Discussion Papers In Economics
And Business

The Change of Nationality in Top Executives of Foreign Affiliates: A Study of North
American, European and Asian MNCs in Japan

Tomoki Sekiguchi

Sachiko Yamao

Discussion Paper 10-11

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANThe Change of Nationality in Top Executives of Foreign Affiliates: A Study of North
American, European and Asian MNCs in Japan

Tomoki Sekiguchi

Sachiko Yamao

Discussion Paper 10-11

March 2010

この研究は「大学院経済学研究科・経済学部記念事業」
基金より援助を受けた、記して感謝する。

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANThe Change of Nationality in Top Executives of Foreign Affiliates: A Study of North
American, European and Asian MNCs in Japan*

Tomoki Sekiguchi†

Sachiko Yamao‡

Abstract
Using archival data published in 2003 and 2007, we investigated factors that influence
the change of nationality of the most senior executives in foreign affiliates of MNCs
operating in Japan. Our results show that as the length of operation in Japan increases, thelikelihood of a non-Japanese top executive in the affiliate being replaced by a Japanese top
executive, was higher than that of a Japanese top executive being replaced by a non-Japanese
top executive. We also found that when an affiliate had a Japanese top executive at time one,it was more likely that a non-Japanese executive replaced the person if the affiliate’s foreign
ownership ratio increased at time two. In addition, there were notable differences between
affiliates of Asian, North American and European MNCs in top executive staffing patterns ofJapanese affiliates. Implications from this study and future research directions are discussed
herein.

JEL Classification: F23, M12, M16
Keywords: MNC, foreign affiliate, top executive, Japan*

This research has been supported by the Grand-in-Aid for Scientific Research (No. 20530341), The
Ministry of Education, Culture, Sports, Science and Technology, Japan.
† Graduate School of Economics, Osaka University 1-7 Machikaneyama, Toyonaka, Osaka 560-0043
Japan.
Email: tomoki@econ.osaka-u.ac.jp‡ Department of Management and Marketing, University of Melbourne.

1INTRODUCTION
Top executives of the firm have substantial influences on corporate strategy, operationand performance. Theories of executive leadership and the upper echelon’s perspective bothsuggest that it is possible to predict top executives’ behavior and strategic decisions fromtheir demographic background (e.g., Hambrick & Mason, 1984; Ireland & Hitt, 1999).
Therefore, top executives’ demographic background is an important research theme.
This argument has been applied to the studies of foreign affiliates’ top executives ofthe multinational corporation (MNC). Their demographic characteristics, especiallynationality, are likely to have a great influence on determining the management style andoperational decisions of MNC affiliates (Gong, 2003b). From the human resource
management standpoint, the nationality of the top executive influences his/her decisionmaking about the characteristics of workforce who are recruited and retained in the affiliate.
Thus, the replacement of a top executive by another one with another nationality can causesignificant changes in the overall characteristics of the affiliate firm. More importantly, top
executives of foreign affiliates play a critical role not only at the local level but also for the
success of the entire MNC. This is because they are expected to contribute to MNC-wide
strategy by acquiring knowledge on local business opportunities and competitions as well as
by developing local resources and capabilities (Bartlett & Ghoshal, 1989).
However, the extant literature on executive staffing of foreign affiliates only provides
the snap shot at one point in time. Apart from few exceptions (e.g., Downes & Thomas, 2000)
the extant research has not investigated staffing pattern from a dynamic perspective. Hence,
the research on what triggers the change in staffing is currently missing from the literature. In
order to fill this gap, we investigate factors that influence MNCs’ executive staffing decisions
by studying changes of affiliate top executives’ demographic background.
Our study is unique, as we theorize and empirically test the dynamic process of the2

top executive change thus contributing to the field of international human resource
management (IHRM). This paper focuses on nationality as the demographic background of
top executives of MNC affiliates (subsidiaries and branch offices) operating in Japan. It also
compares MNC affiliates from different geographic regions—namely, North America, Europe
and Asia—and examines differences in terms of the executive staffing patterns and changesof top executives’ nationalities over two points in time.
This paper is organized as follows. First, we review the literature on the executive
staffing of MNC affiliates, identify the current state of the research stream, and identify the
research gap. Second, the Japanese business context is discussed and hypotheses of this study
are developed. Third, the results of empirical examinations of our data are reported. Finally,
implications for research and practices are discussed.
LITERATURE ON THE EXECUTIVE STAFFING OF MNC AFFILIATES
Researchers in the IHRM field have investigated the roles and determinants of MNCs
in sending expatriates to foreign affiliates. A seminal study by Edström and Galbraith (1977)
offers a theoretical framework that explains MNCs’ use of expatriate managers to: (1) fill
affiliate positions due to the difficulty of finding qualified local managers, (2) develop
capabilities of managers through international experience, and (3) develop affiliates in order
to be controlled by MNC headquarters.
The third aspect—sending expatriate managers as agents to control foreign
affiliates—has been explored in depth in recent years. It has been suggested, for instance, that
there are different types of control through expatriates, from direct and formal ones to more
informal ones by fostering socializations and informal communications (Harzing, 2001a).
Based on agency theory (Eisenhardt, 1989), researchers have demonstrated that cultural
distance (Gong, 2003a) and institutional distance (Gaur, Delios, & Singh, 2007) between aheadquarters and an affiliate are related to using expatriates as agents to control an affiliate.

