Advertisement

Journal of International Business Studies

, Volume 40, Issue 8, pp 1359–1373 | Cite as

The antecedents and consequences of successful localization

  • Kenneth S LawEmail author
  • Lynda Jiwen Song
  • Chi-Sum Wong
  • Donghua Chen
Article

Abstract

Localization in the corporate setting is the extent to which expatriate managers are replaced by local employees originally held by expatriate managers. We sampled 229 multinational enterprises (MNEs) in the People's Republic of China and investigated the antecedents of localization success based on resource dependency theory. We developed a 40-item scale to measure human resource (HR) practices determined to contribute to successful localization. We also identified parent company support and top management's commitment as two sets of factors that predicted localization success. It was the first study that found a significant relationship between localization success and top management ratings of company performance.

Keywords

human resource management performance resource dependency localization success 

INTRODUCTION

For a variety of reasons, many multinational enterprises (MNEs) have adopted localization as an international diversification strategy. We follow Potter (1989) and define localization as the extent to which expatriate managers are replaced by local employees who are competent to perform the jobs originally held by expatriate managers. Expatriate managers (or expatriates) in MNEs are managers sent to the host country from the home company of the corporation. Local managers (or locals) are those who are recruited from the local host country labor market. According to this definition, localization does not refer to the mere practice of replacing expatriates by locals. Instead, localization implies replacement of expatriate managers by competent local managers who can perform as well as the expatriate managers. In the ensuing discussion, we call the MNE as the parent company and the local joint venture (JV) or wholly owned foreign enterprise (WOFE) as the local company or local operation.

Although there were some initial efforts to develop and empirically test localization models (e.g., Fryxell, Butler, & Choi, 2004; Law, Wong, & Wang, 2004; Selmer, 2004a, 2004b; Wong & Law, 1999), studies on the question of how to achieve successful localization remain scarce. The purpose of this study is twofold. First, we investigate the factors that lead to successful localization. We also consider whether localization is related to the ultimate goal of every profit-making organization, improved financial performance. Thus our second objective is to investigate the relationship between localization and firm performance. We first review the relevant literature on localization. We then present the three hypotheses regarding the antecedents and consequences of successful localization and firm performance. We test these hypotheses using a sample of 229 MNEs in the People's Republic of China (PRC) and report on the results. We conclude with a discussion of the possible limitations of this study and with recommendations on directions for future studies.

RELEVANT LITERATURE ON LOCALIZATION

Although localization is an important issue for MNEs operating in the host country, there are relatively few scholarly studies reported in the literature on this topic. From these limited studies, two major themes appear to be emerging. The first theme evolves from the issue of whether localization is beneficial to MNEs (e.g., Selmer, 2004a). The second theme focuses on conditions leading to successful localization in MNEs (e.g., Fryxell et al., 2004).

The first issue of whether MNEs should localize has initiated a debate on the localization literature. Localization, like many other managerial policies, has both advantages and disadvantages, although the general literature tends to indicate that the advantages of localization usually outweigh the disadvantages (e.g., Hailey, 1996; Kobrin, 1988; Scullion, 1991). Since most of the prior discussions on this issue are nominal, without concrete empirical support, it is one of the objectives of this study to offer empirical evidence to the ongoing debate on the possible relationship between localization and firm performance.

An even more important objective of this study relates to the second theme in the localization literature, which focuses on conditions facilitating successful localization of MNEs. Fryxell et al. (2004) found that planning and selection of expatriates were the key determinants of localization success. Selmer (2004a) argued that willingness of expatriate managers to train local managers was a core determining factor. In another study, Selmer (2004b) identified selection, recruitment and retention of suitable local employees as key elements in successful localization. Law et al. (2004) concluded that MNEs’ localization objectives, planning and commitment and relevant human resources management (HRM) practices had a significant impact on their localization results in the 139 JVs under investigation. There were, however, three major problems with these studies. First, none sought to explain the localization process and its determining factors from a theoretical perspective. Second, many of these studies (e.g., Law et al., 2004; Selmer, 2004a) collected data only from one single source, making the results susceptible to common method biases. Third, most of these studies were fragmented. For example, Law et al.'s (2004) study included only four HRM practices as possible predictors of localization success. Fryxell et al. (2004) studied formal planning, emphasis on selection and retention efforts as possible antecedents. Selmer (2004a) studied expatriate managers’ unwillingness and inability as the only two antecedents of localization success. In this study, we address the problems highlighted above, and employ resource dependence theory (RDT) to analyze the localization process.

THEORIES AND HYPOTHESES

We use RDT (Medcof, 2001; Pfeffer & Salancik, 1978) and the resource-based view (RBV; Barney, 1991) as the theoretical foundation for this study. RDT allows us to identify the antecedents of localization; RBV gives us a foundation upon which to codify the consequences of localization.

RDT argues that firms’ desire to minimize their dependence on others and to maximize others’ dependence on them is to maximize their power in the resource allocation process (Ulrich & Barney, 1984). We followed Barney's (1991: 101) definition of resources in this study. When applied to our context, firm resources are “all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness”. Based on the RBV of firms, we argue that parent companies will help their local operations to develop competitive resources in the marketplace through localization so that other firms depend on them in the competitive process. Local companies can develop more resources to enhance their competitiveness in a number of ways. We distinguish two types of resources in this competitive process: external resources and internal resources.

One core external resource is knowledge about the local market. Parent companies of MNEs would help their local companies to build up unique resources by replacing expatriates with capable locals, because local managers have better knowledge of the local market environment. Second, network links are important competitive resources in developing countries, where most localization efforts would take place. Ties with local businesses are rare and are controlled by small groups of people in these developing countries. Since local managers are in a much better position to build local ties (Wall, 1990), the parent company can enter local business networks through localization of its managerial force. Successful localization also helps to promote the image of the firm in the local community, because local governments and communities prefer to see local people in management positions in MNEs (Jones, 1997).

