Faculty of Economics and Business MSc International Business and Management
Master Thesis
“Expatriates as a competitive advantage and the coevolution of expatriate policies and host country environments – a case study on
Finnish MNCs”
Siiri Maria Jääskeläinen S2840014 January 2016
Supervisor: Dr. Rudi de Vries
Referent: Dr. Rian Drogendijk
Abstract
With the help of the resource-based view this study tries to find explanations, why MNCs have decided to deploy expatriates despite the costs and risks involved. I argue that expatriates could be a competitive advantage. The reason for studying this topic is that Finnish MNCs are decreasing their expatriate populations. In addition, this study takes a historical perspective by examining the developments of Finnish MNCs’ expatriate policies and possible coevolutionary relationships between the companies and their host country environments.
A qualitative research method was selected, because research is used to explore this contemporary issue. The use of multiple cases was chosen, since the evidence from multiple cases is regarded as being more robust. The cases studied are Finnish MNCs from different industries. Empirical evidence was collected using semi-structured interviews.
The findings show that for some companies expatriates create additional value. They are not easily imitable or substitutable and they are relatively rare, since the knowledge they possess is very specific. Therefore, expatriates can definitely be a competitive advantage, but in some cases even a sustained competitive advantage, given the expatriate stays in the company.
Moreover, the study shows that expatriate policies have developed very differently. The potential coevolutionary relationship between a MNC and its host country environment requires more research. Some of the interviewees in this underlying study had experienced host country impacts on their policies, while others had only applied the legal requirements. Most foreign subsidiaries were reported to be highly independent from the parent.
Keywords: expatriates, resource-based view, Finland, multinational corporation, coevolution
Table of Contents
Abstract 2
List of Figures 4
List of Tables 4
List of Appendices 4
Acknowledgement 5
1. Introduction 6
2. Literature Review 9
2.1. Expatriates 9
2.2. Expatriate Failure 12
2.3. Expatriate Management and Training 17
2.4. The Resource-based view 19
2.5. Human resources as a competitive advantage 20
2.6. Coevolution 22
2.7. Sub-questions 24
3. Methodology 27
3.1. Case study 27
3.2. Sample 28
3.3. Data Collection 30
3.4. Reliability and Validity 33
4. Findings 35
4.1. Analysis of Case Companies 35
4.1.1. Accountor 35
4.1.2. Biolan 37
4.1.3. Lemminkäinen 40
4.1.4. Nokian Tyres 43
4.1.5. Valio 46
4.2. Cross-case analysis of Case Companies 49
5. Discussion 52
5.1. Expatriates versus host-country nationals 52
5.2. Selection of expatriates 54
5.3. Expatriate training and expatriate failure 54
5.4. Development of expatriate policies and coevolutionary relationships 55
6. Conclusion 57
References 60
Appendix 66
List of Figures
Figure 1 Knowledge and skills required of a foreign subsidiary manager 9
Figure 2 Framework of International Adjustment 14
Figure 3 U-curve of Cross-Cultural Adjustment 15
Figure 4 Finland in comparison with Sweden and Russia on Hofstede’s Cultural
Dimensions 53
List of Tables
Table 1 Summary of Cross-Cultural Training Delivery Mechanisms 18
Table 2 Data Sources 32
Table 3 Cross-case analysis of Case Companies 50
List of Appendices
Appendix 1 – The Sample 66
Appendix 2 – The Interviewees 67
Appendix 3 – Interview Questions 69
Acknowledgement
I would like to sincerely thank all the people that helped me during the process of writing my thesis. First of all I would like to express my gratitude to my supervisor Rudi de Vries. His guidance and support were invaluable.
Furthermore, I would like to thank the interviewees who took the time to meet with me and answer my questions even on short notice. A special thanks goes to the people that helped me in the process of getting in contact with my interviewees.
Also, I would like to thank my fellow students Christina Mayer, Mirjam Richter and Burcu Yedikapu for our countless hours at the library, their support and encouragement.
Finally and most importantly I would like to thank my parents, my sister and my fiancé for
their endless support, inspiration and guidance, but most of all for their never-ending patience
and believing in me throughout my studies.
1. Introduction
Increasing internationalization and globalization have led many companies to expand into foreign countries in order to reach new markets or to gain from more favorable conditions.
Multinational corporations (MNCs) often assign expatriate managers to run foreign operations (Culpan & Culpan, 1993), thus more and more employees are working and living in foreign locations (Harzing, 2007). MNCs are assigning expatriates for control and expertise reasons, but also increasingly to promote new market entry and develop international management competencies (Shaffer, Harrison, Gilley, 1999). The number of expatriates is expected to grow in the following years, since in 2014, 50 percent of international companies reported an increase in their expatriate population over the following two years (Cartus, 2014). When entering new markets, MNCs face several economic, social, political and cultural environments that are often different from their home country (Bartlett, 1990). The topic of how to control foreign operations is highly complex, thus several perspectives have not been studied yet.
Home country managers are assigned to run foreign operations in order to compensate for the lack of availability of skilled managers in host countries, to keep control of foreign operations, to maintain trust, for representation purposes, but also for management development purposes (Suutari & Brewster, 2000). However, numerous researchers have shown that the main reason for MNCs in selecting employees for foreign assignments is technical competence (e.g.
Anderson, 2005). Hence, the assignment of expatriates is a strategic question.
Individuals choose to accept international assignments due to a sense of vocation, for the financial rewards, for the desire to avoid undesirable conditions in the home country (Cleveland, Mangone & Adams, 1960) or to improve their international career (Stahl, Miller
& Tung, 2002).
Sending expatriates abroad is also connected to several difficulties. First, the costs are high, because in order to convince qualified employees to work in a foreign country they are offered high salaries and extensive benefits such as moving costs, children’s school tuition fees etc.
The costs of one expatriate are estimated to be three to four times as high as employing the
same individual in the home country (Suutari & Brewster, 2000). Second, research has shown
that many expatriates return prematurely from their mission abroad. The most prominent
reasons for failure are the selection process, the pre- and post-departure training process,
inadequate knowledge of the country’s culture, and poor repatriation efforts (Yeaton & Hall,
2008; Anderson, 2005). This definitely draws attention to the role of HR in the management
of expatriates (Anderson, 2005).
