anthony goerzen/paul w. beamish the penrose effect:“excess

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Anthony Goerzen/Paul W. Beamish

The Penrose Effect: “Excess” Expatriatesin Multinational Enterprises

Abstract and Key Results

■ Penrose’s (1959) theory of firm growth argues that firm knowledge and experi-ence gives rise to “excess” resources which can be (re)deployed to explore andexploit productive opportunities leading, ultimately, to the achievement of firmgoals.

■ We examine this key insight on organizational slack in the context of expatriatemanagers within multinational enterprises (MNEs).

■ Expatriates are not only a viable way of examining the Penrosian concept of slackbut, as an unique element of MNE management, expatriates also provide an oppor-tunity to develop new insights into international business theory.

■ Using a large sample of MNE subsidiaries, we found that when host country expe-rience is comparatively low, subsidiaries with “excess” expatriate managers aremore likely to experience inferior performance. Alternatively, expatriate slack isassociated with a higher likelihood of superior performance in the context of com-paratively high host country experience.

Key Words

Multinational Corporations, Penrose, Expatriates, Organizational Slack, HumanResources

Authors

Anthony Goerzen, Associate Professor of Strategy & International Business, University of Victoria,Canada.Paul W. Beamish, Canada Research Chair in International Management, Ivey Business School, Uni-versity of Western Ontario, Canada.

Manuscript received September 2004, revised November 2004, final version received January 2005.


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Introduction

Penrose (1959) has become a central source of emerging ideas in the study of strategicmanagement. While the debate as to her intended versus ascribed views continues(cf. e.g., Kor/Mahoney 2004, Lockett/Thompson 2004, Rugman/Verbeke 2004), thereis a consensus that Penrose (1959) has inspired a powerful set of concepts on the re-lationship between intrafirm learning, the source(s) of competitive advantage, andfirm performance that are useful in the analysis of MNEs (Pitelis 2002).

One of Penrose’s (1959) key insights is that learning through experience causesmanagers to become more efficient at what they do. Thus, rising efficiency causespreviously utilized managerial resources to become “slack,” although not idle, andthese “unused productive services are, for the enterprising firm, at the same time achallenge to innovate, an incentive to expand, and a source of competitive advan-tage” (Penrose 1959, p. 85). In fact, Penrose (1959, p. 45) argued that the “capac-ities of the existing managerial personnel of the firm necessarily set a limit to theexpansion of the firm” in any given period – a bottleneck sometimes referred to asthe “Penrose effect.”

Kor and Mahoney (2000) provide an extensive unbundling of Penrose’s modelof firm growth, suggesting that firm growth is a function of firm-specific experi-ences in teams, that managerial capability is the binding constraint that limits thegrowth rate of the firm, and that excess capacity of productive services are driversof firm growth. More specifically, these authors suggest several key questions, in-spired by Penrose’s work, that relate to the ways in which human resources influ-ence a firm’s growth and competitive advantage, the conditions under which a firm’sknowledge and experience have an impact on performance, and the sources of firmheterogeneity.

This framing of key Penrosian questions by Kor and Mahoney (2000) is closelyaligned with questions emerging in the field of international business on the sourceof firm-specific advantages (FSAs) within MNEs. There has been a significantevolution in thinking about MNEs over the past ten years; traditionally, researchersassumed that nonlocation-bound FSAs were developed at the corporate headquartersand leveraged overseas through a network of foreign subsidiaries (Rugman 1981).This established view is characterized by a great emphasis on cost optimization andFSA protection. As overseas subsidiaries grow in size and develop their own uniqueresources, however, it has become increasingly apparent that the home country isno longer the sole source of competitive advantage for the MNE (Rugman/Verbeke1992) as reflected by alternative perspectives such as the heterarchy (Hedlund 1986),the transnational (Bartlett/Ghoshal 1989), and the interorganizational network(Ghoshal/Bartlett 1990).

Rugman and Verbeke (2001) provide a detailed discussion of this shift in think-ing, suggesting that, among the weaknesses in the traditional view of the MNE,

several important shortcomings stand out. Among them are the assumptions of easeof transfer of FSAs across international boundaries yet within the firm, sparse at-tention to the dynamic learning process that underpins the generation of new FSAs,a neglect of the subsidiary contribution to FSA development, and little recognitionof the impact of managerial experience and reputation.

