Towards a conceptual framework for the relationship between

Towards a conceptual framework for the relationship betweensubsidiary staffing strategy and subsidiary performance

Saba Colakoglua*, Ibraiz Tariqueb and Paula Caligiuria

aSchool of Management and Labour Relations, Rutgers University The State University of NewJersey, Piscataway, NJ, USA; bManagement Department, Pace University, New York, USA

Staffing key management positions at host country subsidiaries is a strategic challengefor most MNEs. While previous research in this domain explored the antecedents ofMNE subsidiary staffing decisions, strategic outcomes of different staffing patterns(e.g., using parent, host, orhome countrynationals)havebeenmostlyoverlooked. Drawingfrom the resource-based view of the firm, we develop a theoretical model that explains thelinks between different strategies for staffing key management positions in host countrysubsidiaries and the performance of those subsidiaries in their host markets and within theirMNE networks. Further, we propose contingencies that moderate the relationshipbetween subsidiary staffing strategy and host country and MNE network performance.

Keywords: expatriate; MNE staffing; subsidiary performance

Introduction

Multinational enterprises (MNEs) purposefully staff their host country subsidiaries with

managers from the headquarters’ country, the host country, or another country. This

nationality-based staffing decision-making serves a multitude of strategic purposes, such

as establishing and maintaining global integration and control, responding to host market

conditions, and mobilizing knowledge across national borders (Edstrom and Galbraith

1977; Harzing 1996, 2001a; Konopaske, Werner and Neupert 2002; Scullion and Collings

2006). Given the importance of global staffing strategy for an MNE’s global competi-

tiveness, researchers have explored the factors affecting MNEs’ staffing decisions, in

particular, when MNEs utilize expatriates in their host country subsidiaries (Boyacigiller

1990; Downes 1996; Erdener and Torbiorn 1999; Harzing 1996, 2001a; Delios and

Bjorkman 2000). This research stream has generally demonstrated a link between host

country characteristics, home country characteristics, and MNE characteristics and the

level of expatriates that are deployed to host country units or the choice of a subsidiary

managing director (Tung 1982; Boyacigiller 1990; Welch 1994; Richards 2001;

Kessapidou and Varsakelis 2003; Thompson and Keating 2004; Tarique, Schuler and

Gong 2006; Colakoglu and Caligiuri 2008).

While these findings have increased the collective understanding of the antecedents

of global staffing strategies, the possible influence of different staffing strategies on

subsidiary-level outcomes has not been well-investigated (see Gong 2003a for an

exception). This is important given the fact that the global staffing literature clearly

acknowledges the potential influence of any given subsidiary manager as a possible

liability or asset to the subsidiary (Dowling, Welch and Schuler 1999; Bonache and

ISSN 0958-5192 print/ISSN 1466-4399 online

q 2009 Taylor & Francis

DOI: 10.1080/09585190902909822

http://www.informaworld.com

*Corresponding author. Email: [email protected]

The International Journal of Human Resource Management,

Vol. 20, No. 6, June 2009, 1291–1308

Brewster 2001; Gong 2003a; Toh and DeNisi 2003). Therefore, there is a strong need to

further investigate and theorize on the link between subsidiary staffing strategies and

subsidiary performance.

This paper seeks to address this research gap by offering a theoretical model that

explains the influence of differentially using parent country national (PCN), third country

national (TCN), and host country national (HCN) managers on subsidiary performance –

both host market and within MNE performance (e.g., the ability to attract scarce MNE

resources to the focal subsidiary) – when the staffing strategy is aligned to fit the

subsidiary’s environment (Chandler 1962; Ghoshal and Nohria 1989; Schuler, Dowling

and De Cieri 1993; Nohria and Ghoshal 1994). Focusing on key management positions is

important because these positions have a stronger potential to impact a host country

subsidiary’s effectiveness compared to positions that are purely technical or functional.

Our theoretical model draws mainly from the resource-based view of the firm which

posits that firms need to possess valuable, scarce, inimitable, and non-substitutable

resources in order to create and sustain competitive advantage (Barney 1991). Different

types of knowledge possessed by different national categories of subsidiary managers

(e.g., host market knowledge of HCNs, firm-specific knowledge of PCNs and TCNs) is

such an organizational resource that has the potential to create competitive advantage in

the host market. Related, the network of relationships that expatriates have access to at

MNE headquarters (e.g., their social capital) and the resources available to them through

these relationships as a potential organizational resource that can aid a subsidiary achieve

competitive advantage within its MNE network (Nahapiet and Ghoshal 1998; Kostova and

Roth 2003).

Second, we draw from the differentiated fit framework (Ghoshal and Nohria 1989;

Nohria and Ghoshal 1994) to explain why contingencies need to be considered when

studying these relationships. In this framework, it is recognized that the structure of an

MNE is not homogeneous throughout the organization but needs to be systematically

differentiated so as to ‘fit’ the different environmental contingencies faced by different

subsidiaries (Nohria and Ghoshal 1994). The contingencies explored in the model include

psychic distance between home and host countries and the business strategy, mode of

entry, and the role of the host country subsidiaries. The choice of these contingencies is

also consistent with the most widely-accepted models of strategic international human

resource management (Adler and Ghadar 1990; Milliman, Von Glinow and Nathan 1991;

Schuler et al. 1993; Taylor, Beechler and Napier 1996).

