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Expatriate Management in Multinational Companies in China

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Expatriate Management in Multinational Companies in China
Expatriate Management in Multinational Companies in China
Yu Jiannian, Liu Dan
Wuhan University Economy and management School
Abstract: Recently, there appear new characters on expatriate management in the multinational
companies (MNCs) in China. According to the data from the recent five years’ reports, this article
systematically depicts important changes and then explores three potential reasons behind them. It
points out that interaction between external environment and internal demands have caused these
innovations.
Key Words: expatriate management, human resource management strategy, change trend
1. Introduction
Since China becomes a magnet for foreign direct investment (FDI), more and more multinational
corporations (MNCs) have established branches in China; studies on expatriate management in China
also are increased. However, based on cultural dimension theory (G.Hofsted.1973, 2001; Hall.1966;
Kluckhohn1961) or cultural adjustment theory (Black, S. / Mendenhall, M. / Oddou, G. 1991), most
researches only mainly address the issues of psychological adjustment (Jan Selmer, 2004) and
cross-cultural conflicts and communications (Tung1981; Child,1994; Warner, 1995;Goodall and Warner,
1997; Jan Selmer 2001, Hutching, 2003), very few studies touching on the subject of human resource
management in MNCs (see Bjorkman and Schaap, 1994; Sergeant and Frenkel, 1998). And the
discussions of expatriate management in organizational level, including the changes of staffing
expatriate, expatriate localization model and compensation management are unsystematically.
Furthermore, very little effort has made to describe the innovations of expatriate management in China
during recent years and conclude the reasons for these shifts. According to the data from the recent five
years’ reports and researches about expatriate management, this article tries to depict the changes of
expatriate management in MNCs in China and potential reasons for these are explored in the final
section.
2. Characters in expatriate management in MNCs in China
An expatriate refers to a parent country national or a third country national selected by the
corporation headquarters to work in other countries.
Table 1: China's Foreign Direct Investment Inflows
2003 H1
Number of Contracts
Contracted Amount
Utilized Amount
18,877
$50.96 billion
$30.26 billion
Source: Ministry of Commerce
2004 H1
21,688
$72.69 billion
$33.88 billion
Growth Rate
14.9%
42.6%
11.9%
(2004 H1: the first half of 2004)
Since China has become the hotspot of direct investment, there are a substantially increased
number of foreign business people working in Sino-foreign joint ventures, foreign representative offices,
foreign wholly owned subsidiaries and branches of foreign firms. In 1994, there were about 100,000
expatriates in China (Worm 1994), but now the number is much greater. Just in Shanghai there are about
30,000 expatriates from 102 MNCs in 2004, while over 100,000 expatriates in Guangzhou. According to
relevant reports, expatriate management in MNCs in China has changed greatly in recent five years,
which can be pictured in the following five aspects.
2.1. Transition strategy on expatriate administration
Transition strategy on expatriate administration is closely related to MNCs’ strategy transfer.
835
Nowadays, when developing countries but most China have developed into an important destination for
foreign direct investment, more organizations turn their strategies from domestic policy to globalization,
and the two end points of value chain are also being moved to the developing countries. This results in
the increased number of expatriates assigned to these areas. Traditional expatriate management model
becomes not so suitable to environment of Chinese subsidiaries (Gail Reinhart 2005), which causes
problems in expatriate cross-culture management in China. From a western perspective, Chinese culture,
institution and people may appear completely baffling. It means that western managers probably can’t
handle the jobs very well which require a good grip of China such as marketing and human resource
management etc. How to adapt to Chinese political and economical systems, especially social culture
and value, how to improve expatriate performance, reduce cost, and retain good relationship with the
host country, has become a primary concern in expatriate management in China. Innovation in expatriate
management and reconstruction of expatriate management model has been brought into the agenda
(Hugh Bushnell, Rich Verhage, Sum Yee Long, 2005).
2.2. Variation in expatriate manager sources
Quick development of Chinese economy and optimistic future has attracted not only overseas
Chinese people come back home, but also excellent managers from HK, Taiwan, Thailand, Singapore
and other part of Asia willing to work in Chinese mainland. Besides, local elites also join in position
competition. Abundant supply sources of expatriates and booming international labor market enable
MNCs select expatriate from more diverse talent pools, not limited to parent country managers any
longer. Superiority that parent country expatriate managers had enjoyed in China during the last ten
years has been challenged seriously, and they have to face fierce competition to get an expatriate
assignment.
