Who should the MNE employ to manage its foreign subsidiaries?

This is a key question of

International human resources management. We will refer to three kinds of employees at foreign
locations:
1. Locals: host country nationals,
2. Home country nationals: Citizens of the headquarters country.
3. Third country nationals: individuals from neither the host country nor the headquarters
country.

Individuals in categories 2 or 3 are expatriates. They are individuals who are on

assignment outside their own country.

1. Typical Features of Expatriate Assignments

Many readers of this book will have the opportunity to work on overseas assignment
for a multinational enterprise. This section provides an idea of what to
expect.
1.1. Compensation
Persons sent on a temporary foreign assignment (e.g. a few years) are usually
paid based on the pay scale of their home country. Often, employers will pay premiums
to individuals going on international assignment. In some firms, these
premiums may be negotiated on a case by case basis. However, large multinational
employers typically have an established policy that fixes the premium
based on which country the employee is in (e.g. 10% of base salary for Australia,
30% for China, 0% for the US, etc.).
There is usually some adjustment for cost of living differences. Housing in
foreign locations is often more expensive than at home. Examples of expensive
foreign assignment locations include Hong Kong, London, Paris, Singapore, and
Tokyo. Normally, employers will therefore compensate employees for the difference
in costs. For example, a reasonably spacious apartment in Tokyo might cost
$65,000 per year, while normal housing in the home country might cost $10,000.
So the employer might cover the full cost of the Tokyo apartment, but deduct
$10,000 for hypothetical housing costs from the employee’s pay. The net effect
is that the employee is not out-of-pocket with respect to housing costs; he or she
only bears the cost of normal housing in the home country. Costs of day-to-day
living (e.g. food, gas, clothing, consumer goods, automobiles) may also be more
expensive in some foreign locations. Many employers provide an additional allowance
for these cost-of-living differences.
Taxes often increase as a result of foreign assignments. There are a number of reasons this can
happen:
1. Many of the additional compensation items (e.g. premiums, housing, cost of-living
allowances) are taxable. For example, in the Tokyo apartment example above, there
would be a $55,000 benefit, which would be taxable in most countries. (The $55,000 is
the net cost paid by the employer for housing: the $65,000 rental expense minus the
$10,000 recovered from the employee.) If the employee had to bear the cost of the taxes
on that benefit, he or she would be out-of-pocket. Accordingly, most employers will
therefore pay the taxes arising from such benefits.
 2. If an employer pays part of the employee’s taxes, that payment is itself a taxable benefit.
Suppose for example the marginal tax rate were 45%. Then the employer’s total cost of
the housing benefit plus the payments required for taxes amount to $100,000 [$55,000
housing cost plus $24,750 taxes on the housing cost plus $20,250 taxes on tax payments].
[The total cost (TC) can be computed directly as TC × (100%-45%) = $55,000.]

3. . Foreign taxes may be higher than home country taxes. (This rarely applies
to Canadians going overseas because Canada’s taxes are high. However,
this often applies to American expatriates, because US taxes are relatively
low.)

When an employer bears the cost of any additional taxes arising from a foreign
assignment, it is called tax protection. Many multi-national employers will go a
step further and actually recover any tax savings that might be realized from a
foreign assignment. For example, if a Canadian is sent to Hong Kong, his/her
legal tax liability will typically be reduced. However, the company will not allow
the employee to keep the savings. The company will pay foreign taxes on behalf
of the employee, but deduct hypothetical Canadian taxes from the individual’s
pay. This practice is called tax equalization.
Employers often provide time for and cover the cost of visiting home once or
twice a year. The costs of moving are also generally covered.

2. Expatriate Life
Usually foreign operations are smaller than those at home. As a result, expatriates
often get a greater breadth of experience overseas. For example, an
employee that is in middle management in a large home country operation will
often take on a senior position in the smaller foreign operation. The technology
in foreign locations might be behind what is available at home. It is often more
difficult to get external servicing for leading-edge technology in these locations.
Moreover, the large home operation will normally have greater internal support
functions and networks, whereas such support may be lacking in smaller overseas
operations.

