A thesis
Submitted in partial fulfillment
Of the requirements for the Degree of
Master of Philosophy
ABSTRACT
Management Localization
and Performance of MNCs in China:
A Contingent Resource-based View
Master of Philosophy
Although many foreign invested enterprises (FIEs) and consultants in China
put the localization to a strategic level, management localization is still an emerging
issue of human resource management in academic research. A few previous studies
on management localization focused on the internal efficiency of the subsidiaries or
parent-subsidiary relationship. The impact of management localization on the
interaction between the subsidiary and local environment has received little
attention. Moreover, localization lacks a consistent and valid definition. This thesis
attempts to bridge the gap by systematically exploring the strategic impact of
management localization. Management localization is defined as substituting
expatriate managers with local managers. Based on resource-based view, local
managers can be considered the vehicle of local managerial resources and thus can
bring competitive advantage to the subsidiary. It is hypothesized that the effect of
the management localization on the performance of the subsidiaries is contingent on
cultural distance, localization emphasis, resource dependence, and decision
participation of the local managers. In-depth interviews in China help to illuminate
the concept validity and definition of management localization, and the data from a
questionnaire survey in China are used to test the hypotheses. The results of
hierarchical regression analyses provide partial support for the contingent resource
perspective. The findings have meaningful implications for management
localization at the multinationals’ subsidiaries and provide strong heuristics for
future studies of this issue.
TABLE OF CONTENTS
CHAPTER 1. INTRODUCTION
........................................................................................11.1 Rationale
........................................................................................................................... 11.2 The proposed study
........................................................................................................ 21.3 Major findings
................................................................................................................. 41.4 Organization of the thesis
............................................................................................ 5CHAPTER 2. LITERATURE REVIEW
...........................................................................62.1 Research background
................................................................................................... 62.2 Existing literature
.......................................................................................................... 82.2.1 Motivations of HR localization
.................................................................... 102.2.2 Consequences of management localization
............................................... 112.2.3 Localization as a process
.............................................................................. 132.3 Summary and limitations of previous research
.................................................. 15CHAPTER 3. DEFINITIONS AND THEORY DEVELOPMENT
.........................183.1 Scope of the research and assumptions
................................................................. 183.2 Definitions and validity
.............................................................................................. 193.2.1 Management localization defined
................................................................ 203.2.2 Local manager and expatriate manager
.................................................... 243.3 Resource-based view: A contingent model
........................................................... 243.3.1 Management localization and RBV
............................................................. 243.3.2 Resource-based view of the firm and contingent RBV model
................ 263.4 Expatriate managers, environment change, and local managers
................. 303.4.1 Dominant logic expansion and the role of the expatriate managers
.... 303.4.2 Environmental change and the expatriate strategic failure
................... 323.4.3 The role of local managers and resource internalization
....................... 343.4.4 Evidence: The importance of local-related managerial resources in
China.
.......................................................................................................................... 363.5 The contingent effects of management localization on performance
........... 373.5.1 Main effect of localization
............................................................................. 403.5.2 Contingent value of the local-related managerial resources
................. 42CHAPTER 4. RESEARCH METHODS
.........................................................................484.1 Data collection
............................................................................................................... 484.2 Operationalization and measures
........................................................................... 504.2.1 Management localization
.............................................................................. 504.2.2 Other major variables
.................................................................................... 524.2.3 Control variables
............................................................................................ 54CHAPTER 5. RESULTS
......................................................................................................555.1 Results of in-depth interviews
.................................................................................. 555.2 Descriptions of survey data
....................................................................................... 575.3 Hierarchical regression analysis
.............................................................................. 59CHAPTER 6. DISCUSSION
...............................................................................................646.1 Conclusions and discussions
..................................................................................CHAPTER 1. INTRODUCTION
1.1 Rationale
Localization has become an important issue in the cross-national operations of
international businesses. In China, localization is one of the most enthusiastic
endeavors for many foreign invested enterprises (FIEs) and management consultants
(1999). The widely accepted GI-LR model (global integration and local
responsiveness) emphasized the need for balancing the global and local the
subsidiaries of multinational corporations (MNCs) ( 1987). This
underlying rationale makes localization lie in the same high level as globalization.
(1990) also introduced the Honda’s experience of implementing globalization
by localization strategy. However, academic research on localization is an emerging
issue and far more adequate and theorized.
Existing literature about localization primarily focused on human resource
management (HRM). These efforts are motivated by the problems with expatriate
management, especially the high expatriate failure rate. Some researchers focused on
the standardization or adaptation of the HRM practice (2003).
Some researchers discussed the differences between the locals and the expatriates and
the factors influencing the choices between locals or expatriates (
1999), while other researchers shed light on the process through which the
positions originally held by the expatriates are localized (1999;
2004; 1999).
Previous studies have three limitations. First, previous studies mostly focused
on the internal efficiency or subsidiary-parent relationship. The difference between the
expatriate managers and local managers in terms of their relationships with local
environment should have impact on the relationship between the subsidiary and its
local environment. Secondly, previous research only considers localization one of
HRM issues in operational level or micro level. The GI-LR paradigm implies that
MNCs not only need to keep standardization to exploit their present resources and
knowledge (e.g., cost reduction and scale economy) and but also respond to the local
contingency that is necessary to achieve effectiveness in local environment.
Localization of human resources should have implications for the subsidiary’s survival
and success at strategic level. The impact of localization on performance could be
detectable. Thirdly, the valid and consistent definition of localization is lacked. In
practitioner’s journals, the term “localization” is used with a lot of confusion (
1999). In academic research, the definition of localization (1999;
2004) is also inconsistent and lacks practical validity.
1.2 The proposed study
The purpose of the present thesis is to elaborate and empirically test the effect
of management localization on the subsidiaries’ performance basing on analyzing
localization’s influence on the effectiveness of the subsidiary’s operations.
Based on previous literature, this study reinvestigates the strategic importance
of localization, clarifies the concept of the localization, and defines the management
localization. The distinctions between each level of localization and between
management localization and staffing composition are proposed. Due to the
importance of the human resources to the firm’s success, this thesis focuses on the
management localization and, to make the research consistent with previous studies,
the present study is limited to the research on “pure” management localization
–substituting expatriate managers with local managers.
As the human resource is a vital input to the rent generating system of the firm,
this study adopts the resource-based view as the theoretic framework. After reviewing
the previous research on the resource-based view of the firm, an extended and
contingent resource model is developed. The resources’ contribution to competitive
advantage depends on the environmental factors and the firm characteristics (i.e.,
strategy of the firm) that influence the dynamic value of the resources, the integration
(utilization) of the resources within the firm, and so on.
Different to many practitioners who advocated the positive consequences of
localization, we proposed that the impact of localization is conditional. Localization
has two effects on the managerial resource pool of the subsidiaries: substitution and
complementarity. Management localization with poor substitution, i.e., poor
localization process, will do harm to the exploitation of superior knowledge from
parent company. Furthermore, the value of the location-specific knowledge as
complement managerial resources depends on the country similarity and resource
dependence on local environment. The resource integration within the subsidiaries
also can influence the utilization of the valuable local-related managerial resources. It
is hypothesized that the impact of management localization on the subsidiaries’
performance is conditional (i.e., there is no significant main effect), and their
relationship might be moderated by the efforts of the management localization process,
cultural distance, resource dependence on local environment, and decision
participation of the local managers.
1.3 Major findings
Based on the in-depth interviews with eight FIEs and three HR consulting
companies, the practical significance of localization is reconfirmed. The proposed
content and typology of localization is supported and the discriminant validity of three
levels of localization is verified. Based on a survey data from 80 MNCs in China, our
findings show that management localization of top management team (TMT) does
have strategic implications for the subsidiaries of multinational corporations. In a
culturally distant and resource-dependent host environment, management localization
with high localization emphasis and high local participation can help shore up the
subsidiary’s performance. Our study suggests that localization is among the crucial
factors to achieve local responsiveness and thus could contribute to the GI-LR
paradigm. Our study also implies that MNCs should not only consider the localization
issue from an HRM perspective, but also, the localization policy can act as a strategy
in China’s operation to achieve better performance for their subsidiaries.
1.4 Organization of the thesis
This thesis is organized as follows. In Chapter 2, the practical and theoretical
significance of localization research is reinvestigated and, after reviewing the existing
literature, the research question is developed. In Chapter 3, we define the localization
concept and confirm the validity basing on the in-depth interviews with eleven
companies. A contingent model of resource-based view is developed to guide the
theory development. Chapter 3 also elaborates the theory and hypotheses. Five
hypotheses are proposed. Research methods are described in Chapter 4. The results of
hypotheses testing are reported in Chapter 5. Lastly, we discuss and extend our
findings in Chapter 6.
CHAPTER 2. LITERATURE REVIEW
2.1 Research background
Localization in international business is an emerging issue in academic research.
Although a few studies have focused on it ( 2004; 2004;
1999), it is necessary for researchers to clarify the practical rationale
and significance of the research. In this part, we reconfirm the significance and
rationale of localization research in international business by exploring practical and
academic background. The investigation focuses on two questions: Is the localization
issue practically important? What are the theoretical roots of the localization issue?
Practitioners and consultants have discussed localization and related issues for
more than ten years in China. From year 1995 to 2004, more than one hundred foreign
invested enterprises that are ranked Fortune TOP 500 in China have made public news
or declarations about localization.
11 Searched by online search engines in April 2005. The key words are 1) “localization” & “China”, and 2)
“Bentuhua” and “Dangdihua” in Chinese.
In China, the costs for the expatriate managers are extremely high. On average,
an expatriate manager costs an additional US$ 200,000 to 300,000 per year on top of
his normal salary (1997). As compensation package for the local
managers is much lower than for the expatriate managers, localization can reduce the
extra costs. The adjustment problems that the expatriate managers encounter also
impede the expatriate managers from exhibiting their capabilities (
1998). In China, localization is more important to MNCs than in other host
countries because 1) there is a growing need for managerial human resources
accompanied with the business blooming to most MNCs; and 2) cultural distance and
environmental uncertainty makes the adjustment more difficult to most expatriates
from western countries.
In practitioner’s journals, numerous consultants and managers from foreign
invested companies have discussed the localization issues and shared their experiences.
For example, as a general manager of IBM great China, (1998) showed the
importance and the process of localizing management team of IBM China.
(1996) and (1999) discussed how to localize the compensation
package of expatriate managers. (1999) suggested that the localization strategy
should be formal and scheduled and (1999) implies that a carefully planned
localization should include succession plan.
In international business research, “local” and “global” can be considered two
sides of the international business. As a fundamental framework for international
business, the GI-LR paradigm (global integration and local responsiveness) (
1987) was widely accepted as guidance for international business research
(1995). The GI-LR model might be generalized as how to balance
the global standardization that can exploit the present resource and knowledge (e.g.,
cost reduction and scale economy) and the local contingency that is necessary to
third country nationals (TCNs). The three kinds of human resources, especially HCNs
and PCNs, differ in terms of the relationships with parent company and the host
environment ( 1999). The expatriate managers who mostly are
composed of PCNs and TCNs are good transferors and controllers from parent
company but they could encounter serious adjustment problem due to linguistic
obstacle and cultural barrier. Moreover, in some host countries, the costs of the
expatriate managers are extremely high compared with local counterparts and the
supply of qualified expatriate managers cannot catch up the growing need.
Localization by substituting the expatriate managers or employment of local managers
(HCNs) at the subsidiary level becomes a feasible choice. Therefore, the practices and
HR research turns from how to train the expatriates to adapt to the local conditions (
1986) to how to localize their managerial positions ( 1999;
2004). The differences between the local managers and the expatriate
managers also imply the antecedents, the process, and the consequences of localization.
Because the main objective of the present paper is to study the localization of
managerial human resources, the literature of this stream is reviewed in details as
following.
