23
THE REPRESENTATION OF EXPATRIATES IN THE
CORPORATE GOVERNANCE OF SUBSIDIARIES OF
MULTINATIONAL COMPANIES:
A STUDY FROM THE CZECH REPUBLIC*
Petr Pirožek**
Lenka Komárková***
Received: 17. 2. 2014 Preliminary communication
Accepted: 29. 3. 2015 UDC 005.35:339.97>(437.1)
The issue of the representation of expatriates in the corporate governance of
subsidiaries of multinational companies is currently a much debated and yet
relatively under-researched topic within the academic community. In connection
with the transformation of the economy which has taken place and the activity of
multinational companies in CEE countries, there have been discussions about the
effect of expatriates on the output and efficiency of the corporate governance of
subsidiaries. The main aim of the research carried out was to describe and
analyze the representation of expatriates in the exercise of corporate governance
in subsidiaries of multinational companies operating in the Czech Republic (CR).
The objective of the research was to survey the representation of expatriates in
MNC subsidiaries with respect to various characteristics of the subsidiary such as
the country where its head office is located (country of headquarters), the size of
the subsidiary and the legal form. Using statistical analysis of dependencies, a
different representation of expatriates in relation to the legal form of the MNC
subsidiary was demonstrated. The size of the subsidiary, measured by the number
of employees, also plays a role here. The presence of an expatriate was not
demonstrated to have an effect on the financial performance of an MNC
subsidiary.
*
This work has been supported by the Grant Agency of the Czech Republic - project No.
P403/12/1557.
**
Petr Pirožek, Faculty of Economics and Administration, Masaryk University Brno, Lipova
41a, 602 00 Brno, Czech Republic E-mail: pirozek@econ.muni.cz
***
Lenka Komarkova, Faculty of Management, University of Economics Prague, Jarosovska
1117/II, 377 01 Jindrichuv Hradec, Czech Republic E-mail: komarkol@fm.vse.cz
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1. INTRODUCTION
The exercise of corporate governance in multinational companies in the
post-transition period of many CEE countries has been the subject of
discussions (Ovidiu-Nicuale and Pop, 2012; Roncevic et al., 2012) linked with
the success of not only the subsidiary itself, but also the headquarters of the
multinational company. The findings obtained to date from the transformation
of the economy of the CEE countries (Filatotchev et al., 2001, 2003) points to
the importance of corporate governance, both from the perspective of the
transformation of centrally planned economies to market economies and the
actual substance of the exercise of ownership and management rights (Hashi,
2003). In connection with the form of transformation carried out – privatization
(sale to strategic foreign investors, buyouts by the local management, etc.) – it
is apparent that the exercise of corporate governance can be linked with a
different exercise of administration and management in organizations
(Przybylowski et al., 2010), which may not correspond with the findings about
corporate governance from the highly developed market environments (Wright
et al., 2005).
Multinational companies (MNCs) have to deal with a whole range of
problems, associated with the exercise of effective corporate governance at the
level of the subsidiary of the multinational company (Král et al., 2012).
Situations can very often be encountered in which the management also takes
upon itself the function of monitoring (Boyd, 1994) linked with reporting to
owners at MNC headquarters. This frequently results in the disruption of the
control link between the owner and management (Monem, 2011). In a number
of cases it also leads to a marked centralization, with the owner taking over all
the activities associated with the administration and management of the
company (Harris & Helfat, 1998), which has negative effects on the market
potential in the host country. As some studies have indicated, in post-transition
economies these phenomena can be influenced by the type of owner (Peng et
al., 2010) or the composition of the administrative and executive bodies
(Muller-Kahle &Lewellyn, 2011).
The current paper is based on the findings of an empirical survey carried
out in the Czech Republic. Its preliminary results were made available to the
international community in the conference proceedings (Pirožek, 2014). After a
further and deeper analysis of the data from the empirical survey, this paper
presents a much more thorough and complete view and results of the issue of
expatriates in subsidiaries of multinational companies operating in the Czech
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Republic. This should extend knowledge concerning the issue of international
management in the context of CEE countries.
