Expatriate performance affected by the integration of knowledge on risks in a high-risk country

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University of Amsterdam Amsterdam Business School

Expatriate performance affected by the integration of

knowledge on risks in a high-risk country

Martijn Weener August, 2014 Stadhouderskade 62-2 1072AD Amsterdam (06) 28686043 martijn.weener@student.uva.nl 10464530 1st Supervisor: E. Dirksen, MSc. 2nd Supervisor: Dr. C. Boon

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Abstract

An increasing number of MNCs have engaged and are engaging in investments in countries generally characterized with significant political hazards, weak legal institutions and cross-cultural differences. The mobility of expatriates is reducing, due to increased expenses of sending expatriates abroad and due to the growing importance of quality of life considerations together with continued uncertainty regarding political unrest in high-risk countries. Therefore, host country nationals seem to be granted a larger role in the integration of the knowledge transfer process. Of interest in this study is to examine what the effects on the performance of expatriates are when their knowledge of cultural and political risks increases and what the role of the HCN is in this process. It is found that the responsibility still is placed at the individual efforts of the expatriate to increase knowledge on the subjects of risks, because structural knowledge management processes implemented by the MNC are still lacking. Knowledge transfer about cultural risks is more important than political risk and is also easier to talk about with HCNs. The tacit nature of the knowledge transfer makes it a difficult practice, but is generally dealt with by the implementation of mentorships relationships, leading the expatriate to acquire better expatriate adjustment skills and thereby increased work performance.

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1. Introduction

In the last three decades there has been an increase in research on how multinational corporations (MNCs) respond to high-risks in host countries. High country risk reduces the likelihood of entry via equity investments and these risks tend to lead MNCs to avoid or at least minimize their exposure. On the contrary, an increasing number of organizations have engaged and are engaging in investments in countries generally characterized with having significant policy hazards, weak legal institutions and cross-cultural differences (Feinberg & Gutpa, 2009). International mobility is becoming more problematic in many firms due to several factors. Aside from the increased expenses of sending expatriates abroad, MNCs are also cutting down on the amount of expatriates they send abroad due to the growing importance of quality of life considerations together with continued uncertainty regarding political unrest (Scullion & Brewster, 2001). Seeing the trend toward the engagement in foreign direct investment (FDI) in countries with high-risk rather than avoidance, it is noteworthy that relatively little research has been conducted on how MNCs deal with country risk on an ongoing basis after they have established operations. In the field of expatriate management, it is unclear how or whether the risks in an environment are structurally communicated and what the effects on the expatriate’s performance are, especially when knowledge transfer regarding the political and cultural risks in the host country is communicated from host country nationals (HCNs) to parent country nationals (PCNs) positioned in a high-risk country.

As firms become more internationalized they need to develop more robust, comprehensive and formalized expatriate performance management (EPM) systems (Fee et al, 2011).According to Fee et al. (2011) highly internationalized firms tend to be better at deploying the ‘hard’ components of performance management (goal-setting and performance appraisals), and yet most firms, and in particular highly internationalized ones, are poor at managing ‘soft’ control mechanisms like training and mentoring. Therefore, the purpose of this study is to determine what MNCs tend

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to implement in order to increase the effectiveness of an expatriate’s performance, influenced by the degree of knowledge transfer about the risks in a country. Moreover, while there seems to be extensive research on how mentoring, training and integration of knowledge have an effect on expatriate effectiveness in developed countries, relatively little is written about what the situation is in countries with high political and cultural risk.

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2. Research Questions

The three leading topics throughout this paper are: Country Risk, Knowledge Transfer and Expatriate Performance. Former research has examined the topics separately or in a bilateral direction, this paper however is the first to examine the effects of the three topics combined. The effects of the combination are examined by answering the main research question: How is expatriate performance affected by knowledge transfer on the political and cultural risks in a country, between the host country nationals situated in an MNC’s subsidiary in a high-risk country to an expatriate situated in that country?

To finally reach a conclusion by answering the main research question, first three sub-questions will be attended to, addressing the three leading topics throughout this paper.

Sub-question 1: What are the cultural and/or political risks that affect the host

company and expatriate the most, and does the MNC therefore have programs to increase awareness in order to address the constraints on performance more effectively?

Sub-question 2: What is the role of the HCNs in the practice of knowledge transfer and are they sufficiently aware of the risks in order to assist the expatriates that consider the threats important enough to address and therefore seek to increase their knowledge?

Sub-question 3: How do expatriates manage the constraints on personal effectiveness caused by political and/or cultural risk, and how important is a HCN mentor (if provided) in providing knowledge to increase effectiveness?

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3. Theoretical Framework

The conceptual model in figure 1 is constructed for the purpose of clarification and acts as a guideline throughout this research. The central concept in the model is the expatriate’s performance. It starts with the assumption that the expatriate’s performance and the MNC are both affected by the cultural differences and political risks in a country. Most likely, the parent country and MNC are aware of the expatriate being affected by the risks in the country and it is the question whether the MCN sufficiently informs the HCNs on the challenges and provides strategies and tools on how to manage them. If the HCNs are aware and have knowledge about the practices, they most likely find it important enough to transfer to the expatriate managers who are not fully aware on how to deal with the risks. Consequently, the integration of knowledge transfer should in turn have an effect on the performance of the expatriate. If the knowledge of practices is sufficiently transferred, afterwards probably also the performance increases since the expatriate is more aware of the situation and risks that could possibly affect the MNC as a whole in the host country. And when the effectiveness of the expatriates increases, it will also have an effect on the MNCs subsidiary performance overall.

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4. Literature Review

4.1 Country risk affecting expatriates

Country risks include many types of country-specific political, economic (Lessard, 1989), cultural and technological hazards that share common drivers, such as a weakly constrained political structure and an institutional setting that lacks reliability (Feinberg & Gupta, 2009). In this paper, the country risks investigated in the context of the integration of knowledge exchange on expatriate performance are cultural risk and political risk. To learn on how to deal with local institutions and cultural differences, specific locally based capabilities need development. And the knowledge transfer on how to deal with them is important for expatriates to function effectively. Traditionally, the expatriate was responsible for the provision of knowledge exchange for organizational building and the transfer of organizational culture (Rabbiosi, 2011). This research seeks to find out how the reverse transfer goes in practice, from host country national to the expatriate.

