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Use of Expatriates

 

Introduction

The world economy is moving away from the traditional economic system, where national markets were considered as distinct entities - which were isolated from each other by trade barriers, barriers of distance, time and culture - towards a modern economic system, where the national markets are merging into one huge global market. In many industries it is no longer meaningful to talk about the American market, the German Market or the Japanese market. Therefore, as the development in the international business environment are forcing companies to think of the world as one vast market, the companies are being forced to set up their manufacturing and marketing facilities in different foreign countries in order to do business globally. Ford Motors, for instance, has production plants in 38 countries and sales outlets in over 200 countries (Ford 1997 Annual report, www.ford.com). In this regard, there are in today's world a still increasing number of people, who are sent by companies on foreign assignments for a longer or shorter period of time - and it is those people that we in this paper will refer to as expatriates.

In this paper, we will seek to present a critical discussion of expatriates from a cost-benefit point of view. However, since we only are allowed to do this paper in about 15 pages, we acknowledge that this paper cannot be seen as a full-developed academic work, but only as a preliminary academic description and discussion of the subject, instead. Our approach will be a brief introduction to Dunning's Eclectic Theory in order to open the door for explaining why companies may choose expensive means to run overseas operations. In continuation, we will explain the actual roles of expatriates, which then will lead us to this paper's main discussion of how expatriates are compensated and which critical issues such compensation packages bring along for the companies in today's and tomorrow's world. We then finally end this paper by opening a discussion of expatriation in the future by considering the potential challenges and benefits of using expatriates versus local nationals in foreign operations.






1. Why companies operate overseas

Firms that are operating in a domestic market may find that they possess certain attributes that allow them capture international markets, but the rise of the multinational corporations (MNCs) confuses traditional micro economists because: "Operating overseas usually costs more than operating at home because a foreigner does not have the same contacts and knowledge of local customs and business practices as indigenous competitors" (Hennart, 1982, p.82). As the use of expatriates in MNCs can seem confusing because of the cost involved in training and sending managers overseas, we therefore need to understand why firms then choose to produce in different countries and find the need to send their own people abroad. Dunning's Eclectic Theory (Dunning, 1992) offers a theoretical based approach to why corporations go abroad and consequently prefer to use expatriates. The fundamental starting point for Dunning's Eclectic theory is that firms exist to turn inputs into outputs and whether this is done at home or abroad it depends on an enterprise's resource endowments. Dunning's three criteria's - location and ownership; specific resource endowments; and the incentive to internalize the need to be met for firms to find it desirable to operate abroad - are briefly discussed in the paragraph below.

1.1 Resource Endowments
Resource endowments are assets that are capable of generation of a future income stream for a corporation. Resource endowments can consist of tangible resources (manpower, capital and natural resources) and intangible resources (such as knowledge, organizational access to markets and information technology structures). These two characteristics of resource endowments become uniquely important when location specific resource endowments exists. This is when the resources are originating from a specific country and are available to all firms that are located in that market but because these resources cannot be exported they lose their value. The second resources endowment criterion is called ownership specific resource endowments. Ownership specific endowments are internal organizational resources of the home country but are capable of being used with other resources in the home country or anywhere in the world. Examples of these are patents, trademarks and scale of economies. In the Eclectic theory the pattern of location endowments - that is resources available to all firms in a specific country - will likely explain whether firms supply a market by export or local production. The possession of ownership advantages, internal organizational resources, will determine which firm will supply a particular foreign market.

