Staffing policies for managers in foreign companies

Dr. ALBANA BORIÇI (BEGANI)

Staffing policies for managers in foreign companies in Albania Monograph

SHKODËR, 2012

Recensues: Prof. Dr. Ilia Kristo Prof. Dr. Arjeta Troshani

Redaktor: Prof. As. Dr. Zana Koli Korrektor gjuhësor: Albana Volumi Arti grafik: Sidita Galica

ISBN 987-9928-4087-4-7 Copyright © Albana Boriçi (Begani) Botim i parë, 2012

TO MY FAMILY AND IN MEMORY OF MY BELOVED MOTHER

Preface Today, international business activities are being faced with a large array of challenges and opportunities. The quick expansion of international trade as well as the consolidation and geographical diversification of multinational companies are stimulating the later to change their management structures and policies. Within that context, the effective management of human resources is becoming more and more a critical factor that determines the success or failure of such businesses. An important aspect in the management of international human resources, which is also one of the most debated issues among researchers and business practitioners nowadays, are the policies applied by multinationals in staffing their subsidiaries’ managerial positions, more specifically the policy related to the nationality of the managers. Taking into account the fact that the Albanian literature on human resources management or international business has not been mentioning this issue, and the fact that the number of foreign companies investing in Albania is increasing, this monograph seeks to study staffing policies for managerial positions in foreign companies in Albania. More specifically, this work pretends to answer the following research questions: 1. Is the activity of foreign companies in Albania managed by an Albanian or a foreigner? 2. Which are the factors that have influenced the choice among an Albanian and a foreign manager? In order to answer these questions three interviews have been conducted with the respective managers of three foreign banks operating in Albania, together with two surveys conducted in two different periods of time. 40 companies operating in the region of Shkoder were involved in the first survey, while in the second one were involved 80 companies spread all over Albania.

The author

Table of contents INTRODUCTION............................................................................8 FIRST CHAPTER 1.1 Globalization definition and forms..............................................12 1.1.1 Globalization definition and soures............................................12 1.1.2. Globalization forms.................................................................16 1.2 Multinational companies and their management challenges in the global competitive marktetplace..........................................18 1.2.1 Definition of multinationals and the reasons for their exisence.........................................................................................18 1.2.2 Challenges in managing multinational companies.......................20 1.3 Human resources management in multinational companies a base for ensuring competitive advantages.....................................23 1.3.1 Multinational companies and the strategic importance of human resources managment..........................................................23 SECOND CHAPTER 2.1 Foreign direct investments (FDIs) in Albania.............................26 2.1.1 Foreign direct investments in Albania as a special form of globalization impact in the Albanian economy................26 2.1.2 The legal framework supporting foreign direct investments....................................................................................27 2.1.3 The progress of FDIs in Albania..............................................29 2.1.4 The structure of FDIs in Albania..............................................34 2.1.5 Stimulant and inhibitory factors for FDIs in Albania...............41 THIRD CHAPTER 3.1 A general overview of theories about staffing policies applied by multinationals for subsidiary managerial positions 3.1.1 Introduction..............................................................................44 3.1.2. Factors affecting the selection of subsidiaries’ managers in multinational companies................................................................48

3.2 The theoritical model and the hypotheses about staffing practices for managerial positions in foreign companies in Albania.............................................................................................76 3.3 Research methodology..................................................................86 3.3.1 Measurement of variables and the statistical method..................88 FOURTH CHAPTER 4.1 Presentation and analysis of the research results. Results of the primary research first stage..................................................93 4.2 Results of the primary research second stage.............................100 CONCLUSIONS AND REOMMENDATIONS...........................117 LITERATURE................................................................................129 APENDIKSES APENDIKS 1....................................................................................140 APENDIKS 2....................................................................................142 APENDIKS 3....................................................................................148 APENDIKS 4....................................................................................151 APENDIKS 5....................................................................................155

Staffing policies for managers in foreign companies in Albania

Introduction The changes in the political and economic system in Albania at the beginning of the 90’s were associated with the opening of the Albanian economy to the global markets through the increase in the level of international trade and that of foreign direct investments. The level of these investments in Albania has been increasing over time, but it still remains low compared to some countries in the Western Balkans region.1 Taking into account this fact, as well as the fact that human resources management becomes more critical as companies expand overseas (Harvey et al., 2001), this research work focuses in the analysis of staffing policies for managerial positions applied by foreign companies operating in Albania. More specifically the study concentrates on the policy related to the nationality of these managers and the factors determining it. Staffing policies for managerial positions in multinationals’ subsidiaries represents a widely discussed topic in today’s western business literature, but it is quite new to the Albanian literature. Nonetheless, with the increase in the number of foreign companies investing in Albania, the analysis of policies they use to staff managerial positions becomes not only interesting, but also necessary. One of the most important decisions taken by multinational companies while they expand overseas is to define whether subsidiaries’ managers should be recruited from the home, the host or a third country. The subsidiary manager is responsible for the decisions related to this business unit and therefore he/she directly affects its performance. Therefore, assigning the right person to that position comprises a very critical issue. Each of the sources subsidiaries’ managers can be recruited from has its advantages and drawbacks in particular situations. 1

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Dr. Albana Boriçi (Begani)

According to several authors the transfer of managers from the home country is very much appropriate in cases when transfer of technical or managerial knowledge in the host country is necessary, when local qualified managers are missing or they need to be trained (position filling). Also, in cases when multinationals seek to extend the international experience of their managers (management development) or increase the level of control, coordination and communication between the headquarters and the subsidiaries (organization development), transfer of home country managers is more preferable. In the mean time, other researchers emphasize that the high cost of home country managers (or expatriates), their lack of familiarity with the host country environment and their difficulty to adjust to this environment, make the use of host country or local managers a more appropriate alternative. Based on the fact that the motives supporting the transfer of expatriates or the employment of locals are particularly important in particular situations, various authors have attempted to identify a series of factors determining staffing polices for subsidiaries’ managers. Such factors are grouped into categories as follows: a. b. c. d. e.

Factors related to the multinational’s home country; Factors related to multinational itself; Factors related to the host country; Factors related to the industry the company is operating on, and Factors related to the subsidiary of the multinational in a particular country.

Based on theoretical arguments of these authors, two research questions have been raised and are to be answered through this study: * Are subsidiaries (or the activity) of foreign companies in Albanian run by foreign or Albanian managers? * Which factors have determined this choice? By answering these questions the study aims to achieve the following objectives:

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• Identify if foreign companies in Albania prefer to have more Albanian or foreign managers (expatriates or third country managers) run their subsidiaries or activity in our country. • Identify the factors which have influenced the selection of these managers. Based on such factors, it is pretended to first offer some modest recommendations to foreign companies which may help them choose the right candidates for the management of their activity in Albania. Second, through the recognition of these factors it is pretended to offer some recommendations on the orientation of policies of some interested Albanian institutions toward those factors that support the employment of Albanians as managers of foreign companies in this country. • Identify topics and new directions in this field of study which may require a deeper research work in the future. In order to answer the research questions a primary research procedure has been built and applied. It is composed of two stages and consists on interviews with human resources managers of three foreign banks operating in Albania, as well as on two surveys conducted in two different periods of time. The first survey involved 40 foreign companies operating in the Shkodra region, while the second involved 80 companies, randomly selected and operating in various regions of the country. The results of the interviews and the surveys will be presented in the last chapter of this monograph. The monograph is conceptualized in four chapters. The first one provides a definition of globalization and a description of its major forms. Then, the chapter continues with a discussion on multinational companies, as one of the major forms of globalization, focusing mainly on the strategies they choose to compete in global markets and their relationship with the international human resources staffing policies. The strategic role of human resources and their potential to provide competitive advantages to multinationals is covered as well shortly in this chapter.

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The second chapter of the monograph focuses on the increasing role of foreign direct investments in Albania, their progress over time, their structure and the associated problems. It puts in evidence the factors which attract or those that hold back foreign capital flow in Albania. The reason for including this discussion is related to the fact that the goal of this work is the identification of staffing policies for managerial positions applied by foreign companies investing in Albania. The third and the fourth chapter constitute the main part of the monograph, because of both, their importance and the volume of arguments, data and facts they provide. The third chapter presents in details theoretical and empirical arguments of many authors on staffing policies for subsidiaries’ managers and the factors determining such policies. It also includes the the hypotheses raised and the theoretical model built based on the above mentioned arguments together with the methodology used for the research. In the fourth chapter are presented the results of the primary research, to conclude then with the discussion of these results, the identification of the study limitations, and the recommendations, directed to foreign companies in Albania, to interested instutions in our country as well as to future researchers.

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FIRST CHAPTER 1.1 Globalization definition and forms 1.1.1 Globalization definition and sources Globalization represents today an unavoidable phenomenon, which is reshaping human society life (Wild & Wild, 2012) and making the world progressively smaller, by the increase in the exchange of goods, services, information, knowledge and cultures between countries. It is also the main subject of many books and scientific research and the cause of many protests in the USA and Europe (World Bank, 2002). However, regardless the massive use of this term, still a final, correct and universally accepted definition of it does not exist. This derives from the fact that the term globalization refers to various dimensions such as, the economic, political, socio-cultural and/or environmental dimension (Intriligator, 2001; Jatuliavičienė & Kučinskienė, 2006). So, Bhagwati (2004) describes globalization as the process through which people are unified into a single society, combining economic, political and socio-cultural forces with technological ones. On the other hand, Scholte (2000) emphasizes that, because of telecommunication developments, digital computers, and audiovisual media, global events can now happen almost simultaneously in all countries of the world. He also argues that, the increase in the level of liberalization in the international environment by reducing barriers to the movement of products, capital and people amid nations, contributes to the creation of a more complete picture of globalization. Wild & Wild (2012, pg. 6) provide a simpler but also inclusive definition of globalization. According to them this term refers to “the trend toward greater economic, political and technological interdependence among national institutions and economies”. Nevertheless, for the purposes of this monograph, the term globalization in the following sessions will be referring only to its economic dimension.

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From the economic viewpoint globalization can be defined as the “worldwide trend of economic integration across borders, allowing businesses to expand beyond their domestic boundaries” (Cullen & Parboteah, 2010 pg. 6) or as the expansion of economic activity between people living in different nations (World Bank, 2002). This signifies a rise in the size of trade and other exchanges among these nations consequently contributing to a borderless and more integrated international economy (Intriligator, 2001). The two main business areas where globalization is greatly showing its impact are: globalization of markets and globalization of production (Wild et al., 2003; Hill, 2005, 2007, Wild & Wild, 2012). The first refers to the tendency of companies to move from an economic system with isolated markets, because of trade, geographic and cultural barriers, toward a system with national markets coverging to a global one (Levitt, 1983; Wild et al., 2003; Czinkota et al., 2005, Graham & Cateora, 2006; Hill, 2005, 2007). Production globalization on the other hand represents the extension of production activities in different countries with the intent to benefit from changes in the costs and quality of production factors (Wild et al, 2003; Hill, 2005, 2007). Globalization tendencies represent an early phenomenon, starting in the second half of the XIXth Century (O’Rourke & Williamson, 1999) and involving three stages of development. The last stage started in the year 1980 and continues still today. What distinguishes it from the first two stages is the speed with which economic links between markets, businesses and individuals from different countries are growing. Several factors have caused the acceleration of this process, such as, the technological progress, the liberalization of trade and other international activities, the changes in institutions and organizations, the increase in the level of global reliance on free market values, as well as cultural developments. Technological developments have facilitated and reduced the costs of transferring data, products, equipments and people from one country to another, even between long distances. This has then made possible for companies to expand their activity in many markets using various modes of entry. Internet technology and the application

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of e-commerce have changed the processes of buying and selling and are assisting companies in establishing and retaining strong relationships with their clients, suppliers and strategic partners independently of their location (Jatuliavičienė & Kučinskienė, 2006). Furthermore, the control and coordination of activity among subsidiaries located in different markets, and therefore decision-making, can be easily achieved through the use of sophisticated technologies accelerating the flow of information (Wild et al., 2006). Trade and other forms of international activity liberalization represent the second source of globalization. This process started in the XIXth Century, but it did interrupt with the beginning of the First World War and the occurrence of what is known as the Great Depression of the 30s (Eitman et al., 2007; Eun & Resnick, 2012). Nonetheless, the process of trade liberalization undertook another step forward in the year 1947, when 23 countries decided to establish the General Agreement on Trade and Tariffs (GATT), which aimed to reduce tariff and non tariff barriers in the trade of goods and services between different countries (Goldstein, 2001). Again, economic integrative efforts did not stop here, they continued in the following years, sometimes limited within certain regions, but still more ambitious. To be mentioned are the establishment of the European Union (EU), a group of 27 European countries among which goods, services and factors of production move freely2, the creation of a Free Trade Area between the US, Canada and Mexico (NAFTA), which aims to join with other economic alliances in Latin America and create a Free Trade Area of the Americas (Czinkota et al., 2005; Wild & Wild, 2012, Eun & Resnick, 2012). It is also relevant to mention the undisputable role of the World Bank (WB) and the International Monetary Fund (IMF) in stipulating international economic relationships through the provision of financial and technical assistance to various countries and the efforts to create and maintain a stable international monetary system (Eitman et al., 2007, Eun & Resnick, 2012). 2

http://europa.eu.int/

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Changes in institutions and organizations have also played a crucial role in developing the globalization phenomenon (Intriligator, 2001). Technological progress and liberalization of trade and production factors’ movement have encouraged many companies to expand their activity beyond their origin nations, searching for bigger markets, lower cost sources and higher profits. Such companies are run by managers with an extensive vision, who continuously look for new business opportunities in the domestic and international markets (Jatuliavičienė & Kučinskienė, 2006). Even non-profit organizations, as well as important international organizations, such as the United Nations, the International Monetary Fund or the World Bank are now operating in base of a global perspective, acting as agents in the new global economy (Intriligator, 2001). Changes in the political and ideological environment all over the world form another group of factors that continuously affect globalization expansion. The fall of the Berlin Wall, followed by the demise of the centralized economic systems in the Eastern and Central Europe, contributed to the end of a long ideological division between the East and the West (Goldstein, 2001). These changes helped to first create an ideological global environment that supports the free market and free trade values, and second, they helped to reestablish economic relationships between the East and the West. At last, cultural developments in different countries of the world are the other group of changes affecting globalization phenomenon (Intriligator, 2001). The possibility to move and communicate faster and more freely has increased the collaboration among individuals from different cultures, therefore stimulating intercultural exchanges. This tendency has been more evident in the relationships between people from developed countries, who more and more are showing similar behaviors, attitudes and preferences for products and services. This is also the major reason why many companies today are viewing the world, especially industrialized nations, as a single market and not as a group of markets divided by political, economic, and cultural changes (Czinkota et al., 2005; Cateora & Graham, 2006).

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Besides the fact that globalization phenomenon acceleration during the last two decades can be attributed to many factors, it is important to mention that in base of each of them are technological developments and many countries’ tendency to give priority to cooperation among each other in different areas. But, as also emphasized above, during this monograph particular attention will be given to the economic aspect of globalization. For that reason, the following section will present the main forms of economic globalization development. 1.1.2. Globalization forms Above was mentioned that globalization of economy means an increase in the economic activity between countries. The later is in fact involves three major forms: international trade, foreign direct investments (FDIs) and capital markets integration (World Bank, 2002). World experience in international trade has continuously been proving that free trade among countries provides the necessary elements that support the orientation of a nation’s sources toward those economic sectors the country possesses competitive advantages. During the recent years, international trade volume of both goods and services has been incessantly increasing. So, based on the World Trade Organization (WTO) report “Trade Statistics 2007”3, the average growth rate in the volume of world export of goods for the period 2000-2006 was 5%. However, this tendency slowed down in the following years because of the world financial crisis of 2008-2009. In fact, in 2009, world merchandise trade experienced a negative growth rate of about 12%, but it did recover in 2010, increasing by about 13.8%. In 2011 world trade slowed down again achieving an annual growth rate of 5%, which is expected to lower further during the year 2012. WTO economists attribute such changes to the difficulties the world economy is undergoing right now, 3

http://www.wto.org/english/res_e/statis_e/its2007_e/its07_toc_e.htm

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especially to the Greek sovereign debt crisis.4 The volume of FDIs has also been significantly increasing during the last decade, due to the reduction of barriers in the movement of capital in many countries of the world. So, the value of FDIs in the year 2000 reached the level of 1.5 trillion USD, rising from a level of 324 billion USD in 1995 (World Bank, 2002). Yet, the deterioration of the world political and economic climate after September 11th affected negatively the level of FDIs in the year 2002, particularly in specific regions, such as the North and South America (UNCTAD, 2007).5 The world FDIs volume recovered again in the following years, reaching a peak level of 1.833 trillion USD in 20076, which was followed by another decline during the world financial crisis of 2008-2009.7 A modest recover was registered in 2010, but prospects for 2012 and 2013 are optimistic. In fact it is expected that the world FDIs volume in 2013 will achieve the level of 2007.8 During the last and the actual decade developed nations have been characterized by a greater integration of capital markets, where savers constantly buy foreign securities in order to diversify their portfolios and borrowers rely on foreign sources to accomplish their needs for funds. In fact the USA keep the leader‘s position as far as capital markets opening is concerned. So, in 2009 foreigners invested 376.6 billion USD in American securities, while Americans invested 549.4 billion USD in foreign securities (Eun & Resnick, 2012). All figures presented in the previous paragraphs are indicators of the fact that international trade, foreign direct investments and integration of capital markets, as particular forms of globalization, are continuously increasing due to various liberalization policies applied by many states in the world.

http://www.wto.org/english/news_e/pres12_e/pr658_e.htm http://www.unctad.org/en/docs/wir2007_en.pdf 6 http://unctad.org/en/docs/wir2008_en.pdf 7 http://unctad.org/en/docs/wir2009_en.pdf 8 http://unctad.org/en/docs/wir2011_en.pdf 4 5

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1.2 Multinational companies and their management challenges in the global competitive marketplace 1.2.1 Definition of multinationals and the reasons for their existence Multinational companies play the major role in providing foreign direct investments in the world marketplace. However, despite their constant expansion, business literature does not yet provide a single definition for these companies, because various authors take into account many elements when trying to describe them. Multinationals can be defined as companies with activities dispersed in more than one country (Goldstein, 2001) or as businesses with direct investments (in the form of production or marketing subsidiaries)9 which are placed and operate in many countries simultaneously (Wild et al., 2006; Eitman et al., 2007). Eun & Resnick (2012) offer a similar definition too. They view multinationals as business firms incorporated in one country having production or sales operation in other countries. So, what distinguishes these companies from other businesses with international activities is the fact that the headquarters possesses a considerable amount of assets in one or more foreign countries, from which, with time, it pretends to draw profits. For that purpose, it is necessary the exercise of a direct control of the headquarters on the subsidiaries in foreign countries and an ongoing intervention of it over their decision making process. The later depends a great amount on the nature of relationship existing between the headquarters and its foreign subsidiaries, which on the other hand is depends on the competitive strategy applied by the multinational. Why do certain companies become multinationals? The term subsidiary will be used during this monograph to represent the investments made or the activities performed by multinational companies in the host countries, as well as the investments made or activities performed by foreign companies in Albania.