4.1.1 Knowledge regarding country cultural risk

Culture is the collective programming of the mind distinguishing the members of one group or category of people from others (Hofstede, 1991). It is as a set of cognitive and behavioral tendencies that are learned through social interaction. Cultural risk in a country is the likelihood of incurred losses when firms fail to observe the national business characteristics of a foreign country (Lodh & Nandy, 2008). When MNEs operate in countries with significant differences in culture and institutional environments a liability of foreignness is created (Zaheer & Mosakowski, 1997). The differences between the HCNs and the expatriates make accessing, interpreting and evaluating information about the subsidiary’s performance and the host country market more challenging. Orr and Scott (2008) comment that when MNEs fail to comprehend the environment in an unfamiliar host country, they tend to suffer unforeseen costs related to their foreignness. In this case the lack of detailed cultural and political understanding, thus, a cultural control strategy focusing on expatriates

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may become a preferred approach in a culturally distant host country with considerable political challenges (Gong, 2003).

According to Kraimer et al. (2001) the cross-cultural risks in a country have a considerable effect on expatriate performance, especially in the early stages of employment in a foreign country. In the early stages of employment it can be assumed that the expatriate is considered qualified for the job, since the MNC selected the candidate for the task. However, the expatriate also needs adaptability and certain skills on how to function effectively in a different cultural setting in order to be successful, three important concepts in this context are defined in the study by Caligiuri (2000):

! Cultural intelligence ! Cultural effectiveness ! Cultural adjustment.

Cultural intelligence is the ability to adapt across cultures. Cultural effectiveness is the ability to interact and communicate with host nationals, and cultural adjustment is defined as: “When expatriates do not adjust to the new environment, their assignment tends to fail (Caligiuri, 2000). Cultural intelligence, cultural effectiveness and cultural adjustment are regarded as on of the most important factors for expatriate performance. Cultural adjustment has a positive and significant influence on expatriate performance and expatriates capable of interacting in different cultures will have a higher level of adjustment (Lee & Sukoco, 2010). Failure to confront cultural risk leads to a decline in the overall performance of expatriates in a foreign country. So, recognizing the national culture helps expatriates to cope with the changes in a more sophisticated way and the firm needs to consider what the cultural trends mean to its employees (Lodh & Nandy, 2008). When the expatriate possesses all the above abilities to deal with differences, it can be stated that the expatriate has adequate cross-cultural expatriate adjustment. And inadequate cross-cultural adjustment is a key determinant of poor expatriate performance and early repatriation (Kraimer et al., 2001; Kraimer & Wayne 2004). Several possible consequences of poor expatriate

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cross-cultural adjustment include inadequate performance, psychological stress, the negative effects on the expatriates’ families, and the long-term career impacts upon repatriation of failed expatriate assignments (Kraimer et al., 2001).

The concept of expatriate adjustment (not the same as cultural adjustment) is different from effectiveness. Expatriate adjustment can be described as the responses an expatriates has to the environment, whereas effectiveness deals with how the expatriate uses his or her ability to achieve goals by interacting with HCNs (Lee & Sukoco, 2010). Another study by Black and Stephens (1989) identified three relevant aspects of expatriate adjustment:

! Work adjustment ! General adjustment ! Interaction adjustment

Work adjustment is defined as the degree of comfort with the job, the tasks of the foreign assignment and role factors such as role novelty, role discretion, and role ambiguity. General adjustment refers to the general living conditions and culture of the foreign country. Interaction adjustment is concerned with the degree of interaction with the host-country nationals and the cultural distance between them (Kraimer et al., 2001). It is expected that only work adjustment will be related to task performance since expatriates who are adjusted well to the work environment should also perform their tasks more effectively. However, it will be also be necessary for expatriates to have the general- and interaction adjustment ability, which implies that they should also be able to interact with HCNs in order to perform well on international assignments.

An expatriate’s cultural intelligence has an effect on cultural effectiveness. However, in the literature no significant effect of cultural intelligence on expatriate performance was found, meaning that the cultural intelligence an expatriate has needs to be transformed into cultural adjustment and cultural effectiveness before having an effect on the ability of the expatriate to adjust (Lee & Sukoco, 2010). These results imply

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that the expatriate’s abilities transform into a set of operational capabilities that ultimately have an impact on expatriate performance. The international work and travel experience of an expat will only be effective in regulating cultural intelligence when the cultural intelligence level is high. When the level is low, they may result in over-confidence, with lower levels of cultural adjustment and cultural effectiveness as a result (Lee & Sukoco, 2010). So, it really is a phenomenon that can progress over time and learned on the job. In this study it will be examined whether the ability to interact or communicate with host-country employees is an ability that progresses over time, hopefully being able to conclude that expatriates with better adjustment can improve their work performance.

Cultural effectiveness has two dimensions: relational and communicational abilities. The relational ability is the capacity to establish close relationships and interact effectively with HCNs. This ability is beneficial for the expatriate due to the information and knowledge exchange included in such relationships (Lee & Sukoco, 2010). Logically, the more the expatriate interacts with host nationals, the more information he/she will receive about cultural norms and national business characteristics. Therefore, the expatriate might be able to perform better in the new environment since he/she has acquired better understanding about the behavior of the HCNs. Thus, reducing uncertainty and increasing feelings of comfort and adjustment, which are also likely to improve job performance (Lee & Sukoco, 2010). The communicational ability refers to the ability of expatriates to initiate interaction with a stranger. According to the literature, it is not the language fluency of the expatriate that is of specific importance in relation to adjustment but rather the communicational ability. It is the willingness of a person to become involved in communicating with HCNs that determines the amount of information. The more the expatriate gets involved in communication, the better he/she can understand the host country culture and HCNs, reducing uncertainty and increasing adjustment to the host country. The processes of building relationships between expatriates and HCNs changes according to work environments, experiences in cross-cultural circumstances, career path, gender, age and personal characteristics (Shimoda, 2013). The experience of an expatriate living and working in a foreign country is expected to affect the process of developing locally based competence and knowledge positively. Also the personal