Parent companies of MNEs also help their local operations to localize to seek internal resources to improve their competitive edge. The replacement of expatriates by locals leads to motivational effects among local managers, which indirectly improve their commitment and morale, the quality of the product and the services provided, as well as the operational efficiency of the firm. During our in-depth interviews with managers at several MNEs, many local managers told us that they were disappointed because they did not see clear career paths inside their companies, underscoring the negative effect of the lack of localization policies on motivation.

To help a local company to seek resources to improve its competitive edge in the market, the parent company has “to adopt local practices and become isomorphic with the local institutional context” (Gooderham, Nordhaug, & Ringdal, 2006: 1493). Gong (2003: 729) argued from a principal- agent perspective that “the headquarters must delegate work and responsibilities to overseas subsidiaries since it must depend on the unique knowledge of the subsidiaries.” To secure the unique resources needed to compete in the local market, the principal (i.e., the parent company) will encourage the agent (i.e., the local company) to commit to and engage in HRM practices related to localization. Based on this RDT perspective of localization, we therefore propose that there are three sets of antecedents to localization. These three set of factors, parent company support, local company commitment and HRM practices, are now discussed in turn.

Parent Company Support

From an RDT perspective, a parent company can support localization of local operations in different ways. We argue that parent companies provide support to the local company and thereby facilitate the localization process through two supporting mechanisms: (1) allowing the HR department of the local company to play a strategic role and (2) giving autonomy to the local company.

Strategic role of the HR department. First, to help localization succeed, the parent company should be willing to delegate higher decision-making power to the HR department of the local operation. The HR department is usually one of the most strongly parent-controlled departments, because it is involved with issues related to manpower deployment. When the local HR department can play a strategic role in the local operation, this implies that the parent company is willing to loosen control of HR-related matters, such as selection, training, compensation and performance appraisal. A direct result is a better chance of successful localization. One good indicator of the truth of this argument is that HR positions have been among the first to be localized (Cheng, 2003: 49).

Degree of autonomy. Another factor that reflects the parent company's resource management strategy is how much autonomy it gives the local operations in decision making. With greater autonomy, the local company can be more flexible in reacting to the local environment, and in seeking the resources, it needs to succeed in the local context. Parent companies with less concern for central resource control would therefore facilitate localization by giving autonomy to the local companies to build up external and internal resources in the local competition process.

Based on the above arguments, we hypothesize that:

Hypothesis 1:

  • Parent company support (strategic role of HR and degree of autonomy of the local firm) is positively related to localization success.

Local Company Commitment

While the parent company may provide support and encourage the local company to localize, this does not necessarily mean that the local company will be committed to localization. First, with more support and resources from the parent company to localize operations, there is a higher risk of the local company's being held responsible for the results. If everything is controlled by the parent company, the local company is responsible for any outcomes. Second, top managers in the local operations may have idiosyncratic views about the need for localization. The expatriation and repatriation literature has discussed a possible dual commitment of expatriate managers to the parent and local companies (e.g., Gong, 2003; Gregersen, 1991; Gregersen & Black, 1996). Such factors as the background characteristics of the top management team, including their nationalities, ages, individual commitment to the parent firm, their degree of understanding of the host culture and their experience in being expatriates are all crucial in shaping top managers’ views of localization. Third, the core concern of the local top managers is the financial performance of the local company. The effect of localization on financial performance of the local firm may not be immediately positive. In our in-depth interviews with managers at some firms before our data collection, we learned that many of the top managers see the market in China as extremely volatile. Most of their attention is focused on immediate financial indicators of performance, even though they would like to implement localization policies. In other words, unless they can see the immediate benefit of localization in the bottom line of the company, they may wish to delay. While it is impossible to include all these variables in our study, we use top management's general commitment to localization to represent these kinds of factors that affect localization success.

While support from the parent company allows for firm practices that facilitate localization, factors indicating the commitment of top management of the local firm lead to the accumulation of real momentum for successful localization inside the local firm. Thus, we hypothesize that:

Hypothesis 2:

  • Top management commitment to localization inside the local firm is positively related to localization success.

Local Company HRM Practices

Even when a local company has the appropriate parent company support factors and top management commitment to localization, there still must be actual localization-related HRM practices to ensure real success in localization. These practices indicate that internal resources and effort are actually allocated to implement localization. Without them, it is impossible to have successful localization results. If local company commitment helps to mobilize internal resources for localization, HRM practices help in funneling internal resources into localization. Appropriate localization-related HRM practices include selecting the particular expatriates who are willing to help in the career development of local managers; providing them with appropriate incentives to encourage localization; setting up a localization result-oriented appraisal system; training local managers for localization; retaining the developed local managers; and repatriating the expatriates appropriately (Law et al., 2004). Thus, we propose that localization-related HRM practices are positively related to the success of localization.

Hypothesis 3:

  • Localization-related human resource practices regarding assignment, evaluation, compensation, delegation, and repatriation of expatriates and selection, promotion, training and retention of local managers are positively related to localization success.

Finally, we argue that the above three groups of antecedents to localization success could be arranged in a hierarchical order (Law et al., 2004). Parent company support factors lay a foundation for localization and its success. Local company commitment factors reflect the local company's determination to implement localization plans and to make such plans successful. This second group of factors would therefore explain additional variance in localization success on top of that explained by parent company support factors. Finally, actual localization success comes from the design and implementation of appropriate localization-related HR practices. These factors would therefore explain additional variance in localization success on top of that explained by parent company support factors and local company commitment factors.