1.2 Internalization
The above mentioned resource endowments, however, do not explain why companies use expatriates, but only gives an understanding of the markets in which corporations will operate. Expatriates first enter the picture when corporations have strong incentives to internalize activities. Typical, enterprises will engage in the type of internalization most suitable for the factor combination, market situations and government policies which they face: "When it is more profitable for this company to exploit its ownership advantages in another country itself rather than to sell or license them" (Hennart, 1982, p.10). Corporations will normally internalize for two main reasons: First, an enterprise may try to capitalize on the advantages of imperfections in the external mechanisms of resource allocations. Various aspects of market imperfections include actually structural imperfections, where there are barriers to competition and where Ricardian rents are earned. Cognitive market imperfections are the information about a product or a service that is unavailable and expensive to acquire. Second, enterprises will try to avoid the disadvantages that are apparent in the market. Examples of such disadvantages are the protection of property rights, the control of organizational information flows, the defense of a company's reputation, quality controls for good and services and where the market does not permit price discrimination.

Dunning's Eclectic theory can shed some light on why enterprises go abroad and why corporations indulge in the use of expatriates. When a firm desires to extinguish bilateral monopoly because of market imperfections: that is, when some markets incurs lower cost through hierarchical co-ordination (FDI) than through co-ordination by market prices then the need to use expatriates becomes evident. When an enterprise has location and ownership specific resource endowments and finds the need to internalize these because of market imperfections then the expatriate is born (Hennart, 1982, p. 84). The expatriate will likely be used to take out the imperfections of the market by being the liaison for the organization to that market. Having a manger that knows and understands headquarters desires and wants is therefore of great importance when investing and operation in foreign markets.




2. The role of expatriates

From the HR-literature we know that expatriates are divided into three types: PCNs (Parent Country Nationals); HCNs (Host Country Nationals); and TCNs (Third Country Nationals). As we in this paper assume that there is no need to define these types of expatriates, we will instead focus on the different roles of these expatriates by point of departure in the following four general approaches to international staffing (Harzing, 1999; Welch, 1995):
1)
Ethnocentric Approach: Because of a lack of qualified HCNs, PCNs occupy all key positions in the foreign operation, which means that the subsidiary is highly dependent on the headquarters' decisions. Some drawbacks from this approach could be limited promotion opportunities for HCNs, income gaps between PCNs and HCNs, and that PCNs cannot be involved in local matters.
2)
Polycentric Approach: In this approach HCNs occupy positions in the foreign subsidiary. Some transfers of HCNs to headquarters also take place. The approach eliminates the language barriers, and typically HCNs are less expensive. Some drawbacks from this approach could be communication problems between headquarter and subsidiary and limited career opportunities for HCNs as they cannot be promoted to headquarter.
3)
Geocentric Approach: In this approach the best people are selected for key positions regardless of their nationality. Nationality is not taken into account and a worldwide integration of employees takes place. In this approach an international team of managers is developed. Some drawbacks from this approach may be related to situations, where host governments prefer employment of locals because of i.e. labor issues.
4)
Regiocentric Approach: Here a company's international business is divided into international geographic regions (i.e. the European Union). The staff can only transfer within these regions.

In order to understand in the roles of expatriates, we then combine the above four approaches of international staffing with the earlier mentioned Electric Theory. In doing so, we then finally are able to suggest the major roles of expatriates as
1) securing transfer of technology/filling positions, as companies send the expatriates abroad in order to transfer their technology to the foreign subsidiary. I.e. in countries where qualified people are not available, companies send the PCNs to fill out the positions. This is mostly used by multinational and international firms.
2) securing the headquarter control, where the companies can exercise this control by using the PCNs in their foreign subsidiaries. In such situations firms try to incorporate the headquarters' culture into the foreign operations, which in some cases may create cultural problems. Especially MNCs tend to demand administrative and financial control in their foreign operations.
3) opportunity for international experience/ management development, as several firms find international experience highly important before promoting their employees. Foreign transfers are here important in order to learn foreign cultures and environments. In such situations qualified HCNs are available but managers are still transferred to foreign subsidiaries to acquire knowledge and skills.
4) securing organizational development, which also is called the "Geocentric approach". This role is performed only by the best people at the best places without nationality barriers. Transfers can take place from headquarter to subsidiary, from subsidiary to headquarter, or from subsidiary to subsidiary. Nationality of employees does not matter in this situation, as the objective of this staffing strategy is to get to know about different cultures, create international networks, decentralization, and interaction between managers of different nationalities. In general, this strategy is mostly followed by larger global companies.



