An Empirical Investigation on the Transfer of Expatriates Within MNCs from a Knowledge Perspective
| Published date | 01 August 2019 |
| Author | Joonhyung Lee,Carmen Astorne‐Figari |
| Date | 01 August 2019 |
| DOI | http://doi.org/10.1111/obes.12254 |
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©2018 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 81, 4 (2019) 0305–9049
doi: 10.1111/obes.12254
An Empirical Investigation on the Transfer of
Expatriates Within MNCs from a Knowledge
Perspective*
Carmen Astorne-Figari† and Joonhyung Lee†
†Department of Economics, Fogelman College of Business and Economics, University of
Memphis, Memphis, TN 38152, USA (e-mail: cmstrnfg@memphis.edu, jlee17@memphis.edu)
Abstract
Westudy the use of expatriates in transferring knowledge within a multinational corporation
(MNC). We argue that MNCs use expatriates to allocate knowledge between headquarters
and its foreign affiliates. With data from MNCs headquartered in South Korea, we trace
unobservable knowledge using observable labour mobility. Our empirical analysis shows
that the use of expatriates increases as communication between South Korea and the host
country becomes more costly. However, the extent to which the use of expatriates relates
with communication costs decreases in the sectoral complexity.
I. Introduction
Westudy the use of expatriates as a means of transmitting knowledge within multinational
corporations (MNCs). Since a significant proportion of an organization’sknowledge is tacit
and embedded in its individual members (Argote and Ingram, 2000), communicating this
knowledge must involve human interaction, which can be costly (Arrow, 1969; Keller and
Yeaple, 2013). Moving individuals within an organization is an effective way to transfer
tacit knowledge because it enables more frequent contact with the source of that knowledge
(Kang, Rhee and Kang, 2010). In the context of an MNC, expatriate workers (who work
in the foreign affiliates) can be viewed as a channel for transferring knowledge with a high
tacit component. We expect this to happen whenever an MNC operates in a host country
that is culturally very different from the MNC’s host country. From this perspective, we
investigate the presence of expatriates in foreign affiliates.1
JEL Classification numbers: F21, F23.
*Wewould like to thank JaeBin Ahn, Sajal Lahiri, Seunghoon Lee, and Susan Chun Zhu as wellas conference and
seminar participants at the 2016 Korea America EconomicAssociation workshop (San Francisco), Southern Illinois
University (Carbondale), the 2016 spring Midwest International Trade Conference (Rochester), Korea University,
and Korea Development Institute for helpful comments. This work was supported in full or in part by a grant from
the FogelmanCollege of Business & Economics at the University of Memphis. This research support does not imply
endorsement of the research results by either the FogelmanCollege or the University of Memphis. All errors are ours.
1The importance of labour mobility as a channel for knowledge transfer has long been recognized in the Manage-
ment literature (Gong, 2003; Belderbos and Heijltjes, 2005; Brock et al., 2008; Chang, Gong and Peng, 2012) and
The transfer of expatriates and knowledge 781
Given our interest in studying the role of expatriates in the transfer of tacit knowl-
edge, we restrict attention to South Korean MNCs. South Korea is ethnically quite homo-
geneous and differs significantly from other countries in both culture and language (Alesina
and Wacziarg, 2003; Fearon, 2003; Hofstede, Hofstede and Minkov, 1997; Isphording
and Otten, 2013).2These unique features of South Korea generate high communication
costs across borders. Moreover, since knowledge includes corporate culture and other
entrepreneurial values that can be specific to Korean idiosyncrasy, it could be very costly
for foreign workers to be trained in appropriate business protocol. Thus, we argue that
Korean MNCs respond by sending expatriates to their foreign affiliates.
To guide the conceptual framework, we investigate Gumpert’s (2018) extension of the
knowledge hierarchy models to MNCs. Knowledge hierarchy models (Garicano, 2000;
Garicano and Rossi-Hansberg, 2006; Caliendo and Rossi-Hansberg, 2012) characterize
production as a problem-solving process requiring labour and knowledge as inputs, where
knowledge is required to solve the problems workers encounter during production. The
optimal allocation of knowledge in an MNC balances the trade-off between the cost of
learning and the cost of communicating with those who already possess such knowledge.
Due to issues arising from different time zones, language and culture, firms face higher
communication costs betweentheir headquar ters and foreign affiliate.This requires a higher
level of knowledge for foreign affiliates than for the home production plants. Therefore,
MNCs can either train the foreign workers, or they can send managers from headquarters
(who already possess that knowledge) to the foreign affiliate. Based on this framework, we
predict that the use of expatriates is positively correlated with the cost of communication
between the home and foreign country.3
The extent to which expatiates can be used to reallocate knowledge between an MNC’s
headquarters and affiliates, however, may be limited by sectoral complexity, as Keller
and Yeaple (2013) show. In other words, a composite of complex knowledge may not be
effectively transferred by moving individuals. For example, knowledge created by a team
of researchers working together may not be easily transferred by moving any particular
individual. Because most R&D activities occur at the headquarters, and R&D intensive
knowledge is hard to transfer, products requiring it should be produced at the headquarters.4
relatively more recently in economics literature on MNCs (Fosfuri,Motta and Ronde, 2001; Glass and Saggi, 2002;
Balsvik, 2011; Poole, 2013).
2For example, both Fearon (2003) and Alesina and Wacziarg (2003) rank Korea among the lowest in terms of
ethnic, cultural, and linguistic diversity. Isphording and Otten (2013) specifically mention that Korean is a very
isolated language.
3Our interpretation of expatriates as a means of overcoming communication difficulties is consistent withAntras,
Garicano and Rossi-Hansberg (2008) and Keller and Yeaple (2013). Antras et al. (2008) argues that the middle
managers can be used as a mediator in a situation where communication between home and host country is difficult.
While the middle managers are local talents in the host country in their paper, it can be understood as the expatriates
who mediate communication between home and host country.Keller and Yeaple (2013) document that disembodied
knowledge transfer (i.e. communicating knowledge) will be utilized more when trade costs are high. Disembodied
knowledge transfer can be interpreted as the transfer of expatriates who hold tacit knowledge, so they are utilized
more for the foreign affiliate that is located faraway from home that is more costlyin ter ms of communication and
transportation.
4Management literature has also documented the limit of expatriates’ role as the knowledgetransfer channel. For
example, in cases where the knowledge gap between headquarters and foreign affiliates is large or certain specific
knowledge is required, the expatriates havelimitations in their role for transferring knowledge (e.g. Fang et al., 2010;
Berry, 2017).
©2018 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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