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Various authors mention numerous motives stimulating firms to undertake this strategic decision. They relate to both, the tendency of companies to search and benefit from opportunities in foreign markets, and their need to overcome barriers and smooth business risks effects. According to Eitman et al. (2004) multinational companies usually operate in oligopolistic international markets, in which product differentiation, possession of technical and managerial expertise, financial power and economies of scale advantage, are crucial factors for a successful business. Ferdows (1997), Madura (2002) and Eitman et al. (2004, 2007) relate the existence of multinational companies to the need to increase sales in foreign markets as well as the need to provide inputs, such as raw materials and labor, at a lower cost. Similarly, according to Ferdows (1997) and Madura (2002), many companies decide to exert part of their production activities in other countries, with the intent to avoid tariff barriers or react and deliver the risk deriving from changes in foreign exchange rates. Another very important reason is also the possibility of multinational companies to provide extra technical and managerial knowledge from their suppliers, clients, competitors and research centers in foreign markets (Ferdows, 1997; Eitman, 2004; 2007). Ferdows (1997) distinguishes the opportunity to attract talents from different areas as another stimulant motive, while Madura (2002) mentions the ability of multinationals to diversify cash flows acquired from sales in different markets. Eitman et al. (2004, 2007) cite also political security. They say, many firms, especially those originating in developing countries, tend to locate their subsidiaries in countries noticeable for their political stability and a positive attitude toward foreign investments.

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1.2.2 Challenges in managing multinational companies Andersen & Foss (2005), referring to Prahalad & Doz (1987), Bartlett & Ghoshal (1989), Mudambi (2002), Foss & Pedersen (2002) etc, state that multinational companies hold a strategic opportunity not available to domestic companies, which give them the possibility to have a higher performance than the later. This opportunity derives from the fact that multinationals’ activities are dispersed in many countries. Operating in many markets at the same time offers them the possibility to enhance sales, provide less expensive and more qualitative inputs, exploit specific advantages in other markets, or benefit from economies of scale, etc. But, based on arguments from other authors as, Rosenzweig & Singh (1991), Zaheer (1995), Casson (2000) and Benito et al. (2005), Andersen & Foss (2005), also say that the management of a multinational structure is a very complex process, characterized by a high level of insecurity. This results from a series of factors, like, the lack of familiarity in the way of thinking and doing things in foreign markets, the high cost of assuring information on yet unknown markets, the high costs of control and coordination of activities between the headquarters and subsidiaries, the agency costs, the political risk and foreign exchange risk. What are then the strategies used by multinational companies to take advantage of the opportunities in foreign markets and to manage the complexity characterizing the actual global competition? Many studies have been conducted in order answer this question, but, as Harzing (2000) mentions, Barlett & Goshal (1989) have offered maybe the most complete typology of multinational companies and their competitive strategies. In the 80’s they performed a deep study of 9 multinational companies from three different regions, Europe, USA and Japan, and came to the conclusion that such companies, based on the strategy used, can be classified in four categories: a) 1) the multidomestic (strategy) company, 2) the international (strategy) company 3) the global (strategy) company, and 4) the

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transnational (strategy) company. Three organizational characteristics were taken into account in order to distinguish between these strategies (or companies): a) the companies’ structure of assets and capacities, b) the role of foreign affiliates and 3) the development and delivery of knowledge. In the case of a multidomestic company (strategy) there is a high level of decentralization in the management and delivery of the firm’s assets and capacities. Each foreign subsidiary operates as a small company within the multinational, focusing mainly on the adjustment to the local preferences and tastes, which represents the main strength of the strategy used by this company (Hill, 2005). Low level of knowledge transfer between the headquarters and the affiliates is also characteristic in this case. On the other hand, the international strategy (company) is characterized by the centralization of basic assets and competencies of the multinational at the headquarters and the delivery of the less important assets and competences through the various foreign subsidiaries (Barlett & Goshal, 1998). The centralization of basic competencies at the headquarters is reasonable when they are missing in host markets, therefore allowing the transfer of knowledge from the head office to the affiliates. Then the role of subsidiaries is to modify somehow the strategy of the multinational in order to adjust it to diverse conditions in individual foreign markets, but in this case the level of adjustment is lower compared to the case of a multidomestic company. The global strategy (company) represents the variant with the highest level of centralization of assets and capacities at the head office that intends to draw profits from specialization and economies of scale, therefore bringing to a higher level of efficiency. In this case the duty of subsidiaries in host markets is to just implement the headquarters global strategy (Hill, 2005). This means that the level of adjustment to the conditions in host countries is quite low, while the level of knowledge transfer from the headquarters to the affiliates is high.

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The transnational strategy (company) seems to be a hybrid of the multinational and the global strategy. Its goal is to achieve at the same time a high level of adjustment to individual host markets and a high level of efficiency for the multinational as a whole. For that reason company’s assets and capacities are delivered throughout its all subsidiaries. Basic competencies are transferred from the head office to the affiliates in order to help them react quickly to the dynamic environment in foreign markets. In this strategy the level of knowledge transfer is the highest. In fact, each affiliate can behave as part of a large network of ideas, competencies and knowledge (Barlett & Goshal, 2000). Based on a critical analysis of Barlett & Goshal typology as well as of other authors contribution in this field, Harzing (2000) has drawn some conclusions that have helped her build and empirically test her own typology of multinationals. According to her the three main strategies used by multinationals to compete in the global marketplace are: 1) the multidomestic, 2) the global and 3) the transnational strategy. The first is characterized by the combination of a low level of integration between subsidiaries and a high level of adjustment of their activities to environments in host markets. The second, on the other hand, requires a high level of integration between subsidiaries and weak efforts to adjust to foreign markets. The third can be viewed then as combination of the two first, since it combines the high level of integration between subsidiaries with the high level of efforts to adjust to individual host markets. Furthermore, in a later article of Pudelko & Harzing (2007), the authors have found a strong argument that supports the transnational model of a multinational. They affirm that standardization of the best global practices is being now particularly esteemed by multinational companies, which means that they emphasize on a global learning process or on the process of knowledge transfer between the various subsidiaries, which is the key point of a transnational company.

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1.3 Human resources management in multinational companies a base for ensuring competitive advantages 1.3.1 Multinational companies and the strategic importance of human resources management An organization needs many resources to achieve its goals and objectives such as, technology, time, physical, financial and human resources, as well as information. But, from a long-term perspective people represent the most important resource, because it is them who determine the kind and the way of other resources to be used by the organization (Kume, 2004). If a company emphasizes appropriately the management of human resources its performance can improve significantly. Well trained and productive employees, who perform right their tasks in the organization, help the achievement of its objectives, both inside and outside the country. Human resources management consists on the process through which a company acquires its employees and makes them more effective and efficient in performing their tasks (Wild et al., 2003). This process includes recruitment, selection, training & development, performance appraisal, and the establishment of good relationships between managers and employees. Nonetheless, human resources management in an international context represents a more complex process because of changes existing among business environments in the home and the host countries the company has expanded its activity. But, strategic management of human resources is becoming a vital factor for the future perspective of multinationals, the more their activities are being globalized (Harvey et al., 2001). Decision makers in these companies have already realized that human resources are as important as advanced technology and economies of scale to successfully compete in global markets. Jagersma & van Gorp (2002) have proven this in a research paper studying human resources management policies in a group of big

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multinationals headquartered in Netherlands. They came to the conclusion that international success of multinationals depends, first and over all, on the quality of their human resources management. According to the authors, the successful penetration of a company in international markets starts and ends with its employees in general and with its international managers in particular. There are some conditions to be accomplished in order for their management to be effective. At first, multinationals’ high level managers must be conscious of the critical importance of international human resources. They must also base the policies for the management of these resources on the strategic objectives of the companies they represent, and must assure employees the right instruments to gain the necessary experience for successfully facing international challenges. Stroh & Caliguri (1998) developed another study showing the impact of effective international human resources management policies in the performance of multinationals. At the beginning, based on interviews with human resources managers of 60 biggest multinationals headquartered in the US, they identified some guiding principles, where human resources management in a multinational company should be based in order to be effective. They included: * the implementation of formal systems to improve worldwide communication (amid subsidiaries and the headquarters), * the implementation of Human Resources Information Systems, * the strengthening of the global mindset to all employees through their training and development, * the development of a global leadership through the transfer of managers with tasks abroad, * the consideration of human resources management as a strategic partner in the global business of the company, * the assurance of flexibility in all programs and processes of human resources, * the establishment of relationships with other international managers of human resources, * the global declaration of human resources management as asource of competitive advantage, and

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* the gradual construction of a worldwide structure for the management of human resources. As part of this study, the authors conducted as well a survey, with global human resources managers of the above mentioned companies and their CEOs or heads of subsidiaries. The survey revealed that all managers recognized the critical role of global human resources management in the performance of their companies. Furthermore, the companies having the best financial results were those which had followed the most the first three guiding principles mentioned above. This means that there exists a positive relationship between the performance of a multinational in these three fields of human resources management and its final financial success. Meanwhile, Sparrow (2006), based on four case studies, reached to three other conclusions on the role of human resources management on the success of multinationals. According to this author, human resources management adds value to the company if it is able to establish and maintain the right equilibrium among the global systems for managing people and the specific local needs. Second, in multinational companies it is always more necessary to distinguish well between international human resources management and/or their global management. If the first has to do with the policies and practices used to manage a group of international employees, the second is related to the development of more globalized processes for managing people. In this context even distinctions among specific functions of human resources, such as, recruitment, training and development, etc, fade over time, as they all serve the same goal, the procurement and the retention of the best employees in the company, regardless of their origin.

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SECOND CHAPTER 2.1 FOREIGN DIRECT INVESTMENTS (FDIs) IN ALBANIA 2.1.1 Foreign direct investments in Albania as a special form of globalization impact in the Albanian economy The globalization of economic activities has been creating a tense environment for the world economy and many business units. The issue of surviving and being prosperous in global markets has become their crucial management factor as well as the major stimulant of foreign direct investments. In fact, the big changes in trade policies, through the liberalization and reduction of tariffs, the appropriation and privatization of some industries in different countries have been the most important accelerants of foreign direct investments (Uruçi & Boriçi, 2008). According to a joint definition of the International Monetary Fund and the Organization for Economic Cooperation and Development, “Foreign direct investments (FDIs) refer to a situation at which a resident entity in an economy (the foreign investor) obtains a longterm interest in an enterprise resident in another economy” (OECD, 2008). FDIs have an important position in a nation’s economy. They provide many advantages for the host countries, such as, an immediate enhancement of productivity in companies bought by foreign investors, human capital development as well as the creation of a more competitive business climate (Piccioto, 2003). The following section of this chapter will provide evidence on the position of FDIs in the Albanian economy, the legal framework they are supported by, the level of their inflows over the years as well as the underlying problems.

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2.1.2 The legal framework supporting foreign direct investments Based on the Albanian legislation, particularly on the Law about “Foreign Direct Investments” No. 7764 (November 2nd, 1994), foreign individuals or legal entities have the right to hold economic activities in Albania without the need for a specific permission or authorization. Foreign investors are treated the same as domestic investors, excluding cases involving land ownership, which are treated by a specific law (South East Europe Investment Guide, 2007).10 So the Law No. 7638, of November 19th, 1992, on “Commercial Companies”, regulating their activities and defining the legal structure according to which they should operate, does not distinguish between domestic and foreign investors. The taxes system as well provides the same treatment to both domestic and foreign investors. On the other hand, for the exercise of some particular types of activities in Albania a license is required, but procedures for its procurement are equal for Albanian and foreign investors. It should also be mentioned that the Albanian legislation does not limit the percentage of ownership hold by foreigners in companies operating in Albania (Barolli, 2007).11 But, it also contains some limitations regarding FDIs. They are usually related to transmission, health and legal services. Limitations are applied too during the acquisition of real estate: agricultural land cannot be acquired by foreigners; it can only be rented to them for a period of 99 years. Commercial ownership can be acquired, but only if the value of the investment is three times the price of the land. Meanwhile, there are no limitations as far as the acquisition of private residential property (Barolli, 2007).12

http://www.seeurope.net/files2/pdf/ig2007/albania.pdf http://dspace.lib.niigata-u.ac.jp:8080/dspace/bitstream/10191/6398/1/01_0052.pdf 12 http://dspace.lib.niigata-u.ac.jp:8080/dspace/bitstream/10191/6398/1/01_0052.pdf 10 11

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Albanian legislation does not only guarantee an honest and equal treatment of foreign investments compared to the Albanian ones, it also assures full protection and security to them. Specifically, foreign investments in Albania are protected from expropriation and nationalization, or other similar actions. Based on the 41st Article of the Albanian Republic Constitution, expropriations or ownership limitations are only applicable in cases of public interests violence, but are still associated with a fair compensation (South East Europe Investment Guide, 2007).13 Foreign investors in Albania have also the opportunity of juridical protection of the rights related to their investments. In cases of conflicts among two parties they can decide together to ask the support of an arbitrary institution for its solution (Barolli, 2007).14 Foreign investors have also the right to transfer outside the Republic of Albania territory all the assets related to a foreign investment, including: returns, compensations, payments resulting from the solution of a conflict related to the investment, revenues resulting from the sale or liquidation of one or all parts of the investment, etc. Furthermore, foreign investors faced with losses resulting from wars, armed conflicts or other similar events, are treated by the Albanian legislation the same way as Albanian investors. Since the purpose of this monograph is the study of staffing policies for managerial positions in subsidiaries of foreign companies operating in Albania, it is relevant to talk as well about the legal framework regulating the employment of foreigners in our country, in order to show the limitations and the facilities the Albanian legislation provides to these employees. The Law No. 9959, (July 17th, 2008)15 “For the foreigners”, designates this category of foreigners, living and working in Albania, as “Critical personnel”. It includes individuals who: http://www.seeurope.net/files2/pdf/ig2007/albania.pdf http://dspace.lib.niigata-u.ac.jp:8080/dspace/bitstream/10191/6398/1/01_0052.pdf 15 www.qpz.gov.al 13 14

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a) manage an enterprise or a department/sector, or b) supervise and control other employees. According to the Albanian legislation, like everyone else who is not an Albanian citizen, but wants to work in our country for a period of more than 3 months, this category of employees too needs to get an job permission from the Ministry of Labor and Social Issues (South East Europe Investment Guide, 2007).16 But, according to the Law No. 9959 (July 17th, 2008), employees transferred within the company get job permission (“A/TN” type) without the need to show documents proving the accomplishment of requirements determined in the Article 40 of this law, given that they are judged as “main personnel” or “specialists”. In addition, the initial period of the job permission validity for these employees is equal to the time required for the accomplishment of the task or work they are assigned, till a maximum validity period of 5 years. When bilateral or multilateral agreements do not exist, the foreigner equipped with “A/TN” type job permission, is submitted to the Albanian legislation for social protection. 2.1.3 The progress of FDIs in Albania FDIs continue to be an important factor for the development of the private sector and the economic development in Albania. They have determined the progress of the balance of payments capital and financial accounts. During the recent years, compared to other sources, such as the external debt, FDI inflows have been the major supplier financing the Albanian current account deficit. Albanian economy has become very open to these investments, but their level has been fluctuating during this period (Uruçi & Boriçi, 2008). Nevertheless, despite the fluctuations, the general tendency has been a continuous increase. This can be clearly noticed from the following chart, presenting the volume of FDI inflows in Albania during the period 1990-2010: 16

http://www.seeurope.net/en/pdf/ig2007/Albania.pdf

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Chart 1. FDI inflows in million USD (1990-2010)

Source: Data processed by the author based on UNCTAD statistics17 As the chart plainly shows, the level of FDI inflows started to increase more drastically after the year 2000, if compared to the 90’s. In 2004, FDIs reached the level of 346 million USD18, which can be mostly attributed to the privatization of the former Albanian Savings Bank, sold to Raiffeisen Bank (Austrian Bank) for a value of 126 million USD (Redžepagić & Richet, 2008a). Later on, in 2007, FDIs reached another record level, 656 million USD19, related particularly to the privatization of Albtelecom and the increase of foreign capital participation in the Albanian financial sector (Bank of Albania, 2008). The increasing tendency has continued to persist as well during the period 2008-2010, despite a slow decline in 2009 due to the global financial crisis of 2008-2009. According to the „Report on Foreign Direct Investment in Albania, 2010”, compiled by the Albanian government in collaboration with UNCTAD (United Nations Conference on Trade and Development) and UNDP (United Nations Development Programme)20, Albania’s position on the UNCTAD’s http://unctadstat.unctad.org/TableViewer/tableView.aspx http://unctadstat.unctad.org/TableViewer/tableView.aspx 19 http://unctadstat.unctad.org/TableViewer/tableView.aspx 20 http://www.mete.gov.al/upload/fdi_report_2010.pdf 17 18

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Inward FDI Performance Index has improved remarkably in the year 2009 as compared to the year 2006. Albania ranked 25th among 141 countries in 2009, while in 2006 it was positioned in the 80th place. Also, our country’s weight in the South East European region, as far as FDI inflows is concerned, has improved dramatically, starting from the year 2007. This is related to the fact that during this period, FDI inflows in Albania have only known an increasing trend, while in other countries of the region their level has been declining over time. In fact, referring to the World Investment Report 201121, FDI inflows in Albania in 2010 surpassed for the first time ever the level of 1 billion USD, making it the second major recipient of FDIs in South East Europe, right after Serbia. The following chart shows the position of Albania in comparison to other Western Balkans countries relative to FDI inflows for the period 2008-2010. Chart 2. FDI inflows in million USD (2008-2010)

Source: Data processed by the author based on UNCTAD statistics22 Yet, there are some factors which make Albania a less attractive country to foreign investors and specific measures should be taken in order to reduce their impact on Albania’s FDI performance. 21 22

www.unctad-docs.org/UNCTAD-WIR2011-Full-en.pdf http://unctadstat.unctad.org/TableViewer/tableView.aspx

