1
Master Thesis
MNEs’ executive staffing practices for foreign
subsidiaries in emerging and developed countries:
A comparative study.
(Agency Theory and Institutional Theory)
By
Rosanne Gregoor
University of Groningen Faculty of Economics and Business MSc International Business & Management
2 ABSTRACT
Managers that effectively operate in emerging countries are key in creating a competitive advantage. However, multinational enterprises (MNEs) cannot assume that executive staffing practices for subsidiaries in developed countries also work for subsidiaries in emerging countries. From an integrated perspective of both the agency theory and institutional theory, this study investigates whether there is a difference in MNEs’ executive staffing practices between foreign subsidiaries in emerging countries and developed countries. Moreover, this study also examines the moderating effect of both formal and informal institutional distance on this relationship. Four categories of executive staffing practices are considered, namely 1) parent-country nationals (PCNs), 2) host-country nationals (HCNs), 3) third-country nationals from emerging countries (TCNs E) and 4) third-country nationals from developed countries (TCNs D). This study used multinomial logistic regression based on data from 100 U.S. and U.K. MNEs and 547 overseas subsidiaries. It was found that MNEs use different executive staffing practices. For subsidiaries in emerging countries, HCNs are most likely to be used for executive positions. For subsidiaries in developed countries, TCNs from other developed countries are most likely to be used. With greater or smaller formal institutional distance these executive staffing practices remain the same. However, informal institutional distance changes the executive staffing practices to TCNs from developed countries for subsidiaries in emerging countries and TCNs from emerging countries for subsidiaries in developed countries. In addition, it was also found that MNEs are following the trends and increasingly use HCNs and TCNs instead of PCNs.
3 TABLE OF CONTENTS
ABSTRACT ... 2
1. INTRODUCTION ... 5
2. LITERATURE REVIEW ... 7
2.1 Theory of executive staffing practices in foreign subsidiaries ... 7
2.2 Executive staffing approaches ... 9
2.3 Research gap and questions ... 11
2.4 Hypotheses development ... 12
3. METHODOLOGY ... 16
3.1 Research method and sample ... 16
3.2 Variables ... 17 3.3 Data analysis ... 19 4. DATA ... 20 4.1 Frequencies ... 20 4.2 Descriptive statistics ... 20 5. RESULTS ... 23
5.1 Direct effects of location ... 23
5.2 Moderating effects of institutional distance ... 28
5.3 Effects of the control variables ... 29
6. CONCLUSION ... 31
6.1 Discussion of the findings ... 31
6.2 Contributions and implications ... 34
6.3 Limitations and suggestions for future research ... 35
REFERENCES ... 37
APPENDICES ... 41
4 List of figures
Figure 1. Conceptual model………..15
List of formulas Formula 1. Institutional distance………...18
Formula 2. Cultural distance……….18
List of tables Table 1. Advantages and disadvantages of PCNs, HCNs, TCNs………..10
Table 2. Frequencies of executive staffing practices……….20
Table 3. Descriptive statistics………21
Table 4. Correlation matrix………22
Table 5. Multinomial logistic regression results with reference category TCN D………24
Table 6. Multinomial logistic regression results with reference category TCN E……….25
Table 7. Multinomial logistic regression results with reference category HCN………26
Table 8. Multinomial logistic regression results with reference category PCN……….27
Table 9. Top four executive staffing practices………...28
5 1. INTRODUCTION
Multinational enterprises (MNEs) generally use three types of executive staffing practices for foreign subsidiaries, namely parent-country nationals (PCNs), host-country nationals (HCNs) or third-country nationals (TCNs). Having the right type of staffing practice in the right context is key for creating a competitive advantage, especially in emerging markets (Harvey, Speier, Novicevic, 1999). Emerging markets are the fastest-growing markets in the world and have a great market potential in the 21st century (Khanna, Palepu & Shina, 2005; Harvey et al., 1999). This results in an increasing demand for managers with the distinctive competencies to effectively operate in these markets (Collings et al., 2007). However, CEOs cannot assume that doing business in emerging countries is the same as doing business in developed countries. This means that executive staffing practices that work in one country may not work in another. Emerging countries differ significantly compared to developed countries in terms of economic development, cultural distance and institutional environment (Harvey et al., 1999; Khanna et al., 2005). In addition, MNEs often have difficulties recruiting managers and skilled workers in emerging countries since there is a shortage of qualified or experienced local senior executives compared to developed countries (Khanna et al., 2005; Li & Scullion, 2010; Hitt et al., 2000). All of these factors may have an impact on the executive staffing practices for foreign subsidiaries in different contexts.
6 This empirical study (1) examines whether MNEs use different executive staffing practices for subsidiaries in emerging countries compared to developed countries, (2) takes into account parent-country nationals (PCNs), third-country nationals (TCNs) and host-country nationals (HCNs) and (3) examines the institutional differences between the two contexts by measuring both the informal and formal institutional distance. This study thus researches whether host-country institutional conditions influence MNEs’ executive staffing practices for foreign subsidiaries. The central research question of this study is as followed: Is there a
difference in MNEs’ executive staffing practices between foreign subsidiaries in emerging countries and developed countries? In addition to this central research question, this study also
aims to answer the question: What is the moderating effect of institutional distance on the
relationship between MNEs’ executive staffing practices and subsidiary location? This study
focuses on MNEs from developed countries with foreign, overseas subsidiaries.