2. THEORETICAL BACKGROUND
The services of expatriates are used to ensure effective corporate
governance at MNC subsidiaries. Expatriation is understood as sending
employees from headquarters to an MNC subsidiary operating outside the
country of headquarters (host country). The process of expatriation primarily
relates to a worker being sent from headquarters into a managerial or
administrative post with the aim of representing the head office at the MNC
subsidiary (Collings et al., 2008). The expatriate is thus an employee
performing work abroad, outside his own home country, in a daughter company
which is a subsidiary of a multinational company (Štrach, 2009). MNC
headquarters utilize the services of expatriates in the host country’s subsidiary
primarily in order to fulfill a supervisory and coordinating role including the
transfer of knowledge across the whole MNC (Gooderham & Nordhaug, 2003).
This is often associated with discussions about how the workers in the host
country and the expatriates sent there will work together and what benefits can
be expected (Bruning et al., 2012). The main functions of expatriates at the
subsidiary include ensuring that posts are occupied at the subsidiary and the
related managerial and general development of the organization (Edström &
Galbraith, 1977). Among the most important of these functions is occupying
posts in the initial phase of establishing the MNC subsidiary in the host country
(Harzing, 2000), and in the course of time priority is given to managerial
development (Adler & Bartholomew, 1992).
In order to ensure the expatriation of workers from headquarters to the
MNC subsidiary, special programmes are created with respect to their
adaptation which support the success of acceptance and work performance
(Haslberger, 2005). This primarily derives from individual phases of the
expatriation cycle, in which the most important can be identified as the phases
of the selection of a worker, his training, departure, adaptation and performance
of work, and return, linked with repatriation (Black and Mendenhall, 1991). In
addition, the issue of expatriation is associated with an intercultural effect,
which is a product of the difference between the country of headquarters and the
host country of the MNC subsidiary (Black & Gregersen, 1991), which has an
impact on the cross-cultural motivation of expatriates with a link to job
performance (Chen et al., 2010). All of these findings are dealt with during the
selection of suitable workers from headquarters who can be sent to the MNC
subsidiary (Mendenhall & Oddou, 1985). In addition to the above, when
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selecting a suitable expatriate it is also necessary to take into account a
comprehensive view of the influences which affect international management of
the MNC (Bonache et al., 2001) and the related role and performance of
expatriates (Shay & Baack, 2004).
In view of the whole range of influences in operation, evaluating the
success of expatriates (Benson and Pattie, 2009) and their work, not only for the
subsidiary, but especially for MNC headquarters, is difficult and so far
ambiguous (Hemmasi et al., 2010) without a specifically established universal
procedure. From the perspective of the internationalization of the administrative
and executive bodies, a number of studies have recently been conducted on this
topical subject (Nielsen, 2010), the results of which have delivered ambiguous
conclusions, both positive (Graffin et al., 2011) and negative (Mellahi &
Collings, 2010). Within European countries a new research has been presented
showing the effect of expatriates on the productivity of companies (Hamori &
Koyuncu, 2011). With respect to these findings and the data received from an
empirical investigation carried out on subsidiaries of multinational companies in
the CR, we present the results obtained, which can deepen the knowledge of a
hitherto under-researched area of the management of businesses which went
through the transformation of the economy.
The aim of this article is to show the influence of expatriates on the
corporate governance of MNC subsidiaries and determine the effects on
financial performance linked with the representation of expatriates in MNC
subsidiaries operating in the host country, based on the example of the CR.
More specifically, in this article we will answer the following research
questions.
RQ1: What is the representation of expatriates in MNC subsidiaries in relation
to the country of headquarters?
RQ2: Does the representation of expatriates differ with regard to the size of the
MNC subsidiary or its legal form?
RQ3: What posts do expatriates from headquarters occupy in the corporate
governance of the MNC subsidiary?