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Of particular importance is the perceived economic and political risk of Albania. According to a survey conducted by the World Bank in 2006-2007 (World Bank, 2007) with foreign investors, Albania’s instability of political environment results to be one of the major inhibitors of foreign investments in our country. Other inhibitory factors include: administrative barriers, corruption, regulatory weaknesses and lack of information or of its accuracy. When information is limited, the group of relatively informed investors is disposed to follow those few investors who are thought to possess a more complete and correct information than the others. Such behavior then can bring to investors’ panic and rush, and consequently to higher risks exposure (Uruçi & Boriçi, 2008). Despite the general belief that greenfiled investments are more valuable to host countries, Albania’s experience during the transition period has shown that the performance of the privatization process can be a critical determinant of FDI inflows’ dynamics. It also supports the conclusion that in trasition countries the major form of FDI expansion is the merger with or the acquisition of existing enterprises (Luçi & Kripa, 2008). The process of privatization in Albania can easily be divided into two stages: a) The first stage, ending in 1999, belongs to what can be called the mass privatization, during which foreign investors’ participation was limited, and as a consequence, the level of FDIs was low. FDI inflows during this period represented only 20.3% of the total transition period inflows. b) On the other hand, the second stage started after the 1999, and belongs to what is called the strategic privatization, during which foreign investors’ participation and FDI inflows were higher. Throughout this period inflows reached the value of 1,537.6 million USD or about 79.9% of total transition period FDIs. Their level was about 3 times higher compared to the first stage. Foreign investors’ participation during strategic privatization processes is very important, because they hold sufficient capital resources and advanced technologies, which directly affect in the

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perfomance improvement of the privatized enterprises. But, for this opportunity to be exploited, it is necessary that the host country provides a stagle macroeconomic situation and a friendly business climate. During the second stage of privatization, because of measures for economic stabilization and growth, as well as, of economic liberalizing reforms, the macroeconomic performance of our country has been improving, therefore affecting positively the participation of foreign investors if compared to the first stage (Luçi & Kripa, 2008). There are several examples of Albanian state-owned enterprises privatization. Some of them include: Albanian Savings Bank, sold to the Raiffeisen Bank.23 Albtelecom, the biggest fixed telephony operator. 76% of its shares were sold to Turkish Telekom and Turkish Çalik Enerji Telekomunikasyon A.S.24 ARMO-n, the only company in Albania dealing with oil refining and trade. 85% of its shares were sold to the company “Amra Oil” and to the consortium “Refinery Associates of Texas, Anika Enterprises & Mercuria Energy Group”.25 KESH (The Albanian Energy Corporation). 76% of KESH’s distributor sector shares were sold to the Czech company “Chez”26 for the sum of 102 million €, while the production sector continues to be under the state control. INSIG, the biggest insurance company in Albania. The government actually owns 61% of its capital, while the two other partners are the International Financial Corporation and the European Bank for Reconstruction and Development, each of which own 19.5% of capital. 27

http://www.seeurope.net/en/pdf/ig2006/Albania.pdf. http://www.atnet.com.al/index.php?option=com_content&task=view&id=89&Itemid=69 25 http://www.km.gov.al/index.php?fq=brenda&m=news&lid=9155 26 http://www.mete.gov.al/upload/fdi_report_2010.pdf 27 http://www.insig.com.al/index_AL.htm 23 24

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2.1.4 The structure of FDIs in Albania The structure of FDIs in Albania can be analyzed from both, the viewpoint of the investing country and the viewpoint of the economic sector they are concentrated in. EU countries prevail as far as FDIs’ suppliers in Albania is concerned. During the period 20012006, their position in the Albanian FDI structure has been varying between 77-82% of the total. Greece, Italy, Austria and Germany represent the EU countries with the major contribution to the foreign capital in Albania (The report of the project-AQUILFALC, 2008).28 In 2006 the level of Greek and Italian investments in our country reached the respective values of 610.7 million USD and 152.8 million USD (Luçi & Kripa, 2008). Italian companies are usually small and medium size enterprises operating in the textile and shoes industries, while the rest of them belongs to the construction sector, the real estate sector and to other professional activities. On the other hand, Greek investments are mainly focused on the telecommunication and banking sector. Greek shareholders possess 2 mobile telephony operators, AMC and Vodafone, which also constitute 64% of the total Greek capital in Albania. The number of Greek companies is smaller compared to that of Italian companies, but still they hold the majority of the Albanian FDIs structure (The report of the project-AQUILFALC, 2008).29

Progetto “L’aquila e il falcone volano insieme - AQUIFALC” a valere sul N.P.P. Italia–Albania INTERREG/CARDS 2004-2006 Asse IV, Misura 4.3, Azione 3 29 Progetto “L’aquila e il falcone volano insieme - AQUIFALC” a valere sul N.P.P. Italia–Albania INTERREG/CARDS 2004-2006 Asse IV, Misura 4.3, Azione 3 28

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Chart 3. FDIs in Albania by investing countries, year 2006

Source: The report of the project-AQUILFALC, 200830 Greece has continued to be the major contributor of Albanian FDIs in the following years as well. So, based on the „Report on Foreign Direct Investment in Albania, 2010”31 in 2008, Greece accounted for 41% of total FDI stock in Albania, followed by Turkey, whose share has increased particularly during the 2007 and 2008. The third place is hold by the USA, which in fact is not an important supplier of FDIs in other countries of the region, while in Albania in 2008 it accounted for 12% of total FDI stock. Austria is positioned in the fourth place, with 9% of the total, which is mostly attributed to the acquisition of the Albanian Savings Bank by Raiffeisen bank. A more recent Austrian investment in Albania is also the first major Independent Power Plant to be realized in our country, Energy Ashta that will be built and operated based on a concession

Progetto “L’aquila e il falcone volano insieme - AQUIFALC” a valere sul N.P.P. Italia–Albania INTERREG/CARDS 2004-2006 Asse IV, Misura 4.3, Azione 3 31 http://www.mete.gov.al/upload/fdi_report_2010.pdf 30

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agreement signed among the Albanian government and two Austrian companies operating in the energy industry, Verbund and EVN.32 Chart 4. FDIs in Albania by investing countries, year 2010

Source: Report on Foreign Direct Investment in Albania, 201033 Transport and communication was the most attractive economic sector for foreign investors during the period 2001-2006, accounting for around 38% of the total FDI stock throughout that period. In the mean time, the financial intermediation sector has been expanding considerably, from 4.43% of the total stock in 2001 to 30.04% in 2006. The manufacturing sector, particularly the shoes and textile industry, has also been interesting for foreign investors. It provides high rates of return, because of the low labor cost and the high qualification level of employees. Manufacturing represents as well the sector with the higher number of foreign companies (their number in 2006 was 232), followed by the wholesale and retail trade sector (the number of companies in 2006 was 150) (The report of the projectAQUILFALC, 2008)34. http://www.energji-ashta.al/eashta/ http://www.mete.gov.al/upload/fdi_report_2010.pdf 34 Progetto “L’aquila e il falcone volano insieme - AQUIFALC” a valere sul N.P.P. Italia–Albania INTERREG/CARDS 2004-2006 Asse IV, Misura 4.3, Azione 3 32 33

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Investments in industry have usually been seeking the sectors with the highest labor power concentration, and not those with a high concentration level of capital and technology, therefore leaving little space for the transfer of technology through FDIs and consequently for the increase of the production technological capacity in Albania. The structure of FDIs in Albania by economic sector, from the year 2001 until 2006, is presented as follows: Table 1. FDIs in Albania by economic sector (2001-2006)35 Sector

2001

2002

2003

2004

2005

2006

A. Agriculture, hunting and forestry B. Fishing C. Mining and quarrying D. Manufacturing E. Energy, gas and water supply F. Construction G. Wholesale and retail, repair of motor vehicles H. Hotels and restaurants I. Transport, storage and communication J. Financial intermediation K. Real estate, renting, information technology, research, business services. M. Education N. Health and social work O. Other social and personal activities Q. International organizations activities

0,77%

0,64%

0,39%

0,47%

0,76%

0,68%

Total

0,02% 0,03% 0,02% 0,01% 0,03% 3,01% 1,91% 1,19% 1,19% 2,89% 33,15% 31,67% 37,82% 36,34% 13,97%

0,01% 4,55% 12,59%

0,28% 5,61%

0,23% 5,55%

0,95% 3,44%

0,04% 3,34%

6,76% 10,43% 5,52% 6,67% 43,00% 35,76% 3,77% 4,43% 0,97% 0,18% 0,00% 0,00% 0,01% 0,01% 0,36% 0,49% 0,28% 0,23%

5,59% 3,42%

9,57% 3,00%

7,31% 1,66%

7,15% 1,28%

38,94% 36,85% 40,42% 2,37% 27,31% 2,72% 3,25% 1,11% 2,72% 0,06% 0,07% 0,07% 0,06% 0,01% 0,05% 0,93% 0,06% 1,06% 0,14% 0,12% 0,00%

38,82% 30,04%

100%

100%

100%

0,00% 4,79%

0,45% 4,68%

100%

100%

100%

1,30% 0,06% 0,01% 0,13% 0,00%

Based on data from the Bank of Albania, the “Report on Foreign Direct Investment in Albania, 2010”36 emphasizes that the services Progetto “L’aquila e il falcone volano insieme - AQUIFALC” a valere sul N.P.P. Italia–Albania INTERREG/CARDS 2004-2006 Asse IV, Misura 4.3, Azione 3 36 http://www.mete.gov.al/upload/fdi_report_2010.pdf 35

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sector has continued to prevail in the Albanian FDI stock structure during the years 2007 and 2008. To be distinguished is the transport, storage and communication category, which in 2008 accounted for 23% of the total FDI stock. This is mostly attributed to the expansion of FDIs in the fixed and mobile telephony services in Albania. Financial intermediation has been as well very much attractive for foreign investors. Almost all the banking services in Albania have been acquired and restructured by foreigners. The later brought large amounts of capital in the country and helped circulate it through the financial intermediation services to the Albanian market, therefore fulfilling Albanian businesses and familiars’ needs for financing. In the meantime, the wholesale and retail category, together with the hotels and restaurants one, seem not to be so appealing to foreign investors. In 2008 they accounted respectively for about 7% and 1% of the total stock. This fact is especially depressing when referring to the hotels and restaurants case, because, as will be mentioned in the following section, tourism is one of the sectors with the highest potential to attract foreign capital, due to the Albanian natural and cultural affluence. The depiction of the manufacturing sector as far as FDIs is concerned, during the period 2007-2008, resembles to that of the previous years. FDIs continue to target mainly those production activities that do not require the use of advanced technologies, such as production of construction materials or the production of metals.37 In 2008 this sector accounted for only 16% of the total stock, which is quite less when compared to other South East European countries or to new EU members. In fact, the manufacturing sector performed almost the same as the construction sector, which in 2008 accounted for 15% of the FDI stock, due to the residential construction boom stipulated by emigrant remittances along the period 2004-2008. Following is presented a chart summarizing the structure of FDIs stock structure by economic activity in Albania in 2007 and 2008. 37

http://www.mete.gov.al/upload/fdi_report_2010.pdf

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Chart 5. FDIs in Albania by economic sector, years 2007 & 2008

Source: Report on Foreign Direct Investment in Albania, 201038 As far as the geographical allocation of FDIs within Albania is concerned, the city of Tirana, the capital, holds the first place, followed by Durrës. The areas attracting more FDIs are those with higher incomes and better infrastructure, while in the city of Durrës is located the country’s biggest port, through which circulates the majority of the Albanian foreign trade. The central and the north east part of the country are the least attractive areas for foreign investors. Besides their underdeveloped infrastructure and scarce promotion, external and internal migration, is also thought to be an important factor causing the low level of FDIs in these areas (Uruçi & Boriçi, 2008). Italian and Greek investors have located their businesses in the Albanian cities closer to their countries of origin. So 33% of the Greek enterprises are placed in Korça and Gjirokastër (The report of the project-AQUILFALC, 2008).39 The next chart shows FDIs 38 39

http://www.mete.gov.al/upload/fdi_report_2010.pdf Progetto “L’aquila e il falcone volano insieme - AQUIFALC” a valere sul N.P.P. Italia–Albania INTERREG/CARDS 2004-2006 Asse IV, Misura 4.3, Azione 3

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allocation thoughout the Albanian territory in 2006. As can be clearly noticed from the chart 71% of FDIs are concentrated in the capital. Chart 6. FDIs allocation thoughout the Albanian territory, year 200640

A list of the major foreign investors in Albania during the period 2000-2009 is presented below, classifying them both by country of origin and by economic sector.

40 Progetto “L’aquila e il falcone volano insieme - AQUIFALC” a valere sul N.P.P. Italia–Albania INTERREG/CARDS 2004-2006 Asse IV, Misura 4.3, Azione 3

40


Company name

Country

Sector

Petroleum Bankers

Canada

Oil and gas production

AMC

Greece

Telecommunications

Kurum

Turkey

Metallurgy

Vodafone

Greece

Telecommunications

Edil Centro

Italy

Manufacturing

Consortium Atermon s.a-Roder&Blackwell Consulting

Greece

Energy

Titan cement Group-Antea Cement Sh.a

Greece

General manufacturing

Lockheed Martin

USA

Telecommunications

CALIK (Albtelecom)

Turkey

Telecommunications

EVN

Austria

General manufacturing

Verbund (Ashta Hydro Power)

Austria

Energy

Raiffeisen Bank

Austria

Banking

Interalbanian (Aspis Group)/ (Acquisition)

Greece

Insurance

Sigal (Uniqa Group)/(Acquisition)

Austria

Insurance

Bechtel and Enka

USA&Turkey

Construction

Airport Partners (Hotchtief)

Germany

Infrastructure

Alumil

Greece

Manufacturing

Darfo

Italy

Mining

Table 2. FDIs in Albania by economic sector (2001-2009)41 2.1.5 Stimulant and inhibitory factors for FDI inflows in Albania Financial incentives, such as tax reductions, represent one of the instruments most used by governments of several nations to attract FDIs (Wild et al., 2003). However, experience has shown that the role played by these incentives is limited, especially when compared to factors like legal framework, political and economic stability, buying power level, labor force training level etc. The later 41

http://www.albinvest.gov.al/images/stories/dokumenta/fsh1.pdf

41


can be classified as non financial factors influencing FDI inflows and can be divided into stimulant and inhibitors (Nakuçi & Zizo, 2006). Among the stimulant factors attracting foreign investors in Albania, to be mention are: Albania’s geographical position, particularly its closeness to Italy and Greece, from where originate the major part of foreign investments in Albania (The report of the project-AQUILFALC, 2008)42; The possession of two ports, one in the Adriatic Sea and the other in the Jon Sea, as well as of two airports, from which one is still under construction. They facilitate communication and draw foreign investors and tourists (Nakuçi & Zizo, 2006); The considerable amount of natural resources, most of which are almost completely unexploited, such as mineral resources, forests, water resources, coastal and mountain touristic zones, etc43; The educated and low cost labor force44, which is particularly exploited by foreign investors in the manufacturing industry of textiles and shoes (Nakuçi & Zizo, 2006); The favorable legal framework (please refer to 2.1.2); The lack of competition from domestic companies (Nakuçi & Zizo, 2006); The privatization process and the opportunities it provides for the involvement of foreign capital; The expansion and development of the banking sector, which facilitates credit and the transfer of funds from the headquarters of foreign companies in Albania and vice versa. The low property costs as well as the low tariffs applied in the Albanian trade with other countries (in some cases tariffs are totally eliminated based on the Free Trade Agreements signed between Albania and Western Balkans countries or EU countries).45 Progetto “L’aquila e il falcone volano insieme - AQUIFALC” a valere sul N.P.P. Italia–Albania INTERREG/CARDS 2004-2006 Asse IV, Misura 4.3, Azione 3 43 http://www.albinvest.gov.al/images/stories/dokumenta/fsh1.pdf 44 http://www.albinvest.gov.al/images/stories/dokumenta/fsh1.pdf 45 http://www.albinvest.gov.al/images/stories/dokumenta/fsh1.pdf 42

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There are however some factors that hinder the process of foreign capital flow in Albania. Among them are: The high level of perceived political and economic risk by foreign investors; Problems and conflicts related to land ownership; The high level of informality in economy, which impedes the development of business activities based on an honest competition; The weak functioning of public instituions, corruption, traffics and weak law enforcement (The Strategy for the Developement of Businsess and Investments 2007-2013)46; The inefficiency of institutions supporting FDIs. This is a consequence of the fact that investment contracts are mainly signed based on executives‘ preferences as well as of the lack of a permanent information system connecting potential investors with institutions supporting FDIs and economic sectors needing investments (Nakuçi & Zizo, 2006).