The research questions are approached from an integrated perspective of both the agency theory and institutional theory. An integrated perspective is chosen since agency costs are likely to increase with distance, in this case institutional distance. In this study, the institutional distance is measured formally, using the World Governance Indicators, and informally, using Hofstede’s cultural dimensions. In addition, the topic is also looked at from the perspective of liability of foreignness. The hypotheses are tested on a sample of 50 of the largest U.S. companies and 50 of the largest U.K. companies, based on their total revenue of 2017, and their 547 overseas subsidiaries.
This study makes several contributions. It is a contribution to the International HRM literature since it examines and compares MNEs’ executive staffing practices for two different contexts. It contributes to the literature on Emerging Markets as it studied which executive staffing practices are most likely to be used in these markets. The study is also a contribution to both the Agency Theory as well as the Institutional Theory since the hypotheses are based on perspectives from these theories.
7 2. LITERATURE REVIEW
2.1 Theory of executive staffing practices in foreign subsidiaries
There are several theories that explain executive staffing practices. This study focuses primarily on both the agency theory and institutional theory. The agency theory is relevant to situations with a principal-agent structure. The headquarters-subsidiary relationship can be considered as such a structure where the MNE’s headquarters is the principal who delegates work and responsibilities to the subsidiary who is the agent. In this relationship, an agency problem might arise when the goals of the MNE’s headquarters and subsidiary are different and/or when it is difficult for the MNE’s headquarters to monitor or verify the subsidiary’s behavior (Roth & O’Donnell, 1996). This means that, on the one hand, there is the problem of
goal incongruence and on the other hand, the problem of information asymmetry. Furthermore,
from the perspective of the agency theory, there might exist an economic incentive
misalignment problem between the MNE’s headquarters and the subsidiary’s manager. First,
the subsidiary’s manager may pursue sub-goals and may not fully act in the economic interests of the subsidiary. Second, the economic interests of the subsidiary and of the MNE may not be similar and therefore the subsidiary’s manager may not act in the best economic interests for the MNE as a whole (Tan & Mahoney, 2006). This means that one of the reasons why MNEs might choose for a certain executive staffing practice has to deal with the amount of control a MNE wants to have over its subsidiary’s operations.
According to Chang & Taylor (1999), the agency problems that are highlighted before are greater when foreign subsidiaries operate in substantially different environments from those of the MNE’s parent country. Gong (2003) also notes that the information asymmetry problem between the MNE’s headquarters and the subsidiary becomes more serious when cultural distance increases.De Jong et al. (2015: 877) confirm this by stating ‘‘greater distance between home and host countries is likely to increase agency problems in the headquarters-subsidiary relationship and therefore increase the control headquarters exerts over subsidiaries’’.
8 is the institutional environment of a home or host country. On the other hand, the institutional distance matters. This is the dissimilarity between the institutional environments of two or more countries in which a MNE operates (Van Hoorn & Maseland, 2016). MNEs are active in multiple institutional environments at the same time and the dissimilarities between these environments can create many challenges and problems. A second reason why MNEs might choose for a certain executive staffing practice might therefore have to deal with the institutional differences between the home and host country.
Countries differ in terms of their institutional environments and institutional distance captures the dissimilarities between two countries. The degree of institutional similarity between the MNE’s parent country and the subsidiary’s country influences the ease and success of control, coordination and knowledge transfer (Kostova, 1999). According to Gaur et al. (2007: 615), ‘‘institutional differences between countries are important for staffing decisions because the coordination and control of a subsidiary and knowledge transfer between the parent and the subsidiary can be affected by these institutional differences’’. Besides control, another important reason for MNEs to choose for a certain executive staffing practice might have to deal with the ease of knowledge transfer. However, the knowledge itself might also be a reason. Knowledge of a certain context might be critical to the MNE and therefore it can become a source of bargaining power because it makes the MNE dependent on the subsidiary (Yan & Gray, 1994). The power distribution is thus determined by the level of dependence of the MNE on the subsidiary. In this case, the MNE is dependent on the knowledge of the subsidiary’s country in order to operate there successfully. This results in an asymmetric power distribution leading to increasing uncertainty for the MNE. This strategic dependence of the MNE on its subsidiary might thus also be a factor that influences MNEs’ executive staffing practices (Belderbos & Heijltjes, 2005).
9 2.2 Executive staffing approaches
In section 2.1 a number of reasons have been presented why MNEs use different executive staffing approaches. This section however goes more into detail regarding the types of executive staffing practices. The different orientations MNEs can take towards staffing executive positions in foreign subsidiaries goes back to the seminal paper of Perlmutter (1969). Perlmutter identified three approaches that MNEs can take when they staff foreign subsidiaries. First, the ethnocentric approach where all the key positions in subsidiaries are filled by citizens from the MNEs’ parent country. Second, the polycentric approach where key positions in subsidiaries are filled by citizens from the subsidiary’s country. Last, the geocentric approach where key positions in subsidiaries are filled by the best available person for the job regardless of their nationality (Perlmutter, 1969).
