Chapter 13: Expatriate Assignment

Take-away Expatriates (home-country and 3 rd - country nationals) are expensive, but often indispensable. Net benefits of expatriates depend on –Maturity of subsidiary –MNE form –Selecting the right person

Expatriate Advantage Expert in company products and processes Personal connections to HQ managers Global view –Cross-country coordination –Especially 3 rd country nationals Larger talent pool to draw from –Track record from previous assignments –Performance in smaller subs as testing ground

Local Advantage Expertise on culture of local workers and customers (less cultural separation). Well-connected to local suppliers, buyers, officials (less relational separation). Much cheaper than expats –10-20% in China (1997 report) –20-25% of the total compensation for expats (2006 report) Lower “failure rates” than expats –20-50% failure rate for U.S. firms Placing locals at top of management structure provides career track incentives for entry-level local managers.

Net advantages of locals Increasing in time since the subsidiary was established Decreasing in the authority/responsibility level of the manager (juniors vs seniors) Draw a figure with “local share” on vertical axis and “time” on horiz. axis

Multinational staffing strategy depends on form Replication and polymorphic –Low coordination with HQ –After set-up, little need for expats Branching –Need expats (U) and locals (D) Specialization –High levels of coordination needed –Continued value of expats (who should move frequently) Polycentric –Tournament model for internal advancement

Why are expats so expensive? Base pay determined by home base, not local pay standards –so no savings from cheap host country wages COLA: Cost of living allowance (0-80%) Foreign service premium (0-20%) Hardship premium (0-25%): –“extraordinarily difficult living conditions, excessive physical hardship, or notably unhealthful conditions affecting the majority of employees”

Cost and Hardship allowances (as determined by US State Dept.) CityCost allowance (excl housing) Hardship pay differential Tokyo700 Paris600 Hong Kong505 Rio de Janeiro010 Mexico City015 Beijing1020 Lagos25

Expat expenses (cont’d) Housing allowances Child Education allowances Relocation allowances Interpreters Drivers Language and cultural training TAXES

Taxation of Expats Tax protection vs Tax equalization –Protection: Firm pays any extra taxes associated with foreign assignment (manager benefits from lower taxes) –Equalization: Firm pays extra taxes but makes a deduction to offset any tax savings (manager does not benefit from low taxes)

Taxation of Expats (cont’d) COLAS, hardship, etc, usually taxable benefits Tax protection or equalization requires additional (also taxable) payment  $55,000 housing allowance  45% of 55,000 = $24,750 =cost of extra taxes  45% of 24,750 + …= $20,250 = cost of extra taxes due to payment of extra taxes!  Infinite series: 55K/(1-.45) = 100K *assuming marginal Canadian tax rate at highest bracket of 45%

Who wants to be an expatriate? Not me! –Relocation too disruptive, confusing –Overseas affiliate uses backwards technology –Senior management will forget me… (out of sight, out of mind problem) –No work or social life for my spouse –No decent schools for my kids –Foreigners are strange

Who wants to be an expatriate? I do! –This is my chance to have a real impact (big fish in a small pond) –Senior management will see what I’m truly capable of accomplishing (testing me) –Adventure and luxury –Cross-fertilization: Priceless experiences we’ll take home.