Management Decision

Toward a better understanding of MNEs local staffing decision: a multilevel

analysis
Youjin Baik Young-Ryeol Park
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Youjin Baik Young-Ryeol Park , (2015),"Toward a better understanding of MNEs local staffing
decision: a multilevel analysis", Management Decision, Vol. 53 Iss 10 pp. 2321 - 2338
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Toward a better understanding Toward a

better
of MNEs local staffing decision: understanding
of MNEs
a multilevel analysis
Youjin Baik 2321
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Yonsei Business Research Institute, Yonsei University, Seoul, Korea, and Received 19 May 2015
Young-Ryeol Park Revised 29 July 2015
Accepted 26 August 2015
Yonsei School of Business, Yonsei University, Seoul, Korea

Abstract
Purpose The purpose of this paper is to address the question of how regional diversification affects
subsidiary staffing composition in multinational enterprises. Another important objective of this study
is to examine the effects of institutional distance, specifically regulative and normative distances,
on foreign subsidiary staffing composition.
Design/methodology/approach To estimate firm- and country-level parameters simultaneously,
hierarchical linear modeling was conducted on a sample of 1,068 foreign subsidiaries of South Korean
firms operating in 25 countries in 2014.
Findings The results reveal that intra-regional diversification has a positive effect, whereas
inter-regional diversification has a negative effect on local staffing in foreign subsidiaries. In addition,
there is a positive association between informal distance (such as normative distance) and local staffing
of foreign subsidiaries, while formal distance (such as regulative distance) is negatively related to local
staffing of foreign subsidiaries.
Research limitations/implications The cross-sectional nature of the data in this study may
preclude examination of the relationships among institutional distance, institutional environment, and
subsidiary staffing composition. The authors suggest that future researchers employ a longitudinal
design to examine the effects on staffing composition of institutional distance and institutional
environments over time.
Originality/value The paper contributes to the literature on international human resources
management by highlighting the importance of combining multilevel parameters to improve
assessment of the importance of firms competitive strategy and institutional environments in local
staffing in foreign subsidiaries.
Keywords MNEs, Institutional distance, Multilevel analysis, Regional diversification,
Subsidiary staffing composition
Paper type Research paper

Introduction
In todays competitive global environment, managers of multinational enterprises
(MNEs) are increasingly realizing the pivotal role of international human resources
management (IHRM) in corporate success (Briscoe and Schuler, 2004; Taylor et al.,
1996). While firms utilize a variety of human resources-related practices to sustain
competitive advantage, expatriate staffing in foreign markets is especially relevant to
successful management of subsidiaries and their performance (Belderbos and Heijltjes,
2005; Boyacigiller, 1990; Delios and Bjorkman, 2000).
Since Perlmutter (1969) described three types of MNEs (ethnocentric, polycentric,
and global), the internal differentiation of management practices within MNEs has been Management Decision
a central topic in international business research. After Bartlett and Ghoshal (1989) Vol. 53 No. 10, 2015
pp. 2321-2338
extended the traditional integration-responsiveness framework in several directions, Emerald Group Publishing Limited
0025-1747
many studies in IHRM have focussed on the important organizing principles of global DOI 10.1108/MD-05-2015-0186
 MD integration and local responsiveness (e.g. Preece et al., 2013; Rosenzweig and Nohria,
53,10 1994; Schuler et al., 1993; Taylor et al., 1996). With consideration of their firms strategic
orientation toward either global integration or local responsiveness, MNE managers
can appoint parent country nationals (PCNs), host country nationals (HCNs), or any
combination of the two in their foreign subsidiaries (Gong, 2003). Previous studies have
shown that MNEs with a global strategy are likely to staff their foreign subsidiaries
2322 with more PCNs for better control and coordination (Black and Mendenhall, 1990;
Boyacigiller, 1990), whereas firms pursuing a multidomestic strategy may hire more
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local employees to promote responsiveness to the local environment (Harzing, 2001;