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Other researchers examined the role of total capital investment and ownership ratio as
indicators of control from MNC headquarters. Consistent with this view, Widmier, Brouthers
and Beamish (2008) have found that total capital investment to subsidiaries is positively
related to the percentages of Japanese expatriates in the foreign affiliates. Likewise,
Bebenroth, Li and Sekiguchi (2008) have found that the higher ownership ratio is, the more
expatriates are assigned as top executives in Japanese affiliates of MNCs. Based on theknowledge-based view of the firm (Grant, 1996; Nickerson & Zenger, 2004), which perceives
firm knowledge as an important source of competitive advantage, researchers suggest that
expatriate managers play a critical role as knowledge agents between an affiliate and otherunits of an MNC (Hocking, Brown, & Harzing, 2007; Minbaeva, 2005).
While there are advantages in sending expatriates to foreign affiliates, there are also
compelling reasons for MNCs to consider hiring local executives instead. It is well known
that sending expatriates is extremely costly because MNCs have to pay various benefits to
expatriates (e.g., Dowling, Schuler, & Welch, 1994). On the other hand, local managers’
familiarity to the local market and business practices brings value to successful managementof foreign affiliates (Harzing, 2001b; Toh & DeNisi, 2005). In addition, local executives are
more effective in understanding local institutional rules and obtaining legitimacy, and havemore skills to manage local employees (Sekiguchi, Bebenroth, & Li, forthcoming). By
staffing a local manager as the top executive of an affiliate, there will be a positive signaling
effect for local employees at the middle or lower levels of the affiliate. The literature suggeststhat employees are generally more motivated when they recognize that there are opportunities
for them to be promoted to senior management levels (Daniels & Radebaugh, 1998; Gong,
2003a).
Reconciling the pros and cons of using expatriates or local managers is determined by
the MNC’s international strategy. One of the classic theoretical frameworks in this area is the4typology developed by Perlmutter (1969), in which affiliate staffing policies are identified inrelation to the MNC’s international strategy. He suggested that an MNC with ethnocentric
attitudes towards internationalization adopts a staffing policy where all top-level managerial
positions in both affiliates and headquarters are filled by people from the parent country of
the MNC. MNCs with polycentric attitudes, or MNCs that acknowledge the importance of
local business values and cultures, tend to employ host country nationals for managerial
positions in affiliates. MNCs that adopt geocentric attitudes, or emphasize collaboration
between headquarters and subsidiaries, tend to employ people of from all around the world.
The effect of MNC’s international strategy on executive staffing of affiliates has been
examined empirically. For example, using survey data collected from the affiliates ofJapanese MNCs operating in Korea, Ando, Rhee, and Park (2008) have found that the levelof global integration and the degree of centralization of decision-making are positively
related to assigning Japanese expatriates as executives of Korean affiliates. The size ofaffiliates, usually measured by the number of affiliate employees, is also related to MNCs’international strategy. Using their Irish data, Thompson and Keating (2004) have found thatprevalence of parent country nationals decreases as the affiliate becomes larger and that theprobability of having a parent country national as top executive is lower on average in larger
affiliates.
While most empirical studies give us just a snapshot of MNCs’ staffing policies of
their affiliates at one point in time, several studies imply that the accumulation of MNCs’
local experience over time, measured by the length of operation in host countries, may
influence their affiliate staffing policies. Using the data on subsidiaries of Japanese MNCs in
40 host countries, Widmier et al. (2008) have found that MNCs’ length of operation in hostcountries is negatively related to the expatriate staffing ratio. Likewise, Thompson and
Keating (2004) obtained partial support for the negative relationship between the length of5

operation in a host country (Ireland) and the use of expatriates. Ando et al. (2008) have foundthat the effects of the global integration and centralization of decision-making on sending
expatriates to fill affiliate executive positions became weaker as the affiliate’s length ofoperation increased. Gong (2003a) has also found that the effect of cultural distance on thetendency of MNCs to use expatriates in overseas affiliates became weaker over time.
Drawing from Franko's (1973) theory of the evolution of the MNC, Downes andThomas (2000) theorized the U-curve approach to overseas staffing. They have explained thatfirms will gradually increase expatriate population at their foreign affiliates in the initial stageof internationalization in order to expand their knowledge-base overseas. They have alsosuggested that the use of expatriation will diminish in the second stage as knowledge andexperience of host countries are gained and accumulated within the MNC. However in thethird and more mature stage of internationalization, they suggest that the expatriate
population will increase again. Their empirical data generally supported their propositions.
Although the above-mentioned studies incorporated the idea of change over time intheir studies, they are based on cross-sectional data. To our knowledge, there is hardly any
study that has investigated dynamic, changing process of affiliate top executive staffing in
relation to MNCs’ strategic components such as size, capital investment, or ownership ratioof the affiliate. Therefore, we endeavor to address the effect of dynamic change process byusing longitudinal data.
THE CURRENT STUDY
To address the research gap in the area of executive staffing of MNC affiliates thisstudy focuses on the change of top executive nationality over time in Japanese affiliates of
MNCs. By focusing on the Japanese context, the current study also addresses another gap in
the literature—that is, the scarcity of studies that examine MNCs from multiple regions. To
date, many researchers have studied Japanese MNCs’ affiliate executive staffing (e.g., Ando6