3. Compensating expatriates

3. 1 Why do companies compensate their expatriates?
The purpose of compensation packages for expatriates is first of all to enable a company to attract potential job applications, and secondly to be internally equitable and externally competitive in order to retain suitably qualified employees. Thirdly, compensation packages should stimulate employees by rewarding performances that are essential to a company's success, and fourthly to enable a company to optimize its total wage level. In general, the longer a planned assignment abroad is, the more the principles and local environment of the host company determine the compensation packages for the expatriates (CBS, lecture 15/10 1999, NMN). Also when speaking of compensation, it is relevant to determine the time period of an assignment, as the literature distinguishes between three different assignment stages for expatriates: a) short-term assignment, which is up to one year and without the family, b) long-term assignment, which is for more than a year, and c) permanent assignment. Both long-term and permanent expatriation include moving the family along.


3.2 How do companies compensate their expatriates?

3.2.1 Types of compensation packages
When designing a compensation package, companies usually choose among the following six approaches (Briscoe, 1995, ch.5):
a) Negotiation: When firms first start sending expatriates abroad (and while they still have only few expatriates), the common approach to determine compensation and benefits for those expatriates is to negotiate a separate compensation package for each individual expatriate. This approach is build up around each expatriate, and because of the inexperience of the company of sending expatriates, it can be a difficult task to find the right balance of compensation. In such cases, the expatriates are often overcompensated, and it can lead to inconsistencies between many expatriates and the firm.
b) Localization: It is a relatively new approach used to address problems of high cost and perceived inequality among staff in foreign subsidiaries. The expatriates are paid comparably to local nationals, which can make it relatively simple to administer. However, since expatriates come from different standards of living than they experience in the foreign country, special supplements may still have to be negotiated.
c) Lump sum: To avoid intrusion into expatriate's life-styled decisions, the lump sum approach can be used. Here the firm determines a total salary for the expatriate, and then lets the expatriate determine how to spend it.
d) Cafeteria: This approach is increasingly used by highly salaried expatriate executives to provide a set of choices of benefits. This enables the expatriate to gain benefits such as a company car, insurance, company-provided housing, and the like that do not increase the expatriate's income for tax purposes.
e) Regional systems: For expatriates who make commitment to job assignments within a particular region of the world, some firms are developing a regional compensation and benefits systems to maintain equity within that region.
f) Balance sheet: As this approach is followed by most companies when their international business expands to the point where the firm has a larger number of expatriates, we have chosen to dwell on this approach for a moment. The balance sheet approach is primarily used when the MNCs are sending expatriates from the parent firm to its foreign subsidiaries. It is particularly used for experienced senior and mid-level expatriates and keeps them whole compared to their home country peers while encouraging and facilitating their movement abroad and return home at the end of their assignment. In essence, the balance sheet approach involves an effort by the multinational to ensure that its expatriates are "made whole" (that is at a minimum the expatriates should be no worse off for accepting an overseas assignment). Ideally, the compensation package should also provide incentive to take the foreign assignment, to remove any worry about compensation issues while on that assignment, and to ensure that the individual and his or her family feel good about having been on the assignment. The balance sheet approach of an expatriate's compensation begins with the employee's existing parent-company compensation in form of salary, benefits etc. To this is added two more components: A series of incentives to accept and enjoy the foreign posting and a series of equalization components that ensure the expatriate does not suffer from foreign-country differences in salary or benefits. These components should cover the foreign compensation the expatriates are to receive (see Appendix A).