2.2.1 Motivations of HR localization
For several reasons, there has been an increasing emphasis on localizing the
management with local managers at the subsidiaries. First, the development of
cross-national operations enlarges the needs for localization. Based on life cycle theory,
(1998) predicts that accompanied with the mature of cross-national expansion, the
(2003b) validated the importance of the expatriates in the control mechanism of
the MNCs especially in the culturally distant local countries.
However, research on the effect of management localization has been sporadic.
Only a few empirical studies attempt to examine the effect of management localization
on subsidiary performance ( 2003b; 2000). An
ATKearny survey of global companies in China found that companies that had
achieved large market share in China had less than 10 expatriates, much less than other
firms (1989). (2002) found that while expatriate
management contributes to subsidiary financial performance for wholly owned
subsidiaries, a more localized management is better for joint ventures. Their findings
suggest that the effect of management localization on performance may be conditional
on other factors.
Different from many others who have backed up the localization effort, a few
scholars showed their controversial viewpoints. (1988) argued that the
reduction of the expatriates would weaken the global integration and consistent
identification of the MNCs. Moreover, based on case studies in China, (2000)
pointed out that the development of culturally literate expatriates could become a more
valuable resource for subsidiaries than substituting expatriates with local managers
and the costs of the expatriates should be considered a long-term investment in the
MNCs.
2.2.3 Localization as a process
Believing that how to localize matters more than the pros and cons of locals and
expatriates, some other scholars shed light on the substituting process. In China, due to
the scarcity of local talents, training and qualifying the local candidates before their
filling the expatriates’ positions is definitely important. Meanwhile, the limited supply
of qualified local managers in China presents tremendous challenges to multinationals
in retention. (1999) proposed a three-stage practical model
(Planning–localizing- consolidating) on how to achieve effective localization. Basing
on questionnaire survey, (2004) identified four predictors of successful
localization, i.e., formal planning, local selection emphasis, retention efforts, and
attributions of trustworthiness. (2004) focused on how to transfer the
knowledge from the expatriates to local candidates. (2003b) emphasized the
importance of the expatriates’ willingness to localize their own positions; in other
word, the willingness and the mentoring capability of the expatriate influence the
success of localization. The underlying logic of the previous literature focusing on the
process is that if the locals can own all the same knowledge and skills as the expatriate
managers the localization could be successful.
Although most of the previous studies refer to the term “localization” as the
process in which expatriates are substituted by the locals, the use of the term
localization has not been consistent (1999). Instead of replacing expatriate with
local managers, companies may also transfer an expatriate to local terms at the end of
an assignment, i.e., localizing the expatriates (1996). (1996) refers
“localization” to changing the compensation package to local standard and making
local the employment contracts. The same broadened usage of localization also
appeared in a report from PricewaterhouseCoopers China.
22.3 Summary and limitations of previous research
In the present study, we focus on localization of human resources. In this stream,
the main topic of previous studies is substituting expatriate managers with local
nationals. Except for several studies about staffing pattern in MNCs, most studies in
this stream treated localization as an issue in human resource management.
Localization is considered to benefit to the subsidiaries by reducing the HR costs and
avoiding expatriate failure caused by poor adjustment. Moreover, filling the top
positions with local nationals can also motivate the host country employees because
localization provides more promotion chances for local nationals. The local managers
in the management team are proposed to have impact on the performance by a few
empirical studies but the findings are conditional or inconsistent. A carefully planned
and implemented process is also treated crucial to the successful localization.
The first limitation of previous studies is the lack of consistent and valid
definition of localization, which impedes the localization research. From the
perspectives adopted, previous research focused on the following three aspects: 1) the
subsidiary-parent relationship and the integration of the global operations (
2003b; 1988); 2) the efficiency of the subsidiaries’ operations, such as
transaction cost analysis and organizational learning perspective (2003a;
1999) the effective process of localization, e.g.,
exploring whether and how the locals can own enough competing capabilities to
CHAPTER 3. DEFINITIONS AND THEORY DEVELOPMENT
3.1 Scope of the research and assumptions
We confined our study to the localization of managerial human resources --
management localization. A clear definition will be given in the following part. The
antecedents of the management localization are not the focus of this study. Previous
studies show that the factors related to parent company, the expatriate managers, and
host environment could influence the motivations, incentives, and procedures to
implement management localization (1999; 2004;
2000; 1994; 1999). Nor will we pay a lot of attention to the
process of localization. In other word, we treat localization as an exogenous variable
and only explore the performance-related consequence of localization.
The fundamental assumption of this study is that the MNCs’ motivation of
cross-national operation is to utilize the existent resources, knowledge, and skills.
(1959) proposed that the growth of the firm results from the maximization of
the returns of existent resources and capability. (1993) argue that
the multinational corporations come into being when the knowledge is so tacit that it
cannot be transferred through market transaction.
Secondly, the subsidiaries are in the hierarchy of their parent company. The
MNC is a centralized bureaucratic organization and its subsidiaries share basic
common organizational culture and core resources. It also can be deduced from the
first assumption. The hierarchical arrangement rather than arm-length market
transaction ensures the efficient knowledge transfer and resource exploitation. Parent
company always exerts strict control on its subsidiaries regardless the ownership
structure of the subsidiaries (1999). An MNC is an integrated entity
exposed to different environments that achieves a same but multi-level goal rather than
a group of independent organizations (1993).
Thirdly and therefore, the initial status of oversea subsidiaries could be
regarded as the replications of the parent company or parts of it. In other word,
theoretically, the status before localization is that all the operations are replicated from
parent country. It is undoubtedly that this status might not happen because localization
can always happen more or less. In fact, the MNC often benefits from localization such
as the localization of the raw materials and workforce. Before localization, the
managerial human resources are composed of the expatriates from parent company or
other subsidiaries in third countries. Certainly, some positions, such as HR manager,
could be already localized with the trained locals when the subsidiary was established.
3.2 Definitions and validity
The little attention received in academic research on localization can partly
attribute to the lack of conceptual scheme of the localization research. Clear and
well-defined concept should be developed before exploring the relationships between
localization and other phenomenon. In this part, we clarified the localization concept
and gave definition to our key concept – management localization. The concepts
“expatriate manager” and “local manager” are also defined.
3.2.1 Management localization defined
Although the term “localization” appeared widely in numerous literature of
sociology, economics, international business (IB) and anthropology, unfortunately,
few precise and consistent definitions were given to localization. In
dictionary, the meanings of “localize” include 1) to make local: orient locally; 2) to
assign to or keep within a definite locality; and 3) to accumulate in or be restricted to a
specific or limited area. The first meaning is likely used in IB research. The second and
third meanings are similar to the definition in biology, politics, and computer science.
For example, in politics localization might be equivalent to “decentralization”, which
means to delegate more power to local government and local people.
After analyzing the globalization strategy of Honda Motor Company,
(1990) identified four kinds of localization: localization of products, of profits, of
production, and of management. In his typology, localization means local orientation
and doing in local way. In other words, the localization of cross-national operation
refers to making the operation “by the locals” and “for the locals”. Most of previous
studies focus on localization of human resources. (2004) and
(2004b) refer to localization as “substituting the expatriate managers with locals”.
(2003) use the term “localization” as the counterpart of
standardization when comparing the human resource management practices of
subsidiaries.
In practice, the forms and levels of localization might be more complicated. A
report from PricewaterhouseCoopers China shows that the localization has three forms:
localizing the expatriate’s contract; localizing compensation package of the expatriates;
and substituting by locals. The articles in practitioner journals often discuss the
“localization of expatriates”. (1996) and (1999) focus on
how to convert the expatriate package into local package and award contracts under
the name of local subsidiaries rather than parent company.
It can be concluded that the term “localization” has several dimensions. In the
present study, we classify the localization into two forms: managerial localization and
technical localization. This typology parallels to (1982) viewpoint that the
organization is composed of an administrative and a technical core. The technical
localization refers to the localization of input (raw materials and labor and so on),
production techniques, and output (products). The managerial localization refers to the
localization of structure, mechanism, and pattern of management system. Managerial
localization can have two categories: instrumental localization and management
localization. Instrumental localization focuses on the routinized practice and rules that
are either codified or not codified. Instrumental localization might include localization
of HRM practice (1994;2004). It also
includes “localizing” the expatriates in terms of the compensation package (
1996; 1999). To meet the cost reduction policy or the expatriates’
subjective desires, integrating the expatriates into local management structure is the
localization of management practice. Management localization refers to the
localization of managerial human resources. Our propositions about the typology,
definitions, and validities of different forms of localization are verified by in-depth
interviews conducted in 2004. More details are provided in the methodology and
results parts.
To clarify our research objectives, management localization can be further
categorized into three forms. The first is pure localization, which refers to substituting
local nationals for the expatriate managers
3. The second is quasi- localization, whichrefers to localizing the knowledge and skills of the expatriate managers through
learning from the environment, which can be called “externalized learning” (
1999). The third is homologizer, which refers to the repatriation of host
country nationals. In China, some Chinese managers assigned by the parent company
often have Western educational background and have lived in MNC’s parent country
for some years (e.g., returnees). MNCs may substitute the non-Chinese expatriates
with expatriates with Chinese background or the overseas Chinese. Some practitioners
consider this practice localization as well. For these HRM researchers, the same ethnic
background might reduce the adjustment problem.
To capture the main point of localization research, this study focuses on the
phenomenon of pure localization of top management team (TMT) in the present study
for the following reasons. Quasi- localization is the process that the expatriate
managers learn from the interactions between them and local environment. However,
this learning process might be impeded by absorptive capability due to the lack of
common shared knowledge with local environment (1990). The
interpretation bias can make “learning by doing” very difficult because they cannot
perfectly identify the environmental change or correctly evaluate the environmental
feedbacks ( 1976; 1984). Therefore, the quasi- localization
process could be a very slow process and cannot generate strategic consequences in a
short term. In the “homologizer” localization, most of the returnees have enough
knowledge about the parent company and know little about their homes because they
have not been in host country for some years (1998). Some
HRM scholars call the phenomenon “localization” probably because this kind of
substitution can reduce the adjustment failure. However, if measured by the
knowledge background and cultural and ideological factors, they are more like the
foreign expatriates than local nationals. We focus on the TMT because the crucial
function of the TMT. The top management team includes CEO, General Manager,
Deputy GM, and the directors (or department heads) who report to General Manager
directly (1996).
Although management localization can lead to the change of staffing
composition, they are two different concepts. Management localization specially
refers to the localization of managerial human resources, i.e., the managerial level of
the subsidiaries, while staffing composition generally refers to all employees.
Moreover, as a HRM concept, staffing composition describes a static status of the
workforce composed of heterogeneous subgroups that can be categorized by
nationality, education, and any other factors (1999). Management
localization leads to the different composition of management team only in terms of
local-related characteristics.
3.2.2 Local manager and expatriate manager
We define the local manager as a local-hired local Chinese who is in the
management team. The expatriate manager refers to a manager hired by the parent
company and assigned to the local subsidiary for a relatively long period. A typical
expatriate manager is a non-Chinese foreigner or overseas Chinese (including returnee)
and takes a non-local compensation package. To avoid the classification bias, we
involve all other possible kinds of managers in a third category (“others”). Not all the
expatriates are involved in our research as well. We excluded those short-term
assigned expatriate managers and those expatriated technicians who do not assume
any managerial positions. For example, during the initial period of a newly established
subsidiary, there might be more short-term expatriates whose duties are clearly defined
as training and transferring knowledge and skills rather than controlling the daily
operations. Moreover, substituting them is not the issue of management localization.
3.3 Resource-based view: A contingent model
In the following part, we develop our theoretical model guiding the localization
study. We articulate why resource-based view (RBV) is adopted in our study and, after
briefly reviewing literature about RBV, we propose a contingent RBV model that
would guide the following analysis.
3.3.1 Management localization and RBV
Human resource is a vital input to the rent-generating system of the firm. As an
intangible resource that is of social complexity and causal ambiguity, human resource
is more likely to produce a competitive advantage ( 2001). Strictly speaking,
the knowledge, skills, and abilities embedded in the human resources become the
determinant of a firm’s survival and success.