et al., 2008; Belderbos & Heijltjes, 2005; Delios & Björkman, 2000; Gong, 2003a; Widmieret al., 2008). However, there are few studies that examine MNCs from various different
countries-of-origin (for exceptions see Bebenroth et al., 2008; Harzing, 2001b). Our study is
unique in the sense that it explores MNCs from diverse countries-of-origin operating in one
host country (i.e., Japan). By selecting a particular host country, we are able to incorporate
several local contexts, as described below, into our hypothesis and subsequent analyses.
First, affiliates of foreign MNCs operating in Japan are called gaishikei in Japanese,
meaning “foreign affiliated”. They tend to be perceived by business people and job seekers asa single cluster of firms that have distinctive characteristics compared to those of
conventional Japanese firms. This is because conventional Japanese firms are relatively
homogeneous in terms of management style, including employment policies. The
homogeneity in management style derives from the country’s population structure andlanguage used in business, education, and daily life. The Japanese population’s ethnic
background remains very homogeneous compared to many other Asian and Western countries(e.g., Oyserman, Coon, & Kemmelmeier, 2002). Of the total population, 98.4% are Japanese
who speak Japanese as their first language (Immigration Bureau of Japan, 2006). Almost all
firms in Japan, including MNC affiliates, use Japanese language in daily business. It is veryrare for Japanese people to use English on a daily basis unless they are in job positions that
require interactions with overseas.
Second, the homogeneity and collectivistic nature of the Japanese society is
considered a reason behind the development of strong institutional environment in businessand employment practices, which most of the firms, including MNC affiliates follow (e.g.,
Robinson, 2003). For example, it is often pointed out that a large proportion of Japanesehuman resource practices, such as long-term employment, seniority-based wage andpromotion, and enterprise unionism (OECD, 1973; Sano, 1995; Sekiguchi, 2006) are7

embedded in the unique characteristics of the Japanese context.
With these contexts in mind, we expect that the nationality of a top executive of an
MNC affiliate would have a great impact on strategic decision-making, management styles,
operational procedures and workplace climate of the affiliate in Japan. For example, if the top
executive is Japanese, the Japanese affiliate may have more autonomy, more Japanese style
management, and more Japanese atmosphere and climate. If the top executive is nonJapanese on the other hand, the affiliate may be controlled much more by the MNC parent
and, thus, has a management style, atmosphere, and climate that are more similar to those of
the parent.
We also anticipate that there are significant differences in executive staffing patterns
and factors that cause nationality changes of top executives at Japanese affiliates according todifferent countries-of-origin of the MNC. There are about 3300 MNC affiliates in Japan(Toyo Keizai Shimposha, 2007). Of these, about 48% of MNCs are North American, 40% are
European, 10% are Asian, and the rest are from other regions. While North American andEuropean countries are culturally closer to each other, they are culturally more distant from
Asian countries (Hofstede, 2001). Geographic distances from these regions to Japan also
differ considerably. The cultural distance and/or physical distance between countries-oforigin and the host country (i.e., Japan) may result in different executive staffing patterns(e.g., Gong, 2003a). Moreover, Asian MNCs are relatively new to internationalizationcompared to the North American and European counterparts (Mathews, 2006). This may also
result in different executive staffing patterns.
Based on these theoretical and contextual discussions, we will develop our hypothesisin the next section.

8

HYPOTHESIS DEVELOPMENTThe Direct Influence of the Length of Operation
We predict that an affiliate’s length of operation in Japan has a direct influence on thechange of nationality of the affiliate’s top executive over time. This is because, if a Japaneseaffiliate of an MNC has a non-Japanese top executive, the pressure to replace the executive
with a Japanese will increase over time as the affiliate matures. As the length of operation in
Japan increases and the MNC’s experience in Japan accumulates, the importance of
expatriates in filling the top executive position at the Japanese affiliate as a control agent of
the MNC parent will likely decrease. The headquarter-affiliate relationship will bestrengthened over time, and for example, knowledge exchange between the affiliate and therest of the MNC will become smoother and more effective over time. This will enable aJapanese executive to replace the role of expatriate executive.
In addition, Japanese executives likely have better skills to manage local employees
than non-Japanese ones and are more likely to receive local legitimacy (Gong, 2006).
Institutional theory suggests that organizations seek to obtain legitimacy and respect fromstakeholders by following institutional rules, and failing to obtain legitimacy will decrease
the chance of organizational survival (e.g., Meyer & Rowan, 1977; Scott, 1995). Expatriate
top executives are less experienced than local ones in host countries, indicating that they areless effective in understanding local institutional rules and obtaining legitimacy. Furthermore,as their experience in Japan is accumulated, affiliates will have a better knowledge about theJapanese labor market, which increases the probability of finding talented Japanese managers
for their top executive positions.
This prediction is consistent with extant literature that has theorized and tested
negative association between the length of operation in local countries and the use of
expatriates by cross sectional data (e.g., Thompson & Keating, 2004).

9

In contrast, the length of operation may not have much influence on MNC affiliateswith Japanese top executives to replace them with non-Japanese ones. This is because such
affiliate firms might have already replaced non-Japanese top executives with Japanese ones in
the past. In this case, affiliates will continue to employ Japanese top executives in order tomanage the firm effectively. Downes and Thomas’ (2000) U-curve model suggests that somefirms may replace Japanese top executives with non-Japanese ones as the internationalization
stage proceeds further and affiliate firms become more mature. Yet, it is less likely forJapanese affiliates because not many MNC affiliates are likely to have reached the later orfinal stage of the internationalization process.
We extend the discussion regarding the effect of operation lengths on foreign affiliate
executive staffing by focusing on the change of executive nationality of affiliate firms basedon a set of longitudinal data. Thus, we hypothesize:
Hypothesis 1: As the length of operation in Japan increases, the likelihood that a
non-Japanese top executive of the affiliate be replaced by a Japanese one will
become greater than the likelihood that a Japanese top executive be replaced by a
non-Japanese one.
Motivation to Replace a Non-Japanese Top Executive with a Japanese One
When MNCs currently have non-Japanese top executives to manage their Japaneseaffiliates, such MNCs would be motivated to replace affiliate top executives with Japanese
ones. Other than the simple effect of the length of local operation as predicted in the previous
hypothesis, we posit that there are two major factors that motivate MNCs to replace nonJapanese executives with Japanese ones. The first factor is expansion of the local operationand the second one is increase of the level of affiliates’ autonomy.
MNCs will expand local operation when headquarters want to explore the possibilityof local business expansion. For instance, MNCs may expand their local sales operation in acountry with a large market. The Japanese market has been an attractive one for many MNCs
because the Japanese economy has been the second largest in the world for the most part of10