2.3. Changes on expatriate assignment positions
At present, most MNCs don’t just simply review China as a material-processing base any more, but
the world’s most great potential market. For many organizations, sending expatriates abroad to develop
global competencies is consistent with their overall strategic human resource plan. Objects of expatriate
assignment are different and this has resulted in the change of expatriate assignment positions. Senior
managers, R&D
Respondents provided multiple answers, 1=least common
5=most common
tra ns fe r c ul tu re
bui ld m ana ge me nt
n ew ma rk et
tra ns fe r
t ech no lo gy
0
0 .5
1
1. 5
2
2.5
3
3 .5
Figure 1: Expatriate Assignment Objectives
Source: Take Jobs in China. J. Areddy. Wall Street Journal. New York, 2001
administrators, various line managers of marketing department or public relations department and
problem-solution experts, have become the prominent types of expatriates. For example, among the
expatriates in Shanghai in 2004, 70 percent of them are various administrative managers like consultants
or solution experts (such as R&D technical, sales consultants, personnel and administrators), and
another 15 percent are R&D technical employees and senior professionals. Today, seldom expatriates in
836
China occupy operational positions directly, instead they act as tutors spending much working time in
guiding and training local employees. For example, after moving its refrigerator R&D center into China,
GE has selected local technical elites to enhance its R&D ability. Despite of it, GE also has chosen a few
of its R&D workers and administrators as expatriates assigned to China.
Further, due to the strategic developmental importance of Chinese market, senior managers in
corporation headquarters sometimes are directly posted to China mainland responsible for Chinese
business operations. And MNCs rarely did it so just ten years ago.
2.4. Expatriate localization model
During 1980s or 1990s, expatriates are all on short-term assignment, following the single path
out-and-back. In 1986, Organization Resources Counselors made an investigation and found that as for
American expatriates sent to China, the average length of assignment time was 16 months. But now the
traditional temporary assignment model is being turned into the localization pattern. The number of
local foreign-nationality employees is rising. A local foreign-nationality employee is the expatriate who
chooses to stay in China after his two-or-three-year assignment contract is completed. These staff either
signs a new contract with their companies, or works in another Chinese subsidiary of another MNC, and
they even apply to Chinese state-owned enterprises for a job. Many expatriates get the admission to
work and live in China for a long time by acquiring Chinese green cards. In April of 2005, Shanghai
government has, once for all, entitled 18 foreigners including 10 expatriate in MNCs to Chinese green
cards. Beside this, there are several hundreds of expatriates applying for it.1
2.5. Compensation packages diversity
Nowadays in China the traditional expatriate compensation package has been replaced with
different, leaner arrangements; the expatriate compensation packages are continuing to diversify as the
pool of expatriates grows (Hewitt2004). Currently, expatriates in China include western foreigners from
European or America, Asian managers, or from Taiwan, HK managers, local foreign-nationality
employees and Chinese overseas. And the compensation and benefits packages of the expatriates are
different from each other.
Table 2: The housing allowances of expatriates from different home countries /regions
Home Countries /Regions
The Housing Allowances Of Expatriates
¥20000-50000
¥5000-8000
¥4000-10000
¥4000-10000
¥2000—20000
European or America(CEO)
European or America(mid manager)
Korea
HK, Taiwan
Southeast Asian
Source: Guangzhou Huihuang Marketing Research Company.2004
Western businessmen often take high-level positions, and they enjoy generous compensation
packages well over the local level. Asian personnel and HK employees also receive high base salaries,
but unfortunately, they cannot have their medical insurance, life insurance and endowment insurance in
China. The salary level of overseas Chinese and local foreign-nationality employees has almost been
localized and much lower than other expatriates. Meanwhile, compensation package on the whole shows
a downward trend. As the latest surveys pointed out, during recent years the median of expatriates base
salary has declined from 20 percent to 15 percent. While 83 percent of MNCs have raised expatriates’
salary in 2003, only 9 percent of companies have planned to do so in 2004.
