Second our analysis of the entry decision reveals that the attractiveness for

Second our analysis of the entry decision reveals

This preview shows page 83 - 85 out of 136 pages.

nology. Second, our analysis of the entry decision reveals that the attractiveness for FDI will be lower for locations with high local uncertainty that lack a supply of local managers. Yet, our 5 The leadership theory by Benjamin Hermalin has been extended and applied widely. For example, Kobayashi and Suehiro (2005) extend the model to allow for imperfect information available to all the team members to endogenize the emergence of leadership while Majumdar and Mukand (2007) analyze the leader’s ability to promote reforms, while Gervais and Goldstein (2007) introduce over confidence of the leader in the analysis. Further, Hermalin’s theory has been brought to the experimental lab. Potters et al., 2001, 2005; and Gchter and Renner, 2003 find support for the leading-by-example model. Yet, Meidinger and Villeval (2002) suggest that this is due not to signaling but to reciprocity. Huck and Rey-Biel (2006) introduce the role of conformism among followers and the endogenous determination of who will be the leader. 6 That is, in Hermalin (1998) parlance, he can lead by example. In Hermalin (1998) the leader has two potential signaling strategies to credibly transmit information. He can either lead by sacrifice (giving a gift) or he can lead by example (exerting effort prior to workers). The first means that in the transfer stage the expatriate CEO and the Headquarter can act as leaders, while the local CEO cannot. The second means that only an expatriate manager, physically present in the subsidiary and acquainted with the technological information, and neither the headquarter nor the local manager can lead by example. That is, although we have not explored the two different forms of leadership in our empirical analysis, Hermalin (1998) allow us to open the black box of technological transfer by focusing on the information transmission mechanisms available to the MNCs. This is something other types of organizational theory cannot allow us to do. 3
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model also shows that the composition of FDI that countries in these conditions will receive will be biased towards multinationals in technology intensive sectors. Therefore, developing coun- tries face quantity-composition biases when developing a supply of local managers. 7 These biases depend on the uncertainty over local conditions. Finally, the theory predicts that firms whose transfer-stage is a more important input than the execution stage will find it more valuable to hire an expatriate. Therefore, if exports are less execution stage oriented, which is likely to be es- pecially true if subsidiaries are exporting their products to their headquarter’s country, we expect that export oriented firms are more likely to rely on expatriates. Similarly we do not expect the same for domestic sales. This is important because it shows that not all the performance measures of plants are positively correlated with expatriates. While the model highlights the benefits from hiring an expatriate it also makes explicit its costs, which differentiates itself from the simple
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