Localization and Firm Performance

Since there are pros and cons to localization, we cannot argue that every local firm has better performance after localization. However, based on the RBV, we can argue that performance of the focal firm may be better if the local firm chooses to localize and is successful in the localization process. The ultimate goal of the MNEs is to gain competitive advantage and to reap high performance outcomes. RBV suggests that MNEs would choose to localize to gain valuable social resources for competition through localized managerial positions. According to Barney and Arikan (2001: 144), “resource-based explanations of superior performance cannot be developed independent of understanding the market and competitive context within which a firm operates.” Thus these valuable social resources must be unique in the host business environment, and they must be worthy of imitation, but rare and not easily acquired by other competitors. Competent local managers may be more acceptable to local employees, and able to inspire local employees to work harder and be more committed to the company. RBV argues that human capital is intangible, and it is a difficult-to-imitate intangible resource that contributes to the competitive advantages of a company (Barney, 1991). When local managers are properly developed and utilized, the social ties and networks they build can become competitive resources for the local company. These local managers would have the advantages of having better local networks and better communications with employees, customers and government officials. Finally, successful localization could also help reduce operation costs, enhance the identification of the local managers in the organization, boost the morale of local managers, facilitate communications and expertise transfer between expatriates and local managers, and contribute to firm performance. Therefore, while we do not develop specific hypothesis on the relationship between localization success and local firm performance, we analyze the data and seek preliminary results for future theory development.

METHOD

The empirical component of this study was divided into two parts. The first part aimed at developing scales to measure localization success, localization-related HRM practices and other variables. In this part of the study, we used the inductive scale development approach suggested by Hinkin (1995, 1998). Basically, we used subject matter experts to generate items, and we then cross-validated the content validity of the consolidated dimensions by multiple groups of raters. In the second part of this study, we used the developed scales to test our hypotheses with data collected from companies from several cities in the PRC.

SCALE DEVELOPMENT

There are normally two stages in scale development: item generation and dimension consolidation. We included both stages in our scale development for this study. During the item generation stage, we conducted a series of interviews with top managers and HR managers of MNEs in Hong Kong, Guangzhou and Shanghai to solicit their views concerning major factors contributing to localization success. During these interviews, three questions were asked:
  1. 1)

    “What could your company do to achieve successful localization?”

     
  2. 2)

    “What could expatriate managers do to facilitate localization success?”

     
  3. 3)

    “What could local managers do to facilitate localization success?”

     

The 94 responding managers were asked to write down their answers on a form provided by the interviewers. All answers were included in the consolidation stage, except for some responses that were too broad and general (around 10% items in the pool). An example of an included item is “Expatriates are willing to train local managers.”

During the dimension consolidation stage, we first randomly divided all the answers into two groups. Five doctoral students who were not aware of the research questions were asked to sort the first group of items into related categories. For each of the three questions, the students were asked to group the items into about four to eight categories that were meaningful to them. There were no prescribed category labels, and the students were free to develop any framework they found meaningful. The students then reported their results and were asked to explain the rationale behind their categorization systems. After a thorough discussion, the students achieved consensus and came up with three categorization systems for the three questions and decided on the labels for all categories and subcategories.

We then invited another five doctoral students to conduct the same exercise using the second group of answers. This resulted in another three categorization systems. Finally, we invited another three doctoral students who were earning doctoral degrees in management to review the two sets of categorization systems. They were asked to review all the main categories, the subcategories and the answers. After thorough discussion, they came up with one consolidated categorization framework with factors related to localization success. These factors are from three foci: the firm (e.g., top management's localization commitment); expatriates (e.g., assignment, repatriation); and local managers (e.g., promotion, training).

The final items used in our survey questionnaire were based on these consolidated categories. We compared these three categories with items from Law et al.'s (2004) study and found that repatriation practices appeared to be under-represented in our survey items. Thus, we also included the repatriation items from Law et al.'s (2004) study. All items were worded so that they could be answered by the top manager and the HR manager. Translation and back-translation procedures were followed (Brislin, 1970), and we prepared three versions of the questionnaire in English, Japanese and Chinese.

We conducted a pilot study to test the validity and reliability of the scales. Twenty-seven managers from MNEs participated in this pilot study and completed a questionnaire containing all the items generated. Correlation results and factor loadings from the exploratory factor analyses were carefully checked. Some items in the questionnaire were slightly modified based on these analyses before they were used in the main study.

MAIN STUDY

Sampling Procedure

We distributed 2080 sets of questionnaires through three channels. Each set contained the top manager's questionnaire and the HR manager's questionnaire. First, we contacted the chambers of commerce in Beijing and Shanghai representing different countries, including Canada, the USA, the UK, Australia and Japan, that agreed to provide lists of member companies to us. We hired one research assistant with an HR background in Beijing and one in Shanghai to follow up on the questionnaire distribution and collection process. Their follow-up efforts included making phone calls to solicit MNEs to participate in the survey. To those who were interested, the research assistants delivered the questionnaires by mail/fax or conducted face-to-face interviews. Thirty companies did not allow face-to-face-interviews but returned the completed questionnaires by mail. All other interested companies arranged interviews with the assistants, and the assistants filled out the questionnaires during the interviews. Second, we invited two university professors in Shanghai to distribute questionnaires to top managers in MNEs located in Shanghai and other provinces. Third, we distributed questionnaires in a series of HRM conferences that were held in three major cities: Shanghai, Shenzhen and Beijing. Around 1000 HR managers from all over the country attended the conferences. We asked the managers to seek the help of a top-level manager in their companies to fill in the top management questionnaire and vice versa.

