The International Journal of Human Resource Management, Vol. 19, No. 2, February 2008, 223–239 Cultural distance, expatriate staffing and subsidiary performance: The case of US subsidiaries of multinational corporations Saba Colakoglu* and Paula Caligiuri School of Management and Labor Relations, Rutgers University, Piscataway, NJ, USA This study examines the relationship between cultural distance and the use of parent country expatriates in the wholly-owned US subsidiaries of 52 multinational corporations. This study also investigates the link between the use of expatriates and subsidiary performance as a function of cultural distance. Testing hypotheses based on transaction costs theory, our results suggest that firms rely on a greater number of parent country expatriates when they are culturally distant from the subsidiary (i.e. the United States). This study further demonstrates the bounded rationality problem faced by multinational corporations: cultural distance moderates the relationship between expatriate staffing and subsidiary performance such that a higher ratio of parent country expatriates is related to lower subsidiary performance, particularly in cases when cultural distance is high. Keywords: expatriates; cultural distance; subsidiary performance Introduction There are more than 65,000 multinational corporations with over 850,000 corresponding foreign subsidiaries scattered around the globe (UNCTAD 2005). To maximize the effectiveness of these subsidiaries, multinational firms must respond to opposing demands for national responsiveness and global integration (Bartlett and Ghoshal 1988; Doz, Bartlett and Prahalad 1981). One common method to establish and maintain both integration and control over international expansion activities is subsidiary staffing (Konopaske, Werner and Neupert 2002). In particular, multinational corporations (MNCs) use parent country national (PCN) expatriates, third country national (TCN) expatriates and host country nationals (HCNs) to balance their strategic needs for global integration and local responsiveness (Torbiorn 1997; Briscoe and Schuler 2004; Scullion and Collings 2005). Among these three categories of employees, PCN expatriates have the greatest potential to influence a subsidiary’s performance because of the strategic leadership positions they fill, the headquarters’ knowledge they transfer, and their potential for boundary spanning between headquarters and the host subsidiaries (Edstrom and Galbraith 1977; Bonache and Brewster 2001; Harvey, Speier and Novicevic 2001). The reliance on PCN expatriates1 will continue to increase as the amount of foreign direct investment and the corresponding number of foreign subsidiaries grows steadily (UNCTAD 2005). According to a recent survey by GMAC Global Relocation Services, 65% of the MNCs expect to see an increase in the number of expatriates for the year 2007 (GMAC 2006). *Corresponding author. Email: sabacol@eden.rutgers.edu ISSN 0958-5192 print/ISSN 1466-4399 online q 2008 Taylor & Francis DOI: 10.1080/09585190701799804 http://www.informaworld.com 224 S. Colakoglu and P. Caligiuri The importance of expatriates for the MNCs’ operations has been well-established in the literature (Brewster and Scullion 1997; Bonache, Brewster and Suutari 2001). The management of expatriates (e.g. selection, training, and compensation practices) and the factors contributing to expatriates’ success have also been investigated in the research literature (e.g. Tung 1982; Mendenhall, Dunbar and Oddou 1987; Caligiuri 2000a, 2000b). While past research studies provide a rich foundation for understanding the management and contribution of expatriates, there are few research studies which identify how expatriate levels are determined within MNCs (see Delios and Bjorkman 2000 and Harzing 2001a) and how these expatriate staffing practices relate to the performance of subsidiaries (see Gong 2003a). Therefore, there is a need to further understand the factors that come into play when MNCs staff their subsidiaries and how expatriate staffing relates to subsidiary-level outcomes such as performance (Schuler, Budhwar and Florkowski 2002). Based on the transaction costs theory, the primary goal of this study is to assess the influence of expatriates on subsequent subsidiary-level performance as a function of the cultural distance between the home and host countries. Consistent with a bounded rationality argument, this study posits that while cultural distance will increase the propensity to staff subsidiaries with expatriates, cultural distance may also magnify the disadvantages of using expatriates leading to lower subsidiary performance. Transaction costs theory, expatriate staffing and cultural distance Coase (1937) and Williamson (1975, 1979) suggest that minimizing the transaction costs related to an exchange between two parties is the basic determinant of organizational structure. In the case of MNC-subsidiary relations, MNCs will strive to configure the structure of the subsidiaries such that transaction costs related to internationalization and controlling the operations in the host environment will be minimized (Buckley and Casson 1976; Erdener and Torbiorn 