the last 30 years. Hence, MNC headquarters may regard its Japanese affiliate as a strategic
asset source for the entire MNC. Another example of expansion of local operation occurs
when MNCs transfer their product development function to host countries in order to takeadvantage of the local research and development (R&D) capabilities (Cantwell & Mudambi,
2005; Nobel & Birkinshaw, 1998). Japan’s total R&D expenditure (calculated on purchasing
power parity basis) maintains the second largest in the world (MEXT, 2009). In addition, theR&D expenditure in the country’s gross domestic products (GDP) has been the world’s
highest from 1990 to 2004 (MEXT, 2006). Hence, MNCs may decide to take advantage ofthe local R&D capability by placing R&D functions in Japanese affiliates.
In these scenarios, Japanese affiliates will likely increase the number of employees,
usually through hiring more local people who are knowledgeable about the local market andlocal business practices. Intertwined with the expansion of host country operations, MNCs
may also invite more local shareholders to invest in the affiliate so as to gain local financial
resources in enhancing local operations. This may be especially so when MNCs lack financial
resources to increase capital investment of the local operation.
MNCs will grant foreign affiliates greater autonomy when they adopt multidomestic
strategy. This occurs when MNCs try to achieve maximum local responsiveness bycustomizing both their product offering and marketing strategy to match different national
conditions (Bartlett & Ghoshal, 1989). For example, headquarters may perceive the affiliate
location strategically important as a unique market, thus having location-specific advantages
by increasing local responsiveness. Another possibility where the affiliates will obtain higher
autonomy is associated with the process of subsidiary-driven charter extension (SDE)(Birkinshaw & Hood, 1998). SDE is the process in which foreign affiliates are successful inconvincing their parent firms to allow them more autonomy as well as more resources.
However this process is not always desirable for headquarters as it relates to lowered control

11

over a subsidiary. Another explanation for the increase of affiliate autonomy is that it isassociated with headquarters’ preparation for the withdrawal or exit from local operation.
MNCs may consider exiting from the local operation because headquarters may no longer
consider that particular local market as a strategically important location, even if local
business itself is still in a good condition. Yet another explanation is that local shareholders
or business partners are eager to take over affiliates’ operations.
In these scenarios, the advantage of hiring Japanese top executives instead of nonJapanese executives will become higher. When the number of Japanese employees increases
in a Japanese affiliate, for example, the top executive of the affiliate needs to be able tomanage Japanese employees effectively. In addition, the affiliate’s top executive needs to beknowledgeable about the Japanese context in order to be responsive to local business
opportunities in both cases of business expansion and increase of autonomy. Furthermore, theaffiliate may be motivated to introduce more local mood and atmosphere in the workplace as
to attract more attention of local shareholders and also to attract local employees. Top
executives play an important role in creating such mood and atmosphere (e.g., Walter &Bruch, 2008).
Based on these discussions, we predict that an increase in number of employees and adecrease in foreign ownership ratio will associate with the replacement of non-Japanese top
executives with Japanese ones. Thus, we hypothesize:
Hypothesis 2a: A non-Japanese top executive will be more likely to be replaced by aJapanese one if there is an increase in the number of employees.
Hypothesis 2b: A non-Japanese top executive will be more likely to be replaced by aJapanese one if there is a decrease in the foreign ownership ratio.
Motivation to Replace a Japanese Top Executive with a Non-Japanese One
There are at least two factors that motivate MNCs to replace Japanese top executives
with non-Japanese. The first factor is the tightening of the control over an affiliate by a12

headquarters; and the second factor is the reduction of the service for Japanese customers.
One possible scenario for MNCs increasing the control of foreign affiliates is the
adoption of global integration strategy in which MNCs centralize and standardize business
operations at the headquarter level (Bartlett & Ghoshal, 1989). In global integration strategy,
MNC headquarters aim to transfer standardized know-how, operational routines and otherresources to promote integration. More coordination and control will become necessary inthese processes. To achieve this, MNC headquarters will likely tighten control over its
Japanese affiliate. The headquarters may gain a higher level of control by increasing its
ownership ratio. Affiliates’ foreign ownership ratios will be increased through additional
capital investment by headquarters or headquarters’ purchase of stocks from local
shareholders.
Another possible scenario for MNCs to increase the control of foreign affiliates is toimprove the business performance of affiliates that have not been operating profitably.
Headquarters may become skeptical about the competence of Japanese top executives ofaffiliates with low performance and, hence, may no longer trust them for managing affiliates.
An increase in the level of control may also be accompanied by an increase of headquarters’
ownership ratio of the affiliate, resulting in the reduction of Japanese ownership ratio.
Yet another possible scenario is when MNCs decide to change roles of foreign
affiliates to reduce the level of services for local customers. Instead of locating a large
subsidiary, the MNC headquarters may prefer to place a small branch office with the simple
role of sending local information to the headquarters. Such a branch may exist solely for
MNC parent country nationals to visit Japan to conduct business meetings; they do notprovide service to Japanese customers. If MNC headquarters want to change the role ofJapanese affiliates from serving Japanese customers to more like small branch office, there
will inevitably be a reduction of employment at the Japanese affiliate.