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characteristics and background of expatriates can be critical in the knowledge transfer process because knowledge transfer involves human interaction. In this respect, Choi & Johanson (2012) also stated that an expatriate’s personal characteristics, such as communication skills with local partners and the capability of developing personal relations have a critical effect on the success of the knowledge transfer process. An expatriate who has the capability of developing personal relations with local partners can be more successful in acquiring relationships for the transfer of knowledge. As expected, an expatriate’s previous experience and capability of developing personal relations are critical factors in the knowledge transfer process. Interestingly, the expatriate’s personal characteristics, such as communicativeness with local partners and cultural adaptation significantly affect the knowledge transfer process (Choi & Johanson, 2012). So, when firms select an expatriate they should select a candidate who has cultural intelligence and the capability of developing personal relations with foreign partners. Furthermore, although expatriates must acquire professional knowledge and expertise in the relevant field of business, they should also have the necessary communication skills and relationship building skills with foreign partners because the international transfer of knowledge occurs in the host country.

An MNC’s awareness and understanding of the cultural risks is very important since expatriate performance is affected, especially in the early stages of employment in a foreign country since the personal interaction between HCNs and expatriates could have an impact. All nationalities have unique characteristics that must be understood and communicated properly to operate effectively of which both HCNs and PCNs should be aware. Expatriates need to be effective in the new culture by having the ability to interact and communicate with their local co-workers in order to perform well in their assignment. Reflecting back on the comment that having more international experience does not mean that expatriates will have higher levels of adjustment or cultural adjustment, unless they also have higher cultural intelligence (Lee & Sukoco, 2010) can be reviewed in another study. Johnson et al. (2003) found that expatriate employees received the same amount, but different types, of information from both other expatriates and host country nationals over time. To conclude, expatriates need both advice from other expatriates (who have experienced

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similar differences and thus have knowledge about the norms and behaviors that are acceptable in the workplace) and from the HCNs.

4.1.2. Knowledge regarding country political risk

The other concept of country risk examined in relation to expatriate performance is the political risk in a country. Political risk is the probability of events that cause financial, strategic or personnel losses to the firm and include terrorism, uncertainty over property rights, debt restructuring or non-payment demographic hedges, expropriation and the impact of government policies on company’s financial and competitive position (Lodh & Nandy, 2008). Thus, a firm may find it constrained in the range of business opportunities that it can pursue due to the political risks in a country (Feinberg & Gupta, 2009). The political risks in a country considered important in this research are mainly the risks that could pose a direct threat for the expatriate and the organization, for instance: acts of terrorism, corruption and bribery, civil war threats, coups d’états, dictatorships and resistance against foreign interference.

When MNCs enter a particular country, they must face and overcome several obstacles in order to be successful in that country. Sufficient communication on the challenges in a country through knowledge transfer is essential for expatriate managers in knowing how to respond in potential threatening situations. According to Zaheer (1995) MNCs must learn how to deal with local institutions, local customer needs and a different socio-political and legal context by developing locally based capabilities and knowledge. As with the cultural risks in a country, expatriates who are assigned to a particular country for the first time face a similar challenge upon their arrival in that country. They must learn about the political environment and the possible challenges it could impose. As with the cultural risks, the acquisition of locally based capabilities on how to deal with them typically takes time and can also be achieved by accumulating local experience (Choi & Johanson, 2012). HCNs tend to be described as supporting players in the subsidiary and their roles have been situated in the shadow of prominent expatriate employees (Shimoda, 2013). However, HCNs could also have significant contribution in the process by transferring

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knowledge on how to adapt to the differences in the cultural and political setting. It is interesting to examine whether cultural or political risk is considered more important for increased expatriate effectiveness and if there has been a shift in the focus from expatriates to HCNs, due to the importance of HCNs as a potentially critical factor in the success of expatriates.

An important aspect on how to deal with high political risk is effective implementation of strategies, namely, political and operational strategies. Political strategies require that a MNC has accumulated experience in political action. The ability to manage institutional characteristics is a specialized skill that requires experience over time and across countries (Delios & Henisz, 2003). A key aspect in operational strategies is integration, since the more integrated a subsidiary is within an MNC’s global production and trading network, the greater the extent to which the subsidiary’s managers become socialized within the parent corporation’s managerial network. More importantly, the greater the intensity of production and trading linkages between a subsidiary and other units within an MNC’s global network, the greater the intensity of information and knowledge exchange among the interdependent units, including corporate headquarters (Kobrin, 1991). A high level of information and knowledge exchange is likely to increase the effectiveness and efficiency of efforts by corporate headquarters as well as peer subsidiaries to monitor the decisions and actions of a central subsidiary as well as developments in its external environment. These gains in monitoring will not eliminate the MNC’s exposure to country risk, but they can be expected to mitigate it (Feinberg & Gupta, 2009).

Vance & Paik (2005) identified and formulated twelve categories of potential beneficial forms of HCN learning in the context of knowledge exchange on political risks. These forms of learning include areas as:

- New employee orientation - Entry job skills

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- Supervision and technical operations management - Supporting expatriate interaction

- Expatriate coaching/mentoring

- Relationship role between expatriates and lower level HCNs - Advanced technical system operations

- Subsidiary business level strategy - Parent company (MNC) strategy - Parent company (MNC) culture

Learning routines and experience may be an important component of a long-term internationalization strategy for globalizing firms in hazardous situations (Goerzen, 2005). Previous studies have suggested that firms engaging in FDI face certain adjustment costs, but also learn from their previous experience through foreign entry and operational learning (Barkema, & Vermeulen, 1997). This experience allows the firms to move along a learning curve as they expand to foreign countries, increasing their know-how on how to operate in environments with high risks, thereby potentially improving the performance of the MNCs subsidiary.