Where HRM focuses on employees within one country, IHRM deals with three national categories: the MNE’s parent country, the country where the MNE’s subsidiary is located, and other countries which are sources of labor, finance and R&D. Global staffing is an emerging key area in IHRM and can be defined as ‘‘the critical issues faced by multinational corporations with regard to the employment of home, host and third country nationals to fill key positions in their headquarter and subsidiary operations’’ (Scullion & Collings, 2006: 20). Some of the reasons for the emergence of global staffing are an increase in the mobility of human resources; the effective management of HR at the international level as key source of competitive advantage; the performance of expatriates continuing to be problematic; the shortages of international managers; and the rapid growth of emerging countries resulting in an increasing need for managers with distinctive competencies (Scullion & Collings, 2006).
10 third option is third-country nationals (TCNs) who are not citizens of the MNE’s parent country and not citizens of the foreign subsidiary’s country and who are a compromise between PCNs and HCNs. TCNs might be an option for organizations with a geocentric approach. Several advantages and disadvantages of each type of international employee are presented in table 1.
TABLE 1.
Advantages and disadvantages of PCNs, HCNs, TCNs Parent-country nationals (PCNs) Host-country nationals (HCNs) Third-country nationals (TCNs)
Advantages • Ensures subsidiary’s activities are in line with the goals of HQ • Act as a coordination and control function • Familiar with
corporate culture of the MNE
• Increase the international experience and knowledge base of MNE’s present and future managers
• Has knowledge of the host country, its
language, legislations and culture
• Access to the local market
• Reflects MNE’s commitment to the local market and the MNE’s trust in the local staff
• Cheaper option that PCNs
• May be less threatening to host employees compared to PCNs
• Cheaper option than PCNs • May reduce language barriers • Due to limited opportunities in their own country, TCNs may be more willing to accept international assignments
Disadvantages • Inability of the PCN (and its family) to adapt to a different physical of cultural environment
• High costs involved • Limited awareness of local culture,
legislation and market
• Lack of familiarity of HQs’ external and internal environment • Less control possible • Divergent interests • Difficulty of finding local qualified senior executives • Possible cultural difficulties • Less control possible • Repatriation problems
11 MNEs. Among other things, she found that U.S. and European MNEs use HCNs much more in the developed regions of the world in comparison to the less developed regions. Japanese MNEs, on the other hand, employ much more PCNs in their foreign subsidiaries. Furthermore, in the results of Tung’s study it is also visible that the use of TCNs is still quite limited compared to the other staffing practices. Just like Tung (1982), Harzing (2001) is also one of the few researchers that investigated actual staffing practices of MNEs. Besides other things, she found that in Latin America, Africa and the Far and Middle East the use of PCNs is much higher than in Canada and Western Europe.
Several other studies presented the trends that are visible when it comes to executive staffing practices. Peterson, Napier & Shul-Shim (2000) investigated the expatriate practices of MNEs from four different parent countries, namely the U.S., U.K., Germany and Japan. Among other things, they found that there is a trend towards a decreasing use of expatriates, being PCNs. This was also found in a later study by Tungli & Peiperl (2009). They also studied the expatriate practices of U.K., U.S., German and Japanese MNEs and found that with growing internationalization, there is a decrease in the use of PCNs and an increase in the use of TCNs. TCNs are said to have an advantage over PCNs since they are more familiar with the surrounding cultures and often less expensive. Of the four different parent countries, MNEs from the U.K. seem to be most willing to use TCNs. As already stated before and also noted in an article by Tarique, Schuler & Gong (2006), most staffing literature focuses on PCNs. However, due to the high costs that come along with PCNs, MNEs are exploring ways to effectively use TCNs and HCNs to satisfy staffing needs in foreign subsidiaries.
2.3 Research gap and questions
12 It seems that a recent, empirical study examining actual executive staffing practices of MNEs for foreign subsidiaries is missing. Furthermore, after Tung’s (1982) and Harzing’s (2001) study, no further research has been done into executive staffing practices for different contexts even though the results of their studies showed there was a difference between emerging market regions and developed market regions. In addition, most studies do not include all three types of executive staffing practices even though there is a greater focus on HCNs and TCNs nowadays. Collings, Morley & Gunnigle (2008) note that there is only little knowledge about the utilization of HCNs and TCNs for executive positions in MNEs’ subsidiaries. An empirical study researching this might be of great importance. Therefore, this study could be the first one that examines (1) whether there is a difference in MNEs’ executive staffing practices between foreign subsidiaries in emerging countries and developed countries and (2) what the moderating effect of institutional distance is on the relationship between MNEs’ executive staffing practices and subsidiary location. It is important to fill the research gap and examine these research questions to find out what the current executive staffing practices of MNEs are for foreign subsidiaries in different contexts, to measure those differences and their effects, but also to examine whether the presented trends prove themselves in actual numbers. It is also interesting to examine what type of managers are mostly used for emerging countries, since managers who can effectively operate in emerging countries are key in creating a competitive advantage (Harvey et al., 1999).
2.4 Hypotheses development
13 compared to developed markets. There is often absence of good legal systems, intermediaries and contract-enforcing mechanisms. This indicates that there are many institutional differences between emerging and developed countries. Since institutional differences determine the institutional distance between two countries, MNEs from developed countries experience greater institutional distance to emerging countries compared to other developed countries.