The resource-based view focuses on the role of resources in creating revenue thus generating competitive advantages on an organizational level (Wright, McMahan, McWilliams, 1994). A competitive advantage is occurring when a company implements a strategy that creates value, and this strategy is not implemented by other current or potential competitors (Barney, 1991).
Human capital resources are seen as one of the strategic assets each organization has that can create significant competitive advantages (Tan & Mahoney, 2006). Human capital resources comprise aspects as experience, judgment and intelligence of the managers and employees in the organizations (Wright et al., 1994).
One of the most important decisions that the MNC has to make for their foreign subsidiaries is the choice of managers.
In this study I will examine whether the resource-based view can help to understand why investing in expatriates is important for MNCs and whether MNCs see their expatriates as a competitive advantage. The importance of human resources to an organization has been studied and is well recognized by the literature (e.g. Barney, 1991; Wright, et al., 1994). Expatriates have also been studied (e.g. Harzing, 2001; Boyacigiller, 1990; Edström & Galbraith, 1977;
Franko, 1973). McWilliams, van Fleet and Wright (2001) recognize that human resources can in fact create a global competitive advantage, however, they only propose an extended model of the resource-based view and they refer to the entire human resource pool, hence not only expatriates. This research will address this research gap.
This study will be conducted in the form of a case study, examining Finnish MNCs who have assigned expatriates to work in their foreign subsidiaries.
Finnish MNCs are studied, because existing studies mostly focus on companies from the Anglo-Saxon world, especially the United States, or Europe as one big homogeneous block. I chose Finland, because it is a geographically large Nordic country with a rather small population of around 5.3 million. Furthermore, over 5000 Finnish companies are operating outside of Finland. That is a substantial number considering the size of the country.
Furthermore, this study will take on a historical perspective in order to understand how the evolution of the environment has affected companies’ expatriate policy. Researchers argue that the evolution of organizations is not independent from the evolution of the environment, thus groups, subunits, organizations, industries, institutions and economies change simultaneously.
At the same time, it is argued that this evolutionary process is in fact a co-evolutionary process,
meaning while the environment shapes organizations, they can as well shape the environment
(McKelvey, 1997).
To summarize, this study will focus on the organizations role in appointing expatriates for overseas assignments. Analyzing five Finnish MNCs will give insights how expatriate management has developed in the course of time and whether expatriates can be more valuable for the company than host country nationals. I argue, that the resource-based view will give answers to why MNCs appoint expatriates despite them being expensive. Moreover, I expect that changes in the environment have affected expatriate policies. This leads to the following main research question:
To what extent do Finnish MNC’s expatriate policies add value to the company if looked at from a resource-based view and to what extent do coevolutionary effects play a role in expatriate policies?
The research topic introduced is relevant due to the following reasons. First, in regard to management theory it will give insights whether strategically expatriates are an important source of competitive advantage, hence they bring increased value to the company despite their high costs. Moreover, organizations are continually making enormous losses, due to expatriate failure, even though these could be prevented.
Second, the research contributes to the theory of the resource-based view, because even though human resources as a sustained competitive advantage have been studied by various researchers (e.g. Wright et al., 1994; Steffy & Maurer, 1988), it has only very little been applied to expatriates. Furthermore, possible coevolutionary relationships are investigated, because they can provide important insights into how expatriate policies have developed due to changes in the environment and vice versa.
This study is structured as follows: Section 2, the Literature Review, discusses the theoretical
background of this study. Section 3, Methodology, presents the research strategy as well as the
case companies. This is followed by section 4, the Findings, in which the findings of the
interviews are presented. In section 5 the findings are discussed and compared with the
literature shown in the literature review. Finally, in section 6 I will draw conclusions and give
recommendations for future research.
2. Literature Review
In this section I will review the relevant literature for this study. I will begin by reviewing expatriates in general, who they are and why they are employed by organizations. Then I will discuss the relevance of expatriate failure and its reasons and how this can be prevented. This will be followed by a review of the resource-based view, in particular the role of human resources, and its relevance to the underlying topic. Finally, coevolutionary aspects are discussed.
2.1. Expatriates
From an international human resource management point-of-view, expatriation is defined as the process of sending home country nationals to a foreign subsidiary for a pre-defined period of time (Herry & Noon, 2001). Shaffer, Kraimer, Chen and Bolino (2012, 1287) define expatriates as ”employees who are temporarily relocated by their organization to another country […] to complete a specific task or accomplish an organizational goal”. Understanding the role of home nationals in foreign subsidiaries has been an important management concern since the 1940s. Even though trends in regards to the importance and the number of expatriates sent overseas has varied in the course of time, expatriation continues to play an important role in managing international business (Thomas & Peterson, 2015).
Figure 1 Knowledge and skills required of a foreign subsidiary manager – adapted from Thomas D.C. (2002)
A major question in international human resource management HRM, but also generally in Foreign
subsidiary manager
Host country knowledge
Corporate culture familiarity
International Experience
Technical Expertise
international business, is the executive nationality policy in foreign subsidiaries: should organizations mainly employ home country nationals or host country nationals (Harzing, 2001). The choice of manager is essential to the success of the foreign subsidiary (Black &
Gregersen, 1999). The main tasks of foreign subsidiary managers include i.a. the execution of the headquarters orders and the management of the headquarter-subsidiary relationship. They often face simultaneous pressure from the headquarters for internal consistency and pressure from the host country environment to adapt to local practices. Hence, as shown in Figure 1, a foreign subsidiary manager is required to have not only familiarity with the corporate culture, but also knowledge about the host country’s culture. Moreover, technical expertise and international experience are important (Thomas, 2002).
One of the earlier studies argues that the use of expatriates in an organization depends on the stage of internationalization of the organization. Especially in the early stages home country nationals are used in order to transfer technical skills to the subsidiary. Home country managers are more likely to be used when the MNC is in its early stages of internationalization or when it lacks international experience (Vaghefi, Paulson & Tomlinson, 1991), because they do not have yet established links and methods to choose host country national managers (Steers &
Nardon, 2006).
Franko (1973) studied 25 European and US MNCs and found a repeating cycle with an overall consistent pattern among the companies studied. He argues that during the initial export stage, foreign sales management is typically left to host country nationals, but as soon as production is moved to the foreign subsidiary, the number of home country nationals increases significantly (Franko, 1973). More recent studies have argued that the patterns proposed by Franko have changed in the course of time and that other factors increasingly affect the use of expatriates.
