integration process. If the partner is from a
third country, the use of a geocentric staffing strategy will lead to more favorable
performance outcomes since such a staffing approach represents the interests of all the
parties involved in the venture and does not create conflict that can inhibit knowledge
integration and performance.
Proposition 5:
Entry mode will moderate the relation between subsidiary staffing and
host market performance such that ethnocentric staffing will lead to more
favorable performance for wholly owned entry modes; polycentric
staffing will lead to more favorable performance in equity based entry
modes with a local partner, and geocentric staffing will lead to more
favorable performance in equity based entry modes with a third country
partner.
Discussion
Research implications
This paper provided a model of subsidiary staffing strategy and subsidiary performance
based on the differentiated fit framework that identifies variables moderating this
relationship (Chandler 1962; Nohria and Ghoshal 1994). These moderating variables
represent conditions that determine under what conditions different approaches to
subsidiary staffing can aid or hinder performance by balancing the benefits and costs of
knowledge transfer and integration. The underlying concept of the model is that different
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S. Colakoglu et al.
national categories of subsidiary managers (PCNs, HCNs, and TCNs) have unique
knowledge bases that provide differential value under different conditions. Under certain
conditions, the subsidiaries are highly reliant on the local tacit knowledge residing in HCN
managers. In other situations, the MNE-specific knowledge and the social capital of PCNs
provide a competitive advantage for the subsidiary against both local competitors and
other subsidiaries in the MNE network. Still in other cases, the knowledge integration
process among different national categories of managers is worth investing in since
innovation that is created out of diversity can be critical for the subsidiary’s performance.
The moderators included in this model are evident in much of the subsidiary staffing
and strategic international human resource management literature (Milliman et al. 1991;
Schuler et al. 1993; Taylor et al. 1996). By building upon this stream of literature, this
paper extended the global staffing literature by discussing how these variables can lead to
increased host market performance if they have the right fit with the staffing approach.
This paper also responds to the strong need in the international human resource
management (IHRM) literature to link international HRM policies with behavioral and
financial outcomes/firm’s performance in individual business units and the overall firm
(Schuler, Budhwar and Florkowski 2002).In the model provided in this paper, it was
acknowledged that subsidiaries compete within the MNE with other subsidiaries to influence
strategic decisions such as investment allocations. It was proposed that presence of PCN
expatriates in the subsidiary will make the subsidiary more cognizant of the political
processes within the MNE and aid performance in this respect. By doing so, this paper
introduced the political and power issues within the MNE to the staffing literature which
were not considered in previous studies and frameworks (Edwards and Kuruvilla 2005).
The challenges of carrying-out international research are widely acknowledged. This
is in part why most of the understanding about subsidiary staffing is based on the
subsidiaries of Japanese MNEs. Researchers utilizing the Toyo Keizai database have
started to establish an understanding of how the presence of expatriates impacts the
performance of foreign subsidiaries of Japanese MNEs (Delios and Bjorkman 2000;
Konopaske et al. 2002; Gong 2003b, Dutta and Beamish 2005; Gaur, Delios and Singh
2005). However, when considering the empirical examination of the relationships
proposed in this paper, researchers need to rely on a survey methodology since it would
not be possible to collect data about the all variables using secondary or archival data. For
this purpose, researchers can take one of several approaches in terms of sampling.
The ideal approach would be to conduct a large-scale international study that includes
MNEs from multiple home countries operating in multiple host locations. An alternative
approach can be to focus on a single country and test part of the model on the subsidiaries
of foreign multinationals in that country. A third approach can be to focus on a single MNE
and test part of the model on the subsidiaries of that MNE. Also, a longitudinal design
would be desired since the impact of subsidiary staffing strategy on performance may
materialize over time.
Existing or newly created measures can be used for the independent and dependent
variables as well as the moderators. Subsidiary staffing strategy can be measured as the
number of managers from different national categories and the extent to which they are
represented in the subsidiary management team. Previous subsidiary staffing research has
predominantly inferred subsidiary staffing from whether the managing director of the
subsidiary was from the parent or the host country (Harzing 1996; 2001a) or by calculating
the ratio of PCN expatriates at the top management team or subsidiary workforce levels
(e.g. Boyacigiller 1990; Konopaske et al. 2002; Gong 2003b). In this respect, the focus has
been on the continuum or dichotomy between an ethnocentric and a polycentric staffing
The International Journal of Human Resource Management
1303
strategy. Measures that can be borrowed from the diversity literature can be used to
measure a geocentric staffing strategy. For example, Gong (2003a) suggests using Blau’s
(1977) index to measure the national heterogeneity of subsidiary staffing. He suggests that
when there is an equal number of PCNs, TCNs, and HCNs, this index reaches its largest
value of .67. Alternatively, subjective measures of the three staffing approaches can be
created by asking respondents to reflect on the extent to which PCNs, HCNs, or TCNs are
influential in the management and daily operations of the subsidiaries. In terms of our
dependent variable, subjective indices of performance can be created to measure
subsidiary performance both in the local market and within the MNE network since it is
notoriously difficult to get objective performance data for the subsidiaries (cf. Taggart
1999; Andersson et al. 2001).