From the perspective of the agency theory, it became clear that greater distance between the MNE’s parent country and the subsidiary’s country increases the agency problems (Chang & Taylor, 1999; Gong, 2003; De Jong et al., 2015). In order to reduce the agency problems, Chang & Taylor (1999) present two types of control, one of them being staffing control, also known as ‘headquarters supervision’ (O’Donnell, 2000). Staffing control means staffing the executive positions in subsidiaries with PCNs who are more likely to act in line with the MNEs’ interests. Since emerging countries are substantially different and distant from developed countries, it might be more likely that MNEs from developed countries staff the executive positions in subsidiaries in emerging countries with PCNs rather than HCNs or TCNs. This is also supported by Tung’s (1982) and Harzing’s (2001) studies since they found that the percentages of PCNs in executive positions are higher in the less developed regions of the world. Furthermore, several studies (Gong, 2003; Gaur et al., 2007; Ando & Paik, 2012) found that with greater cultural or institutional distance MNEs rely more on PCNs. Therefore, it is expected that the greater the institutional distance between the MNE’s developed country and the subsidiary’s emerging country, the more likely the MNE chooses PCNs for executive positions than HCNs or TCNs. This leads to the following hypotheses.
H1: In an emerging market subsidiary, MNEs are more likely to employ PCNs for executive
positions compared to HCNs and TCNs.
H1a: In an emerging market subsidiary, MNEs are more likely to employ PCNs for executive
positions compared to HCNs and TCNs when institutional distance becomes greater.
14 of roots in the local environment is one of the four sources of liability of foreignness (LOF). Luo, Shenkar and Nyaw (2002) note that the LOFs in emerging countries are even higher due to uncertainties in the industrial environment and unpredictable challenges in the institutional environment. One way to overcome this is by ‘input localization’. MNEs can reduce LOFs by using local managers, known as HCNs. HCNs may help local adaptation and show commitment to the host country economy (Mezias, 2002; Luo, Shenkar and Nyaw, 2002). From this perspective, subsidiaries in emerging countries are more likely to be staffed by HCNs rather than PCNs or TCNs.
H2: In an emerging market subsidiary, MNEs are more likely to employ HCNs for executive
positions compared to PCNs and TCNs.
H2a: In an emerging market subsidiary, MNEs are more likely to employ HCNs for executive
positions compared to PCNs and TCNs when institutional distance becomes greater.
MNEs from developed countries also have subsidiaries in other developed countries. All of the differences that were presented at the beginning of this section do not apply between two developed countries. Developed countries have specialized intermediaries, regulatory systems, effective contract-enforcing mechanisms, but also good infrastructures and a large pool of skilled management talent (Khanna et al., 2005). Developed countries thus do not experience the institutional voids that emerging countries have. This results in less differences, and less distance, since two developed countries are in somewhat the same context. Therefore agency costs are more likely to decrease since control of the subsidiary’s operations becomes easier for the MNE. This is also confirmed by Kostova (1999) who stated that the more similar the institutional environments, the easier and the more successful the control. Therefore, it could be expected that HCNs would suffice as executive staffing practice in subsidiaries in developed countries. The results of Tung’s (1982) study also proved that European and U.S. MNEs, which are also in the sample of this study, use HCNs much more in the developed regions of the world. Therefore, the follow hypotheses are presented.
H3: In a developed market subsidiary, MNEs are more likely to employ HCNs for executive
positions compared to PCNs and TCNs.
H2a: In a developed market subsidiary, MNEs are more likely to employ HCNs for executive
15 Based on these six hypotheses, a conceptual model can be constructed. In figure 1 the conceptual model of this study is presented which provides an overview of all the hypotheses.
FIGURE 1. Conceptual model H3 H3a H2 H2a H1 H1a Location: Subsidiary in developed country PCN as managing director Executive staffing practice:
Institutional distance Subsidiary in
emerging country
16 3. METHODOLOGY
This chapter presents the methodology for this study. First, the research method and sample are discussed. This is followed by an overview of the dependent, independent, moderating and control variables. The chapter concludes with the method of data analysis and an explanation of how the hypotheses presented in chapter 2.4 are tested.
3.1 Research method and sample
For this study a quantitative research is conducted. In order to test the hypotheses, secondary data is collected which can be considered as reliable, time and cost effective. This data is primarily collected from the Orbis database. Orbis is a global database that provides information on executives and staff of companies worldwide.
The sample consists of MNEs from developed countries. According to Van Hoorn & Maseland (2016: 376) ‘‘reasoning from a single reference point implies that variation in institutional distance between an MNE’s home country and its host countries is tantamount to variation in the institutional profile of those host countries’’. So keeping the home country constant means that there is only variation in the institutional profiles of the host countries. Therefore, this study focuses on MNEs from two developed home countries, namely the U.S. and the U.K, and their overseas subsidiaries. In this case there is not a constant for all the possible host countries in the sample which increases the variation.
The sampling strategy is partially based on Gong’s (2003) work. First, relatively complete information had to be available for each overseas subsidiary on the following variables: country, industry, size of the subsidiary (number of employees), % of ownership, managing director’s name, and managing director’s nationality. In addition, information had to be available for the MNE’s performance (total revenue), industry, age and size (number of employees). Second, subsidiaries in as many overseas countries as possible were sought to maximize institutional distance. Third, the MNE had to be the Global Ultimate Owner of the foreign subsidiary. Fourth, in order to have greater generalizability of the results, MNEs from different industries were chosen. Furthermore, following Tung (1982), Peterson et al. (2000) and Tungli & Peiperl (2009), this study focused on the largest MNEs since these MNEs are likely to have the most sophisticated staffing practices. Therefore, the 50 largest U.S. and 50 largest U.K. companies, based on their total revenue of 2017, were chosen.
