What Are The Critical Success Factors In Expatriate Assignments?

TABLE OF CONTENTS

1. INTRODUCTION
1.1 Background to Dissertation Topic
1.2 Relevant Definitions
1.3 Professional and Academic Significance of the Study
1.4 Research Objectives and Research Question
1.5 Research Design and Sample Selection
1.6 Structure of the Dissertation

2. CRITICAL LITERATURE REVIEW
2.1 Expatriation in Context
2.1.1 Motives for Expatriation
2.1.2 Problems of Expatriation
2.2 Success Factors in the Individual Phases of the Expatriate Cycle
2.2.1 Selecting Expatriates
2.2.2 Preparing and Orienting Expatriates
2.2.3 The Adjustment Process
2.2.4 Expatriate Compensation
2.2.5 Repatriation
2.3 Concluding Remarks

3. METHODOLOGY
3.1 Research Approach and Strategy
3.2 Sample Selection and Data Collection
3.3 Ethical Issues
3.4 Generalisability, Validity and Reliability of the Findings

4. ANALYSIS AND EVALUATION OF FINDINGS
4.1 Success Factors in the Selection Process
4.2 Integration as Potential Success Factor
4.3 An Appropriate Leadership-Style as Success Factor
4.4 Compensation as Success Factor
4.5 Success Factors in Repatriation

5. CONCLUSIONS AND RECOMMENDATIONS
5.1 Success Factors in the Selection Process
5.2 Integration as Potential Success Factor
5.3 An Appropriate Leadership-Style as Success Factor
5.4 Compensation as Success Factor
5.5 Success Factors in Repatriation
5.6 Closing Remarks

APPENDIX A: Ethical Review Form

APPENDIX B: Questionnaire

BIBLIOGRAPHY

LIST OF FIGURES AND TABLES

Figure 2-1 The Purpose of Expatriation

Figure 4-1 Proportion of Respondents Agreeing and Disagreeing

Table 2-1 Selection Criteria

Table 2-2 Expatriates’ Advice to New Expatriates

Table 2-3 Expatriate Compensation Systems

Table 2-4 The Process of Re-Integration

Table 4-1 Selection Criteria Employed by the Companies

Table 4-2 Selection Criteria Expatriates Recommend

Table 4-3 Number of Expatriates Provided with Training

Table 4-4 Factors Contributing to a Successful Repatriation

1. INTRODUCTION

1.1 Background to Dissertation Topic

An understanding of the management of expatriates is of growing importance because of the recent rapid increases in global activity and global competition (Young and Hamill, 1992; cited by Brewster and Harris, 1999). As multinational enterprises (MNEs) increase in number and influence so the role of expatriates in those MNEs grows in significance (Dowling et al., 1994). According to the 1996 survey carried out by the consulting firm Organization Resources Counselors, from a sample of 546 MNEs (87 Asian, 108 European, 351 North American) the most common pattern among the majority of these companies is an increasing use of expatriates (Bonache and Fernández, 1999). The effectiveness of these expatriates and, therefore, the management of this group of employees are recognised as major determinants of success or failure in international business (Tung, 1984; cited by Brewster and Harris, 1999). According to Deresky (2003), most MNEs underestimate the importance of the human resource planning function in the selection, training and acculturation of managers assigned abroad. So, what needs to be taken into consideration when managing expatriates? What do current and former expatriates think are the critical success factors in the selection, preparation, adjustment and repatriation phases? It is the aim of this dissertation to answer that question by exploring a number of ‘cases’.

1.2 Relevant Definitions

Before going into detail, the term ‘expatriate’ should be defined. According to Mendenhall et al. (1995), an expatriate is anyone living or working in a country of which he or she is not a citizen and who can be classified as possessing skills critical to the success of the performance of foreign subsidiaries.

As Evans et al. (2002) stated, expatriation allows the firm to avoid the pathologies of excessive centralisation. Business decisions can be made locally but with the global perspective in mind. Moreover, the standards of the parent firm are transferred abroad via expatriates.

1.3 Professional and Academic Significance of the Study

The importance of expatriate success for professionals is clear. As will be seen later, expatriates are among the most expensive employees. Moreover, according to many academics, expatriate failure rates are still relatively high (see Section 2.1.2). So, in order to avoid costly mistakes, it is essential for companies to be aware of the critical success factors in expatriate assignments.