The country level variable psychic distance is maybe the trickiest construct that
needs to be dealt with among the proposed variables. Psychic distance had usually been
reduced to cultural distance and measured by Kogut and Singh’s (1988) cultural distance
index based on Hofstede’s (1980) country scores on the dimensions of power distance,
uncertainty avoidance, individualism, and masculinity. This measure has been criticized
by many scholars (Shenkar 2001; Harzing 2003; Kirkman, Lowe and Gibson 2006). Such
indices assume both corporate and spatial homogeneity which decreases the validity of
these measures (Shenkar 2001). An alternative, but a less convenient way to measure
psychic distance can be to supplement these indices by cognitive and perceptual measures
such as asking the PCN expatriates the extent to which they think the cultural and
institutional frameworks of the host country is similar to the home country and aggregating
the responses. In addition, geographic distance, religious and language similarities can be
assessed to fully capture the psychic distance between home and host countries. This way,
a better and a more valid understanding of the actual distance can be obtained.
Subsidiary-level moderators can also be measured using objective or subjective
measures. Entry mode can be measured using archival data or getting information from
respondents. The role of the subsidiary can be determined by the extent of interdependence
between the subsidiary and the headquarters as well as between the subsidiary and other
subsidiaries in the MNE in the flow of resources (Rosenzweig and Nohria 1994).
The generic strategy typologies have been around for some time and can be measured
using existing measures (e.g., Jackson, Schuler and Riviero 1989; Huselid 1995).
Despite the contributions our paper makes to the global staffing literature, it is not
without its limitations. Specifically, our model is limited by the current status of global
staffing theory and literature. For example, while the dominant framework for categorizing
MNE staffing approaches is to make a distinction between ethnocentric, polycentric, and
geocentric staffing patterns, MNEs use a multitude of employees within each national
category. For example, Briscoe and Schuler (2004) differentiate between permanent
transfers, second-generation expatriates, immigrants, and just-in-time assignees among
others. Tarique et al. (2006) differentiate between those HCNs and TCNs that have been
socialized at parent country headquarters, host country subsidiary, or regional
headquarters. Future studies can make a finer distinction between different types of
MNE employees and thus improve the model we developed in this paper.
Practical implications
This paper has several implications for the subsidiary staffing practices of MNEs. When
staffing foreign subsidiaries, MNEs need to examine carefully the configuration of the
internal and external contingencies for each of their subsidiaries and take a differentiated
1304
S. Colakoglu et al.
staffing approach that is going to optimize the constraints imposed on the subsidiaries by
the unique strategic, competitive, cultural, and institutional environments they are facing.
This way, MNEs can utilize the different knowledge bases of PCNs, TCNs and HCNs
strategically and create a competitive advantage in the host market. Given that many
MNEs prefer to adopt ethnocentric staffing approaches irrespective of these contingencies
(Mayrhofer and Brewster 1996), our model provides a guideline for the type of staffing
approach that is appropriate under different conditions.
Second, our paper has implications for the management of expatriation which includes
practices such as selection, preparation for the expatriate assignment, managing their
performance during the assignment, and managing the repatriation process after the
assignment (Stroh and Caligiuri 1998; Caligiuri and Colakoglu 2007). However, MNEs
differ on the extent to which these practices are used (Tung 1982; Kopp 1994; Peterson,
Sargent, Napier and Shim 1996) and how effectively they are designed (Brewster and
Scullion 1997; Mendenhall, Dunbar and Oddou 1987) which may inhibit or facilitate the
knowledge integration process among different national categories of employees. Carefully
designed expatriate management practices can aid knowledge transfer and integration
between PCNs, TCNs, and HCNs. Especially in the case of ethnocentric and geocentric
staffing approaches where the presence of PCN and TCN expatriates are significant, high
investment expatriate management practices will pay off in terms of improving communication, trust, and interaction between different categories of employees, and by catalyzing the
knowledge integration process.
Notes
1.
2.
Although there are many variations of international employees within this general categorization
based on nationality (Briscoe and Schuler 2004; Tarique et al. 2006), focusing on each and every
type of international employee such as permanent transfers, second-generation expatriates,
immigrants, or just-in-time assignees is beyond the scope of this paper.
For this contingency, use of polycentric vs. ethnocentric staffing approach is only considered
since the distance concept is related to the existence of two distinct nationalities. Therefore,
consideration of a geocentric staffing approach is not applicable.
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