Gong, 2003).
In the literature on subsidiary staffing, scholars have examined not only the
outcomes of such strategic choices, but also the factors influencing staffing
composition (Tan and Mahoney, 2006; Gong, 2003; Delios and Bjorkman, 2000;
Harzing, 2001). However, with few exceptions (Tarique et al., 2006; Taylor et al., 1996),
MNEs global orientation has received relatively little attention compared to other
factors that determine the level of staffing composition. In particular, the importance of
regional diversification has rarely been examined in the subsidiary staffing literature.
Even though several studies have described the advantages and disadvantages of
more concentrated regional activity vs a broader multinational spread in the
internationalization process (Hejazi, 2007; Rugman, 2005), empirical testing to analyze
the effects of regional diversification on employment practices has been neglected.
Country-level factors are also regarded as key determinants of HRM practices in
MNE subsidiaries (Bae et al., 1998; Ferner, 1997; Fu and Kamenou, 2011; Ollo-Lpez
et al., 2011). Some countries provide more favorable environments for local staffing,
whereas others pose a number of difficulties and challenges for foreign MNEs.
To measure various country-level effects and environmental complexities, Kogut and
Singhs (1988) cultural distance index, which is based on Hofstedes (1980) classification
of culture, is commonly introduced in many studies. It has been considered a
convenient measure to address strategic issues, such as how home and host country
differences influence employment in foreign subsidiaries (Boyacigiller, 1990; Gong,
2003; Harzing, 2001). Yet, there has been criticism of the national cultural distance
concept in that it does not capture the complexity of cross-country differences
influenced by rules, regulations, and norms, nor does it consider corresponding
national institutional frameworks (Delios and Henisz, 2003; Xu and Shenkar, 2002).
Thus, more research is necessary to illuminate the impact of institutional distance (as
an alternative to cultural distance) on subsidiary staffing composition and local
responsiveness in general.
Another approach to evaluating the multifaceted view of environmental complexity
across host country environments is to apply multilevel methods. Multilevel research
on subsidiary staffing composition is remarkably scarce so far, although this approach
can provide useful insights into subsidiary-level outcomes through analysis of societal
and institutional variables. For instance, Kostova (1999) proposed a comprehensive
model to describe the phenomenon of the transnational transfer of strategic
organizational practices within MNEs, but did not conduct a cross-level analysis to
examine the multilevel effects. In this study, we use hierarchical linear modeling (HLM)
in order to estimate firm- and country-level parameters simultaneously and resolve
difficulties (including aggregation bias) that usually result from use of ordinary least
squares methods (Arceneaux and Nickerson, 2009; Martin et al., 2007; Raudenbush
and Bryk, 2002).
 To fill the gap in the existing literature, we herein propose and test hypotheses that Toward a
focus on the key research question of how different levels of intra- and inter-regional better
diversification impact subsidiary staffing composition. We also address the question of
how institutional distances between home and host countries affect MNE subsidiary
understanding
staffing decisions, with separate consideration of the regulative and normative of MNEs
dimensions. We tested our multilevel questions using HLM on a sample of 1,068 foreign
subsidiaries of Korean firms operating in 25 countries in 2014. 2323
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Theory and hypotheses

Subsidiary staffing in MNEs
Subsidiary staffing is a strategic means for MNEs to share knowledge, coordinate
activities, and exercise control over their subsidiaries (Gaur et al., 2007). A key issue in
subsidiary staffing is whether to deploy PCNs, HCNs, or third-country nationals
because each choice has different implications for coordination and control, knowledge
management in the subsidiary, and attainment of local legitimacy (Gong, 2003). In this
paper, we focus our discussion on the cases of PCNs and HCNs, the implications of
whose employment are recognized as most contrasting (Gaur et al., 2007).
First, PCNs are defined as employees of MNEs who are citizens of the country
wherein the corporate headquarters is located. PCNs have fundamental competencies
such as familiarity with the MNEs corporate culture, ability to communicate effectively
with headquarters, and ability to maintain control over subsidiary operations (Dowling
et al., 1999; Schuler et al., 1993). By employing more PCNs in foreign subsidiaries,
managers at headquarters can coordinate and exercise more control of subsidiaries
activities (Harzing, 2004; Reiche and Harzing, 2011).
On the other hand, HCNs are employees from the host country wherein the
subsidiary is located. HCNs are more familiar with local norms and practices compared
to PCNs (Banai, 1992; Kobrin, 1988) and tend to respond more effectively to the host
countrys requirements for localization of the subsidiarys operations (Tarique et al.,
2006). HCNs increase the level of interaction within the local environment, making it
easier for foreign subsidiaries to accommodate isomorphic pressures and allowing
MNEs to gain local knowledge and legitimacy, which are critical for corporate survival
and success in new environments (Kostova and Zaheer, 1999).
In decision making about staffing in foreign subsidiaries, consideration must be
given of these different competencies of PCNs and HCNs. Managers of MNEs make
decisions about the appropriate composition of subsidiary staff given various
environmental complexities (Boyacigiller, 1990). In this study, we include competitive
strategy, particularly region-specific diversification, and institutional distance as main
factors to reflect organizational and environmental contingencies that foreign
subsidiaries frequently face.