The academic significance of the study results from the fact that it represents a European contribution to the debate on expatriate failure and success. As Brewster and Harris (1999:6) put it, ‘not only is the vast mass of research into the topic conducted in the USA and focused on US companies, but the US texts have tended to set the agenda’. Furthermore, in contrast to the predominantly descriptive literature in the area of expatriation, the aim of this dissertation is to present new evidence and develop theories and frameworks from a European/German perspective.

1.4 Research Objectives and Research Question

As the above already suggests, the overall aim of this dissertation is to identify the critical success factors in expatriate assignments. This aim is achieved by:

- critically reviewing the existing literature;
- developing five hypotheses to be tested;
- drawing conclusions from the case study.

The five hypotheses are the research objectives that are aimed to answer in order to answer the research question. The following hypotheses were posited for this study:

- Expatriates will support the view of academics that family situation (adaptability of spouse and family, stable marriage, willingness of spouse to live abroad) and flexibility/adaptability (tolerance of ambiguity, listening skills, ability to deal with stress) are the most important success factors in the selection process.
- Expatriates will support the view that integration is a key success factor and that adjustment to interaction with local nationals is more challenging than adjustment to work or to the general environment, thus stressing the need for language and cross-cultural training.
- Expatriates will not support Lanier’s (1979) view that a good manager in one country will be a good manager in any country, thus stressing the need for cross-cultural training, a development of a leadership-style appropriate to the specific country, and a selection considering soft skills such as flexibility and adaptability.
- Expatriates will agree that they would not have decided to move abroad, if it had not been beneficial to them financially, thus stressing the importance of appropriate compensation and benefit packages.
- Expatriates will support the view that a successful repatriation strongly depends on the career outcome.

1.5 Research Design and Sample Selection

As research strategy, a multi-method approach, combining survey and case study methods, was adopted. The survey and case study involves expatriates from Germany living and working in several countries all over the world. So, in contrast to most previous studies on expatriation that are of American origin, this dissertation illustrates the topic from a European/German perspective. The author decided to interview expatriates (rather than HR-managers) because of the personal experiences they have made abroad. As sample selection method, snowball sampling is used.

1.6 Structure of the Dissertation

Including this introduction, the dissertation consists of five chapters. In the following paragraph, the issues each chapter will cover are briefly described.

The following chapter will provide a critical review of existing literature in the field of expatriation. It begins by looking at the motives for and the problems of expatriation and continues with an examination of the success factors in the various phases of the expatriate cycle. Chapter 3 will then discuss the methodological approach undertaken, covering issues such as the research approach and the research strategy chosen, a sample discussion, ethical issues and issues dealing with generalisability, validity and reliability of the research findings. In Chapter 4, using the results obtained from the survey and the interviews, the validity of the above hypotheses will be examined in turn. This examination will help to find out what the critical success factors in expatriate assignments are and, thus to answer the research question. In the last chapter, the research findings will be summarised and subsequently, it will be recommended what companies and expatriates should do in order to be effective and successful abroad.

2. CRITICAL LITERATURE REVIEW

This chapter will provide a critical review of previous research in the field of expatriation. It begins by looking at expatriation in context (Section 2.1). In this section, the motives for and the problems of expatriation will be discussed. In Section 2.2, the critical success factors in expatriate assignments will be examined.

2.1 Expatriation in Context

2.1.1 Motives for Expatriation

In their early internationalisation stages, companies usually rely on an ethnocentric staffing approach, that is, parent-country nationals (PCNs) from headquarters are sent abroad in order to maintain tight control over international operations. According to Deresky (2003), most MNEs tend to start out their operations in a particular region by selecting primarily from their own pool of managers. Over time, and with increasing internationalisation, they tend to move to a predominantly polycentric policy (key managerial positions are filled with host-country nationals [HCNs]). Reasons for this are an often increasing pressure from local governments to hire locals and the greater costs of expatriate staffing (Deresky, 2003).

Besides control and co-ordination, research on international staffing has identified a number of other principal reasons for employing PCNs from headquarters (Brewster and Harris, 1999): a perceived lack of availability of management and technical skills in some [developing] countries; to maintain trust in key foreign businesses following large international acquisitions; for representation; and for management development purposes. Further it is argued that the larger the cultural distance, the higher the proportion of PCNs in top management positions in foreign subsidiaries (Harzing, 1994).

Pucik (cited by Evans et al., 2002) differentiates between demand-driven and learning-driven international assignments. Traditional expatriate jobs fit mainly into the former category: employees who were dispatched abroad to fix a problem or for reasons of control. Today, more and more companies recognise that cross-border mobility is a potential learning tool, thus increasing the number of assignments in which the primary driver is individual or organisational learning (Brewster and Harris, 1999; Deresky, 2003; Evans et al., 2002).