In response to these shortcomings, more recent MNE research has begun tofocus on other sources of FSA development that treat the subsidiary as the relevantunit of analysis (Birkinshaw 1996, Birkinshaw 1997, Birkinshaw/Hood 1998).Birkinshaw and Hood (1998), for example, identified several interacting drivers ofMNE subsidiary evolution and, thereby, capability creation: head office assignment,subsidiary choice (i.e., the freedom to develop an unique resource profile), and localenvironment determinism (i.e., the constraints and opportunities in the local market).

While other authors have addressed the significant differences between FSAtypes (cf. e.g., Rugman/Verbeke 2001), we do not distinguish between FSAs thatare developed within a subsidiary in isolation, in connection with the home country,or through collaboration between two or more of the MNE’s subsidiaries. Instead,since “it is clear that much more attention needs to be paid in future to the waysthat capabilities are developed at a subsidiary level” (Birkinshaw/Hood 1998, p.791), our interest pertains to the internal subsidiary-specific factors that foster FSAdevelopment and, hence, subsidiary performance. We focus specifically on theelements through which MNE subsidiaries may build new FSAs or augment existingones by examining the conditions under which the Penrosian concept of organiza-tional slack – in the form of “excess” expatriates – influences subsidiary perfor-mance.

The balance of this paper is organized as follows. The next section will elabo-rate our thinking on organizational slack and the development of FSAs. Subse-quently, hypotheses will be developed and tested using a large sample of MNEsubsidiaries. The final sections will provide an analysis and discussion of our re-sults followed by conclusions and suggestions for future research.

The Role of Organizational Slack in Firm Performance

Organizational slack has been commonly understood in prior research as “a cushionof actual or potential resources that allow an organization to adapt successfully tointernal pressures for adjustment or to external pressures for change in policy, aswell as to initiate changes in strategy” (Bourgeois 1981). Organizations that areintent on acquiring and assimilating knowledge have been shown to maintain a con-scious tolerance for redundancy (e.g., overlapping job responsibilities), since firmswith resources that are fully committed to highly specified tasks have neither the

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time nor the free resources to invest in new ideas (Nonaka/Takeuchi 1995). Withinlimits, therefore, higher levels of organizational slack can lead to conditions ofgreater creativity and innovation as it affords the organization opportunities toexperiment with new ideas (Nohria/Gulati 1996).

There is, however, a significant body of literature that suggests an alternativeview on the effects of organizational slack. Some have suggested that the existenceof slack is an indication of inept management or of “empire building” (Jensen 1993).This alternative view toward slack is based on the perception that the accumulationof slack is due to “inferior organization and maladapted operations” (Williamson1991) and will lead to inferior performance unless it is rooted out.

The lack of consensus on the effects of organizational slack on firm perfor-mance suggests a need for research that focuses on the conditions under which slackyields a differential impact on firm performance. This issue is important since acommon managerial tactic is to attempt to improve financial performance by re-ducing costs that are perceived to be unnecessary – often personnel – indicatingthat practitioners are enacting their own theory-in-practice as they attempt to elim-inate perceived slack, making their organizations “leaner and meaner” (Harrison1994). While approaching human resources with an emphasis on short-term effi-ciency and productivity may yield improvements in certain contexts, some authorshave suggested that many firms worsen their long term prospects in this way(Hamel/Prahalad 1994).

Expatriate Slack within MNEs

Given that MNEs straddle time zones, national boundaries, and socio-culturaldivides, MNE managers face the “liability of foreignness” which results in an in-herently expensive organizational structure; to remain viable, therefore, MNEs mustbe particularly vigilant about cost control without impairing its capacity to protect,enhance, and develop FSAs. Since expatriates are a significant governance expense(Beamish 1998), this class of managerial talent – that is unique to the multinationalorganizational form – is of major concern to MNE managers.

Aside from facilitating the transfer of skills and technology, expatriates oftenserve as a control mechanism to ensure that affiliates adhere to corporate goals andobjectives (Peterson/Sargent/Napier/Shim 1996). The relatively simple concepts oftransfer and control, however, are based on the traditional economic view of theMNE, which has become a less satisfactory explanation of MNE behaviour andperformance, as discussed above. Thus, an emerging concern for scholars andmanagers are the conditions under which expatriates play a role in FSA creation,augmentation and, ultimately, subsidiary performance.


