The Utilization of Expatriates: An Agency and Transaction Costs Theory of Managerial Transfer from a Multinational Parent Company to Its Foreign Affiliate

This paper develops an integrative theory explaining multinational firms' staffing decisions in initial foreign entry situations from agency theory, transaction costs theory, and resource-based theory, and it offers a set of theoretically-grounded, testable propositions concerning these staffing decisions. In particular, we maintain that staffing decisions are influenced by (1) the value that expatriates and local hires could potentially add to the firm, and (2) the relative contractual risks associated with the use of expatriates and local hires. This paper indicates that the use of expatriates can improve contractual efficiencies in at least four ways. First, the use of expatriates helps align the economic incentives between the parent firm and its foreign affiliates. Second, the parent firm knows better the characteristics of expatriates relative to local hires. The use of expatriates reduces the uncertainty of the parent firm in recruiting managers and relieves the incomplete contracting problem. Third, expatriates are better equipped with firm (parent)-specific capabilities than local hires, reducing contractual (small-numbers) problems. Fourth, expatriates have committed greater sunk cost investments in the parent company than local hires. These investments support their cooperative relationships with the parent firm and mitigate hold-up risk of the parent firm. However, although expatriates can potentially improve contractual efficiency and may relieve a firm's concern over its limited control on managers, expatriates may not have adequate abilities in managing local idiosyncrasy.