Intra- and inter-regional diversification and subsidiary staffing

In previous literature on internationalization, there are several justifications for
competitive strategies that lead to geographical spread of an MNE (Tallman and Yip,
2009). Among the many strategic decisions MNE managers must make, the choice
involving the most contrast is between a global strategy and a multidomestic strategy
(Tarique et al., 2006). A global strategy seeks to organize and manage foreign
subsidiaries in a standardized manner to achieve economies of scale, whereas a
multidomestic strategy maximizes responsiveness to local needs in terms of products,
 MD channels, and marketing practices of each national market in a more decentralized
53,10 manner (Porter, 1986).
A region-specific strategy lies somewhere between these two (Hout et al., 1982;
Tarique et al., 2006). MNEs with regional diversification strategies utilize economies of
scale at the regional level, while allowing and promoting responsiveness to regional
conditions. Thus, a region-specific strategy helps firms to manage the inherent tension
2324 between pressures for internal consistency and local adaptation. Recently, evidence has
been found for the advantages of more concentrated regional activity vs a broader
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multinational spread (e.g. Rugman, 2005; Rugman and Verbeke, 2004).

Region-specific diversification can be understood as a moderate choice in
comparison with some other strategies (i.e. global vs multidomestic strategies), and
can be reclassified into intra- and inter-regional diversification. These approaches have
some parallels to multidomestic and global strategies, respectively. MNEs that adopt
intra-regional diversification strategies may conduct their business activities in a
limited geographic region. In doing so, they may facilitate building, integration, and
reconfiguration of resources and capabilities located in one or two regions in
geographically close countries (Goerzen and Beamish, 2003; Nachum et al., 2008). Due to
the spatial proximity of subsidiaries within a region (Rugman, 2005; Rugman and
Verbeke, 2007), use of these intra-diversification strategies can enable firms to be
responsive to regional needs and differentiate products and service at a regional level.
During this process, subsidiaries gain a certain legitimacy, which can increase the
corporations legitimacy in the regional market due to the spillover effect (Kostova and
Zaheer, 1999). As a means of establishing and maintaining legitimacy, therefore, MNEs
following intra-regional strategies will employ more HCNs in order to capitalize on their
familiarity with local culture and ability to respond to the host countrys requirements
for localization (Tarique et al., 2006).
By contrast, MNEs that adopt inter-regional diversification strategies focus on
various different regions. This diversification approach allows them to achieve benefits
such as economies of scale and scope (Grant et al., 1988), cross-subsidization, and price
discrimination (Palich et al., 2000). However, spreading business activities over a broad
region is likely to increase managerial difficulties and cross-border managerial costs
(Geringer et al., 2000). In order to deal with different market environments in different
regions, standardization is a more viable option for MNEs than differentiation of
products and services for each country. Firms pursuing inter-regional strategies are
therefore likely to deploy more expatriates (PCNs) to work in their foreign subsidiaries
in order to capitalize on their competencies, including effective communication with
headquarters and maintenance of coordination and control over their subsidiaries
operations. Hence, we propose the following hypotheses:
H1. Greater intra-regional diversification relates positively to local staffing of
foreign subsidiaries.
H2. Greater inter-regional diversification relates negatively to local staffing of
foreign subsidiaries.