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In these scenarios, accompanied by the increase of foreign ownership ratio and/or thedecrease of the number of employees, advantages of having non-Japanese top executives
instead of Japanese ones will increase. For example, non-Japanese top executives sent from
MNCs’ home countries would be more effective for maintaining close communication ties
with headquarters that facilitate coordination and control (Gaur et al., 2007; Gong, 2003a;
Hocking et al., 2007). In short, in these circumstances, the top executive of the affiliate is
likely be replaced by non-Japanese who will act as an agent on behalf of the headquarters. In
addition, non-Japanese top executives are more preferable in the case of serving foreignbusiness partners and parent country nationals, who travel from home countries, with theabsence of serving Japanese customers or Japanese business partners.
Based on these discussions, we hypothesize:
Hypothesis 3a: A Japanese top executive will be more likely to be replaced by a nonJapanese one if there is a decrease in the number of employees.
Hypothesis 3b: A Japanese top executive will be more likely to be replaced by a nonJapanese one if there is an increase in the foreign ownership ratio.
Comparison between North American, European and Asian MNCs
As discussed earlier, we anticipate significant differences in executive staffing
patterns depending on MNCs’ countries-of-origin. Factors that cause nationality changes ofaffiliates’ top executives are also likely depend on the countries-of-origin.
We posit that MNCs from North America and Europe, or ‘Western’ MNCs, are moresimilar to each other rather than different from each other in terms of executive staffing. We
also expect that MNCs from Asian countries are significantly different from their North
American and European counterparts in executive staffing of foreign affiliates. Specifically,
we predict that Asian MNCs rely more on non-Japanese top executives, and on parent
country nationals in particular, than North American and European counterparts. Furthermore,
we predict that Asian MNCs are less likely to replace their non-Japanese top executives with

14

Japanese ones compared to North American and European counterparts.
There are at least two good reasons to predict in this way. First, Asian MNCs are often
considered late- and new-comers in the global economy (Mathews, 2006). As a result ofaccelerated internationalization, the degree of globalization, or “having a broad and deep
penetration of foreign markets across the world” (Rugman & Verbeke, 2004: 3), of Asian
MNCs tend to be lower than those of North American and European counterparts from moreindustrialized nations (Mathews, 2006). Thus, Asian MNCs are likely to have ethnocentric
policies towards affiliate staffing, resulting in a heavy reliance on parent country nationals tomanage foreign affiliates (Perlmutter, 1969).
Second, the geographic distance between Japan and countries in which MNCs areheadquartered is another factor for our prediction. Headquarters of Asian MNCs are locatedgeographically closer to Japan than those of North American and European counterparts. Thismeans travel cost and time to and from Japan is relatively small for Asian MNCs. Therefore,
it is easier and less costly for Asian MNCs to send their parent country nationals to Japan as
top executives. Due to the geographical proximity and the cultural proximity between Asian
countries and Japan, it would be easier for Asian MNCs than North American and European
counterparts to assign parent country nationals to lead the Japanese affiliates. In addition, it
would be easier for Asian MNCs than for North American and European counterparts torecruit their home country nationals who are foreign residents living in Japan. In fact, Korean
and Chinese account for over 50% of foreign resident aliens (Immigration Bureau, Japan,2006). It may also possible to find many other Asian people currently living in Japan. MNC
affiliates in Japan may find these people attractive in filling in their top executive positions
because they know both about their home countries and Japan very well. Therefore, theaffiliates may seek to select foreign residents in Japan as top executives.
From these reasons, we would argue that Asian MNCs tend to have non-Japanese top

15

executives to manage their Japanese affiliates. Thus, we hypothesize:
Hypothesis 4: Asian MNCs will rely more on non-Japanese top executives and areless likely to replace them with Japanese executives compared to North Americanand European counterparts.
METHOD
SampleWe obtained data from the electronic versions of Gaishikei-kigyo Soran (or Directoryof Foreign-affiliated Corporations in Japan), published in 2003 and 2007 (Toyo Keizai
Shimposha, 2003; 2007). We identified 3,244 Japan-based MNC affiliates that were listed inboth 2003 and 2007 directories. Industries of the affiliates include wholesale (23.6%),
telecommunication (11.6%), retail and service (10.7%), finance and insurance (9.4%), steel
and metal (8.7%), medical and chemistry (7.5%), electronics (7.3%), machinery (6.7%),
automobile (4.4%) and others (10.1%). MNCs in our sample are from 50 different parent
countries, which include USA (46.7%), Germany (10.4%), UK (7.5%), France (7.1%),
Switzerland (5.3%), South Korea (2.6%), Netherlands (2.3%), Hong Kong (2.1%), Italy(1.8%), Sweden (1.8%), China (1.7%), Canada (1.4%), Taiwan (1.4%) and others (7.9%).
The average number of people employed by the affiliate was 226 in 2003 and 256 in 2007.
The affiliate’s average foreign ownership ratio was 82.0% in 2003 and 86.5% in 2007. The
affiliate’s average capital was 2.24 billion yen in 2003 and 2.56 billion yen in 2007. The
affiliate’s average length of operation in Japan was 22 years as of 2003.
Measures
The nationality of the top executive of each affiliate was determined by examining thename of the executive. The authors independently examined the nationality of the executives
and the results were matched later. The inter-rater agreement was 99%. The authors thendiscussed the conflicting judgments and reached the final consensus. Due to the relative easein differentiating Japanese names from those of other cultures, previous studies that utilized

16

the same method also yielded a high level of reliability that is similar to the current study (e.g.
97% to 100% inter-rater agreement) (Gong, 2003a; Harzing, 2001b). The nationality wasdummy-coded with 1 for non-Japanese and 0 for Japanese.
The change of nationality of the top executive (dependent variable) was identified
whether a Japanese top executive in 2003 was replaced by a non-Japanese one in 2007, or a
non-Japanese top executive in 2003 was replaced by a Japanese one in 2007. The change in
the number of employees for each affiliate (independent variable) was computed bysubtracting the number of employees in 2003 from that in 2007, which was then divided by
the number of employees in 2003. The change of ownership ratio (independent variable) for
each affiliate was computed by subtracting the ratio in 2003 from that in 2007.
Control Variables
Control variables in this study include industry, the number of years of the Japanese
operation, the amount of capital invested in the affiliate, the number of employees, foreign
ownership ratio, and regions where MNCs are headquartered. To control for the industry
effect, 10 dummy variables were created representing different industries. To control for thecountry-of-origin of MNCs, we created three dummy variables representing North American,
European, and Asian regions.
RESULTS
Means, standard deviations and correlations of key variables under study arepresented in Table 1.
-----------------------------Insert Table 1 about here-----------------------------Table 2 presents the cross tabulation and transitional matrix of nationalities of top
executives in 2003 and 2007 for the complete sample. Table 3 presents cross tabulations andtransitional matrices of regional samples based on the MNCs’ countries-of-origin (i.e., North17