1999; Gong, Shenkar, Yadong and Mee-Kau 2001; Harzing 2003). Such costs relate to searching for relevant information in that location, enforcing the performance of subsidiary employees, and controlling and monitoring subsidiary operations (Rugman and Verbeke 2003). Given that ‘an MNC consists of a group of geographically dispersed and goal-disparate organizations that include its headquarters and the different national subsidiaries’ (Ghoshal and Bartlett 1990, p. 603), controlling subsidiary operations so that they act in line with overall MNC objectives is a central issue for optimizing the transaction costs of internalization. According to Balgia and Jaeger (1984), MNCs use two types of control over their subsidiaries: bureaucratic and cultural control. Bureaucratic control utilizes an extensive set of rules, regulations and procedures that clearly limit the subsidiaries’ role and autonomy. Cultural control utilizes a set of shared values and norms for work processes, behaviours and the like (Ouchi 1980; Balgia and Jaeger 1984). Cultural control may be achieved by placing a number of expatriates who may either directly control subsidiary operations by acting as mini headquarters or indirectly control the subsidiary based on socialization (Harzing 2001b). Thus, the number of expatriates present in a subsidiary reflects the level of cultural control an MNC wants to exert on that subsidiary (Konopaske et al. 2002). The need for cultural control is often perceived to be greater in the subsidiaries where the national cultural distance (or difference) is great. According to Gong (2003a, p. 729), greater cultural distance will result in greater information asymmetry between the headquarters and the subsidiary, reducing knowledge of the given subsidiary’s The International Journal of Human Resource Management 225 environment, actions and performance. Gong states that ‘as cultural distance increases, complete and accurate information about subsidiary actions and performance becomes more difficult and expensive to obtain, and subsidiary activities thus become harder to interpret, making behavioural and outcome controls by the headquarters difficult’ (2003a, p. 729). In addition, cultural distance has been recognized as a crucial factor in the management of transaction costs in subsidiaries (Buckley and Casson 1976; Gatignon and Anderson 1988; Harzing 2003). Cultural distance increases the uncertainty, risk and information asymmetry between the home country and the host country, increasing the transaction costs of operating in that environment (Coase 1937; Buckley and Casson 1976). Thus, following from transaction cost theory, the greater the cultural distance, the greater the need for cultural control (Balgia and Jaeger 1984; Boyacigiller 1990; Kogut and Zander 2003). Given that PCN expatriates are utilized as a form of cultural control, consistent with transaction cost theory, it follows that greater cultural distance should be related to a greater use of PCN expatriates. In fact, previous research has found that greater cultural distance between home and host countries increases the propensity of MNCs to use more expatriates in the host subsidiaries (Boyacigiller 1990; Harzing 1996, 2001a; Gong 2003a). Consistent with transaction cost theory and past research findings we propose hypothesis 1: Hypothesis 1: The greater the cultural distance between the parent company country and the host national subsidiary country, the higher the ratio of expatriates in the subsidiary workforce. Bounded rationality, expatriate staffing and subsidiary performance While the relationship between cultural distance and expatriate staffing is hypothesized to be linear, the effect of expatriate staffing on subsidiary performance is hypothesized to be nonlinear: increasing the use of expatriates may not always result in an increase in subsidiary performance. Past research has found that the influence of expatriates on subsidiary performance can be either positive or negative (or potentially neutral) depending on the context. On one hand, some researchers found possible benefits of staffing host national subsidiaries with expatriates. Expatriates can control and coordinate subsidiary operations, transfer MNC-specific knowledge to the host location, and assure that the subsidiary is performing in line with the expectations of the parent MNC (Edstrom and Galbraith 1977; Dowling, Welch and Schuler 1999; Harzing 2001b; Riusala and Suutari 2004). On the other hand, researchers also found potential liabilities from staffing host national subsidiaries with expatriates. Expatriates may cause interpersonal friction due to poor intercultural communication and they may produce an ‘us versus them’ mentality between the local and expatriate employees (Kopp 1994; Gong 2003b). In addition, host nationals may also perceive inequality in terms of their compensation compared to expatriates (Toh and DeNisi 2003) and a perceived lack of promotional opportunities caused by expatriates occupying the more senior or key roles within the host national subsidiary (Dowling et al. 1999). These disadvantages may have direct and indirect implications for subsidiary-level performance as