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Our argument is that resources that are located at the subsidiary in the form of“excess,” although not idle, expatriates constitute a specific form of organizationalslack – that of an available pool of knowledge of the MNE’s routines, an awarenessof the location(s) of the MNE’s resources, an understanding of and capacity to man-age intersubsidiary relations, and deep insights into both home and host countryfactors. Further, we suggest that two key conditions that moderate the impact ofexpatriate slack and subsidiary level performance are host country experience andindustry growth as explained below.

The Combination of Expatriate Slack and Host Country Experience on Subsidiary Performance

Penrose (1959, p. 75) suggested that heterogeneity due to creative resource de-ployments spurs differences in productive opportunities and financial performance.Moreover, the “very ideas of its executives and the opportunities they see, dependas much on the experience…already existing within the firm as they do upon ex-ternal opportunities open to all (Penrose 1956, p. 250).

Prior research at various levels of analysis has established the importance ofexperience on the development of capabilities and outcomes. At the level of theindividual, for example, experience has been shown to give rise to creativity,permitting the sorts of associations and linkages that allow for new insights andmethods. The ability to learn a new task improves when related or similar taskshave been mastered (Ellis 1965). These new skills are usually not learned rapidlybut rather, over time and through practice on related problems (Harlow 1959). Atthe level of the firm, prior research has similarly suggested that experience has asignificant impact on the firm’s ability to detect and assimilate new information andto learn from others (Lane/Lubatkin 1998). As suggested by Penrose (1959, p. 46),“an administrative group is…a collection of individuals who have experience inworking together, for only in this way can ‘teamwork’ be developed.” Therefore,as a firm’s experience increases, its management team would become more adeptat using the firm’s internal reservoirs of knowledge and information to advantage(Pennings/Barkema/Douma 1994).

While experience is one of the key assets that firms may possess – a key sourceof both Ricardian and monopoly rents (Penrose 1959) – this asset “can never betransmitted; it produces a change…in individuals and cannot be separated fromthem” (Penrose 1959, p. 53). The issue of expatriate placement, therefore, is a sig-nificant element that can influence MNE subsidiary performance.

The existence of relevant experience, however, is a necessary, but not sufficient,condition to enable the firm to take advantage of the opportunities available. Thepresence of slack is also required as an enabling factor, allowing the subsidiary ameasure of freedom to act upon the opportunities that surround it. Thus, expatriate


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slack would enable exploratory behaviour while host country experience wouldguide this creative activity towards more productive ends. This reasoning leads tothe following hypothesis:

Hypothesis 1. The effect of expatriate slack on MNE subsidiary performance willbe moderated by the firm’s level of host country experience, wherefirms with greater experience and higher levels of slack are morelikely to achieve superior performance.

The Combination of Expatriate Slack and Industry Growth on Subsidiary Performance

If slack is to play a positive role in firm performance these “unused” resources mustmatch the requirements of the firm’s particular situation. Since industries in variousphases of development differ in the market structure they face, the division of labour,and the specialization of equipment in production processes (Stigler 1968), a commonobservation in the microeconomic literature is that industry maturity is a funda-mental determinant of the demand for cost containment. As a result, success atdifferent stages of an industry’s evolution requires varying degrees of managerialemphasis on cost efficiency (Strebel 1987).

In young industries, for example, organizations maintain high levels of flexi-bility as they experiment with product and process design in short runs, makingsignificant and rapid modifications in response to consumer and competitor re-action. In contrast, as industries move towards more mature stages, standardizedproduct architectures become established (Abernathy 1978) where efforts to ad-vance technology typically focus on increasing the efficient scale of production(Kamien/Schwartz 1982). Overall, the nature of organizational adaptation evolvesfrom frequent, fluid, and novel change in the early life cycle stages toward condi-tions of relative stability as an industry matures (Abernathy/Clark 1985). Thus, therequirements for expatriate slack will not be the same for all industries and slackwill not be uniformly valuable across MNEs as suggested by the following hy-pothesis:

Hypothesis 2. The effect of expatriate slack on MNE subsidiary performance willbe moderated by the firm’s industry growth, where firms that havehigher levels of slack in higher growth industries are more likely toachieve superior performance.