It should surprise no one to adopt resource-based view of the firm to study HR
issues. (1991; 2001) argue that managerial skills and knowledge
of the top management team (called managerial resources hereinafter) is also a kind of
resource of the firm. Management localization, which means substituting the
expatriate managers with local managers, should influence the managerial resources
input to the firm. Therefore, using the RBV to study the consequences of management
localization is reasonable and feasible.
The RBV framework is adopted in the present study not only because of the
strong power of RBV in strategic management but also the lack of coherent theory in
HRM (1992) and the limitations of other theories ever used in
localization–related research.
Transaction cost approach has three limitations. First, it only focuses on the
efficiency issue within the subsidiaries and has ignored or bypassed the
environment-firm relationship. For example, total costs explanation in (1997)
has ignored the differences of economic conditions between host country and parent
country. The resource-based view of the firm not only takes into account the resources
that the firms obtained but also implies the environmental factors that influence the
rent-generating capability of those resources. Secondly, the transaction cost approach
is hard to empirically test. It is difficult to identify the transaction costs of hiring local
or expatriate managers. Moreover, the transaction costs or the total costs could not be
operationalized and measured directly and persuasively. Thirdly, transaction cost
explanation cannot provide practical strategic implications and suggestions (
1996). In other word, it fails to provide a solution for the MNCs to
manipulate and evaluate the staffing pattern to achieve lower transaction costs or
better performance.
Organization learning theory previously used in localization study also has
several limitations ( 2003a). First, organization learning theory emphasizes
the effect of the management team heterogeneity but doesn’t takes into consideration
the relationship between host country nationals (locals) and host environment.
Secondly, the mutual learning behavior can happen only if the local manager in the
TMT can have discretion power. Otherwise, the learning behavior might be
unidirectional and could not lead to the maximization of the knowledge pool of the
whole TMT. In practice, the discretion power is often unequally distributed in terms of
local managers and the expatriates. In other word, the improvement of long-term
performance, which (2003a) has mentioned, might not be achieved. However,
organization learning theory does not involve this disparity in the analytical scheme.
3.3.2 Resource-based view of the firm and contingent RBV model
The resource-based approach focuses on the resource side of the firm rather
than the market side ( 1984). Whether the firm occupies the needed
resources and how it deals with the needed resources links to the competitive
advantage and performance. (1991) proposes that if the firm owns the
resources that are valuable, rare, and imperfectly imitable and substitutable, the firm
can obtain sustained competitive advantage and abnormal profit (better performance).
The resources include assets, organizational processes, firm attributes, information,
knowledge, and so on. (1959) argues that the inputs of the firm are the
combination of the resources for different purposes in different ways rather than the
resources themselves. Some other scholars have extracted “capabilities” form
(1991) concept. The capabilities come from the combination and integration
of resources and thus are more intangible and inimitable sources of competitive
advantage than simple input resources (1993; 1990;
1994).
RBV is one of the most powerful approaches to explain the issues in
international business ( 2001b). However, in practical adoption the Barney’s
(1991) four criteria are limited in practical adoption because of their context
insensitive character (1999). (1984) proposes that the
“isolation mechanism” makes those resources and capabilities difficult to imitate and
substitute and thus provides potential to generate competitive advantage. The isolation
mechanism not only includes resource-related attributes just as what (1991)
has proposed, but also can come from the environment-related attributes, such as path
dependence and social complexity ( 1991), or specificity of the resources
(1984). In other word, the competitive advantages could differ even if two
firms have homogeneous resources: the different integration and combination methods
will lead to different rent-generating capability.
Therefore, some researchers propose a contingent perspective of the RBV.
(1999) suggest that the “value” of the resources might be contingent to
different contexts. Based on empirical investigation into service sector, (2001)
find that the returns of the resources also depend on the firm’s strategy.
(1990) imply that the “architectural innovation” could affect the substitutability
of the resources. (1990) pointed out that absorptive capability
could speed the imitation. (1996a) suggested that only when the knowledge
resource can be integrated into the value adding process the knowledge could be a
source of competitive advantage.
The actual and positive linkage between the competitive advantage and the
performance is also conditional. The strong bargaining power of resource suppliers
and the imperfection of the resource market could weaken the tie between competitive
advantage and measurable performance. Thus, the competitive advantage does not
always lead to higher firm-level performance because the resource owners might
appropriate abnormal rents from the firm (1999; 2001).
Following the contingent perspective of RBV, we classify the contingent
factors into two categories: contextual factors and firm characteristics. The contextual
factors might include the competitors, resource markets, and customers. The firm
characteristics might include firm strategy, organization culture, and other
characteristics. Based on literature review, this study proposes a contingent RBV
model as the theoretical guidance of localization study (Figure 1).
Figure 1. The RBV Model Used in the Present Study
Managerial
Resources
Competitive
Advantage
Performance
Contextual
Factors
Firm
Characteristics
3.4 Expatriate managers, environment change, and local managers
In the present part, the theory of management localization is developed and the
hypotheses are proposed. First, the roles of expatriate managers and local managers
are discussed based on analysis of the function of top management team (TMT) and
the cross-national expansion of MNCs. Expatriate managers act as a vehicle for
superior knowledge from the parent company and, on the other hand, the local
manager can be the efficient internalization of local-related knowledge. Secondly, it is
proposed that the local-related managerial resources can be the source of competitive
advantage of the subsidiaries and thus have implications to the firm’s performance.
Based on above propositions, we develop five hypotheses about the impact of
management localization on performance. Four moderating effects are identified
based on the contingent RBV model.
3.4.1 Dominant logic expansion and the role of the expatriate managers
The top management team has strong and influential power on firm’s
operations and is one of the important factors in the rent generating system of the firm
(1984; 2001). The choices made by the top
management team are the content of strategic management of a firm (1972).
The managerial resources not only have substantial impact on the internal operations
but also have externally-related functions such as dealing with external parties (
1991; 1991). The managerial resources embedded in the TMT
have been accumulated during the previous operations. (1986)
named such knowledge as “dominant logic” of a firm. The top management team
makes decisions based on those skills and knowledge accumulated from previous
experience. Because the dominant logic is path-dependent, it is difficult to shift in
accordance with the environmental change ( 1986).
The expansion of MNCs can be considered the exploitation of their own
superior resources. The critical advantage that a MNC brings to its subsidiaries is its
superior knowledge (1997; 1991; 1959). The
resources especially knowledge and skills are often difficult to codified and transferred
(1993). The subsidiaries of the multinationals adopt similar (if not
the same) production, marketing, and management techniques to their parent company.
They have similar organizational structures and share the same organization norms
and culture. The expatriate managers in the TMT are the holders and transferors of the
superior knowledge. Many of them come from the parent companies or other
subsidiaries with years’ experience prior to their assignments to the new subsidiary.
They are familiar with the parents’ strategic goals (1988). They have already
internalized the parent companies’ cultures, values, and norms (2003b). The
routinized “best practice” embedded in the expatriate managers, which forms the
dominant logic of the subsidiaries, becomes a critical source of success in
cross-borders expansion. These parent-company-related knowledge and skills are not
available in local managers for three reasons: 1) the tacitness and uncodifiablility of
these knowledge and skills; 2) the different knowledge base of the expatriates and
locals; and 3) the different learning environment (2000; 1988).
3.4.2 Environmental change and the expatriate strategic failure
Many management researchers treat an organization as an adaptive system. In
other word, the organization has to match the environment complexity and changes in
a nontrivial way ( 1999; 1975). The resource
dependency theory suggests that the inter-dependence among organizations (i.e.,
between organization and its external interest parties) forces them to meet the external
expectations and requirements (1978). In a multinational
environment, the subsidiary not only faces an external environment different from the
parent country in terms of the interest groups, institutional forces, and cultural, social
and economical conditions, but also encounters a different internal environment, i.e.,
the workforce mostly composed of the host country nationals (HCNs). Therefore, the
management behaviors of the subsidiaries need to respond to these differences.
From the organizational ecology theory, (1989) argue that
the two properties of the organization, named reliability and accountability, give
advantage to the organizations through improving the internal efficiency. At the same
time, the organizations have high inertia due to the efficient practice routines and the
rules to switch between routines. When the environment changes, whether the
adaptation to the different environments is successful or not depends on the change
speed of environment and the speed of organization’s correspondent changes to adapt
to it (1989).
In a word, it is necessary to adjust the dominant logic to achieve effective
strategic management. Because of the inertia of dominant logic and the TMT
composed of the expatriate managers, the managerial resources from the expatriate
managers probably do not match the new environment very well. Moreover, the need
for location-specific knowledge and the lack of absorptive capability for learning can
lead to the expatriate failure at strategic level. A detailed analysis is as follows.
In the organization-environment exchange, information about the environment
must be correctly and efficiently obtained, filtered, and processed into a central
nervous system of sorts, in which the organization’s choices and reactions are made
(1984). This exchange process, which (1984) defined
as “interpretation”, includes translating environmental events, developing models for
understanding, bringing out meaning, and assembling conceptual schemes among the
top managers. If the subsidiary faces a very different local environment from that of
the parent company, top managers might encounter serious problems because of the
interpretation bias due to the lack of consistent decoding and coding system.
According to the communication theory, consistent decoding and coding
scheme must be developed between the sender and receiver (
2000). (1993) also mentioned the importance of coding system in
knowledge transfer. The coding system itself is a kind of knowledge. The essence of
this knowledge is how to correctly desymbolize the environmental information and
how to react to the environment in an understandable way. This knowledge also
constitutes into the absorptive capability (1990). It is likely that
this knowledge is tacit and difficult to codify and transfer. It relates to the custom,
religion, routine, culture, and social and economic conditions and is location-specific
and highly context-dependent. It was historically created, accumulated, and routinized
by nationals through long-term interactions among them and the environment they live
in.
Therefore, in a host environment dissimilar with parent country, the “strategic
failure” of the expatriates could happen: the expatriate managers will find it difficult
and even fail to cope with the organization-environment exchange. It is also unlikely
that they can easily obtain these knowledge and skills in a short time through “learning
by doing” or training due to the tacitness of the knowledge and the high contingency of
these resources’ application to the daily decision-making process.
3.4.3 The role of local managers and resource internalization
When the expatriate managers cannot adapt to the change of the environment,
involving local managers in the TMT of the subsidiary might be a feasible solution to
react to the changes. Growing up from the local environment, local managers have
local-related managerial resources. These resources are complement to the
parent-company-related managerial resources owned by the expatriate managers.
These local-related managerial resources embedded in the locals were created and
accumulated from the long-term local experience under the local climate. Moreover,
they are not only the information of the local environment but also the knowledge that
is hard to codify and teach ( 1994).
For example, in China, the managers of the foreign invested enterprises should
know more about the effects of the Guanxi (interpersonal relationships) in business
operations. Without local-related managerial resources, many managers from Western
countries cannot understand why their rivals can win the business through negotiating
with customers on the dinner table rather than on the working table. Moreover, the
managers should know how to motivate their local employees through changing their
management patterns that come from parent company. They certainly have more
chance to succeed if they have constructed strong valuable social relationships.
Theoretically, involving local managers in the TMT is internalization of
local-specific knowledge and skills. They might take two roles: mediator and
accelerator.(1999) conclude that "unfamiliarity, unpredictability,
and complexity of the foreign environment create a need for cultural mediators who
are knowledgeable about the host country culture." As mediators, local managers can
act as translators to identify and interpret the environment changes and to resymbolize
the possible reactions to environment. Thus, the conflicts and mismatch between the
TMT and the environment could be reduced. On the other hand, involving the
individuals with location-specific knowledge in the subsidiaries can speed up the
knowledge creation through socialization and accelerate the knowledge upgrading of
the TMT (March, 1991; 1994).
