MNCs means of controlling and processing information within their organization

Mncs means of controlling and processing information

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MNC’s means of controlling and processing information within their organization (Egelhoff, 1984 and Gupta and Govindarajan, 1991). However, administrating the development and mobility of expatriate managers has been a major challenge for most MNCs, which has attracted much attention in the management literature (See for example Black et. al, 1999 and Ricks, 1999). Since expatriates tend to lack local knowledge, MNCs are facing a trade off when choosing between expatriates, who know better their firms, and local managers, who know better local conditions. 1 In contrast to the much attention of practitioners and the management literature on the cost and benefit of expatriates, systematic economic analysis has been scarce. In this paper, we fill this gap by presenting both evidence from Mexican subsidiaries of MNCs and a theoretical framework that analyzes the causes and consequences of MNCs’ choice of their subsidiaries CEOs and their entry decisions in foreign markets. This is the first paper to analyze both theoretically and empirically MNCs’ choice of foreign employees and its implication on technology transfer and the type and amount of FDI flows developing countries attract. 2 1 An illustrative example of this trade off between transmission of technology and local knowledge can be found in the field study by Carrillo and Hinojoza (1999) in which a German autoparts firm has two subsidiaries in Mexico. The high end subsidiary employs a German CEO while the low end subsidiary employs no German. 2 Tan and Mahoney (2006) analyze empirically the determinants of the choice between expatriates and local 1
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We first document several facts from Mexican data that further motivates us to study the MNCs choice of managers in their subsidiaries. Our analysis of Mexican plant-level data reveals that subsidiaries relying on expatriates behave systematically different from those that do not in terms of their innovative activities and technology transfer. Namely, they engage in more knowl- edge transfer from abroad and innovative activities. After presenting theoretical results outlined in the next paragraph, we provide more concrete evidence of correlates of foreign expatriates and of equilibrium predictions regarding the entry both in terms of the quantity and its composition. In the theoretical section of the paper, we analyze two aspects of MNCs expansion decision: the choice of their potential subsidiary CEO and their entry decision. 3 That is, whether the Headquarter (HQ) appoints an expatriate or a local CEO in the subsidiary where the company may choose to expand. We argue that the subsidiary CEO shapes the ability to transfer technology and the costs incurred in the local economy. Similarly to Antr` as (2005), we distinguish two parts in the pro- duction process of the MNC subsidiary. We call them transfer and execution stage. The transfer stage can capture from the actual transfer of technology to management expertise and processes for the best use of this technology or simply the HQ corporate culture. Its defining characteristic is that it requires information to flow from the HQ to the local environment. The technological
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