This paper advances global staffing literature in three specific ways. First, it attempts to

fill the research gap in this area by providing a theoretical model of the relation between

staffing of managerial positions and performance in host country subsidiaries taking into

account contingencies that operate at different levels. The model is based on the premise

that PCN, HCN, and TCN managers possess unique knowledge bases. These knowledge

bases, in turn, have a differential value under the various strategic, operational, and

competitive conditions surrounding a given subsidiary and its unique need for knowledge

transfer and local integration.

Second, the model considers two different aspects of subsidiary performance,

performance in the host market and performance within the MNE network – a differen-

tiation that has not been considered in previous global staffing literature. This is an

important issue to consider given that past research has been criticized for paying

inadequate attention to internal organizational politics within the MNE, despite the

importance of power and politics for an MNE’s internal operations (Edwards and

Kuruvilla 2005). Given that subsidiaries compete simultaneously in the host market

S. Colakoglu et al.1292

against host-country competitors and in the MNE network against their sister subsidiaries

(Birkinshaw, Hood and Young 2005), discussing the implications of subsidiary staffing on

both types of performance is the second contribution of this paper.

Finally, six testable research propositions are presented that may serve as a stimulus

for future empirical research. Collectively, these contributions may further the conceptual

and empirical understanding concerning the subsidiary staffing strategy-performance

relationship. Subsequent sections describe the independent variable ‘subsidiary staffing

strategy’ and discuss the relation between subsidiary staffing and the two types of subsidiary

performance in light of the contingencies moderating this relationship. Theoretical, empirical,

and practical implications are discussed at the end.

Subsidiary staffing strategy

MNEs configure the staffing composition of a subsidiary by utilizing different national

categories of employees at different rates (Tarique et al. 2006). They have the option of

choosing from PCN expatriates, TCN expatriates, or HCNs to staff the key management

positions in host country units. In this categorization based on nationality, PCN expatriates

are defined as employees of the MNE who are citizens of the parent country where the MNE’s

headquarter is located and HCNs are defined as employees of the MNE who are working in

the foreign subsidiary and are citizens of the host country where the subsidiary is located.

Finally, TCN expatriates are employees of the MNE who are neither citizens of the

parent country nor citizens of the host country, but are from a third and distinct country1.

This paper defines subsidiary staffing strategy based on Perlmutter’s (1969)

categorization of the attitudes of top managers of MNEs towards building their

worldwide operations – a categorization that is widely accepted and used in the global

staffing literature to refer to different staffing strategies. According to Perlmutter (1969),

such attitudes also dictate the global staffing strategy such that key positions in host

country units are differentially filled with PCN, HCN, or TCN managers based on such

overarching managerial attitudes.

In an ethnocentric staffing strategy, strategic decisions for the host country subsidiaries

are managed at corporate headquarters, subsidiaries have limited autonomy, and key

positions are filled by PCN expatriates. Such a staffing strategy helps an MNE facilitate

and maintain control and coordination, and also is an assurance that the subsidiary

complies with the MNE’s overall objectives and policies (Dowling et al. 1999). The second

staffing strategy is the polycentric approach in which subsidiaries can act as distinct

national entities with considerable decision-making autonomy. Typically, HCNs are in

charge of the subsidiary operations and utilization of either PCN or TCN managers is kept

at a minimum. The polycentric approach aids the MNE in dealing with cultural and

language barriers in the host location and continuity of management in its host country

units (Dowling et al. 1999). Finally, in a geocentric staffing strategy, PCNs, HCNs, or

TCNs can all be found in key positions anywhere in an MNE’s worldwide operations.

In this respect, a geocentric staffing approach would indicate a diverse staffing com-

position and would range from less heterogeneous to more heterogeneous based on the

number and ratio of different national categories of employees present in the key

management positions of a subsidiary (Gong 2003a).

Different staffing strategies result in different types of knowledge stocks to emerge in

the upper echelons of host country units. This is because regardless of the different

motivations for deploying expatriate managers to host country subsidiaries, (Edstrom and

Galbraith 1977), an emergent outcome of any expatriate assignment is the transfer and flow

The International Journal of Human Resource Management 1293

of tacit knowledge (i.e., best practices, core competencies, technical or managerial know-

how) from the headquarters and sister subsidiaries to the focal subsidiary (Bonache and

Brewster 2001; Hocking, Brown and Harzing 2004; Novecevic and Harvey 2004; Riusala

and Suutari 2004; Bonache and Zarraga-Oberty 2008). Use of expatriates are related to the

flow of tacit knowledge within MNE units rather than the flow of explicit or more

codifiable knowledge because MNEs tend to rely on other means such as manuals and

knowledge management systems to disseminate explicit knowledge and rely on

expatriates to transfer tacit knowledge (Bonache and Zarraga-Oberty 2008).