One of the most important studies that offers a theoretical explanation to why MNCs employ
expatriates was conducted by Edström and Galbraith (1997). Their classification is still widely
accepted and cited by scholars in the management and the HR literature on expatriates. Edström
and Galbraith (1997) name three general organizational motives for international transfer of
managers. First, organizations need to fill positions in order to transfer technical knowledge
especially to developing countries. The flow is from the headquarters to developing countries
and the placement of expatriates is mostly determined by the lack of qualified employees in
the foreign country (Edström & Galbraith, 1977). This is likely to be of more importance when
the educational level in the host country is low (Boyacigiller, 1990) or when the products of
the MNC are research intensive and they need to transfer specific knowledge to their subsidiaries. This strategy may also be of increased importance for new subsidiaries, because the parent company might not have sufficient knowledge of the host country labor market, but also because the MNC is still rather unknown in the host country and does not attract qualified locals (Harzing, 2001).
Second, organizations intend to develop managers for positions of responsibility especially in organizations that are highly internationalized. The main objective is to develop an international mindset among managers. In this case, the flow is not only from headquarters to their foreign subsidiaries, but also the other way around (Edström & Galbraith, 1977). It is more likely that large MNCs have a formal management development program. In smaller MNCs international transfer for management development is more likely to be conducted at an ad hoc basis (Harzing, 2001).
Third, research suggests that organizations use transfer for organization development.
International transfers are used to change or maintain the structure of the organization, and, furthermore, as a coordination and control strategy. On the one hand, it intends to socialize expatriate and local managers into the organizational culture, and, on the other, it intends to create an information network to provide links between the headquarters and its subsidiaries (Edström & Galbraith, 1977). The control and coordination function is more likely to be of importance for MNCs that come from highly uncertainty avoidant countries. Uncertainty avoidance is one of Hofstede’s cultural dimensions that classify countries according to their culture. He originally suggested four dimensions: individualism-collectivism, power distance, uncertainty avoidance and masculinity-femininity. Later two additional dimensions were added: long-term versus short-term orientation and indulgence versus restraint (Minkoff &
Hofstede, 2011).
Uncertainty avoidance refers to how far a society focuses on reducing uncertainty and creating stability (Minkoff & Hofstede, 2011). In highly uncertainty avoidant countries there is a strong need for being in control. Especially in the beginning, foreigners are not trusted and subordinates should be controlled (Hofstede, 1980). Thus, MNCs from countries that score high in the uncertainty avoidance dimension will most likely use home country nationals to run subsidiaries. Hence, different staffing patterns regarding the use of expatriates will exist among countries, which is confirmed by a number of studies (e.g. Harzing, 2001; Tung, 1981).
Control and coordination will also play a more important role when the level of cultural
distance between the host and home country is high (Harzing, 2001). Highly different cultural
backgrounds can lead to communication difficulties and misunderstandings, thus MNCs might
prefer home country managers in important positions to alleviate communication between headquarters and subsidiaries (Harzing, 2001; Boyacigiller, 1990). However, this preference for home country managers due to cultural distances is likely to decrease over time (Gong, 2003).
Furthermore, a number of subsidiary characteristics can increase the need for control and coordination. Strategically important subsidiaries and large, majority-owned subsidiaries will be more important to headquarters than subsidiaries that are small and lower in the corporate hierarchy (Harzing, 2001; Boyacigiller, 1990).
More recent studies mostly agree with Edström and Galbraith’s theory. For example, Suutari and Brewster (2000) argue that home country nationals are assigned to run foreign operations in order to compensate for the lack of qualified personnel in host countries, and management development purposes. Additionally they suggest that employing home country nationals will maintain trust, but they are also used for representation purposes (Suutari & Brewster, 2000).
Anderson (2005) shows that the main reason for MNCs in selecting employees is technical competence. Furthermore, some researchers have argued that expatriate managers are more loyal and they are perceived to be more trustworthy and more willing to share knowledge and information with the headquarters (Schniederjans, 1998).
In summary, the reasons for using expatriates have been clearly identified by scholars. The main tasks performed by expatriates comprise filling positions in order to meet the need for expert knowledge and, moreover, transfer knowledge from the headquarters to the foreign subsidiary. Furthermore, the management development objective includes the development of managerial skills for the individuals involved. The final objective, organization development, includes maintaining the structure of the organization, and, furthermore, developing a coordination and control strategy .
2.2. Expatriate Failure
Using expatriate also does have its disadvantages. The costs are very high, since in order to attract qualified employees to leave their home country, and work and live in a foreign country, organizations have to offer them incentives. Expatriates are usually compensated generously:
high salaries and extensive benefits such as moving costs, children’s school tuitions, expense accounts etc. In fact, the costs of one expatriate are estimated to be three to four times higher as employing them in the home country (Suutari & Brewster, 2000; Shaffer et al., 1999).
However, in most cases, the benefits of using expatriates exceed these costs.
One of the major issues is still expatriate failure. Failure rates are estimated to range from 16 percent to as high as 70 percent and the losses connected to these failures are estimated to range from USD 40.000 to 1.000.000 (Yeaton & Hall, 2008; Shaffer et al. 1999; Tung, 1982). Webb and Wright (1996) estimate the losses for US companies at USD 2 billion annually in direct costs associated with expatriate failure. This number does not include indirect costs, such as damage to organizational reputation or lost business opportunities (Webb & Wright, 1996).
Moreover, the organization usually loses a strategically important asset, since the expatriate is often familiar with the headquarters and the subsidiary’s operations (Stroh, Gregersen & Black, 2000).
Whether an overseas assignment can be considered to be successful or unsuccessful depends on the definition of success. The most common measure of expatriate success and failure is turnover, in specific employee turnover - how often employees leave an organization and move on to another organization (Black & Gregersen, 1990). In the case of expatriates, Black and Gregersen (1990) suggest that expatriates interrupt the international assignment prematurely and return to the home country, but, in many cases, continue to work for the same organization.
Many of the reasons why employees leave a company and start working for another one, can also be found in the context of expatriates prematurely discontinuing their international assignment. Often variables that are not that important in home country employee turnover play a much larger role in expatriate turnover. For instance, nonwork factors play a much bigger role in expatriate turnover than in general employee turnover (Black & Gregersen, 1990).