RQ4: Does the presence of expatriates in the MNC subsidiary have an effect on
its financial performance?
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3. RESEARCH METHODOLOGY
The population comprised 2,509 subsidiaries of multinational companies
which operate within the CR and fulfill the parameters of size (50 or more
employees), legal form (joint-stock companies and limited companies) and
origin of registered capital (registered capital is fully or partly composed of
foreign capital). The subject of the research was a sample of 335 MNC
subsidiaries drawn from the population by self-selection. In view of the primary
function of the questionnaire survey, the research sample had the following
parameters. The sample consisted of 335 MNC subsidiaries, which represents
13.35% of the initial population.
The size of subsidiaries according to the number of employees was as
follows: from 50 to 99 employees 24.2%; from 100 to 249 employees 39.7%
and more than 250 employees 36.1%. In terms of the legal form, the sample was
made up of 20% joint-stock companies and 80% limited-liability companies.
The representation of subsidiaries of multinational companies follows the
structure of business sectors in the CR. The greatest representation was shown
by manufacturing and companies representing wholesale and retail trade, with
the proportion exceeding 10%. Both these two most prevalent sectors and the
other sectors are represented in a proportion corresponding to the population
and sample.
From the sectoral point of view, MNC subsidiaries were most prevalent in
section C – manufacturing (59%), G – wholesale and retail trade, repair and
maintenance of motor vehicles (13%), M – professional, scientific and technical
activities (6%) and section J – information and communication activities (4%).
A total of 82% of the observed MNC subsidiaries were included in these most
significant sections of the sample. Within the set, subsidiaries with 100%
foreign capital in the registered capital predominated (85.1% of MNC
subsidiaries) over subsidiaries with a majority of foreign capital – more than
50% foreign capital in the registered capital (13.4% of MNC subsidiaries) and
subsidiaries with a minority of foreign capital – less than 50% foreign capital in
the registered capital (1.5% of MNC subsidiaries).
Financial performance was evaluated using the most frequently used
indicators based on revenue and amount of assets (Šiška & Lízalová, 2011);
specifically, return on assets (ROA) and growth of assets (GA) were used. In
view of possible short-term influences on the indicators and due to the
requirement for adequate explanatory power about the long-term situation of the
company, a five-year arithmetical average of the chosen financial indicators was
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used (Blažek et al., 2011). Since the aim was to determine the successfulness
and related competitiveness of individual companies (Pokorná & Částek, 2013),
they were divided into three groups. Group A represented companies with
above-average financial performance, while groups B and C were represented
by companies with below-average financial performance (Pokorná, 2012). The
theoretical boundary between companies with above-average and belowaverage
performance is formed by the product of the medians of the five-year
averages of ROA and assets growth of all of the companies included in the
sample (Blažek, 2011).
The information obtained was analyzed using statistical methods for
categorical data. The results are presented in the form of contingency tables and
an analysis of dependency was evaluated using Pearson’s chi-squared test of
independence. All of the analyses were performed in the statistical software R
version 3.0.1 (R Core Team, 2014).
4. RESULTS
The results obtained point to some interesting facts regarding the utilization
of workers from headquarters – expatriates – in subsidiaries of multinational
companies. Empirical investigation demonstrated that a number of MNCs have
a representative – expatriate – operating in their subsidiary in the Czech
Republic. Specifically, this applied to 146 companies. In the remaining cases
expatriates were not found in the subsidiary of the multinational company (186
companies) or there was no reply to the question about the existence of
expatriates (3 companies). The number of subsidiaries with the active presence
of expatriates which was established (44%) can be regarded as significant, and
consequently the issue of expatriation plays a role in the management of MNC
subsidiaries in the Czech Republic.