For example, when expatriates are used to fill technical and functional management

positions in the host location (Edstrom and Galbraith 1977), they can transfer product,

process, technical, and functional know-how from other units in the MNE to a focal

subsidiary. If the motive is to expose the expatriate manager to international experience

and thus prepare him or her for future executive positions, MNE’s cultural values and

managerial know-how is the type of knowledge that can be transferred along with such

expatriates. When expatriates are used as part of a coordination and control strategy

(Edstrom and Galbraith 1977), MNE-specific tacit knowledge such as core competencies

and strategic values are transferred to the foreign subsidiaries. While MNE-specific

knowledge (e.g., product, process, technological, and managerial know-how) would be

possessed typically by PCN expatriates, TCN expatriates carry sister subsidiary-specific

knowledge (e.g., process and marketing know-how of sister subsidiaries, best practices)

that may bring diversity into the focal subsidiary’s knowledge stock. Finally, HCN

managers possess in-depth knowledge about host country environment regarding

competition, cultural norms, institutions, regulations, and the like. The implications of

different knowledge flows associated with different staffing strategies in relation to

subsidiary performance are discussed in the following sections.

Subsidiary performance

The MNE subsidiary can be conceptualized as ‘a semi-autonomous entity with

entrepreneurial potential, within a complex competitive arena, consisting of an internal

environment of other subsidiaries, internal customers and suppliers, and an external environ-

ment consisting of customers, suppliers and competitors’ (Birkinshaw et al. 2005, p. 227).

That is, host country subsidiaries of MNEs are unique organizational units in the sense that

they are faced with an institutionally dual environment and need to conform and adapt

simultaneously to their internal and external environments in order to be competitive in both

(Kostova and Zaheer 1999; Hillman and Wan 2005).

According to this conceptualization of MNE subsidiaries, a subsidiary’s host market

performance is related to its competitive position in the external environment in which it

deals with host country suppliers and customers and competes against host country

competitors. Such performance can typically be inferred from the financial-, customer-,

and accounting-based performance results of a subsidiary such as profitability, return on

investment, sales revenues, and market share (Andersson, Forsgren and Pedersen 2001).

As opposed to the external competitive environment in which the subsidiary operates,

within its MNE network, the subsidiary competes against sister subsidiaries for the

allocation of MNE’s scarce resources (e.g., new investment, positive attention from MNE

top management team) (Birkinshaw et al. 2005; Bouquet and Birkinshaw 2008). For

example, Bouquet and Birkinshaw (2008) suggest that positive attention received from

MNE headquarters is one such scarce commodity that is allocated across a portfolio of

countries. Positive attention can be received in the form of: (1) level of perceived


recognition and credit given to a focal subsidiary in comparison to other subsidiaries; (2)

provision of discretionary resources that are in limited supply to facilitate a subsidiary’s

development relative to other subsidiaries; and (3) explicit recognition (e.g., expressed in

media) of a subsidiary’s existence and achievements in comparison to other subsidiaries

(Bouquet and Birkinshaw 2008). Therefore, it becomes inevitable for the subsidiary to

develop influencing strategies and tactics that will enhance its competitive position within

the MNE and attract scarce MNE resources to the subsidiary (cf. Andersson et al. 2001).

Performance, then, can be inferred from the extent to which a focal subsidiary receives

such resources compared to other subsidiaries in the MNE network.

Subsidiary staffing and performance within the MNE

Harzing (2001b) suggests that PCN expatriates act as bumble-bees and spiders within the

MNE and that they weave an informal communication network by ‘flying from plant to

plant and creating cross-pollination between the various off-shoots’ (Harzing 2001b,

p. 369). By possessing a network that spans boundaries, having frequent, multiple, and

longer-tenured contacts with the headquarters, such expatriates build high levels of private

social capital within the MNE (Kostova and Roth 2003; Bjorkman, Barner-Rasmussen and

Li 2004) which Nahapiet and Ghoshal (1998, p. 243) define as ‘the sum of actual or

potential resources embedded within, available through, and derived from the network

of relationships possessed by an individual or social unit’. According to Kostova and Roth

(2003) such private social capital possessed by boundary-spanners (i.e., PCN expatriates)

will in turn evolve into a public good through social information processing, benefiting

the subsidiary as a whole. In the case of PCN expatriates, the social capital they possess within

the MNE may be valuable when it is used to influence MNE top management team in favor of

decisions that benefit the subsidiary operations. In other words, social capital possessed

by PCN expatriates becomes a valuable, scarce, non-substitutable, and inimitable subsidiary

resource that has the potential to create competitive advantage within the MNE network.

Other than having the necessary social capital within the MNE, PCN expatriates are

also subject to dual levels of organizational commitment and identification (Gregersen and

Black 1992). This dual organizational commitment puts them in an ideal position to

understand the dynamics of ‘institutional duality’ (Hillman and Wan 2005). They can

identify both with the unique objectives of the subsidiary and also with the overall

objectives of the MNE. Therefore, they can be in a better position to understand how to

align the interests of both parties and thus be successful at influencing MNE top

management team’s decision-making process.

Overall, PCN expatriates that are present in a subsidiary’s management team may

make the subsidiary more cognizant of the political processes within the MNE (Carpenter,

Sanders and Gregersen 2001). Having valuable contacts at the headquarters and an

awareness of the strategic decision-making process of the MNE will provide the subsidiary

with an understanding of how to influence organizational decision-makers. Neither HCNs,

nor TCN expatriates would be as valuable as PCNs in influencing such performance due to

their lack of social capital within the MNE. Therefore, we argue that the more PCN

expatriates are present in a subsidiary’s key management team (i.e., ethnocentric staffing

strategy), the better the subsidiary’s performance within its MNE network will be:

Proposition 1: All things equal, ethnocentric staffing strategy will lead to more

favorable subsidiary performance within the MNE compared to a

polycentric or a geocentric staffing strategy.