17 (UNCTAD) which ranks developed and emerging countries. Furthermore, institutional distance between the MNE’s home country and the subsidiary’s country needed to be determined. This was done by using data from the World Bank’s Governance Indicators and data from Hofstede’s cultural dimensions.
Based on the sampling strategy, the final sample included 100 MNEs, of which 50 are U.S. MNEs and 50 are U.K. MNEs, and 547 overseas subsidiaries.
3.2 Variables
Dependent variable. The dependent variable in this study is the nationality of the current
managing director of the subsidiary. This is a nominal variable, taking the value of ‘‘1’’ for parent-country nationals (PCNs), ‘‘2’’ for host-country nationals (HCN), ‘‘3’’ for third-country nationals from emerging countries (TCNs E) and ‘‘4’’ for third-country nationals from developed countries (TCN D). Since the dependent variable in this study has four categories, it is quite different from most studies. Most studies (Harzing, 2001; Gong, 2003; Sekiguchi, Bebenroth & Li, 2011) use two categories and thus use a dichotomous variable. In this study, managing directors from the home country are categorized as PCNs and managing directors from the host country as HCNs. Managing directors from neither the home country nor the host country are categorized as either TCN E or TCN D depending on the country they originally come from.
Independent variable. The independent variable is the location of the MNE’s overseas subsidiary which can be either in an emerging country or in a developed country. As noted
before, to categorize whether countries are emerging or developed the World Investment Report of 2017 by UNCTAD (2017) was used. A dummy variable is used where the subsidiary’s country is coded as ‘‘1’’ if the subsidiary is located in a developed country and ‘‘0 ’’ if the subsidiary is located in an emerging country. Appendix 1 offers an overview of the host countries included in this study.
Moderating variable. The moderating variable in this study is institutional distance. As
18 of Violence, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. These indicators include a wide range of institutional issues. Ando & Paik (2012) studied the effect of institutional distance on foreign subsidiary staffing practices. They used formula 1 for institutional distance where I refers to the institutional indicator for the host or the home country and V refers to the variance of the indicator.
FORMULA 1. Institutional distance
In order to measure the informal institutional distance between the home and host countries, this study used data from Hofstede’s cultural dimensions. Kogut & Singh (1988) constructed a formula to measure cultural distance based on these dimensions. This formula (formula 2) is used in this study to measure cultural distance where I refers to the cultural dimension for the host or the home country and V refers to the variance of the dimension.
FORMULA 2. Cultural distance
Control variables. There are several factors that could influence the relationships of
19 the MNE and the subsidiary are similar or not. This variable is a dummy variable which takes the value of ‘‘0’’ when the MNE’s and its overseas subsidiary’s activities are related and ‘‘1’’ if not. Since emerging countries often have a shortage of qualified local senior executives, the last control variable is the availability of qualified HCNs in the host country. This is measured as a percentage of the labor force with advanced education (% from the total) in 2016. When percentages for 2016 were not available, a value of an earlier year was taken. Advanced education means a bachelor’s degree, master’s degree, doctoral degree or any equivalent education levels. Data for this variable was obtained from The World Bank (2017).
3.3 Data analysis
20 4. DATA
In this chapter of the master thesis the data is presented. The frequencies of the executive staffing practices and descriptive statistics will be discussed.
4.1 Frequencies
In table 2 the frequencies of the executive staffing practices are presented. As visible in the table, the category HCNs is the biggest category in this study, followed by TCNs from developed countries, PCNs and TCNs from emerging countries. A comparison is made between U.S. and U.K. MNEs as well as a comparison between their subsidiaries in emerging and developed countries. Both U.S. and U.K. MNEs make the biggest use of HCNs as executive staffing practice. U.S. MNEs seem to use PCNs more for developed countries than for emerging countries which is the other way around for U.K. MNEs. What is also interesting is that U.S. MNEs make a much bigger use of TCNs from other developed countries for subsidiaries in developed countries than U.K. MNEs do.
TABLE 2.
Frequencies of the executive staffing practices
Location PCNs HCNs TCNs from emerging countries TCNs from developed countries TOTAL U.S. MNEs Emerging 4 61 2 2 69 Developed 19 207 6 58 290 U.K. MNEs Emerging 12 104 11 7 134 Developed 3 48 2 1 54 TOTAL 38 420 21 68 547 4.2 Descriptive statistics
21 total revenue of 2017. Of the 547 subsidiaries, 87% is wholly-owned by the MNE and 26% operate in the same industry as its parent.
TABLE 3. Descriptive statistics
Variable Minimum Maximum Mean Standard
Deviation Nationality 1 4 2.22 0.748 Location 0 1 0.63 0.483 Institutional distance -0.545 3.280 0.39 0.850 Cultural distance 0.249 4.759 1.66 1.329 MNE age 3 170 72,79 47.194 MNE performance 2 040 778 305 406 000 63 582 435.18 62 754 285.55 MNE size 5128 588 112 149 601.17 135 049.696 Subsidiary size 10 9980 631.01 1331.668 Subsidiary ownership 0 1 0.13 0.334 Industry relatedness 0 1 0.74 0.441 Available qualified HCNs 30.81 89.66 74.45 9.108 N = 547
22 TABLE 4.
Correlation matrix
** Correlation is significant at the 0.01 level * Correlation is significant at the 0.05 level
23 5. RESULTS
This chapter presents the results of the multinomial logistic regression analysis. The direct effects will be discussed first which are followed by the moderating effects and the effects of the control variables. This chapter concludes which hypotheses are supported and provides an overview of the top four executive staffing practices.