Overall, a total of 229 sets of useful questionnaires were collected, giving a response rate of 11%. Of these 229 sets, 26 (11.4%) were from Beijing, 131 (57.2%) were from Shanghai, 38 (17.6%) were from Guangdong province and 34 (14.8%) were from other provinces. Forty companies were USA firms (20.1%), 12 were UK firms (6.0%), 29 were Hong Kong firms (14.6%), 13 were Taiwanese firms (6.5%), 39 were Japanese firms (19.6%), four were Korean firms (2.0%), four were Australian firms (2.0%), five were Swiss firms (2.5%), eight were French firms (2.0%), 17 were German firms (8.5%) and 28 were firms from other countries (14.1%). Eighty-three companies were in the manufacturing sector (41.3%), 29 were in the high-technology sector (14.4%), 42 were in the services sector (20.9%) and 47 were in other industries (23.4%). Thirty-seven (19.9%) of the responding companies were listed companies.

Measures

Dependent variables. There were two dependent variables in this study: localization success and firm performance. Localization success was measured by two types of indicators: subjective ratings and an objective ratio. The subjective indicators included a self-developed seven-item measure of localization success on a seven-point scale (1=totally disagree). A sample item was “In my company, many local mangers have successfully replaced expatriate managers.” The objective ratio of localization success was the ratio of expatriate positions successfully replaced by local managers to the total number of expatriates assigned to the focal firm since inception. The top managers provided both the subjective ratings and the objective numbers. We also asked the HR manager to provide these ratings and numbers. The correlations between the two rating sources on the two localization success measures were 0.75 and 0.75 (p<0.01), respectively. Since information for all the predictor variables was provided by the HR manager, we used the top manager's inputs as the dependent variables in our analyses to avoid the problem of common method variance. Results from using the HR managers’ information in our analyses were very similar to those using the top managers’ data.

We also asked the top manager to evaluate the present performance of the firm and its performance 2 years ago, relative to other firms in the same industry, using a seven-item, seven-point Likert-type measure developed by Tan and Litschert (1994). One sample item was “The level of profit of our operation is: (1=very low; 7=very high)”.

Past localization success was measured by asking both the top manager and the HR manager to provide an estimate of the success of the localization efforts 2 years ago as compared with their major competitors on a scale between 0 (extremely poor) and 100 (extremely good). The mean rating by top managers was 54.5, with a standard deviation of 26.4. The mean rating by the HR managers was 57.2, with a standard deviation of 25.6. The correlation between the ratings by the two managers was 0.77 (p<0.01). The items for measuring localization success and firm performance are presented in Appendix A.

Localization-related human resource practices. Items measuring localization-related HRM practices were developed by the inductive procedure described above. On top of the actual grouping results by the three groups of doctoral students, we also referred to items used to measure localization-related HR practices in the Law et al's. (2004) study during the item consolidation phrase. We developed eight groups of localization-related HR practices: selection of expatriates, training and development of local managers, expatriates’ delegation to local managers, rewards related to localization, evaluation of expatriates, promotion of local managers, repatriation of expatriates and retention of local managers. The reliabilities of these eight HR practice scales ranged from 0.85 to 0.95 (see Table 1). The localization-related human resource practice items are provided in Appendix B.
Table 1

Descriptive statistics and correlations among variablesa,b,c

Variable

Mean

s.d.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

 1. TPROG

4.58

1.38

(0.93)

              

 2. TPROGS

0.33

0.32

0.48

             

 3. TPROGP

54.52

26.44

0.62

0.44

1.00

            

 4. HPROGP

57.21

25.59

0.54

0.45

0.77

1.00

           

 5. PERF_1

4.67

0.93

0.35

0.12

0.32

0.24

(0.86)

          

 6. PERF_0

4.15

1.09

0.17

0.12

0.23

0.13

0.30

(0.91)

         

 7. WHOWN

0.61

0.49

−0.12

−0.06

0.01

−0.09

−0.18

−0.04

        

 8. JV

0.30

0.46

0.08

0.12

0.06

0.12

0.11

0.02

−0.82

       

 9. MANUFA

0.41

0.49

0.04

0.11

0.01

0.04

0.10

−0.02

0.14

−0.03

      

10. TECH

0.14

0.35

0.01

−0.06

0.09

0.12

−0.06

0.11

0.00

−0.02

−0.34

     

11. SERV

0.21

0.41

0.07

−0.01

0.03

−0.04

0.05

0.04

−0.14

0.09

−0.43

−0.21

    

12. CHINA

0.21

0.41

−0.02

0.03

−0.04

−0.17

−0.05

−0.05

0.00

0.01

−0.16

0.06

0.03

   

13. USA

0.20

0.40

0.22

0.23

0.21

0.23

0.18

0.07

−0.02

0.00

0.08

0.12

−0.04

−0.26

  

14. EUROPE

0.21

0.41

−0.05

−0.09

−0.01

−0.05

−0.11

0.03

−0.10

0.10

−0.12

−0.11

0.13

−0.27

−0.26

 