Ministry of Economy, Trade dhe Energy – Strategjia e Zhvillimit të Biznesit dhe Investimeve 2007-2013 46

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THIRD CHAPTER 3.1Ageneral overview of theories about staffing policies applied by multinationals for subsidiary managerial positions 3.1.1 Introduction Human resources represent the most important asset of any successful business. In fact, according to Harvey et. al (2001) their role is more critical as companies expand overseas. This is particularly true in the case of multinationals, where the effective management of these resources can be a key factor for their success of failure (Tung, 1987). Within the context of human resources management in multinationals, staffing policies for subsidiaries’ management positions, specifically the policy related to subsidiaries’ managers nationality, are of special interest. “Having the right people, at the right place and at the right time is the key for a company‘s successful international expansion. Having solved that problem I am certain we will be able to face all the others that will follow”, (Duerr, 1986, pg. 43). Perlmutter (1969) is through the first to provide a typology on management and staffing policies for multinational companies. Many authors have considered it as an important instrument to understand these companies’ international strategies (Sandberg & Hasen, 2004). According to Perlmutter, a multinational company (MNC)47 is at first composed of an ethnocentric staff, which is gradually replaced by a polycentric one. Next, after a long experience of the company in international markets, its staffing policy guides more toward geocentrism (Heenan & Perlmutter, 1979). An 47

MNC as the abbreviation

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ethnocentric policy requires that individuals from the home country (parent country nationals, PCNs or expatriates) run multinationals’ operations abroad. A polycentric policy is exactly the contrary. In this case individuals from the host country (host country nationals or HCNs) are those manage subsidiaries of multinationals abroad (Wild et al., 2003). On the other hand, the geocentric policy consists in the selection of the best employees to perform managerial tasks indipendently of their nationality. They may be from the home, the host or a third country (third country nationals or TCNs), it depends on the company’s specific needs. At the beginning, the major part of the research work regarding this topic focused on the advantages and disadvantages of PCNs as compared to HCNs, and in some cases efforts have been made to identify the factors that had influenced the choice among these two options (Tung, 1981, 1982, 1987; Hamill, 1989; Boyacigiller, 1990; Dowling & Schuler, 1991; Fatehi, 1996, Downes & Thomas, 2000, O’Donnell, 2000 etc.). However, only few studies have empirically investigated actual practices in staffing managerial positions in MNCs’ subsidiaries. Among them, of special interest are Tung publications, respectively in the years 1981, 1982 and 1987, which have served as a point of reference for following investigations. Kopp (1994) as well, in his study of human resource management policies in some companies in US, Europe and Japan, mentioned the issue of subsidiaries managers’ nationality. Nevertheless, its study was limited in providing only some descriptive results about the percentage of PCNs as compared to HCNs in the surveyed companies. Edström & Galbraith (1977) were through the first to successfully specify the three major reasons for the use of expatriates or PCNs as managers of MNCs’ subsidiaries. They built the basis for further research in the field, where to be mentioned is the group of German authors’ studies during the period 1977-1994. It should be emphasized as well that Edström & Galbraith (1977) arguments have also been a point of reference for the latest studies examining staffing policies for subsidiaries’ managers (Harzing, 2001a, b; Harvey et al., 2001; Gong, 2003b; Bonache Perez & Pla-Barber, 2005;

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Belderos & Heiltjes, 2005; Tarique et al, 2006; Reiche, 2006 etc). According to them and all the later authors supporting their theory, multinationals decide to use a PCN or an expatriate over an HCN for the following reasons: 1. Position filling, which is particularly important in cases when transfer of technical or managerial knowledge in the host country is necessary, or in cases when local managers are not qualified or need to be submitted to training programs; 2. Management development, which aims to increase the level of global conscience and experience of managers from the headquarters; 3. Organization development, which means changing or maintaining the actual organizational structure, as well as the improvement of actual control, coordination and communication channels among the headquarters and the MNCs’ subsidiaries. Other authors have identified also the major reasons for using HCNs or local managers instead of PCNs. Hence, according to Tung (1982), Kobrin (1988), Harvey et al. (1999, 2000b), Czinkota et al. (2005), Tharenou & Harvey (2006) etc., a PCN is not familiar with the local environment in the host country. He is not familiar with the politics, laws, culture, people as well as business practices. On the other hand, the cost of transferring an expatriate is really high, which makes it more convenient to relpace him/her with an HCN (Kobrin 1988; Banai 1992; Harzing, 2001b; Czinkota et al, 2005; Bonache Perez & Pla-Barber, 2005 etc.). Lastly, expatriates have difficulties to adjust to the new environment in the host country (Kobrin 1988; Banai 1992; Florkowski & Fogel, 1999; Harvey et al. 1999, 2000b; Czinkota et al, 2005; Paik & Song, 2004 etc.). Each of the aforementioned reasons, both those favoring expatriates and those favoring HCNs, receive exceptional importance in some specific situations that are directly related to the characteristics of the:

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a. MNC’s home country b. MNC itself c. Host country d. Industry where the company is involved, or e. MNC’s subsidiary in the host country This has been mentioned in several papers investigating staffing policies for managerial positions applied by multinationals. Making this connection, many authors have been able to identify an array of factors that can possibly affect these staffing policies. The following sections will present in more detail the impact of each of these factors based on various theoretical and empirical analyses provided by different authors. As stated above, the other source for recruiting subsidiaries’ managers can be a third country (meaning that the managers are neither from the home nor from the host country, the so called TCNs). They are usually viewed as a compromising choice among expatriates and local managers. Furthermore, in many cases TCNs can be less expensive than PCNs (Tarique et al., 2006). The advantage of using them is related to the fact that they can contribute to the development of the general international expertise of the company (Czinkota et al, 2005). Consequently, these managers are more likely to be found in those MNCs that apply a global or a regional expansion philosophy (Tarique et al., 2006; Czinkota et al, 2005). Today, in order to follow business opportunities many companies are expanding their activities in emerging economies’ markets. Sending out PCNs to run subsidiaries in these markets can be challenging. In many cases they will be faced with a culture that is very different from the one in their home country therefore creating serious adjustment problems to them, which are then associated with a considerable cost for the company if they fail to perform their duties (Harvey et al., 1999). In this case, the transfer of local ma-nagers or HCNs to the headquarters, the so called inpatriates, can be viewed as an appropriate option to provide the necessary connection bridge among subsidiaries and the headquar-

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ters, consequently replacing the role of PCNs as builders of communication channels between them. Inpatriates are increasingly filling multinationals’ informational gaps on characteristics of host country environments, hence facilitating their entry and activity in these markets (Harzing, 2001a; Gong, 2003b; Reiche; 2006). However, research on the role of these managers is still at an early phase. 3.1.2. Factors affecting the selection of subsidiaries’ managers in multinational companies The main reasons cited above, which favor the selection of PCNs or HCNs as subsidiaries’ managers, are not equally important in all situations. Their relevance depends on the multinational characteristics, its country of origin, the host country characteristics, on the industry the multinational is operating in, as well as on the characteristics of the company’s subsidiary in this particular host country. Consequently, many researchers, based on theoretical and empirical analyses have identified an array of factors that may influence the selection among an expatriate, a local manager and a third county manager. Following are presented arguments supporting each of these factors based on a bulky literature review. 3.1.2.1 Characteristics of the MNC’s home country According to Schuler et al. 1993, culture, particularly cultural change, has been identified as an significant factor affecting the choice of subsidiaries‘ managers. Cultural change can be identified as the level of change among the home and host country cultures (Erez & Early, 1993). Many authors, such as Harzing, 2001; Harvey et al., 2001; Gong, 2003b; Paik & Sohn, 2004; Bonache Bonache Perez & PlaBarber, 2005; Tarique et al, 2006; Tharenou & Harvey, 2006, affirm that MNCs are more likely to appoint PCNs as managers of their subsidiaries in cases when the home country culture differs considerably from that of the host country. According to them such tendency

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is related more to their need to control and coordinate the activity of their affiliates48, so that the later move toward the accomplishment of the common MNCs objectives. Harzing (2001a) surveyed 212 subsidiaries of a group of MNCs originating from 9 different countries and dispersed in 22 host countries with the intent to study the functions and the role played by the PCNs managing these subsidiaries. She came to the conclusion that companies originating from Germany and Japan were more likely to send expatriates as subsidiary managers, mostly for control and coordination purposes. Such likelihood was stronger in the cases when the host country culture was very different from the German or the Japanese culture. In accordance with Harvey et al. (2001), the emergence of business opportunities in developing countries have spurred many MNCs to guide their operations towards these countries. But, during this process these companies were faced with the high level of change among the culture of their home country and the culture of the host countries where they settled their activities. Based on theory of agency’s assumptions (Eisenhardt, 1989), Harvey et al. (2001) raised the hypothesis that, the higher the level of change among the home and host country cultures, the more likely is the MNC to choose a PCN as subsidiary manager. The theory of agency analyzes the relationship among two parties where one delegates the other (the agent) the authority to perform tasks on his behalf (Jensen & Meckling, 1976). Since most of the time the interests of these two parties are different, the major problem in managing this relationship is the construction of an appropriate control mechanism, which will make possible the agent acts in the interest of the other party. The relationship headquarters-subsidiary, in the case of MNCs, has been viewed as a relationship of this type. Consistent with Harvey et al. (2001) there exist two core factors

Control and coordination of subsidiaries’ activities represent one of the major reasons for employing PCNs. 48

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related to the theory of agency which are particularly relevant for the global strategic management of human resources. These include: 1) asymmetric information and 2) goal congruency among the headquarters and its subsidiaries. Asymmetric knowledge refers to a situation at which the necessary or the available information at the headquarters is different from the one sent by or available at its subsidiaries. This difference can be the result of a greater autonomy held by a specific affiliate, but also of the significant cultural changes as far as performance indicators definitions is concerned between the home and the host country. In these conditions using an expatriate as the manager of the subsidiary can be a more preferable option. A PCN possesses the necessary knowledge to evaluate the subsidiary decisions and results in the same way and using the same performance indicators as the parent company does. Gong (2003b) is another author who has been using the agency theory to explain the choice among PCNs and HCNs for the position of subsidiaries’ managers. According to him, there are three major ways MNCs’ headquarters can exercise their power and control over subsidiaries. First, a multinational can use authoritarian performance control as a means to guide subsidiaries’ activities towards the common MNC’ goals. This is possible when information on subsidiaries’ performance indicators is correct and easy to be provided. Second, the headquarters can use the behavior control strategy, which is appropriate in cases when complete information on work processes and behavior within subsidiaries is available. And third, the headquarters can exercise the so called cultural control through the transmission and the sharing of parent company values and norms with its subsidiaries. This can be achieved particularly by sending out expatriates to run these subsidiaries. Gong (2003b) emphasizes as well that in cases of a huge difference between the host and the home country cultures, exercising control over subsidiaries through the use of PCNs can be the most appropriate option. He argues that, the larger the cultural

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change among the home and the host country, the more difficult is for headquarters’ managers to have complete knowledge about the host country environment and the respective subsidiary actions and results. In such conditions, it is more complicated and expensive for them to understand and control the subsidiary activity through performance indicators or behavior control. On the other hand, PCNs are already embedded in the parent company’ cultural values and norms, and therefore, while managing a subsidiary they are more likely to be identified with the MNCs global goals than local managers are (Gregersen & Black, 1996). The common values and norms help them (expatriates) guide the given subsidiary to the achievement of the multinational strategic goals. Based on these arguments Gong (2003b) raised the hypothesis that there is a positive relationship between the level of cultural change among the home and the host country and the MNCs likelihood to assign an expatriate as the general manager of a given subsidiary. Tested in a sample of 4.201 multinationals, the hypothesis resulted to be true. The use of PCNs as a means of cultural control by MNCs headquarters has been supported as well by Paik & Sohn (2004). Nevertheless, differently from previously mentioned authors, they pointed out that the ability of an expatriate to effectively exercise the control function depends on his/her level of knowledge about the host country culture. Paik & Sohn (2004) surveyed 101 Japanese MNCs with a total number of 379 subsidiaries spread in 4 host countries. The survey revealed that, in cases when the expatriates’ level of knowledge about the host country culture was high, they were contributing positively to the increase in the level of headquarters control over subsidiaries. On the other hand, in cases when PCNs’ knowledge was low, they were having difficulties adjusting to the host country culture and therefore their presence, instead of helping, was harming the parent company ability to exercise control. Two other authors, contributing in the study of the relationship among cultural change between home and host country and the nationality of managers running MNCs’ subsidiaries in host countries,

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are Bonache Perez & Pla-Barber (2005). They used the economics of transaction cost theory in order to verify the impact of the MNC’s internal and external environmental factors in designing its staffing policies for subsidiaries’ managers. Based on Williamson (1975), Buckley & Casson, (1976) and Teece (1982), Bonache Perez & Pla-Barber (2005) emphasize that markets ‘imperfections” stay at the basis of the economics of transaction cost theory. They form an internal characteristic of these markets and companies are institutions which should move on through such imperfections. This reasoning is valuable for every situation that involves the occurrence of a transaction. In fact, the decision to put an expatriate or an HCN (or a TCN) as the general manager of a particular subsidiary is a transaction itself. The aim of the economics of transaction cost theory is to make a decision that minimizes the combined transaction costs. Therefore, when a company has to decide who is going to manage a particular subsidiary it has to consider the total costs associated with each specific alternative (i.e. the use of an expatriate, an HCN or a TCN), in order to choose the one that requires the minimal cost. As stated above based on agency theory assumptions, with the increase in the level of cultural change among the home and the host country increases the level of information asymmetry among the parent company and its subsidiaries. In order to reduce this asymmetry, in the cases of using HCNs as subsidiary managers, the headquarters will have to control them more rigorously, apply a deeper selection process and implement expensive training programs. Each of these activities has its own costs, making the employment of locals a costly option for the MNC. As a result with the increase in the level of cultural change between the home and the host country, increases the cost of using local managers too, which, according to Bonache Perez & Pla-Barber (2005) might be higher than the cost of sending out expatriates. For that reason, in order to reduce costs, the MNC should be better by putting a trusted PCN in the position of a subsidiary manager instead of employing a local to perform that task.

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Based on such reasoning Bonache Perez & Pla-Barber (2005) assumed that the greater the level of cultural change between the home and the host country the more likely are the MNCs to use expatriates. Tested in a sample of 96 MNCs based in Spain this hypothesis was rejected. Instead, the authors discovered that at least in Spanish MNCs the host country (consequently its culture) had no impact in the decision to choose amongst a PCN and an HCN. They argued this conclusion with the fact that the higher is the level of an MNC’s international presence the lower is the relevance of cultural changes among the home and the host country. The more internationally a company is expanded the greater is its level of knowledge about local labor markets, therefore the higher are its possibilities to develop a base of local employees from which to choose those who are more trustworthy. In this situation the agency and information asymmetry costs, which are the major reasons spurring the use of PCNs are lower, so favoring the employment of HCNs as subsidiaries’ managers. Tharenou & Harvey (2006) looked at the role of cultural change among the home and the host country in determining staffing policies for subsidiaries’ managers from another point of view. Based on assumptions of the competence theory49 (Lado & Wilson, 1994) and on a study conducted with 90 Australian MNCs they reached to the same conclusions as the above mentioned authors. The longterm transfers of managers from their home country are undertaken among other reasons for the purpose of reducing agency and asymmetric information costs deriving from changes among the home and the host country cultures. But, differently from previous studies, Tharenou & Harvey (2006) used semi structured interviews with managers of these companies to analyze the nature of relationship

According to the competence theory, MNCs can face successfully the actual dynamic global environment by continuously renovating their individual and organizational competences, through the selection of the best and the more qualified managers. 49

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between cultural change and staffing policies for subsidiaries’ managerial positions. Furthermore, according to them, the expatriate transferred should possess the necessary competences to reduce the risks deriving from agency costs. In cases the manager does not possess such competences then he or she is not the best option to choose. Additionally, Tharenou & Harvey (2006), based on statements from Australians managers, provide some other options where to pick out from in order to fill subsidiaries’ managerial positions. In order to reduce the risk originating from cultural change an interesting alternative could be the employment of PCNs who, at the moment of selection, are living in the host or in another foreign country. These managers, during their experience abroad are more likely to have earned the basic knowledge about foreign cultures and therefore are in a better position to understand and manage the effect of cultural change in the relationship between the headquarters and its subsidiaries. The use of PCNs and HCNs are viewed as well as valuable alternatives in cases when them, through training and experience earned at the parent company, have been accustomed with the MNC’s home country culture as well as the MNC’s culture (the so called inpatriates). But, at the basis of each of these alternatives stands the possession by the manager of the necessary knowledge that will help him reduce the risks originating from cultural changes between the home and the host country. The impact of cultural change in determining the nationality of the manager who will run a given subsidiary is mentioned too by Tarique et a. (2006). In their paper they have presented a theoretical model illustrating the influences and the reciprocal relationships between the MNCs’ business environment factors and the composition of their subsidiaries’ managerial staff. In this framework the effect of cultural change has been discussed in association with the MNCs’ competitive strategies. The three major competitive strategies used by multinationals to integrate their affiliates all over the world are: the global strategy, the multidomestic strategy and the regional strategy (Schuler et al.,

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1993; Taylor et al., 1996). Based on the individual-environment fit theory and on various authors’ arguments about this theory, Tarique et al (2006) have raised a series of hypotheses on the relationship existing between the cultural change, competitive strategies applied by multinationals and the nationality of managers of their subsidiaries. According to Edwards (2003) the individual-environment theory suggests that organizations choose their employees based on their characteristics and qualities that comply with the requirements of the environment they will be working in (Tarique et al., 2006). Tarique et al., (2006) define environment as a context within which individuals perform their duties. Also, according to them, fit is possible only when individuals hold similar characteristics with the environment or when their skills and knowledge accomplish environment requirements. In their model cultural similarity and competitive strategies are viewed as two independent variables according to which managers should be selected. Tarique et al. (2006) affirm that, in cases of similarity between the home and the host country culture, the MNC prefers to put at the position of a given subsidiary’s general manager: 1) a local manager socialized at the headquarters (when using the global strategy); 2) a local manager socialized at the respective subsidiary (when using the multidometic strategy); and 3) a TCN socialized at the respective regional center of the MNC (when using the regional strategy). Based on the institutional theory they argue that when the level of cultural change is low subsidiaries are under the pressure of the host country institutions to employ local managers, with the intent to act in accordance with the cultural and legal expectations of the local environment. Achieving such expectations makes it easier for the MNC to get support and guarantee a long-term endurance in the host country. On the other hand, when the level of cultural change among the home and the host country is high, PCNs (global strategy), HCNs (multidomestic strategy) and TCNs (regional strategy), who have all been socialized at the headquarters, are more preferable. This derives from the fact that they provide a better fit with the parent

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company values and objectives, and as such, reduce insecurity and agency costs in managing operations abroad (this later argument was discussed above while talking about the agency theory). 3.1.2.2. Characteristics of the multinational company The decision about the nationality of managers who will run an MNC’s subsidiaries is influenced as well by the characteristics of multinational itself. Many authors have mentioned this arguing that, the level of international expansion of a particular MNC, the intensity of R&D activities it uses and its size, in many cases are determinants of the nationality of subsidiaries’ managers. Level of international expansion Based on conclusions from Edström & Gailbraith (1977) relative to this factor, Harzing (2001b), argues at first that the likelihood of using expatriates is higher in companies with a larger international expansion. She states that the need of such companies to increase their managers’ global awareness is higher. Therefore they have greater motivations to use an managers’ transfers abroad. But, tested, in a sample of 200 MNCs originating from 11 different countries, the relationship among the level of an MNC’s international expansion and its likelihood to use expatriates resulted to be weak. In the mean time, as Bonache Perez & Pla-Barber (2005) were studying the costs associated with the employment of PCNs as subsidiaries’ managers they discovered another relationship among the aforementioned variables. They found out that further expansion of MNCs in international markets was associated with fewer chances to send out expatriates. Their hypothesis, which was supported by arguments of the transaction cost theory, proved to be true. According to Bonache Perez & Pla-Barber (2005), a company that has just started its activity abroad, is not in the best position to select right the managers from the local labor market. This is so because the MNC doesn’t know this market yet. But, if it is determined to fill managerial position in subsidiaries with HCNs, then,