As noted, MNCs in most cases have the ability to use high levels of direct experience to improve their competitive positions and to reduce the political risk associated with foreign investment by influencing the regulatory domain. However, indirect experience obtained from other firms that have already operated in the market can help because risks increase the value of obtaining local knowledge through a partnership (Murtha & Lenway, 1994). And as suggested by Delios & Henisz (2003), as local political risks increase, the potential that the local partner will make decisions or try to manipulate the political system for their own benefit at the expense of the MNC also increases.

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4.2 The transfer of knowledge

4.2.1 The tacitness of knowledge

Knowledge is broader, deeper, and richer than data or information. It originates from unique experiences and organizational learning and is rooted in written documents, routines, tasks, processes, practices, norms, and values of organizations (Bhagat et al., 2002). Knowledge flows across globally dispersed organizational units are vital for the MNC’s success. In order to build on the organizations' knowledge stock, subsidiaries need to share knowledge across organizational entities. They need to be able to transfer knowledge within organizational networks characterized by differences through culture, language and personal interactions between individuals and are likely to be harmed by distance (Ambos & Ambos, 2009).

There are two types of knowledge: tacit and explicit. Tacit knowledge cannot be codified and is acquired through practical experience and observation rather than formal learning (Grotenhuis & Weggeman, 2002). Explicit knowledge refers to knowledge that is transferable in formal systematic language (Riusala & Suutari, 2004). The competencies and knowledge of subsidiaries regarding the country’s political risks and differences in national business characteristics are likely to have a high degree of tacitness (Rabbiosi, 2011). Transfer of tacit knowledge between people is slow, costly, and uncertain. And the more tacit the knowledge, the more likely it will be transferred within the firm (Kogut & Zander, 1993). Knowledge of political risks and cultural business characteristics is predominantly measured as tacit knowledge and the transfer should be integrated internally when considered important enough. In order to do so, standardization, homogenization, concentration, and coordination on a worldwide basis require effective management of knowledge across borders (Riusala & Suutari, 2004) and are crucial to the MNCs’ competitiveness. Organizations succeed with knowledge transfers by creating various kinds of organizational routines to create, diffuse, and transfer knowledge across units. However, it remains a question whether this also is the case when transferred to the expatriate employees. It is interesting to examine whether organizational routines exist and if the HCN is considered responsible for the knowledge transfer, since the

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role of cultural patterns that might characterize the knowledge transfer is also significant (Bhagat et al., 2002).

In the knowledge management theory most often the focus is on how knowledge is transferred from headquarters to subsidiaries abroad. Increasingly headquarters act as a receiver of knowledge from subsidiaries abroad (Ambos et al., 2006). However, this does not go without difficulty. Doz & Santos (1997) argue that it might be more important to realize that the reverse flow is difficult to accomplish once the MNC has developed into a set pattern of relationships, typically with a strong center or with dispersed units that become increasingly self-sufficient. Also, knowledge transfer is not always managed actively. Effective cross-border transfer of organizational knowledge will become increasingly critical as competition among multinational and global organizations intensifies (Bhagat et al., 2002). It has even been argued that the transfer of cross-unit business practices is a main determinant of the competitive advantage within multinational companies and the requirements for learning effective knowledge transfer methods and processes have become even more important than in the past (Riusala & Suutari, 2004). How the knowledge transfer takes place in practice in international assignments is something that might differ per country and is dependent on the openness, the ability to communicate and the ability to establish relationships of the expatriate.

4.2.2. The internal stickiness of knowledge

The difficulty of transferring knowledge within the organization has often been referred to as internal stickiness (Riusala & Suutari, 2004). Sticky knowledge (Szulanski, 1996) is more complex, tacit, and more difficult to transfer. Regardless of cultural differences there is no guarantee that knowledge is transferred across cultures without difficulty (Bhagat et al., 2002). Knowledge transfer in this context is a matter of transfer without loss with a focus on using knowledge in the new organizational and cultural context, meaning the knowledge developed in a certain cultural background has to be translated in order to become useful in a new context (Choi & Johanson, 2012). But before knowledge can be developed and translated, it is

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important to understand which type of knowledge is relevant since the different types have different stickiness factors related to them.

Kogut & Zander (1993) presented three factors that measure the attributes of knowledge. The three factors are:

- Codifiability - Teachability - Complexity.

Codifiability measures the extent to which the knowledge can be articulated in documents. Teachability measures the ease by which knowledge can be taught to new workers. And complexity is the number of critical and interacting elements in the knowledge being transferred, having a high degree of tacitness. The types of knowledge are perceived as being a relevant stickiness factor in international knowledge transfers. The most common knowledge-related internal stickiness factor appeared to be the low codifiability of the knowledge and thus the high tacit nature of the knowledge that was transferred. Such tacit nature of knowledge is among the most discussed internal stickiness factors in the transfer processes in the literature. In turn, low teachability or complexity of the knowledge did not appear so commonly as an internal stickiness factor to the knowledge transfers through expatriates (Kogut and Zander, 1993)

Because the expatriates in this research are assigned to countries where cultural values and political situations are different from common practice, it can be assumed that there is a significant gap in association of organizational and country specific culture that could have an effect on the knowledge being transferred. Kostova (1999) suggests that organizational culture can have two types of effects on the success of the transfer of practice:

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- Practice-specific effect

The general effect refers to the cultural orientation a subsidiary has to learning, innovation, and change. The practice-specific effect suggests that the success of transfer will be affected by the fit between the values implied by the particular practice and the values underlying the culture of an organizational unit. Obviously, transfer failures are possible, even when social and organizational environments are favorable. A potential reason for failure could be due to the relationships that exist between the expatriate and the host country national. Transfer of knowledge, especially in its tacit sense, may require numerous individual exchanges and the success of such transfer depends on the ease of communication and on the overall relationship between the two parties involved in the transfer process. Comparable with the general and practice-effect by Kostova (1999), more recently, according to Riusala & Suutari (2004), the knowledge transfer from the foreign affiliates to headquarters can be classified into two different groups.

- Knowledge about the local environment

- Knowledge concerning the operations and success of the affiliate itself.