Role of the subsidiary

The role of the subsidiary within the MNE network is likely to moderate the effect of

subsidiary staffing strategy on subsidiary performance within the MNE network. Although

an ethnocentric staffing strategy can lead to stronger within MNE network performance in

general, its real impact and the impact of other staffing strategies on this type of

performance may depend on the role that was imposed on the subsidiary by the corporate

headquarters such that different staffing strategies can lead to better performance under

different roles.

Birkinshaw and Morrison (1996) developed a useful typology that differentiates

between three types of roles that are imposed on MNE subsidiaries. Accordingly, a

subsidiary that is a ‘local implementer’ has limited geographic scope, as well as limited

product or value-added scope within the MNE. Such a subsidiary’s role is to adapt

global products to the needs of the local market. A ‘specialized contributor’ has

considerable expertise in certain functions or activities, but its activities are tightly

coordinated with the activities of other subsidiaries. Thus, it is characterized by a narrow

set of value activities and high levels of interdependence with the rest of the MNC.

‘The world mandate’ works with the headquarters to develop and implement strategy.

Such a subsidiary has worldwide or regional responsibility for a product line or entire

business and typically has unconstrained product scope and broad value-added scope.

As noted by Birkinshaw and Morrison (1996), role suggests a deterministic process

whereby the subsidiary is required to fulfill the function ‘imposed’ by the headquarters.

Therefore, successfully fulfilling the imposed role can have implications for the

subsidiary’s performance within the MNE network. A subsidiary which fulfills its role

successfully and meets the expectations of the corporate headquarters will in turn be in a

better position to negotiate with the headquarters for its own interests and influence them.

Because the role of the local implementer is to adapt the global products to local needs,

the amount of local knowledge that resides in the subsidiary is more important in terms of

getting favorable performance outcomes against headquarters’ expectations. HCN

managers are the kind of employees who have the critical tacit knowledge to tailor

products and services according to local customer needs. The ability to modify

global products and services into localized ones that match the needs and wants of

local customers will also meet the expectations of the headquarters. Subsidiaries will

in turn have better negotiating power with the corporate headquarters and influence

decision-makers.

In the case of a specialized contributor, the interdependence between other subsidiaries

requires the subsidiary to effectively coordinate its activities with the rest of the

organization. One of the purposes for utilizing expatriates is to achieve this coordination

role by building effective informal networks throughout the MNE (Edstrom and Galbraith

1977; Harzing 2001b). In addition, this subsidiary role requires the presence of human

capital that is aligned with the special expertise that is needed in such centers of

excellence. Therefore, a subsidiary staffing strategy that utilizes expatriates either in an

ethnocentric or a geocentric form is aligned with the specialized contributor subsidiary

role as long as the expatriates present in the subsidiary are the ones who have a social

network spread around the globe (not confined to social capital in the headquarters) and

have the specific type of know-how required by the subsidiary role. By managing the

coordination of activities with the rest of the MNE network through the use of expatriates,

it is possible for the subsidiary to successfully fulfill its role imposed by the headquarters

and influence the MNE political processes for its own interests in return.


Finally, the world mandate can be considered as a mini-replica of the MNE, a diverse

range of capabilities and competencies are needed within the subsidiary so that subsidiary

learning that is needed to realize the high value-added role can be achieved. Therefore a

geocentric subsidiary staffing is in line with this subsidiary role. PCNs, TCNs, and HCNs

all bring diverse perspectives and competencies into the subsidiary and can bring about the

innovative energy into the subsidiary. In line with the argument for the two previous roles,

successfully fulfilling the role imposed by the MNE will have a positive impact on the

performance of the subsidiary within the MNE.

Proposition 2: The role of the subsidiary will moderate the relation between subsidiary

staffing and performance within the MNE such that polycentric staffing

will lead to more favorable performance in local implementers; geocentric

staffing will lead to more favorable performance in world mandates; and

either ethnocentric or geocentric staffing will lead to more favorable

performance in specialized contributors.

Subsidiary staffing and performance in the host market

According to the resource-based view of the firm, having valuable, scarce, inimitable, and

non-substitutable firm resources is the most important source for creating and sustaining

competitive advantage (Barney 1991). Among the many resources an MNE may have,

firm-specific knowledge that is valuable, rare, inimitable, and non-substitutable has the

greatest potential to provide global competitive advantage (Hymer 1976; Caves 1982;

Kogut and Zander 1993; Grant 1996; Buckley and Carter 2004). Therefore, we argue that

the impact of subsidiary staffing strategy on host market performance largely results

from the different types of knowledge that resides in HCN, PCN, and TCN managers and

the creation of unique knowledge stocks that emerge from different strategies for staffing

subsidiary management positions. Yet, the stock of knowledge that would be conductive to

a host country subsidiary’s competitive advantage could be different under different

circumstances. Therefore, we argue that the relationship between subsidiary staffing

strategy and their associated knowledge flows and subsidiary host market performance is

not linear but depends on the environmental contingencies surrounding the subsidiary.

In certain circumstances, MNE-specific knowledge that typically resides in PCN

managers can be particularly critical since MNEs exist to transfer and exploit

MNE-specific knowledge and advantages across borders (Kogut and Zander 1993).

