Mimicry, Knowledge Spillover and Expatriate Assignment Strategy in Overseas Subsidiaries.

Author:Ge, Lipeng Gary
 
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1 Introduction

In a global economy, overseas assignment of personnel is often a competitive necessity for multinational corporations (MNCs) (Kraimer et al. 2016; Riaz et al. 2014). Studies have emphasized expatriates' role in constraining overseas subsidiaries' opportunistic behavior (Tan and Mahoney 2006), transferring useful knowledge from headquarters to subsidiaries (Berry 2017; Chang et al. 2012; Harzing et al. 2016; Kawai and Chung 2019), bringing host country's business opportunities to headquarters' attention (Plourde et al. 2014), and creating an informal network that facilitates coordination within the MNC (Belderbos and Heijltjes 2005; Belderbos et al. 2014). But, expatriates face the challenges of adjusting themselves to the host country environment. And maladjustment results in a high failure rate of overseas assignment with financial loss for the MNC (Takeuchi 2010). Thus, it is critical for an MNC to understand when expatriates should be sent out.

Scholars have examined some of the key factors determining the expatriate staffing strategies used in foreign subsidiaries (Brock et al. 2008; Gong 2003; Paik and Ando 2011; Peng 2012; Peng and Beamish 2014; Shin et al. 2017; Tan and Mahoney 2003). A subsidiary's size and age, its equity ownership, its strategic role and importance, interdependence between the headquarters and the subsidiaries, and the parent firm's international experience have all been shown to be important predictors of expatriate staffing practices (Belderbos and Heijltjes 2005; Chang and Taylor 1999; Harzing 2001). Expatriation is most common in technology- and marketing-intensive industries, particularly in emerging economies like China where there is a lack of qualified local nationals (Delios and Bjorkman 2000). Cultural distance between the home and host countries has also been found to be positively related to the use of expatriates, largely because of potential agency problems and uncertainty about the host country environment (Boyacigiller 1990; Gong 2003; Harzing 2001; Shin et al. 2017). Finally, MNCs deploy more expatriates to their overseas subsidiaries when they pursue global integration as their strategic goal (Paik and Ando 2011).

Even though prior scholarly work on expatriate staffing has generated significant insights, it has been limited in two important ways. First, it has seldom considered the possible influence of inter-organizational relationships on expatriate assignment. Firms are not only affected by their own resources and ownership structure, they can also be influenced by what other firms do (Greve 2011; Guillen 2002; Haunschild and Miner 1997; Ozmel et al. 2017; Xie and Li 2017), including in forming their expatriation strategies (Williamson and Cable 2003). The neo-institutional theory suggests that firms tend to imitate their peers' practice, which is considered legitimate (DiMaggio and Powell 1983; Haunschild and Miner 1997; Meyer and Rowan 1977). While prior research has consistently reported a high failure rate or premature return of expatriates in overseas assignments (Black and Gregersen 1999; Takeuchi 2010), there is no evidence that MNCs are reducing their frequency of using expatriates. It is thus possible that MNCs send expatriates because other firms have previously done so.

Second, scholars have paid less attention to knowledge spillover from the expatriate community in a host location. Prior studies have mostly focused on expatriates' role in transferring knowledge within an MNC: from the headquarters to the overseas subsidiaries or vice versa (Chang et al. 2012; Harzing et al. 2016). They have paid less attention to the fact that knowledge spillover tends to occur between expatriates and host country nationals in the same location. Research has documented the impact of geographical proximity on knowledge spillover (Alcacer and Chung 2014; Shaver and Flyer 2000), which is an important driver for the geographical concentration of organizations (Chang and Park 2005; Kalnins and Chung 2004). Knowledge spillover from agglomerating with others can facilitate firms' access to critical knowledge (Alcacer and Chung 2007; Lamin and Livanis 2013), which can be related to production systems or process technology, as well as to management, distribution and marketing skills (Singh 2007). At the same time, host country personnel can also benefit from knowledge spillover from the community of expatriate managers, improving their skills and knowhow and reducing later entrants' need to use expatriates. Taking account of knowledge spillover might therefore help clarify the relationship between the expatriate community and MNCs' expatriate staffing decisions.