In addition, expatriates differ in the time they spend in an assignment abroad. According to Evans et al. (2002), many assignments are long term, lasting two to four years or more whereas others are short term, less than one year, linked to a specific task or need. Figure 2-1 combines the length and purpose of the assignment together into a framework for understanding the purpose of expatriation:

Figure 2-1: The Purpose of Expatriation

illustration not visible in this excerpt

[Source: Adapted from Evans et al., 2002:119]

Evans et al. (2002) explain, that traditionally, most expatriates were assigned abroad for a relatively long period of time as agents of the parent firm in order to accomplish a variety of tasks related to operations and the oversight of the subsidiary. Here the demand is driven primarily by control or knowledge transfer requirements, and therefore the expatriates serve a corporate agency role. In other cases, the demand for expatriates is driven by short-term problem solving needs. Historically, most expatriate assignments were of these two types. In both cases, the expatriate has knowledge that is not available locally. Evans et al. (2002) further state that with the development of local managerial and professional capabilities, there is less demand for expatriate assignments to fill a local skill gap. This view is shared by Deresky (2003), who observed that in recent years, many MNEs have noted an improvement in the level of managerial and technical competence in many countries. At the same time, companies face an increasing need to develop global co-ordination capabilities, fostered in part by mobility across borders. The focus of these competence development assignments is on learning rather than teaching (Evans et al., 2002). Finally, a rapidly growing type of expatriation today is short-term learning assignments of young high potential professionals who move across borders for personal and career enhancement (Evans et al., 2002). In a number of global firms, such as BASF (Badische Anilin- und Sodafabrik) or Bosch, for example, such assignments are becoming an integral part of career development planning for young professionals and managers (BASF-Daten und Fakten, 2004; Bosch heute-Informationen, 2004).

2.1.2 Problems of Expatriation

The above indicates that the use of expatriates can resolve a number of problems for an international enterprise. However, the use of expatriates also creates areas of problems. First, expatriates are very expensive. It has been estimated that an expatriate costs three or four times as much as the employment of the same individual at home (Brewster, 1988; Copeland and Griggs, 1985; Hiltrop and Janssens, 1990; cited by Brewster and Harris, 1999). In general, expatriates receive their base salary, which is supplemented with relocation allowances, cost of living differential, travel expenses and education costs (Harvey, 1996; Hiltrop and Janssens 1990; cited by Morley et al., 1999). Second, expatriates are commonly reported to face significant adaptation problems in their new environment which make it difficult to operate effectively (Brewster and Harris, 1999). Culture shock, differences in work-related norms, isolation, homesickness, differences in healthcare, housing, schooling, cuisine, language, customs, gender roles and the cost of living are just some of the elements that have contributed to making expatriate failure one of the most significant problems facing today’s MNEs (Mendenhall et al., 1987; cited by Morley et al., 1999). Other major issues cited by Morley et al. (1999) include: inadequate selection criteria (Harvey, 1996; Scullion, 1991; Tung, 1981); poor pre-departure training (Mendenhall and Oddou, 1985; Philips, 1993; Scullion, 1991); poorly designed compensation packages (Hamill, 1989; Toyne and Kuhne, 1983) and the expatriate’s and/or his/her partner and family’s inability to adjust to the new culture (Black et al., 1991; Hamill, 1989; Harvey, 1997; McEnery and Des Harnais, 1990; Scullion, 1991; Torbiörn, 1982). The latter is, according to Morley et al. (1999), the most commonly identified cause of failure in the expatriate literature.

The extent of expatriate failure and the question of defining what ‘failure’ means are controversial issues. Dowling, Welch and Schuler (1999; cited by Edmond, 2002) state that the term expatriate failure has been defined as the premature return of an expatriate. According to Evans et al. (2002), there is no shortage of references to high expatriate failure rates, with claims that as many as 40 percent of expatriations are aborted (see, for example, Deresky [2003] with reference to a study of American expatriate managers in Japan by Black [1998]). However, Harzing (1995) argues that a persistent myth of high failure rates seems to have been created by ‘massive misquotations’ of a handful of articles on U.S. multinationals, some dating back to the 1960s. Tung (1982; cited by Morley et al., 1999) notes that recall rates among US MNEs are two to three times above those of European MNEs. The idea that European MNEs have lower recall rates than MNEs of other nationalities is reinforced by the findings of Brewster (1988), Hamill (1989) and Scullion (1991), who each found that the majority of European MNEs had failure rates of less than 5 percent (Morley et al., 1999).