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it must spend more time and money during the selection process in order to overcome the risk of choosing the wrong employees in an unknown market. Additionally, for the purpose of making HCNs acquainted with the products, policies and procedures of the headquarters, the later should invest considerable amounts of money to train them. In base of these arguments Bonache Perez & Pla-Barber (2005) suggest that in cases of an MNC’s limited international experience using PCNs can be a more cost effective option. Later on, as the company expands more in international markets, the costs of using host country managers decrease, therefore making them a more preferable option for multinationals. Tan & Mahoney (2006) developed an integrated model of three organizational theories in order to argue why expatriate managers should be used as subsidiaries’ managers of multinational companies. These theories include: the agency theory, the cost of transaction theory, and the resources theory. Based on the resources theory viewpoint a company can add to its incomes by putting managers in those positions where, based on their capabilities, they provide the maximum of contribution (Tan & Mahoney, 2006). However, even if an individual may possess the appropriate talent to run an overseas subsidiary, the conflict/transaction cost to be paid by the parent company in order to control and influence his/her behavior may be very high. Therefore, from the view point of the resources theory this individual can provide additional incomes to the company, but from the view point of the agency and the transaction cost theory he/she brings to higher costs for the company. According to Tan & Mahoney (2006), the level of international expansion or the degree of an MNC’s internationalization, can stimulate or reduce its likelihood to employ PCNs as subsidiaries’ managers, but this depends on the theory taken into consideration during the explanation of this relationship. In order to measure the level of international expansion of an MNC they used the rate of production performed overseas. Based on the resources theory a company with a higher rate of production overseas has a larger necessity to possess local knowledge and expertise. Knowledge about

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the legal, cultural and logistic environment in the host country helps this company be a better competitor in this market and consequently attain a higher level of profits. In this context the contribution of local managers is of particular importance, since they are much more familiarized with the host country legal, cultural and logistic environment than expatriate managers are. On the other hand, a company with a higher rate of production overseas is characterized by a large array of reciprocal employee transfers among its headquarters and subsidiaries (Barlett et al., 2003). Moreover, it is more likely to increase the level of integration between different production activities in various countries with the intent to benefit from lower production costs in particular host markets (Flaherty, 1992). Based on the agency theory, transfers within the company and the need to integrate production activities in various countries bring to higher costs of monitoring subsidiaries’ managers and create conflict of interests between the parent company and subsidiaries. In such conditions, the use of PCNs would be a good option to reduce agency costs in companies with a higher rate of production overseas. As can be noticed from above the theory of resources supports the use of HCNs whiles the agency theory the use of PCNs. The test of these different viewpoints in 284 subsidiaries of Japanese MNCs in the US revealed that they were using more PCNs in cases of a higher rate of production overseas. So, when the level of international expansion of Japanese companies was high (Tan & Mahoney, 2006), they were more concerned about the high level of agency costs than about their need to hold local expertise. This result is consistent with the conclusion of Beechler et. al. (1996) who emphasize that the more Japanese MNCs expand overseas the higher is their need to integrate and coordinate the activities of subsidiaries with those of the headquarters. As a consequence, the majority of these multinationals prefer the use of Japanese managers to create and maintain a solid relationship among them. The research results provided by the above mentioned authors, about the impact the internationalization degree of an MNC has in

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its staffing policies for subsidiaries’ managers, are not the same. So, according to Beechler et al. (1996) and Tan & Mahoney (2006) Japanese companies prefer more to use expatriates, while Spanish local managers in cases of a larger expansion of the MNC in international markets (Bonache Bonache Perez & Pla-Barber, 2005). On the other hand, Harzing (2001b) who studied MNCs originating in different home countries concluded that the degree of internationalization had no impact on staffing practices applied for subsidiaries‘ managerial positions. These different conclusions suggest that the country of origin of an MNC, particularly its culture, may play a critical role in determining the relationship between the level of international expansion of an MNC and the practices it applies to recruit subsidiaries’ managers. The Japanese culture is characterized by a high degree of uncertainty avoidance (Hofstede, 1980), meaning that it values more security and societies based on strong rules and procedures (Wild et al., 2006). This is illustrated for example by the fact that Japanese do not trust foreign managers, which justifies the fact why Japanese MNCs continue to maintain expatriates as subsidiaries’ managers, even in cases of a large experience of the company in international markets. Japanese companies emphasize on cultural control systems based on the principles of reciprocal trust, loyalty and identification of the individual with the group. Since the application of such control systems to local managers is difficult, because of cultural differences among Japan and the host countries, Japanese multinationals have judged the use of Japanese expatriates to run their subsidiaries (Belderos & Heijltjes, 2005). In the mean time, the majority of European cultures and particularly the American culture, are characterized respectively by a moderated and a low degree of uncertainty avoidance (Wild et al., 2003). Therefore, MNCs based on these countries are more likely to include managers from the host country in the higher levels of subsidiaries’ management, especially in cases of a larger expansion in international markets.

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The intensity of using R&D activities Another factor mentioned by various authors to influence staffing policies for managerial positions is as well the intensity of R&D activities used by MNCs. The development of new technologies by the parent company enhances its likelihood to transfer them to the subsidiaries (Harzing, 2001b; Hocking et al., 2004). But, with the intent to apply them effectively and efficiently in specific subsidiaries, the headquarters needs to enforce the control during their implementation (Kim & Hwang, 1992), which can be exercised through the transfer of PCNs to run overseas subsidiaries (Paik & Sohn, 2004). Harzing (2001b) did not find any relationship among the intensity of using R&D activities and the decision of the MNC to employ PCNs or HCNs as subsidiaries’ managers. The same conclusion was achieved as well by Geng (2004), who studied a group of American companies who had developed joint-ventures with Japanese partners. He raised the hypothesis that a higher intensity of R&D activities would require a higher use of expatriates, but the relationship amongst these variables resulted to be very weak. In the mean time, Paik & Sohn (2004) discovered that the relationship between the R&D intensity and the rate of PCNs use, varied depending on the level of their knowledge about the culture of the host countries. In cases of considerable knowledge the rate of using PCNs increased with the increase in the level of R&D intensity. This conclusion signifies that managers from the home country, who hold the necessary knowledge about culture of the host country, are in a better position to transfer new technologies and exercise the right control for a successful application of them in subsidiaries. Alternatively, in cases when PCNs did not possess the right knowledge on the host country culture, they were a less preferable option when the company was increasing the intensity of its R&D activities. This means that the lack of knowledge about the host country culture complicates the transfer of technology through ex-

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patriates, because they are not able to implement it in accordance with the new cultural environment. Based on the research from Baron & Kreps (1999) and on the theory of transaction cost economics, Bonache Perez & Pla-Barber (2005) argued that with the increase in the use of R&D activities reduces the likelihood of using expatriates. According to these researchers, jobs in an organization can be divided into two categories: “star jobs” and “guard jobs”. The firsts are more probable to be found in innovator companies. Their major characteristic is that, in cases they are performed well they provide excellent results to the company, but if they are not performed as required the damage to the company is not important. An example of this kind of job is that of a subsidiary manager whose dependence on parent company products, brand image and procedures is low. The fundamental task of this manager is to continuously develop products and procedures appropriate for the host country markets. Instead, a “guard job” is characterized by the opposite impact in the general results of the MNC. If this kind of job is performed well the benefits for the multinational as a whole are small, but in cases of a weak performance the damage to the company can be very big. The task of a subsidiary manager operating in the finance sector represents a typical example of this kind of job. Since “star jobs” are typical for innovator companies, which apply the development of products and procedures in accordance to the local market, the employment of a subsidiary manager who would do well this job, would provide a big benefit to the company. A manager from the host country is in a better position to develop products and procedures appropriate for the local market, therefore he/she would be a better solution for an innovator company. The benefit the MNC would get from this manager would be higher than the agency and information asymmetry costs associated with his/her assignment as subsidiary manager50. Please refer former arguments given in the above sections on the agency theory and its impact on subsidiaries’ managers staffing policies 50

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Consequently, according to Bonache Perez & Pla-Barber (2005), the more a company is concentrate in innovation activities the more likely it is to hire local individuals as managers of its subsidiaries. The size of the MNC The size of the MNC is another characteristic that influences the decision about the nationality of subsidiaries’ managers. The fact that a company is small or big influences the ability of its headquarters to control and coordinate the affiliates’ activities (Beechler et al., 1996). Based on a study of 119 subsidiaries of Japanese MNCs in USA and Europe Beechler et al. (1996) came to the conclusion that, with the increase in the size of these companies increased their need to use expatriates. According to them, this is related to the irreplaceable role of PCNs in integrating the activities of subsidiaries with those of the parent company. Managers from the host country are judged as unable to perform effectively this function, because of their inability to speak foreign languages and because of their lack of global experience. On the other hand, Harzing (2001b) argues that bigger companies are more likely to have formal programs for the development of their managers, which include their transfer with managerial tasks abroad. Therefore, in these companies is expected to have a higher percentage of PCNs as subsidiaries’ managers. The hypothesis she raised about a positive relationship between the size of the company and its likelihood to use PCNs resulted to be true. Later research, such as that from Bonache Perez & Pla-Barber (2004), Thomson & Keating (2004) and Geng (2004), who studied respectively Spanish MNCs, MNCs with subsidiaries in Ireland and American - Japanese joint-ventures, did not discover any significant relationship amongst the size of the MNCs and their preference about PCNs or HCNs. In the mean time, Bebenroth & Donghao (2006), as they were studying 1.223 MNCs with subsidiaries in Japan, found out that companies with a number of employees larger than 5.000 were more likely to put expatriates in the position of a subsidiary manager.

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Alternatively, companies with less than 5.000 employees were more prompted to use a higher percentage of PCNs in the board of directors of the subsidiary, even if the general manager of this subsidiary was local, in this case Japanese. 3.1.2.3 Host country characteristics In many cases, the literature dealing with the management of human resources in multinational companies, mentions the role played by some features of the host country environment in shaping staffing policies for subsidiaries’ managers. Several authors have supported the fact that the cost of living in the host country, the level of political risk and the education level in this country can be critical in determining the nationality of managers. The cost of living in the host country One of the major problems associated with the use of expatriates as subsidiaries’ managers is the high cost the company should be facing in such cases (Kobrin 1988; Banai 1992; Harzing, 2001; Czinkota et al, 2005; Bonache Perez & Pla-Barber, 2005; Wild et al, 2006, etj). In order to encourage PCNs to accept managerial tasks in foreign countries, multinationals are obliged to pay them, besides the base salary, some additional allowances. (Wild et al., 2003). The purpose of such payments is to apply an effective compensation program, which will make possible, among others, the achievement of the following objectives: 1) motivate managers to accept transfers overseas; 2) provide them a standard of living at least equivalent to the one in the home country. (Czinkota et al., 2005; Kleiman, 2006). The financial incentive used to help achieve the second objective is called the cost of living allowance (Czinkota et al., 2005; Kleiman, 2006). If the cost of living in the host country is higher than in the home country the parent company compensates managers for the difference by using the cost of living allowance. Obviously, the higher is the difference the higher is the compensation, meaning that, with the increase in the cost of living in the host country, increases the cost of transferring an expatriate manager overseas.

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In these conditions a local manager would be more favored. Harzing (2001b) has studied this relationship in a number of 200 MNCs and has come to the conclusion that, in cases of a higher cost of living in the host country compared to the home country, HCNs are more favored. Gong (2003b) and Gaur et al. (2006) conclusions were the same. As have been mentioned earlier, Gong (2003b), studied the impact of cultural change among the home and the host country in the selection between PCNs and HCNs as managers for MNCs’ subsidiaries, as well as the change of this relationship over the time. Then, Gaur et al. (2006), based on Gong’s (2003b) work, studied the effect of institutional distance on staffing policies for subsidiaries’ managers and its change over time. Their goal was to include in their study not only cultural differences among the home and the host country but also other institutional factors, such as laws and rules. Even if the impact of the cost of living in the host country in staffing policies was not the primary goal of Gong (2003b) and Gaur et al. (2006) studies, they used it as a control variable, and in both cases the relationship resulted to be negative. So Gong (2003b) and Gaur et al. (2006), same as Harzing (2001b), concluded that the higher the cost of living in the host country, the less likely is the multinational to appoint an expatriate as the general manager of its subsidiary in this country. Political risk Political risk can be defined as the “possibility that a government or a society face political changes that affect negatively the activity of the local market” (Wild et al., 2003, fq.84). Every country has a specific level of political risk (Czinkota et al., 2005; Eitman et al., 2004), but in some countries this level is higher than in others. Usually political risk is lower in those countries which have a long history of stability and higher in those whose history is the opposite (Czinkota et al., 2005). All companies in a country are exposed to political risk, both domestic and foreign, but the later, in most of cases, are more sus-

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ceptible to its effects (Eitman, Stonehill & Moffet, 2004). Political risk can be a consequence of actions outside the control of the government (Wild et al., 2003), such as conflicts, violence, and terrorism, or of the government actions (Czinkota et al., 2005), such as wealth confiscation, changes in the government policies or requirements to use local resources (Wild et al., 2003). Based on these arguments, many authors have supported the use of PCNs in environments with a high level of political risk. These managers provide a direct control and the necessary clarity in the communication between the headquarters and the subsidiaries placed in such countries (Boyacilliger, 1990; Downes, 1996; Harzing, 1996, 2001b), therefore reflecting the tendency of MNCs to increase control over risky investments. Boyacilliger (1990) was through the first to come to this conclusion. She developed a multidimensional analysis of environmental and organizational factors to explain staffing practices applied to managers in an American bank with activity dispersed in 43 countries. Political risk was one of the environmental factors she took into consideration. Her study focused on a single company and belongs to the beginning of the past decade. However, her conclusion about the impact of host country political risk in selecting subsidiaries’ managers was theoretically and empirically supported by other researchers. So, Downes (1996), in an article published in the “Journal of International Management”, presented a theoretical model explaining the relationship between political risk, cultural change as well as specific cultural dimensions and the staffing policies for subsidiaries’ managers. Six of the 10 hypotheses she raised in this paper were tested by Harzing (1997) in 1640 subsidiaries of MNCs originating from 22 different countries. The tests revealed that home country managers were more probable to be found in subsidiaries placed in high political risk countries. Harzing (1997) argued this with the parent company needs to increase control over those subsidiaries exposed to a higher political risk, an argument she proved herself in a later study (Harzing, 2001b).

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On the other hand, Gong (2003b) and Gaur et al. (2006) evidenced a negative relationship between political risk and the MNCs’ likelihood to use expatriates. According to them, the tendency to put PCNs in the position of subsidiaries’ managers is lower in host countries with a high level of political risk. One aspect of political risk corresponds too to government policies which directly or indirectly impact the activity of MNCs’ subsidiaries in host countries. In many countries there may be specific laws which prohibit the transfer of managers from the headquarters (Czinkota et al., 2005). Therefore, in order to increase the level of their acceptance in such countries, by complying with their laws and rules, many MNCs may be obliged to increase the inclusion of local employees in their managerial structures. The same fact has been commented as well by Chua (2005) in a paper aiming to explain subsidiaries’ managers staffing practices based on the assumptions of the agency and institutional theories. Chua (2005) argues that in cases when local legislation does not favor PCNs, their percentage in managerial structures is lower. Education level One of the most important reasons for using PCNs is to fill managerial positions, specifically in cases when there are no qualified local managers (Harzing, 2001b). The later is often a consequence of a low education level in the host country (Boyacilliger, 1990; Scullion, 1991) which is more probable in developing economies or in the new industrialized countries (Wild et al., 2006). Some empirical studies have revealed the existence of a negative relationship between the education level in host countries and the likelihood of MNCs to use expatriates (Harzing, 2001; Gong, 2003b; Gaur et al., 2006). According to them the higher the level of education in host countries the lower is their tendency to put PCNs in the position of subsidiaries’ managers, therefore favoring the recruitment of local managers.

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3.1.2.4 Industry characteristics The literature dedicated to staffing policies for subsidiaries’ managerial positions has often been using industry as an approximation of the MNC’s competitive strategy. Based on the Barlett & Goshal (1989) typology as well as in other models related to the strategic management of human resources, the following strategies, used by MNCs to compete overseas, can be identified: the global strategy, the adaptation or multidomestic strategy and the transnational strategy.51 Companies applying the global strategy organize and manage their subsidiaries in a uniform way with the intent to achieve economies of scale. Their major goal is the improvement of efficiency through the integration of their subsidiaries’ activities (Roth et al., 1991). Meanwhile, the multidomestic strategy is characterized by a high level of decentralization, which aims to maximize the level of adjustment of specific subsidiaries to the needs of the local markets in host countries. In such cases each individual market is considered different from other markets. For that reason it is necessary to adjust a company’s products and services to local needs, which means a low level of integration among the activities of subsidiaries and those of the headquarters (Barlett & Goshal 1998, 2000). On the other hand, the transnational strategy represents an effort to combine the characteristics of the global strategy to those of the multidomestic one, trying to achieve simultaneously two conflicting objectives, the adjustment to the host countries’ markets and the efficiency increase. In the case of a company following this strategy subsidiaries are more dependent on each other than on the parent company. They function as parts of a network through which people, products and knowledge move, therefore delivering the best technical and managerial knowledge and practices all over the company. Tarique et al. (2006) provide another variant of the combination among the characteristics of the global and the multidomestic

For more details about the Bartlett & Ghoshal (1989) typology, please refer to the section 1.2.2 of the first chapter of this monograph. 51

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strategy, the regional strategy. A company using this strategy selects specific geographic regions and considers them as unique markets deserving a special treatment as far as the products and services offered to them is concerned. Subsidiaries within a region are managed as interconnected and led by a regional center, while each individual region is viewed as a unit independent from other regions. In this case, the major objective of the company is to maximize the adjustment level of products, services and subsidiaries’ management within the region to the specific needs of the region, which are different from the needs of other regions. Usually multinationals are likely to adapt their staffing policies to their respective competitive strategies. This has been mentioned by Olian & Rynes (1984) and Schuler & Jackson (1987), but also by later authors, who have specifically related competitive strategies to staffing policies. As cited above, companies applying the global strategy are characterized by a high level of integration among the activities of the headquarters and the subsidiaries. Based on this fact, as well as on the theory of individual-environment fit52, Tarique et al. (2006) argued that for such companies is more appropriate the recruitment of PCNs, or of HCNs and TCNs who have been socialized within the parent company. These individuals are in a better position to understand the global vision of the headquarters and provide the necessary level of integration among the subsidiaries. On the contrary, in the case of a company using the multidomestic strategy, managers from the host country are more appropriate, because of their natural familiarity with the local environment, which is a fundamental requirement of this strategy. Finally, when the strategy selected by the multinational is the regional one, managers from a third country, who have been socialized in a regional center, provide the best fit amid the individual and the requirements to be fulfilled by the subsidiaries’ managers, because they know better the features of the region. For more about the study of Tarique et al. (2006), please check the section 3.1.2.1 of the third chapter.