Due to Chinese poor living conditions in 1970s and 1980s, expatriate assignment to China was
considered a very hard task. Expatriates took hard line in compensation package bargaining with the
headquarters, and expatriate administration cost was very expensive. However, with the development of
1
China Daily (English Edition), 2005-04-13
837
the living standard especially in Shanghai and Beijing, many multinational companies have called off
hardship allowances of the expatriates in first-level cities such as Shanghai; and expatriates in
second-level cities such as Wuhan or Changchun still enjoy this kind of allowance, but the amount of
allowance has been declined. Meanwhile, MNCs are reducing the air-travel cost offered to expatriates.
3. Motivations for the changes
3.1.
Transition in role of Chinese subsidiary
Role of subsidiary is the conception based on the realization that internal departments or branches
of a multinational company have different abilities2. When MNCs came to China first, the local market
was undeveloped. At that time, MNCs didn’t view China as an important market, and a Chinese
subsidiary just acted as a task executive. The competition advantages of the subsidiary mainly depended
on resources of the parent company such as management experience, products, advanced techniques and
branding etc. Little effort had been made to adjust to the local market, and little obligations or rights did
a Chinese subsidiary enjoy. Domestic policy is an important principle in expatriate relocation, mainly
because it will protect benefits of foreigners in Sino-foreign joint ventures. Chinese staff only
undertakes junior jobs.
With the continuous growth of Chinese subsidiaries, Chinese subsidiaries gradually involve in more
activities in value chain, and their roles have transferred from simple executive to strategic partners. As
China becomes one of the most important markets, a Chinese subsidiary should be responsive to the
local market and be turned into a local company. To do so, a Chinese subsidiary must have deep
understanding of Chinese politics, economy, laws and culture, retain good communication with local
government, other enterprises and consumers, innovate corporation products to meet with local clients’
needs. Local staff is naturally good at these. To form continuous and local competition advantage in
Chinese market, MNCs in China should have the ability to turn these above advantages into internal
ones and combine special resources owned by parent corporations with them. “ Expatriate businessmen
are a pillar, but it can not bring true help for global opportunities. Local relocation is the necessary
choice.” Furthermore, development of Chinese staff also creates objective conditions for local
relocation.
On the other hand, just because of strategic advancement of Chinese subsidiaries, MNCs pay more
attention in controlling Chinese branches. Expatriates, as representatives of MNCs, can ensure the
far-flung subsidiaries sharing same culture with the headquarters and making Chinese branches
accomplish global strategy3. Currently, key positions and senior management positions are still occupied
by expatriates. Therefore while MNCs try to implement localization strategy, the demand for expatriates
is brisk.
Chinese strategy transfer has caused organization regional structure change in Asia-Pacific branches.
Many MNCs choose Shanghai or Beijing as one of their global strategy centers. Due to little attention
that headquarters have paid to those expatriates who have finished overseas assignments4, many foreign
managers worry that their overseas experience will be ignored and feel negative about career
development. Since more and more MNCs move their headquarters or strategic centers of Asia-Pacific
into China, expatriate business managers choose to stay in China after accomplishment of their
assignment in order to obtain a brighter career future. This is the main reason that why the number of
local foreign-nationality staff is rising.
At first, most MNCs didn’t make specific plan for Chinese market, and types of expatriates was
dependent on actual needs of Chinese subsidiaries. However, changes in role of Chinese subsidiaries
2
Xiannan Tao, Shuming Zhao, Effects of subsidiaries’ role and performance on human resource localization
policy of multination corporation-from the empirical research, Management World: 2003. Vol.8
3
Ruixu Wang, Xiaolin Zhang, Environment analysis and model choice of human resource localization of
multinational corporations, Economic Management-New Management: 2003. Vol. 4
4
Shuming Zhao, Peter J Down, Dennis E Welch, Human Resource Management of Multinational Corporations,
Publication of Renming University of China, Beijing: 2001:183
838
make MNCs have to design special Chinese strategy. At this time, relocation of expatriates is based on
development forecasting of Chinese branches. Present and future time, China is in a great short supply
of senior administrators, technical experts and solution experts who are the prominent force pushing
Chinese subsidiaries ahead, and therefore, MNCs have sent or plan to send these kinds of expatriates to
China.
