28 motive to exert effort signaling Therefore multinationals in technology

28 motive to exert effort signaling therefore

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motive to exert effort (signaling). Therefore, multinationals in technology intensive sectors find it more valuable to hire an expatriate, and the expatriate’s leading by example boosts local efforts to adopt the technology. Regarding the relation between the local conditions (local inefficiency and local uncertainty) and the reliance on expatriates the following results are relevant: Result 10: Expected profits in the execution stage under an expatriate manager are a decreasing and convex function of q h and of λ H . Result 11: The expected profits in the execution stage under an expatriate manager are lower than under a local manager. The difference is decreasing in λ H and increasing with local uncer- tainty. That is, the difference in profits is a U-shaped function of q H . In the model, uncertainty over local conditions, in particular labor costs, is captured by the probability, q H , that worker’s cost of effort is high ( λ i = λ H ). 39 The model results mean that higher uncertainty over local conditions increases the relative value from hiring a local manager, who is familiar with local conditions and so outperforms the expatriate in the execution stage. That is, when q h is low, increasing it leads to lower reliance on expatriates. When q h is high, increasing it leads to higher reliance on expatriates. Therefore, the model predicts that subsidiaries in more unstable locations (with middle range values of q h ) are more likely to rely on local managers. This is more so for firms in non-technological intensive industries, that may be more willing to afford the (lower) cost of not relying on an expatriate in terms of technology transfer. Result 11 also states that locations with lower inefficiency in the bad scenario, that is lower λ H , will benefit more from having the local manager. Regarding the analysis of the entry decision we find that the supply of local managers will be most critical for locations with high local instability and average fixed costs of entry. This is because the value of local managers is higher in more unstable locations, as previously discussed. Therefore, the attractiveness for FDI will be lower for locations with high local uncertainty. Yet, 39 In particular, uncertainty is maximized when q H = 0 . 5. An example of such uncertainty is related to political risks or political willingness to undertake reforms. Location with high political risks may be more likely to experience strikes, which increase the cost of effort, for example, making commuting to the workplace more costly for workers. Local managers, familiar with the political, legal and cultural conditions of the location will be better positioned to anticipate these risks than the expatriate. 29
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our model allow us to say more than that. In particular, our analysis shows that the composition of FDI to an unstable location that lacks a supply of local managers will be biased towards multinationals in technology intensive sectors. This is so because for these type multinationals it
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  • Spring '17
  • JAMES FENSKE

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