The balance sheet approach becomes much more complex as the firm evolves into moving individuals between foreign subsidiaries and from its foreign subsidiaries back to its headquarters or other home-country locations. With a large numbers of expatriates, this approach can become complex to administer. Some firms have found that this approach begins to lead managers to view the incentives and adjustments as entitlements that are sometimes difficult to change. Other expatriate managers have complained that this approach to determining their overseas compensation is much more intrusive into their personal lives than is true for the traditional domestic compensation package.

3.2.2 What should a fair compensation package take into account?
First - and most obvious - an expatriate should to be compensated for the costs that she or he will experience as a consequence of the expatriation and for retaining the same standard of living as in the home country. Secondly, the company that is sending the employee overseas needs to ensure itself that the expatriate is enough motivated in order to be successful at the assignment. Motivation includes self-motivation, career prospective and so forth, as well as personal/technical development, so he or she will still be able to compete in the market.

A fair compensation package should therefore consist of two components: financial (extrinsic) and non-financial (intrinsic) compensation (Harzing, 1999). As the extrinsic compensation concerns the financial part of the compensation, it can be divided in two subcategories: direct and indirect compensation, where the direct compensation consists of the fixed and variable income, such as salary and bonus, and the indirect compensation consists of the deferred income, such as pension and benefits. The intrinsic compensation is related directly to the nature of the work, such as possibilities for personal development and career moves.

3.2.2.1 The extrinsic compensation approach
One of the key complications in the balance sheet approach is the determination of the base upon which to add incentives and adjustments. A number of possibilities exist, including: Parent-country salaries; International standards; Regional standards; and Host country salaries. The choice of which base to use should be related to the nature of the company as well as the kind of expatriation the company is using. For example, if the company is using long international assignments, and the assignees often go from one foreign-country assignment to another, then an international standard is probably most appropriate. To date most companies compensate their expatriates based on either a home- or a host- country philosophy.

Once the base salary has been determined, the firm must then decide which incentives that are necessary in order to convince its employees that it will be to the employees' financial advantage to take the assignment abroad. Additional incentives usually include housing allowances, either to ensure the expatriate lives as well as his ore her foreign peers or to make the expatriate's housing comparable to what he or she had "back home". In addition to the many incentives that firms have offered to their expatriates, MNC's have also traditionally provided a number of equalization adjustments, like compensation for any fluctuation in exchange rates between the expatriate's parent-country currency and that of the foreign assignments.

3.2.2.2 The intrinsic compensation approach
As mentioned earlier, we use the term "intrinsic compensation" to describe the incentives that companies use to motivate their expatriates - that is incentives, where the expatriates do not directly get "money in the pocket" compensation but more in terms of benefits, instead.
Intrinsic compensation includes scope for development, career movement, and personal development. An interesting job could compensate for a comparably low pay or long transportation hour or even move abroad. One example could be to give fast track managers experience in running a larger organization without close oversight from headquarters.




4. A critical note on expatriate compensation

4.1 The need to adjust compensation packages
In finding ways of cutting costs as much as possible, several MNCs have in their recent annual reports stated that they now are seriously beginning to focus on the high costs of using expatriates, as they in average estimate that their typical expatriate costs are about three to five times as much as a comparable domestic employee. Several companies do not even have an exact handle on the costs of using expatriates, because their accountings are so fragmented - i.e. some of their accounting is in the local country, some in the regional headquarters, and some at the home office (www.euromoney.com). But even without a clear picture of what is going on, companies that are operating in foreign countries are becoming more and more aware that the actual costs of their expatriates are very high, and in many cases too high for them to compete in their foreign locations. For instance, if a company is using expatriates and its competitors are using locals, then the company may have a rather big cost disadvantage. And in addition, in some multinational companies the culture is about to change toward a climate, where it is understood that career development requires taking a foreign assignment, and where these companies therefore do not pay compensation premiums or generous cost-of-living adjustments to attract good people.