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Also, according to Harzing (2001b), Bonache Bonache Perez & Pla-Barber (2005) and Bebenroth & Donghao (2006), managers from the home country are more likely to be found in MNCs operating in industries where the global efficiency is more important than adjustment to the local setting. This means that the probability to put expatriates as subsidiaries’ managers is higher in companies following a global strategy. Harzing (2001b), studying 200 companies from 11 different countries, revealed that companies operating in the industry of automobile production, of telecommunication equipment production, as well as in the financial services sector, had the higher percentage of PCNs in the position of subsidiaries’ managers. So PCNs were more present in those industries where the production in a global scale is necessary to achieve economies of scale. Also from this study resulted that, companies operating in the food industry and that of advertising and business counseling, which require a high level of adjustment to the local conditions, had the lower percentage of PCNs as managers of their subsidiaries. Bonache Perez & Pla-Barber (2005) analyzed the relationship between competitive strategies and staffing policies from the viewpoint of the transaction cost economics theory.53 They argued and proved empirically that companies implementing a global strategy were facing a lower cost when employing expatriates instead of local managers, therefore making PCNs more preferable as subsidiaries’ managers. These companies’ presence in foreign markets is justifiable by the fact that they possess special knowledge which provides them a competitive advantage over local companies. An expatriate is a better holder of this knowledge because of his long experience in the company, while an HCN needs to be trained in order to be acquainted to it. This means the company must spend money to train local managers making them a more expensive alternative over expatriates. At the same time there is also a For more about the study of Bonache Perez & Pla-Barber (2005), please check the section 3.1.2.1. of the third chapter. 53

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possibility that the local manager transfers the knowledge received to local competitors of the multination in the host country or that he/she requires renegotiation of the actual job terms and conditions. In the case of an expatriate, who is generally considered a more reliable employee, there is a lower probability to encounter this behavior. In conclusion, according to Bonache Perez & Pla-Barber (2005), companies applying a global strategy consider expatriates a more cost efficient option and consequently more preferable over HCNs. Bebenroth & Donghao (2006) came to the same conclusion. The goal of their paper was the identification of the factors determining staffing policies for subsidiaries’ managers, focusing on multinationals whose subsidiaries were operating in Japan. One of the hypotheses they raised in the paper was about the role of the industry characteristics in determining the nationality of the manager who will run a specific subsidiary. Based on arguments of the resources theory they suggested that a multinational is more likely to use HCNs when the need to know about the local environment is quite large. Whilst in cases when such knowledge is not that important, such as that of the banking industry, an expatriate is more preferable. They proved empirically that in the banking industry the percentage of expatriates transferred was higher compared to all other industries they studied. Differently from the above mentioned authors, Tan & Mahoney (2006), in their research applied to a group of Japanese MNCs with subsidiaries in the US, ended up with some other results. They raised two alternative hypotheses, one supported by the resources theory and the other by the cost of transaction theory.54 As was also stated above, the resources theory favors the use of HCNs in cases when a high level of knowledge about the local setting is necessary. This is more probable in those industries that offer products requiring more

For more about the study of Tan & Mahoney (2006), please check the section 3.1.2.2. of the third chapter 54

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adjustment to local tastes and preferences. Local managers are more likely to achieve effectively this adjustment, since they belong to the same culture and language, therefore bringing to higher incomes and a higher value for the company, which represents the essence of the resources theory. On the contrary, based on the transaction cost theory, Tan & Mahoney (2006) suggested that MNCs should rely more on PCNs when the need to adjust to the local setting is higher. The cost of transaction theory argues that job contracts provide a base through which companies can control their employees, determining what is required of them (Williamson, 1975). The costs associated to these contracts include employees’ compensation, economic costs for the specification, regulation and enforcement of these contracts as well as costs related to their violation. The operation in industries characterized by a high level of products’ adjustment to the local environment requires too a high level of knowledge about it (Luo & Peng, 1999). Since the MNC does not hold completely this knowledge it has difficulties to specify right the requirements and the tasks managers must accomplish in the host country environment, and consequently has difficulties defining the criteria to be used for their recruitment. In such conditions the manager is exposed to the risk of facing new and unknown tasks that now every individual is willing to accept and able to confront successfully. As a consequence, according to Pearce (1997) the company can prefer more as manager an individual who is willing to face and adjust to new situations. But, identifying this personality characteristic in a person is not easy (Bonache & Fernandez, 1999). It is usually evidenced after a certain experience of the employee in the company. Starting from this viewpoint, Tan & Mahoney (2006) argue that MNCs have a higher probability to favor expatriates over HCNs, since they can identify more easily expatriates‘ than HCNs willingness to adjust to new situations, because of expatriates‘ previuos experience within the company. To conclude, when the need to adjust to the local setting is higher, the economic cost of exercising control over PCNs

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is lower than over HCNs, making them more preferable. The test of the two above cited hypotheses proved that only the second one was true. So, according to Tan & Mahoney (2006) research results, MNCs prefer to put expatriates as subsidiaries‘managers in cases when a high level of adaptation to the local environment is required, or when the company is using a multidomentic competitive strategy. As far as the relationship between the transanational strategy and the nationality of managers is concerned, Harzing (2000) argued and proved empirically that companies using this strategy are more likely to transfer PCNs to run subsidiaries. As stated above, the indirect control over subsidiaries exercised in the form of PCNs‘ socialization with the headquarters culture and the building of informal communication channels among them (through the presence of these home country managers in subsidiaries), represents an important element for the management of companies applying the transnational strategy. The hypothesis raised by Harzing and supported by this argument resulted to be true. 3.1.2.5 Characteristics of the MNC’s subsidiary Characteristics of the MNCs‘ subsidiaries, such as the size of the subsidiary, the ownership percentage hold by the MNC, the subsidiary performance and age, as well as the fact that the subsidiary represents a greenfield investment or the acquisition of an existing company, have been often analyzed by several authors as critical factors in determining the nationality of managers running these subsidiaries. Following are presented the respective arguments about the impact of each of these characteristics. The size, the ownership percentage and the subsidiary performance Edström & Gailbraith (1977) state that the use of expatriates to perform the organization development function becomes particularly important when the size of the subsidiary is growing or the ownership percentage hold by the MNC in the subsidiary is high.

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In such cases the given subsidiary is more important because the level of risk the parent company is exposed to is higher, therefore it is interested to increase the control over the subsidiary. PCNs are considered as a very much appropriate mechanism to exercise that control. Numerous authors like, Boyacilliger (1990), Beechler et al. (1996), Harzing (2001b) and Bebenroth & Donghao (2006), have tested and proved this empirically. Also, Harzing (2001b) has argued and proved that the direct control of the headquarters over its subsidiaries by using expatriates is necessary in cases when subsidiaries are not performing well. In these cases a direct intervention of the parent company is essential and one of the best ways to do that is the use of PCNs as managers of these subsidiaries. The subsidiary age Various authors have come to different conclusions as far as the role of the subsdiary age in determining the nationality of managers is concerned. So, Beechler et al. (1996), based on arguments from Perlmutter & Hennan (1979) about the MNCs life cycle, predicted that PCNs were more preferable when the subsidiary of an MNC was new in a particular host country, or the experience of the MNC in this market was limited. But their empirical test, applied to a group of Japanese companies with subsidiaries in Europe and US did not support this prediction. Bebenroth & Donghao (2006) did not find any significant relationship between the subsidiary age and the MNCs’ tendency to use expatriates. On the contrary, other researchers (Harzing, 2001b; Gong, 2003b; Geng, 2004; Belderos & Heijljtes, 2005; etc) have discovered that there exists a negative relationship between the subsidiary age and the probability it is being managed by a PCN. A long experience of the MNC in a host country (through the presence of its subsidiary in this country) makes it more able to interact with the foreign culture throughout a process of “learning by doing”. Furthermore, as the time goes by, this experience helps the development of reciprocal trustworthy relationships amid the

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headquarters and managers from the host country (Gong, 2003b; Geng 2004). As a consequence, agency costs, which generally associate these relationships, are reduced, (Gong, 2003b; Geng 2004), therefore bringing to a reduction in the need of the MNC to exercise direct control over that particular subsidiary by the use of expatriates (Harzing, 2001b). Also, the transfer of expatriates in order to build communication channels among the head office and the subsidiary becomes less necessary, therefore leaving space for their replacement with local managers (Harzing, 2001b). A multinational can be viewed as a knowledge base, where knowledge is created, saved and applied. In this context, PCNs play the role of a knowledge warehouse through which information moves from the parent company to the subsidiaries and vice versa (Belderos & Heijljtes, 2005). Such role is particularly important in the first stages of a subsidiary activity. At this point its acquaintance with the headquarters routine practices is limited, therefore requiring within it the presence of individuals who share values and norms similar to those of the head office, and facilitate the reciprocal transfer of knowledge among the parent company and the subsidiary. Such individuals are precisely the PCNs. Harzing (2001b) offers another argument in favor of the use of expatriates in the newly created subsidiaries. The lack of experience of the MNC in a specific host country means as well a low level of its knowledge about the host country labor market and as a result, many difficulties in identifying and recruiting the most qualified individuals in that market. In such conditions the transfer of PCNs can be viewed as the best alternative. With time, the position of the subsidiary in the host country is consolidated together with its knowledge about the respective labor market. Accordingly, the possibility to choose local qualified managers is higher. On the other hand, in the mean time, a considerable part of knowledge, culture and routine practices of the headquarters have been transferred and absorbed by the subsidiary employees, making the use of PCNs much less necessary.

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Acquisition of an existing company or a greenfiled investment The lack of an MNC‘s knowledge about the host country labor market can be used as a supportive argument for using expatriates even in cases when subsidiaries represent greenfield investments (Harzing, 2001b). In such subsidiaries every business element must be built from the beginning, including the selection of the appropriate human resources. Since the host labor market is almost unknown for the multinational, recruiting the manager of the subsidiary there is not considered a proper action. The task the later has to perform holds a high level of responsibility. As a result, it is more suitable to put a PCN in this delicate managerial position, because his performance is already known by the head office, reflecting therefore a higher level of reliability. In the mean time, when the subsidiary represents the acquisition of an existing company, the transfer of expatriates to accomplish the function of position filling is unnecessary. This is so because the existing business may already have a consolidated managerial team, which is also more familiarized with the local setting and less expensive.

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3.2 The theoretical model and the hypotheses about staffing practices for managerial positions in foreign companies in Albania The previous sections of this chapter presented the theoretical arguments of many authors about the factors influencing the selection of subsidiaries’ managers (based on their nationality) of multinational enterprises. Based on these arguments this section will present the study hypotheses and the theoretical model about the factors that might influence the choice among Albanian or foreign managers to run foreign companies’ activities in Albania. As cited above, there are three major sources where MNCs can recruit their subsidiaries’ managers. They include the home country labor market, the host country or a third country market. Several authors emphasize that there exist three main reasons why companies may prefer the transfer of expatriates to manage their activities overseas, which are: 1) position filling, 2) management development, and 3) organization development. On the other hand, other authors mention that the three core reasons why HCNs may be more preferable are: a) lack of PCNs familiarity with the host country environment, b) high PCNs cost, and 3) difficulties of PCNs to adjust to the new environment in the host country. Each of these reasons becomes particularly important in specific situations, which can be related to the specific characteristics of the MNCs home country, the MNCs itself, the MNCs host country, the industry the MNC is acting on and the characteristics of the particular subsidiary. Cultural change among the home and the host country has been emphasized by several authors as an MNC’s home country characteristic that strongly influences staffing policies for subsidiaries’ managers. According to Harzing (2001a,b), Harvey et al. (2001), Gong (2003), Paik & Sohn (2004), Bonache Perez & Pla-Barber (2005), Tarique et al, (2006) and Tharenou & Harvey (2006), if the level of cultural change among the home and the host country is high, MNCs are more likely to transfer expatriates for the purpose of managing their subsidiaries abroad. This is a consequence of their

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need to increase the control and coordination between the activities of the headquarters and those of the subsidiaries, in order for the later to operate in accordance to the MNC’s goals. Based on this argument the following hypothesis can be raised about the case of foreign companies in Albania: Hypothesis 1 The higher the level of change between the home country culture (of a foreign company operating in Albania) and the Albanian culture, the higher is the likelihood that the foreign company prefers a home country national (i.e. a foreigner instead of an Albanian) as the general manager of its activity in Albania. Many authors mention the MNC’s level of internationalization, its intensity of using R&D activities as well as its size, among the MNC’s characteristics that influence management staffing policies. It seems that there is no consensus between various authors about the role of the MNC’s level of internationalization in shaping staffing policies for subsidiaries’ managers. According to Beechler et al. (1996) and Tan & Mahoney (2006), Japanese companies are more prone to put expatriates in the position of their subsidiaries’ managers as the level of internationalization increases. Conversely, according to Bonache Perez & Pla-Barber (2005) Spanish companies show the opposite behavior. The more the MNC expands internationally the more likely it is to replace expatriates with HCNs. Whereas, Harzing (2001b), surveying 200 companies from different home countries, did not find any specific relationship between these two variables. The different conclusions achieved by different authors can be explained based on the characteristics of the cultures where the MNCs originated from and specifically on the uncertainty avoidance characteristic (Hofstede, 1980). Taking into consideration the fact that in many European countries the level of uncertainty avoidance is moderated (Wild et al., 2003), and the fact that the majority of foreign companies investing in Albania are European, the subsequent hypothesis is proposed:

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Hypothesis 2a If the internationalization level of a foreign company operating in Albania is high, there is a higher probability that it favors an Albanian instead of a foreigner as general manager of its activity in Albania. From a theoretical viewpoint many authors support the thesis that the intensification of using R&D activities in an MNC is associated with its tendency to appoint PCNs as subsidiaries’ managers. However, empirical tests show different results as far as this relationship is concerned. So, Harzing (2001b) and Geng (2004) did not find any relationship between the intensity of using R&D activities and staffing policies for subsidiaries’ managers. Paik & Sohn (2004) discovered that PCNs are successful in transferring technological know-how from the parent company to subsidiaries in cases when the level of their knowledge about the host country culture is high. In contrast, Bonache Perez & Pla-Barber (2005), based on the transaction cost theory, proved that the tendency to send out expatriates decreases with the intensification of R&D activities. Meanwhile, it is already known that the transfer of technology is one of the biggest benefits a host country obtains from foreign direct investments (FDI) (Picciotto, 2003). Albania, like many other developing countries, has technology investments shortage. For that purpose, it is necessary that the transfer of new technologies as well as their implementation by foreign companies in Albania be as effective and efficient as possible. But this on the other hand requires the increase in the level of control by the respective foreign companies’ headquarters during their implementation in Albania (Kim & Hwang, 1992), which can be achieved by the transfer of their home country managers in Albania (Paik & Sohn, 2004). Based on this reasoning the following hypothesis has been formulated:

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Hypothesis 2b If the intensity of using R&D activities by a foreign company operating in Albania is high, there is a higher probability that it favors a foreigner instead of an Albanian as general manager of its activity in Albania. The MNC’s size represents another factor that affects the selection of subsidiaries’ managers. The ability of a company to control and coordinate the activity of its affiliates depends considerably on its size (Beechler et al., 1996; Bebenroth & Dounghao, 2006) and PCNs are in a better position to perform effectively the control and coordination function. Also, according to Harzing (2001b), big companies are more likely to have formal management development programs, part of which is also their transfer abroad with managerial tasks. Based on these arguments the following hypothesis is proposed: Hypothesis 2c If the size of the foreign company operation in Albania is big, there is a higher probability that it favors a foreigner instead of an Albanian as general manager of its activity in Albania. Numerous researchers have also discovered that host country characteristics may determine staffing policies for subsidiaries’ managers. Expatriates are much more expensive than local managers are. Companies should pay them allowances in order to stimulate them accept overseas transfers and one of these is the cost of living allowance or COLA (Czinkota et al., 2005). The COLA purpose is to provide the transferred manager at least the same standard of living they were enjoying in their home country. This means that the higher is the cost of living in a host country the higher the level of COLA will be, and as a result, the PCN will become more expensive to the company. In these conditions he/she will be less preferable. According to this reasoning the subsequent hypothesis is raised:

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Hypothesis 3a If the cost of living in Albania is higher than that in the home country of a foreign company (operating in Albania), there is a higher probability that is favors an Albanian instead of a foreigner as general manager of its activity in Albania. Political risk has also been identified as a critical factor determining the nationality of subsidiaries’ managers. All companies operating in a given country are exposed to a certain level of political risk, but foreign companies are more sensitive to its negative effects. Based on this fact, many authors suggest the transfer of expatriates in those countries known for their high level of political risk. According to them PCNs guarantee the accurate level of direct control and the clarity of communication between the parent company and its subsidiaries in high political risk countries, therefore reflecting the MNCs’ need to increase their control over risky investments Harzing (2001b). Based on this argument the next hypothesis in formulated: Hypothesis 3b If the level of political risk in Albania is high, there is a higher probability that the foreign company operating in Albania favors a foreigner instead of an Albanian as general manager of its activity in Albania. Several authors mention as well the education level as a crucial factor in deciding if a PCN or an HCN should be put in the position of a subsidiary manager. Expatriates are more preferable than locals in cases when the later have not the right qualifications to run affiliates. This is usually the result of a low level of education in the host country. Empirical studies provided by Harzing (2001b), Gong (2003), Gaur et al. (2006) etc., have proved that in cases when the education level in host countries was low, MNCs were more likely to send out expatriates. Based on these results the subsequent hypothesis is proposed:

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Hypothesis 3c If the education level in Albania is high, there is a higher probability that the foreign company operating in Albania favors an Albanian instead of a foreigner as general manager of its activity in Albania. In the literature of global management of human resources, industry has often been used as an approximation of the competitive strategy applied by multinationals for the purpose of explaining staffing policies for subsidiaries’ managers. As mentioned earlier in this manuscript, MNCs can use a global, multidomestic, transnational or regional strategy. In the first case the multinational runs all its affiliates in the same way with the intent to achieve economies of scale. On the contrary, when applying the multidomestic strategy the MNC tends to decentralize its subsidiaries so that they can adjust as better as possible to the host country market. On the other hand the transnational and the regional strategy lie somewhere in between the global and the multidomestic strategy. The transnational strategy signifies a simultaneous effort of the MNC to adjust to local markets as well as to achieve economies of scale. Whereas in the case of the regional strategy, affiliates within a region are managed equally, but specific regions are run and dealt with in a decentralized way. Usually managers staffing policies are built in accordance to the competitive strategies applied by MNCs. So, as stated by Harzing, (2001b), Bonache Perez & Pla-Barber (2005), Bebenroth & Dounghao (2006) and Tan & Mahoney (2006), PCNs are more probable to be found in companies applying a global or transnational competitive strategy (Harzing, 2000), whilst in the case of companies applying a multidomestic strategy HCNs are judged to be more appropriate. Alternatively, in the case of companies applying a regional strategy, TCNs socialized in a regional center, are a more preferable option (Tarique et al., 2006). Based on the abovementioned arguments the following hypotheses are raised55: 55 For the purpose of this study a specific hypothesis has been raised about the relationship among the regional strategy and the nationality of managers in foreign companies in Albania based on the fact that their subsidiaries are organized on a regional basis.