they may reduce the motivation and performance level of host national employees. To better understand the context under which the influence of expatriates on subsidiary performance can be either positive or negative, past research has examined a variety of contextual variables – including mode of entry, institutional differences, and cultural 226 S. Colakoglu and P. Caligiuri differences – and their role in determining the direction of expatriate staffing – subsidiary performance relationship (Konopaske et al. 2002; Gong 2003b; Gaur, Delios and Singh 2005). For example, Konopaske and colleagues (2002) found support for an interactive effect of mode of entry and staffing approach on the subsidiary performance of Japanese MNCs. Specifically, they found that ethnocentric staffing in joint ventures relates negatively to subsidiary performance, and ethnocentric staffing in wholly owned subsidiaries relates positively to subsidiary performance. Richards (2001), in her comparison of the subsidiaries of US MNCs in the UK and Thailand, reported that locally managed subsidiaries in Thailand were more successful than expatriate-run ones because of the higher cultural distance between the US and Thailand, compared to the UK and US. Gaur et al. (2005) found that a higher proportion of expatriates in institutionally distant environments hindered the performance of subsidiaries, while the employment of PCN managing directors aided performance in the same type of environments. Gong (2003a) found that expatriate staffing has a positive effect on subsidiary performance as cultural distance increases, and that this effect diminishes over time as the subsidiary learns from the parent company. The present study will focus on the contextual variable of cultural distance because of its influence on both organizational structure (i.e. reducing transaction costs through expatriates) and organizational decision-making. March and Simon (1958) argue that some environments are so complex – such as the global business environment – that organizations must rely on simplified decision-making to function. These simplified decision making processes reflect the cognitive limitations of individual decision-makers. MNCs’ rational decision-making is bounded by the fact that information, resources, networks, etc. are often culturally limited when operating in a foreign environment. Rugman and Verbeke (2003) who applied the bounded rationality argument to the global context argue that MNCs are not always capable of making correct decisions on behalf of the subsidiaries. They both lack sufficient insight about the context in which subsidiaries operate and also have limited information-processing capabilities. Consistent with this bounded rationality argument, this study posits that while cultural distance will increase the propensity to staff with expatriates, cultural distance will also magnify the disadvantages of using expatriates by inhibiting expatriates’ ability to effectively control subsidiary operations, transfer knowledge, and manage relations in the host country, leading to lower performance. Consistent with this bounded rationality approach, we propose hypothesis 2: Hypothesis 2: The relationship between the ratio of expatriates and subsidiary performance will be moderated by cultural distance – whereby greater (versus lower) cultural distance is related to lower subsidiary performance when a high (versus low) ratio of expatriates are in the subsidiary workforce. The present study will predict subsidiary performance among subsidiaries based in the United States. The focus on US-based host national subsidiaries is important because of divergent findings, suggesting that the case of US-based subsidiaries is unique. For example, studies have found that the performance of host national subsidiaries is superior to that of domestic firms because subsidiaries have broader firm-specific resources from their parent company (Globerman and Meredith 1984). This relationship, however, does not hold when foreign MNCs operating in the United States are compared to their local counterparts. Empirical evidence suggests that financial performance of foreign MNCs in the US are consistently lower than US-owned firms (Kim and Lyn 1990), an indication that The International Journal of Human Resource Management 227 the US market poses specific challenges even for MNCs that are successful elsewhere. Jones and Galvez-Munoz (2001) reveal that falling market shares, declining profits, and the sudden removal of foreign-owned companies from the S&P 500 are not unique to a few MNCs, but that many of the world’s leading MNCs experience acute control, managerial and performance problems in the US. Furthermore, they argue that one of the major challenges that contribute to the performance problems of these foreign MNCs is that they find it particularly hard to transfer knowledge from the outside world to the US. Given these unique challenges for US-based subsidiaries, and that research to date on this topic has not included US-based subsidiaries, the focus seemed logically justified. Method Sample The 2004 edition of The Directory of Foreign Firms Operating in the US was used as the main