It has been questioned whether ‘premature return’ is an adequate reflection of expatriate failure. Harzing (1995), for example, concludes that expatriate failure should continue to be examined, but using the measure of underperformance. When underperformance in the new job as a result of poor cultural adaptation is included, failure rates are typically higher (Forster, 1997; PriceWaterhouse, 1997; cited by Evans et al., 2002). According to Evans et al. (2002), a third of expatriates who stay in their position do not perform up to the expectations of their superiors. Deresky (2003) argues that half of those who do remain function at a low level of effectiveness.

Given the high risk of failure/underperformance and the fact that expatriates are among the most expensive employees, it is now more than justified to review the academic literature with regard to critical success factors. What needs to be done to avoid underperformance and premature return of expatriates?

2.2 Success Factors in the Individual Phases of the Expatriate Cycle

From a Human Resource Management (HRM) perspective, the process of expatriation can be broken down into a set of phases (Brewster and Harris, 1999; Evans et al., 2002):

- Selecting expatriates.
- Preparing and orienting expatriates.
- Adjustment process.
- Expatriate compensation.
- Repatriation.

These activities in the ‘expatriate cycle’ will be discussed separately in the following subsections, although they are closely linked. As Evans et al. (2002) state, the problems of later phases have to be anticipated earlier – for example, repatriation has to be taken into account at the selection phase, while the purpose of preparation is to facilitate the adjustment process.

2.2.1 Selecting Expatriates

Research into selection criteria for international assignments shows a split between theory and practice, with the theory stressing the need for interpersonal skills and the practice stressing technical competence.

In a 1997 survey by Organization Resources Counselors (cited by Bonache and Fernández, 1999) technical and other professional qualifications were by far the most frequently cited criteria employed when selecting a person for an international assignment. Companies ranked seven selection criteria from most important (1) to least important (7). The percentage of companies ranking each factor as first, second, or third most important are shown in Table 2-1:

Table 2-1: Selection Criteria (n=528)

illustration not visible in this excerpt

[Source: Organization Resources Counselors, 1997; adapted from Brewster and Harris, 1999:176]

As Bonache and Fernández (1999) state, this finding is consistent with other surveys on expatriate selection criteria (Mendenhall et al., 1987; Tung 1981, 1982; Björkman and Gersten, 1993; Brewster, 1988). Selection processes often fail to consider factors such as the candidate’s cross-cultural ability or the family’s disposition to live abroad, although there is abundant evidence that these factors also play a critical role in the success of international assignees (Bonache and Fernández, 1999). A survey by Copeland (2002), for example, revealed that only 6.2 percent of the spouses were contacted by the employer before the decision to move abroad was made.

What do academics who argue that stronger efforts should be deployed by organisations to assess ‘softer’ factors say about the characteristics of successful expatriates?

Mendenhall and Oddou (1985) identified three sets of individual cross-cultural skills: self-efficacy skills – including reinforcement substitution, stress reduction and technical competence; relational skills – including relationship development, willingness to communicate and language; perceptual skills – including understanding why host nationals behave and think in the way they do.

Ronen (1989; cited by Deresky, 2003) identified five categories of success for expatriate managers: job factors, relational dimensions such as cultural empathy and flexibility, motivational state, family situation, and language skills.

Oddou (1986; cited by Evans et al., 2002) stated that while there are never any guarantees in identifying the ‘right’ person for the international assignment, a few indicators enhance a firm’s chances of picking a successful candidate: the capacity to adapt to change (new structures, new rules, and new faces), the open-mindedness of the candidate, sociability, self-confidence, having a supportive family, and the capacity to deal with stress.

In a more recent study on the relative importance of factors that contribute to the success of expatriates, as perceived by 338 international assignees, Arthur and Bennet (1995; cited by Bonache and Fernández, 1999) classified them into five categories: job knowledge and motivation; relational skills; flexibility and adaptability; extra-cultural openness; family situation. The authors found that family situation (adaptability of spouse and family, stable marriage, willingness of spouse to live abroad) and flexibility/ adaptability (tolerance of ambiguity, listening skills, ability to deal with stress) were perceived as the most important factors in the success of expatriates.