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Methods

Research Design

We tested our hypotheses on a sample of 629 Japanese MNE subsidiaries operatingin the United States. Since the sample includes only Japanese firms, the potentiallyconfounding issue of country of origin is controlled (Shan/Hamilton 1991). Usingthe same reasoning, country of operation was also controlled given that the sam-ple includes only those subsidiaries operating in the US. Our sample is substan-tially larger than those found in prior research on organizational slack (cf.Cheng/Kesner 1997, Nohria/Gulati 1996) and yields, therefore, greater statisticalreliability.

Data Description and Statistical Approach

The primary source of data used in this study was a 1997 survey entitled KaigaiShinshutsu Kigyou Souran, a publication of Toyo Keizai Shinposha (Toyo Keizai1997). Toyo Keizai (which translates to Oriental Economist) was formed in 1895and currently publishes more than 100 volumes annually as well as a variety ofdata covering economic conditions, stock markets, and Japanese corporations. The629 surveys, which were sent to the subsidiaries through their parent firms, werecompleted by the subsidiary general managers of Japanese-owned subsidiariesbased in the US. The survey included basic questions such as the subsidiary loca-tion, industry, annual revenue, financial performance, capital investment, totalnumber of employees, number of expatriates, and parent identities. These surveyresults were augmented with industry-level data from the US Bureau of the Cen-sus (1998). The effects of these data were tested using a multinomial logistic re-gression model since the dependent variable as obtained from the survey is cate-gorical.

Variable Description

Subsidiary Performance. The dependent variable is a trichotomous measure ob-tained from the general manager’s categorical assessment of subsidiary perfor-mance (i.e., subsidiary was profitable; operated at breakeven; incurred a financialloss). Although there are limitations to this method of performance measurement,there are also factors that recommend it. First, since the performance data of MNEsubsidiaries is extremely difficult to obtain, our data allow a rare, direct glimpseinto subsidiary-level performance. Second, Geringer and Hébert (1991), among


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others, examined the reliability of objective versus subjective performance data andconcluded that, while they are not exactly the same, the two measures are highlycorrelated.

Expatriate Slack. Since slack is an elusive construct that is difficult to measure(Penrose 1959), prior research have tended to consider slack in a variety of ways:absolute or relative quantities, measured objectively or subjectively, segregatedslack into available, recoverable, and potential stockpiles, or into absorbed and un-absorbed quantities. For our purposes, however, it is important to consider slack interms of its ability to influence internal organizational processes and, in line withother research that has examined the impact of slack on managerial processes (seee.g., Nohria and Gulati 1996, Poynter/White 1985), we measure slack by the num-ber of “excess” expatriates. More specifically, following Marino and Lange’s (1983)discussion, we measure expatriate slack by considering (a) the relative amount (withreference to other comparable firms), (b) the objective quantity (as determined byobjective subsidiary level data), and (c) available/recoverable reserves (i.e., actu-al, rather than potential, levels within the firm).

To capture expatriate slack, the following formula was used:

Host Country Experience. Host country experience was calculated by deriving thelog-transformed sum of the ages, at the time the subsidiary was formed, of the par-ents’ investments in a given host country.

Industry Growth. Industry growth (5-year compound average rates) was taken fromthe 1998 edition of the Statistic Abstract of the United States (US Bureau of theCensus 1998).

Control Variables. To control for various alternative explanations of subsidiary per-formance, a number of measures were used including industry experience, calcu-lated by finding the log-transformed sum of the ages, at the time the subsidiary wasformed, of the parent firms’ other investments that were in the same 3-digit SIC.Subsidiary age was included as a control since, as subsidiaries become more es-tablished over time, they would gain improved access to the various local resourcesrequired to establish successful operations. Since firm size has been shown to boostperformance through, for example, facilitating access to lower cost of capital whilesimultaneously lowering risk, firm size has been measured using subsidiary annualrevenue. Finally, because industry membership may have an important effect onperformance, this factor will be controlled.


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Results

Descriptive Statistics

As shown in Table 1, the average subsidiary in the sample was a substantial or-ganization in its own right. With total average employment of 226 people andover six expatriates, parent MNEs had invested almost $US 400 million in theseUS-based subsidiaries. Table 1 also indicates that, while the majority of firmsoperated profitably in 1997, 24 percent of the firms surveyed simply broke evenand fully 22 percent incurred a financial loss. Since almost half (i.e., 46 percent)of the firms reported a negative financial outcome, this reinforces the validity ofour dependent variable since desirable response bias does not appear to be a fac-tor.