A second possible measure for expatriate success or failure is the ability of the expatriate to overcome cultural shock and adjust to his or her new living and working environment (Thomas
& Peterson, 2015).
Figure 2 Framework of International Adjustment - adapted from Black, J.; Mendenhall, M.; Oddou, G. (1991), 291-317.
Cross-cultural adjustment has received a lot of attention from researchers. Black, Mendenhall and Oddou (1991) developed an integrated model of international adjustment by incorporating international and domestic adjustment literature. The authors suggest three dimensions of adjustment: work, interaction and general, which are influenced by different factors. These factors can be divided into four groups: organization, nonwork, individual and job (Black et al, 1991). The integrated model is shown in Figure 2, which summarizes the relationships between the dimensions and the factors determining them.
Degree of Adjustment 1. Work Adjustment 2. Interaction Adjustment
3. General Adjustment Organization
Culture Novelty (1) Social Support (1) Logistical Help (2,3)
Nonwork Culture Novelty (2, 3)
Family (Spouse) Adjustment (1, 2, 3)
Individual Self-Efficacy (1, 2, 3) Relation Skills (1, 2, 3) Perception Skills (1, 2,
3)
Job Role Clarity (1) Role Discretion (1)
Role Novelty (1) Role Conflict (1)
Figure 3 U-curve of Cross-Cultural Adjustment – From Black, J. & Mendenhall, M. (1991), 225-247.
Another prominent theory about expatriate adjustment is presented by Lysgaard (1955). Black and Mendenhall (1991) agree in their study on Lysgaard’s model which proposes an U-shaped curve of cross-cultural adjustment shown in Figure 3. Numerous other researchers have also found evidence for the assumption that adjustment to the foreign environment will follow a U- shaped pattern (e.g. Surdam & Collin, 1984; Chang, 1973; Davis, 1963; 1971). The U-shaped curve describes four stages that individuals experience when adjusting to a new culture. In the honeymoon stage the new environment is new, exiting and fascinating. This stage is followed by a culture shock, where the individual might experience frustration and disillusionment, since he or she has to seriously adapt to living in the new environment At the adjustment stage the individual starts to gradually adapt to the new culture and he or she learns how to act in the new environment. Eventually, the individual can reach the mastery stage. At this stage the individual has the ability to function effectively in his or her new surroundings (Black &
Mendenhall, 1991). Even though researchers have found a lot of support for this model, it is
not without its critics. For instance, Black and Mendenhall (1991) argue that the studies
conducted by Lysgaard (1955) and Davis (1963, 1971) show support for the theory, however,
none of the researchers actually conducted statistical tests. Despite the lack of strong supporting
evidence, the proposed model still remains an attractive explanation from academic and practical perspective (Thomas & Peterson, 2015).
More recent studies emphasize the role of network ties in the ability to adjust to new work and environment conditions. Network ties are described as the relationships expatriates build with other individuals during their foreign overseas assignment (e.g. Farh, Bartol, Shapiro & Shin, 2010; Johnson, Kristof-Brown, Van Vianen & De Pater, 2003). Network ties provide informational support, especially about problem solving and how to function in the new environment, and emotional support, which helps them overcome adjustment difficulties (Johnson et al., 2003). Expatriates with a larger network that includes a diverse set of individuals will adjust more easily to the new environment than less well-connected expatriates (Johnson et al., 2003).
A third indicator of expatriate success is task performance. MNCs are often concerned with underperformance of their expatriate managers (Storey, 2007). Performance is much more difficult to measure than for instance expatriate turnover, which explains why there is less research about this topic.
Task performance can be defined as how effectively expatriates carry out assignments that add value to the organization’s technical core. This can be done directly by implementing a part of its technological process, but also indirectly by providing required resources or services (van der Heijden; van Engen & Paauwe, 2009). Expatriates often have to face conflicting performance expectations from headquarters and host nationals (Mendenhall and Oddou, 1985). The success of expatriates in their international assignments is important to the overall success of the international projects of the organization. Furthermore, the costs of underperformance are often enormous (van der Heijden et al., 2009).
Expatriate failure is often rooted in culture shocks and on the expatriate’s poor performance abroad, which both might result in premature repatriation (Mendenhall & Oddou, 1988). Often it is not only the expatriate him- or herself who is not able to adjust to the new environment, but the expatriate’s spouse’s inability to adjust. In fact, according to the Global Mobility Policy
& Practices 2014 survey, respondents listed inability of the family to adjust as the second most
common reason why overseas assignments fail (Cartus, 2014). Whether it is the expatriate or
his or her spouse, culture shocks are often the result of poor cross-cultural adaption (Peltokorpi,
2008). Furthermore, Anderson (2005) suggests inappropriate selection practices, inadequate
preparation and training as reasons for expatriate failure.
In summary, there are several possibilities to define expatriate success or failure. Failure can be the premature return of the expatriate, the expatriate’s or his or her family’s/spouse’s inability to adjust to the new environment or the inability to perform his or her task. In order to prevent these costly failures organizations need to manage their expatriates more appropriately.
2.3. Expatriate Management and Training
Tung (1982) studied expatriate managers from MNCs from the US, Europe and Japan, and found out that lower expatriate failure rates were found in MNCs that provided more variability in staffing, but also more training for the expatriate assignment. Generally, Japanese and European MNCs suffered less from expatriate failure than their US counterparts. They provided more training and support for their expatriates during their overseas assignments (Tung, 1982). In fact, a number of studies have shown that corporate career support have had a significant impact on international business success (Van der Heijden et al., 2009).
According to the organizational support theory, employees personify the organization and the way they are treated in the organization signals them to which extent their efforts are being valued and they are taken care of. In return, employees show increased commitment, loyalty and performance (Eisenberger, Huntington, Hutchison & Sowa, 1986). In regard to expatriates, research shows that the extent to which expatriates perceive support has positive effects on career prospects and performance, and negative effects on their intention to leave prematurely (Van der Heijden et al., 2009).
Despite the findings, many parent organizations are still not investing sufficiently in training and supporting their expatriates, which, in consequence, is reflected in the high numbers of expatriate failure (van der Heijden et al., 2009; Suutari & Brewster, 2003; Stahl et al., 2002;
Riusala & Suutari, 2000).
