Tan and Mahoney

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Journal of Management Studies 43:3 May 2006 0022-2380

Why a Multinational Firm Chooses Expatriates: Integrating Resource-Based, Agency and Transaction Costs Perspectives*

Danchi Tan and J. T. Mahoney
National Chengchi University; University of Illinois at Urbana–Champaign abstract This paper develops an integrative organizational economics framework explaining and predicting multinational firms’ managerial resource deployments based on resource-based, agency, and transaction costs theories. Our empirical findings suggest that the governance decision for managerial services of multinational firms is influenced not only by the comparative capabilities of managers, but also by the economic costs to the firm of influencing the behaviours of managers through managerial contracting.

INTRODUCTION Over the past two decades in management studies, transaction costs economics has emerged as a predominant theoretical explanation of governance structure choices. While the transaction costs theory is noteworthy for its analytical rigour in explaining such governance choices, the theory is criticized by some for overemphasizing the influence of ex post contractual costs (e.g. emphasizing contractual hold-up problems due, in large part, to asset specificity) and for underemphasizing the influence of revenue creation on governance structure choices (e.g. Gong, 2003; Poppo and Zenger, 1998; White, 2000). Agency theory provides a conceptual lens for analysing ex ante contractual problems and thus provides a balance for the transaction costs theory (which emphasizes ex post contractual problems). The resource-based theory also complements the transaction costs theory by focusing on the role of resources in creating firm-level revenue and in shaping firm-level decisions. It is not surprising, therefore, that recently researchers have increasingly been integrating these three theories toward providing a more complete understanding of various corporate strategic management activities, such as vertical Address for reprints: Danchi Tan, Assistant Professor, Department of International Trade, National Chengchi University, 64 Chih-nan Road, Sec. 2, Wenshan, Taipei 11623, Taiwan (dctan@ nccu.edu.tw). © Blackwell Publishing Ltd 2006. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.


D. Tan and J. T. Maloney

integration (Mahoney, 2005), equity joint ventures (Tsang, 2000), strategic alliances (Madhok, 1997), diversification (Silverman, 1999), and export performance (Peng and York, 2001), The current paper develops an integrative organizational economics framework to both explain and predict an important business phenomenon in international strategic management – the deployment of human resources within a multinational firm – from the perspectives of resource-based, agency, and transaction costs theories. Human resources are strategic assets that influence the likelihood of generating and sustaining competitive advantages in a multinational firm. In this paper, we consider two types of human resources that a multinational firm can deploy to top managerial positions in its foreign operations – expatriates and host country nationals. Expatriates are home-country nationals (i.e. citizens of the country in which the multinational firm is headquartered) who are sent by the headquarters to the foreign positions. Host country nationals, or local managers, are citizens of the country in which they are working (Daniels et al., 2004). The extant research literature regarding the deployment of expatriates poses a paradox. On the one hand, conceptual and empirical works concerning both expatriate utilization (e.g. Edström and Galbraith, 1977; Kobrin, 1988, 1991; Richards, 2001; Scullion, 1991) and control within multinational firms (e.g. Egelhoff, 1984; Gupta and Govindarajan, 1991; Mascarenhas, 1984) have convincingly argued that expatriates are a multinational firm’s means of achieving...
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