source for selecting companies to be included in this study. Out of 3,500 firms from 86 countries that were listed in the directory, 300 were selected using a random numbers table. The selected companies were contacted via telephone to identify the name of their HR Managers in order to personalize the invitation letters, which is suggested to increase response rates (LaGrace and Kuhn 1995; Harvey 1987). Out of the 300 companies contacted, contact names for 237 companies were identified. The letters were sent to the ‘Director of Human Resources’ when a name was not identified and to the ‘Managing Director’. Survey procedure An online survey was created and the initial mailings included the link to the online survey. One week after the first letters were sent, reminders were mailed including similar information contained in the first letter. One week after the second letter, another set of reminders was sent to those companies where a contact name was not available, and follow-up phone calls were made to the rest of the companies. This approach is in line with the suggestions of Dillman (2000). Respondents There were 19 undeliverable surveys and the total number of usable surveys was 52, yielding a response rate of 18.5%. The final response rate of 18.5% compares favourably to the 10– 12% response rates typical for mailed surveys to top executives of American firms (Hambrick, Geletkanycz and Fredrickson 1993). The mean size of the subsidiary workforce in the sample is 278 (s.d. ¼ 633.21) and the mean age of the subsidiaries is 24.2 years (s.d. ¼ 22.2). A total of 44% of the subsidiaries has managing directors who are expatriates, and subsidiaries in the sample have an average of 7.8% (s.d. ¼ 1.1%) expatriates in their workforce. Table 1 shows the distribution of respondents in terms of their country-of-origin and Table 2 exhibits the industries that were represented in the sample. The subsidiaries were from 18 different countries, and the random sampling allowed for a representative distribution among countries in terms of their investment in the US. The subsidiaries that were involved in manufacturing made up 49% of the population and the service sector made up 51% of the sample. An analysis of the industries in terms of Kobrin’s (1991) measure of global vs. multi-domestic showed that most of these industries can be classified 228 S. Colakoglu and P. Caligiuri Table 1. Countries represented in the sample and their scores on cultural dimensions and cultural distance from the US. Country Frequency % PD UA MAS IND CD 2 1 7 1 1 1 4 5 2 1 9 2 1 2 1 4 1 7 52 3.8 1.9 13 1.9 1.9 1.9 7.7 9.6 3.8 1.9 17 3.8 1.9 3.8 1.9 7.7 1.9 13 100 11 36 39 80 18 33 68 35 13 50 54 31 80 60 57 31 34 35 70 51 48 40 23 59 86 65 81 75 92 50 68 85 86 29 58 35 79 61 52 66 16 26 43 66 47 70 95 8 52 39 42 5 70 66 55 90 80 20 74 63 71 67 54 76 46 69 38 18 51 71 68 89 1.44 0.02 0.12 2.91 2.17 1.37 1.54 0.41 1.64 0.55 2.63 2.40 2.28 3.39 1.78 2.73 0.34 0.08 1. Austria 2. Australia 3. Canada 4. China 5. Denmark 6. Finland 7. France 8. Germany 9. Israel 10. Italy 11. Japan 12. Norway 13. S. Arabia 14. S. Korea 15. Spain 16. Sweden 17. Switzerland 18. UK TOTAL PD: Power Distance; Avoidance; MAS: Masculinity; IND: Individuality; CD: Cultural Distance P4UA: Uncertainty 2 from US CDj : i¼1 ðI ij 2 I iu Þ =V i =4. as multi-domestic since intrafirm transactions account for less than 25% of international sales in these industries. The only industries that can be classified as global within the sample are ‘chemical manufacturing’ and ‘electronics and components manufacturing’ industries which make up 5.7% of the sample. Measures Expatriate staffing Based on Gong (2003a), Konopaske et al. (2002) and Boyacigiller (1990), expatriate staffing is measured as the ratio of expatriates in the workforce. In the survey instrument, an expatriate was defined as ‘a parent country national that has been transferred to the US operations from the headquarters or from another subsidiary for an extended period of time’. As MNCs are increasingly opting for localizing expatriates and thus lowering their high compensation costs (Dwyer 2004), respondents were also instructed to include those employees that stay in the US operations for a fixed period of time with a typical expatriate contract, and those employees that have been localized in the US operations. Subsidiary performance Based on Taggart (1999), and Andersson, Forsgren and Holm (2002), respondents were asked to report on the subsidiary’s performance against industry norms with respect to sales volume, profitability, and market share on a scale of 5 (1 ¼ well below industry norm; 5 ¼ well above industry norm). Respondents were also given a ‘not applicable’ option in case a performance dimension is not relevant for that subsidiary’s goal. By asking the respondents to assess performance with respect to industry norms, the effect of the industry on performance was also controlled for. Respondents were also asked to 229 The International Journal of Human Resource Management Table 2. Industries represented in the sample. Industry Frequency % Beverage & tobacco Primary metal Machinery Computer & electronics Wood Petroleum & coal Chemicals