Table 1 summarizes the results of MNC subsidiaries where a country of
headquarters occurred at least five times in the research sample. The breakdown
of MNC headquarters presented here basically corresponds to the position of
major investors in the Czech Republic’s economy. Only Slovakia (6
subsidiaries) and Russia (1 subsidiary) do not have a representation which
corresponds to their investment position. It is worth noting that all the MNC
subsidiaries with headquarters in Japan confirmed the presence of an expatriate.
An absolute majority was also given by subsidiaries of Italian (75.0%), Spanish
(66.7%), French (60.0%) and American companies (55.6%). In contrast, the
lowest representation was for Swedish (12.5%) and Belgian subsidiaries
(25.0%).
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Table 1. The number of expatriates in MNC subsidiary company according the country
of origin (row percentages)
Country Expat No expat Total
Germany 45 (40.9%) 65 (59.1%) 110
Netherlands 17 (38.6%) 27 (61.4%) 44
Austria 17 (44.7%) 21 (55.3%) 38
Great Britain 5 (35.7%) 9 (64.3%) 14
Luxembourg 5 (38.5%) 8 (61.5%) 13
Switzerland 4 (33.3%) 8 (66.7%) 12
Spain 8 (66.7%) 4 (33.3%) 12
Belgium 3 (25.0%) 9 (75.0%) 12
France 6 (60.0%) 4 (40.0%) 10
US 5 (55.6%) 4 (44.4%) 9
Japan 9 (100.0%) 0 (0.0%) 9
Sweden 1 (12.5%) 7 (87.5%) 8
Italy 6 (75.0%) 2 (25.0%) 8
Denmark 4 (50.0%) 4 (50.0%) 8
Slovakia 3 (50.0%) 3 (50.0%) 6
others 8 (42.1%) 11 (57.9%) 19
Total 146 (44.0%) 186 (56.0%) 332
Source: Research results.
In terms of the size of the multinational company’s subsidiary, measured
by the number of employees, the utilization of expatriates predominates in
companies with more than 250 employees (52.5%). In companies with 50 to 99
and 100 to 249 employees, approximately 39% make use of expatriates.
The chi-squared test of independence narrowly failed to demonstrate
dependence between the sending of expatriates to a subsidiary by headquarters
and the size of that subsidiary (p=0.063).
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Table 2. The number of expatriates in MNC subsidiary company according its size
(column percentages)
Number of employees 50-99 100-249 250 and
more
Total
Expat 32 (39.0 %) 51 (39.2 %) 63 (52.5 %) 146 (44.0 %)
No expat 50 (61.0 %) 79 (60.8 %) 57 (47.5 %) 186 (56.0 %)
Total 82 130 120 332
Source: Research results.
The results of the empirical investigation also show that the most
frequently utilized legal form of subsidiary of a multinational company is the
limited-liability company, which is present in 80% of cases. From interviews
with managers of subsidiaries of multinational companies it was determined
that the legal form of a limited company was chosen because of the time
flexibility in setting it up and due to lower costs. The staffing of statutory bodies
does not represent a very significant issue in relation to the choice of legal form
and the representation of expatriates in an MNC subsidiary. Nevertheless, in
some cases, in view of the size and importance of the activities carried out, a
standard form linked with more effective corporate governance was chosen in
the form of a joint-stock company.
The presence of expatriates in subsidiaries differs in a statistically
significant way with regard to their legal form (p=0.038). In joint-stock
companies an expatriate is found in an absolute majority, while in limitedliability
companies the reverse is true (Table 3).
Table 3. The number of expatriates in MNC subsidiary company according its legal
form (row percentages)
Legal form Expat No expat Total
Join stock company 37 (56.1%) 29 (43.9%) 66
Limited liability company 109 (41.0%) 157 (59.0%) 266
Total 146 (44.0%) 186 (56.0%) 332
Source: Research results.