Formal and informal institutional distance and subsidiary staffing

Institutional theory is one of the most frequently applied theoretical approaches in
international business research (Dacin et al., 2002), since it provides a rich theoretical
foundation for explaining critical issues that MNEs confront (Djelic and Quack, 2003).
The main concern of institutional theory is how organizations can improve the security
 of their positions and increase their legitimacy by conforming to the rules and norms Toward a
of the institutional environment (Meyer and Rowan, 1991). The term institution has better
been broadly defined by many scholars (e.g. Dunning and Lundan, 2008a;
Jepperson, 1991); the three-pillar model of Scott (1995) is one well-known typology.
understanding
According to Scott (1995), the first institutional pillar is the regulative one, which of MNEs
encompasses the existing laws and rules that promote certain types of behaviors and
restrict others (Kostova, 1997). These include governmental legislation and industrial 2325
agreements and standards (Bruton et al., 2010). The second (normative) pillar consists
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of social norms, values, beliefs, and assumptions that are socially shared and utilized
by members of society (Kostova, 1997). Normative institutions include what is
preferred or considered right, how people feel things should be done, which is
consistent with social values and beliefs (Bruton et al., 2010). Finally, the cognitive pillar
reflects the cognitive structures and symbolic systems shared among individuals
(e.g. shared knowledge) (Trevino et al., 2008). Kostova and Roth (2002) have
operationalized the concept of institutional distance recently on the basis of Scotts
(1995) conceptualization.
In this study, we focus on regulative and normative distances, which are relevant to
the formal rules of North (1990) (e.g. statute law, common law, and regulations) and
informal constraints (e.g. conventions, norms of behavior, and self-imposed codes of
conduct). We choose these two distances since they are known as important causes of
lack of legitimacy for foreigners in national environments (Xu and Shenkar, 2002).
These two constructs have different operating mechanisms. Regulative (or formal)
distance is when market players are subject to the coercive pressure of isomorphism,
whereas normative (or informal) distance is evident when market players are under
normative or mimetic pressure (Rosenzweig and Nohria, 1994). In the business world,
strategic choices in MNEs can be affected differently by regulative and normative
distances (Estrin et al., 2009; Kostova and Roth, 2002).
When MNEs establish subsidiaries in unfamiliar national environments, they are
considerably constrained by normative institutions, which are not formally codified,
but are instead implicit and embedded in the new countries shared norms and values
(North, 1990; Boyacigiller et al., 2004). As bridging normative distance requires local
resources and knowledge, HCNs in foreign subsidiaries play an active role in the
adaptation process because they have sufficient knowledge and understanding of
tacit norms, values, and beliefs of society in the new countries. Put differently, the lack
of familiarity, unpredictability, and complexity resulting from large normative distance
increase the need for HCNs to be employed as cultural mediators who are
knowledgeable about the host country culture (Erdener and Torbirn, 1999). Hence,
we postulate that in situations with large normative distance and high need for
local knowledge, the likelihood of employing more HCNs in foreign subsidiaries
will increase.
However, regulative institutions may impact subsidiary staffing decisions in the
opposite way. As they are usually formalized and codified, regulative institutions are
more easily understood by newcomers than normative or cognitive institutions are
(Estrin et al., 2009). Moreover, the operational mechanism of regulative institutions is
coercive pressure (Kostova and Roth, 2002). MNEs, as new entrants, may have to
conform to rules set by formal institutions so as to gain legitimacy and increase their
chances of survival and success. In this study, therefore, we posit that when regulative
distance is large, MNEs dependency on HCNs will decrease because the relative
advantage of employing HCNs vs PCNs will diminish; instead, it will be more
 MD advantageous for the firm to employ PCNs, a practice that typically reduces risks and
53,10 costs of transactions between the parent firm and its overseas subsidiaries (Erdener
and Torbirn, 1999). In line with these arguments, the following hypotheses are
advanced:
H3. Informal institutional distance (such as normative distance) is positively related
to local staffing of foreign subsidiaries.
2326
H4. Formal institutional distance (such as regulative distance) is negatively related
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to local staffing of foreign subsidiaries.

The hypothetical research model of our study is graphically displayed in Figure 1,
wherein the numbers refer to the hypotheses.

Methodology
Data
Data on 1,068 subsidiaries in 25 countries were drawn from the Overseas Korean
Business Directory (2014) provided by the Korea Trade Investment Promotion Agency
(KOTRA). KOTRA is a governmental organization that supports overseas expansion of
Korean companies and promotes foreign direct investment in Korea. KOTRA has been
publishing the Overseas Korean Business Directory biannually since 1992. The data set
includes each subsidiarys year of entry, entry mode, number of HCNs and PCNs, the
address of company headquarters, and so on. In order to collect financial data for each
subsidiary, we used the TS2000 database of the Korea Listed Companies Association
and the KIS-LINE database provided by the Korea Information Service.
Table I gives the country-subsidiary breakdown for the sample in this study.
It indicates that the 1,068 subsidiaries included in the study were operating in 25
countries and six regions during the study period.

Description of variables
Local staffing. Based on Colakoglu and Caligiuri (2008), Konopaske et al. (2002), and
Boyacigiller (1990), we calculate the value for local staffing by dividing the number of
HCNs by the number of subsidiary employees (LOCAL).
Intra- and inter-regional diversification. In this study, two commonly accepted
entropy measures of diversification are employed: the intra- and inter-regional
diversification indexes developed by Qian et al. (2010), labeled INTRA and INTER.