3.2. Growth of local employees
Good understanding of China, familiarity with culture and beliefs of foreign corporations through
long-term work at the Chinese subsidiaries of MNCs, as well as gradual capability improvement in
management, business and learning and mastery of professional knowledge, these all usually make
Chinese staff excellent in job performance and qualify them taking junior management positions. Local
employees not only expect further career advancement, but also have confidence in their competencies
to undertake much more responsibilities. If they get frustrated in promotion to a higher position, they
probably become less aggressive in their job performance or quit, which will undermine corporation
productivity. Under this pressure, MNCs have to consider career advancement of local staff, which
causes the change of expatiate relocation. Nowadays, expatriates are not responsible for operational
tasks any longer, but offer help and guidance to local staff in difficulties. However, since expatriates
have the benefits of familiarity with corporate culture and the ability to transfer it into Chinese
subsidiaries, many organizations still prefer to select expatriates especially parent country nationals to
be senior managers or administrators of non-product department.
3.3. Pressure of low cost
Expensive compensation packages of expatriate business managers are a heavy burden of
international enterprises. Usually, the amount of an expatriate manager’s salary and the cost of housing
allowance, vacations and children education will reach to 250,000-350,000 dollars. In1998, a famous
MNC compared the cost of expatriates in branches of some Asian countries (except Japan) and found
that among these countries (Malaysia, Singapore, Thailand, Korean and China), the overall cost of
expatriates in China was obviously the highest. Some companies with high profits also found that they
had to spend a great part of profits in paying expatriates’ salaries, which would unavoidably hurt
corporation good performance5.
Statistics show that the assignment failure rate of US expatriates is 70 percent in developing countries
(Desatinick & Bennett,1978), and for the peculiarity of China, the failure rate may be higher. Failed
overseas assignments not only result in the decline of Chinese subsidiary performance level, market loss,
bad relationship between corporation with the interested party such as Chinese clients and government
officials etc, but also undermine the expatriates’ confidence and self-respect leading to reduction in
status. Chinese market is so important to international enterprises that they become more and more
impatient to expatriate assignment failure in China.
Great heavy cost burden and too high expense of overseas assignment failure force MNCs to find
low-cost but suitable substitutes. Human resource localization is a wise choice. Besides, attracted by the
optimistic development future of China, many HK managers and Asian managers are rushing into
Chinese mainland. Comparing with western foreigners, these people are presumed to have a better
understanding of China and thus succeed in expatriate assignment more easily; comparing with local
staff, they have more international management experience and they are willing to accept local salary
level or reduce their salary automatically. By comparison, MNCs more like to choose these businessmen
instead of western expatriates to fill in senior positions in Chinese subsidiaries.
Due to abundant supply of expatriate managers, MNCs don’t rely on parent country nationals so
much as in past. Now, multinational enterprises can take a lead in compensation bargaining with
expatriates, pile pressure on expatriate managers and reduce their salary expectancy. That’s the main
reason why the level of expatriate compensation package has been down during recently years.
4. Conclusion
5
Xin Liu, Difficulties in localization of multinational companies and solutions, Transaction of Chengdu Normal
College: 2002. Iss.12
839
The paper has shown the innovation trend of expatriate management of multinational companies in
China. From the extensive experience of expatriate management of MNCs in China recent five years,
we can see that the significant issues and ways of expatriate management that MNCs handled have been
change. These changes including transition strategy on expatriate administration, variation in expatriate
manager sources, expatriate assignment positions, expatriates localization model and compensation
packages diversity are discussed.
The changes of expatriate management of MNCs Indicates that China mainland is developing into
a modern international business metropolis and ‘Meeting the challenge of expatriate management’ is the
subject of a MNC to be maintain its competitive in China. It is critical for the organizations to identify
and develop their future expatriate management strategies in response to changing corporate needs.
This paper also discussed the importance reasons for the change trend, and found that interaction
between external environment and internal demands have caused these change or innovations: the
transition and growth in role of Chinese subsidiary, pressure of low cost and the growth of local
employees are mainly driving wheels for change trend of expatriate management of MNCs in China.
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