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Table 1. Sample Descriptive Statistics

Total Number of Employees 225.6Number of Expatriates 6.4Average Capital Invested ($US million) $391.1

338 (53.7%)Number of Subsidiaries that Broke Even 152 (24.2%)Number of Subsidiaries that Incurred a Financial Loss 139 (22.1%)

Table 2 summarizes the range of industry from which the sample firms weredrawn. Based on a 2-digit Standard Industrial Classification (SIC), a total of 29 in-dustries are represented. Manufacturing firms account for over 38 percent of thesample with the single largest group being composed of transportation equipmentmanufacturers. Further, durable and non-durable wholesalers represent 41 percentof the subsidiaries in this sample with finance and insurance firms as well as oper-ations in the service industries totalling 12 percent and 8 percent of the sample, re-spectively.

Our basic descriptive statistics as well as the correlation matrix are displayedin Table 3. In this table, all measures have acceptable means with reasonablevariance. Further, while host country experience and industry experience both aremoderately correlated, multicollinearity does not appear to be a factor among thebasic predictors.


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Table 2. 2 Digit SIC Industry Code

23 Apparel 1 0.22 0.32 0.3

27 Printing and Publishing 3 0.540 6.41 0.212 1.913 2.118 2.924 3.837 5.930 4.842 6.710 1.66 1.02 0.3

189 30.169 11.03 0.515 2.433 5.327 4.33 0.51 0.218 2.91 0.21 0.226 4.1

Total 629 100.0%

Table 3. Descriptive Statistics and Correlations

Mean StandardDeviation

1 2 3 4 5 6

1. Subsidiary Performance

2.32 0.81 1.000

2. Expatriate Slack 0.15 0.25 -0.002 1.0003. Industry Growth 4.54 3.68 0.066† 0.113** 1.0004. Subsidiary Age 12.95 8.81 0.184*** 0.017 0.076† 1.0005. Host Country

Experience48.67 136.15 -0.077† -0.199*** -0.048 -0.474*** 1.000

6. Industry Experience 14.08 46.18 -0.089* -0.084* -0.027 -0.226*** 0.413*** 1.0007. Annual Revenue 153.66 560.92 0.076† -0.057 -0.026 0.098** -0.027 0.089*

† p < 0.1; * p < 0.05; ** p < 0.01; *** p < 0.001

Model and Variable Validation

The Goodness-of-fit statistics (that compare observed with expected frequencies)in Table 4 indicate an excellent fit of the model to the data. Nonsignificant re-sults based on the Pearson criterion (p = 0.22) as well as on the Deviance criterion(p = 0.87) indicate clearly that the model is capable of distinguishing between out-come categories using the independent variables in this study. Further evidence ofa valid model can be determined from the Cox and Snell Pseudo R2 as well as theNagelkerke Pseudo R2 that were 0.20 and 0.23, respectively, in the full model.


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Table 4. -2 Log Likelihood Ratio Tests (χ2 Values)

Model 1 Model 2 Model 3 Model 4 Model 5

Model Goodness-of-Fit:Pearson 2 1229 1229 1227 1225 1223 (p value) (0.25) (0.23) (0.24) (0.23) (0.22)Deviance 2 1145 1145 1144 1140 1131 (p value) (0.85) (0.84) (0.84) (0.85) (0.87)

Variable Effect:Expatriate Slack 5.38† 5.39† 4.93† 5.02† 8.02**Industry Growth 0.05 0.08 0.14 0.05Host Country Experience 1.15 2.89 0.77Industry Experience 3.70 3.86Slack* Industry Growth 0.90Slack* Country Experience 9.52**Subsidiary Age 13.90*** 13.91*** 14.04*** 13.24** 13.40**Annual Revenue 2.11 2.14 2.09 2.35 2.65Industry Membership 82.13** 79.56* 80.36* 81.46** 81.45**

Variance Explained:Cox and Snell Pseudo R2 0.18 0.18 0.18 0.19 0.20Nagelkerke Pseudo R2 0.21 0.21 0.21 0.22 0.23

† p < 0.1; * p < 0.05; ** p < 0.01; *** p < 0.001

In addition, Table 4 indicates that expatriate slack, the key variable in this study,is consistently significant statistically as the models are made increasingly com-plex. In Model 5, for example, the -2 log likelihood χ2 value for expatriate slack is8.02 (p < 0.01). This suggests that the overall model tested in this research wouldbe significantly worsened if this variable were omitted. Further, the interaction be-tween expatriate slack and host country experience was statistically significant inthe model in which it appears (χ2 = 9.52, p < 0.01).