Nonmetallic mineral Electrical equipment, appliance & component Transportation equipment Apparel 2 2 5 4 1 1 5 1 2 1 1 25 3.8 3.8 9.6 7.6 1.9 1.9 9.6 1.9 3.8 1.9 1.9 48 Financial services Agriculture, forestry Mining Construction Wholesale trade Retail trade Transportation Information Professional, technical, & scientific services Management of companies Administrative support 2 2 4 1 2 3 2 2 7 1 1 27 52 3.8 3.8 7.6 1.9 3.8 5.7 3.8 3.8 13 1.9 1.9 51 Manufacturing Total manufacturing service Total service TOTAL report on the subsidiary’s performance against the parent company’s expectations on a scale of 5 (1 ¼ well below expectations; 5 ¼ well above expectations). The performance measure was an average of all the applicable dimensions. Cronbach’s alpha for this measure was .86, indicating high reliability. Cultural distance Cultural distance between the US and the country-of-origin of the parent company was measured using Kogut and Singh’s (1988) established measure of cultural distance. In order to calculate the cultural distance index, Hofstede’s (2001) country scores on the dimensions of power distance, uncertainty avoidance, individualism and masculinity were used. The cultural distance index is formed based on the deviation along each of the four cultural dimensions of each country from the US ratings. The deviations are corrected for differences in the variances of each dimension and then arithmetically averaged. Algebraically, the following index is formed: CDj : 4  X ðI ij 2 I iu Þ2 =V i =4 ð1Þ i¼1 where CDj is the cultural distance of the jth country from the USA, Iij stands for the ith cultural dimension of the jth country, Vi is the variance of the index for the ith cultural dimension, and u indicates the host country, the USA. 230 S. Colakoglu and P. Caligiuri Control variables Two control variables were used in the prediction of expatriate staffing: age of the subsidiary and the complexity of subsidiary operations. Age of the subsidiary was measured as the number of years a subsidiary has been present in the US. Complexity of subsidiary was based on Thompson and Keating (2004). A simple summated rating was created by adding the number of functions a subsidiary has. The functions included in the list were: 1. 2. 3. 4. 5. 6. Production/manufacturing Sales R&D Regional headquarters Call centre Shared services. Even though some functions may be strategically more important or complex than others, there is no natural ordering of these functions and therefore they have not been considered in the creation of the index. The possible values of this index ranged from 1 to 6. The average complexity score for the subsidiaries was 1.76 (s.d. ¼ 1.4). Power analysis Power analysis exploits the relationships among sample size, significance criterion and population effect sizes (Cohen 1992). A review of the reported correlations among the variables of interest suggests a population effect size that is considered to be medium by Cohen (1992). For example, Gong (2003) reported a correlation of .42 between subsidiary performance and expatriate staffing and Boyacigiller (1990) reported a correlation of .15 between cultural distance and expatriate staffing. In order to achieve the desired power of .80 with three variables at a ¼ 0.05, a sample size of 76 is required (Cohen 1992). In cases where the desired sample size is not achieved or when the study is an exploratory one, Cohen (1992) suggests using a ¼ 0.10 as appropriate. At a ¼ .10, with three variables, and a medium population effect size, our sample size of 52 results in a power of .60 (Cohen 1977). This indicates that we have a 60% chance of detecting the effect that we believe to exist in the population, and a 40% chance of engaging in a Type II error by not finding evidence against the false null hypothesis. Although this power is lower than the desired power level of .80, it still compares favourably to the median power of published studies in the behavioural sciences, which is estimated to be around .37 (Seldmeier and Gigerenzer 1989). Results Preliminary analyses Using the ratio of expatriates as the dependent variable in an ordinary least squares regression may violate the regression assumption of normality of distribution (Cohen and Cohen 1983; Tabachnick and Fidell 2001). To avoid this as a potential problem and stabilize the variance in this variable, Kleinbaum, Kupper, Muller and Nizam (1998) suggest using an ‘arcsin’ transformation of such variables. Thus, the arcsin transformation of the ratio of expatriates was used in subsequent analyses. Table 3 presents the means, standard deviations and zero-order correlations of the variables included in the analysis. 