Littrell, Salas, Hess, Palye and Riedel (2006, 356) define cross-cultural training “as the educative processes used to improve intercultural learning via the development of the cognitive, affective, and behavioral competencies needed for successful interactions in diverse cultures”. Traditionally, cross-cultural training has mainly focused on the preparation of expatriates for international assignments, however, increasingly training is intended to improve cultural awareness of domestic employees in order for improving their abilities when interacting with individuals from different country backgrounds (Littrell et al., 2006).
Cross-cultural training aims at preparing expatriates for their international assignment, hence
companies should provide expatriates with the knowledge, skills, and abilities they need to be
successful, especially how to adjust to the foreign environment, how to perform effectively, and how to interact with individuals from different cultural backgrounds. Effective cross- cultural training programs should at least include key elements such as the needs of the expatriate, the customization of the content and design methodologies, and the program quality.
At the beginning, it is important to assess the needs of the expatriate. These include his or her strengths and weaknesses, but also the needs of the spouse or the family that could influence the outcome of the international assignment (Littrell et al., 2006).
The second key element, the customization of the content, states that the training, including its design and techniques, should be adapted to the expatriate’s needs (Littrell et al., 2006).
The third element, program quality, is concerned with the aspects that the training is provided by experts of the specific destination culture and of the expatriation process in general (Littrell et al., 2006).
Table 1 Summary of Cross-Cultural Training Delivery Mechanisms – adapted from Littrell, L.; Salas, E.; Hess, K.; Paley, M. & Riedel, S. (2006), 355-388.
Approach to training Focus
Attribution Enabling the expatriate to make isomorphic attributions Culture awareness Understanding own culture to appreciate cultural differences Interaction On-the-job training
Language Facilitating intercultural adjustment
Didactic Providing expatriate with factual information Experiential Learning how to learn
Researchers have identified seven approaches to cross-cultural training (Bhawuk, 2001). A summary of these approaches can be seen in Table 1. These approaches go beyond the scope of this study, hence they will not be discussed further.
Researchers are debating whether predeparture or postarrival training is most effective (Littrell et al., 2006). On one hand, supporters of predeparture training claim that training is more effective when the expatriate has the possibility to gain knowledge about business practices, cultural differences, living conditions etc. in the destination country prior departure, he or she will have more realistic expectations what he or she will have to face in the new environment.
Moreover, it is more likely that the realistic expectations can be met and even exceeded
(Caligiuri, Phillips, Lazarova, Tarique & Bürgi, 2001).
Supporters of postarrival training, on the other hand, argue that postarrival programs enable real-time issues to be addressed, thus training can be customized to meet the explicit issues of the expatriate in the new environment (Littrell et al., 2006).
Researchers have not agreed which strategy is better or if these two strategies should be combined, thus there is room for further research.
In this research I study what the organization’s role is in the support and training of expatriates.
An explanation to why organizations should invest in expatriate management and training could be found in the resource-based view of an organization.
2.4. The Resource-based view
The resource-based view of a company is rooted in the organizational economics literature, where profit and competition theories are linked to internal resources of the firm as a major determinant of company success (Wright et al., 1984).
A resource is “anything which could be thought of as a strength or weakness of a given firm […] whose tangible assets which are tied semi permanently to the firm” (Wernerfelt, 1984, 172). This definition can be further expanded into “all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness”
(Barney, 1991, 101). The resource-based view implies that organizations acquire or develop resources that provide them a competitive advantage (Schmidt & Keil, 2013). Before acquiring or developing resources, organizations are influenced by four factors: 1) the organization’s market position; 2) the existing resource base; 3) their position in interorganizational networks, where they have the possibility to access information; 4) their managers, who have the knowledge and experience how and where to apply the resource (Schmidt & Keil, 2013).
One of the key aspects of the resource-based view is that differences in performance among organizations originate from differences in their selection of resources (Schmidt & Keil, 2013;
Barney, 1991; Wernerfelt, 1984).
These resources can be divided into three groups: physical capital resources, human resources,
and organizational capital resources (Barney, 1991). Physical capital resources comprise such
assets as the company’s production site, equipment, technology etc. Human capital resources,
on the other hand, consist of the experience, judgment and intelligence of individual managers
and employees of the company. Organizational capital include the company structure, its
control and co-ordination systems and its informal networks among groups within the
organization, but also the networks with other organizations in which the organization is embedded in (Barney, 1991). The focus of this study is on human capital as a resource.
In the resource-based view, the resources mentioned above can be the sources of an organization’s competitive advantage (Wright et al., 1994). A competitive advantage is given when an organization is performing a value creating strategy that is not being used by another organization at that moment (Barney, 1991). A competitive advantage is only possible if resources vary across organizations and resource immobility is given, meaning competing organizations cannot obtain these same resources from the market (Wright et al., 1994).
In contrast to the competitive advantage, “a sustained competitive advantage exists only when other firms are incapable of duplicating the benefits of a competitive advantage (Wright et al., 1994, 303). Only after competitors have used all possibilities to copy the advantage unsuccessfully, a competitive advantage is considered sustained (Wright et al., 1994). In order for a resource to provide the organization a sustained competitive advantage, it must fulfill the following four criteria: (1) add positive value to the organization (2) be unique or rare (3) imperfectly imitable (4) cannot be substituted (Schmidt & Keil, 2013; Peteraf & Bergen, 2003;
King & Zeithaml, 2001; Barney, 1991).
2.5. Human resources as a competitive advantage
Human resources are defined “as the pool of human capital under the firm’s control in a direct employment relationship” (Wright et al., 1994, 304). Under this definition, expatriates are included in an organization’s human resource pool, since they are “employees who are temporarily relocated by their organization” (Shaffer et al., 2012, 1287).
Wright et al. (1994) identify two aspects of human resources. First, the individuals and their characteristics are the more important resource to the organization rather than the practices and procedures used. Second, they argue “that the characteristics of individuals do not provide value to the firm unless they are utilized through employee behavior” (Wright et al., 1994, 304). This means, that employees should actually have the competencies, namely knowledge, skills and abilities, to actually be able to perform the behaviors expected.
