Understanding Expatriate Assignments: Costs, Benefits, and Staffing Strategies

1. Chapter 13: Expatriate Assignment

2. Take-away • Expatriates (home-country and 3rd-country nationals) are expensive, but often indispensable. • Net benefits of expatriates depend on • Maturity of subsidiary • MNE form • Selecting the right person

3. Expatriate Advantage • Expert in company products and processes • Personal connections to HQ managers • Global view • Cross-country coordination • Especially 3rd country nationals • Larger talent pool to draw from • Track record from previous assignments • Performance in smaller subs as testing ground

4. Local Advantage • Expertise on culture of local workers and customers (less cultural separation). • Well-connected to local suppliers, buyers, officials (less relational separation). • Much cheaper than expats • 10-20% in China (1997 report) • 20-25% of the total compensation for expats (2006 report) • Lower “failure rates” than expats • 20-50% failure rate for U.S. firms • Placing locals at top of management structure provides career track incentives for entry-level local managers.

5. Net advantages of locals • Increasing in time since the subsidiary was established • Decreasing in the authority/responsibility level of the manager (juniors vs seniors) • Draw a figure with “local share” on vertical axis and “time” on horiz. axis

6. Multinational staffing strategy depends on form • Replication and polymorphic • Low coordination with HQ • After set-up, little need for expats • Branching • Need expats (U) and locals (D) • Specialization • High levels of coordination needed • Continued value of expats (who should move frequently) • Polycentric • Tournament model for internal advancement

7. Why are expats so expensive? • Base pay determined by home base, not local pay standards • so no savings from cheap host country wages • COLA: Cost of living allowance (0-80%) • Foreign service premium (0-20%) • Hardship premium (0-25%): • “extraordinarily difficult living conditions, excessive physical hardship, or notably unhealthful conditions affecting the majority of employees”

8. Cost and Hardship allowances(as determined by US State Dept.)

9. Expat expenses (cont’d) • Housing allowances • Child Education allowances • Relocation allowances • Interpreters • Drivers • Language and cultural training • TAXES

10. Taxation of Expats • Tax protection vs Tax equalization • Protection: Firm pays any extra taxes associated with foreign assignment (manager benefits from lower taxes) • Equalization: Firm pays extra taxes but makes a deduction to offset any tax savings (manager does not benefit from low taxes)

11. Taxation of Expats (cont’d) • COLAS, hardship, etc, usually taxable benefits • Tax protection or equalization requires additional (also taxable) payment • $55,000 housing allowance • 45% of 55,000 = $24,750 =cost of extra taxes • 45% of 24,750 + …= $20,250 = cost of extra taxes due to payment of extra taxes! • Infinite series: 55K/(1-.45) = 100K *assuming marginal Canadian tax rate at highest bracket of 45%

12. Who wants to be an expatriate? • Not me! • Relocation too disruptive, confusing • Overseas affiliate uses backwards technology • Senior management will forget me… (out of sight, out of mind problem) • No work or social life for my spouse • No decent schools for my kids • Foreigners are strange

13. Who wants to be an expatriate? • I do! • This is my chance to have a real impact (big fish in a small pond) • Senior management will see what I’m truly capable of accomplishing (testing me) • Adventure and luxury • Cross-fertilization: Priceless experiences we’ll take home.