15. %SHARE

86.23

21.90

−0.21

−0.16

−0.05

−0.10

−0.18

−0.09

0.69

−0.72

0.11

−0.05

−0.21

−0.11

0.16

−0.05

16. SIZE

676.53

1438.20

0.12

0.18

0.13

0.03

0.05

0.20

−0.12

0.17

0.15

0.11

−0.12

−0.02

−0.03

0.02

−0.26

17. HRR

5.11

1.14

0.33

0.10

0.19

0.16

0.21

0.00

−0.01

0.11

0.03

−0.05

0.03

−0.10

0.10

0.00

−0.18

18. AUT

4.50

1.45

0.24

0.04

0.10

0.24

0.08

−0.18

−0.12

0.18

0.04

−0.05

0.00

−0.16

−0.03

0.10

−0.17

19. COM

4.68

1.34

0.57

0.38

0.39

0.43

0.21

0.01

−0.05

0.10

−0.05

0.02

0.09

−0.06

0.15

−0.03

−0.18

20. SEL

5.48

1.00

0.44

0.08

0.18

0.18

0.27

0.01

−0.15

0.16

−0.04

0.03

0.02

−0.05

0.16

0.05

−0.16

21. T&D

5.16

1.04

0.35

0.17

0.17

0.28

0.27

0.04

−0.12

0.15

0.01

−0.05

0.01

−0.14

0.19

0.06

−0.11

22. DEL

4.87

1.26

0.50

0.26

0.29

0.39

0.31

0.03

−0.10

0.17

0.06

−0.02

0.04

−0.10

0.17

−0.05

−0.16

23. REW

4.00

1.44

0.38

0.25

0.33

0.41

0.16

−0.05

−0.02

0.09

−0.01

0.06

0.04

0.00

0.07

−0.14

−0.12

24. EVA

4.05

1.46

0.32

0.26

0.28

0.33

0.24

−0.01

−0.09

0.13

−0.01

0.06

0.08

−0.05

0.16

−0.11

−0.18

25. PROM

5.23

1.21

0.46

0.28

0.18

0.27

0.13

−0.08

−0.11

0.13

0.02

0.01

−0.06

−0.14

0.14

−0.02

−0.22

26. REP

4.79

1.18

0.14

0.09

0.01

0.14

0.05

0.15

0.02

0.00

0.13

0.02

0.04

−0.09

0.00

−0.12

−0.06

27. RET

5.04

1.04

0.29

0.12

0.13

0.10

0.21

−0.03

0.04

0.01

−0.01

0.00

0.05

0.03

0.10

−0.01

−0.06

Variables

16

17

18

19

20

21

22

23

24

25

26

27

16. SIZE

           

17. HRR

0.13

(0.95)

          

18. AUT

−0.01

0.51

(0.84)

         

19. COM

0.06

0.48

0.29

(0.94)

        

20. SEL

0.04

0.59

0.37

0.53

(0.90)

       

21. T&D

0.04

0.67

0.44

0.52

0.67

(0.90)

      

22. DEL

−0.02

0.67

0.46

0.62

0.65

0.68

(0.94)

     

23. REW

0.05

0.46

0.41

0.52

0.48

0.55

0.61

(0.94)

    

24. EVA

−0.04

0.51

0.41

0.54

0.50

0.63

0.67

0.73

(0.95)

   

25. PROM

−0.06

0.59

0.44

0.57

0.61

0.60

0.67

0.49

0.50

(0.89)

  

26. REP

0.12

0.31

0.19

0.28

0.21

0.37

0.27

0.40

0.37

0.26

(0.86)

 

27. RET

0.14

0.65

0.35

0.54

0.53

0.59

0.59

0.45

0.47

0.56

0.31

(0.85)

aNumbers on the diagonals are the reliability coefficients.

bN ranged from 140 to 204; r⩾0.14, p<0.05; r⩾0.21, p<0.01.

cTPROG, top-manager-rated localization success; TPROGS, ratio of the number of localized to the number of expatriates; TPROGP, top-manager-rated localization success 2 years ago; HPROGP, HR manager-rated localization success 2 years ago; PERF_1, current firm performance; PERF_0, firm performance 2 years ago; WHOWN, 1=whole-owned foreign enterprises; JV, 1=joint ventures (dummy); MANUFA, 1=manufacturing firms (dummy); TECH, 1=technological firms (dummy); SERV, 1=service enterprises (dummy); CHINA, 1=firm dominant owner is from Taiwan or Hong Kong (dummy); USA, firm’s dominant owner is from the USA (dummy); EUROPE, firm’s dominant owner is from Europe (dummy); %SHARE, % of firm’s shares owned by non-PRC owners; SIZE, number of employees; HRR, HR department’s role in the firm; AUT, autonomy of host operation with respect to parent company; COM, top management commitment to localization; SEL, selection of expatriates and local managers; PROM, promotion of local managers; T&D, training for local managers; EVA, evaluation for expatriates and local managers; DEL, delegation to local managers; REW, reward of expatriates and local managers; REP, repatriate expatriates; RET, retention of local managers.

Parent company support factors. We assessed these factors by measuring the level of autonomy with respect to the parent company and the strategic role of the HR department.

Autonomy of the focal firm was measured by four items revised from Gong, Shenkar, Luo, and Nyaw's (2001) international JV CEO autonomy scale. A sample item was “My company can make the following decisions without consulting our parent company: Budget planning”. The Cronbach α of this measure was 0.84.

The strategic role of the HR department was measured by eight items developed by Law, Tse, and Zhou (2003). A sample item was “Our HR department can significantly affect the formulation of our company's overall strategy.” The Cronbach's α of this measure was 0.95.

Local company commitment factor. We used one variable, top management commitment to localization, to represent the factors facilitating localization success. This variable was measured by six items developed for this study. One sample item was “Overall, my company tries hard to develop local managers and hopes that they can replace expatriate managers.” The Cronbach's α of this measure was 0.94.

All the items used to measure the parent company support and local company commitment variables are given in Appendix A.

Control variables. We controlled for a number of important variables in our analyses. These included industry type (manufacturing, Hi-tech, services), ownership type (WOFE, JV), percentage of shares owned by the foreign partner (%SHARE), country of origin (Greater China, USA, Europe) and company size (total number of employees in the focal company).

Analyses

Confirmatory factor analyses (CFAs). We first performed a CFA on the two parent company support variables, the local company commitment variable and the eight HRM practices variables. These variables were analyzed together because they were reported by the HR manager in the same questionnaire. Since our sample was not very large, we grouped items together and used the approach of random assignment (Little, Cunningham, Shahar, & Widaman, 2002) to form three indicators for each of the 11 variables. This method of parceling indicators to form new indicators and to reduce the number of observed variables in the CFA is quite common in the literature (e.g., Mathieu & Farr, 1991; Mathieu, Hofmann, & Farr, 1993). The model χ2 of the CFA was 857.48 (p<0.01), the d.f. was 440, the CFI was 0.98, the TLI was 0.98, the RMSEA was 0.07 and the standardized RMR was 0.06. All the fit indices showed that our 11-factor model fitted the data well. Based on the results of the CFA and the high Cronbach's α of each variable, we concluded that the measures used in this study were acceptable.