However, only very few companies have today actually managed to change their expatriate compensation packages (www.hbs.edu), as it is our opinion that most international companies still are locked into expensive compensation packages that were developed in a much different era - that is when globalization and career boosting through overseas postings were unknown issues, and where these compensation packages were formulated primary according to the earlier mentioned "balance-sheet" approach. This point of ours should by no means be misunderstood, as we acknowledge that if today's companies are simply exporting or using wholly owned or licensed distributors to sell their goods in a few international markets, a balance-sheet approach makes sense. Those companies are simply using their overseas business as an extension of the domestic operations. But in contrast, what we are claiming is that when companies become truly multinational, with substantial manufacturing, marketing, distribution, and management investments in many countries around the world, and when international revenues account for a large part of total revenues, then the company's business is no longer simply an extension of the home office, whereby adjustments of the compensation packages are needed in order to keep up with reality. Theoretically, we can rephrase this as the more global a company becomes and the more involved it is in foreign markets, the more flexible its compensation policies should be, as for multinational or transnational companies, the goal is to maximize operations for the good of the global organization, not just for the home office. Therefore, expatriate compensation must take into consideration such things as what competitors are paying or how expatriate compensation compares with compensation of local employees in the same job.

4.2 What are the new industries doing ?
Companies in the newer industries, especially those in information technology, biochemicals, and electronics, have reported to be more flexible in formulating expatriate-compensation packages and more willing to break with the balance-sheet approach (www.fortune.com). These companies are more and more using younger members of the staff and sending them abroad for shorter periods of time - often technical people in 6 months or less - as most of today's young skilled employees are much more flexible in terms of cross-culture orientation/exploration and family life. The shorter assignments also seem to be better for the employee-company relationship because it means that the employees are not "out of sight, out of mind" long enough to lose close contact with the parent company.

Companies in the new industries therefore seem to be riding on the fittest wave in terms of expatriation expenditures, as their talent pool primary are among younger people (www.borsen.dk), who in general seem to consider short-term assignments as a combination of a personal and a professional development (and a good career move), whereby these employees agree to make some extrinsic and intrinsic sacrifices when going abroad. As a consequence, the expatriate compensation packages in these newer industries do not aim to keep the employees' standard of living whole, instead the companies want the expatriates to live as local as possible - and not as part of an i.e. German expatriate community. However, this does not mean that the person taking a development assignment will be paid in local wages. For instance, from their web-site, Deloitte & Touche states that they pay the same base salary in the foreign post as the employee gets at home: "We don't want someone from Lisbon (Portugal) working next to someone from New York in London who is making a lot more money, but we recognize that in some cases we may have to increase the base pay if the person is going to a higher-paying country like Switzerland" (www.deloitte.com).

5. The use of locals vs. the use of expatriates

From the previous chapter it becomes quite clear that (in light of cost-cutting strategies) the managers of today's internationalized companies are increasing their efforts to find new ways of minimizing the costs of their global expansions by questioning the costs of their expatriates in terms of adjustments of expatriate compensation packages and increased use of younger and more globalized employees. As also mentioned in the beginning of the previous chapter, most companies are in addition increasingly questioning whether they should continue to send costly expatriates to run foreign operations or to take advantage of the local workforce. However, going through the HR-literature it has become obvious to our group that there is no fully developed theoretical framework for weighing the exact challenges and benefits of employing local talent versus expatriate employees. But with background in our disperse HR-readings we suggest to summarize an approach to such weighing in the model found in Appendix A building upon the works of Doz & Prahalad (1986) and Hamil (1989). With respect to the restricted limit of this paper we will, however, not comment on each of the parameters in the model, but use the model as point of departure for further discussion, instead.