Normative
Distance (+)
3
LV2
Regulative ()
Distance
4
Country level
Subsidiary level
Intra-regional (+)
diversification
1 Subsidiary
LV1 local staffing
Figure 1. ()
composition
Inter-regional
Research model diversification
2
 Host country Region Observations %
Toward a
better
1. Australia Western Europe and others 14 1.31 understanding
2. Brazil Latin America and the Caribbean 27 2.53
3. Canada Western Europe and others 9 0.84 of MNEs
4. China Asia Pacific 450 42.13
5. Egypt Africa 8 0.75
6. Germany Western Europe and others 11 1.03 2327
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7. Greece Western Europe and others 12 1.12

8. India Asia Pacific 42 3.93
9. Indonesia Asia Pacific 26 2.43
10. Japan Asia Pacific 52 4.87
11. Malaysia Asia Pacific 19 1.78
12. Mexico Latin America and the Caribbean 20 1.87
13. The Netherlands Western Europe and others 9 0.84
14. Panama Latin America and the Caribbean 9 0.84
15. Philippines Asia Pacific 10 0.94
16. Poland Eastern Europe 14 1.31
17. Russia Eastern Europe 33 3.09
18. Slovakia Eastern Europe 19 1.78
19. Spain Western Europe and others 10 0.94
20. Thailand Asia Pacific 34 3.18
21. Turkey Western Europe and others 27 2.53
22. UAE Asia Pacific 11 1.03
23. UK Western Europe and others 13 1.22 Table I.
24. USA Western Europe and others 99 9.27 Subsidiary sample
25. Vietnam Asia Pacific 90 8.43 breakdown by
Total 6 1,068 100.00 country and region

We calculated these measures based on subsidiary presence in five regions: Africa,

Asia Pacific, Eastern Europe, Latin America and the Caribbean, and Western Europe
and others, based on the OECD regional classification. While INTRA captures
geographic diversification across countries within a given region, INTER captures
diversification across different regions (Qian et al., 2010).
The entropy measure of INTRA is defined as:
X j
I N TRA P jaj  I N TRAaj :
a1

Here, INTRAaj equals the subsidiaries within the ath global market region (aA j) and
Pajj is the proportion of the number of subsidiaries in the jth country to the total
subsidiaries of the ath global market region. If there are all together j regions, INTRA
will be the weighted average of INTRAaj, while the weight is the previously defined Pajj .
INTER is calculated using the following equation:
Xm  
i 1
I N TER P ln i ;
i1 P

where m is the number of regions in which a firm has subsidiaries, and Pi is the
proportion of the number of subsidiaries in the ith global market region to a firms total
number of subsidiaries in all regions.
 MD Regulative and normative distances. We measure the regulative and normative
53,10 distances between the home country of an MNE and the host country of its
subsidiary (REG/NOR). To develop measures of regulative and normative distances,
we select items and values from the World Competitiveness Yearbook (WCY)
(2011) related to the regulative and normative aspects of institutions. Based on
Xu et al. (2004) and Gaur et al. (2007), we compile 14 indicators listed in the 2011 edition
2328 (Table II). We employ seven indicators of regulative aspects: political transparency,
antitrust regulation, intellectual property protection, settlement of disputes,
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institutional stability, effectiveness of police force, and extent of market dominance.

In addition, we employ seven indicators of normative aspects: buyer
sophistication, customer orientation, staff training, willingness to delegate authority,
performance-related pay, reliance on professional management, and effectiveness of
corporate boards.
Then, we perform a factor analysis (principal components analysis) with Varimax
rotation. This analysis yields two distinct factors with eigenvalues greater than 1.
The loadings for all retained items on the corresponding factors are greater than 0.70.
We use the factor scores obtained from the principal components analysis to
develop the measure of regulative and normative distances between different
countries, following Gaur et al. (2007). The respective difference is the factor score for
Korea minus the factor score for the host country. We then measure the reliability
of the two distance scores using item-to-total correlations and Cronbachs .
Cronbachs values for regulative and normative items are greater than 0.70.
The item-to-total correlations are higher than the minimum cutoff value of 0.60,
which provides strong support for the reliability of the two distance measures
(Nunnally, 1978).
Control variables. We measure subsidiary age as the difference between a
subsidiarys year of establishment and the year of observation (AGE). We code a
subsidiarys entry mode as 1 for joint venture entries (MODE). We control for industry
effects by coding the industry dummy variable as 1 for global industries and 0 for
non-global ones. To classify the sample subsidiaries into the following global industries,

Xu et al. (2004) Gaur et al. (2007)