RESULTS

Descriptive Statistics

The means, standard deviations, reliabilities and correlations are presented in Table 1. As the data in Table 1 show, most of the localization-related HR practices are highly correlated with the indicators of localization success. Past localization success as rated by the top manager and the HR manager also correlates significantly with current firm performance (r=0.32, p<0.01 and 0.24, p<0.01 respectively).

Hierarchical Regressions with Localization Success as the Dependent Variable

We used hierarchical regression to test the hypotheses with localization success as the dependent variable. Results of the analyses are presented in Table 2. We entered the control variables as the first block. The parent company support variables were then entered as the second block. The change in model R 2 R2) of 0.14 (ΔF=11.68, p<0.01) was significant in the top managers’ subjective ratings of localization success. However, the ΔR2 was insignificant when the objective localization ratio was used as the dependent variable. An examination of the variance inflation factor (VIF; Stevens, 1992) of the independent variables (ranging from 1.34 to 3.98) in the final model suggests that multicollinearity was not a serious problem, since Myers (1990) mentions that VIF greater than 10 should be worthy of further investigation. Hypothesis 1 was partially supported.
Table 2

Results of hierarchical regression analyses on localization success

 

Subjective rating

Objective ratio

Wholly owned

−0.01

−0.11

−0.17

−0.13

0.21

0.20

0.14

0.16

Joint venture

−0.09

−0.16

−0.18

−0.22

0.07

0.06

0.06

0.04

Manufacture

0.11

0.13

0.15

0.13

−0.01

−0.01

0.01

0.04

Hi-tech

0.02

0.07

0.06

0.03

−0.12

−0.12

−0.14

−0.14

Service

0.05

0.07

0.06

0.06

−0.11

−0.11

−0.12

−0.11

Greater China

0.03

0.06

0.06

0.09

0.14

0.15

0.13

0.20*

USA

0.26**

0.20*

0.12

0.13

0.33**

0.34**

0.26*

0.27**

Europe

0.02

0.01

0.03

0.05

0.00

0.00

0.00

0.10

%SHARE

−0.32*

−0.17

−0.09

−0.13

−0.25***

−0.25***

−0.16

−0.16

Size

0.06

0.05

−0.02

0.04

0.16***

0.16

0.10

0.15***

Parent company support factors

 HR role

 

0.33**

0.13

−0.00

 

−0.02

−0.19

−0.26***

 Autonomy

 

0.11

0.06

0.02

 

0.04

−0.01

−0.10

Local company commitment factors

 Commitment

  

0.49**

0.35**

  

0.42**

0.27*

HRM practices factors

 Selection

   

0.04

   

−0.31*

 Training

   

0.06

   

0.02

 Delegation

   

0.31*

   

0.26

 Rewards

   

0.16

   

0.10

 Evaluation

   

−0.18

   

0.13

 Promotion

   

0.11

   

0.25***

 Repatriation

   

−0.01

   

0.01

 Retention

   

−0.15

   

−0.11

Model R2

0.14*

0.27**

0.43**

0.50**

0.16*

0.16*

0.28**

0.38**

Adjusted R2

0.07*

0.20**

0.37**

0.41**

0.09*

0.08*

0.19**

0.26**

ΔR2

 

0.14**

0.16**

0.07*

 

0.00

0.11**

0.11*

*p<0.05; **p<0.01; ***p<0.10.

The top management commitment to localization variable and the localization-related HR practices variables were entered into the regression as the third and fourth block, respectively. Their incremental explanatory predictions on localization success were significant in most of the regressions (ΔR2 ranging from 0.07 to 0.14). The multicollinearity test showed that the VIF of independent variables in the final model ranged from 1.35 to 4.57. Hypotheses 2 and 3 were supported.

Hierarchical Regressions with Firm Performance as the Dependent Variable

With firm performance as the dependent variable, we tested the impact of past localization success (the rated localization success of the local firm 2 years ago) on the current performance of the firm, controlling for ownership status, industry type, country of parent company, ownership and size. We also controlled for performance of the local firm 2 years ago as rated by the same top manager of each firm. The results are reported in Table 3. Model 1 in Table 3 shows the results when the top managers’ ratings of past localization success were used as the predictor. Since current firm performance was rated by the top managers, there might be a problem of common method variance in this model. Therefore we used the HR managers’ ratings of past localization success to predict the top managers’ ratings of current firm performance in Model 2. Past localization success was used to predict current firm performance because it would take time for the localization results to affect firm performance. Table 3 shows that the results from the two models are basically the same. Past localization success is a significant factor affecting current firm performance after controlling for past firm performance and all the control variables (ΔR2=0.05, ΔF=8.82, p<0.01 for the top managers’ ratings of localization success; ΔR2=0.04, ΔF=7.19, p<0.05 for the HR managers’ ratings of localization success). The VIF of the independent variables (ranging from 1.07 to 3.66 in Model 1 and from 1.07 to 3.39 in Model 2) also passed the multicollinearity test according to Myers (1990).
Table 3

Results of hierarchical regression analyses on firm performancea

 

Firm performance

 

Model 1

Model 2

Wholly owned

−0.18

−0.18

−0.23

−0.20

−0.19

−0.19

Joint venture

−0.15

−0.15

−0.20

−0.18

−0.16

−0.19

Manufacture

0.15

0.14

0.13

0.16

0.15

0.12

Hi-tech

−0.07

−0.11

−0.13

−0.06

−0.10

−0.15

Service

0.04

0.02

0.03

0.05

0.03

0.05

Greater China

−0.02

−0.01

−0.01

−0.03

0.01

0.01

USA

0.16

0.14

0.10

0.14

0.14

0.11

Europe

−0.12

−0.12

−0.12

−0.15

−0.13

−0.13

%SHARE

−0.22

−0.21

−0.21

−0.21

−0.20

−0.18

Size

−0.01

−0.04

−0.07

0.02

−0.04

−0.02

Past performance

 

0.34**

0.30**

 

0.34**

0.21**

Past localization success

  

0.25**

  

0.23*

Model R2

0.14**

0.25**

0.30**

0.14**

0.25**

0.30**

Adjusted R2

0.07**

0.18**

0.23**

0.07**

0.18**

0.22**

ΔR2

 

0.11**

0.05**

 

0.11**

0.04**

**p<0.01; *p<0.05.

aModels 1 and 2 differ in the past localization success predictor. Model 1 uses the top managers’ ratings, whereas Model 2 uses the HR managers’ ratings.