MNE-specific knowledge stock can be valuable since different types of know-how, mostly

tacit (i.e., hard to codify, record), that made the MNE successful in its home market and

abroad is embedded in it. This type of knowledge is also inimitable since its transfer is a

causally ambiguous and socially complex process making the knowledge-based advantage

hard to imitate by competitors in the host country (cf. Reed and DeFillipi 1990;

Barney 1991; Kogut and Zander 1993). Moreover, this type of knowledge is scarce and

non-substitutable because it is MNE-specific and not possessed by host country

counterparts. In other circumstances, a diverse knowledge base that is associated with a

geocentric staffing strategy can be a source of competitive advantage for host country units

against host country competitors. A diverse knowledge base that results from combining

and integrating knowledge that resides in PCN, HCN, and TCN managers can also be

valuable, rare, inimitable, and non-substitutable leading to favorable performance results.

Both ethnocentric and geocentric staffing strategies require the transfer, sharing,

integration, and combination of individuals’ tacit knowledge within the host country unit


to have an impact on subsidiary performance. However research on knowledge suggests

that although it is relatively easier to transfer explicit (i.e., codified) knowledge, tacit

knowledge is more difficult to convey, and its transfer requires greater effort, time,

resources, and stronger ties between the parties in which knowledge transfer and

integration takes place (Polyani 1966; Hansen 1999; Reagans and McEvily 2003). Such

transfer and integration is even harder to realize when the degree of homophily – the

degree to which individuals are similar in certain attributes such as beliefs and values – is

low. Because the presence of different national categories of managers lowers the degree

of homophily within the subsidiary management team, it also lowers the ability of PCN,

TCN, and HCN managers to share common meanings, a mutual sub-cultural language, and

relationship specific heuristics that ease the knowledge transfer and integration process

(Hansen 1999).

Thus, knowledge transfer and integration at the subsidiary level is a costly and risky

endeavor due to motivational (e.g., expatriates ‘dragging their feet’ or HCNs engaging

in ‘not-invented-here’ syndrome), knowledge related (e.g., lack of absorptive capacity in

HCN managers such as their lack of ability and motivation to learn from expatriates),

and/or coordination related problems (e.g., lack of understanding of PCN, HCN, and TCN

managers of complementary knowledge bases) (Cohen and Levinthal 1990; Szulanski 1996;

Buckley and Carter 2004; Bonache and Zarraga-Oberty 2008). For example, a geocentric

staffing strategy may enhance the learning, innovation potential, and performance of a

subsidiary by facilitating the knowledge integration process if these issues are adequately

dealt with (Gong 2003a). However, if the motivational, knowledge-related, and coordination

problems are not effectively managed, it may also lead to nationality-based social

categorization and identification that may work against knowledge integration by creating

conflict (Kopp 1994; Gong 2003a; Toh and DeNisi 2003). The differentiated fit perspective

(Ghoshal and Nohria 1989, 1994) supports the argument that the cost-benefit ratio of using

different staffing strategies needs to be taken into account.

Differentiated fit perspective

Ghoshal and Nohria (1989, p. 1994) argue that managing host country subsidiaries

requires an understanding of the different contingencies that each host country context

presents. Accordingly, an MNE is not a collection of homogeneous units – but rather – it

needs to be systematically differentiated so as to fit the environmental contingencies

faced by different host country units (Ghoshal and Bartlett 1990). In this respect, the

differentiated fit perspective adopts an economizing approach to managing subsidiary

operations in its specification of structural elements by which each subsidiary should be

managed (Ghoshal and Nohria 1989; Nohria and Ghoshal 1994). Conditions of fit are said

to be obtained when optimal trade-offs exist between the cost of each structural element

and its efficacy in the context of the subsidiary under consideration (Ghoshal and Nohria

1989; Nohria and Ghoshal 1994).

Applying this perspective to the subsidiary staffing decision, the alignment between

staffing strategy and the subsidiary context has an impact on subsidiary performance not

only because of a synergistic potential (Chandler 1962), but also because it optimizes the

costs and benefits of adopting different subsidiary staffing approaches (Ghoshal and

Nohria 1989; Nohria and Ghoshal 1994). That is, due to the costs related to transferring

and combining knowledge and associated motivational and coordination problems, MNE

managers are faced with an optimization problem (Szulanski 1996; Buckley and Carter

2004). They need to analyze the costs of transferring and integrating the knowledge


of different national categories of managers and the benefits of doing so under different

subsidiary circumstances. As a result, we suggest that the subsidiary staffing strategy

needs to fit the contingencies that are operating at different levels in order to optimize the

costs of knowledge transfer and integration and benefits of doing so (Bonache and

Brewster 2001; Novecevic and Harvey 2004; Riusala and Suutari 2004). In the following

sections, we highlight those contingencies.

Psychic distance between home and host countries

Psychic distance refers to the distance between two countries due to the differences in

culture, language, level of education, industrial development, and legal and political

systems (Johanson and Vahlne 1977). As such, it encompasses both the cultural distance

between two countries (Hofstede 1980; Kogut and Singh 1988) and the institutional

distance that is based on the regulative, normative, and cognitive aspects of the host

country environment (Kostova 1999; Kostova and Zaheer 1999). The crux of the argument

in the distance concept is that, as the psychic distance between home and host countries

increases, the uncertainty and risk related to the host environment also increases leading to

a higher perceived need to control those subsidiaries (Balgia and Jaeger 1984). Therefore,

MNEs have an urge to deploy more PCN expatriates to overcome the uncertainty that they

are facing in the host locations (Boyacigiller 1990; Harzing 1996). However, when studied

from the differentiated fit perspective, such an ethnocentric staffing strategy creates an

inherent paradox for MNEs. Although psychic distance increases the probability of

implementing an ethnocentric staffing strategy (see Boyacigiller 1990; Gong 2003b;

Harzing 1996 for empirical evidence), it will also amplify the performance inhibiting

outcomes of using PCN expatriates leading to a decrease in host market performance.