America, Europe, and Asia). The rows of the cross tabulation show whether a top executiveof an affiliate was Japanese or non-Japanese in 2003 and the columns show whether an
executive was Japanese or non-Japanese in 2007. The transitional matrix shows the
proportion of Japanese and non-Japanese top executives in 2007 for each category in 2003. Inother words, it illustrates how much proportion of executives’ nationality changed orremained the same between 2003 and 2007.
------------------------------------Insert Table 2 and 3 about here------------------------------------The cross tabulation in Table 2 indicates that a majority of the Japanese affiliates(56.1%) had Japanese top executives in both 2003 and 2007. About 26.5 percent of affiliates
had non-Japanese executives in both 2003 and 2007. About 20 percent of the affiliates
replaced Japanese executives by non-Japanese ones or vice versa. Hypothesis 1 predicted thata non-Japanese top executive in an affiliate at time one would be more likely to be replaced
by a Japanese one at time two than a Japanese top executive is replaced by a non-Japanese
one. The transitional matrix in Table 2 indicates that the proportion of non-Japanese
executives in 2003 being replaced by Japanese ones is higher (.22) than that of Japanese
executives being replaced by non-Japanese ones (.15). According to the result of Chi-square
test, the difference between the proportions was statistically significant (χ2 = 21.65, p < .01).
Thus, Hypothesis 1 was supported.
We conducted further analysis using the regional samples (i.e., North American,
European and Asian samples) and made some interesting findings. First, the majority of the
Asian MNCs (66.0%) have non-Japanese top executives in both 2003 and 2007 as shown incross tabulations in Table 3. This is in sharp contrasts to the North American and European
samples. According to the Chi-square test results, the North American sample clearly support
Hypothesis 1 (χ2= 48.47, p < .01) and European samples provides marginal support for18

Hypothesis 1 (χ2 = 2.64, p < .10). However, the Asian sample does not support Hypothesis 1.
The results show that Asian MNCs of our sample hardly replaced their non-Japanese top
executives with Japanese ones, which renders support for Hypothesis 4.
A series of logistic regression analyses were conducted in order to test our Hypotheses
2 and 3 because dependent variables for these hypotheses are dichotomous (i.e., Japanese or
non-Japanese). We split the complete sample into two groups. One group consists only of theaffiliates that had non-Japanese top executives in 2003. Another group consists only of theaffiliates that had Japanese top executives in 2003. Table 4 presents the results of logistic
regression analysis of the complete dataset. Control variables only were included in Models 1
and 3 as the first step. Independent variables were added in Model 2 and 4 as the second step.
-----------------------------Insert Table 4 about here-----------------------------Models 1 and 2 in Table 4 represent the results for the group that had non-Japanese
executives in 2003 as to test Hypothesis 2. Hypothesis 2 predicted that a non-Japanese top
executive is more likely to be replaced by a Japanese one (a) if there is an increase in thenumber of employees and/or (b) if there is a decrease in foreign ownership ratio. Model 2
shows that regression coefficients of neither (a) the change in number of employees nor (b)that in ownership ratio were significant. Thus, both Hypothesis 2a and 2b were not supported.
Models 3 and 4 in Table 4 present the results for the group that had Japanese
executives in 2003. Hypothesis 3 predicted that a Japanese top executive is more likely to be
replaced by a non-Japanese one (a) if there is a decrease in the number of affiliate employees
and/or (b) if there is an increase in foreign ownership ratio. Model 2 shows that thecoefficient for change in number of employees was not statistically significant. Thus,
Hypothesis 3a was not supported. Model 4 shows that the regression coefficient for change inownership ratio was positive and significant (p < .01), supporting H3b.

19

We conducted further analysis using the regional samples based on MNCs’ countriesof-origin (i.e., North America, Europe and Asia). We conducted logistic regression analyses
following exactly the same procedures utilized in the complete dataset. Each regional sample
was divided into two groups, with one group consisting of affiliates that had non-Japanese
executives in 2003 and another one consisting of affiliates that had Japanese executives in
2003.
Table 5 shows the results of logistic regression analyses using the North American
sample. For this sample, the results were similar to those of the complete sample. Model 2 inTable 5 indicates that regression coefficients of neither (a) the change in number of
employees nor (b) that in ownership ratio were significant. Thus, both Hypothesis 2a and 2b
were not supported. Likewise, the regression coefficient for change in number of employees
was not statistically significant in Model 4 in Table 5. Hence, the results did not support
Hypothesis H3a. Yet, the regression coefficient for change in ownership ratio was significant(p < .05) in Model 4. Thus, similar to the result from the complete dataset, results from theNorth American sample provided support for Hypothesis 3b.
-----------------------------Insert Table 5 about here-----------------------------Table 6 presents the results of logistic regression analyses of the European sample.
Model 2 in Table 6 presents that the regression coefficient for the change in number of
employees was not statistically significant. Hence, Hypothesis 2a was also not supported inthis sample. However, the regression coefficient for the change in ownership ratio was
statistically significant (p < .05). Thus, Hypothesis 2b was supported. Model 4 in Table 6
indicates that the regression coefficient for the change in number of employees was notstatistically significant. Hence, Hypothesis 3a was not supported. Yet, the regression
coefficient for the change in ownership ratio was statistically significant (p < .01), supporting20

