Chapter 13:
Expatriate Assignment
Take-away
• Expatriates (home-country and 3rdcountry nationals) are expensive, but
often indispensable.
• Net benefits of expatriates depend on
– Maturity of subsidiary
– MNE form
– Selecting the right person
Expatriate Advantage
• Expert in company products and processes
• Personal connections to HQ managers
• Global view
– Cross-country coordination
– Especially 3rd country nationals
• Larger talent pool to draw from
– Track record from previous assignments
– Performance in smaller subs as testing ground
Local Advantage
• Expertise on culture of local workers and customers
(less cultural separation).
• Well-connected to local suppliers, buyers, officials
(less relational separation).
• Much cheaper than expats
– 10-20% in China (1997 report)
– 20-25% of the total compensation for expats (2006 report)
• Lower “failure rates” than expats
– 20-50% failure rate for U.S. firms
• Placing locals at top of management structure provides
career track incentives for entry-level local managers.
Net advantages of locals
• Increasing in time since the subsidiary
was established
• Decreasing in the authority/responsibility
level of the manager (juniors vs seniors)
• Draw a figure with “local share” on
vertical axis and “time” on horiz. axis
Multinational staffing strategy
depends on form
• Replication and polymorphic
– Low coordination with HQ
– After set-up, little need for expats
• Branching
– Need expats (U) and locals (D)
• Specialization
– High levels of coordination needed
– Continued value of expats (who should move
frequently)
• Polycentric
– Tournament model for internal advancement
Why are expats so expensive?
• Base pay determined by home base, not local
pay standards
– so no savings from cheap host country wages
• COLA: Cost of living allowance (0-80%)
• Foreign service premium (0-20%)
• Hardship premium (0-25%):
– “extraordinarily difficult living conditions, excessive
physical hardship, or notably unhealthful conditions
affecting the majority of employees”
Cost and Hardship allowances
(as determined by US State Dept.)
City
Tokyo
Cost allowance Hardship pay
(excl housing) differential
70
0
Paris
60
0
Hong Kong
50
5
Rio de Janeiro
0
10
Mexico City
0
15
Beijing
10
20
Lagos
25
25
Expat expenses (cont’d)
•
•
•
•
•
•
•
Housing allowances
Child Education allowances
Relocation allowances
Interpreters
Drivers
Language and cultural training
TAXES
Taxation of Expats
• Tax protection vs Tax equalization
– Protection: Firm pays any extra taxes
associated with foreign assignment
(manager benefits from lower taxes)
– Equalization: Firm pays extra taxes but
makes a deduction to offset any tax savings
(manager does not benefit from low taxes)
Taxation of Expats (cont’d)
• COLAS, hardship, etc, usually taxable
benefits
• Tax protection or equalization requires
additional (also taxable) payment
 $55,000 housing allowance
45% of 55,000 = $24,750 =cost of extra taxes
45% of 24,750 + …= $20,250 = cost of extra
taxes due to payment of extra taxes!
Infinite series: 55K/(1-.45) = 100K
*assuming marginal Canadian tax rate at highest bracket of 45%
Who wants to be an expatriate?
• Not me!
– Relocation too disruptive, confusing
– Overseas affiliate uses backwards technology
– Senior management will forget me… (out of
sight, out of mind problem)
– No work or social life for my spouse
– No decent schools for my kids
– Foreigners are strange
Who wants to be an expatriate?
• I do!
– This is my chance to have a real impact (big
fish in a small pond)
– Senior management will see what I’m truly
capable of accomplishing (testing me)
– Adventure and luxury
– Cross-fertilization: Priceless experiences
we’ll take home.