Compared with outsourcing methods to gain local-related knowledge and skills
such as external training and consulting, internalizing the locals could be more
efficient. Due to the high context-dependence nature of local-related knowledge, the
expatriate managers cannot effectively and efficiently obtain the knowledge and skills
from secondary data or other institutions. In other words, because of the tacitness and
individual-stickiness of the managerial resources and the alien character of the
expatriates, internalizing the local managers into the organization is the most efficient
solution (1994). Moreover, managerial resources cannot be gained from
market transactions because the transaction costs and risks would be extremely high
due to high assets specificity and possible opportunism behavior ( 1975).
Furthermore, it is practically infeasible to assign all the local-related operations to
external institutions.
3.4.4 Evidence: The importance of local-related managerial resources in China.
China, which has the biggest population in the world, is attracting more and
more foreign direct investment since 1979. During the past twenty years, China has
absorbed nearly 4,997,600 million US dollars FDI from 1979 to 2003 (
2004). The survey from Kang Management Adviser Company indicated
that China has replaced Brazil, becoming the second most popular region among
foreign investors after the U.S.A. By year 2000, 400 of the Fortune TOP 500 MNCs
have invested in China ( 2000).
However, many researchers have pointed out that China cannot promise the
players fruitful results if they ignore the special situations and characteristics of China.
What the most MNCs encountered in China is an environment different from that in
their parent countries. Cultural differences, structural uncertainty, and the fast changes
during transition might make the local environment more difficult to adapt to and to
react effectively. As a typical Eastern culture, the Chinese culture has many different
characteristics from those of a typical Western culture under which the most MNCs are
grown up. These differences could have impact on the management and operations of
the MNCs (1993; 2001). The transformation from a centralized economy to
a market-oriented economy triggered the fast changes in the policy system and
industrial environment, which increases the uncertainty and risks ( 2000).
Treating China as a complex social system, (1999) propose
that the historical characters shaped the different and complex nature of Chinese
society compared with those Western industrialized countries. They also propose two
alternative strategies to handle the complexity of Chinese system based on complexity
theory and the “information space” framework. One is “leave it alone”, which means
the standardization approach. However, previous empirical studies do not support that
this approach would lead to better results (1999). The other is using
local Chinese capabilities to absorb it. The latter approach might be less efficient but
offer a greater chance for those MNCs from Western countries to survive in a complex
and unpredictable environment ( 1989).
Under the host environment with high uncertainty and complexity, the
managers, especially the top managers of the subsidiaries from Western countries,
desperately need the local-related knowledge and skills. The huge environmental
difference makes the upgrading of managerial resource more necessary. Therefore, as
an efficient and feasible channel to own the local-related managerial resources,
localization of the TMT is more important in China than elsewhere.
3.5 The contingent effects of management localization on performance
As discussed, local-specific knowledge and skills can help a subsidiary to
achieve effective exchange between the firm and local environment. Involving the
locals in the TMT could be the most efficient way to enlarge the resource pool of the
TMT. Furthermore, (2001) argue that the characteristics of
managerial resources satisfy (1991) criteria and they are important sources of
competitive advantages and contribute to the rent generating process for the firm. As
the vehicle of local-related managerial resources, qualified local managers are rare in
China ( 2000). As a possible “imitation” method, poaching local managers
from other rivals might not bring the same managerial resources because the
managerial resources are intangible and HR management practice is of high specificity
and complexity ( 1994). Coff (1999) proposes that if the resource owner
has more bargaining power to appropriate abnormal benefits the competitive
advantage might not lead to better measurable performance. (2001) also
found that the curve-linear relationship between human capital and performance could
attribute to the high costs of superior human resources. However, in China, this
situation might not happen after localization due to the big compensation disparity
between the expatriates and local managers ( 2002).
Therefore, it can be concluded that local-related managerial resources have the
potential to bring competitive advantage. However, because management localization
is a substitution, the managerial resources embedded in the expatriate managers might
be lost after localization. Those resources are as same important as local-related
resources. Therefore, management localization alone could not promise a better
performance. Furthermore, from RBV, the rent-generating process could be influenced
by contextual factors and firm characteristics. In this part, we discuss the main effect
of the management localization and identify four moderating factors.
Following previous literature, we identify two factors that influence the value
of local-related managerial resources. The value relates to the subsidiary’s need for
local-related managerial resources. First, the need can be attributed to the degree of
environmental difference. The more environmental difference between parent and host
countries, the more likely the failure could happen. Consequently, the need for
local-related managerial resources increases. Secondly, the dependence on local
environment could influence the need for local-related resources. The less dependence,
the lower necessity for the subsidiary to react to host country environment and,
therefore, the lower need for local-related managerial resources. Besides above two
environmental factors, firm strategy also can moderate the effect of management
localization. As a method to obtain local-related resources, management localization is
not costless. The leave of the expatriate managers might reduce the knowledge pool
and weaken the lies between parent company and the subsidiary. The consequent loss
of parent-related resources, i.e., the cost of localization, depends on the degree in
which the skills and knowledge of expatriate managers were retained in the
localization process. Therefore, the success of localization process could be the third
factor to influence the benefit of management localization. The second firm factor is
how to utilized and integrate the local-related resources within the subsidiary. The
realization of the power of local-related resources depends on the participation of the
local managers in the management practice ( 1996a).
In summary, four factors, namely, localization effectiveness, cultural distance,
resource dependence, and decision participation could influence the linkage between
management localization and performance. According to the contingent RBV model, a
conceptual model of the effect of management localization can be established (Figure
2). In the following parts, more details are discussed and five hypotheses are proposed.
3.5.1 Main effect of localization
Even though management localization can help the subsidiary adjust to local
environment, it is hard to conclude that management localization alone can improve
the performance. Previous literature suggests that the expatriates have more functions
than the vehicles of managerial resources in the subsidiary-parent relationship.
Figure 2. The Conceptual Framework
Management
Localization
Local-related
Managerial
Resources
Local Resource Dependency
Environment Difference
Localization Emphasis
Resource Integration
Firm
Characteristics
Contextual
Factors
Performance
41
Expatriate managers could also benefit the subsidiaries in the following three ways:
cultural control, absorptive capability of the inflow knowledge, and the transfer
channels. First, (1979) posits that the expatriates can help the parent companies
exert cultural control on the subsidiaries through duplicating the same organizational
climate as the parent company. Secondly, the common shared knowledge between
expatriates and the parent companies will improve the absorptive capability, and thus
the inflow knowledge from parent company and other subsidiaries can be correctly
decoded and efficiently absorbed by the top management team composed of the
expatriates (1990). Lastly, the richer social ties and closer
relationships with parent companies and other subsidiaries also provide broad
channels to transfer the knowledge into the subsidiaries (2000)
Management localization is a substitution. The expatriate managers as a
managerial resource might be not perfectly substitutable. The reduction of the
expatriate managers may result in a loss of parent-company-related managerial
resources not available in local managers even if a successful localization process was
conducted.
According to the contingent RBV, the resource’s impact on performance is also
conditional. As we will discuss in the coming parts, the contextual factors and firm
characteristics could moderate the impact of management localization and even
change the direction of the relationship. Thus, the first hypothesis is proposed as
following.
H1: Management localization has no significant direct impact on the
performance of the subsidiaries in China.
3.5.2 Contingent value of the local-related managerial resources
The value of resources will differ in terms of different context and firm strategy
(1999). It is argued that country difference and
resource dependence could change the value of local-related resources brought by
management localization.
Cultural distance. As we discussed in previous part, the dominant logic of the
TMT might mismatch the local environment if the local environment is very different
from that of parent company. The expatriates’ knowledge and skills need to be
upgraded in respond to the local environment. In China’s transition economy, cultural
difference, institutional uncertainty, and the changing environment call for the
location-specific knowledge and skills. However, the alien property of the expatriate
managers might impede the effective exchange between the subsidiary and local
environments. On the other hand, if the subsidiary lies in similar environments with
the parent countries, the expatriate managers will encounter less mismatch problem.
Moreover, they might share common cultural background (i.e., absorptive capability)
with the local environments and can learn from environments efficiently and upgrade
their knowledge quickly. Consequently, management localization might not be a
necessary choice and its impact is limited. Following other studies (
1980; 1991) about the location similarity of FDI, we use the cultural
distance as the proxy of country environmental difference. Thus, we propose the
following hypothesis:
H2: Cultural distance moderates the effect of management localization of the
TMT on the performance of the subsidiaries in China: localization leads to higher
performance at the FIEs from culturally distant countries than those FIEs from
culturally similar countries.
Resource dependence. Resource dependence theory suggests that
inter-dependence among organizations (e.g., between the organization and its external
interest parties) forces organizations to meet the external objectives or requirements of
various groups due to the asymmetric resource dependence (
1978). In a multinational environment, the external dependent parties of the subsidiary
might be dispersed and not constrained to the local environment. The subsidiary also
depends on the parent company, foreign suppliers and customers, and so on.
(1991) argued that the lower degree of external dependence, the greater the likelihood
of organizational resistance to institutional pressures. The dispersal of resource
dependence will influence the attitude of the subsidiaries toward the changes in host
environments, institutional force, and interest parties' requirements. The higher
dependence on local resources, the more necessity for the subsidiary to identify with
and react to local environment. The local-related knowledge and skills could be more
useful and valuable to those local resource dependent subsidiaries. In other word,
management localization can bring more benefits if local resource dependence is high.
Previous studies also imply that resource dependence on local resources and
institutions could influence the human resource management of the multinationals
(1995).
H3: Resource dependence moderates the effect of management localization of
the TMT on the performance of the subsidiaries in China: localization with high
resource dependence on local environment leads to better performance than those with
low resource dependence on local environment.
Effectiveness of localization process and internal efficiency. Although
parent-company-related managerial resources cannot be perfectly transferred to the
local successors, the effectiveness of the localization does matter.
(1999) and (2004) defined the “effective localization” as the successful
knowledge transfer from the expatriate managers to the locals. Actually, the effective
localization has two direct effects on the subsidiary. First, it can make the local
managers develop more knowledge and skills from parent company within the
subsidiary after the leave of the expatriate managers. Secondly, through socialization
during the localization process, the local managers might have assimilated into the
culture and norms of parent company. Their shared common “language” could reduce
the conflicts and frictions within the mixed TMT and, therefore, improve the internal
efficiency (March, 1991). On the other hand, the shared knowledge can also help the
subsidiary strengthen the weakened ties with parent company and other subsidiaries
after the leave of the expatriates (2000). Both the above
effects can magnify the benefits of management localization and contribute to better
performance of the subsidiary.
However, the problem is how to operationalize and measure the effectiveness
of the localization process. The practical effectiveness is measured by the performance
(e.g., KPI, Key Performance Indicators). In other word, if local top managers get high
evaluation in terms of KPI, A high evaluation could be given to the effectiveness of
localization process. Therefore, there should be automatic high correlation between
the performance and the effectiveness of localization process. Exploring the
relationship between effective localization and performance could become
tautological. To avoid tautology, we adopted the localization emphasis as the indicator
of effective localization process. Most of the literature about the localization process
proposed the high positive correlation between localization emphasis and
effectiveness of the management localization. (1999) and
(2004) suggest that the localization emphasis from MNCs is the important predictor of
effective localization. The emphasis includes 1) the positive attitude toward
localization, 2) the development of a detailed localization plan, and 3) explicit training
schedule for local candidates ( 1999). Thus,
H4: localization emphasis moderates the effect of management localization of
the TMT on the performance of the subsidiaries in China: localization with high
localization emphasis leads to better performance than those with low localization
emphasis.
Resource integration. Previous studies suggest that the resources will not
generate maximum rents for the firm until the resources are effectively integrated to
the rent generating system (1996a; 2001). (2001)
believe that the resource complementarity is an insufficient condition to achieve
synergy unless the resources are effectively integrated and managed to realize the
synergy. If the subsidiary more frequently involves the local mangers in the
management processes and authorizes them to make decisions, the decisions could
reflect the advantage of the enlarged managerial resource pool. Unlike in a domestic
company, expatriate managers and local managers in the subsidiaries of the MNCs
may have different levels of decision power. The expatriate managers are treated as the
controllers and guiders of the oversea affiliates, especially joint ventures (
1988; 2003b). In many subsidiaries in China, the expatriates have more
discretionary power than the local counterparts. If the participation of the local
managers to the decision-making processes is limited, exploitation of the local-related
managerial resources will be limited. On the other hand, if the local managers
participate actively in the decision makings of the subsidiary and their opinions are
well considered, the subsidiary’s reactions to the environment could be more effective.