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Hypothesis 4a If the type of industry the foreign company (operating in Albania) is operating on requires the application of the global strategy, there is a higher probability that it prefers a home country national (i.e. a foreigner instead of an Albanian) as the general manager of its activity in Albania. Hypothesis 4b If the type of industry the foreign company (operating in Albania) is operating on requires the application of the multidomestic strategy, there is a higher probability that it prefers an Albanian instead of a foreigner as general manager of its activity in Albania. Hypothesis 4c If the type of industry the foreign company (operating in Albania) is operating on requires the application of the regional strategy, there is a higher probability that it prefers a foreigner instead of an Albanian as general manager of its activity in Albania. Affiliates’ characteristics have been described too as an important category of factors in determining staffing policies used for the selection of their managers. First of all, Boyacilliger (1990), Beechler et al. (1996), Harzing (2001) and Bebenroth & Dounghao (2006) have proved that with the increase in the subsidiaries’ size there is a higher probability that expatriates be appointed as managers of these affiliates. The same tendency has been verified too in cases when parent company owned the highest percentage of particular subsidiaries (Harzing, 2001; Belderos & Heijljtes, 2005; Bebenroth & Dounghao, 2006). This is a consequence of the fact that bigger subsidiaries as well as those owned in majority by the parent company, are more important and consequently need to be controlled more. These arguments bring to the following hypotheses:

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Hypothesis 5a If the subsidiary (activity) of the foreign company operating in Albania is big, there is a higher probability that it prefers a home country national (i.e. a foreigner instead of an Albanian) as general manager of this subsidiary (activity). Hypothesis 5b If the subsidiary (activity) of the foreign company operating in Albania is owned in majority by the parent company, there is a higher probability that it prefers a home country national (i.e. a foreigner instead of an Albanian) as general manager of this subsidiary (activity). Other conclusions have been reached as far as subsidiaries age is concerned. With time multinationals are tended to replace PCNs with HCNs. A long operation in a host country reduces agency costs and increases familiarity with the host market, therefore reducing the need to transfer expatriates (Beechler et al., 1996; Gong, 2003; Harzing, 2001; Geng, 2004; Belderos & Heijljtes, 2005; Gaur et al, 2006 etc). Based on this reasoning the following hypothesis is proposed: Hypothesis 5c If the number of years a foreign company is operating in Albania increases, there is a higher probability that it prefers an Albanian instead of a foreigner as general manager of its activity in Albania. Beechler et al. (1996) and Harzing (2001b) argue that when MNCs’ subsidiaries represent greenfield investments there is a higher probability that expatriates be appointed as their managers. This is so because in the case of greenfield investments MNCs have few or no knowledge about the local labor market and consequently are not able to choose the appropriate local candidates as potential managers. But, if the subsidiary represents the acquisition of an existing

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company, PCNs transfer is not necessary, given that local individuals are already holding managerial positions in this company. Harzing (2001b) has also discovered that expatriates are more preferable in cases when certain affiliates are not performing well. According to her in such cases the headquarters intervention is indispensable and can be effectively fulfilled by the transfer of PCNs to run these affiliates. Based on the aforementioned arguments the succeeding hypotheses are raised: Hypothesis 5d If the subsidiary (activity) of the foreign company operating in Albania is a greenfield investment, there is a higher probability that it prefers a home country national (i.e. a foreigner instead of an Albanian) as general manager of this subsidiary (activity). Hypothesis 5e If the performance of the subsidiary (activity) of the foreign company operating in Albania is high, there is a higher probability that it prefers an Albanian instead of a foreigner as general manager of its activity in Albania. The hypotheses proposed above have been summarized in the form of a conceptual model which is presented below. In this model can be easily identified the dependent variable and the independent variables. The dependent variable is the nationality of managers in subsidiaries of foreign companies operating in Albania, while independent variables are the aforementioned characteristics of: the foreign company’s home country, the foreign company’s itself, of the host country (i.e. of Albania), the industry the foreign company is operating on as well as the characteristics of the company’s subsidiary (activity) in Albania.

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Figure 1. The conceptual model Home conuntry of the foreign company - Cultural change among the homecountry and Albania

Foreign company -The degree of internationalization - Intensity of R&D activities - Size

Nationality of the manager in the foreign company's subsidiary (activity) in the Albania - Foreign - Albanian

Host country (Albania) - Cost of living - Level of political risk - Education level

Industry where the company is operating on

Subsidiary (activity) of the company in the host county (Albania) - Size - % of ownership - Age - Greenfield vs. acquisition - Performance

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3.3 Research methodology The research methodology used for the purposes of this study consists in a combination of primary and secondary data. The contemporary literature on staffing policies for managerial positions in multinationals’ subsidiaries represents an important part of the secondary research. It has been used as a basis for the formulation of hypotheses and the construction of the conceptual model presented and tested in this research work. Also, many other secondary sources have been used, such as, academic literature, annual reports from key international organizations, or other publication, in order to provide facts and support the arguments presented in the first and the second chapter, dealing with the issue of globalization, the MNCs’ features, the global management of human resources and the foreign direct investments in Albania. In addition, secondary data have been used to calculate the cultural change among Albania and the home countries of the foreign companies included in the study. The majority part of these data was provided through the use of electronic libraries of various American, European and Australian universities, through other internet sources or from annual reports of important national institutions such as, Bank of Albania and the Albanian Center for International Trade (ACIT). The primary research has been built in two stages. During the first stage three interviews have been conducted, one with the general manager of Emporiki Bank and two others with the human resources managers of ProCredit Bank and Raiffeisen Bank, respectively in 2006 and 2007. Part of this stage was also the first survey, involving a sample of 40 foreign companies operating in the region of Shkodra, which was conducted during the first half of 2007. The goal of the first research stage was to create a general idea on staffing policies for subsidiaries’ managers applied by foreign companies in Albania as well as on the specific reasons determining these policies.

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During the second stage of the primary research another questionnaire was formulated with the purpose to test the conceptual model. It was delivered to 250 foreign companies that had invested in Albania. All the data concerning the variables of the conceptual model have been provided through this questionnaire except for the variable representing the cultural change between Albania and the home countries of the surveyed companies. Questionnaires were delivered by email or personally. From 150 questionnaires sent by emails only 22 were returned (i.e. a 15% rate of return), while from 100 questionnaires delivered personally only 80 were filled in. From those barely 58 were valuable. The rest could not be taken into consideration because they were not filled in correctly. As a consequence the sample submitted to the study was limited to a number of 80 companies. The list and the contacts of the companies which were sent the emails was obtained based on information from the American Chamber of Commerce, the Shkodra Chamber of Commerce as well as the Albanian business directory offered at the webpage: http://www.directory.albic.net/ The questionnaire used to test the conceptual model consists in 5 parts. The purpose of the first one is to provide general information on foreign companies and their activity in Albania. The second and the third part tend to provide respectively data on the characteristics of the foreign company’s subsidiary (activity) in Albania and on the characteristics of the foreign company itself. In the mean time, the fourth part provides information on the perception of the foreign company’s managers about the level of political risk, education level and cost of living in Albania. The fifth and the last part of the questionnaire pretend to identify if general managers of foreign companies in Albania or their branch managers are Albanians or foreigners and which reasons have determined this selection.

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3.3.1 Measurement of variables and the statistical method This section presents the means used to measure each variable of the conceptual model as well as the statistical method used to analyze them. As mentioned above, data about all variables, except for the cultural change among Albania and the home countries of the surveyed companies, were provided by the questionnaire. The compound index of Kogut & Singh (1988) was used to measure the level of cultural change between Albania and the home countries of the foreign companies studied. In general, this index measures the difference amid two cultures based on the four cultural dimensions proposed by Hofstede (1980).56 Geert Hofstede has defined on a score basis the position of many countries versus each of these dimensions57, but unfortunately Albania was58 not included in this group. However, according to Bakacsi et al. (2002), Gupta et al. (2002) who refer to the GLOBE59 Project, Albania can be included in the group of Eastern Europe based on its cultural characteristics, same as Greece. Since Hofstede had already determined the cultural dimensions indexes for this country and since there were no indexes for Albania (by the time the study was conducted), Greece’s indexes were used to perform the respective calculations about cultural change between Albania and the home countries of the interviewed companies. According to the Kogut & Singh (1988) index, the calculation of cultural change among two countries is done using the following formula: CDj =Ʃ4i=1 {(Iij - Iiu)2/Vi}/4 56 According to Hofstede, the four dimensions based on which cultures can be classified are: 1) individualism vs. collectivism, 2) power distance, 3) uncertainty avoidance and d) masculinity vs. femininity. 57 http://www.geert-hofstede.com 58 By the time the study was conducted Albania was not yet included in Hofstede’s cultures’ classification 59 For more about this project please refer to the note at the end of this section.

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Where Iij refers to the i cultural index of the j country, Iiu refers to the i cultural index for Greece (in our case), Vi the variance for the i dimension and CDj the cultural difference between the j country and Greece. It is understandable that the higher is the value of CDj, the higher is the cultural change between the j country and Greece. Same as for Greece, respective indexes for the cultural dimensions of the surveyed companies were provided on the webpage: http://www.geert-hofstede.com. Information about the rest of the variables included in the conceptual model, dependent and independent, was obtained through the questionnaires. So, the number of countries (including the home country), where the surveyed companies had expanded their activity, was used to measure their level of internationalization. Questionnaires’ responses provided these data. The interviewed managers were also asked to evaluate on a Likert60 scale, from 1 to 5, the intensity of using R&D activities by their companies, where level 1 meant the companies were considering such activities as unimportant and level 5 the companies were viewing them as very important. On the other hand, to collect data about the size of the surveyed companies, interviewed managers were asked about the level of total sales achieved by these companies (in the year preceding the delivery of questionnaires) or the total number of employees (including all employees in all countries where companies had expanded their activity). The reason why two indices were used to measure a single variable is related to the fact that in many cases companies may not be willing to report their sales figures. Among other things, this study’s aim was to identify the role of cost of living, political risk and education level in Albania in determining staffing policies for managerial positions. For that purpose the interviewed managers were also asked to express their perceptions (more precisely their companies’ perceptions) about these characteristics of the Albanian business environment. The Likert 60

http://www.uni.edu/its/us/document/stats/spss2.html#lik

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scale from 1 to 5 was used as well in this case, where level 1 meant the foreign company perceived a very low level of cost of living, political risk or education level in Albania, while level 5 meant that the perceived level of each of these characteristics was very high. The next variable in the conceptual model is industry. In the literature related to staffing policies for managerial positions industry has often been used as an approximation of the competitive strategy applied by the multinational.61 Therefore, this study too uses information about competitive strategies to measure the effect of the variable industry in the selection of managers in foreign companies in Albania. Such information was also retrieved from the questionnaires. The last category of independent variables in the conceptual model is represented by the characteristics of foreign companies’ subsidiaries in Albania. The number of employees was used as a measure of these subsidiaries size. Data about this indicator were also provided by the questionnaires, same as the data about the percentage of subsidiaries’ capital owned by foreigners, data about the fact the investment was a greenfield one or an acquisition, data about the age of subsidiaries and data about these subsidiaries’ performance. Relative to the later each surveyed company was asked to evaluate on a Likert scale basis, from 1 to 5, the performance of the Albanian subsidiary versus other subsidiaries of the company in other markets. In this case level 1 meant the performance of the Albanian subsidiary was very high, while level 5 meant that this performance was lying far behind that of other subsidiaries in other countries. At the end, data about the dependent variable, the nationality of managers running foreign companies’ activities in Albania, was also obtained through the questionnaires. Furthermore, managers interviewed were also asked about the nationality of managers running the various branches of the surveyed companies in various regions of Albania, in cases they had more than one. Anyway, data about the 61

Please refer to section 3.1.2.4 of this chapter

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nationality of branches’ managers are not included in the conceptual model. Data collected were then processed by using SPSS 11.0. Since some independent variables and the dependent one are qualitative, a coding procedure has been used in order to incorporate them into the SPSS 11.0 software (based on the model from Beqiri et al. (2008), where a great part of the variables under study are qualitative): * The dependent variable, nationality of the manager in the foreign company’s subsidiary (activity) in Albania (0=foreigner;1=Albanian) * Investment nature (0=none, meaning the cases when the foreign company operates in Albanian in base of management contracts, franchising or licensing contracts; 1=greenfield investment; 2= acquisition of an existing company ) * The performance of the Albanian subsidiary (1=much higher compared to the performance of other subsidiaries in other countries; 2=higher; 3=same; 4=weaker; 5=much weaker) * The intensity of using R&D activities (1= these activities are unimportant for the company 2=a few important; 3=moderately important; 4=important; 5=very important) * Competitive strategy (1=global; 2=regional; 3=multidomestic) * Cost of living in Albania versus its level in the home country. (1=very low; 2=low; 3=same; 4=higher; 5=much higher) * Level of political risk in Albania (1=very low; 2=low; 3=average; 4=high; 5=very high) * Level of education in Albania (1=very low; 2=low; 3=average; 4=high; 5=very high)

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Note: The GLOBE project represents a research program consisting of many stages and methods, built with the intent to investigate the impact of a given country culture as well as the organization culture on leadership and organizational practices. In this long-term series of studies are included 160 researchers, from 62 countries of the world, which represent the major world regions. The results of this research have been summarized in the book entitled “Culture, leadership and organizations. The GLOBE study of 62 societies” published in 2004. Based on their work and that of other authors, especially in the work of Hofstede (1980), GLOBE researchers have developed a series of 9 dimensions based on which cultures can be classified. So, in base of these dimensions they have split the world in 10 culture clusters. A culture cluster is a group of countries showing cultural similarities. Countries that belong to a specific cluster are much more similar to each other than to any other country outside the group, always as far as cultural characteristics is concerned. According to the GLOBE project Albania belongs to the Eastern Europe cluster, together with Greece, Kazakhstan, Hungary, Poland, Russia, Slovenia and Georgia. For more details on the GLOBE project, please refer to the webpage: http://www.thunderbird.edu/wwwfiles/ms/globe

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FOURTH CHAPTER 4.1 Presentation and analysis of the research results. Results of the primary research first stage

As mentioned above the primary research conducted for the purposes of this study was divided into two stages. The first stage consisted of three interviews and a preliminary survey. The interviews were conducted with the general manager of Emporiki Bank in Albania and with the human resources managers of ProCredit Bank and Raiffeisen Bank in Albania. The survey on the other hand was conducted with 40 foreign companies operating in the region of Shkodra. Results of this research will be presented in the following section. Emporiki Bank Emporiki Bank is a Greek bank operating in Albania since the year 1999. By the end of 2006 the number of its branches in Albania was 8. They were located in Tirana, Vlora, Fier and Saranda employing in total around 96 employees. Starting from the year 2004, the strategy of Emporiki Bank was oriented toward individual clients and small and medium size enterprises. The bank operates based on the principal that the reputation and the position of a financial institution depends a great amount on the professionalism and the high standards of its managers and staff. For that reason Emporiki Bank has continuously invested for the development of its staff level of expertise and motivation. Part of Emporiki Bank Albania’s staffs are as well two Greek managers, who are positioned in the highest levels of management of this bank in Albania. The interview with the general manager of Emporiki Bank revealed that the main reasons for their transfer in Albania were related to the need to transfer technical and managerial knowledge in our country, to the need to extend managers’ interna-

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tional experience as well as to the need to augment the level of control and coordination between the headquarters of the company and its activity in Albania. This means that the three major reasons for transferring expatriates, mentioned by many authors, are relevant too in the case of Emporiki Bank Albania. In the mean time the interview revealed that the managers of the various branches of the bank around Albania were Albanians. The main reason for using this policy is related to the high level of familiarity of these managers with the Albanian business environment. Both Greek managers transferred to Albania had been selected based only on their skills and experience in the banking industry, therefore underestimating their ability to adjust to new business environments. Also, they had not gone through an intercultural training program that would have prepared them to successfully face the Albanian environment. As a consequence, both managers were faced with the cultural shock phenomena at the beginning of their activity in Albania, therefore proving the arguments of several authors on the challenges associated with expatriates transfer. Raiffeisen Bank Raiffeisen Bank is the biggest bank in Albania and ranks through the firsts in all performances indices. The total value of its assets fluctuates around the 2 billion euro-s figure, while the number of branches around the country amounts to 98.62 In 2004 Raiffeisen International, the international division of Raiffeisen Zentralbank bought the Albanian Saving Bank and during its years of operation in Albania it has transformed the old state-owned bank into a financial institution assisting all business sectors and individual clients. From the interview with the human resources manager of Raiffeisen Bank Albania is revealed that only 4 positions in the bank’s board of directors are hold by foreigners, precisely, the position of: 1) General Manager, 2) Chief of Treasure and Banking Investments, 3) Chief of Operations and IT and 4) Chief of Retail 62

http://www.raiffeisen.al

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Business. The fifth position is hold by an Albanian same as all other managerial positions in the various branches of Raiffeisen Bank in Albania. In this case too, the need to increase control and improve coordination between the head office and the bank’s activity in Albania, in addition to the need to enhance managers’ international experience, are distinguished as the major motives for transferring foreign managers to run Raiffeisen Bank Albania. At the same time, the need to transfer technical and managerial knowledge in Albania, together with the lack of qualified managers in our country, are estimated as moderately important motives. Same as in the case of Emporiki Bank Albania, skills and experience in banking activities were the basic criteria for the selection of the foreign managers working in the Albanian subsidiary of Raiffeisen Bank. International experience of these managers was considered as another important selection criteria, while the level of their knowledge about the Albanian culture and business setting was not taken into consideration. In addition, intercultural training programs they were involved to, consisted in the improvement of these managers’ ability to act in cultures different from their own, but they did not include the Albanian culture. Therefore, since foreign managers transferred to Raiffeisen Bank Albania were not prepared to cope with the Albanian situation they all suffered cultural shock and consequently left our country before the completion of their task. ProCredit Bank ProCredit Bank was founded 17 years ago, in 1995, as the “Foundation for the Development and Financing of Enterprises” (FEFAD). All is capital was owned by KFW a well-known banking group in Germany. In 2003 the bank changed its name from FEFAD to ProCredit.63 The ProCredit group ia leaded by ProCredit Holding AG, an investment company located in Frankfurt in Germany, which is also the the main shareholder in a group of 22 banks operating in transition econimies and developing countries in Africa, latin America and eastern Europe. 63