In our view, managers should determine the advantages of both types of employees (expatriates or locals) with regard to the general strategic goals, costs and productivity of their companies. Different strategic objectives of a company will typical dictate when to send expatriates and when to localize the business, so it is therefore crucial to determine whether expatriates can meet these objectives most effectively or whether local nationals can accomplish them as well. In order to clarify this perspective we suggest - with reference to the model in Appendix B and to the work of Boyacigiller (1990) - that a manager in such situations could solve this dilemma by comparing each of the company's assignment situations with the in chapter 2 earlier mentioned four most common reasons for using expatriates: 1) to establish a corporate culture (communicating and translating the corporate vision), and in addition, if the company is setting up a new business, it only has the expertise to establish it through expatriate transferees; 2) to transfer knowledge (locals as a choice, but expatriates to transfer technology to three or four locals at one time, which can be a major cost advantage); 3) to fill a skills gap (providing skills that are not available in the local marketplace); and 4) to develop the individual worker for future assignments (which has long-term implications for a company and continued understanding of the global market).

If the manager looks at the value of each of the above four reasons for sending someone from the home office, then the business case should become more clear because of the fact that if the assignment fits into all of these four common reasons, then the price of an expatriate might be worth paying. We recognize, however, that even if the above reasons speak for expatriation, there surely are abundant difficulties as well, when choosing to expatriate. From the expense of moving an individual or family overseas to dual-career concerns to the down-time that it takes for expatriates to adjust to culture and life abroad, expatriates can be "high maintenance" and present a raft of complications in administration. Also according to the literature there are even more concerns when expatriates after a longer assignment return to the home location and face readjusting back to life at headquarters.

On the other hand, if a company already has a strong global mindset, it will most likely be able to find talent anywhere around the world and assign them based on expertise - and not on geography - and then the company should consider using local talents as soon as possible, as local staff brings its own set of benefits: 1) understanding the local business environment and how to transact business most effectively; 2) knowing the local culture and the nuances that are important in that country; 3) grasping the marketplace from an insider's perspective and being more in-tune with the quickly changing market; 4) providing insight into local marketing, sales and product development. However, using local staff also has its challenges - from availability of talent to training so they understand the corporate culture of the home office. Though, choosing locals are not without costs as practical evidence (www.kmpg.co.uk) shows that when managers discuss staffing overseas, they often see local employees as cheaper, as they do not actually stop to consider the real costs of bringing a local onboard (as these costs can be considerably higher than the cost of a expatriate employee because of a wide range of regulations regarding overtime, mandatory time off, and severance benefits). Further, some local laws (i.e. Germany) require a thirteenth month pay, and there can be enormous issues surrounding retirement and social security, so a company's labor costs can therefore skyrocket depending upon the location that the company chooses.

In short, this group will not recommend any final solution whether companies should use expatriates or locals, as we recognize that both choices seem to present an array of benefits and challenges dependent on the companies' specific assignment situations. Instead, we therefore argue that most companies might be better off finding their own best combination of expatriates and locals, as the time it takes to "nationalize" an operation (from expatriates to host country individuals) is as unique as each company.


6. Conclusion

As we have learned from Dunning's Eclectic Theory, an expatriate is born when a company has location and ownership specific resource endowments and then finds the need to internalize these because of market imperfections. The expatriate will therefore likely be used to take out the imperfections of the market by being the liaison for the organization to that market - especially by securing the transfer of technology; securing the headquarter control; and securing the organizational development.

With point of departure in the general compensation literature, we conclude that the financial (extrinsic) and the non-financial (intrinsic) factors are crucial components for clarifying the issue of why and how companies compensate their expatriates. However, since the costs of using expatriates are estimated as three to five times as much as a comparable domestic employee, we have in this paper focused upon some of the different ways companies can keep such costs down. By looking on how the companies in the newer industries are doing, we conclude that one approach to minimize these costs is to incorporate more flexible expatriation programs that are willing to break with the ordinary compensation packages and terms for expatriation. Especially younger people and shorter assignments are suggested as means to achieve lower costs, as younger people in today's world seem to consider expatriation as a combination of personal and a professional development, whereby such employees agree to make some extrinsic and intrinsic sacrifices when going abroad. On the other hand, as most companies still are locked into ordinary expatriation programs - as i.e. the balance sheet approach - these companies are increasingly about to question whether they should continue to send costly expatriates to run foreign operations or to take advantage of the local workforce. However, as we have found that both choices seem to present an array of benefits and challenges that are related to the specific situations of each company, we conclude that most companies might be better off finding their own best combination of expatriates and locals.