5.1 Direct effects of location
Tables 5, 6, 7 and 8 report the effects of the probability that any of the four alternatives are chosen over the other three. In each table, model 1 incorporates the control variables, model 2 includes the independent variables, and model 3 is the full model which also includes the moderating variables. Each model provides a better fit when looking at the increasing R2-statistic. The significant coefficients are in bold.
The results are somewhat mixed with respect to the hypotheses. For hypothesis 1, it was proposed that in an emerging market subsidiary, MNEs are more likely to employ PCNs for executive positions compared to HCNs and TCNs. Using model 2 in each table, PCNs are only significantly more likely to be used than TCNs from developed countries. This means hypothesis 1 is only partially supported. Looking at model 3 which incorporates all the variables, none of the direct effects of location are significant anymore.
Hypothesis 2 stated that in an emerging market subsidiary, MNEs are more likely to employ HCNs for executive positions compared to PCNs and TCNs. Looking at model 2 again, HCNs are significantly more likely to be used than TCNs from developed countries and insignificantly more likely than PCNs. For hypothesis 2, this also means that it is only partially supported. Using model 3, HCNs are most likely to be used compared to the other three categories, however, this is not significant.
24 TABLE 5.
Multinomial logistic regression results with reference category TCN D
Reference category is TCNs D. * p < 0.05, **p < 0.01, ***p < 0.001
Model 1 Model 2 Model 3
PCNs HCNs TCNs E PCNs HCNs TCNs E PCNs HCNs TCNs E
Main regressors
Location in emerging country Location x Institutional distance Location x Cultural distance
1.147* (0.526) 1.170** (0.393) 1.550* (0.632) 0.339 (0.661) 1.177 (0.808) -0.546 (0.343) 0.729 (0.483) 1.611** (0.546) -0.186 (0.196) 0.620 (0.816) 1.444 (1.133) -0.654 (0.507) Controls MNE age MNE performance MNE size Subsidiary size
25 TABLE 6.
Multinomial logistic regression results with reference category TCN E
Reference category is TCNs E. * p < 0.05, **p < 0.01, ***p < 0.001
Model 1 Model 2 Model 3
PCNs HCNs TCNs D PCNs HCNs TCNs D PCNs HCNs TCNs D
Main regressors
Location in emerging country Location x Institutional distance Location x Cultural distance
-0.403 (0.627) -0.380 (0.523) -1.550* (0.632) -0.281 (0.823) -0.268 (1.186) 0.108 (0.552) 0.109 (0.693) 0.167 (1.025) 0.467 (0.479) -0.620 (0.816) -1.444 (1.133) 0.654 (0.507) Controls MNE age MNE performance MNE size Subsidiary size
26 TABLE 7.
Multinomial logistic regression results with reference category HCN
Reference category is HCNs. * p < 0.05, **p < 0.01, ***p < 0.001
Model 1 Model 2 Model 3
PCNs TCNs E TCNs D PCNs TCNs E TCNs D PCNs TCNs E TCNs D
Main regressors
Location in emerging country Location x Institutional distance Location x Cultural distance
-0.023 (0.387) 0.380 (0.523) -1.170** (0.393) -0.390 (0.500) -0.434 (0.651) -0.360 (0.301) -0.109 (0.693) -0.167 (1.025) -0.467 (0.479) -0.729 (0.483) -1.611** (0.546) 0.186 (0.196) Controls MNE age MNE performance MNE size Subsidiary size
27 TABLE 8.
Multinomial logistic regression results with reference category PCN
Reference category is PCNs. * p < 0.05, **p < 0.01, ***p < 0.001
Model 1 Model 2 Model 3
HCNs TCNs E TCNs D HCNs TCNs E TCNs D HCNs TCNs E TCNs D
Main regressors
Location in emerging country Location x Institutional distance Location x Cultural distance
0.023 (0.387) 0.403 (0.627) -1.147* (0.526) 0.390 (0.500) 0.434 (0.651) 0.360 (0.301) 0.281 (0.823) 0.268 (1.186) -0.108 (0.552) -0.339 (0.661) -1.177 (0.808) 0.546 (0.343) Controls MNE age MNE performance MNE size Subsidiary size
28 In table 9, an overview is given of the top four executive staffing practices for subsidiaries in emerging countries and in developed countries following model 3 in tables 5 until 8.
TABLE 9.
Top four executive staffing practices Emerging country Developed country
1 HCNs TCNs from developed countries 2 TCNs from emerging countries PCNs 3 PCNs TCNs from emerging countries 4 TCNs from developed countries HCNs
5.2 Moderating effects of institutional distance
The results of the moderating effects on executive staffing practices are reported in model 3 of table 5, 6, 7 and 8. The moderating effect is institutional distance which can be both formal and informal. Formal institutional distance was measured using the World Governance Indicators and informal institutional distance was measured using cultural distance values. Again the results are somewhat mixed with respect to the hypotheses.
