Subsidiary staffing, cultural friction, and subsidiary performance: Evidence from Korean subsidiaries in 63 countries

• DOI: http://doi.org/10.1002/hrm.21947
• Date: 01 March 2019
• Author: Deeksha Singh,Jeoung Yul Lee,Chinmay Pattnaik,Ajai S. Gaur
• Published date: 01 March 2019

ORIGINAL ARTICLE

Subsidiary staffing, cultural friction, and subsidiary

performance: Evidence from Korean subsidiaries in

63 countries

Deeksha Singh

1

| Chinmay Pattnaik

2

| Jeoung Yul Lee

3,4

| Ajai S. Gaur

5

1

School of Business, Rutgers University,

Camden, New Jersey

2

Discipline of International Business,

University of Sydney Business School, Sydney,

New South Wales, Australia

3

National Research Base of Intelligent

Manufacturing Service, Chongqing Technology

and Business University, Chongqing, China

4

Department of Global Management, School

of Business Management, Hongik University,

Sejong, South Korea

5

Department of Management and Global

Business, Rutgers Business School—Newark

and New Brunswick, Newark, New Jersey

Correspondence

Jeoung Yul Lee, Department of Global

Management, School of Business

Management, Hongik University, Sejong

30016, South Korea.

Email: jeoungyul@hongik.ac.kr

Drawing from the notion of cultural friction and based on the agency theory rationalization of

multinational enterprise (MNE) headquarter–subsidiary relationship, we examine the impact of

cultural friction in foreign subsidiaries on subsidiary performance. We argue that cultural fric-

tion, arising due to a high presence of parent country nationals (PCNs) in culturally distant loca-

tions, has a detrimental effect on subsidiary performance. This effect is the strongest when the

cultural friction is at the top management team (TMT) level and the weakest when friction is at

the regular employee level. However, this relationship is contingent on factors that work as

drags or lubricants for cultural friction between PCNs and host country nationals (HCNs). We

identify governance mode and language differences between home and host countries as drag

parameters and host country experience and subsidiary interdependence as lubricants that con-

dition the effect of cultural friction on subsidiary performance. Empirical findings based on a lon-

gitudinal sample of 7,495 foreign subsidiary observations of 467 Korean MNEs in 63 countries

during 1990–2014 provide robust support for our theoretical predictions.

KEYWORDS

international HRM, international management, international strategy, strategic HR

1|INTRODUCTION

Staffing composition in foreign subsidiaries is an important lever that

multinational enterprises (MNEs) use to exert formal and informal

control over their subsidiaries, transfer knowledge and strategic orga-

nizational practices from the parent to its subsidiaries, learn from the

host country, and gain local legitimacy in host countries (De Cieri &

Dowling, 2012; Gaur, Delios, & Singh, 2007; Gong, 2003a). Given the

importance of staffing composition for subsidiary level outcomes,

there is a growing emphasis on examining the antecedents and conse-

quences of the subsidiary staffing decision in greater detail

(Colakoglu & Caligiuri, 2008; Widmier, Brouthers, & Beamish, 2008).

One of the important dimensions of staffing composition decision-

making is the choice between the parent country nationals (PCNs)

and the host country nationals (HCNs) (Gong, 2003a). In the literature,

cultural difference between the home and host countries has emerged

as a key determinant of the subsidiary staffing composition (Brock,

Shenkar, Shoham, & Siscovick, 2008; Gong, 2003a). In culturally dis-

tant locations, MNEs are more likely to rely on PCNs for subsidiary

staffing (Gong, 2003a) as MNEs can exert greater cultural control

using PCNs and easily transfer firm-specific knowledge to subsidiaries,

leading to higher subsidiary performance (Gaur et al., 2007). However,

a high presence of PCNs in the culturally distant locations could also

lead to cultural friction with HCNs within the subsidiary (Gong,

2003b; Shenkar, Luo, & Yeheskel, 2008), which may negatively impact

subsidiary performance.

We have a limited understanding of how the interplay between

cultural differences and staffing composition affects subsidiary perfor-

mance. The internal friction that arises due to cultural differences

between PCNs and HCNs within the subsidiary poses a substantial

challenge for subsidiary management (Gong, 2003a, 2003b; Koch,

Koch, Menon, & Shenkar, 2016; Shenkar et al., 2008). Given the suc-

cess of Korean and Japanese firms in international markets, despite

their highly ethnocentric staffing policies, it is important to study how

All authors contributed equally.

DOI: 10.1002/hrm.21947

Hum Resour Manage. 2019;58:219–234. wileyonlinelibrary.com/journal/hrm © 2019 Wiley Periodicals, Inc. 219

firms manage the complexities arising due to cultural friction in host

nations. Accordingly, we examine how cultural friction arising due to

staffing composition in culturally distant locations impacts foreign

subsidiary performance.