231 The International Journal of Human Resource Management Table 3. Descriptive statistics and zero-order correlations. Variable Mean s.d. 1 2 3 4 1. Subsidiary age 2. Subsidiary complexity 3. Cultural distance 4. Ratio of expatriates a 5. Performance 24.19 1.76 1.41 .08 3.39 22.19 1.40 1.15 .11 .83 .17 .03 2 .18 .15 2.21 2.21 2.15 .29* 2 .01 2.14 5 N ¼ 52; aThe correlation coefficients are based on the arcsin transformation of the variable; *p , .05; Two-tailed significance tests. Hypothesis 1 suggested that cultural distance would be positively related to the use of expatriates in staffing subsidiaries. Observation of the zero-order correlations indicates that the correlation between ratio of expatriates and cultural distance is significant (r ¼ .29, p , .05), providing preliminary support for hypothesis 1. Hierarchical regression analysis was used to further test hypothesis 1. Models 1 and 2 in Table 4 present the regression results to test hypothesis 1. In step one, control variables subsidiary age and subsidiary complexity were entered. None of the control variables significantly predicted expatriate staffing. In step two, cultural distance was entered in the regression. The coefficient of cultural distance variable and the overall model were significant. Thus, hypothesis 1 was supported (F ¼ 2.91, p , .05). The final model with the three predictors explained 16% of the variance in the arcsin transformation of the ratio of expatriates. Hypothesis 2 suggests that cultural distance would moderate the relationship between subsidiary staffing and performance, such that a higher ratio of expatriates in the workforce would lead to lower performance when cultural distance is high. In order to test this hypothesis, the variables cultural distance and the arcsin transformation of ratio of expatriates were centred to decrease collinearity between these variables and their interaction term (Cohen and Cohen 1983; Aiken and West 1991). The moderation effect is present when the addition of the interaction term to the model that contains the independent and the moderator variables significantly increases R2, and the coefficient of the interaction terms is significant. Table 5 presents the results of this moderated regression analysis to test hypothesis 2. In step one, the independent and moderator variables were entered. None of the variables had a main (direct) effect on performance. After entering the interaction term in step 2, the change in R2 was significant. Table 4. Hierarchical regression analysis results for hypothesis 1a. Variables Intercept Subsidiary age Subsidiary complexity Cultural distance Model F R2 Change in R2 Model 1 Model 2 .30 (.05) 2.001 (.001) 2.03 (.02) .21 (.06) 2 .002 (.001) 2 .02 (.02) .06 (.02)* 2.91* .16 .09* 1.78 .07 n ¼ 52; aDependent variable: Arcsin transformation of the ratio of expatriates; *p , .05; Two-tailed significance tests. 232 S. Colakoglu and P. Caligiuri Table 5. Moderated regression analysis results for hypothesis 2a. Variables Intercept Ratio of expatriates Cultural distance c Ratio of expatriates F R2 Change in R2 b,c b,c £ Cultural distance c Model 1 Model 2 3.39 (.12) 2 .63 (.54) .03 (.11) 3.45 (.12) 2 .68 (.58) .01 (.11) 2 .93þ(.54) .26 .08 .06þ .571 .023 n ¼ 52; aDependent variable: Subsidiary performance. b The coefficients are based on the arcsin transformation of the variable. c The coefficients are based on centered variables. þ p , .10; Two-tailed significance tests. The coefficient of the interaction term was also negative and significant (ß ¼ 2 .93, p , .10), lending support for hypothesis 2. In order to increase the interpretability of the interaction effect, the regression equation was solved for high and low levels of cultural distance and then plotted on a graph (Aiken and West 1991). For two-way interactions, regions of significance are values of the moderator for which the simple slope of the dependent variable on the independent variable is statistically significant (Preacher, Curran and Bauer 2006). According to Curran, Bauer and Willoughby (2006), computing regions of significance can be more powerful than picking arbitrary values of the moderator at which to examine the significance of simple slopes. Calculation of the significant region (Preacher et al. 2006) revealed that the slope of subsidiary performance on the ratio of expatriates was significant between cultural distance values of 1.17 and 2.48. Figure 1 shows that the slope of subsidiary performance on the ratio of expatriates decreases at a higher rate when cultural distance is high. Overall, as cultural distance increases by one unit, the slope of subsidiary performance on the arcsin transformation of ratio of expatriates decreases by .93 units. Figure 1. Moderating effect of cultural distance. Regions of Significance: Lower Bound CD: 1.17; Upper Bound CD: 2.48; Performance ¼ 3.45 2 .68 (Ratio of PCNs) þ.011 (Cultural Distance) 2 .93 (Ratio of Expatriates £ Cultural Distance) The International Journal of Human Resource Management 233 Discussion Research implications The primary contribution of this study for the subsidiary staffing literature has been to show that while MNCs have a propensity to adapt an ethnocentric staffing approach (Perlmutter 1969) in culturally distant locations; such a tendency simultaneously hinders the performance of the subsidiaries. This finding is in line with Rugman and Verbeke’s (2003) arguments that MNCs have a bounded rationality problem when managing their foreign subsidiaries. They have limited insights about the context in which subsidiaries operate, have limited information processing capabilities due to the complexity of operations (Fiske and Neuberg 1990), and thus may make mistakes in