Hypothesis H3b.
-----------------------------Insert Table 6 about here-----------------------------Table 7 presents the Asian sample. There was hardly any statistical significance foundin all models tested utilizing this sample. There was only one regression coefficient (thecoefficient for change in number of employees found in Model 4 of Table 7) that was
statistically significant. Yet, it was significant only at a marginal level (p < .10). Hence, H2a,
H2b, H3a, and H3b were not supported in the Asian sample.
-----------------------------Insert Table 7 about here-----------------------------Post Hoc Analysis
Our data did not to support Hypotheses 2a and 3a in which we tested the change in thenumber of affiliate employees relating to the nationality change of the top executive.
However, it was suspected that the number of affiliate employee (i.e. affiliate size) at timeone (2003) could interact with the change in the number of employees (between 2003 and2007), in predicting the top executive nationality change. This is because, for example, theeffect on top management staffing might be different between the case of small affiliates
becoming larger (or smaller) and the case of large affiliates becoming larger (or smaller).
Therefore, as a post-hoc analysis, we included the interaction terms (i.e., number of
employees in 2003 x change in the number of employees between 2003 and 2007) into thelogistic regressions. Results indicate that, for the complete sample, interaction between thenumber of employees in 2003 and the change in the number of employee was negatively andmarginally significant (p < .10) for the change of nationality from non-Japanese to Japanese
top executives. Although the result was marginal, the result may be indicating that, a nonJapanese top executive is more likely to be replaced by a Japanese top executive, if a21

relatively small MNC affiliate increases the number of employees over time.
DISCUSSION
The purpose of this study was to investigate the factors that influence the nationalitychange of top executives of the Japanese affiliate firms of MNCs. We also investigateddifferences between Japanese affiliates of North American, European, and Asian MNCs in
executive staffing patterns and the change of the top executive nationality.
Results of our analysis revealed that, in general, as the length of operation in Japan
increased, the likelihood of a non-Japanese top executive in the affiliate being replaced by aJapanese top executive was higher than a Japanese top executive being replaced by a nonJapanese top executive. This finding confirms the view that the importance of expatriate
executives’ role as headquarters’ control agent diminishes over time as a foreign affiliate
matures (Thompson & Keating, 2004). Unlike other studies that examine the role ofexpatriate executives as headquarters’ agents using cross-sectional data, our study issignificant as we confirmed the view by examining changes of affiliate top executives’
nationality by utilizing longitudinal data.
We also found that the change in affiliates’ foreign ownership ratios was significantly
related to the replacement of Japanese top executives with non-Japanese ones. For Japaneseaffiliates of European MNCs, the change in foreign ownership ratio was also related to thereplacement of non-Japanese top executives by Japanese ones. These findings indicate thatthe change in ownership ratio is a strong predictor of top executive nationality change inJapanese affiliates of MNCs. This finding confirms the view that the change of foreign
ownership ratio reflects change in MNCs’ foreign operation strategy which will intern bereflected in international staffing practice of affiliates’ top executives. Again, we emphasizethat our contribution in this area is that we examined changes in MNCs’ international staffing
over time.

22Another contribution of our study is that it shed light on differences between affiliates
of MNCs from North America, Europe, and Asia and found that there are notable differencesin staffing practices of their Japanese affiliates. First, the Japanese affiliates of European
MNCs seem more sensitive to the change of ownership ratio in predicting the top executive
nationality change compared to those of American MNCs. Second, the affiliates of Asian
MNCs are relatively unique in comparison to those of North American and European MNCs
with regard to executive staffing patterns and the change of top executive nationality overtime. That is, the affiliates of Asian MNCs heavily rely on non-Japanese people to fill top
executive positions of their Japanese affiliates. In addition, non-Japanese executives are
hardly replaced by Japanese ones in these affiliates.
These findings are important because they seem to be reflecting different strategies of
MNCs with different countries-of-origin. Our results on European MNCs indicate that their
top executive staffing practices are consistent with levels of their financial control overJapanese affiliates. These findings are consistent with previous observations that European
MNCs are more likely to delegate autonomy to foreign affiliates (i.e. multidomestic strategy)(e.g., Bartlett & Ghoshal, 1989). However, we did not find evidence of North American
MNCs delegating autonomy to Japanese affiliates by replacing non-Japanese top executives
with Japanese ones. As for Asian MNCs, they tend to favor having non-Japanese top
executives (mostly parent country nationals) leading their Japanese affiliates. This clearly
indicates an ethnocentric staffing policy (Perlmutter, 1969) and shows a somewhat similar
trend to Japanese MNCs. These differences are worthy of further investigation. We havecontributed in this arena by utilizing unique data sets that incorporate data of Asian MNCs.
Our data did not support statistical associations between the size of Japanese affiliates(measured by the number of employees) and changes in nationality of affiliate top executives.
A possible reason for this result is that the standard deviation of the change of the number of23

employees was very small (only 22) relative to that of the number of employees itself (1103
in 2003). These statistics indicate that the size of the Japanese affiliates of MNCs did notchange much in between 2003 and 2007. This stability in the number of employees ofJapanese affiliates may have affected our results. Nonetheless, our results marginallyindicated that non-Japanese top executives are more likely to be replaced by a Japanese one if
a relatively small affiliate increases the number of employees over time. This finding may be
indicating that changes of MNCs’ foreign operations are more likely to take place when asmaller rather than larger affiliate increases the number of employees.
Implications for Research
The results of our study have implications for research in IHRM. This study has taken
the first step toward better understanding the change in nationality of top executives of
MNCs affiliates. Using data from two different points of time, our study captured the changes
in a dynamic way. Extant studies on executive staffing of MNC foreign affiliates did not pay
enough attention to this dynamic process of top executive staffing as they were based oncross sectional data. Using longitudinal data, we have demonstrated the association between
the increase/decrease of ownership ratio and the change of top executive nationality inaffiliate firms.
This line of research is important because the change in nationality of affiliates’ top
executives will have significant impact on the management of the affiliates, especially incountries like Japan where workforce is very homogeneous. In such a homogenous context
like Japan, sending a top executive from an MNC’s parent country will have a significant
signaling effect of the imposition of management styles and workplace culture that are very
different from the host country. In particular, replacing an expatriate top executive with a hostcountry national one would be a totally different signal because it means that there will be thereturn of the management styles and workplace culture back to the more local ones. We