An interesting question then becomes: why does expatriate selection tend to focus on technical competence and domestic track record as shown in Table 2-1 above? According to Tung (1981; cited by Bonache and Fernández, 1999), the emphasis on technical competence is due to the fact that this is more easily identified than other factors such as cultural adaptability. Moreover, it is often argued (see for example Bonache and Fernández, 1999; Evans et al., 2002) that relevant selection criteria should always depend on the strategic role of the assignment. For agency-type assignments where expatriates are used to transfer skills and knowledge (see Figure 2-1 in Section 2.1.1 above), clear managerial qualifications together with the relevant professional skills are the essential foundation. In contrast, for learning-oriented assignments, relationship abilities and cultural awareness may become more important since they are the keys that open access to new knowledge.

How do MNEs respond to these recommendations? According to Evans et al. (2002), so far, only a minority of multinationals rely on standardised tests and evaluations such as psychological profiling, cultural proficiency tests, or family readiness evaluations, although some of the desirable expatriate traits such as intercultural adaptability, conflict-resolution style, and willingness to communicate can be assessed. Evans et al. (2002) further argue that when formal assessment is used, this should not be applied to screen out unsuitable candidates. The results should instead guide objective feedback to the employee. This would then allow the potential expatriate (and the family) to carefully consider all the factors that may influence success on the assignment, to consult with experts on how to deal with problematic areas - or to decline the assignment.

Another kind of assessment tool is the ‘pre-assignment orientation visit’ for the potential expatriate and his/her family. According to a survey of Finnish MNEs by Suutari and Brewster (1998), two-thirds of the larger MNEs seem to be using this approach. It helps the local hosts to evaluate the candidate’s fit with the new environment, and the candidate can review the job and location before agreeing.

2.2.2 Preparing and Orienting Expatriates

Selecting suitable managers (better: suitable families) is a logical first step but does not alone ensure success. A large percentage of expatriate failures can be attributed to poor preparation and planning for entry and re-entry transitions (Deresky, 2003).

Two problems make preparation and training for international assignments more complex than for domestic assignments. First, the expatriate not only has to adjust to a new job and a new role, but also to a new culture (Mendenhall and Oddou, 1985; cited by Brewster and Harris, 1999). Second, since the stress associated with a foreign assignment falls on all family members the issue of training programmes for the spouse and family need to be addressed (Harris and Moran, 1979; Harvey, 1985; cited by Brewster and Harris, 1999). According to Evans et al. (2002), preparation and training for the family, or at least the spouse, deserves the same attention and material support as for the expatriate since the spouse is typically more exposed to the local culture than the expatriate on the job.

Expatriate training programmes can include topics such as language, cultural awareness, country-specific information, cultural assimilation, flexibility, and local business norms (Romero, 2002). Although many studies indicate that expatriate training can reduce failure rates (Deshpande and Viswesvaran, 1992; Tung, 1982; cited by Romero, 2002), Tung (1982; cited by Adler and Ghadar, 1990) found that only 32 percent of US companies conducted formal international training programmes, as compared with 57 percent of Japanese companies and 69 percent of European companies. Other research shows two-thirds of American firms providing language training (Tung, 1982; cited by Brewster and Harris, 1999) and a third of organisations providing training for the entire family (Global Relocation Trends Survey Report, 2002). The belief that expatriates could be effective without preparation for their assignment is built upon the assumption of ‘universalism’: a manager who has proved to be successful in one country will be successful in any other (Lanier, 1979; cited by Brewster and Harris, 1999). This assumption is widespread in organisations and accounts for the fact that most studies of selection criteria for expatriates find that the main focus is on current competence (Suutari and Brewster, 1998). However, despite the importance of technical competence, it is also clear from the literature that applying those skills in a different cultural environment is not problem free (Suutari and Brewster, 1998).

Mendenhall et al. (1995) suggest that there are three key variables involved in the decision as to whether to provide training and the relative degree of rigour required in each case: job novelty, meaning the degree to which a new job is different from the current one; degree of interaction with host nationals; culture novelty, meaning the degree of difference between the home country and host country in terms of value systems, behavioural norms, etc.. Mendenhall et al. (1995) further argue that differing degrees of cross-cultural training will need to be provided depending on the extent to which each of these variables is present in the expatriate assignment.

So, the requirements for preparation will vary considerably. Some basic issues, such as the job that the person is going to, the country involved and whether the family is going as well, have a significant impact on the need for preparation and the kind of preparation that is necessary (Brewster and Harris, 1999).

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