Regarding the legal form of MNC subsidiaries, the representation of
expatriates in various posts and bodies was investigated. Table 4 shows that the
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office of an expatriate is linked with top management of the subsidiary and is
utilized in the posts of members of supervisory boards, of the board of directors
(over 70%) in a joint-stock company and an executive director (65.1%) in the
case of limited-liability companies, or appointment as the director or manager
of a business unit of the MNC subsidiary. In many cases expatriates were
present in more than one post at the MNC subsidiary. A somewhat surprising
finding is the significant representation in the posts of managers of business
units (for both types of company 43.8%, for limited-liability companies as high
as 48.6%). The explanation as to why even these posts outside the
administrative and executive bodies are occupied may be connected to the
transfer of knowledge in relation to the output achieved in the MNC subsidiary.
Table 4. Representation of expatriates in MNC subsidiaries according to the legal form
Legal form
Supervisory
Board
Board of
Directors
Managing
Director
Company
Director
Head of
Units
Join stock
(37)
29 (78.4%) 26 (70.3%) 4 (10.8%) 11 (29.7%) 11 (29.7%)
Limited
liability (109)
9 (8.3%) 5 (4.6%) 71 (65.1%) 26 (23.9%) 53 (48.6%)
Total (146) 38 (26.0%) 31 (21.2%) 75 (51.4%) 37 (25.3%) 64 (43.8%)
Source: Research results.
The financial performance of MNC subsidiaries, examined in terms of the
individual groups, was carried out on a set of companies which provided
economic results (266 out of 332 studied). Of these, 117 subsidiaries (44%)
reported the presence of expatriates and in the remaining 149 subsidiaries (56%)
the position of expatriate was not present. A comparison of the level of financial
performance (A, B, C) with regard to the existence or non-existence of
expatriates in the subsidiary is given in Table 5.
Table 5. Financial performance versus expatriates (row percentages)
Cluster A B C Total
Expat 41 (35.0%) 31 (26.5%) 45 (38.5%) 117
No expat 62 (41.6%) 38 (25.5%) 49 (32.9%) 149
Total 103 (38.7%) 69 (25.9%) 94 (35.3%) 266
Source: Research results.
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From the relative frequencies presented, it follows that in the case of MNC
subsidiaries in which expatriates are present subsidiaries with below-average
financial performance predominate (cluster C) compared to MNC subsidiaries
without expatriates (a difference of 5.6%). In the case of subsidiaries where
expatriates are not present, most frequent in relative terms are companies with
above-average financial performance (cluster A). The representation of
subsidiaries in cluster B is similar with both types. The result of the statistical
test indicates (p=0.514) that there is no significant effect on economic results
from the representation of expatriates in an MNC subsidiary. At this point it
should be stated that this may also be due to the MNC headquarters’ policy with
regard to the creation and reporting of profit (Bistrova & Lace, 2012) or tax
operations throughout the MNC.
5. CONCLUSIONS
From all the sub-sets of results it emerges that expatriation is significantly
represented in MNC subsidiaries operating within the CR. In the majority of
cases, expatriation is not connected with the specific country of headquarters: it
occurs in all MNCs which contribute significantly to foreign investment in the
CR. The only exception are MNC subsidiaries with headquarters in Japan,
where the presence of an expatriate from the Japanese head office at the
subsidiary in the host country, in this case the CR, is confirmed in all the
subsidiaries included in the research. This fact can be explained by the attempt
of Japanese MNCs to transfer sophisticated knowledge, which cannot be done
without the active involvement of expatriates from headquarters at the
subsidiary (Oki, 2013).
Similarly, it is also apparent that the utilization of expatriates is linked with
the size of the MNC subsidiary, measured by the number of employees. It can
be assumed that with growing size the utilization of expatriates in the MNC
subsidiary increases. Empirical investigation demonstrated a different
representation of expatriates in the MNC subsidiary in relation to its legal form.