Most interesting for this study is knowledge about the local environment and how this knowledge is transferred to the expatriate. Riusala & Suutari (2004) claim that the role of the expatriate manager is very central. The expatriate manager has a high level of independence concerning decisions on what to develop locally and what kind of knowledge transfers are considered necessary within the strategic frames given by the parent company. Moreover, knowledge transfer was among the central concerns when the expatriate was originally selected where knowledge transfer issues were involved, but not consciously discussed. Also in the research of Riusala & Suutari (2004), knowledge transfers and the level of integration were pretty much left to individual expatriates. The MNCs did not have systematic knowledge management processes in an international context. In that way, the level of systematic integration and standardization was not very high yet, though in the literature, it is discussed that in many fields of industry, importance of such issues will increase in the future.

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The most common context related internal stickiness factor appeared to be the bureaucracy of public authorities, cultural issues, legislation and taxation; the use of gifts/bribes within the context and the infrastructure. These issues can be well connected to the existing understanding of the context. For example, the high level of bureaucracy and role formalization, and the related difficulty in relationships with public authorities, is commonly pointed out in the literature. Similarly, the existence of the corruption and certain cultural stickiness factors as high power distance and lack of open communication have been widely discussed in literature. However, social factors were found to be the most important stickiness factors to consider in international knowledge transfer processes.

In this research the social factors are considered important due to the relatedness to the cultural differences and risks in a host country, as was stated in the previous paragraph, regarding knowledge on the political risks in a host country and the stickiness associated with them. Bhagat et al., (2002) confirms that the common stickiness factors are related to regulatory and normative components of the institutional environment. With regard to the regulatory environment, the major stickiness factor is considered to be bureaucracy of the public authorities, legislation and taxation. These factors tend to slow down the knowledge transfer processes in which public authorities have a role. Thus, it would be interesting to determine whether these factors also pose an issue between the expatriates and HCNs. While many aspects of cultural variation play important roles in the transfer processes, the most important role is that of individualism versus collectivism. These cultural patterns are extremely important in understanding multinational and global organizations' ability to effectively transfer and absorb knowledge across borders. The effectiveness of knowledge transfers is greatly enhanced when individual differences relating to tolerance for ambiguity, signature skills, and holistic versus abstractive cognitive style match the requirements of the situation (Bhagat, 2002).

The study by Shimoda (2013) has revealed the importance of talking with each other as an action to adopt the trust, feelings and knowledge flow between the HCN and the expatriate. In unfamiliar work circumstances, talking with each other is considered one of the most important skills because talking, or its absence, influenced the work

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relationships between the HCN and expatriate to some extent. By talking, employees enable their structurally weak ties, thereby strengthening information and knowledge flows. It is important to consider circumstances and facilities that will promote talk among employees to promote the effectiveness of social activities for some employees’ work relationships.

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4.3 Effectively Managing Expatriate Performance

MNEs use expatriate performance management (EPM) as a mechanism to align the goals of the parent company and its subsidiaries (Tahvanainen & Suutari, 2005) and its purpose is to maximize the expatriate’s effectiveness in new cultural settings. There are different views on how expatriate performance can be defined. For example, on the job effectiveness, reasons for failure, achieving expected outcomes and finishing the assignment (Lee & Donohue, 2012). Another definition already mentioned in the literature, encompassing a wider range and relevant to the components in this study is the definition of adjustment: “The adjustment to a foreign country or culture, linked to the desire to complete the assignment” (Caligiuri, 2000).

If MNCs do not see the importance of EPM, expatriate failure is a probable outcome. Expatriate failure is not only a matter of personal concern to the expatriates themselves, it can also be a critical source of organizational competitive disadvantage, largely due to firms’ overemphasis on selection based on technical expertise rather than cross-cultural competence (Wu & Ang, 2011). To minimize failure, effective use of EPM is essential and is most relevant for MNCs with a high degree of internationalization, since MNCs must manage expatriates across vast and various cultural and geographic boundaries. A great deal of research has focused on factors that may enhance expatriate effectiveness and is mainly concerned with typical performance management activities which include goal setting, feedback, appraisal, training and development (Ellis, 2011). The general performance management activities can be divided into hard and soft components. According to Fee et al. (2011), the ‘hard components’ of EPM (goal setting and feedback) alone, represent a limited perspective that excludes performance management components like support for the expatriate through the ‘soft components’ training and/or mentoring. The soft performance management components are considered especially important because they sustain expatriate learning and thus support and enable the levels of expatriate performance desired by MNEs (Tahvanainen & Suutari, 2002). In this research, the main focus will be on the soft components of expatriate management since training and mentoring are considered important constructs in the knowledge transfer process on how to operate effectively in countries with high risks.

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Performance is the outcome of three determinants, knowledge about facts and things, knowledge about how things are done, skills to do them and the motivation to act, to expend effort and to persist (Campbell et al. 1993). Three components of performance (communication performance, maintaining discipline and demonstrating effort) are determined by the three performance abilities. Lee and Donohue (2012) studied how well these knowledge measures act in combination with Campbell’s performance model. Campbell’s model is useful because it helps to define the scope and the content of expatriate performance and how it complements to organizational goals. The research of Lee and Donohue (2012) is considered particularly important for this study, since the effect of the integration of knowledge is examined in the context of the country’s business characteristics both in a cultural and political context. When knowledge is transferred adequately, the increased knowledge could possibly have an effect on not only the expatriate’s performance, but also on the performance of the subsidiary, thus, the organizational goals. The model focuses on performance components relevant to organizational goals and, by doing so, clearly defines predictors and components of performance (Lee & Donohue, 2012). Fulfilling specific task requirements, as well as developing and maintaining relationships with HCNs are the core aspects of expatriate performance (Lee & Sukoco, 2010), and are consistent with the dimensions of the study of Lee & Donohue, (2012) of expatriate performance namely:

- Task performance

- Contextual performance.

Task performance is defined as the extent to which the expatriate meets performance goals and standards, while relationship (contextual) performance can be defined as performance beyond technical duties and responsibilities (Kraimer & Wayne, 2004). An example of contextual performance is the ability to build good relationships with local employees (van der Heijden et al. 2009) and the effective development or maintenance of ties with members of the host country workplace.

