International Staffing Agency Perspective
Our contribution here is to summarize the arguments, findings, and discussions of a 2002 research paper entitled An Empirical Investigation Of Expatriate Utilization: Resource-Based, Agency, And Transaction Costs Perspectives, professors Danchi Tan, Chengchi University, Taipei, Taiwan, and Joseph T. Mahoney, University of Illinois at Urbana-Champaign.
This article is presented in four parts. The first installment covers the arguments over international staffing decisions from a resource-based perspective. The second installment (this installment) takes on the agency perspective of international staffing decisions. The third deals with the transaction costs perspective of international staffing decisions. In the fourth, and final, installment, we present research results and discussion of international staffing choices.
International staffing is one of the important categories of International Expansion, so please check back frequently for additional articles on this subject.
Agency Perspective of International Staffing Decisions
Since human resources are under only limited organizational control, a multinational firm making international staffing decisions is likely to consider not only the potential economic revenues that expatriates and local hires could bring to the firm, but also the economic costs that a firm may incur in order to exert effective organizational control over expatriates and local hires.
When a multinational firm enters a foreign market, it can make managerial contracts with its internal managers (i.e., expatriates) and local hires to gain more control over them. The costs associated with the contracting include not only the out-of-pocket costs such as compensation, but also the economic costs of the firm in specifying, adjusting, and enforcing the employment contracts, and any economic loss due to the (necessarily) incomplete contract. High contractual costs are likely to lead to incomplete contracting problems, which is likely to increase the multinational firms’ concern about its limited organizational control over managers.
The relationship between a multinational headquarters and the managers of its foreign subsidiaries is a type of principal-agent relationship, in which the headquarters is the principal whose interests are influenced by the agents; i.e., the managers of its foreign subsidiaries. The managers of the foreign subsidiaries may not fully serve the headquarters’ economic interests due to the following reasons:
- First, there may be an economic incentive misalignment problem between the headquarters and the managers of the foreign subsidiaries because the managers may pursue sub-goals and may not be motivated to promote fully the economic interests of the foreign subsidiaries, and the multinational firm may find it costly to monitor the self-seeking behaviors of the managers.
- Second, when selecting the managers for its foreign subsidiaries, the multinational firm may have only limited understanding of the abilities and characteristics of the candidates, because some of the employee attributes are unobservable and could only be revealed through time and experience. As a consequence, the multinational firm may be uncertain about the quality of managerial services that these candidates are capable of providing, and may fail to place the right managers for the foreign subsidiaries. In this case, even if managerial self-interest-seeking behaviors are circumvented, the selected managers may not have the required skills to promote effectively the interests of the foreign subsidiaries.
- Third, even if the managers are willing and able to pursue the best economic interests of the foreign subsidiaries, they do not necessarily promote the best economic interests for the multinational firm as a whole, because the best economic interests of the foreign subsidiaries and the best economic interests of the multinational firm may not be identical (i.e., there is an economic incentive misalignment situation between the headquarters and the foreign subsidiaries). One dramatic example would be when it is in the headquarters’ economic interests to shut down a particular foreign operation in order to rationalize its worldwide production.
Expatriation potentially provides a solution to these agency problems. Since expatriates generally have worked and socialized within the multinational firm for a period of time, they have established track records and they have been typically put to work on various tasks so that the multinational firm has assessed their less observable abilities and characteristics. In contrast, local workers have typically fewer working experience within the firm than expatriates. In addition, language and cultural barriers, and lack of information collecting systems may make it difficult for the multinational headquarters to access the characteristics of local workers. Thus the multinational firm is expected to be less uncertain about the characteristics of expatriates than about the characteristics of the workers in the local labor market. In addition, since expatriates have been socialized within the multinational firm, they are expected to better understand and accept the role of the subsidiaries within the multinational network and to better maintain the headquarters’ economic interests than local personnel. The use of expatriates thus potentially reduces the information asymmetry problem that a multinational firm would face in recruiting managers for its overseas operations, and reduces potential incentive misalignment problems between the headquarters and the foreign subsidiaries.
It should be noted that some empirical studies suggest that roughly 10-20% of expatriates are free agents and have not had much experience with the firm prior to their assignment. However, since these free agents share the same languages with the MNE top managers, the MNE may find it easier to assess their ability through interviews than they can evaluate the ability of locals.
Additionally, the conflict of economic interests between the headquarters and its foreign subsidiaries is likely to be higher in global industries. A global industry is one in which a firm’s competitive position in one country is significantly affected by its position in other countries. The high interdependency within a multinational firm often requires the firm to rationalize its production processes and to coordinate its activities worldwide, such as coordination of pricing, product positioning, service standards, and sourcing. The coordination and rationalization process, while crucial for the overall success of the multinational firm, may not maximize and may even harm the economic interests of individual subsidiaries. Expatriates are expected to have a better understanding of individual subsidiaries’ roles in the multinational firm and they should be more committed in maintaining the headquarters’ policies than local personnel.