The Main Effect of Expatriate Slack on Subsidiary Performance

Individual variable effects within multinomial logistic regression models can be in-terpreted through the odds ratios (eβ)1 of statistically reliable coefficients. The oddsratio is the increase (or decrease if the ratio is less than one) in odds of being in thegiven outcome category relative to the reference when the value of the predictorincreases by one unit. Further, these ratios must be interpreted in terms of the ref-erence category (i.e., profitable2). Thus, given that expatriate slack is statisticallysignificant (β = 1.99, p < 0.01), the likelihood of breakeven versus profitable op-erations increases by 630 percent (i.e., 1- eβ * 100) if expatriate slack increases byone unit (see Table 5). Similarly, it is interesting to note that, while the expatriateslack coefficient in the financial loss category is not statistically significant, theodds ratio points in the same direction in that the likelihood of a given firm beinglocated in the loss versus profitable category is 178 percent greater with an increaseof one unit of expatriate slack. Taken together, our findings indicate that the maineffect of greater slack is to increase the likelihood of inferior financial performance.


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Table 5. Parameter Estimates

Breakeven Loss

B Standard Error

WaldStatistic

Odds RatioeB

B StandardError

WaldStatistic

Odds RatioeB

Intercept -0.29 0.58 0.25 0.38 0.64 0.36Expatriate Slack 1.99 0.77 6.74** 7.296 1.02 0.96 1.13 2.778Host Country Experience 0.03 0.07 0.15 1.030 -0.06 0.07 0.72 0.939Industry Growth 0.00 0.04 0.00 0.999 -0.01 0.05 0.03 0.992Slack*Country Experience -0.70 0.27 6.81** 0.496 -0.43 0.31 1.83 0.654Slack*Industry Growth -0.08 0.09 0.73 0.927 -0.06 0.12 0.25 0.943Industry Experience 0.02 0.09 0.03 1.016 0.18 0.09 4.23* 1.195Subsidiary Age -0.01 0.01 0.44 0.991 -0.07 0.02 11.96*** 0.936Annual Revenue 0.00 0.00 1.60 1.000 0.00 0.00 0.55 1.000

† p < 0.1; * p < 0.05; ** p < 0.01; *** p < 0.001

The Interaction Between Expatriate Slack and Host Country Experience on Subsidiary Performance

The results summarized in Table 5 suggest that the interaction between expatriateslack and host country experience is statistically significant for firms in the breakevencategory (β = -0.7, p < 0.01). For these subsidiaries, it is 50 percent less likely (i.e.,1- eβ * 100) to be placed in the breakeven versus the profitable category if theslack*country experience increases by one unit. Thus, as the combination of expa-triate slack and host country experience rises, MNE subsidiaries are more likely to

be found in the profitable category. While this interaction term is not statisticallysignificant for firms in the financial loss category, the odds ratio suggests the samerelationship (i.e., eβ = 0.7, indicating that for each unit increase in the interactionterm, it is 30 percent less likely that a firm will be placed in the loss versus the prof-itable category).

Placing these interaction terms in the context of the model main effects, we findthat the negative main effect of expatriate slack on subsidiary performance is mod-erated by higher levels of a combination of expatriate slack and host country ex-perience. Taken together, these findings provide support for hypothesis 1 whichwas that the effect of slack on firm performance will be moderated by experience,where firms with greater host country experience and higher levels of expatriateslack are more likely to achieve superior subsidiary performance3.

To gain a clearer perspective on the form of this relationship, the main effectand interaction terms are presented in Figure 1. This procedure involves the calcu-lation of log odds4, converted into probabilities5, by allowing the values of expa-triate slack to vary along the entire range of its actual values (minimum = -0.081,maximum = 0.989) while holding host country experience to the sample averageand two standard deviations in each direction (µ = 1.93, σ = 2.01). Figure 1 showsthat the main effect of expatriate slack (i.e., when host country experience is aver-age) is associated with a rising probability of inferior subsidiary performance. How-


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Figure 1. The Combination of Expatriate Slack and Country Experience on Subsidiary Performance

Low Experience

Mean Experience

High Experience

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

Pro

babi

lity

of

Infe

rior

Per

form

ance

Expatriate Slack

–0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

e(α + β1 Organizational Slack + β2 Country Experience + β3 Slack*Country Experience)

y = 0000000000003(1 + e[α + β1 Organizational Slack + β2 Country Experience + β3 Slack*Country Experience])

ever, firms with above average levels of host country experience have a greaterprobability of superior subsidiary performance when expatriate slack also rises.Conversely, firms with relatively low host country experience have a greater like-lihood of inferior subsidiary performance as their levels of expatriate slack rise.Thus, the negative main effect of expatriate slack is reversed in the presence ofrelatively greater host country experience and is exacerbated in cases of low expe-rience.