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According to Kraimer et al., (2001) there is a positive relationship between expatriate adjustment and expatriate performance, implying that expatriates who are well adjusted at work and comfortable interacting with HCNs are perceived to be higher performers on task and contextual performance. This finding highlights the importance for organizations to provide (language) training and social opportunities for the expatriates to interact with foreign nationals. So, expatriate adjustment relates to performance on the job and suggests that it is worth the company’s time and resources to help expatriates adjust to the foreign subsidiary and to develop the language skills needed to interact with host country nationals.

4.3.1 The importance of training

Most expatriate training takes place before the expatriate’s departure. For expatriates, in-country training can be expensive, hard to target and hard to implement related to difficulties in diagnosing training needs (McGrath-Champ & Yang, 2006). In-country training is the commitment of an organization to influence expatriates’ performance beyond just adjustment and acculturation. More focused training can be linked to (in-country) performance evaluation and goals, and thus represents a more powerful tool for firms than pre-departure training (Scullion & Brewster, 2001). Sergeant & Frenkel (1998) examined performance management in relation to cultural differences, and highlighted the importance of cultural training. Fee et al. (2011) stated that on-assignment professional training could provide the parent firm with formal bureaucratic control so that the subsidiary operations align with the parent firm’s objectives, even when parent firms overlook pre-departure training. Whether training is also considered more important in the pre-departure stage instead of ‘on-the-job will be a topic further addressed in this study.

4.3.2 The importance of mentoring

A similar strategy as training to increase knowledge as an expatriate performance management tool is the principle of mentoring. Mentoring is a component of EPM that is most often overlooked and aims to enhance an expatriate’s work performance and thereby benefit them and the organization (Fee et al, 2011). Firm uncertainty

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towards cultural differences and training is particularly visible given that several expatriates appear to have initiated mentor relationships to deal primarily with cultural issues (Fee et al, 2011). What is significant in interpersonal interactions between expatriate and HCNs, who are generally in different socio-economic–cultural groups, is the dissemination of new information and knowledge between them (Shimoda, 2013). The literature indicates that the cost of knowledge transfer increases as the distance between home and host country increases (Ambos & Ambos, 2009) Thus, it is necessary to control for the cultural distance in the parent-subsidiary context.

Mentors are often made available in two ways for expatriates: A predecessor or seasoned senior manager with experience in the country, or a host country employee who acts as a mentor (Fee et al, 2011). In this research there will be a focus on what kind of mentor is implemented the most. In case of it being mostly host country mentors, it will be examined what topics they address in the knowledge transfer process. According to the literature, the general function of a mentor is to bring employees together directly or indirectly, and to bridge gaps in communication between persons, groups, structures and even cultures (Shimoda, 2013). The expression of ‘even cultures’ can be interpreted as considered less important in knowledge exchange in the mentoring relationship. It is unknown whether a mentor assigned to an expatriate also has the function of transferring or expressing the MNCs strategies of how to cope with political risks and/or cross-cultural adaptation on a daily basis. Analysis in this research attempts to examine that topic.

According to Carraher et al., (2008) the reason for little research on the importance of mentoring appears to be due to relatively few expatriates actually engaging in mentoring. The reason why so few expatriates have had a mentor can be explained by the complexity of international assignments. Expatriates generally do not have time to engage in developmental relationships, have had little or no experience as a protégé, or they do not know how to initiate a mentoring relationship, or even lack the desire to seek out a host-country mentor. On the other hand, while expatriates may not find it necessary to seek out host-country mentors, host-country nationals may also find little personal benefit in having an expatriate as a protégé. On the other hand, if firms tend

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to believe that assigning a mentor is valuable, and in particular a host country mentor, then the host-country mentor can provide information and assistance during the on-site stage of the international assignment (Carraher et al., 2008). He or she can enhance the socialization process and guide the expatriate through the challenges of the local organizational and community environment. For instance, helping in meeting new co-workers, coping with different cultural norms by acting as a source of inter-cultural training and providing accurate information to better understand his or her new work environment, job requirements, and office politics (Carraher et al., 2008).

More importantly and more in line with this research, is the reason why the host country mentor might be particularly helpful for expatriate employees in increasing the job performance. According to Fee et al. (2011) the mentor can be useful in the following ways:

- By providing counsel on how to cope with potential problems that may arise in an unfamiliar work environment.

- By helping the expatriate develop a wider range of skills.

- By providing reliable information, coaching, and support to the expatriate to reduce the ambiguity and uncertainty the expatriate is experiencing, thus helping him or her to adjust and become productive more quickly (Shaffer et al., 1999).

- Transferring organizational and cultural norms through direct contact. - By communicating the vision, values and culture of the subsidiary.

The most effective expatriate mentoring programs are those that are formalized and supported at the organizational level, rather than the responsibility of the expatriate and/or mentor to establish and maintain (Carraher et al., 2008). Results from the study of Fee et al. (2011), suggest that firms would be wise to direct attention to training and mentoring because mentoring may be particularly valuable as it is inexpensive, flexible, and can be better targeted than structured training. A mentor can contribute

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directly and indirectly to EPM through monitoring and feedback, as well as knowledge, skill and value transfer to the expatriate.

Research has indicated the importance of the supervisor or mentor in influencing employee attitudes and job performance. Increasing the frequency and number of interpersonal relationships across ethnic groups will reduce conflict and interaction adjustment will positively relate to general adjustment (Kraimer et al, 2001). Interaction between group members leads to the development of positive feelings toward the other group. A second explanation is that intergroup contacts serve as channels for information that help to contradict biases and intergroup conflict. As expatriates interact more frequently with HCNs (which over time will increase their interaction adjustment) they will gain information that will help facilitate their adjustment to the foreign country. In addition, frequent interaction with HCNs should help expatriates develop positive feelings toward the people of that country, which should translate to greater general adjustment and in the process the expatriate may increase his or her level of knowledge sharing (Carraher et al., 2008). Thus, when the mentor assists in the expatriate’s adjustment process to the new working environment, emphasizing on the importance of integrating with HCNs, the performance of the expatriate also increases.