As the psychic distance increases, the ability of PCN expatriates to transfer knowledge,

cope with the demands of the host country, interact with HCN colleagues and subordi-

nates, and manage relations with customers, suppliers, and government officials will

decrease. Therefore, the costs incurred to transfer MNE-specific knowledge of PCN

expatriates and/or attempts to combine the knowledge bases of PCNs and HCNs will be

too great to reap any benefits. Therefore, we argue that polycentric staffing strategy will

lead to better host market performance when the psychic distance between the home and

host countries is large2. In support of this argument, Colakoglu and Caligiuri (2008) found

that MNEs rely on a greater number of PCN expatriates as cultural distance increases but

that a higher ratio of PCN expatriates is related to lower subsidiary performance in cases

when cultural distance is high. Consistent with these arguments and past research findings,

we propose the following:

Proposition 3: Psychic distance will moderate the relation between subsidiary staffing

strategy and host market performance such that polycentric

staffing strategy will lead to more favorable performance for those

subsidiaries that are located in psychically distant locations.

Subsidiary business strategy

Because host country units are semi-autonomous entities with entrepreneurial potential,

they sometimes tend to pursue their own business interests and strategies in the host

market independent of the MNE (Birkinshaw et al. 2005). Accordingly, a subsidiary that

makes a strategic decision to compete by differentiating its products or services in the host


market needs to be high on innovation and find new ways or segments to market its

products and services (cf. Porter 1980). In this case, the value created out of knowledge

diversity can help these subsidiaries implement their strategies more effectively. Even

though the costs of combining knowledge among PCN, HCN, and TCN managers will be

large in a geocentric staffing strategy, the benefits of knowledge integration will exceed

the costs for those subsidiaries due to the innovative products and processes that result

from the emergence of a diverse subsidiary knowledge stock.

On the other hand, successfully competing based on costs requires organizational

practices and policies that are aimed at maintaining a low cost structure (Porter 1980).

On average, expatriates cost employers two to five times as much as home-country

counterparts and frequently 10 or more times as much as local nationals in the country to

which they are assigned (Reynolds 1997). Therefore, using TCN or PCN expatriates will

diminish the ability of those subsidiaries to compete on low cost. This means that

the payroll costs will increase at least 10 times the number of expatriates present in the

subsidiary and the value their knowledge will add to a low cost strategy is questionable.

Therefore, polycentric staffing strategy will lead to better performance for this type of

business strategy.

Proposition 4a: Business strategy of the subsidiary will moderate the relation between

subsidiary staffing strategy and host market performance such that

polycentric staffing will be related to more favorable performance for

those subsidiaries competing on low cost and geocentric staffing will lead

to more favorable performance for those subsidiaries competing on

innovation/differentiation.

However, the impact of a geocentric staffing strategy in subsidiaries with a differentiation/

innovation strategy will take time to materialize. Based on social identification theory

(Tajfel and Turner 1986), Gong (2003a) suggests that a heterogeneous staffing

composition (e.g., geocentric staffing strategy) will lead to lower cohesion and higher

emotional conflict in MNE subsidiaries. Such outcomes, in turn, may block the innovative

potential of different nationalities of managers working for the same subsidiary.

The innovative potential of a geocentric staffing strategy will be unleashed once the

managers develop positive attitudes towards each other through continued contacts over

time. As the managers learn to draw from each other’s diverse sources of knowledge,

innovation and subsequent subsidiary performance will follow. Based on this argument,

we propose a three-way interaction between geocentric staffing strategy, differentiatio-

n/innovation strategy, and host market performance.

Proposition 4a: The proposition that geocentric staffing will be more strongly related to

subsidiary performance that competes on innovation/differentiation (per

proposition 4a) will be stronger for subsidiaries with more experience in

the host market.

Mode of entry

MNEs can choose from a number of different options when entering into a new market.

They can either choose to enter with a wholly owned entry mode (e.g., greenfield

investments) or opt for equity based entry modes (e.g., international joint ventures and

mergers and acquisitions). In wholly owned entry modes, the MNE maximizes the amount

of control it can exert on the subsidiary while limiting the local resources it can gain access


to (Konopaske et al. 2002; Woodcock, Beamish and Makino 1994). In equity based entry

modes, the MNE has less control on the subsidiary operations but have rapid access to new

markets and can operate effectively by partnering with local companies (Schuler, Jackson

and Luo 2004). Equity based entry modes facilitate organizational learning and enable

MNEs to capitalize on the existing competence and resources of their alliance partners

(Makino and Delios 1996).