DISCUSSION AND CONCLUSION

By adopting the resource-based view, we argued that a localization-related management arrangement and localization-related practices contribute to the success of localization, which in turn has a positive effect on firm performance. Results showed consistent support for our hypotheses. According to the RBV (Barney, 1986), resources that are intangible and difficult to imitate help the firm to build competitive advantage. Localization is one key process in developing important intangible and non-imitable HR that help to improve firm performance. Results in Table 3 show that localization success two years ago does affect current firm performance.

If localization of expatriate positions can help to build up resources for local companies of MNEs to compete in the local market, what should their parent companies do to facilitate this localization? We argued from the resources dependency view that the parent companies must be willing to share more resources with their local companies. We distinguished two indicators of parent companies’ willingness to give out their resources to their local counterparts. They are the strategic power of the local HR department and the degree of autonomy granted to the locals by parent companies. While the parents may be willing to render some of their resources to the local company to facilitate localization, top management of the local company must be willing to commit to localization as well. When both of these two are present happen, they would be transformed into localization-related HRM practices.

Limitations

There are, as in all studies, several limitations to this study. First, we did not measure the objective rating of localization success 2 years ago. Further studies could use a longitudinal design to strengthen our results on the effect of localization success on firm performance. Second, firm performance is measured by subjective ratings from top managers. Although some previous studies have shown that this may not be a serious problem (Geringer, Frayne, & Milliman, 2002; Geringer & Hebert, 1991), future studies may use an objective financial performance measure to explore the relationship between localization success and firm performance. Third, we used only one variable to operationalize the local company's commitment to localization. Future studies may include more variables to enrich this factor and further check its effects on localization success. Finally, we focused on localization-related HR activities in the PRC, and the data for this study were all collected in the PRC. While we do not see any reason why our results cannot be generalized to localization in other countries, further studies in other countries may provide empirical support for our claims.

Future Research Directions

This localization study extended previous studies on localization in many ways. First, it is the first study to provide empirical evidence on the relationship between localization success and firm performance. Second, we provided one theoretical perspective of how the parent company and the local company could work together to facilitate localization success. Parent companies must be willing to render more resources to their local companies in order for localization to be successful. Resources in this context include assets (e.g., money to reward local employees and training to develop their skills), competencies (e.g., selecting expatriates who intend to train locals), processes (e.g., allowing local companies more discretion in their compensation, appraisal system, motivation and retention of local employees), and firm attributes (e.g., allowing the operation system of the local company to be different from that of the headquarters). As far as we know, this is the first study to develop a theoretical framework of how localization should be executed. Third, we systematically developed a 40-item scale to measure localization-related HR practices. This can provide companies with a systematic and thorough checklist of what the HR department could do to contribute to localization success. The measurement instrument based on our inductive approach showed satisfactory predictive validity. Finally, we used an independent source of information to identify the antecedents of localization success and the outcome measures. This improvement in methodology further confirms the importance of top management commitment and appropriate HR practices in affecting localization success.

We also started a new direction for research on localization by exploring the internal mechanism between the parent company and the local company during localization. Future studies might further explore the detailed relationship between the parent company and the local company in this localization process. They can also investigate management practices that can alleviate the psychological imbalances among managers in the headquarters when more resources and decision-making power are delegated to the local companies. Future studies should also provide stronger control variables to partial out irrelevant variances in the outcome variables. Controlling variable such as the stage of the firm life, the strategy it takes and the time it entered China may be considered. Another possible direction for future research on localization that is related to our framework is consideration of the boundary conditions for the extent to which localization helps in the financial performance of companies.

Notes

Acknowledgements

Data collection for this project is supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region (project no. HKUST6219/00H) and NSFC no. 70602001.