Therefore, we propose our last hypothesis as following:
H5: Decision participation moderates the effect of management localization of
the TMT on the performance of the subsidiaries in China: localization with high
decision participation of the local managers leads to better performance than those
with low decision participation of the local managers.
CHAPTER 4. RESEARCH METHODS
4.1 Data collection
We conducted in-depth interviews and a questionnaire survey in Mainland
China in 2004. The purpose of the interviews is 1) to reinvestigate the practical
significance of localization issue, 2) to clarify the definition and content of localization,
and 3) to provide supports for questionnaire design. The aim of the questionnaire
survey is to find empirical support for the proposed five hypotheses.
The interviews were conducted face to face during August and September and
are guided by an open framework (Please refer to Appendix B for details). We selected
twenty FIEs according to representativeness and convenience. After initial contact,
eight FIEs accepted the invitation for interview. They are located in Beijing, Shanghai,
and Nanjing. All the interviewees from eight FIEs are high-level managers, including
one General Manager, four HR directors, and three Sales/Marketing directors. Two
FIEs come from USA, one comes from Taiwan, two come from Japan, two come from
Germany, and one comes from Korea. Four of the eight FIEs are invested by MNCs
ranked Fortune TOP 500. To obtain a more complete profile, three senior consultants
from three HR consulting companies were also interviewed. All the three consulting
companies are specialized in providing HR services to FIEs in China for more than
five years. The interviewees were asked the prepared questions in their office. The
duration of interviews ranges from half an hour to two hours. Their comments and
opinions were recorded in texts and reorganized by the interviewer before
interviewees’ confirmation. The information is recoded and analyzed based on
(2002).
Data for hypotheses testing were collected through a questionnaire survey after
the interviews. The sampling areas for questionnaire survey include Beijing, Shanghai,
Jiangsu, and Guangdong, which totally have attracted nearly half of the FDI in China
( 2004). The population is defined as the legally independent foreign
invested enterprises in China that have been in operation for more than two years. The
representative offices of the MNCs in China are excluded. During the initiation period,
more expatriates might be assigned to help the newly established firms (1998). In
other word, there exists an entrepreneur bias. Therefore, we excluded those newly
established subsidiaries. To those FIEs with two or more foreign investors, we defined
“parent company” as the foreign company who has the largest equity ratio in the
subsidiary. The sampling framework is based on the manufacture enterprises in 11
economics and technique development zones (ETDZs) in above sampling areas. We
also added the FIEs listed in the Directory of (2004)
and HKMA ((1999) to balance the
number of FIEs from North America and Hong Kong. The total number of FIEs
involved is about seven hundred. All the FIEs come from manufacturing industries.
We have contacted the Administrative Commissions (Guanweihui) of ETDZs
and asked them to distribute our questionnaires to the top-level managers of the
companies in their zones. We received help from commissions of four ETDZs. We
mailed a cover letter including pledge of confidentiality and the questionnaire to the
CEO, General Managers, or other persons in the TMT in all other seven ETDZs. The
expatriate managers in the TMT are preferred. The respondents should not represent
the interests of local partner(s) in the joint ventures. We followed up by e-mail and
telephone. To those FIEs with no detailed managers’ information, we contacted the HR
department head by phone and asked them to fill out our questionnaires. Totally, there
are 86 responses and 80 responses are valid with no missing value. The total valid
response rate is about 12%.
The respondents are CEOs, General Managers, or HR managers. Because in
some FIEs HR department manager is treated as mid-level, 68% of the respondents are
top-level managers, and 32% are mid-level managers (primarily HR managers). As for
the ethnic origin of the respondents, 53.5% are local Chinese and others are expatriates
(23.7% are oversea Chinese and 23.7% are non-Chinese expatriates). ANOVA tests
show that there is no significant difference between different levels of management
position and different ethnic origins in major variables.
4.2 Operationalization and measures
4.2.1 Management localization
The localization concept is multidimensional and complex and it is not feasible
to measure the localization directly. The present study only focuses on the pure
localization, i.e., substituting the expatriate managers with the local managers.
Therefore, we operationalize localization of the TMT as the ratio of the local hired
managers among the top managers of 11 top-level positions (i.e., CEO and the
directors of the subsidiaries). The ratio approach is based on the following two
reasons.
The first, we adopt the ratio of the local top managers because the ratio might
satisfy the face validity of the localization construct and is more objective. The
localization variable is difficult to be operationalized as the quality or quantity of the
local-related resources embedded in local managers. The direct judgment of
localization, such as the effectiveness of localization or degree of localization, also
could lead to serious tautological problem due to its subjectivity.
Secondly, there is a theoretical consideration of the localization measure.
(2001) argued that the knowledge and skills embedded in top
managers are unique and hard to imitate. It is likely that when the ratio of the local
managers increases, the local knowledge pool will be enlarged accordingly. At the
same time, the knowledge pool from the expatriates might decrease. The same
measure was used in (2000) and (2003b).
We classified the top managers into four categories, the local managers, the
oversea Chinese expatriates, the non-Chinese expatriates, and others that are not
included in former three categories. Top managers are defined as those individuals that
typically include the CEO and the people who report directly to the CEO (usually the
functional heads of finance, sales, R&D, and manufacturing), all of who work full time
for the firm in executive positions ( 1996). As discussed
in the definition part, the Chinese returnees, if assigned by the parent company and not
locally hired, are not considered locals. To joint ventures, some local top-level
managers (often also are Board members) are representatives of local parent
companies. They are hired by local parent companies and are safeguards of local
partners’ rights and interests. They did not experience the localization process, nor
need the necessary managerial resources related to local environment or foreign parent
company. Based on our assumption, they would not be considered the outcomes of
management localization. Therefore, we asked the respondents to exclude the persons
at top level who are representatives of local partner(s) when calculating the number of
top managers in 11 top positions.
4.2.2 Other major variables
Multidimensional scales are used to measure major variables. The criteria for
performance may vary across subsidiaries and it is not possible to use a single
performance criterion for all subsidiaries (1996). We asked the
respondents to compare his or her company with the top three competitors in the local
market. Moreover, market performance and financial performance are measured
respectively.
Using culture indices (1993; 2001), the cultural distance
is calculated based on the deviation along each of the four dimensions (i.e., power
distance, uncertainty avoidance, masculinity/femininity, and individualism) of each
country from the China ranking. The calculation method in (1988) is
adopted. The same approach was used in (2003b) and (2001). Algebraically,
the index is built as following:
CD
j/China = 1/4Σ[(Sij - SiChina)2/Vi]where S
ij=the score for cultural dimension i of parent country j; SiChina=the score forcultural dimension i of mainland China; and V
i =variance of the dimension i.The resource dependence refers to the relative importance of the resource
provider to the subsidiaries. The resource dependence can be classified to three
categories: dependence on parent’s resources, dependence on local resources, and
dependence on host institutions. The measurement of the construct is adopted from
(1981) and (1990). The measures also were
used in (1995). Decision participation refers to the involvement of the
local managers in the firm’s decision process. Decision participation is firm-specific
characteristics. Even though the local managers assumed most senior positions, the
participation to decision making might be very inactive. Some firms have formal and
fixed policies (such as regulatory meetings and reports) that the local managers should
be included in the decision-making. Other firms only have informal routines and
climate for decision participation. We asked the respondents about whether formal
regulation or informal routines are developed to motivate the local managers to exert
their authority. Localization emphasis was measured by a group of items about attitude
toward localization, localization plan, and local managers’ training.
Except management localization, all above variables are measured by 7-point
Likert scale. Please refer to Appendix A for the items used.
4.2.3 Control variables
We include the firm-specific variables to control for the firm variations.
Firm-level variables are the amount of invested capital, number of employees, length
of operation, entry mode (wholly owned subsidiary vs. joint venture, coded as 0 and 1
respectively). Interaction term between localization and length of operation was also
included.
CHAPTER 5. RESULTS
5.1 Results of in-depth interviews
The in-depth interviews with eight typical FIEs and three consulting companies
support that the localization concept practically exists and is conceptually consistent
and convergent. Although the respondents’ descriptions about of localization are
multidimensional, the basic content of localization was clearly linked to
“local-oriented” and “making local”. Moreover, they all agree that localization not
only is an important practical issue in international human resource management
(IHRM) but also stands in the strategic level in the FIE operations. Three of the eight
interviewed FIEs have formal policies and schedules to localize their high-level
management team. With the help from consulting companies, some of them also have
developed localization programs, implemented localization strategy, and had
measures to evaluate the outcomes. Although there was no consensus on the detailed
benefits, most of the FIEs believed that localization has had positive implications for
their performance in China. Three possible beneficial outcomes can be identified: cost
reduction; career opportunity for local employees; and improvement of local business
development.
The results show that localization has three levels: 1) substituting the
expatriates with locals; 2) the local-oriented products, i.e., design or develop products
according to the local market; and 3) localizing the management practice, e.g.,
adopting human resource management and financial management with local
characteristics (Please refer to Table 1 for the content of localization).
Table 1: The Dimensions of Localization
Content
No. of
interviewees
Selected journal articles Classification
Substituting the
expatriates with
locals
1999;
2004;
2000
Management
localization
Localizing
management
practice
2003;
1996;
1999
Instrumental
localization
Localizing
products
1990 Technical
localization
Based on the results of the interviews, we discriminate the three levels of
localization from each other in terms of transition difficulty, consideration, and
consequences (See Table 2), which shows the discriminant validity.
Table 2. Discriminant Validity
Dimension
Consideration
Ex Ante
Consequence Transition
difficulty
Operational Strategic Strategic Effectiveness Efficiency
Technical
localization
High Middle Middle Middle High Low
Instrumental
localization
Low High High Middle High High
Management
localization
Middle High High High Low Middle
5.2 Descriptions of survey data
The descriptive statistics suggest that among the valid responses, 61.8% are
wholly owned subsidiaries and others are joint ventures. The FIEs’ investments come
from twelve countries and areas, such as USA, France, Germany, Japan, Korean, Hong
Kong, and Taiwan. As for the country of origin of parent companies, 16 firms are from
Europe, 20 from North America, 25 from Hong Kong and Taiwan, and 19 from other
Asian countries. The invested capital ranges from 200,000 US dollars to 460 million
US dollars; the number of employees ranges from 40 to 12,000; and the length of
operation ranges from two years to twenty-six years. Thus, the sample represents
different types of FDI operations in China.
After the data pre-processing, we tested the reliability of the measures for the
key variables, which ranged from 0.69 to 0.88 and proved to be adequate. Please refer
to the Appendix A for the results of reliability tests. Table 3 shows the correlations
between variables.
5.3 Hierarchical regression analysis
Hierarchical regression analysis for market performance and financial
performance was conducted. The multicollinearity tests showed there is serious
multicollinearity among several terms (VIF>40). Therefore, we use mean-centered
method to correct the multicollinearity problem (1991). After
correction, all the values of the VIF are smaller than ten and most of them ranged from
1 to 2, which implies the successful correction. Due to the small sample size, we
reported the results with significance level lower than 0.1. The same approach is used
in (1998).