Starting with hypothesis 1a which stated that in an emerging market subsidiary, MNEs are more likely to employ PCNs for executive positions compared to HCNs and PCNs when institutional distance becomes greater. When the formal institutional distance becomes greater, PCNs are only more likely to be used than TCNs from developed countries. When informal institutional distance becomes greater, PCNs are only more likely to be used than TCNs from emerging countries. However, none of the moderating effects are significant which means that hypothesis 1a is not supported.
29 are insignificant. All of this means that hypothesis 2a receives some support, only partially for formal institutional distance.
Hypothesis 3a stated that in a developed market subsidiary, MNEs are more likely to employ HCNs for executive positions compared to PCNs and TCNs when institutional distance becomes smaller. When formal institutional distance becomes smaller, HCNs are least likely to be used, but only significantly less likely than TCNs from developed countries. When the informal institutional distance becomes smaller, HCNs are only significantly more likely to be used than TCNs from developed countries. Hypothesis 3a thus receives some support, only partially for informal institutional distance.
In table 10, an overview is given of the top four executive staffing practices for subsidiaries in emerging countries and developed countries including the moderating effect of both formal and informal institutional distance. It is visible that with greater or smaller formal institutional distance, the executive staffing practices remain the same, but that with greater or smaller informal institutional distance, they change. Unfortunately, many of the coefficients were not significant to fully support this overview.
TABLE 10.
Top four executive staffing practices including institutional distance Emerging country with greater
institutional distance
Developed country with smaller institutional distance
Formal Informal Formal Informal
1 HCNs TCNs from developed countries TCNs from developed countries TCNs from emerging countries 2 TCNs from emerging countries HCNs PCNs PCNs 3 PCNs PCNS TCNs from emerging countries HCNs 4 TCNs from developed countries TCNs from emerging countries HCNs TCNs from developed countries
5.3 Effects of the control variables
30 countries are most likely to be used for executive positions, but only significantly more likely than PCNs and TCNs from emerging countries. Secondly, the control variable available
qualified HCNs. When the availability of qualified HCNs in the host country increases, the
31 6. CONCLUSION
In this chapter, the conclusion is presented. First, the findings of this study are discussed. In addition, several contributions and implications are given. This chapter ends with the limitations of this study and suggestions for future research.
6.1 Discussion of the findings
Based on an integrated perspective of the agency theory and institutional theory, this study examines whether host-country institutional conditions influence MNEs’ executive staffing practices for foreign subsidiaries. More specifically, it aimed to answer the following central research question: Is there a difference in MNEs’ executive staffing practices between
foreign subsidiaries in emerging countries and developed countries? The study distinguished
between four executive staffing practices, namely PCNs, HCNs, TCNs from emerging countries and TCNs from developed countries. Even though for most hypotheses no statistical significant support was found, the signs of the coefficients indicated the effect of the independent variable on the dependent variable. Based on this, this study found that MNEs do use different executive staffing practices for foreign subsidiaries in emerging countries compared to developed countries.
32 countries are used for subsidiaries in other developed countries since these two countries might be quite similar.
Besides that the results indicate that MNEs use different executive staffing practices for different contexts, they also indicate that staffing practices changed over time. Based on earlier studies (Tung, 1982; Harzing, 2001; Tarique & Schuler, 2008), it seems that traditionally MNEs used mainly PCNs, especially for emerging markets. Nowadays it seems that most MNEs are going along with the trends and employ HCNs and TCNs for executive positions in overseas subsidiaries.
By now it is clear that MNEs use different executive staffing practices, namely HCNs for subsidiaries in emerging countries and TCNs from developed countries for subsidiaries in other developed countries. In addition to the direct effect of subsidiary location on MNEs’ executive staffing practices, this study also investigated the moderating effect of institutional distance on this relationship. Institutional distance was measured both formally, using the WGI, and informally, using Hofstede’s cultural dimensions. Even though most of the results were not significant, the signs of the coefficients indicated the effects of the moderating variables.
When looking at the effect of formal institutional distance, the executive staffing practices remain the same as before. In an emerging market subsidiary, HCNs are most likely to be used for executive positions when formal institutional distance becomes greater. This is contradicting with the agency theory as well as with some earlier studies. The agency theory proposes that with greater distance the agency problems increase and therefore PCNs should be used in order to reduce those problems. Gaur et al. (2007) and Ando & Paik (2012) also found that when there is greater institutional distance, PCNs are more likely to be used in order to bridge the differences and enhance control over operations. This study showed that this is not the case for the largest MNEs of the U.K. and U.S.. Furthermore, in a developed market subsidiary, TCNs from developed countries are most likely to be used for executive positions when formal institutional distance becomes smaller. In this study no theoretical base is provided for this, however, it sounds logical that managing directors from developed countries are used for subsidiaries in other developed countries since the formal institutions in these countries are quite similar and the two countries are not very distant from each other.