Regulative Antitrust laws Political transparency

aspects Legal system
Impartiality of arbitration
Settlement of disputes
Institutional stability
Effectiveness of police force
Product liability
Normative Product design
aspects Customer orientation
Table II. Staff training
Comparison of Willingness to delegate
institutional Performance-related pay
indicators between Professional managers
Xu et al. (2004) and Effectiveness of corporate
Gaur et al. (2007) boards
Antitrust regulation
Intellectual property protection
Judicial system efficiency
Fiscal policy
Inflation
Market dominance in key industries
Political system to economic challenges
Bureaucratic corruption
Governments attitude toward economic realities
Transparency toward citizens
Political risk
Bureaucratic hindrance to economic
development
Independence of local authorities
 we use the 2014 Global Industry Classification Standard as a guideline (Brggen et al., Toward a
2009) (GLOBAL): better
energy; understanding
materials (chemicals, construction materials, containers and packaging, metals of MNEs
and mining, and paper and forest products);
industrials (capital goods, commercial services and supplies, and transportation); 2329
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consumer discretionary (automobile and components, consumer durables and

apparel, hotels, restaurants and leisure, media, and retailing);
consumer staples (food and staples retailing, food, beverage, and tobacco,
household and personal products);
health care (health care equipment and services, pharmaceuticals and
biotechnology);
financials (banks, diversified financials, insurance, and real estate);
information technology (software and services, technology hardware and
equipment, semiconductors and semiconductor equipment);
telecommunication services; and
utilities.
We measure the relative size of subsidiaries by dividing the number of employees in a
given subsidiary by the number of employees at headquarters (SIZE). To control for
country effects, we use cultural distance (CD) and economic distance (ED) between
home and host countries. To calculate cultural distance, we follow the method of Kogut
and Singh (1988), by using the four cultural dimensions uncertainty avoidance, power
distance, individualism/collectivism, and masculinity/femininity identified by
Hofstede (1980). To measure economic distance, we calculate the differences in the
real per capita gross domestic product between Korea and a given host country (Tsang
and Yip, 2007). The equation is as follows:

Economic distance between parent country p : Korea and host country h

 
ln yp  ln yh where Korea is the more developed host country
 
ln yh  ln yp where the host country is more developed than Korea

Empirical model: HLM

We are interested in variations in local staffing composition explained by a number of
firm- and country-level predictors. Thus, we perform a multilevel analysis using the
HLM technique (Raudenbush et al., 2004). HLM is an appropriate method for analyzing
data with a nested structure by constructing a separate submodel at each of the levels
in the data structure (Raudenbush and Bryk, 2002).
Using HLM, we simultaneously estimate our firm- and country-level parameters
without such statistical pitfalls as exaggerated levels of statistical significance to
coefficient estimates (Moulton, 1990) and violation of the standard assumption in
regression analysis that the errors are independently and identically distributed, as
characteristically occurs with ordinary least squares methods (Raudenbush and Bryk,
 MD 2002). To evaluate the main effects of level 1 and level 2 variables on the country mean
53,10 level 1 outcome (local staffing) adjusted for within country level 1 predictors, we use
random effects intercept-as-outcomes models, centering the variables in accordance
with the guidelines that Enders and Tofighi (2007) suggest.

Results
2330 Table III lists the means, standard deviations, and correlations of the variables in this
study at both level 1 (subsidiary) and level 2 (country). Following Martin et al. (2007),
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we attach country-level indicators to individual firms to calculate correlation

coefficients both within and across levels of analysis.
We next generate a series of models to test our hypotheses concerning regional
diversification and institutional distance at the country level to account for variance in
subsidiary-level local staffing. First, we test an unconditional model, in which no
independent variables are included at either the firm or the country levels. In order to
identify systematic between-group variance in subsidiary staffing composition,
a significant within-group agreement statistic (i.e. the intra-class correlation (ICC))
should be attained in order to justify the aggregation of data from the individual level
to the organizational level (see Klein and Kozlowski, 2000). An ICC value of 0.34 with
significant 2 values for local staffing level ( p o 0.001) indicates that this prerequisite
is met.
H1 and H2 predict that subsidiary staffing composition is affected by the extent of
regional diversification of MNEs. With regard to H1, we find support for the premise
that the greater the intra-regional diversification, the more prevalent the local staffing
(10 0.025, p o 0.05). H2 suggests that greater inter-regional diversification is
associated with less local staffing in foreign subsidiaries; this hypothesis is also
supported. As shown in Model 3 of Table IV, inter-regional diversification has a
negative relationship with local staffing (20 0.023, p o 0.10).
H3 predicts a positive association between informal distance (such as normative
distance) and local staffing of foreign subsidiaries. As shown in Model 3 of Table IV,
normative distance has a positive relationship with local staffing (01 0.091, p o 0.10).
Thus, H3 is supported. H4 predicts that formal distance (such as regulative distance) is
negatively related to local staffing of foreign subsidiaries. According to Model 3 of
Table IV, regulative distance is negatively related to local staffing (02 0.088,
p o 0.10), demonstrating that H4 is also supported.