Table 4 shows the results of the regression analysis using market performance
as dependent variable. The high adjusted R-square of Model 3 (Adjusted R
Square=0.293) shows that fit of the regression model is very good. In the base model
(Model 1), the localization has no main effect on market performance. When we add
other variables and the interaction terms (Model 3), the main effect of the localization
is still not significant. Thus, H1 was supported. The positive coefficient of the
interaction between localization and local resource dependence (Standardized Beta
=0.336, p<0.05) shows that the higher local resource dependence, the more benefits
the management localization can bring. Thus, H3 is supported. The interaction term
between localization and localization emphasis (Standardized Beta =0.129, p<0.1) is
significant and the coefficient is positive, which means the localization with higher
emphasis can bring higher performance and supports H4. Similarly, the positive
coefficient and the significance level of the interaction term between localization and
local participation also support H5 (Standardized Beta =0.204, p<0.1). All the main
effects of major variables, except localization emphasis (Standardized Beta =0.253,
p<0.05), are not significant. In summary, H3, H4, and H5 for market performance are
supported. However, the coefficient of the interaction between localization and
cultural distance is marginal negative (Standardized Beta =-0.113). H2 is not
supported.
In table 5, regression on financial performance as dependent variable did not
show any significant predictor variables. The high adjusted R-square of Model 6
(Adjusted R Square=0.403) shows the good fit of the regression model. The main
effect of localization is still insignificant, which shows H1 is supported. Similarly, the
results show the significant positive impact of the interaction between localization and
local resource dependence (Standardized Beta =0.404, p<0.01). Thus, H3 is supported.
It is worthy of pointing out that main effect of localization emphasis is significant
(Standardized Beta =0.356, p<0.01) for both performance measures. The positive
coefficients suggest the importance of localization process. As long as the localization
process was carefully planed and managed, better financial performance could be
achieved in spite of the degree of localization. Except for the interaction between
localization and local resource dependence, the other predicted relationships between
interaction terms and financial performance are not significant, which show that other
three hypotheses (H2, H4, and H5) were not supported for financial performance. The
insignificance of the proposed relationships might be attributed to 1) the fact that
financial measures could be biased more easily than market measures for performance;
and 2) the possibility that there is no direct or strong effect on financial performance.
The directions and the significance of the most control variables in both
regression functions also are consistent with relevant previous studies, providing
support for our data and analysis process. The small sample size might be responsible
for the non-significance and the low significance level of the proposed relationships. If
the sample size increases, we believe that the proposed relationships could be more
significant. Moreover, H2 was not supported by the regression results and even the
directions are opposite to predicted. The alternative explanation is that the
insignificance could be attributed to the measurement bias. First, the cultural distance
might be not so accurate to be the proxy of environment differences although previous
studies have adopted this method. The differences in terms of economic and social
characteristics are not included in the cultural measures. Secondly, the coefficient
estimation could be biased if some other excluded variables positively related to the
performance have strong positive correlations with the culture measure.
In summary, except H2, all the hypotheses were supported or partially
supported by the regression analysis on the collected data.
CHAPTER 6. DISCUSSION
6.1 Conclusions and discussions
Localization is a complicated but very important issue to the operations of the
MNCs in China. However, academic study on localization is lacked due to the
difficulty both in conceptualization of localization and in theorization. The present
study tried to bridge the gap by clarifying the localization concept and developing a
theoretical framework. Moreover, empirical data collected from FDI in China were
used to test the hypotheses.
First, the present study has verified the conceptual validity of localization. The
findings reconfirm the significance of localization research and show that localization
is a multidimensional concept. The dimensions cover the technical and managerial
cores of the subsidiaries. Among the forms of localization, two different dimensions
are identified: managerial localization and technical localization. Managerial
localization is categorized into two forms: instrumental localization and management
localization.
Secondly, based on data from questionnaire survey, the present study has
explored the strategic outcomes of management localization. Previous studies on
localization are limited in micro level, i.e., in organizational behavior and HRM
domain. Our study attempts to bridge the gap by showing that the localization of the
TMT can bring better performance under certain circumstances. On one hand, the
expatriates’ knowledge and skills (i.e., managerial resources) is vital to the subsidiary;
on the other hand, these knowledge and skills need to be upgraded in respond to the
local environment. In China’s transition economy, cultural difference, institutional
65
uncertainty, and the changing environment call for the location-specific knowledge
and skills. The proposition that local-related knowledge has implications for the
performance of the subsidiaries is consistent with (1996). However,
the alien property of the expatriate managers might impede the effective exchange
between the subsidiary and local environment. Involving local nationals in the TMT
can internalize the local-related skills and knowledge that are especially useful to the
local operations. These skills and knowledge embedded in local managers can be
treated as important resources input to the subsidiaries.
The contingent effect of localization we proposed suggests that the benefit of
management localization is not totally determined by the ratio of the local managers in
the TMT. Even encountering a same environment in terms of resource dependence and
cultural difference, the same localization ratio cannot bring the same benefits for FIEs
in China. Under the localization strategy, FIEs can maximize the positive effect of the
management localization by implementing a carefully planned localization process.
FIEs should also consider how to delegate more power to local managers and to
involve local managers into the decision making process.
Furthermore, our study gives a reasonable explanation for the debate about
localization. (1997) believed that localization is necessary and
beneficial to FIEs in China and, however, (2000) and (1988) suggested
that expatriates provide a more important input to the subsidiaries. We propose that the
value of locals and expatriates depends on the relationships between the subsidiary,
parent company, and host country environment. When the host country environment is
different from parent country but very important to the subsidiary compared with
parent company, management localization can be a feasible strategy. Otherwise,
keeping more expatriates could be a better choice.
Focused on the parent-subsidiary relationship, previous studies on localization
also take into account control issues. For example, (1988) argued that the
expatriate manager is a necessity for MNCs to control their oversea subsidiaries. The
reduction of the expatriates might weaken the relationship and thus could do harm to
the performance of subsidiaries. Although our research has not touched the control
issue as a possible consequence of management localization, our results do not prove
the relationship that (1988) predicted between localization and performance.
Although the theory framework in present study has some limitations on the
control issue as a consequence, actually the control issue is so sophisticated that it is
impossible to conclude that localization is “good” or “bad” for control. First, the
control from MNCs over their oversea subsidiaries has several different forms, such as
structural control, functional control, and personnel control. Even in international joint
ventures, the parent companies could exert strict control on the subsidiaries besides the
personnel channel (i.e., expatriation) due to their stronger bargaining power than that
of local partners ( 2003; 1999; 2004).
The reduction of expatriates does not necessarily lead to the decrease of control
strength from parent companies. Secondly, the control only depending on the
expatriate managers also is dangerous because they could behave opportunistically as
well as the local managers. With no close supervision from parent company and with
their strong discretion power in the subsidiaries, it is more likely that there is no
efficient monitoring mechanism to deter the opportunistic behavior of the expatriate
managers.
As mentioned in the definition part, we focus on the “pure” management
localization, i.e. substituting the expatriate managers with the local managers. From
RBV perspective, we can extend our results to the other two kinds of management
localization. In terms of the local-related knowledge and skills, the homologizer
management localization cannot be treated as localization. However, if the returnees
are well trained by the parent company, their expatriation to their home country not
only can reduce the adjustment problems but also lead to higher absorptive capabilities
to learn from the local environment compared with non-Chinese expatriates due to
their shared language and cultural root with the locals. Quasi-management localization,
which means localizing the knowledge and skills of the expatriate managers, is also an
endeavor for obtaining local-related resources. In our study, FIEs from Korea and
Japan often spend a lot of money and time on training their expatriate managers to
speed up the localization of the expatriates. Even before their expatriation to China,
they learned to speak Chinese and studied the Chinese cultural, social, and economic
background. The closer distance between both countries and China makes the learning
and training process more effective compared with the FIEs from western countries.
We believe that the reason might account for the preference for the expatriates to the
locals by many Japan and Korea FIEs.
Essentially, the homologizer and quasi-management localization are the
trade-offs for FIEs in China. On one hand, the shortage of local talents impedes FIEs
from recruiting local nationals from the local market. Moreover, the challenge of the
localization process makes it difficult to equip the locals with necessary knowledge
and skills and shared value and norms within the FIEs. On the other hand, to obtain
local-related managerial resources as soon as possible is crucial to the success of FIEs
in China. Thus, the homologizer and quasi-management localization become more
feasible and attractive.
6.2 Implications
Our research contributes to both the empirical research and practical
implication of the management localization.
First, the present study refines the localization concept and benefits future
research. The localization concept in previous studies is summarized and practical
content of localization is investigated through in-depth interviews. The typology of
localization makes the academic research consistent with practical understanding of
localization.
Secondly, a comprehensive model of the effect of the management localization
of the TMT is proposed and it expands the academic research on localization. Most of
previous research focuses on cost reduction (1998), training qualified
locals to fill the positions held by the expatriates (2004b;
1999), and its impact on internal efficiency (through internal transaction cost analysis)
(1997). There have been few studies to shed light on the strategic impact of
the localization on the knowledge upgrading and organization-environment exchange.
The present study developed a model to explain when, why, and how the management
localization influences the performance of subsidiaries. In addition, the findings
suggest that the effect of management localization on performance is conditional,
which is different from what was advocated by many practitioners and consultants
(2000).
Thirdly, our research also implies a strategy to balance the “local” and “global”.
As a fundamental framework for international business, the GI-LR paradigm (global
integration and local responsiveness) (1987) was widely accepted
as a guideline for IB research ( 1995). The GI-LR model might be
generalized as how to balance the global standardization that can exploit the present
resource and knowledge (e.g., cost reduction and scale economy) and the local
contingency that is necessary to achieve success in local environment. On one hand,
MNCs should efficiently transfer to their oversea subsidiaries their superior
knowledge accumulated from their successful operations in their home countries or
other host countries (1993). On the other hand, they face the risk
that the knowledge may not match the new host countries’ environment. The
applicability of the “dominant logic” of the parent companies would be one of the
influential factors to decide whether the parent companies adopt a global-based
strategy or a local-based strategy. Moreover, the strong evidence from this study shows
that with a strong local-oriented strategy, i.e., the management localization could help
MNCs to overcome the disadvantages of global standardization.
The managerial implication of our research is that the localization should not
only be considered based on operation level, such as cost reduction and expatriate
failure, but in a more important perspective--the strategic need. Based on our study
and previous literature, we can draw a more comprehensive hierarchy of
considerations for management localization (See Figure 3). Putting management
localization in a strategic level means that cost reduction could not be the only reason
for localization. Management localization could be preferred if the subsidiary in a
culturally distant host country is highly local resource dependent, even though the
local compensation costs are higher than expatriates in this host country. On the other
hand, expatriates might be preferred in a subsidiary in a culturally similar country and
with less local resource dependence even though the expatriates are more costly than
locals.
Moreover, the subsidiaries in China can maximize the benefits of localization
strategy through integrating with other strategies. First, a carefully planned and
implemented localization process can speed the knowledge exchange between local
managers and expatriate managers and make the localization more efficient. Fro
example, the parent companies can establish a formal training and substitution strategy
for their subsidiaries. Secondly, the decision-making mechanism also can influence
the utility of the capability of local managers. For example, developing an organic
organization structure can achieve more interaction between local managers and
expatriate managers and reflect the competencies embedded in the local managers.
As an application of resource-based view of the firm, we also provide an
empirical test of the RBV. RBV has been widely criticized for its lacking contextual
sensitivity and empirical evidence. Our study has approved that resources do have the
capability to produce competitive advantage for the firm and, however, the capability
might depend on the contextual factors. The environment the firm lies in and the firm
strategy could influence the effect of the resources owned by the firm. Moreover, our
analysis about the substitution during localization suggests that the value of the
More Strategic
Local
Responsiveness
Cost Reduction
Substitution
Organizational
Efficiency
More Operational
Figure 3. The Hierarchical Considerations of Management Localization
71
resource also depends on the value of the resources used to obtain it because under the
market mechanism for the resource allocation the attainment of most resources is not
costless.
6.3 Limitations and suggestions
The most serious limitation of the present study is the small sample size of the
data. More data should be collected to test the relationships between variables.
Secondly, future research should explore the effect of management localization in
other countries so that the predicted relationships between localization, environment
difference, and performance can be tested. Third, other correlates of management
localization such as market orientation may lead to potential confounding effects and
should be controlled in future studies.
