This is true regardless of the amount of local uncertainty which is highest

This is true regardless of the amount of local

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of good project in the transfer stage will always prefer to rely on an expatriate. This is true regardless of the amount of local uncertainty (which is highest when q H = 0 . 5). The intuition is that for these type of firms the expatriate is very valuable in the transfer stage, overcoming his relatively lower performance as manager in the execution stage. In contrast, as figure 3 illustrates, firms that are not at the cutting edge of their technological sector will choose their subsidiaries manager as a function of local uncertainty. While they will rely on expatriates if uncertainty is low (when q h is very low or very high), they will prefer local managers when uncertainty is high (for middle range values of q h ). This analysis allows us to address the following question: Are multinationals relying on ex- patriates doing so because they are constrained by a shortage of local managers? 36 Empirically, it is hard to distinguish multinationals for which an expatriate is optimal versus those for which a local manager was unavailable. Yet, the model allow us to identify conditions under which the multinational relying on an expatriate was constrained to do so. 37 In particular, let ( q d , q u ) denote the interval of q H such that a multinational relying on an expatriate is constrained, where q d and q u are the roots of Ψ = 0. The interval is bigger for firms with lower p H , lower θ H and lower λ H . That is, firms transferring projects to highly unstable economies, specially those with low technological content, would be better off relying on a local manager. If they do not, it must be that they are constrained by a shortage of local managers. 3.5 Entry Decision In this section we derive the conditions under which the Multinational decides to enter (with an expatriate or with a local manager) and those under which it decides not to enter. To do so, we assume that the multinational faces a positive fixed and exogenous cost of entry, C . We analyze 36 Alternatively, multinationals may rely on expatriates because they have higher ability not because they need to transfer technology. Although we do not have data to proxy for ability, the case study of German plants in Mexico by Carrillo and Hinojoza (1999) supports our information based story in which German employees are said to be used for the “introduction of new product or process” (translation from Spanish) 37 We say a multinational is constrained to rely on an expatriate manager when a local manager would have generated higher profit. 24
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six cases according to the magnitude of the cost of entry. Let’s index C from highest to lowest such that C a > C b > C c > C d > C e > C f and these thresholds are chosen as the graph shows. This exercise allows us to ask the following relevant and other related questions. What types of projects get implemented in high risk economies? Unstable developing economies are more likely to attract what type of multinationals? Should governments in developing countries invest in high education of future managers or in primary schooling? What are the consequences for the type of FDI they will attract? And for long run development? These questions are broad, and
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  • Spring '17
  • JAMES FENSKE

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