The Interaction Between Expatriate Slack and Industry Growth on Subsidiary Performance

Our second hypothesis suggested that the effect of expatriate slack on subsidiaryperformance will be moderated by the firm’s industry growth, where firms in highergrowth industries that have higher levels of slack are more likely to achieve supe-rior performance. The results summarized in Table 5 indicate, however, that thereis no support for hypothesis 2 in our sample since the slack*industry growth inter-action coefficients are not statistically significant. Further, the odds ratios (eβ = 0.92and 0.94 for breakeven and loss, respectively) imply that an increase in the combi-nation of these two variables have virtually no impact on subsidiary performance.

Discussion

The intention of our study was to empirically examine two key conditions underwhich “slack” expatriates may influence subsidiary performance. Our findings ex-tend our understanding on the Penrosian concept of organizational slack and alsocontribute to the emerging literature on the MNE subsidiary-specific mechanismsthat are associated with FSA development and augmentation.

With respect to research on organizational slack, prior scholars has often fo-cused primarily on its main effects (e.g., Nohria/Gulati 1996). Thus, it may be thatthe inconsistent findings in the literature may be related to the tendency to stopshort of a more nuanced theoretical and empirical examination of the variouselements that act as moderators. Our results indicate that the main effect of higherlevels of expatriate slack was to decrease the probability of superior performance.Yet, a more subtle analysis of the conditions under which varying levels of slackhave an influence on subsidiary performance indicated that higher levels of hostcountry experience significantly attenuate the relationship between slack and sub-sidiary performance, creating a condition under which slack yields a net benefiteven after a variety of alternative explanations are parcelled out (e.g., subsidiary


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age, size, industry, etc.). Thus, our findings provide support for Penrose’s (1959)proposition that organizational slack propels firm performance when combined withfirm experience, another key Penrosian concept.

It should be noted that causality cannot be established with these tests giventhat that the cross-sectional data used in this study does not include information ontemporal order. Thus, we cannot determine whether higher levels of slack are a re-sponse to a given level of financial performance or the cause of it. It is plausiblethat the response of an MNE to poor performance would be to increase the numberof expatriates to try to sort out the problems. In this case, a negative relationshipwould be expected between slack and performance. Conversely, those subsidiariesthat achieve satisfactory results might become more independent of head office –in fact, given their relatively high cost, expatriates may even be withdrawn fromthese subsidiaries. A second limitation of our study is that organizational slack wasmeasured with a single item; it would be preferable to have other dimensions ofslack in MNEs. Unfortunately, in the available data, no supplementary items exist.On a positive note, however, our objective measurement of slack is not subject tothe typical criticisms of past research that have used managerial assessments ofslack; Bourgeois (1981), for example, questioned whether individuals can accu-rately assess the levels of slack that surround them.

Our results also provide some new insights into the mechanisms that may un-derpin subsidiary-level FSA development. Host country experience appears toenable the assimilation and integration of new information when slack resources,in the form of expatriates, are also present. Thus, expatriates may provide a bene-fit to the subsidiary through the traditional process of deriving insights within thehost market. Moreover, expatriates may have privileged and fluid access to ideasand information that originate in the home country and/or the headquarters. In fact,given the culture- and value-laden elements of Japanese management, this mecha-nism of home country-host country transfer within the firms of our sample is highlylikely.