Discussion
In a broad sense, our research provides empirical evidence for the influence of
cross-level factors affecting MNE subsidiary local staffing. The results indicate that the
level of local staffing is affected by two factors: firm-level strategic orientation and
country-level institutional distance.
This study contributes to the literature on IHRM in the following ways. In keeping
with Qian et al. (2010), we identify two dimensions of regional diversification intra-
and inter-regional diversification and offer the first empirical findings on the
relationship between regional diversification and subsidiary staffing composition in
MNEs. The results support that MNEs adopting intra-regional strategies are likely to
employ more HCNs, whereas firms pursuing inter-regional strategies employ more
PCNs. The implication is that MNEs entering intra-regional markets may be more
concerned about local legitimacy and adaptation for survival; thus, they employ
more HCNs, perceiving their local expertise to be more advantageous. In doing so,
 Downloaded by BAHAUDDIN ZAKARIYA UNIVERSITY IN PAKISTAN At 06:30 25 November 2015 (PT)

Means SD 1 2 3 4 5 6 7 8 9 10

1. LOCAL 0.85 0.23

2. INTER 0.57 0.52 0.114***
3. INTRA 0.61 0.60 0.006 0.663***
4. GLOBAL 0.56 0.50 0.096** 0.176*** 0.143***
5. AGE 12.41 7.83 0.127*** 0.202*** 0.243*** 0.031
6. MODE 0.86 0.34 0.148*** 0.049 0.097** 0.054 0.003
7. SIZE 1.03 5.36 0.106*** 0.137*** 0.120*** 0.050 0.031 0.025
8. CD 2.15 1.04 0.103*** 0.073** 0.122*** 0.056 0.142*** 0.107*** 0.033***
9. ED 1.41 0.72 0.315*** 0.248*** 0.074* 0.108*** 0.153*** 145*** 0.096** 0.161***
10. NOR 0.37 0.30 0.310*** 0.007 0.005 0.013 0.361*** 0.102** 0.052 0.663*** 0.286***
11. REG 0.59 0.37 0.324*** 0.093** 0.044 0.035 0.322*** 0.102*** 0.076* 0.327*** 0.378*** 0.563***
Note: *p o 0.05; **p o0.01; ***p o0.001
understanding

Means, standard
better

deviations, and
Table III.
2331

among variables
of MNEs
Toward a

intercorrelations
 MD Hypothesized Model 1 Model 2 Model 3
53,10 Variables sign b SE b SE b SE

Level 1: subsidiary level (n 1,068)

Intercept (00) 0.810*** 0.025 0.810*** 0.025 0.810*** 0.024
Regional diversification
Intra-regional + 0.025* 0.011 0.025* 0.011
2332 diversification (10)
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Inter-regional 0.022**** 0.013 0.023**** 0.013

diversification (20)
Level 2: country level (n 25)
Institutional distance
Normative institutional + 0.091**** 0.054
distance (01)
Regulative institutional 0.088**** 0.044
distance (02)
Controls
Global industry (30) 0.054** 0.017 0.053*** 0.015 0.052** 0.015
Subsidiary age (40) 0.026* 0.013 0.024**** 0.014 0.024**** 0.014
Table IV. Entry mode (50) 0.055* 0.022 0.054** 0.020 0.054** 0.020
Results of HLM Subsidiary size (60) 0.002* 0.001 0.002**** 0.001 0.002**** 0.001
analyses with Cultural distance (03) 0.001 0.022 0.000 0.022 0.034 0.021
subsidiary staffing Economic distance (04) 0.079** 0.025 0.079** 0.025 0.074** 0.023
composition as the Notes: n 1,068 (Level 1, subsidiaries); n 25 (Level 2, countries). *p o0.05; **p o0.01; ***p o 0.001;
dependent variable ****p o0.10