calculating the transaction costs of a given decision. In line with the majority of previous subsidiary staffing studies, this study found that cultural distance increases the propensity of staffing subsidiaries with more expatriates (Boyacigiller 1990; Harzing 1996, 2001a; Gong 2003a). Moreover, cultural distance predicted the use of expatriates even after controlling for the age of the subsidiary as well as the functions embedded in it, supporting the importance of the role that cultural distance plays in staffing host subsidiaries (Tarique, Schuler and Gong 2006). Therefore, this study reveals that many MNCs may be at a performance disadvantage in culturally distant locations where a greater number of expatriates are deployed. While this study replicates some of the earlier findings of antecedents of subsidiary staffing in the case of foreign MNCs in the US (Boyacigiller 1990; Harzing 1996, 2001a; Gong 2003a), it contradicts earlier findings with respect to the relation between expatriate staffing and performance. When this relation was studied by Gong (2003a) and Gaur et al. (2005), it was reported that the interaction between the ratio of expatriates and cultural distance was positive and significant for the subsidiaries of Japanese MNCs. One reason for this contradiction may be the presence of superior Japanese product, process and management know-how that is being effectively transferred along with a Japanese expatriate team (Johnson and Ouchi 1974; Ouchi 1981; Adler 1999; Jenkins and Florida 1999). Another reason may be the sample that we have targeted – US subsidiaries of foreign MNCs – a target that is known to have specific control, management, knowledge transfer and performance problems. Therefore, it is imperative to study these relations in other host locations and in MNCs from a wide range of countries. It is also worth noting that even though the relation between expatriate staffing and subsidiary performance was not significant when cultural distance was not accounted for, the overall pattern is that a greater use of expatriates in the US decreases performance. This finding may result from the difficulty that foreign MNCs are experiencing in transferring knowledge to their US subsidiaries (Jones and Galvez-Munoz 2001), which increases as cultural distance increases. Even for the Japanese MNCs, which seem to be effectively transferring knowledge through the use of expatriates in general (Gong 2003a), there is some evidence that they encounter serious knowledge transfer problems in their US operations (Fucini and Fucini 1990; Milkman 1991; Kenney and Florida 1993). Therefore, future research can explicitly tap into the question of how knowledge is being transferred via the expatriates to the US subsidiaries and the problems MNCs face in this regard. Another reason for this pattern may be that a greater use of expatriates is an indication of an overall ethnocentric attitude on the part of MNCs that does not reflect well on the performance of US subsidiaries. After all, US culture is geared toward individualism (Hofstede 1980, 2001) and independence that may not respond well to ‘headquarter 234 S. Colakoglu and P. Caligiuri imperialism’ (Briscoe and Schuler 2004). This tendency is also in line with Caligiuri and Stroh (1995) who reported ethnocentric companies to be less successful than geocentric or polycentric ones. However, as Mayrhofer and Brewster (1996) suggest, many MNCs are having difficulty empowering their individual subsidiaries or making the transition to a geocentric mindset. Earlier studies also suggest that the relation between subsidiary staffing and performance is not a direct one, but rather depends on contextual factors (Konopaske et al. 2002; Gong 2003a; Gaur et al. 2005). In this study, we exclusively explored the role of cultural distance since we argued that it presents a dilemma for MNCs and is a theoretically important construct. Future studies can explore the fit between staffing strategy and other contextual variables. The fit between subsidiary staffing and subsidiaryspecific factors such as mode of entry, the role of the subsidiary, or MNC-specific factors such as industry, strategy, and state of internationalization can be topics for future research. As a result, our attempt to disentangle antecedents of expatriate staffing and its relation to subsidiary-level outcomes opens the door to more interesting and fruitful research avenues. Practical implications Expatriates play a significant role in transferring firm-specific tacit knowledge to the subsidiaries, and are needed for better performance at both the subsidiary and the MNC level (Bonache and Brewster 2001; Novicevic and Harvey 2004; Riusala and Suutari 2004). However, cultural distance between different national categories of employees can inhibit the knowledge transfer and integration process, as the results of this study suggest. Based on the findings of this study, there are three practical implications for MNCs. First of all, MNCs need to find out ways to effectively transfer knowledge among different groups of employees, especially in culturally distant subsidiaries, and take measures to increase cooperation, coordination and