Carraher et al. (2008) found that having a host-country mentor has a significant positive effect on the expatriate's organizational knowledge, organizational knowledge sharing, job performance, promotability, and perceptions of teamwork. The results from the study illustrate that the relationship between having a host-country mentor and expatriate effectiveness are significantly and positively related. These results are in line with previous findings. For example, Kraimer et al., (2001) focused on the impacts of expatriate adjustment on performance, and concluded that a causal relationship did exist. In the study of Kraimer & Wayne, (2004) results provided evidence that expatriates who had high-quality relationships with their supervisors were more effective in completing their job responsibilities, emphasizing on the importance for supervisors to take the initiative in terms of developing a positive relationship with their expatriate workers. Organizations can enable high-quality relationships between expatriates and their supervisors by providing the

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supervisors with training on the challenges of cross-cultural adjustment. This would make the supervisor more aware of the issues facing their expatriates and encourage supervisors to provide expatriates with information and assistance in learning their job tasks and building the expatriate’s international skills. Thus, from previous research it can be concluded that the efforts by mentors translates into better expatriate performance at work.

4.3.3 EPM and internalization

Highly internationalized firms tend to be more thorough in deploying the hard components of EPM (i.e. goal-setting and performance evaluation) in overseas subsidiaries while overlooking informal mechanisms (i.e. training and mentoring). With less internationalized firms there is no clear pattern of performance strategies, suggesting a less strategic approach to control and co-ordinate the integration of the expatriate (Fee et al. 2011). Seeing this difference between implementation of EPM strategies and the degree of internalization it is interesting to discover whether the firms tend to overlook the informal (soft) components of performance management. However, the hard components are also part (and considered more important for MNCs) of expatriate performance management and relevant for this study, since the question is whether more integration of knowledge about the local practices, transferred from HCN to PCN increases expatriate performance overall. According to Fee et al. (2011) companies with a high degree of internationalization tend to employ more comprehensive and robust EPM systems, focusing more on the hard components of EPM.

Performance management becomes much more complex and important in an international context. And it is likely that as firms become more internationalized, they need to develop more robust, comprehensive and formalized EPM for the purpose of control and to integrate subsidiaries (Fee et al. 2011). However, only a small number of studies have suggested a link between EPM and a firm’s degree of internationalization. Jaw and Liu (2004) found a direct relationship between international strategy and implementation of EPM. Gong (2003), found that MNEs use expatriates as means of cultural control in subsidiaries in host countries with

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higher cultural distance, and EPM is a mechanism MNEs use to solve agency problems between the parent company and subsidiaries. On the other hand, Tahvanainen & Suutari (2005) argue that a relationship does exist between a firm’s degree of internationalization and approaches to EPM. Mechanisms for monitoring, searching, and applying the new knowledge to its existing knowledge base is known as absorptive capacities (Cohen & Levinthal, 1990) and these capacities are largely determined by cultural constraints (Kedia & Bhagat, 1988).

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5. Methodology

5.1 Qualitative, Exploratory, Deductive & Inductive Approach

In order to understand the feelings, values and perceptions that underlie and influence the behavior of host country nationals and expatriates, qualitative research is chosen for analysis. Another reason for the preference for qualitative research is because knowledge transfer regarding country risk cannot be addressed through codifiable objects but by the transfer of tacit knowledge. Moreover, a qualitative research approach offers the richness and depth required due to a lack of theory linking a country’s culture and political situation to expatriate performance management (Ellis, 2011).

A combination of a deductive and inductive approach is chosen as a coding strategy to analyze the data. The deductive approach is used to predefine codes in order to analyze the relevance of the selected subjects and an inductive approach to minimize inflexibility and to allow for other themes to emerge from the data. Data will be collected through in-depth, semi-structured exploratory interviews either face-to-face, by phone or Skype – in case of the expatriate living and working abroad. The duration of the interviews was approximately 30 to 45 minutes. The interviews will be recorded and typed out in full directly after the interview.

The expatriates with relevance for this research must have worked or must be currently working for an MNC in a country/countries characterized with having clear cross-cultural differences and/or high political risk, having returned from (or still working) abroad, with deployment of at least one year. These expatriates usually have had varying corporate functions in more than one country, having relatively more experience and insight on the topics of interest.

Because the actual differences in cultural values will hinder or simplify understanding, the cultural distance will be measured and calculated using the Kogut and Singh, (1988) index. The index builds on the actual value differences among

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country pairs and measures the cultural distance between the host countries and the Netherlands, using the index in figure 2.

Figure 2. – Kogut and Singh index

Where,

Iij = index for the ith cultural dimension and jth country; Iic = index for the ith cultural dimension of the Netherlands; Vi = variance of the index of the ith dimension;

CDj = cultural distance of the jth country from the Netherlands

The index values are calculated by summing the mean differences of Hofstede's (2001) cultural dimensions: Power Distance, Uncertainty Avoidance, Individualism vs. Collectivism and Masculinity. After dividing the summed mean difference of the dimensions of the Netherlands (Iic) and the host country (Iij) scores, by the variance (Vi), the outcome is the cultural difference index and represents an indication of the cultural difference between the host country versus the Netherlands, the higher the index, the higher the cultural difference. In section 6.3 the relevant index scores per country of interest will be further analyzed.

The organizations considered ideal for analysis are MNCs with FDI in two or more countries with high political and/or cultural risk, with high levels of relational capital, structural capital and human capital. Human capital is especially important in this research, since it is an indicator of an MNC’s employee skills, expertise and know-how. As for the political risks, the companies should have a high ranking on global political risk assessments, as presented in Appendix A.

5.2 Interview strategy

Each interview is preceded by questions related to the expatriate’s professional experience, the duration, their function and the department. The interview strategy is

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based on the same line of reasoning as the theoretical framework and the corresponding sub-questions. Addressing subjects accordingly, starting with assessing the country risks (both politically and culturally), followed by examining the process of knowledge transfer and lastly expatriate performance.

