26 N t 2 Size of the transfer team N x 1 Size of the execution stage workforce

26 n t 2 size of the transfer team n x 1 size of the

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26 N t [2,+ ) Size of the transfer team N x [1,+ ) Size of the execution stage workforce Variable Function Description V V = F ( T, X ) Production output of subsidiary T T = N t n =1 θe n Output of the transfer stage X X = N x n e n Output of the execution stage Table 3: Parameters and main variables of the model Finally, we show under what conditions (properties of the technology to be transferred and the extent of local inefficiency and uncertainty) the former outweighs the latter and so an expatriate is hired (and viceversa). 3.4.1 Technology Transfer Transferring technology to the subsidiary involves both a flow of information from the Head- quarter to the local workers and an adoption effort from the local team. In particular, assume that the value of the technology transferred can be high (equal to θ H ), with probability p H , or low (equal to θ L ) with probability 1 p H . The marginal product of effort to adopt the technology is, therefore, increasing in the value of the technology. As a result of this complementarity, and because local workers ignore the technology, workers’ effort at this stage will depend on their beliefs about its value. Announcing the value of the technology from the Headquarters will not be credible, as the HQ has incentives to fool workers. 27 Therefore, transmitting information on the value of the technology must be costly to be credible. The first option of the Multinational is to choose an expatriate CEO. Because the expatriate knows the value of the technology, his presence in the subsidiary means that he can use his own effort to credibly transmit information. That is, in terms of Hermalin (1998) leadership theory, he can lead by example . Alternatively, the expatriate can make side payments to the members 27 Please refer to the appendix for the derivation and proof. 13
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of his team whenever the technology is of high value. This is what Hermalin (1998) calls lead by sacrifice . The second option of the Multinational is to hire a local CEO. In this case leading by example is not in the set of available strategies because the local CEO ignores θ i . Therefore, the headquarter must make side payments to the members of his team to transmit the information. Hermalin’s leadership theory finds a natural application in this setting allowing us to analyze how the choice of the subsidiary CEO affects the set of available strategies to transfer the technology. By assumption, the fraction (1 η ) of team’s output is shared evenly among the team members. Consequently the utility of worker j in the transfer team is: θ J 1 η ( e j + m ̸ = j e m ) 1 2 e 2 j (1) Let θ E ( µ ) be the expected value of θ given p H = µ . The best response of a given workers to θ E ( µ ) is e BR = θ E ( µ ) J 1 η (2) Let r ( µ ) = ( J 1) e BR = J 1 J 1 - η θ E ( µ ) be the collective reaction of the workers in the transfer team.
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