When the MNE chooses to enter a new market with a wholly owned entry mode, it

relies mostly on the MNE-specific knowledge residing in its own employees to compete

effectively in the local market. Therefore, it is important that PCN managers be deployed

to the subsidiary to engage in an extensive knowledge transfer process and control the

uncertainty surrounding the subsidiary based on lack of local competence. Firm specific

know-how, then, will be a differentiator for the subsidiary in the host country and a source

of competitive advantage against local competitors and in turn, enhance performance.

For example, Konopaske, Werner and Neupert (2002) documented that wholly owned

subsidiaries of Japanese MNEs performed better when they utilized an ethnocentric

staffing strategy.

In the case of equity based entry modes, the level of control the MNE can exert on the

subsidiary is limited and is shared by its partners. Because learning is a stated goal of such

an entry strategy, an ethnocentric staffing strategy can create a sense of hostility or a

perceived attempt to dominate the subsidiary operations on the part of the host country

partners which can increase knowledge costs. In such entry modes, the staffing approach

chosen needs to reflect the level of control and equity each partner has on the subsidiary so

that the costs of knowledge transfer and combination is minimized by reducing conflict

and tension. If the partner is a local one, a staffing strategy oriented towards polycentrism

is more appropriate and can lead to more favorable host market performance. Such an

orientation can facilitate and ease communication and coordination among existing PCNs

and HCNs and lead to a less costly knowledge integration process. If the partner is from a

third country, the use of a geocentric staffing strategy will lead to more favorable

performance outcomes since such a staffing approach represents the interests of all the

parties involved in the venture and does not create conflict that can inhibit knowledge

integration and performance.

Proposition 5: Entry mode will moderate the relation between subsidiary staffing and

host market performance such that ethnocentric staffing will lead to more

favorable performance for wholly owned entry modes; polycentric

staffing will lead to more favorable performance in equity based entry

modes with a local partner, and geocentric staffing will lead to more

favorable performance in equity based entry modes with a third country

partner.

Discussion

Research implications

This paper provided a model of subsidiary staffing strategy and subsidiary performance

based on the differentiated fit framework that identifies variables moderating this

relationship (Chandler 1962; Nohria and Ghoshal 1994). These moderating variables

represent conditions that determine under what conditions different approaches to

subsidiary staffing can aid or hinder performance by balancing the benefits and costs of

knowledge transfer and integration. The underlying concept of the model is that different


national categories of subsidiary managers (PCNs, HCNs, and TCNs) have unique

knowledge bases that provide differential value under different conditions. Under certain

conditions, the subsidiaries are highly reliant on the local tacit knowledge residing in HCN

managers. In other situations, the MNE-specific knowledge and the social capital of PCNs

provide a competitive advantage for the subsidiary against both local competitors and

other subsidiaries in the MNE network. Still in other cases, the knowledge integration

process among different national categories of managers is worth investing in since

innovation that is created out of diversity can be critical for the subsidiary’s performance.

The moderators included in this model are evident in much of the subsidiary staffing

and strategic international human resource management literature (Milliman et al. 1991;

Schuler et al. 1993; Taylor et al. 1996). By building upon this stream of literature, this

paper extended the global staffing literature by discussing how these variables can lead to

increased host market performance if they have the right fit with the staffing approach.

This paper also responds to the strong need in the international human resource

management (IHRM) literature to link international HRM policies with behavioral and

financial outcomes/firm’s performance in individual business units and the overall firm

(Schuler, Budhwar and Florkowski 2002).In the model provided in this paper, it was

acknowledged that subsidiaries compete within the MNE with other subsidiaries to influence

strategic decisions such as investment allocations. It was proposed that presence of PCN

expatriates in the subsidiary will make the subsidiary more cognizant of the political

processes within the MNE and aid performance in this respect. By doing so, this paper

introduced the political and power issues within the MNE to the staffing literature which

were not considered in previous studies and frameworks (Edwards and Kuruvilla 2005).

The challenges of carrying-out international research are widely acknowledged. This

is in part why most of the understanding about subsidiary staffing is based on the

subsidiaries of Japanese MNEs. Researchers utilizing the Toyo Keizai database have

started to establish an understanding of how the presence of expatriates impacts the

performance of foreign subsidiaries of Japanese MNEs (Delios and Bjorkman 2000;

Konopaske et al. 2002; Gong 2003b, Dutta and Beamish 2005; Gaur, Delios and Singh

2005). However, when considering the empirical examination of the relationships

proposed in this paper, researchers need to rely on a survey methodology since it would

not be possible to collect data about the all variables using secondary or archival data. For

this purpose, researchers can take one of several approaches in terms of sampling.

The ideal approach would be to conduct a large-scale international study that includes

MNEs from multiple home countries operating in multiple host locations. An alternative

approach can be to focus on a single country and test part of the model on the subsidiaries

of foreign multinationals in that country. A third approach can be to focus on a single MNE

and test part of the model on the subsidiaries of that MNE. Also, a longitudinal design

would be desired since the impact of subsidiary staffing strategy on performance may

materialize over time.

