Result 11 The expected profits in the execution stage under an expatriate

# Result 11 the expected profits in the execution stage

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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 . Let GE denote the expected gain in the execution stage from relying on a local CEO rather than an expatriate. GE is equal to GE = N x [ q h ( e l H e e H | {z } > 0 w l H w e H | {z } > 0 ) + (1 q h )( e l L e e L | {z } =0 w l L w e L | {z } < 0 )] (18) GE > 0 follows from result 11. 20
3.4.3 Choice of Subsidiary CEO As shown before, the expatriate is better at transferring technology but worse at dealing with local conditions. When does the gain in the transfer stage out weight the loss in the execution stage? Assume that expected output from the subsidiary operation is additive in the transfer and the execution stages. That is, V = T + X This assumption means that in terms of the total output generated by the subsidiary, these are perfect substitutes. 35 Result 12: In the transfer stage, an expatriate CEO will outperform a local CEO. In the execution stage, a local CEO will outperform an expatriate. The multinational will choose the CEO, local or expatriate, that maximizes expected profits, which are equal to E [Υ] = E [ V (1 η ) T N x w x ]. Let’s define Ψ E | Local ] E | Expat ], be the net impact on profits resulting from relying on a local manager rather than an expatriate. Therefore, Ψ = GE + LT . The following graphs plot the profits generated under local and expatriate. 35 We can relax this assumption in two ways. First, we can let T and X be imperfect substitutes, with V = αT + (1 - α ) X . In this case we can express Ψ as the weighted sum of the expected gain in the execution stage, GE, and the expected loss in the transfer stage, LT. It is straightforward to see that higher α (for export oriented firms, for example) increases the attractiveness from relying on an expatriate manager. Second, T and X may be complement inputs. That is, V = T α X 1 - α . The formal derivation of how potential complementarities affect multinationals choice is ongoing work. Still, note that if complementary, it may happen that neither the expatriate nor the local CEO generate positive profits and that the multinational decides not to install a subsidiary even if there are no entry costs. That is, the model could generate endogenously barriers to multinational’s expansion. 21
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 14 16 18 20 22 24 26 28 30 q h Total profits Firms with θ h / θ l =2, p h =0.95, λ h / λ l =2 Expatriate subsidiary CEO Local subsidary CEO Expatriate Figure 2: Case I: The expatriate is always preferred 22
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 12 14 16 18 20 22 24 26 28 q h Total profits Firms with θ h / θ l =2, p h =0.25, λ h / λ l =2 Expatriate subsidiary CEO Local subsidiary CEO Expatriate Expatriate Local low local uncertainty low local uncertainty high local uncertainty Figure 3: Case II:The expatriate (local) manager is preferred when local uncertainty is low (high) 23
As figure 2 illustrates, firms with very high value technology, and/or very high likelihood of good project in the transfer stage will always prefer to rely on an expatriate.

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• Spring '17
• JAMES FENSKE

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