Looking ahead, our group is of the opinion that as the world will become more and more globalized, companies and people may develop such strong global mindsets that the use of locals instead of expatriates may be more efficient and more in-tune with the quickly changing globalized market. However, as we acknowledge that this opinion of ours needs much more study in order to be accepted as an academic statement, we hope that by bringing this opinion into discussion the door for further research of this issue has been opened a bit wider.
7. A note on the group work

Intense healthy discussions combined with a climate of cooperation and critical honesty were the main conditions while performing this term paper. All the group members were actively involved in the process of gathering, analyzing and interpreting the available literature and data, as well as, critical constructive comments with the objective of widening the group's perspective. In short, the results established in this paper can therefore best be described as a process of motivation, cooperation, self-discipline and busy coffee machines

The background diversity of the international members in our group was another important factor that led to the creation of creative solutions and helped open the spectrum of our discussions.

Finally, developing this paper was not only challenging but also pedagogical interesting in the way that theoretical assumptions were linked with practical dilemmas in the complex reality of the today's world.


















References

Boyacigiller, N.:
Role of expatriates in the management of interdependence, complexity, and risk of MNNs, 1990, Journal of international business studies, 3rd quarter

Briscoe, Dennis R.:
International Human Resource Management, 1995, Prentice-Hall Inc., New Jersey.

Dunning, John H.:
Multinational enterprises and the global economy, 1992, Addison-Wesley, Harlow

Doz, Y. & Prahalad, C.K.:
Controlled variety: a challenge for human resource management in MNCs,1986, Human Resource Management, Issue 21

Hamil, J.:
Expatriate policies in British MNNs,1989, Journal of general management, Issue 14

Harzing, Anne-Wil:
International Human Resource Management, 1995, SAGE Publications Ltd., London

Hennart, Jean-Francois:
Theory of multinational enterprise, 1982, Ann Arbor, Michigan

Welch, Denice E.:
International Human Resource Management, 1998, South-Western College Publishing, Canada.





Web-sites:
www.borsen.dk

www.euromoney.com

www.deloitte.com

www.ford.com

www.fortune.com

www.hbs.edu

www.kmpg.co.uk

Appendix

Appendix A
International Compensation Balance Sheet Approach
(Briscoe, 1995, p.113)








Appendix B
Benefits and challenges of the use of expatriates vs. the use of locals
(building upon the works of Doz & Prahalad,1986; and Hamil, 1989)




The use of expatriate staffing in international subsidiariesBenefits Challenges
ü cultural similarity with parent company ensures transfer of business/management practicesü permits closer control and coordination of international subsidiariesü gives employees a multinational orientation through experience at parent companyü establishes a pool of internationally experienced executives ü involve high transfer and salary costs ü increases the foreigness of the subsidiary ü may have disinfective effect on local- management morale and motivationü may be subject to local government restrictionsü may create problems of adaptability to foreign environment and cultureü may result in personal family problems
The use of local staffing in international subsidiariesBenefits Challenges
ü lower labor costsü demonstrates trust in local citizenryü increases acceptance of the company by the local environmentü leads to recognition of the company as a legitimate participant in the local economyü effectively represents local considerations and constraints in the decision-making process ü makes it difficult to balance local demands and global prioritiesü leads to postponement of difficult local decisions (such as layoffs) until they are unavoidable, when they are more diifult, costly and painful than they would have been if implemented earlierü may make it difficult to recruit qualified personellü may reduce the amount of control exercised by headquarters