The Firm Specific Human Capital Theory indicates under which circumstances human
resources can create value (Steffy & Maurer, 1988). One cannot create value by investing in
human resources when both the demand and supply of labor are homogeneous, meaning that
potential employees have the same abilities and are easily replaceable. At the same time, when
organizations offer different jobs with diverse skill requirements, and potential employees vary
in their skills there is a possibility to create value through investing in human resources (Wright et al., 1994). Higher quality human resources may result in higher financial value for organizations (e.g. Wright et. al, 1994; Boudreau & Berger, 1985; Boudreau, 1983). In order for human resources to be a source of competitive advantage, they must have power, information, knowledge and rewards (PIKRs), hence it is expected that more skilled individuals possess these factors (Lawler, 1996).
The second prerequisite for a resource to be a competitive advantage is its rareness. At first glance human resources do not seem very rare since many countries have at least some sort of unemployment, hence there is an excess of labor (Wright et al., 1994). Most jobs vary significantly in the skills required, thus it allows for extensive variances in individual skills and knowledge contributions. Some jobs require more extensive knowledge and skills, so one can expect that high quality human resources are required (Wright et al., 1994). Statistically, cognitive ability can be expected to be normally distributed, thus individuals with high levels of cognitive ability will be, by definition, rare (Wright et al., 1994).
Wright et al. (1994) use cognitive ability as a measure of the quality of the human resources of an organization, because research has shown a significant positive relationship between cognitive ability and individual job performance (Hunter & Hunter, 1984). This has been confirmed by later studies as well (e.g. Schmidt, 2002). In short, general cognitive ability is the ability to learn and it predicts an individual’s job and training performance (Schmidt, 2002).
Competitors should not be able to identify the exact source of competitive advantage and they should not be able to duplicate exact components of the resource. Human resources are unique in the matter that they are often influenced by unique historical conditions, causal ambiguity and social complexity, which make them very hard to imitate (Wright et al., 1994).
Unique history refers to the historical circumstances that have led the organizations to its place in time and space (Barney, 1991). An organization develops unique corporate cultures and norms, but also synergies among the workforce, which can be highly advantageous.
Consequently, the history of an organization is nearly impossible to imitate (Wright et al., 1994).
Causal ambiguity is given when the causal connection between an organization’s resources and the competitive advantages cannot be understood (Reed & DeFillippi, 1990). Consequently, it decreases the possibility of imitation because competitors cannot find the underlying reasons for the effectiveness of the organization (Ambrosini & Bowman, 2010).
Social complexity indicates that social phenomena are often so complex that it is impossible to
systematically manage or even influence them. Relationships between key employees, for
instance, might constitute a competitive advantage for the organization (Wright et al., 1994).
Furthermore, Collins and Clark (2003) found a positive relationship between top management team’s social networks and company performance. The value of these social relationships is argued to lie in transaction-specific human capital, which means that trust and knowledge are developed in the course of time between the individuals or groups involved, and the value is given only in these relationships (Wright et al., 1994).
As argued before, human resources are often influenced by these three factors - historical conditions, causal ambiguity and social complexity – that are extremely difficult, mostly impossible, to imitate. This increases the likelihood that human resources can indeed be sustainable competitive advantages.
The final condition, the unsubstitutability of the resource, means that competitors cannot just use another type of resource to replace the resource used as a sustained competitive advantage (Morgan, Vorhies & Schlegelmilch, 2006). The key issue is the ability of competitors to replicate an organization’s strategy by using an alternative set of resources (Barney, 1991).
In comparison to technological resources, human resources have the advantage that they are transferable across technologies, products and markets, and they do not get outdated easily.
Individuals with high levels of cognitive ability can be constantly trained in up to date technological skills, which ensures that their skills do not get outdated (Wright et al., 1994).
2.6. Coevolution
I argue that environmental changes have affected MNCs expatriate policy, but at the same time MNCs have affected their host environments. Hence, it is important to understand the theory behind coevolutionary processes.
Scholars have increasingly recognized coevolutionary theories as a part of organization theory by helping to understand organizations and environments change and evolve (Murmann, 2013).
The evolution of organizations cannot be understood without involving changes of the environment in the process and in various levels of social organizations. Groups, subunits, organizations, industries, institutions and economies are argued to often change together (McKelvey, 1997). Organizational environments are developing faster, more competitive and more turbulent than ever before, because of advances in information technology, globalization and the rise of global pools of capital (Murmann, 2013).
Institutional theory proposes that organizations encompass various institutional elements, such
as rules, norms, beliefs and values, which they derive from their institutional environment (e.g.
countries. When a subsidiary is managed primarily by home country agents, the industrial pressure from the home country is more likely to dominate (Spencer & Gomez, 2011). Hence, expatriates that are strongly influenced by their home country institutions might transfer these influences into the host environment.
Murmann (2003, 23) defines coevolution as “the bidirectional causality linking the two parties in the relationship”. Coevolution can only take place between two evolving populations if they significantly impact each other’s ability to persist. Such a relationship can exist between certain industries and between producers and user populations, but also between two populations of competing technologies (Murmann, 2003).
Murmann (2003,4) mentions “the rise and development of the large managerial firma as a new economic institution”, suggesting that one large organization that dominates the industry can shape the entire industry.
From the management theory perspective, researchers have argued that organizations are not only affected by their environment, but in some cases they as well have the opportunity and power to shape their environment (Murmann, 2013; Volberda & Lewin, 2003). In order for coevolutionary processes to occur, “the population must consist of heterogeneous firms that have adaptive/learning capability and are able to interact and mutually influence each other”
(Volberda & Lewin, 2003, 2114). Coevolution tries to explain the relationship that exists between the evolution of individual organizations and their national environment.
One of the most important reasons why organizations use expatriates on their foreign missions, is the transfer of knowledge to the foreign subsidiary. At the same time, many organizations are trying to adapt to local conditions in order to be more efficient. Thus in the expatriate context, I expect that the changing environment has influenced organizations to adapt their expatriate practices accordingly, while, at the same time, organizations are transferring knowledge abroad, hence they are influencing their environment – the host country. Studies of evolution or coevolution of organizations and their environments are still rare (Lewin and Volberda, 1999) and they have not been applied to the expatriate context. The underlying research aims at shedding light to this research gap.