References

  1. Barney, J. B. 1986. Strategic factor markets: Expectations, luck and business strategy. Management Science, 32 (10): 1231–1241.CrossRefGoogle Scholar
  2. Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17 (1): 99–120.CrossRefGoogle Scholar
  3. Barney, J. B., & Arikan, A. M. 2001. The resource-based view: Origins and implications. In M. A. Hitt, R. E. Freeman, & J. R. Harrison (Eds), Handbook of strategic management: 124–188. Oxford: Blackwell Publishers.Google Scholar
  4. Brislin, R. 1970. Back-translation for cross-cultural research. Journal of Applied Psychology, 1 (3): 185–216.Google Scholar
  5. Cheng, E. (Ed.) 2003. China hand: The complete guide to doing business in China. Hong Kong: The Economist Intelligence Unit Limited.Google Scholar
  6. Fryxell, G., Butler, J., & Choi, A. 2004. Successful localization programs in China: An important element in strategy implementation. Journal of World Business, 39 (3): 268–283.CrossRefGoogle Scholar
  7. Geringer, J. M., & Hebert, L. 1991. Measuring performance of international joint ventures. Journal of International Business Studies, 22 (2): 249–263.CrossRefGoogle Scholar
  8. Geringer, J. M., Frayne, C. A., & Milliman, J. F. 2002. In search of “best practices” in international human resource management: Research design and methodology. Human Resource Management, 41 (1): 5–30.CrossRefGoogle Scholar
  9. Gong, Y. 2003. Subsidiary staffing in multinational enterprises: Agency, resources and performance. Academy of Management Journal, 46 (6): 728–739.CrossRefGoogle Scholar
  10. Gong, Y., Shenkar, O., Luo, Y., & Nyaw, M. K. 2001. Role conflict and ambiguity of CEOs in international joint ventures: A transaction cost perspective. Journal of Applied Psychology, 86 (4): 764–773.CrossRefGoogle Scholar
  11. Gooderham, P., Nordhaug, O., & Ringdal, K. 2006. National embeddedness and calculative human resource management in US Subsidiaries in Europe and Australia. Human Relations, 59 (11): 1491–1513.CrossRefGoogle Scholar
  12. Gregersen, H. B. 1991. Dual commitments during repatriation: The case of American expatriates. Best Papers Proceedings, Academy of Management: 100–104.Google Scholar
  13. Gregersen, H. B., & Black, J. S. 1996. Multiple commitments upon repatriation: The Japanese experience. Journal of Management, 22 (2): 209–230.CrossRefGoogle Scholar
  14. Hailey, J. 1996. Breaking through the glass ceiling. People Management, 2 (14): 32–34.Google Scholar
  15. Hinkin, T. R. 1995. A review of scale development practices in the study of organizations. Journal of Management, 21 (5): 967–988.CrossRefGoogle Scholar
  16. Hinkin, T. R. 1998. A brief tutorial on the development of measures for use in survey questionnaires. Organizational Research Methods, 1 (1): 104–121.CrossRefGoogle Scholar
  17. Jones, S. 1997. Localization threat forces expats into rearguard action. China Staff, October: 6–9.Google Scholar
  18. Kobrin, S. J. 1988. Expatriate reduction and strategic control in American multinational corporations. Human Resource Management, 27 (1): 63–75.CrossRefGoogle Scholar
  19. Law, K. S., Tse, D. K., & Zhou, N. 2003. Does human resource management matter in a transitional economy? The example of the PRC. Journal of International Business Studies, 34 (3): 255–265.CrossRefGoogle Scholar
  20. Law, K. S., Wong, C. S., & Wang, K. 2004. An empirical test of the model on managing the localization of human resource in the People's Republic of China. International Journal of Human Resource Management, 15 (4–5): 638–648.Google Scholar
  21. Little, T. D., Cunningham, W. A., Shahar, G., & Widaman, K. F. 2002. To parcel or not to parcel: Exploring the question, weighing the merits. Structural Equation Modeling, 9 (2): 151–173.CrossRefGoogle Scholar
  22. Mathieu, J. E., & Farr, J. L. 1991. Further evidence for the discriminant validity of measures of organizational commitment, job involvement, and job satisfaction. Journal of Applied Psychology, 76 (1): 127–133.CrossRefGoogle Scholar
  23. Mathieu, J. E., Hofmann, D. A., & Farr, J. L. 1993. Job perception–job satisfaction relations: An empirical comparison of three competing theories. Organizational Behavior and Human Decision Processes, 56 (3): 370–387.CrossRefGoogle Scholar
  24. Medcof, J. W. 2001. Resource-based strategy and managerial power in networks of internationally dispersed technology units. Strategic Management Journal, 22 (11): 999–1012.CrossRefGoogle Scholar
  25. Myers, R. 1990. Classical and modern regression with applications. Boston, MA: Duxbury Press.Google Scholar
  26. Pfeffer, J., & Salancik, G. R. 1978. The external control of organizations: A resource dependence perspective. New York: Harper & Row.Google Scholar
  27. Potter, C. C. 1989. Effective localization of the workforce: Transferring technology in developing countries. Journal of European Industrial Training, 13 (6): 25–30.CrossRefGoogle Scholar
  28. Scullion, H. 1991. Why companies prefer to use expatriates. Personnel Management, 23 (11): 32–35.Google Scholar
  29. Selmer, J. 2004a. Expatriates’ hesitation and the localization of Western business operations in China. International Journal of International Human Resource Management, 15 (6): 1094–1108.CrossRefGoogle Scholar
  30. Selmer, J. 2004b. Motivating Western business expatriates in China to localize. Journal of Asian Business, 20 (1): 49–69.Google Scholar
  31. Stevens, J. 1992. Applied multivariate statistics for the social sciences. Hillsdale, NJ: Lawrence Erlbaum Associates.Google Scholar
  32. Tan, J. J., & Litschert, R. J. 1994. Environment-strategy relationship and its performance implications: An empirical study of the Chinese electronics industry. Strategic Management Journal, 15 (1): 1–20.CrossRefGoogle Scholar
  33. Ulrich, D., & Barney, J. B. 1984. Perspectives in organizations: Resource dependence, efficiency, and population. Academy of Management Review, 9 (3): 471–481.Google Scholar
  34. Wall, J. A. 1990. Managers in the People's Republic of China. Academy of Management Executive, 4 (2): 19–32.CrossRefGoogle Scholar
  35. Wong, C. S., & Law, K. S. 1999. Managing localization of human resources in the PRC: A practical model. Journal of World Business, 34 (1): 26–40.CrossRefGoogle Scholar

Copyright information

© Academy of International Business 2009

Authors and Affiliations

  • Kenneth S Law
    • 1
    Email author
  • Lynda Jiwen Song
    • 2
  • Chi-Sum Wong
    • 1
  • Donghua Chen
    • 3
  1. 1.Department of ManagementThe Chinese University of Hong KongShatinHong Kong
  2. 2.Business School, Renmin University of ChinaBeijingPR China
  3. 3.Institute of Accounting and Finance, School of Business, Nanjing UniversityNanjingPR China

Personalised recommendations