Building on neo-institutional theory and the knowledge spillover argument, this study is designed to examine expatriate staffing practices when an MNC enters an emerging economy. The study investigate two questions: (1) how does the number of expatriates sent by previous investors in the same geographical location affect an MNC's expatriate assignment decisions? And (2) will such a relationship be moderated by a parent MNC's ownership in the subsidiary and cultural distance between the parent MNCs home country and the host country? The presence of many expatriate managers in a location may signal successful expatriate adjustment in that local environment, but it may also signal a lack of qualified local nationals. Firms mimic their peers' expatriate staffing when expatriation practice is frequently adopted. Based on neo-institutional theory, we argue that the number of expatriates used by prior firms influences probability of subsequent expatriation. On the other hand, knowledge spillover from expatriate communities should help develop a pool of increasingly-qualified local nationals, particularly in emerging economies, reducing the need for expatriates. Taken together, we suggest that a combination of mimicry and knowledge spillover may result in an inverted U-shaped relationship between the assignment of expatriates and others' assignments.

Parent MNCs' equity ownership in their subsidiaries and cultural distance between the MNCs' home countries and the host country are likely to be critical contingent factors affecting any such relationship. Specifically, the increased control associated with equity ownership might be expected to weaken the impact of the expatriate community's influence on expatriation decisions. But greater cultural distance between an MNCs home country and the host country might strengthen that impact because of increased uncertainty. Figure 1 shows a conceptual model of this study.

This study draws upon a comprehensive data set on foreign-invested manufacturing ventures in China to test these hypotheses. China is a large emerging economy where foreign firms often encounter substantial uncertainties. In an uncertain environment, social considerations and peers' actions are likely to influence firms' decisions (Kostova and Zaheer 1999; Scott 2002). The emerging economy context also makes the knowledge spillover perspective appropriate for explaining firms' behaviors (Hoskisson et al. 2000) in a context where local nationals can benefit from knowledge spillover from expatriate employees (Delios and Bjorkman 2000).

2 Theoretical Background

2.1 Imitation of Legitimate Community Practices

Neo-institutional theory seeks to explain why firms behave similarly (DiMaggio and Powell 1983; Meyer and Rowan 1977). In particular, it argues that firms adopt the practices defined by their institutional context as legitimate (DiMaggio and Powell 1983; Tolbert and Zucker 1983). By conforming to the expectations of the stakeholders in the institutional context, firms gain legitimacy and have access to resources provided by those stakeholders (Meyer and Rowan 1977).

Neo-institutional theory has been widely applied in the international business literature (Kostova et al. 2008). In particular, studies have probed the process through which international expansion practices become institutionalized in a host country (Li et al. 2007). In this institutionalization process, whether a practice gains legitimacy depends on how well it fits with the prevalent social norms and values in the host country (Cantwell et al. 2010; Fortwengel 2017; Li et al. 2019). If the action is considered appropriate or desirable, that gives it legitimacy in the eyes of local stakeholders (Suchman 1995).

One critical source of legitimating influence is the organizational community (Hannan and Freeman 1989). The community refers to bounded sets of firms that have overlapped identities (Astley 1985) and defines the boundaries of legitimacy and competition (Ruef 2000). Scholars have found that a practice gains social acceptance and can be perceived as legitimate if it is frequently adopted by the firms in the same community (Haunschild and Miner 1997; Haveman 1993). Besides, in response to the uncertainty about the performance of a practice, firms look for cues from their peers and imitate their behavior (DiMaggio and Powell 1983; Gaba and Terlaak 2013; Haunschild and Miner 1997; Lieberman and Asaba 2006; Ozmel et al. 2017). So the larger the number of organizations adopting a practice in the same community, the more likely that the practice will gain legitimating influence. A firm will thus face a high pressure to mimic that practice. As an example, studies have shown that foreign-invested firms more often choose the wholly-owned subsidiary as their entry mode when a large number of previous investors in that host country adopt the same practice and define its legitimating influences (Li et al. 2007).

2.2 Knowledge Spillover

The community defines the boundary of legitimacy, but clustering in the same community may also create possible knowledge spillover (Ryu et al. 2018). Research has suggested that spillover occurs among firms that are co-located (Alcacer and Chung 2014; Li and Xie, 2011; Shaver and Flyer 2000). The...

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