There are several directions for future research. First, management localization
might not only influence the performance but also have impact on the employee moral
and satisfaction. Therefore, it is interesting in future research to include other
consequences than performance. Secondly, to generalize our theory, the research
should be replicated using the data from other host countries to wash out the
country-specific factors. The hypotheses can be tested using the data from both those
developing host countries such as Russia and Brazil and those developed host
countries such as USA and Japan. Thirdly, to enrich the localization research, the
antecedents of management localization need be investigated.
Moreover, as a practical issue in international business, localization is a
multidimensional concept. There should exist correlations between management
localization and other localization dimensions, such as instrumental localization, i.e.
the localization of management practice. Our in-depth interview also suggests that
management localization is often accompanied by instrumental localization. Therefore,
the relationships between different dimensions of localization and their effects on
performance could be explored.
The indirect effect of management localization is also worthy of studying. We
only explored the direct impact of management localization on the FIEs’ performance.
Many MNCs prevent the knowledge spillover and leakage by using more expatriates
than local hired local managers because the locals are more likely to spread the
knowledge to competitors through turnover. (2000) also imply that
the employee turnover could be the spillover channel. The possible spillover might
bring indirectly negative impact on FIEs’ performance by aggravating the competition.
The unintended spillover effect brought by management localization might be
influenced by the assets specificity of the knowledge and the industrial homogeneity.
Combined model considering both the direct and indirect impacts could capture a
more comprehensive picture of the effects of management localization. It is our hope
that the present study will stimulate more academic research on the localization issue,
which could be more and more important with the increasing global operations of
businesses.
Appendix A. Measures and Reliability of Key Variables
Variables Items
Market
Performance
(Alpha=0.786)
In comparison to your major competitors in the same industry
in the following areas: (much lower-much higher, 7-point)
1. Our company's average annual sales revenues from this
operation in the last three years were
2. Our company's average annual growth rate in sales revenues in
the last three years was
3. Market share of our company in the industry in China in the last
three years was
Financial
Performance
(Alpha=0.826)
In comparison to your major competitors in the same industry
in the following areas: (much lower-much higher, 7-point)
1. Our company average annual gross pre-tax profit margin in the
last three years was
2. Our company's average annual return on investment (ROI) in
the last three years was
Local resource
dependence
(Alpha=0.693)
Absolutely disagree – absolutely agree, 7-point:
1. The operation of our company relies on local technological
expertise in China.
2. The operation of our company relies on local managerial
expertise in China.
3. The operation of our company relies on the strength of the
relationships with local suppliers in China.
Localization
emphasis
(Alpha=0.690)
Absolutely disagree – absolutely agree, 7-point:
1. We have a formal and fixed plan to localize our management in
China
2. We are satisfied with our effort in management localization.
3. Our program in management localization is right on schedule.
Decision
participation
(Alpha=0.882)
Absolutely disagree – absolutely agree, 7-point:
1. There are some formal or informal conventions that all the top
managers should participate in the major decision-making
processes.
2. We often make decisions basing on group discussion and
democratic processes.
3. We often organize formal or informal meeting with all top
managers to discuss company strategies and other issues.
4. Local managers play an important role in all major
management decisions we make.
5. The local manager’s opinions are well considered in our
planning and decisions.
74
Appendix B. The Framework for In-depth Interview
1. Do you know the term “localization” or its Chinese term “Bentuhua” or
“Dangdihua”? If you know, what do you think it means at first sight?
2. Is there any official or routinized understanding of “localization” in your company
or your foreign headquarter? And else?
3. Among the management practices of your company, what practices do you think
can be considered the content of localization?
4. Do you agree the following statement in true in your company? Localization is a
very important issue in FIEs in China. Please list your reason to support your
opinion basing on your own experience.
5. Please list all the strategies and policies (if has) related to the localization practice
in your foreign headquarter and/or your company, as many and as detailed as
possible.
6. Do you think localization can bring benefits to your operations in China?
a) If have, please list according to the importance degree. (If the respondents
have not mentioned, ask the following question.) Do you think localization
has implication to the performance of your company?
b) If not, how do you evaluate the outcomes of localization?
7. Is there any formal localization plan for the top level managers in your company
or/and your foreign headquarter? If have, could you please give a brief
introduction?
8. If your foreign headquarter emphasizes the localization of your company, please
tell me what kind of localization is the most important to your company.
Appendix C: The Questionnaire
Management Localization at Foreign Invested Enterprises in China
Section 1. General Information
1. *Your Company Name: __________________________________________
2. Company Location: Province: ________________ City: ___________________
3. Your Position/Title: ____________________
*Please check the level of management position you are in: 1) ___ top level, 2)___ middle
level
*Your position represents: 1) ___ foreign investor,
2) ___ Chinese investor (if a joint venture)
3) ___ not apply
Note: You must be a member of the senior management that represents the interests of the
foreign investor, i.e., not representing the Chinese investor in the case of a joint venture. If
so, please proceed to complete the questionnaire. If not, we thank you very much and
apologize for any inconvenience. However, we appreciate it very much if you could kindly
forward the questionnaire to a member of your senior management, such as CEO/President,
Senior Vice President, and Director of Human Resources that represents the foreign
investor.
4. Number of years you have worked at this company: ___ ___ years
5. *Telephone: (city code): ___ ___ ___ ___ -- (phone number): ___ ___ ___ ___ ___ ___
___ ___
(Please be assured that you will not be contacted again for more questions. Your phone
number is requested to confirm a very small number of randomly selected participants
ONLY.)
76
**************************************************************************
Instructions for Completing the Questionnaire
**************************************************************************
Please read the questions carefully and follow the instructions when answering the
questions.
1. Please note that we define local managers as 1) those Chinese nationals who are local hires
and not on typical expatriate packages and 2) those Chinese who returned from overseas,
are hired locally and not on the typical expatriate packages including items such as
allowances for moving, housing, and children’s education.
2. We define expatriates as 1) those foreign nationals who were sent by the headquarters
from its home country or a third country to your company on the typical expatriate
packages, and 2) those ethnic Chinese who may be foreign nationals sent by the
headquarters from its home country or a third country (including Hong Kong and Taiwan)
to your company on the typical expatriate packages.
3. Most questions are followed by a set of choices labeled as 1, 2, 3..., and so on. Please
indicate your answer by circling the number or ticking the box that corresponds to your
answer. Please don’t miss the “*” marked questions.
4. In some cases, you need to put the specific information requested into the space next to the
question. Please kindly answer all the applicable questions to your best knowledge.
Leaving the answers blank would reduce the usefulness of the information.
5. For specific information that you may not have on hand, please check the accuracy of the
information before completing the question. If you don’t have the exact information,
please make your best estimate and provide the most approximate answer.
6. Should you have any questions about the research, please contact me directly.
Section 2. General Information about Your Firm
1. *When was your company (the foreign invested company) first established in China?
Year : ___ ___ ___ ___
2. *Where is the national origin of your foreign parent company? If there are more than two
foreign partners in the company, please indicate the country of origin of the parent
company that had the highest equity ratio now?
Country of the foreign parent company: _______________________________
(Please note that the “foreign parent company” hereinafter refers to this company.)
3. *What kind of ownership structure does this subsidiary in China have now? Please check
or circle the appropriate answer:
A. ___ equity joint venture
B. ___ contract joint venture
C. ___ wholly owned subsidiary (of the foreign parent company)
D. ___ others, please specify: _____________________________
77
4. What was the approximate total amount of utilized capital for this venture in US dollars
for the initial investment?
US$: ___ , ___ ___ ___, ___ ___ ___ , ___ ___ ___
(billion) (million)
5. *If a joint venture, what is the foreign investors’ equity ratio? (Skip the question if it is not
an equity joint venture). If more than one foreign investor, please refer to the largest one.
Foreign investors’ equity ratio: ___ ___ %
6. *Which industry is your company's primary business activity? Please circle the number
before the right category.
1. Agriculture, Forestry, Stockbreeding,
and Fishery
2. Mining
3. Food Processing, Foods/Beverage
Manufacturing
4. Textiles
5. Clothing & Other Fibre Products
6. Wood Processing & Bamboo, Rattan,
Palm, and Straw Products; Furniture
Manufacturing
7. Paper Manufacturing & Paper
Products
8. Printing & Reproduction of Recording
Media
9. Educational & Sports Products
Manufacturing
10. Oil Processing and Coking
11. Chemical Raw Material and
Chemical Products
12. Medicine Manufacturing
13. Chemical Fibres Manufacturing
14. Rubber Products
15. Plastic Products
16. Non-metal Mineral Products
17. Metals Smelting & Rolling Processing
18. Metal Products
19. General Machinery and Special
Equipment Manufacturing
20. Transportation Equipment
Manufacturing
21. Electrical Machinery and Equipment
22. Electric and Communication
Equipment
23. Instruments, Meters, Educational and
Office Equipment
24. Other Manufacturing
25. Electricity, Steam, Hot Water
Production and Supplies
26. Architecture
27. Transportation, Storage, and Post &
Telecommunication.
28. Wholesale & Retailing, Catering
service
29. Finance and Insurance service
30. Real estate
31. Community Services
32. Other industries not included (Please
specify) _____________
83
7. *Currently, how many employees does your company employ directly at this subsidiary?
No. of employees: ___ ___ ___ , ___ ___ ___
8. Currently, what is the approximate total amount of assets for this venture in US dollars?
US$: ___ , ___ ___ ___, ___ ___ ___ , ___ ___ ___
(billion) (million)
9. *Between re-export and accessing the local China market, what is your company’s
(foreign investor’s) primary objective for investing in China? Please circle the number that
corresponds to your feeling on the following 7-point scale. Please note: 1 = totally for
re-export, 4 = balanced combination of the two, and 7 = totally for accessing the China
market.
To establish efficient
manufacturing for
re-export to other
countries
<< 1 2 3 << 4 >> 5 6 7 >>
to access the local market
and sell our products in
domestic China market
10. *We like to know about the types of people sent as expatriate managers. Please respond to
the following statements regarding the expatriate managers sent by your parent
company by circling the number that corresponds to your feeling.
Please
note:
1=
Absolutely
Disagree
2 =
Strongly
Disagree
3 =
Somewhat
Disagree
4 = Neutral 5 =
Somewhat
Agree
6 =
Strongly
Agree
7 =
Absolutely
Agree
10.1 The expatriate managers well adapted to the
Chinese way of doing business.
1
2
3
4
5
6
7
10.2 The expatriates understand the difficulty Chinese
experience when doing business with foreign
firms.
1
2
3
4
5
6
7
10.3 The expatriates are aware of how the Chinese
conduct business in China.
1
2
3
4
5
6
7
10.4 The expatriate managers have difficulty in
understanding the cultural norms in China and
adjusting to local work and social environment.
1
2
3
4
5
6
7
10.5 We have made significant investment in training
and equipping our expatriate managers with the
necessary knowledge and skills.
1
2
3
4
5
6
7
10.6 The expatriate managers have insufficient
Chinese language skills and found it difficult to
communicate with their Chinese counterparts.
1
2
3
4
5
6
7
10.7 Training and qualifying the expatriate managers
has involved substantial commitment of time and
money.
1
2
3
4
5
6
7
10.8 Our expatriate managers have the necessary skills
84
and knowledge to communicate and coordinate
with our foreign parent company.
1 2 3 4 5 6 7
10.9 The expatriate managers help to coordinate the
strategies and activities with the parent
companies and its other divisions.
1
2
3
4
5
6
7
10.10 Our expatriate managers have abundant general
management knowledge and skills in different
areas of operation.
1
2
3
4
5
6
7
10.11 Our expatriate managers have the necessary skills
and knowledge that are specifically useful to our
industry.
1
2
3
4
5
6
7
10.12 Our expatriate managers have sufficient skills
and knowledge that are specifically useful to our
company.
1
2
3
4
5
6
7
10.13 The types of knowledge and skills of our
expatriate managers are not readily available
among the potential candidates.