To summarize, expatriation continues to play an important role in managing international
business and literature has identified a number of reasons why organizations continue to
appoint expatriates for international assignments, the main reasons being knowledge transfer
to the subsidiary, development of managers and organization development, especially
coordination and control of subsidiaries. Even though the importance of expatriates is clearly
recognized, expatriate failure, namely premature return of expatriates, their or their family’s inability to adjust to the new environment and underperformance in the assignments, continue to be an enormous issue. Research has found support for the connection between the organization’s role in expatriate training and support, and decreased expatriate failure. Despite these findings, many organizations do not provide sufficient training or support.
The results of the Global Mobility Policy & Practices Survey 2014 show that about 50 percent of MNCs are planning to increase the number of expatriates in the future (Cartus, 2014). Other researchers have argued that there might actually be a decreasing trend in the use of expatriates in Western European and English-speaking countries. They propose that increased political pressures on MNCs might have affected staffing policies (Harzing, 2001).
The resource-based view could give important implications why MNCs apply expatriates and whether an organization can achieve a competitive advantage or even a sustained competitive advantage from their human resources, especially expatriates. Internal resources, such as human resources, have increasingly been accepted as a source of competitive advantage, hence people are seen as strategically important to firm success. The main findings of human resources as sustained competitive advantage are shown in the previous sections. Furthermore, this study is examines to what extent coevolutionary relationships have shaped not only MNC expatriate policies, but also their host country environments.
In the following section I will discuss sub-questions that aim at answering the main research question and afterwards the methodology of this study is presented.
2.7. Sub-questions
The sub-questions are based on the theoretical background presented in the previous sections and serve for the purpose of to directing the data collection and data analysis process and in the end to answering the main research question of this study. The main research question is:
To what extent do Finnish MNC’s expatriate policies add value to the company if looked at from a resource-based view and to what extent do coevolutionary effects play a role in expatriate policies?
Even though research has recognized the main reasons why MNCs employ expatriates, it is
important to understand why these specific case companies apply expatriates. As argued in the
previous section, many Finnish MNCs have increasingly moved to using host country nationals
in their foreign operations. However, as there are companies that are still using expatriates, it
is important to study why they still do that. I argue that they see their expatriates as a competitive advantage and they provide more value to the company than host country nationals. Thus, I propose the following sub-question:
1) What are changes in the reasons for using expatriates instead of local employees and managers - are expatriates seen as a competitive advantage in comparison to their local counterparts?
As argued in the previous sections, in order for human resources to be a source of competitive advantage, they must have power, information, knowledge and rewards, hence it is expected that more skilled individuals possess these factors (Lawler, 1996). In consequence, I expect that companies have certain expectations towards their candidates, when they are appointing expatriates. Thus, the following sub-question is formulated.
2) How do companies choose their expatriates?
Numerous studies have shown that training and support have decreased expatriate failure und increased firm success when operating in a foreign country (e.g. van der Heijden et al., 2009;
Tung, 1982). Furthermore, prior research has shown a significant positive relationship between cognitive ability and individual job performance (Hunter & Hunter, 1984). I assume that companies appoint high quality employees with high cognitive ability as their expatriates, hence training should make them more successful and increase their value for the company.
Moreover, cross-cultural training makes them increasingly familiar with the host country’s culture, thus they should be more effective in their performance. This leads to the following sub-question.
3) In what way do companies support or train their expatriates in order to decrease expatriate failure and to support their success?
Increasing internationalization and globalization have led to numerous changes in
environments. Many MNCs are trying to adapt to local conditions, in order to make their
foreign operations more efficient and valuable. At the same time they are transferring
knowledge to the foreign subsidiaries. This two-way flow of information, knowledge and
customs is expected to have influenced both parties, hence it can be expected that there are
coevolutionary effects between these two. Thus, I address the following sub-question.
4) Has the environment of the host country affected the companies’ expatriate policy and vice versa?
The preceding section has given a summary of existing literature on the underlying topic. The findings of previous studies were used as a basis to formulate sub-questions, which serve as a guidance to the underlying research and, finally, they will help to answer the main research question.
In the following section I will introduce my research methodology.
3. Methodology
In the process of approaching Finnish MNCs in order to get them to participate in this underlying study, I faced the issue that companies that used to have a lot of expatriates, do not appoint expatriates anymore. Furthermore, large MNCs with numerous foreign subsidiaries, such as Raisio plc, Ramirent plc and Apetit plc had appointed only one or two expatriates in their entire history.
Not all Finnish MNCs have decided to use only host country managers. Hence, I argue that MNCs still consider expatriates to be important and to some extent more capable in running foreign operations in comparison to host country nationals.
3.1. Case study
When conducting a study, the researcher must make the decision in which form the study will be conducted. This research is done as a case study. A case study can be defined as “a research design that takes as its subject a single case or a few selected examples of a social entity”
(Thomas, 2004, p.127). It is a research strategy that tries to understand the dynamics within a single case. Case studies can be used to provide description, test theories or generate new theory (Eisenhardt, 1989).
Yin (2009) argues that a case study is an acceptable method in cases when the focus of the study is a contemporary phenomenon that is studied in depth and within its real-life context.
Moreover, in cases where the boundaries between the phenomenon and context are not very clear a case study is a good option. The appointment of expatriates to international assignments is an ongoing process, thus it can be argued that it is a highly contemporary phenomenon.
The research design chosen for the underlying study is a multiple-case design. The method was chosen in order to compare and contrast the data of different MNCs.
The literature does not propose an ideal number of cases to be used for a case study. However, Eisenhardt (1989) recommends using a number between 4 and 10 cases, because this window should provide the researcher with enough data to generate theory with sufficient empirical grounding. Moreover, case studies with more than 10 cases may become too complex and the volume of data uncontrollable. Focusing on five cases allows me to look into the detail of each interview.
There are six data collection methods that can be used in case studies. These are interviews,
documents, archival records, direct observations, participant observation and physical artefacts
(Yin, 2009). Eisenhardt (1989) argues that theory-building research can combine multiple data collection methods, such as interviews, observations and archival sources.
Based on Yin’s (2009) classification method of case studies, this research is conducted as an exploratory research. Furthermore, it is a qualitative research, since it leaves more room for interpretation of different perceptions and this will give well-grounded information, as interviewees may possess highly context-specific individual experiences. For the purpose of this research I expect qualitative data to generate more significant findings since interviewees are able to express their personal opinions and experiences.