The purpose of the structure is to examine whether the HCNs actually have the knowledge of the risks in the host country and know how to operate with expatriates, and how to cope in ambiguous situations. There should be significant differences in cultural norms and values in the ways local business is conducted. Therefore, I seek to investigate if the knowledge transfer of these customs and ways of doing business is communicated properly and whether, after working as an expatriate, the integration of knowledge and the achievements of learning and ultimately the integration of knowledge have improved effectiveness.

Topic 1 – The Country Risk

Firstly the topic of country risk will be addressed, namely the political and cultural risks acknowledged in the countries and what was more important or had a greater effect on the expatriates. Subsequently, it is considered important to examine if the parent company is sufficiently aware of the personal effectiveness being constrained. How it is constrained and to what extent MCNs have strategies in order to cope with risks (e.g. training), and if the strategies have changed over time.

Topic 2 - The Transfer of Knowledge

Concerning the subject of knowledge transfer it will be assessed whether the expatriates personally consider the topic of risks important enough to address, and therefore are willing to increase their knowledge through personal interaction with the HCN. It will also be investigated whether the HCNs were/are aware of the possible threats that could impede business practices. Also, who is considered responsible for the transfer of knowledge, either the expatriate or the host country nationals, and if

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knowledge about the local environment (the country risks) or the knowledge about operations and success of the affiliate is considered more important.

Topic 3 - Expatriate performance management

According to the literature, country risk influences the expatriate’s personal effectiveness. Therefore, the interest is in how the risks in the host countries actually affect the performance of the expatriate and in that context, whether the expatriates consider task specific performance or the contextual performance (the ability to interact with HCN to increase knowledge) more important. In terms of increasing the effectiveness of the expatriate, a mentor has been found a valuable source in communicating the ways of doing business. Thus, information was gathered on whether the expatriates have had/have a mentor assigned, and what the tasks of the mentor in the knowledge transfer process were.

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6. Analysis and Discussion

All expatriates demonstrated knowledge of general policy and practice within their company, and all were able to relate their expatriate experience and the role of the HCNs to that of the company overall. As an outcome, an extensive qualitative database was gathered. In total about 40 pages of transcripts of the interviews was available for analysis. Analysis started by collecting comments from the interviews per question or topic, and themes from the answers were assigned to relevant nodes. Subsequently, the material was content-analyzed in order to identify common answers and themes appearing from the data. In the Results section, these key themes are presented in combination with direct quotations from the interviews in order to describe the type of evidence behind the conclusions.

6.1 The Nodes

As mentioned an inductive and deductive approach was chosen for the coding process. Following codes were pre-determined or emerged in the coding process. The nodes displayed in bold emerged inductively.

! Effectiveness constrained ! Type of cultural risks

• How to deal with them

! Type of political risks

• How to deal with them

! Change over time ! HCN Awareness

! Parent company awareness ! Training and EPM programs

• Learning on the job

! Considered important enough to address ! HCNs dealing with risks

! How is knowledge transferred

• Expat increasing knowledge • Responsible for transfer

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• Knowledge about local environment • Knowledge about subsidiary • Equally important

• Pre-departure knowledge

! Mentorship

• HCN

• PCN

• What did mentor do

! Type of performance

• Contextual

• Task

! Country specific ! Largest effect on expat

• Cultural risk • Political risk

6.2 The interviewees

The overall profile for all of the expatriates interviewed is provided in a table in the appendix C. The expatriates selected for the interviews all occupied or are currently still occupying managerial positions in the host organization and all have had experience of at least one year. The average amount of years experience is 13 years and all participants are male. The respondents operated in the corporate banking, insurance, paper-pulp, oil, beer, and telecommunications sector. Overall, a wide range of corporate functions in different industries is available for analysis, ranging from two second year Management trainees, a third year Junior Brand Manager to the CEO of Royal Dutch Shell Middle East, CEO of Elof Hannson and the CEO of Rabobank Mozambique. With respectively 23, 18 and 10 years experience working abroad. Also it is noteworthy that one person interviewed works for the Dutch Ministry of Foreign Affairs. Although that person has not worked for an MNC, his experience was found particularly useful since he has been stationed in high-risk countries for over 30 years for the Economical and Commercial department.

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6.3 The host countries

In total personal experience was shared on the political risks and cultural differences in 25 different countries. Of the interviewees with experience in more than three countries an overall experience of the years abroad was provided, because simply the time was not available to address all the countries separately. Important to note is that all the interviewees had functions in departments that required/require them to interact with host country employees on a daily basis. The companies examined are all MNCs with operations in high-risk countries for a long term; the expatriates examined were part of companies with experience of over ten years. Furthermore, some expatriates interviewed have experience in more than one country of which one or more countries can be considered having less high-risk than the conventional ‘high-risk’ countries. However, their experience overall was found useful and only statements regarding the high risks countries were taken into account.

The list of the Kogut and Singh index scores that were calculated, are displayed in appendix B and presents the degree of cultural difference between the Netherlands and the host countries where the interviewees were stationed. The index scores are considered useful in this analysis because the scores provide evidence that the expatriates were/are operating in countries with high cultural risks, and some comments by interviewees can be considered having a larger impact when made about countries with a higher index. For example, statements on cultural differences in Saudi-Arabia (index 5,71) have more significance than for example comments on the cultural differences in Canada (index 1,77). However, all comments are considered important and useful, because fortunately all countries in the analysis indicate a significant cultural distance versus the Netherlands. Furthermore, the index scores in red are higher than the mean index of 3,547 and indicate a high cultural difference compared to the Netherlands and comments made by the interviewees on these countries are considered particularly important for analysis. The countries: Oman, Rwanda and Papua New Guinea are excluded from the list because there are no Hofstede dimension scores available for these countries. However, good judgment may dictate that these countries probably will have higher indexes than the mean score of 3,547 and are therefore taken into account in the analysis. Only Norway with

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a score of 0,12 is not considered a culturally distant country, however, no comments on Norway were made in the interview with the equivalent expatriate.

Expatriate performance affected by the integration of knowledge on risks in a high-risk country