More importantly, given that the knowledge bases that underlie FSA creationare characterized by mobility barriers or isolating mechanisms that make full ab-sorption difficult throughout the MNE, we suggest that expatriate managers are acentral piece of the solution to this problem. When a subsidiary-specific advantageis embodied in nonlocation-bound FSA, i.e., products or services, international rentcan be created through simple transfer across borders. However, when the FSA isin the form of an intermediate product such knowledge and experience, such a sub-sidiary-specific advantage is not fully transferable internally. Capabilities are stickyand do not transfer easily across subsidiaries even when transferred willingly (Szu-lanski 1996). Expatriate managers, who embody both subsidiary-specific knowl-edge as well as MNE-level knowledge may be a remedy to overcome the barriersthat isolate intermediate FSAs within their respective subsidiaries. This suggeststhat subsidiary-specific resources in the form of expatriates may be a hybrid FSA


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that lies between the traditional location-bound and nonlocation-bound FSA di-chotomy (see e.g., Rugman/Verbeke 1992). Thus, our findings imply that expatri-ate slack may be a key avenue that enables intersubsidiary transfer, sharing, andjoint development of subsidiary-level FSAs.

Suggestions for Future Research

This discussion suggests a number of possibilities for future research. As indicat-ed by Rugman and Verbeke (2001) and Birkinshaw and Hood (1998), there is aclear need for greater attention to be devoted to the processes of FSA developmentand the mobility barriers that impede the dissemination of subsidiary-level advan-tages across the MNE. Whereas this study considered only expatriate slack and itsinteractions with host country experience and industry growth, there are surely otherimportant elements that are important. One area for further study, for example, couldbe the role of incentive systems that effectively create a desire on the part of indi-viduals to achieve organizational goals. This line of research could also be extendedto exogenous factors including that of national culture, in line with Gong (2003).Since all the subsidiaries in our study operated in the US, it would be interesting toknow the extent to which national culture has an impact on the opportunities forthe development and diffusion of FSAs. Perhaps, given a higher level of interfirm“connectedness” in developed economies (Ghoshal/Bartlett 1988), the opportuni-ties for FSA development may be impaired in less developed economies. Further,while our intention in this paper was to address the impact of “excess” expatriateson the subsidiary performance, the human resource issues that surround the use ofplacement and transfer of expatriates should be explored in future research.

Conclusion

Hennart (1994) suggested that scholarship on MNEs should focus to a greater extenton how rents can be earned through superior internal organization. This research isone step in that direction by examining the placement and resource commitment toexpatriate staffing. To improve our understanding of this issue, our study examinedexpatriates staffing levels to consider the conditions under which this unique classof managerial talent provides a differential benefit at the subsidiary level. Based ona large quantitative sample, we found that firms with comparatively higher levelsof host country experience tend to benefit from a relatively larger pool of slack


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expatriates. Thus, our results provide a relatively rare empirical examination ofexpatriates (cf. Boyacigiller 1990 for a discussion), providing some support for theproposition that international human resources are assets that benefit from strategicmanagement (Taylor/Beechler/Napier 1996).

As summarized by Kor and Mahoney (2004), Penrose identified at least fivetypes of isolating mechanisms: path dependencies in resource development, firm-specific knowledge possessed by managers, shared team-specific experience ofmanagers, entrepreneurial vision of managers, and the firm’s idiosyncratic capacityto learn and to diversify. International business theory similarly focuses on the cre-ation of isolating mechanisms through managerial choice (Lockett/Thompson 2001,Rugman/Verbeke 2002). Thus, greater attention to location of and investment inexpatriate staffing may be a key aspect of Penrosian concepts of valuable, nonsub-stitutable, and nonimitable resource bundles that play a key role in the increasinglyimportant FSA development process within MNEs.

Acknowledgement

We gratefully acknowledge that this research was made possible by the financial support of the SocialScience & Humanities Research Council through grant # R1484A26.


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Endnotes

1 Where e = 2.718 and β is the value of the regression coefficient.2 The reference outcome category chosen in this research was profitable given that it standard prac-

tice to select the group with the largest number of cases.3 Several robustness checks were carried out (e.g., checking for undue influence based on size, age,

industry groups, etc.) to confirm that the results were not biased but are not reported here in theinterest of brevity.

4 Log odds = ey where y = Constant + β1 Slack + β2 Country Experience + δ1 Slack*Country Ex-perience and the Constant = α + β1 Industry Growth + β2 Industry Experience + δ1 Slack*Indus-try Growth + δ2 Slack*Industry Experience (the constant takes into account all variables that arenot directly involved in the interaction).

5 Probabilities are derived from log odds through the following calculation: ey/(1 + ey).


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anthony goerzen/paul w. beamish the penrose effect:“excess

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