communication among them. For example, cross-cultural training that is typically offered to expatriates can also be offered to HCNs to increase their understanding of the MNC’s home culture and increase their awareness of cross-cultural issues. Therefore, rather than focusing exclusively on expatriate assignment management, the focus of HR departments in MNCs needs to shift to managing the relation between different national categories of employees as well as developing knowledge integration practices among them. Another practical implication that may alleviate this performance problem can be to focus on effectively localizing subsidiaries in culturally distant locations. One goal for such subsidiaries can be to speed up the process of transferring MNC-specific knowledge to the HCNs such that the subsidiary is no longer dependent on expatriates. Effective localization means that local talent that has an understanding of the MNC’s ways of doing business is being developed. Such an objective of mentoring and developing local successors can be incorporated in the performance management process of expatriates. In addition, the use of inpatriates from culturally distant locations can help MNCs cope with such performance problems without sacrificing from either global integration or local responsiveness (Harvey, Kiessling and Novicevic 2003). Third, even if compressing the pay levels between HCNs and expatriates is not a feasible objective, the perceived opportunities to advance in the MNC can decrease the level of frustration of the HCNs, and facilitate increased communication among these groups. Therefore, geocentric and regiocentric approaches to staffing can be better in terms of utilizing different knowledge bases of expatriates and local nationals. The International Journal of Human Resource Management 235 Limitations Although this study has important contributions to make to the subsidiary staffing literature, it is not without its limitations. First of all, even though the sample is representative of foreign MNCs in the US, the modest sample size poses some problems in terms of the power of the statistical analysis. Future studies can replicate the findings of this study on a larger sample of the same population. Second, only foreign MNCs operating in the US were included in the study. Therefore, its generalizability to other MNCs operating in other countries is also limited. Another limitation is that while our measurement of expatriate staffing construct is in line with previous research (e.g. Boyacigiller 1990; Konopaske et al. 2002), the ratio of expatriates in the subsidiary workforce provides only an overall assessment of the construct without capturing the expatriates’ ability to influence subsidiary performance.2 Given that senior level expatriate managers may have larger impact on subsidiary’s performance compared to technical or functional expatriates, future research may measure this construct at multiple levels (Gong 2003). The cross-sectional design of the study may also pose some limitations. The positive or negative impact of expatriate staffing on performance may not always be immediate, but may take time to materialize. Therefore, the results should be interpreted with this alternative possibility in mind, and future attempts may use a longitudinal design to capture the effect over time. While this study is not an exception in terms of excluding TCNs from analysis, the negligible amount of TCNs that were present in subsidiaries makes the analysis of the antecedents and outcomes of using geocentric staffing patterns not meaningful. While the lack of TCNs in subsidiaries may indicate that many of the foreign MNCs in the US are not at an advanced stage of internalization, it is important for future studies to focus on their presence. Using a geocentric staffing pattern may have different antecedents (such as a global or a transnational strategy) than the extent of the ethnocentricity of staffing. Moreover, a geocentric staffing pattern may have more positive performance outcomes than ethnocentric staffing patterns because of the diversity created out of this diverse staffing composition. In future studies researchers can try use alternative measures that capture cultural distance. The use of a cultural distance index, as developed by Kogut and Singh (1988), has been criticized by several researchers due to the methodological properties of the index, which assume corporate and spatial homogeneity (Shenkar 2001; Harzing 2003; Kirkman, Lowe and Gibson 2006). While the use of a cultural distance index by Kogut and Singh (1988) improves the comparability of findings with previous international staffing research that has relied primarily on this measure, future studies can try to incorporate suggestions to improve the measurement of the cultural distance concept. Such suggestions include supplementing the index by using cognitive cultural distance measures (e.g. Boyacigiller 1990) or conjunction measures that do not assume linearity (e.g. Ronen and Shenkar 1985). Conclusion The complexities and challenges of staffing a MNE’s global operations are widely acknowledged. 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