1
2
3
4
5
6
7
11. *Please indicate your level of agreement/disagreement on the following statements
regarding your headquarters' attitude towards localization of management using a
7-point scale.
Please
note:
1=
Absolutely
Disagree
2 =
Strongly
Disagree
3 =
Somewhat
Disagree
4 = Neutral 5 =
Somewhat
Agree
6 =
Strongly
Agree
7 =
Absolutely
Agree
11.1 Increasing the proportion of local staffs lowers our
operation costs.
1
2
3
4
5
6
7
11.2 Compensation packages for the expatriates put
severe financial strains on our subsidiary.
1
2
3
4
5
6
7
11.3 Financially, our subsidiary can not afford to have
many expatriate managers.
1
2
3
4
5
6
7
11.4 The pay disparity between expatriates and local
managers is a major problem for us.
1
2
3
4
5
6
7
11.5 Increasing the proportion of local staffs reduces the
effectiveness of our global operations.
1
2
3
4
5
6
7
11.6 If local talents can be found, we believe in total
localization of management staff.
1
2
3
4
5
6
7
11.7 At this moment, expatriate staffs are a must in our
China operations.
1
2
3
4
5
6
7
11.8 We have a formal and fixed plan to localize our
management in China
1
2
3
4
5
6
7
11.9 It is difficult to recruit qualified local people for top
management positions.
1
2
3
4
5
6
7
11.10 Our salary and promotion package is not attractive
enough to attract best local talents.
1
2
3
4
5
6
7
11.11 The supply of talented local staffs is limited and
impedes our localization efforts.
1
2
3
4
5
6
7
11.12 Local managers provide good input to our
company's strategy in China.
1
2
3
4
5
6
7
11.13 Localization of management reduces the control our
headquarters have on the China subsidiary.
1
2
3
4
5
6
7
11.14 Localization of management jeopardizes the
85
subsidiary's integration and coordination with our
global operations.
1 2 3 4 5 6 7
11.15 Local managers are good for optimizing our China
operations.
1
2
3
4
5
6
7
11.16 Local managers help us reduce cultural gaps
between the Chinese and our parent company
culture.
1
2
3
4
5
6
7
11.17 Local managers help us adapt our products and
services to the Chinese market.
1
2
3
4
5
6
7
12. *Please indicate your level of agreement/disagreement on the following statements
regarding your headquarters’ attitude towards local managers using a 7-point scale.
Please
note:
1=
Absolutely
Disagree
2 =
Strongly
Disagree
3 =
Somewhat
Disagree
4 = Neutral 5 =
Somewhat
Agree
6 =
Strongly
Agree
7 =
Absolutely
Agree
12.1 Local staffs are not yet equipped to assume key
leadership positions.
1
2
3
4
5
6
7
12.2 Local staff cannot communicate well with the
headquarters.
1
2
3
4
5
6
7
12.3 Local staffs lack management knowledge and
skills to move to the top-level management.
1
2
3
4
5
6
7
12.4 We are satisfied with the qualifications of the
local managers.
1
2
3
4
5
6
7
12.5 The local hires have sometimes promised to do
things without actually doing them later.
1
2
3
4
5
6
7
12.6 Sometimes, the local managers slightly alter or
exaggerate things in order to get what they
wanted.
1
2
3
4
5
6
7
12.7 Turnover of management personnel is a serious
problem in our company.
1
2
3
4
5
6
7
12.8 After completing the training, local managers
may request a promotion or job hopping.
1
2
3
4
5
6
7
12.9 Confidential company information may leak out
during or after training.
1
2
3
4
5
6
7
12.10 Generally speaking, the company is facing a
serious problem of losing excellent employees.
1
2
3
4
5
6
7
12.11 The local managers always negotiate things to
their own benefits.
1
2
3
4
5
6
7
12.12 Local Chinese managers have abundant general
management knowledge and skills in different
areas of operation.
1
2
3
4
5
6
7
12.13 Local Chinese managers have the necessary
skills and knowledge that are specifically useful
to our industry.
1
2
3
4
5
6
7
12.14 Local Chinese managers have sufficient skills
and knowledge that are specifically useful to
our company.
1
2
3
4
5
6
7
12.15 Some employees may take advantage of the
company’s support to achieve personal goals.
1
2
3
4
5
6
7
13. What kind of role that the local top managers (if any in your company) take in the
86
operation of your company? Please respond to the following statements on the scale of 1-7
regarding the local managers’ participation in management decision.
Please
note:
1=
Absolutely
Disagree
2 =
Strongly
Disagree
3 =
Somewhat
Disagree
4 = Neutral 5 =
Somewhat
Agree
6 =
Strongly
Agree
7 =
Absolutely
Agree
13.1
There are some formal or informal conventions
that all the top managers should participate in
the major decision-making processes.
1
2
3
4
5
6
7
13.2 We often make decisions basing on group
discussion and democratic processes.
1
2
3
4
5
6
7
13.3 We often organize formal or informal meeting
with all top managers to discuss company
strategies and other issues.
1
2
3
4
5
6
7
13.4 Local managers play an important role in all
major management decisions we make.
1
2
3
4
5
6
7
13.5 The local manager’s opinions are well
considered in our planning and decisions.
1
2
3
4
5
6
7
13.6 Normally, local managers almost have no
managerial discretion whatsoever.
1
2
3
4
5
6
7
13.7 The major decisions are mostly made by the
expatriates.
1
2
3
4
5
6
7
13.8 Usually, the major decisions are made by
foreign parent company.
1
2
3
4
5
6
7
14. *On the scale of 1-7, please respond to the following statements regarding
the humanresource management
at your company by circling the number that corresponds to yourfeeling.
Please
note:
1=
Absolutely
Disagree
2 =
Strongly
Disagree
3 =
Somewhat
Disagree
4 = Neutral 5 =
Somewhat
Agree
6 =
Strongly
Agree
7 =
Absolutely
Agree
14.1 Our efforts in management localization (to replace
expatriates with qualified local managers) are
successful.
1
2
3
4
5
6
7
14.2 Overall, our employees are happy with the
company.
1
2
3
4
5
6
7
14.3 Our employees are satisfied with the positions
given to them.
1
2
3
4
5
6
7
14.4 At our company, most managerial positions are
held by local Chinese managers.
1
2
3
4
5
6
7
14.5 It is clear that many managerial positions are being
localized – filled up by local Chinese.
1
2
3
4
5
6
7
14.6 We are satisfied with our effort in management
localization.
1
2
3
4
5
6
7
14.7 Our program in management localization is right
on schedule.
1
2
3
4
5
6
7
14.8 Most of our top-level managers are either local
Chinese or those overseas Chinese who are not
expatriates.
1
2
3
4
5
6
7
87
14.9 Generally speaking, our employees are satisfied
with the company.
1
2
3
4
5
6
7
14.10 Our employees are confident about the prospect of
our company.
1
2
3
4
5
6
7
14.11 Our employees are motivated and willing to help
the company get through difficulties if the need
arises.
1
2
3
4
5
6
7
15. *What is the number of people in your company's top-level management (including the
President/CEO, all the VPs and department heads, and other senior-level managers)?
Please also indicate the number of top-level managers from each of the following ethnic
background.
Ethnic Background of Top-level Managers No. of Top-level Managers
A. a local Chinese national (non-expatriates)
No.: ___ ___
B. an overseas Chinese who is a foreign national
(including HK and Taiwan) (expatriates)
No.: ___ ___
C. a non-Chinese expatriate who is a foreign national
(expatriates)
No.: ___ ___
D. Others including foreign managers who are not
expatriates
No.: ___ ___
Total:
No. ___ ___ ___ (100%)
16. Please indicate the ethnic origin of the person in the following positions. Please check or
circle the appropriate category that applies to your company.
Please
note:
A=
a local Chinese national
(non-expatriates)
B=
an overseas Chinese who is
a foreign national
(including Hong Kong and
Taiwan) ( expatriates)
C=
a non-Chinese
expatriate who is
a foreign national
(expatriates)
16.1 Chairman of the Board of the company A B C
16.2 CEO/President/General Manager of the company A B C
16.3 Vice President/deputy manager of the company A B C
16.4 Accounting department head A B C
16.5 Finance department head A B C
16.6 Marketing and Sales department head A B C
16.7 Productions Operations department head A B C
16.8 Human resources department head A B C
16.9 Purchasing, Supply and Logistics A B C
16.10 Advertising and Public Relations A B C
16.11 Research and Development department A B C
88
If your company is joint ventured company with local partner, please indicate
the number of local managers in above positions who are the representatives of
China parent company (if have):
No. of representatives:______________
17. *Please also indicate the number of mid-level managers from each of the following ethnic
background: Mid-level management should include managers at the below-top-level or the
intermediate level management such as brand officers, assistant managers to department
heads.
Ethnic Background of Mid-level Managers No. of Mid-level Managers
A. a local Chinese national (non-expatriates)
No.: ___ ___ ___
B. an overseas Chinese who is a foreign national
(including HK and Taiwan) (expatriates)
No.: ___ ___ ___
C. a non-Chinese expatriate who is a foreign national
(expatriates)
No.: ___ ___ ___
D. Others including foreign managers who are not
expatriates
No.: ___ ___ ___
Total:
No. ___ ___ ___(100%)
18. *On the scale of 1-7, please rate your
company's performance in comparison to yourmajor competitors in the same industry
in the following areas.Please
note:
1 =
much
lower
2 =
lower
3 =
a little
lower
4 =
the same
5 =
a little
higher
6 =
higher
7 =
much
higher
18.1 Our company's average annual sales revenues
from this operation in the last three years were
1
2
3
4
5
6
7
18.2 Our company average annual gross pre-tax
profit margin in the last three years was
1
2
3
4
5
6
7
18.3 Our company's average annual growth rate in
sales revenues in the last three years is
1
2
3
4
5
6
7
18.4 Market share of our company in the industry in
China in the last three years is
1
2
3
4
5
6
7
18.5 Our company's average annual return on
investment (ROI) in the last three years is
1
2
3
4
5
6
7
19. Does your company export to other countries/regions (including Taiwan and Hong Kong)?
Yes No
*If Yes, please indicate what percentage of your sales come from export to other countries
last year?
89
Percentage of export from total sales: ___ ___ %
20. Approximately, what percentage of sales do research & development (R&D) expenses
constitute in your company?
Research & Development as a percentage of sales: ___ ___ %
21. Approximately, what percentage of sales do marketing, advertising and promotion
expenses constitute in your company?
Marketing expenses as a percentage of sales: ___ ___ %
22. *To your best knowledge, what is the average annual turnover of management personnel?
In other words, what percentage of managers leave the company per year for reasons
including resignation, retirement, and termination?
Management personnel turnover: ___ ___ %
23. Including this project, total how many operations (subsidiaries) does your foreign parent
have in China, defined as separate legal accounting entities?
No. of independent operations in China: ___ ___ ___
24. *What approximately were your company's total sales (domestic sales plus export sales)
revenues last year in US$?
US$ ___ ___ ___, ___ ___ ___, ___ ___ ___, ___ ___ ___
25. *What’s the ratio of the total China sales of your company (including both export and
China domestic sales) to the total sales of your parent company last year?
___ ___ . ___ ___%
26. *How many years has your foreign parent company engaged in international business
(having operations in other countries other than your home country)?
No. of years: ___ ___ ___ for which our foreign parent company has operated overseas
27. *How many countries/ regions (including Hong Kong and Taiwan) does your foreign
parent operate in (having separate business operations there)?
No .of countries: ___ ___ ___ our foreign parent company operates in
28. *Last year, what percentage of your parent company’s total sales comes from overseas
90
sales outside its home country?
___ ___ % of overseas sales
29. *Please indicate your own ethnic origin by checking the appropriate one:
____ A = a local Chinese national (non-expatriate)
____ B = an overseas Chinese who is a foreign national on expatriate package
____ C = a non-Chinese expatriate who is a foreign national
Thank you very much for participating in the study!
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