MNEs may better capitalize on the familiarity of HCNs with local culture and
their ability to respond to the host countrys requirements for localization. By contrast,
MNEs in inter-regional markets prefer to employ PCNs rather than HCNs because
their ability to coordinate and exercise control over subsidiaries is more useful
in this context.
This study provides one potential explanation for the opposite effects of intra-
and inter-regional diversification. PCNs and HCNs may be uniquely equipped to
mitigate distinctive types of liabilities of foreignness. When MNEs operate across
multiple regions, they face overwhelming complexity, diversity of operations, and
high costs of doing business across regions, the so-called liability of inter-regional
foreignness (Banalieva and Dhanaraj, 2013; Qian et al., 2013). To overcome these
problems, firms may choose to appoint PCNs in order to use their strengths,
which may include effective liaising and communicating with home office personnel
and facilitating of control over subsidiary operations (Reiche and Harzing, 2011).
In contrast, for MNEs operating within a single region, reducing the liability of
intra-regional foreignness, or the costs of doing business in the region, may be their
major challenge (Rugman and Verbeke, 2004). The resulting problems can be
reduced by employing more HCNs, whose familiarity with the socioeconomic,
political, and legal environment in the region and ability to respond effectively to the
regional demands for localization may prove invaluable. These opposite findings
also coincide with the argument suggested in the literature that organizations select
individuals with similar characteristics and qualities in accord with the demands
arising from the environment (Edwards, 1991; Muchinsky and Monahan, 1987).
 Therefore, MNEs seem to recognize the fundamentally different competencies of Toward a
PCNs and HCNs and to make appropriate staffing choices in line with their regional better
diversification strategies.
Second, we classify institutional distance into formal institutional (i.e. regulative)
understanding
and informal institutional (i.e. normative) distances and examine their unique and of MNEs
opposite effects on subsidiary staffing composition. Prior research has described the
differences between formal and informal institutions (e.g. Dunning and Lundan, 2008a, 2333
b; North, 1990), but the effects of different types of institutional distances on subsidiary
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staffing composition have not yet been investigated empirically. Although Estrin et al.
(2009) found empirical support for the idea that formal and informal institutional
distances have different effects, their main focus was on MNEs entry strategies.
Kostova and Roth (2002) also empirically tested the opposite effects of regulatory and
normative institutional profiles on internalization of business practices, but the use of
the institutional profile construct is too issue specific to elucidate country effects such
as the cultural differences between home and host countries. This study, therefore, has
extended the findings of existing studies assessing the different operational
mechanisms of formal and informal distances at the country level, revealing the
potential fit between home-host cultural differences and IHRM strategy.
Third, in this study, we focussed on proper estimation of the effects of firm- and
country-level factors by conducting a multilevel analysis, and in doing so, avoided
underestimating the standard error of causal estimates and making Type 1 errors
(Arceneaux and Nickerson, 2009). Although no interaction term between cross-level
factors was specified at this exploratory stage, scholars in past research have implied a
linkage between regional diversification strategy and institutional distance. As Qian
et al. (2013) noted, intra-regionally diversified MNEs perceive short institutional
distances; due to these institutional similarities, firms easily apply their accumulated
knowledge, experience, and business networks to other countries within a region
(Zaheer and Mosakowski, 1997). On the other hand, firms operating in multiple regions
must manage the many diversities and complexities posed by large institutional
distances (Qian et al., 2013). In these circumstances, and with different levels of regional
diversification and institutional distance, MNEs can adopt various IHRM strategies in
addition to ethnocentric or polycentric staffing policies.
Our study has some practical implications as well. We suggest that practitioners
should carefully consider the fit between their IHRM strategies, their strategies, and the
host countrys institutional environment before making decisions about subsidiary
staffing composition. As Porter (1996) noted, firms may gain competitive advantage
when they are able to accord their specific strategies with their organizational and
environmental contingencies. Although we do not examine the actual performance
effects of fit in this study, our results suggest that the MNEs in our sample have
successfully harmonized their IHRM choices with their strategies related to
institutional distance and the institutional environment.
This study has several limitations that point out possible future research directions.
First, the cross-sectional nature of the data precludes the opportunity for examining the
causal relationships among institutional distance, institutional environment, and
subsidiary staffing composition. We suggest that future researchers employ a
longitudinal design to examine the effects on staffing composition of institutional
distance and institutional environments over time. The second limitation is that we
restricted our sample to companies based in South Korea. To improve the cross-cultural
generalizability of the results, future research can include samples from Western and
 MD other Asian countries. Finally, we may have made measurement errors related to
53,10 institutional distance. The concept of institution is broad and may require further
disaggregation (Estrin et al., 2009). Although we conducted our tests using index scores
from the WCY (2011) that are widely utilized in academia, future studies may include
more indicators or use alternative measures that better capture the comprehensive
concept of institutional environment.
2334
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Further reading
Evans, P., Doz, Y.L. and Laurent, A. (Eds) (1989), Human Resource Management in International
Firms: Change, Globalization, Innovation, Palgrave MacMillan Limited, London.

Corresponding author
Dr Young-Ryeol Park can be contacted at: yrpark@yonsei.ac.kr

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