Existing or newly created measures can be used for the independent and dependent

variables as well as the moderators. Subsidiary staffing strategy can be measured as the

number of managers from different national categories and the extent to which they are

represented in the subsidiary management team. Previous subsidiary staffing research has

predominantly inferred subsidiary staffing from whether the managing director of the

subsidiary was from the parent or the host country (Harzing 1996; 2001a) or by calculating

the ratio of PCN expatriates at the top management team or subsidiary workforce levels

(e.g. Boyacigiller 1990; Konopaske et al. 2002; Gong 2003b). In this respect, the focus has

been on the continuum or dichotomy between an ethnocentric and a polycentric staffing


strategy. Measures that can be borrowed from the diversity literature can be used to

measure a geocentric staffing strategy. For example, Gong (2003a) suggests using Blau’s

(1977) index to measure the national heterogeneity of subsidiary staffing. He suggests that

when there is an equal number of PCNs, TCNs, and HCNs, this index reaches its largest

value of .67. Alternatively, subjective measures of the three staffing approaches can be

created by asking respondents to reflect on the extent to which PCNs, HCNs, or TCNs are

influential in the management and daily operations of the subsidiaries. In terms of our

dependent variable, subjective indices of performance can be created to measure

subsidiary performance both in the local market and within the MNE network since it is

notoriously difficult to get objective performance data for the subsidiaries (cf. Taggart

1999; Andersson et al. 2001).

The country level variable psychic distance is maybe the trickiest construct that

needs to be dealt with among the proposed variables. Psychic distance had usually been

reduced to cultural distance and measured by Kogut and Singh’s (1988) cultural distance

index based on Hofstede’s (1980) country scores on the dimensions of power distance,

uncertainty avoidance, individualism, and masculinity. This measure has been criticized

by many scholars (Shenkar 2001; Harzing 2003; Kirkman, Lowe and Gibson 2006). Such

indices assume both corporate and spatial homogeneity which decreases the validity of

these measures (Shenkar 2001). An alternative, but a less convenient way to measure

psychic distance can be to supplement these indices by cognitive and perceptual measures

such as asking the PCN expatriates the extent to which they think the cultural and

institutional frameworks of the host country is similar to the home country and aggregating

the responses. In addition, geographic distance, religious and language similarities can be

assessed to fully capture the psychic distance between home and host countries. This way,

a better and a more valid understanding of the actual distance can be obtained.

Subsidiary-level moderators can also be measured using objective or subjective

measures. Entry mode can be measured using archival data or getting information from

respondents. The role of the subsidiary can be determined by the extent of interdependence

between the subsidiary and the headquarters as well as between the subsidiary and other

subsidiaries in the MNE in the flow of resources (Rosenzweig and Nohria 1994).

The generic strategy typologies have been around for some time and can be measured

using existing measures (e.g., Jackson, Schuler and Riviero 1989; Huselid 1995).

Despite the contributions our paper makes to the global staffing literature, it is not

without its limitations. Specifically, our model is limited by the current status of global

staffing theory and literature. For example, while the dominant framework for categorizing

MNE staffing approaches is to make a distinction between ethnocentric, polycentric, and

geocentric staffing patterns, MNEs use a multitude of employees within each national

category. For example, Briscoe and Schuler (2004) differentiate between permanent

transfers, second-generation expatriates, immigrants, and just-in-time assignees among

others. Tarique et al. (2006) differentiate between those HCNs and TCNs that have been

socialized at parent country headquarters, host country subsidiary, or regional

headquarters. Future studies can make a finer distinction between different types of

MNE employees and thus improve the model we developed in this paper.

Practical implications

This paper has several implications for the subsidiary staffing practices of MNEs. When

staffing foreign subsidiaries, MNEs need to examine carefully the configuration of the

internal and external contingencies for each of their subsidiaries and take a differentiated


staffing approach that is going to optimize the constraints imposed on the subsidiaries by

the unique strategic, competitive, cultural, and institutional environments they are facing.

This way, MNEs can utilize the different knowledge bases of PCNs, TCNs and HCNs

strategically and create a competitive advantage in the host market. Given that many

MNEs prefer to adopt ethnocentric staffing approaches irrespective of these contingencies

(Mayrhofer and Brewster 1996), our model provides a guideline for the type of staffing

approach that is appropriate under different conditions.

Second, our paper has implications for the management of expatriation which includes

practices such as selection, preparation for the expatriate assignment, managing their

performance during the assignment, and managing the repatriation process after the

assignment (Stroh and Caligiuri 1998; Caligiuri and Colakoglu 2007). However, MNEs

differ on the extent to which these practices are used (Tung 1982; Kopp 1994; Peterson,

Sargent, Napier and Shim 1996) and how effectively they are designed (Brewster and

Scullion 1997; Mendenhall, Dunbar and Oddou 1987) which may inhibit or facilitate the

knowledge integration process among different national categories of employees. Carefully

designed expatriate management practices can aid knowledge transfer and integration

between PCNs, TCNs, and HCNs. Especially in the case of ethnocentric and geocentric

staffing approaches where the presence of PCN and TCN expatriates are significant, high

investment expatriate management practices will pay off in terms of improving communi-

cation, trust, and interaction between different categories of employees, and by catalyzing the

knowledge integration process.

Notes

1. Although there are many variations of international employees within this general categorizationbased on nationality (Briscoe and Schuler 2004; Tarique et al. 2006), focusing on each and everytype of international employee such as permanent transfers, second-generation expatriates,immigrants, or just-in-time assignees is beyond the scope of this paper.

2. For this contingency, use of polycentric vs. ethnocentric staffing approach is only consideredsince the distance concept is related to the existence of two distinct nationalities. Therefore,consideration of a geocentric staffing approach is not applicable.

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Towards a conceptual framework for the relationship between