The notion of cultural friction is relatively new to the international

management literature that examines culture as a key element of

cross-national differences. The general assumption in this stream of

literature is that the cultural difference between the home and host

country as measured by cultural distance, on its own, is a major source

of concern for foreign subsidiary management. However, the notion

of cultural friction posits that the source of problems may not be the

cross-national cultural distance per se, but the difficulties and resis-

tance that arise when two or more entities, such as organizations,

units, teams, groups, and individuals, from different countries resist

each other in their international business interactions (Popli, Akbar,

Kumar, & Gaur, 2016). Unlike cultural distance, cultural friction

emphasizes the actual cultural contact between exchanging entities in

an environment where multilevel yet intertwined cultural differences

simultaneously occur (Luo & Shenkar, 2011; Shenkar et al., 2008). It

should be noted that the interaction between individuals and organi-

zations from culturally diverse countries has the potential for develop-

ing a shared understanding, which can potentially reduce the conflict

between them (Mukherjee, Hanlon, Kedia, & Srivastava, 2012; Stahl &

Tung, 2015). However, in the context of MNE–subsidiary relation-

ships, there is an inherent scope for cultural friction due to the agency

relationship between the MNE headquarters (HQ) and their subsidi-

aries, leading to goal incongruence. The cultural distance between the

home and host countries together with subsidiary staffing composi-

tion further increases the goal incongruence (Roth & O'Don-

nell, 1996).

We integrate the literature on agency relationship between the

HQ (principal) and its subsidiaries (agents) with the cultural friction lit-

erature to examine the role of cultural friction in subsidiary perfor-

mance. We argue that subsidiaries that face a greater level of friction

are likely to experience inferior performance. However, the negative

effect of cultural friction due to the presence of PCNs will be stronger

at the level of the top management team (TMT) than at the level of

regular employees. Moreover, Luo and Shenkar (2011) suggested that

there are important drag parameters and lubricants that affect cultural

friction when organizations and individuals go through contact experi-

ences. We identify governance mode, host country experience, sub-

sidiary's dependence on the MNE network, and language differences

as important parameters that affect cultural friction and condition its

effect on subsidiary performance. We tested our arguments on a sam-

ple of 7,495 observations of the foreign subsidiaries of 467 Korean

MNEs in 63 countries during 1990–2014.

We make several contributions to international human resource

management (HRM) and cross-cultural management literature by

focusing on the impact of cultural friction on subsidiary performance.

First, departing from a sole focus on agency and transaction cost the-

ory rationalizations to explain the impact of staffing composition and

subsidiary performance, we examine the microprocesses that lead to

cultural friction, which in turn affect the performance outcome of

staffing composition. We focus on the internal cultural conflicts

between PCNs and HCNs, together with the need for control and

monitoring due to goal incongruence between HQs and subsidiary.

Second, the use of cultural friction allows us to demonstrate that

PCNs may not always be beneficial for foreign subsidiary perfor-

mance. The limited prior research on this topic primarily provides evi-

dence on the positive consequences of PCNs in culturally distant

subsidiaries. We invoke the negative dimensions of such ethnocentric

staffing by providing a balanced view of the subsidiary staffing com-

position. Finally, we contribute to cross-cultural management litera-

ture by examining the issue of cultural friction between PCNs and

HCNs and supplementing the cultural distance literature, which has

been criticized for ignoring the interactions between transacting enti-

ties in the specific context in which the transactions occur.

2|THEORETICAL BACKGROUND

2.1 |Subsidiary staffing composition and

performance

Staffing composition of foreign subsidiaries and its impact on subsidi-

ary performance are key concerns for global HRM (Von Glinow,

Drost, & Teagarden, 2002). There is a general consensus that human

resources are the key strategic assets that enable firms to develop

and sustain their competitive advantages. In the case of foreign sub-

sidiaries, MNEs primarily choose between two types of human

resources: PCNs or HCNs.

1

There are costs and benefits associated

with staffing subsidiaries with PCNs and HCNs (Tables 1 and 2).

PCNs bring several benefits such as effective control, coordina-

tion, and efficient transfer of strategic organizational practices (Gaur

et al., 2007; Gong, 2003a) together with mitigating the agency prob-

lems through direct monitoring of subsidiary employees (Gong,

2003a). However, PCNs also pose many challenges such as their low

level of commitment to the subsidiary, adjustment difficulties in the

host country (Perera, Chew, & Nielsen, 2016; Shaffer, Harrison, & Gil-

ley, 1999), and an inadequate understanding of the host country envi-

ronment (Gaur et al., 2007). Given the conflicting theoretical

prediction and empirical evidence about the importance of PCNs for

subsidiary performance, there is a need to develop a more compre-

hensive framework that acknowledges the alternative explanations

and allows for the examination of contingency factors affecting staff-

ing composition–subsidiary performance relationships (Cogin & Wil-

liamson, 2014). Minbaeva and De Cieri (2015) made a case for

developing such a framework of strategic international human

resource management (SIHRM). We argue that such a framework can

be developed by looking at the nature of problems that MNEs face in

managing foreign subsidiaries.

A key challenge in managing foreign subsidiaries is the goal incon-

gruence between the MNE HQs and the subsidiary. The MNE parent-

subsidiaryrelationship has a principal-agentstructure because HQs del-

egate tasks and responsibilities to the top management of its foreign

subsidiaries (Kostova, Nell, & Hoenen, 2016; Roth & O'Donnell, 1996).

Foreign subsidiaries, however, are also embedded in the local environ-

ment, which requiresthem to be responsive to the local context.More-

over, subsidiaries often compete with each other to obtain resources

and attention from the MNE parent (Anderson, Gaur, Mudambi, &

220 SINGH ET AL.