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In 2008 ProCredit Holding became the major shareholder of ProCredit Bank Albania with 80% of ownership. The number of ProCredit Bank branches around Albania arrives at 26 covering a market of about 150.000 clients. During the last years ProCredit Bank Albania has invested a lot for the training of high and medium level managerial staff. According to the information provided by ProCredit Bank Albania human resources manager, only two positions in this bank are hold by foreigners. One of them is a board of directors’ position, while the other is the position of Saranda branch manager. In fact, two other positions are hold by non Albanian citizens, respectively, the position of Medrese and Kukës branch. They are covered by two Kosovo citizens. All other positions are coverd by Albanians. The need to increase control and improve coordination among the activity of ProCredit Bank Albania and its headquarters, together with the need to transfer technical and managerial knowledge, represent the main motivation for the transfer of the two foreign managers in Albania. On the other hand, Albanian managers’ familiarity with the local environment I considered as the most important reason why the majority of managerial positions is hold by Albanians, especially in this bank’s branches in various districts of Albania. Technical and managerial skills are the only criteria used to select the foreign managers transferred to Albania in the case of ProCredit Bank. Their knowledge about the Albanian culture and setting, their interest to work abroad or their ability to put connections with others, were not taken into consideration during the selection process. This is an error very often made by multinationals. While selecting candidates to be transferred overseas, they do not consider the relevant factors that truly determine the success of the managerial tasks they are assigned. Foreign managers sent to the subsidiary of ProCredit Bank in Albania were submitted to preliminary training programs providing them with basic knowledge about the Albanian political, economic,

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financial and socio-cultural setting. However, such programs were not sufficient to equip them with the right tools to deal with this environment. According to the ProCredit human resources manager, the foreign staff had difficulties to cope with the Albanian language and culture, which were than associated with cases of cultural shock. In the mean time, the two Kosovo managers, did not encounter adjustment problems in Albania, because of the fact that they share the same nationality, language, and culture with the Albanian citizens. Results of the preliminary survey In order to create a general idea on staffing policies for managerial positions, applied by foreign companies operating in Albania, a preliminary survey was conducted, including 40 companies acting in the Shkodra region. The questionnaires were delivered to top level managers or to managers of these companies’ branches in Shkodra. The majority of the surveyed companies were operating in the production sector (45%), 25% in the services sector, while the rest was engaged in trade and other economic activities. The main entry mode these companies had chosen to enter the Albanian market was the direct investment. 18 from the 40 companies surveyed mentioned that the low cost of labor was the major stimulus for them to choose the Albanian market, while for companies operating in the banking industry the most important reason was market development and geographical closeness of their home countries to Albania. The survey revealed that, in 61% of cases, foreign companies operating in the region of Shkodra had preferred to transfer managers from their country of origin to run their subsidiaries in Albania. The rest of them had preferred to employ Albanian managers therefore there were no cases of using third country managers.

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Chart 7. Managers’ nationality

Surveyed companies stated that their need to increase control over their Albanian subsidiaries as well as their desire to transmit the parent company’s culture and experience there, were among the main reasons for transferring expatriates. Management development was considered important only in a few cases. These results are consistent with the theoretical arguments of various authors plus the results of many previous research efforts on multinationals’ staffing policies for managerial positions. Chart 8. Reasons for the transfer of expatriates

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Literature suggests that, the effectiveness of PCNs in exerting the control function and in building the communication channels between the parent company and its subsidiaries depend a great amount on their ability to work and adjust to new environments, new cultures and new ways of doing business. Preliminary intercultural training is suggested as an instrument particularly important for the preparation of managers to face the new environment in the host country (Treven, 2001). For that reason, managers of the surveyed companies whose subsidiaries in Albania were run by foreigners were asked to estimate the problems encountered by the transferred expatriates because of cultural changes. In 60% of cases, the surveyed managers reported that cultural changes had caused serious problems to transferred managers, therefore complicating their ability to exercise effectively their duties. In 20% of cases such problems were estimated to be small and unimportant, while the rest of the surveyed managers affirmed that they were completely indifferent to cultural changes. Only 10% of the surveyed companies were providing intercultural training to prepare managers for the Albanian business environment, 72% of which reported that these training programs were insufficient. 39% of surveyed companies, which reported to employ Albanians as managers of their activity in Albania, stated (in 54% of cases) that the major reason for making this decision was the familiarity of Albanians with the local business environment. The low cost of local managers was also mentioned as an important factor influencing this decision, while difficulty of expatriates to adjust to the Albanian setting was viewed as unimportant.

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Chart 9. Reasons for employing Albanian managers

The surveyed managers were also asked to report about the future policies their companies could apply as far as subsidiaries’ managers staffing policies is concerned. In 65% of the cases they answered that such policies were going to favor more Albanian over foreign managers. Their arguments were consistent with theoretical arguments relative to subsidiaries’ age and its impact of staffing policies for managers. Foreigners will continue to run subsidiaries of foreign companies in Albania as long as there are not qualified Albanian managers, but as foreign companies’ experience in the Albanian market increases the probability that they consider Albanian managers as a more effective and efficient option will be higher.

4.2 Results of the primary research second stage The second stage of the primary research, performed for the purposes of this study, consists of a second survey conducted with a sample of 80 randomly selected foreign companies operating in Albania. The intention of this survey was to test the conceptual model and the hypotheses formulated in the third chapter. Following are presented its results.

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General information on the surveyed companies Foreign companies participating in the second survey seem to be equally dispersed as far as the activity they are engaged to is concerned. 51% of them are involved in services activities while the rest (49%) in production activities. 15% of them operate in the banking sector, 18.75% in the textile industry, 12.5% in the shoes industry, 15% in other processing industries and the rest in the construction industry, the trade sector, telecommunication and other service activities. Chart 10. The structure of companies by industry

The majority of the surveyed companies report to have selected Albania as a trade where to invest their capital for the purposes of market development (51.3%) and exploitation of the Albanian low cost of labor (40%). Such motivations are especially important in the case of banking industry (market development) and the textile and shoes industry (low cost of labor). Other reasons mentioned by the companies include the exploitation of raw materials resources and geographical closeness to Albania. The later is particularly relevant in the case of companies operating in the trade sector, same as in the first survey. 63 of the 80 companies surveyed declare that their activity

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in Albania represents a greenfield investment, while 17 of them declare it represent an acquisition. Chart 11. The motivations for entering the Albanian market

70% of the surveyed companies state that their activity in Albania consists of a single branch, in 15% of them this figure varies from 2 to 10, while the rest (12 companies) report that they have more than 10 branches in Albania. Italy is the country where the majority of the companies originate from (46.3%), followed by Greece (12.5%) as well as Germany and USA (8.8% each). The survey reveals too that 88% of these companies have not a regional center and the Albanian subsidiary reports directly to the headquarters.64

For more detailed data on the surveyed companies please refer to Apendix 1: General information on the surveyed companies.

64

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Chart 12. Structure of companies by country of origin

Staffing policies for managerial positions in Albanian subsidiaries of foreign companies surveyed and the reasons determining them

Nationality of the general manager Industry

Total

Foreigner

Albanian

Banking industry

12

0

12

Textile industry

5

10

15

Shoes industry

7

3

10

Other processing industries

5

7

12

Construction industry

5

3

8

Telecommunication

3

1

4

Trade

3

4

7

Other services

10

2

10

Total

50

30

80

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Table 2. Nationality of the general manager (of the Albanian subsidiary) by industry

The survey results show that in 62.5% of the cases studied the Albanian activity of the foreign companies was being run by a foreigner. This was more probable in the case of companies acting in the banking sector. This can also be noticed by the following


table. From 41 companies operating in this sector, 33 had prefered to transfer managers from the headquarters to supervise and manage their Albanian activities. In the mean time it can be noticed that companies coming from Greece, USA and Turkey are more likely to transfer managers from their home countries, while Italian companies show almost an equal preference for Albanians or foreign managers. Chart 13. Nationality of the general manager by country of origin

The surveyed managers were invited to estimate based on the Likert scale, from 1 to 5, the motivations that had influenced the selection of a foreigner over an Albanian, or vice versa, for the position of the general manager of the company in Albania. The need to transfer technical and managerial knowledge in our country has been considered as the major reason by the majority of the companies. So, in 98% of the cases, this motivation was considered as “important” or “very important”. The improvement of the communication channels among the parent company and the companies’ activity in Albania has also been estimated as “important” and “very important” in 98% of the cases, while the use of the same culture in all subsidiaries (including the Albanian one) was considered

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“important” in 54% of the cases. These results prove the tendency of the foreign companies operating in Albania to increase headquarters’ control over the Albanian subsidiary as well as their tendency to use expatriate as transmitters of the specific technical and managerial parent company’s knowledge and culture. On the other hand, the development of managers international experience, is estimated as an “important” motivation in 50% of the cases and “very important” in 22% of them, while the lack of qualified Albanian managers is valued as an “important” motive in 48% of the cases and as “moderately important” in 36% of them. Among the motives that had favored the employment of Albanians as managers of the surveyed companies’ activities in our country, they report their familiarity with the local market. This motivation has been considered as “very important” in 76.7% of the cases and as “important” in 23.3% of the cases. In addition, 70% of the surveyed managers answered that the high cost of expatriates or PCNs was an “important” and “very important” reason for the use of Albanians instead of foreigners. The difficulty of PCNs to adjust to the Albanian environment was estimated to be important in only 60% of the companies. In fact there are some of them which see this motive as “slightly” or “not at all important” in determining the nationality of the subsidiary manager. From 80 companies surveyed 24 of them had more than one branch in Albania. Asked about the nationality of the branches’ managers their managers reported that in all cases this position was hold by Albanians. In this case too familiarity with the local market is the main motivation for making this choice. Consequently, this motive is considered “very important” in 91.7% of the cases and “important” in 8.3% of them. The high cost of expatriates is also viewed as a “very important” in 62.5% of the cases and “important” in 29.2% of them. These conclusions are more than logical. First of all, an Albanian manager in the position of the branch manager facilitates the relationship of the company’s he/she represents with the outside environment, because is much better acquainted with the consumers’

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expectations, the way business is done in Albania, the political and legal setting, and as a consequence, is much more able to adjust the activity of the given branch to this environment. In the mean time, the function of coordinating the branches’ activities and the creation of the communication channels among them and the headquarters can be better performed by a foreigner placed in the position of the general manager of the foreign company in Albania. Second, if in each branch the manager would be foreigner, their cost to the parent company would be multiplied in accordance to the number of the foreign company’s branches in Albania. As far as the difficulty of PCNs to adjust to the Albanian environment is concerned, 83.3% of the surveyed companies consider this as an “important” motive, while only 8.3% of them consider it as a “very important”65 one. After a general view of the surveyed companies and the motives that have influenced their staffing policies, the next section will present the results of the statistical analysis used to test the hypotheses. Results of the statistical analysis In order to identify if the raised hypotheses were true or not a series of independent sample t tests were performed (Berenson & Levine, 1996). These tests compare the mean scores of two groups on a given variable. In our case t tests were based on the comparison of the mean score of each independent variable in the conceptual model for the group of companies using expatriates, with the mean score of each of these variables for the group of companies employing Albanians. In addition, in order to reinforce the conclusions reached through the use of t tests, a simple linear regression analysis was also carried out. The later is normally used to predict the change in a dependent variable caused by a given change in an independent variable, assuming their relationship is linear and corresponds to the following equation: 65 For more details on the motives that have detemined staffing policies for managerial positions in foreign companies in Albania, please refer to Apendix 1 (B dhe C).

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Yi = ß0 + ß1Xi + Ɛi, where Yi is the value of the dependent variable for the i observation, ß0 is the value of the constant or the value of the dependent variable when the value of the independent variable is 0, ß1 is the slope of the population, Xi is the value of the independent variable for the i observation and Ɛi is the random error for the i observation. The application of these tests has resulted in the proof of some of the hypotheses, while some of the independent variables resulted to be not important in determining the value of the dependent variable. Meanwhile, one of the raised hypotheses (Hypothesis 2c) could not be tested because the majority of the surveyed managers did not answer to questions related to it. Hypothesis 2c deals with the role of the company’s size in shaping staffing policies for managerial positions in foreign companies in Albania. In order to measure this size surveyed managers were asked about the value of the company’s total sales and the total number of the company’s employees in all markets she had expanded its activity. Unfortunately, 42 of 80 surveyed companies reported the required sales figures. Furthermore, in some of the later cases, the figure reported was not correct, because managers instead of giving the value of the company’s total sales were reporting only the value of the Albanian subsidiary sales. In addition, only 9 of the 80 companies surveyed reported their total number of employees therefore making the hypothesis testing irrelevant. Data about the rest of the variables, provided by the questionnaires, were more than sufficient to be submitted to the statistical t test and the linear regression analysis. Accordingly, the mean score of the variable cultural change, for the group of companies employing a foreigner as general manager, resulted to be 2.2666, while for the group of companies employing Albanians 2.15. The fact that the For more details about the calculation of the cultural change, plase refer to section 3.3.1 of Chapter 3. Mbi mënyrën e llogaritjes së ndryshimit kulturor referojuni seksionit 3.3.1 të Kapitullit III. 66

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value of the first mean score is higher than that of the second one signifies that, companies originating in countries with a culture different from the Albanian culture are more likely to send home country managers to run their Albanian subsidiaries. However, the difference among these mean scores resulted to be irrelevant for a level of control 0.05 t (7867)=0.363; p68 =0.718).69 This brings to the conclusion that cultural change does not affect staffing policies for managerial positions in foreign companies in Albania. Same findings resulted too from the ANOVA test. The statistical test F=0.132 did not result significant for a level of control 0.05, meaning that the simple linear regression model, where cultural change is the independent variable, does not explain the variation of the dependent variable. Therefore we can finally say that the first hypothesis could not be confirmed. There isn’t any significant relationship amid cultural change and the staffing policies applied by foreign companies in Albania for managerial positions. Chart 11. (presented above) did also show evidence of that. Companies coming from countries with little cultural changes with Albania (Greece, 0 and Turkey, 0.79) were more likely to transfer foreigners for the management of their Albanian subsidiaries, while Italian companies (cultural change in this case is 2.30) did not show any specific preference for Albanian or foreign managers. Only two of the three hypotheses related to the foreign company’s characteristics were tested. As mentioned above the hypothesis about the impact of the company’s size could not be tested because of missing data. The level of internationalization of the foreign company resulted as well an irrelevant factor in determining the nationality of foreign companies’ subsidiaries managers in Albania. The mean scores of this variable for companies using foreign

The number of degrees of freedom p is the observed significance value domethënies 69 Complete statistical data about each variable can be found in Apendix 3 67 68

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general managers and those employing Albanians were respectively 13.10 and 15.13, but in this case too, the difference among the mean scores was insignificant for a level of control 0.05 (t(77)= -0.243; p=0.809). The ANOVA test also did not verify any variance of the staffing policies for managerial positions that corresponded to the level of internationalization of the surveyed companies. Therefore, Hypothesis 2a was also rejected. On the contrary, the importance the foreign company gives to R&D activities seems to be a critical factor in defining the nationality of managers. The mean score of the intensity of using R&D activities in companies employing foreign managers was 4.80, while in companies using Albanian managers it resulted to be 2.27. Such difference was significant for a level of control (2-tailed) 0.05 (t (78)=16.17; p=0.000), thus brining to the conclusion that companies using intensively R&D activities are more prone to transfer managers from their home country or from third countries to run their activities in Albania. The ANOVA test resulted significant too for a level of control α=0.05 (F=261.69; p=0.000), therefore demonstrating that the variation described by the simple linear regression model, where the independent variable is the intensity of using R&D activities, was not random. The correlation coefficient among this variable and the nationality of Albanian’ subsidiaries’ managers resulted to be 0.878, meaning that the relationship between these variables is strong. The corresponding regression equation is: Y = 1.546 – 0.304X2b. Both equation coefficients were significant for a level of control 0.05 (t(78)= -16.177; p=0.000). The negative sign close to the coefficient B2b certifies a negative relationship amid the intensity of using R&D activities and managers nationality, therefore proving Hypothesis 2b. The next variable in the conceptual model is the cost of living in Albania. The surveyed managers were asked to evaluate the perception of their companies about the cost of living70 in Albania compared 70 The method used to measure this perception is explained in section 3.3.1. of Chapter 3

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to the cost of living in their home countries. The analysis of their answers revealed that in most of the cases the cost of living in Albania was considered to be lower than in other countries. In fact in 83.3% of them this cost was considered to be “lower”, while in 12.5% the Albanian cost of living was considered to be “much lower” than that in the surveyed companies home countries. Only in 3.8% of the cases the cost of living was perceived to be the “same”. Since in the majority of the cases the cost of living in Albania was perceived to be lower, compared to the surveyed companies home countries, it is logical to expect that the impact of this variable in shaping staffing policies for managers will be unimportant. In fact, the mean scores of this variable for companies using expatriates and those using Albanians resulted to be quite close, respectively 1.88 and 1.97. Additionally, their difference (0.09) resulted to be insignificant for a 2-tailed level of control α=0.05 (t(78)= -0.947; p=0.347). This means that the cost of living in Albania is not an important factor in deterring staffing policies for managerial positions in foreign companies operating in our country. Consequently Hypothesis 3a is also rejected. On the other hand survey results show that the impact of political risk in Albania has had a strong influence in defining staffing policies for managers. The mean score of this variable for companies having a foreigner run their Albanian activity resulted to be 4.66, while the mean score for companies employing Albanians was 3.37. The difference between these mean scores is significant since the t test (t(78)=11.008) reports a probability p