The design of a research explains how data is collected, how it is analyzed and finally connected to theory. After reviewing existing theories in the current literature, I formulated sub-questions that direct the data collection and data analysis process. From the interviews conclusions can be drawn, which then are connected to the theory, thus answering the main research question. By following this path, the findings will contribute to the existing theory (Wilson, 2013).
3.2. Sample
As noted in the literature review, culture can affect the staffing pattern of an organization, which in return will most likely have an effect on the appointment of expatriates and their training. This study will be conducted on Finnish MNCs, because existing studies mostly focus on companies from the Anglo-Saxon world, especially the United States, or Europe as one big homogeneous block or only Germany. The underlying study adds something from a different, European culture.
I choose Finland, because it is a geographically large Nordic country with a rather small population of around 5.3 million. Furthermore, over 5000 Finnish companies are operating outside of Finland. That is a substantial number considering the size of the country.
Selecting the cases to be studied is essential for case studies that intend to build theory. It is
important to define clear populations, because these outline the pool from which the sample is
drawn. Furthermore, a clear population helps to control extraneous variation, but it also “helps
to define the limits for generalizing the findings” (Eisenhardt, 1989, 537).
Due to time and resource limitations the cases were chosen by opportunity amongst Finnish MNCs that have foreign subsidiaries
1. These five cases are not the whole population of Finnish MNCs, but they are sufficient for the purpose of this study.
The first case company is the Accountor Group, which is a financial and HR management services provider for organizations (Accountor, 2015, www.accountorgroup.com). The group has a total of 78 subsidiaries (Orbis database, 2015) in Finland, Denmark, the Netherlands, Norway, Russia, Sweden and the Ukraine (Accountor, 2015, www.accountorgroup.com) and its turnover amounted to EUR 189 million in 2014 (Orbis database, 2015).
The second case company is Biolan Oy. Biolan develops, manufactures and markets growing medias, fertilizers, soil improvement materials and environmental products (Orbis database, 2015). It is still considered a large company, however, in comparison to the other cases, it is much smaller with a turnover of EUR 37,9 million in 2014 (Orbis data, 2015) and seven subsidiaries (Biolan, 2015, www.biolan.fi). The company operates in Finland, China, Estonia and Sweden (Orbis data, 2015).
The third case company is Lemminkäinen Oyj. The company’s main activities are engineering and project management contracting within the building and construction sector (Orbis data, 2015). Their business is organized in four segments: paving, infrastructure projects, building construction, Finland and Russian operations. The group has 57 subsidiaries that operate in Finland, Denmark, Estonia, Latvia, Lithuania, Norway, Russia and Sweden (Lemminkäinen, 2015, www.lemminkainen.com). The group’s turnover amounted to EUR 2,044 million in 2014 (Lemminkäinen Annual Report, 2014). Lemminkäinen is listed on the Nasdaq OMX Helsinki stock exchange (Orbis database, 2015).
The fourth case company is Nokian Tyres plc, in Finnish also known as Nokian Renkaat. The company’s main products are tires for cars, trucks and special heavy machinery mainly in areas with special challenges for tire performance (Nokian Tyres, 2015, www.nokiantyres.com). The company has in total 27 subsidiaries in Finland, Belarus, Canada, Germany, Kazakhstan, Lithuania, Norway, Russia, Sweden, Switzerland, the Ukraine and the USA. The company is listed on the Nasdaq OMX Helsinki stock exchange (Orbis database, 2015). The company’s turnover amounted to EUR 1,39 billion in 2014 (Nokian Tyres Annual Report, 2014).
1The selection of cases can be done randomly, however, it is better to study extreme situations and polar types given that only a limited number of cases can be studied. The goal is to select cases that are most likely to imitate or extend the theory (Eisenhardt, 1989).
The fifth case company is Valio Oy. Valio’s main activity is the production of dairy products such as ice cream, milk, cheese, yoghurt, butters, milk powders and demineralized whey powder. The company has in total 18 subsidiaries, of which 10 are foreign subsidiaries. These are located in China, Denmark, Estonia, Latvia, Lithuania, Poland, Sweden and the USA (Orbis database, 2015). The group’s turnover amounted to EUR 2,4 billion of which approximately 35 percent comes from export and their foreign subsidiaries that account for 30 percent of the entire Finnish food product export (Valio, 2015, www.valio.fi).
In addition to the case companies an interview was conducted with the head of Region Americas of Finpro. Finpro is a public organization aiming at supporting Finnish small and medium-sized enterprises SMEs to internationalize, encouraging foreign direct investment in Finland and promoting tourism. The organization consists of three branches: Export Finland, Visit Finland and Invest in Finland. Through Export Finland, Finpro aims at helping Finnish companies find opportunities abroad, recognizing their potential and transforming these into profitable businesses (Finpro, 2015 www.finpro.fi). This interview helped to understand the general trends and it gave me a good overview of the topic.
3.3. Data Collection
In order to acquire the required information to answer the main research question of the underlying study, interviews, as well as the company homepage, annual reports and Orbis database are chosen as the method for data collection. The companies’ homepages, annual reports and the Orbis database are mainly used to collect secondary data such as the size of the company and the number of foreign subsidiaries.
In order to collect primary data, interviews are conducted. Interviews are considered to be one of the most important sources of case study data (Yin, 2009). The interviews should be guided conversations, not structured queries. They are considered highly important since most case studies are about human affairs or behavioral events, hence a well-informed interviewee can give important insights into these affairs or behavioral events. Moreover, interviews are highly targeted and the focus can be put on the case study topic (Yin, 2009). In semi-structured interviews, the main topics are prepared in advance, but the interviewer has the possibility to ask clarifying questions. The main topics of the underlying study are formulated as questions, in order to guide the interview. These are presented in Appendix 2.
The interviews are, when possible, conducted face-to-face. Face-to-face interviews allow
observing more clearly the attitudes and behaviors of the interviewee. Another benefit of this
the underlying topic. Obtaining such information would not have been possible for example with surveys.
Due to time and location constraints, two of the interviews were conducted via Skype. Even though face-to-face interviews are still the optimal solution, however, via Skype it is still possible to hold semi-structure interviews and ask clarifying questions.
The data analysis of a case study is the process of examining, categorizing, tabulating, testing and recombining evidence with the aim to produce empirically based findings (Yin, 2009).
This study is based on the initial literature review and the theoretical backgrounds.
A summary of the data sources is presented in Table 2.
Table 2 Data Sources