In many organizations, foreign assignments are considered an important

part of career development. Individuals aspiring to senior management positions
in a multinational company may need to get foreign experience. However,
there are some risks associated with foreign assignment. There is the “out of
sight, out of mind” problem. There is a tendency for people in foreign locations
to be overlooked when decisions concerning career development are made. Yet,
an expatriate can adopt strategies to minimize this problem, such as keeping in
touch with HQ, visiting the home office whenever he or she is on home leave, and
maximizing face time with key decision-makers. The employee may be unaware
of opportunities that arise at HQ. An expatriate can minimize this problem by
getting a friend at HQ to keep him/her posted on such opportunities.
A foreign assignment can be hard on families. If the individual’s spouse has
employment, the spouse may have to try to coordinate a transfer to the foreign
location, or may have to give up working for the duration of the assignment.
Sometimes the spouse will not want to go. Separation from family and friends,
and from the amenities at home can be hard. The hardship and loneliness is
magnified if the spouse is not occupied with employment at the foreign location.
The foreign assignment can also be difficult for those with children. Such
employees often need to decide whether to pull their children away from their
current schools and peers, or to be separated from their children for long periods
of time. (If the children go on the foreign assignment, there will usually be
private international or American schools in the foreign location. Employers
will usually cover schooling costs for the children.)

1.2 Selection of Managers in Foreign Locations

One important decision facing multinational enterprises is whom to appoint to
senior positions in foreign locations. Is it better to send people from headquarters
or to appoint locals?

1.2.1 Advantages of Expats

.
1. Expertise in the firm-specific advantages of the MNE. Expatriates reassigned from HQ are
familiar with the company’s products, core competencies, global operations, systems,
industry and senior managers.

2. Awareness of activities of MNE in other countries and, consequently, the ability to

coordinate them effectively.

3. Larger pool of talented managers to draw from. In some countries, competent managers with
experience in the firm’s industry may be in short supply.

4. Expatriates tend to be more well-known and trusted at headquarters, because they have spent
time with personnel at HQ. This facilitates getting appropriate resources from HQ, and helps
HQ to take more seriously what they are being told about what is happening in the foreign
location.

5. A multinational firm may be able to use foreign operations as testing grounds

or a place of learning for potential senior managers.

1.2.2 Advantages of Locals

1. Local managers speak the local language.

2. Local managers are aware of (and usually follow) local customs in how to do business.

3. Local managers are more likely to understand the needs, expectations and practices of local
customers.
4. Locals have local relationships with important customers (or intermediaries like wholesalers
and retailers).

5. Locals are more likely to have contacts within government and the regulatory commissions.

6. Local managers are usually better regarded by the public. They do not engender as much
resentment for being over-paid and pampered.

7. Local managers are almost always cheaper than expatriates.

(a) Additional training (language, culture).
(b) Immigration authorization hassles.
(c) Compensation for higher cost of living or “hardship” or higher taxes.

8. Expats have high failure rates: Difficulties in adjustment to the new environment by either the
manager or her spouse may result in early return to the home country. This means the MNE has
wasted the investment in training and immigration authorization.

9. Having locals in senior management also helps the company to attract and retain good
employees, since there is a visible upward career track.

1.2.3 Strategy and Staffing

Which MNE strategy favours which staffing approach? The replication strategy
puts an emphasis on local manufacturing and marketing and thus will particularly
benefit from the host-country manager’s local expertise and connections.
Meanwhile the lack of awareness of the rest of the MNE’s activities will not be
too harmful because MNEs pursuing replication strategies do little coordination
across geographical divisions.
Many companies use the following procedure: When starting up at a foreign
location, use expatriate managers who are familiar with the company’s products
and systems. The expatriates facilitate the transfer of the firm’s key advantages
(or core competencies) to the new subsidiary. Each expatriate will usually have a
host-country national as an “apprentice” (but also as a source of local expertise).
Then promote local people to management positions, once they have acquired
familiarity with the company’s products and systems. Gradually the expatriates
will be removed and their apprentices will take their positions.
Some companies take a “global” approach to management, and move managers
(of all nationalities) around from location to location. The objective is to
have managers all over the world who are familiar with the operations of other
parts of the world. These two methods can be combined. The idea is that the
firm should economize on the small number of key managers who can transmit
corporate culture and capabilities to overseas affiliates. These people will be
not only good at their jobs but also comfortable with life in new foreign environments.
After they have trained local replacements, they move on to the next
recently established or restructured affiliate.