33 becomes smaller. These findings are quite contradicting with the hypotheses in this study since in both cases either PCNs or HCNs were expected to be used. Employing a TCN from a developed country for a subsidiary in an emerging country could make sense since PCNs are often an expensive option and HCNs may not be qualified enough for the executive positions and therefore TCNs are a good compromise. However, it does not sound quite logical to use a TCN from an emerging country for a subsidiary in a developed country since these contexts are not very similar and executives from emerging countries are often inexperienced or underqualified (Hitt et al., 2000; Khanna et al., 2005). There is not a theoretical base for these findings other than that MNEs are increasingly following the trend of using TCNs for executive positions in foreign subsidiaries.
Besides the direct and moderating effects, the effects of the control variables also indicated three things. First, it was found that when subsidiaries are wholly owned, MNEs are most likely to use TCNs from developed countries for executive positions. This is also a surprising new insight, since for example Harzing (2001) found that wholly owned subsidiaries are more likely to have a PCN as a managing director. Second, it was found that with increasing availability of qualified HCNs in the host country, TCNs from developed countries were most likely to be used for executive positions. This is again a surprising result since one would expect that the more available qualified HCNs in a host country, the more likely these HCNs are used for executive positions in this host country. However, it seems that this is not the case in this study. Lastly, the older the MNE is in number of years, the more likely HCNs are used for executive positions. This result could be expected since MNEs gain more experience over time and may develop more trust in overseas subsidiaries and their local managers.
Lastly, this study included U.K. and U.S. MNEs. It was found that MNEs from both countries mostly use HCNs as executive staffing practices for developed countries as well as for emerging countries. However, looking at the other categories, U.S. MNEs mostly use PCNs for subsidiaries in developed countries whereas U.K. MNEs mostly use PCNs for emerging countries. In addition, it was also found that U.S. MNEs make a much bigger use of TCNs, especially TCNs from developed countries, than U.K. MNEs do. This is surprising since Tungli & Peiperl (2009) found that U.K. MNEs seem to be most willing to use TCNs compared to U.S., German and Japanese MNEs. However, this study proved otherwise.
34 smaller the formal institutional distance between the MNE’s and subsidiary’s country, the more likely these executive staffing practices are used. However, with greater or smaller informal institutional distance, executive staffing practices seem to change. Besides that, it can be concluded that MNEs go along with the trends and increasingly use HCNs and TCNs and decreasingly use PCNs.
6.2 Contributions and implications
This study makes several contributions to the existing literature. First of all, this study is a contribution to the IHRM literature. It seems that this study is the first study that investigates and compares MNEs’ executive staffing practices between subsidiaries in emerging countries and developed countries. It shows whether MNEs still use different executive staffing practices for their overseas subsidiaries in emerging and developed countries like they did more than 15 years ago, visible by the numbers in Tung’s (1982) and Harzing’s (2001) study. In the past, MNEs were more likely to use PCNs for subsidiaries in emerging countries. However, as noted in the introduction there is a trend towards a bigger focus on using HCNs and TCNs and there is a decreasing use of PCNs. This study showed that this is the case for subsidiaries in both emerging and developed countries. In addition, this also seems to be the first study that makes the distinction between four different executive staffing practices for the dependent variable. Second, this study contributes to the literature on Emerging Markets. It examines which executive staffing practices MNEs are most likely to use in subsidiaries in these markets. This is an important contribution since managers who can effectively operate in emerging markets are key in creating a competitive advantage. Third, this study also contributes to the Institutional Theory by examining the moderating effect of institutional distance on the relationship between MNEs’ executive staffing practices and subsidiary location. Institutional distance was measured both formally and informally. It was showed that greater or smaller formal institutional distance does not change the types of executive staffing practices for the two contexts, but that informal institutional distance does. Lastly, this study is a contribution to the Agency Theory as it examined the principal-agent relationship which is in this case the headquarter-subsidiary relationship. However, the theory was not supported in this study.
35 and U.K. MNEs, based on their total revenue of 2017, use different executive staffing practices for emerging and developed countries. Since these MNEs could be considered as quite successful, they might be an example for many other MNEs. However, when MNEs decide about executive staffing practices, they do not only need to take the context into account but also other factors. They need to make a trade-off between having the control over the subsidiary’s operations or having the local knowledge of the subsidiary’s country. Even within the pool of emerging countries or developed countries executive staffing practices could differ. For example, MNEs should examine the availability of qualified HCNs in the host country or determine how culturally and institutionally similar the host country is compared to the home country.
6.3 Limitations and suggestions for future research
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41 APPENDICES
Appendix 1. Host countries included in this study
Country Emerging or developed
Angola Emerging Austria Developed Bangladesh Emerging Belgium Developed Botswana Emerging Canada Developed China Emerging Denmark Developed Egypt Emerging Finland Developed France Developed Germany Developed Ghana Emerging Greece Developed
Hong Kong Emerging
Iceland Developed India Emerging Indonesia Emerging Ireland Developed Israel Developed Italy Developed Japan Developed Kenya Emerging Korea Emerging Lebanon Emerging Libya Emerging Luxembourg Developed Malaysia Emerging Nepal Emerging Netherlands Developed Nigeria Emerging Norway Developed Oman Emerging Pakistan Emerging Philippines Emerging Portugal Developed
Saudi Arabia Emerging
South Africa Emerging
Spain Developed
Sri Lanka Emerging
Sweden Developed
Switzerland Developed
42
Tanzania Emerging
Turkey Developed
United Arab Emirates Emerging United Kingdom Developed United States Developed
Vietnam Emerging
Zambia Emerging
Zimbabwe Emerging