The work of expatriates is utilized more by the legal form of the joint-stock
company. In the legal system of the CR (adopted from German business law)
this legal form allows for flexible changes in the transfer or sale of MNC
subsidiaries. However, a major drawback of this legal form, as opposed to the
limited-liability company, are the greater administrative demands. The
significant result obtained may also be related to the fact that joint-stock
companies tend to be larger (measured by the number of employees) than
limited-liability companies. A closer examination of the administrative and
executive bodies reveals that in MNC subsidiaries in the host country, MNC
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headquarters fill both the administrative (supervisory board) and at the same
time executive (executive director or board of directors; director) bodies of the
chosen legal form of the MNC subsidiary. Surprisingly, positions lower in the
hierarchy, which are primarily related to specialist activities, are also occupied
by expatriates. From the ownership structure, it emerges quite clearly that the
MNC headquarters establish subsidiaries in a host country primarily with a
100% ownership stake. Lesser property interests are the exception.
The financial performance of subsidiaries is not directly affected by the
expatriate’s performance of work. The results obtained do not explicitly
demonstrate this due to the complexity of this issue, which corresponds with the
results attained using the example of German companies (Schmid & Dauth,
2014). When comparing subsidiaries in which expatriates are not present, better
financial performance does not occur, even though in this case there are more
financially high-performing MNC subsidiaries according to the frequency of
occurrence. This is mainly due to the MNC head office’s centralized policy of
managing costs and tax operations, which applies to all subsidiaries. From
direct interviews with managers of MNC subsidiaries it emerged that the
economic results and tax operations are adapted to the requirements of
headquarters and in this respect have limited explanatory power. Nevertheless,
in the case of subsidiaries in which expatriates are not present and which are run
only by managers from the host country, there is a greater tendency for the
subsidiary in the host country to achieve better economic results and a
corresponding tax liability. In contrast to MNC subsidiaries where expatriates
are present, emphasis is placed on reporting far more accurate financial results
(McNulty & De Cieri, 2013).
The results presented here yield some new and interesting findings from
the area of expatriation in MNC subsidiaries. Despite the possible limitations of
the research (the set of businesses investigated, the number of respondents, the
method of managing costs and taxation in the host country, etc.) there are
results here which deserve closer scrutiny. In further research it would be
possible to focus closer attention on causality, yielding new knowledge in the
area of expatriation (McEvoy & Buller, 2013; Lin et al., 2012) with countries in
the post-transition phase of the market economy using the example of a specific
country. This is also connected with a deeper understanding of the mutual link
between the MNC headquarters and their branches in host countries which are
in the post-transition phase of the market system.
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SUDJELOVANJE DISLOCIRANIH DOMAĆIH MENADŽERA U
KORPORACIJSKOM UPRAVLJANJU PODRUŽNICA MEĐUNARODNIH
PODUZEĆA: ISTRAŽIVANJE U ČEŠKOJ REPUBLICI
Sažetak
O pitanju sudjelovanja dislociranih domaćih menadžera u korporacijskom upravljanju
podružnicama međunarodnih poduzeća se trenutno mnogo raspravlja, ali ono i dalje nije
dovoljno istraženo. U svezi s transformacijom gospodarstva i aktivnosti
multinacionalnih korporacija u zemljama centralne i istočne Europe, diskutira se o
djelovanju ovih menadžera na učinak i efikasnost korporacijskog upravljanja
podružnica. Glavni je cilj ovog rada opisati i analizirati sudjelovanje dislociranih
domaćih menadžera u korporacijskom upravljanju podružnica međunarodnih poduzeća
u Češkoj Republici. Pritom je provedena anketa predstavnika navedenih menadžera u
podružnicama međunarodnih poduzeća, s obzirom na različite karakteristike
podružnice, kao što su: zemlja u kojoj je locirana centrala poduzeća, veličina i pravni
oblik podružnice. Koristeći statističku analizu ovisnosti, pokazano je da postoji
povezanost sudjelovanja dislociranih domaćih menadžera, s obzirom na pravni oblik
podružnice poduzeća, kao i njenu veličinu (mjerenu brojem zaposlenika). Prisutnost
dislociranih menadžera, pak, nije povezana s financijskim performansama podružnice
međunarodnog poduzeća.