24

would therefore suggest that it is very important to continue this line of research because it
could help uncover a new understanding of executive staffing patters of foreign MNC
affiliates.
Limitations
Like any other research, this study is not without limitations. First, although our
methodology using longitudinal data was able to capture the dynamic change process of key
variables, we did not test causal relationships precisely. Hence, future research should
consider using more rigorous methodology to establish the causal link between the key
constructs related to this research topic.
Second, one could argue that the comparison between American, European, and Asian
MNCs is too coarse. Results of our study indicate that the affiliates of MNCs from North
America and Europe are more similar to, than different from, each other in executive staffing
and replacing patterns. Still, it is possible that there are significant differences between these
two regions and within each region. Europe has many counties with different cultures andhistories, MNCs in Europe may be more diverse than those in North America. Thus, there
could be more variety in European MNCs in executive staffing practices for their foreign
affiliates than those in North America.
Future Research Directions
There are issues on this research topic that could be investigated further in the future.
First, future research could investigate other variables than those examined in this study thatwill influence the change of nationality in top executives of MNC affiliates. For example, thechange of organizational structure of entire MNCs and the change of management
development policies might be good candidates to be explored in the future.
Second, although this study focused on the nationality of the most senior executive in
MNC affiliates, because that person is considered to be the most influential in operations of25

the affiliate, future research should include other top executives in analysis and examine thecharacteristics of top management teams (TMT) as a whole. The change of the TMT
characteristics is more complex than the single executive such that it includes the change inthe degree of diversity (e.g., proportion of non-Japanese executives within TMT) and thechange of the distribution of power within TMT. Therefore, there are possibilities to gain
more insights by focusing on the characteristics of TMT as well as the most senior executive.
Third, while our study focused on the predictors of the top executive nationalitychange, future research could explore the outcomes of the change. Several studies haveinvestigated the relationship between top management nationality of MNC affiliates andaffiliate performance (Gaur et al., 2007; Gong, 2003a; Sekiguchi et al., forthcoming).
However, there is very little research that went one step further and examined the mechanism
between top management nationality and the performance of MNC affiliates. Future research
could deal with the effects of the top executive nationality change in relation to employee
attitudes and behaviors, and subsequent performance and productivity of the affiliate. In order
to investigate these inquiries, researchers may need to combine survey data and archival datasuch as the ones that were used in this study.
Finally, the comparison of the MNC affiliates from different countries or regions inexecutive staffing patterns should be investigated further. In particular, there are very limited
number of studies that examine the characteristics of Asian MNCs. While many Japanese
MNCs are studied in regards to foreign affiliate staffing, there are yet to be similar studies forother Asian MNCs. While Japan shares many similarities with other countries, especially East
Asian countries like China and Korea, there are also significant differences too. Therefore, it
is worthwhile asking whether Asian MNCs are similar to Japanese MNCs in foreign affiliate
executives staffing patters. Thus, future research could focus on the similarities anddifferences in affiliate top executive staffing between Asian and Japanese MNCs.

26

In conclusion, the research on executive staffing patterns of foreign MNC affiliates isstill in its early stage and future research on this topic would significantly advance the field ofinternational human resource management.

27

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30

Table 1. Descriptive Statistics and Correlations
Variable
Mean S. D.
1
1. Years of operation
22.4 14.8
2. Capital
2,242 16,086 .15 **3. Number of employees in 2003
226 1,103 .21 **4. Number of employees in 2007
255 1,171 .20 **5. Ownership ratio in 2003
82.0 25.8 -.13 **6. Ownership ratio in 2007
86.5 23.2 -.13 **7. Top executive nationality in 2003
0.3
0.5 -.01
8. Top executive nationality in 2007
0.4
0.5 -.01
9. Change in number of employees
0.8 21.8 .01
10. Change in ownership ratio
1.4
9.9 .02

2

3

4

5

6

.77 **.80 **-.08 **-.07 **
.04 *
.04
.03
.00

.97 **-.12 **-.10 **
.01
.02
-.01
.03

-.11 **-.10 **.02.02.09 **.03.91 **.28 **.23 **-.03-.25 **.23 **.24 **-.02.17 **

N = 3,226; *p < .05; ** p < .01

31

7

8

9

.62 **
-.02
-.04

-.01
.02

.01

Table 2. Cross Tabulation and Transitional Matrix of Top Executive
Nationality in 2003 and 2007 (Complete Sample)
Cross Tabulation

Transitional Matrix

2007
2003
Japanese
Non-JapaneseJapanese
1,294 (56.1%)
177 (7.7%)

Non-Japanese223 (9.7%)
612 (26.5%)

2003
Japanese
Non-Japanese32

Japanese
.85
.22

2007
Non-Japanese.15.78

Table 3. Cross Tabulation and Transitional Matrix of Regional Samples
Cross Tabulation

Transitional Matrix

North American MNCs
2003
Japanese
Non-JapaneseNorth American MNCs

2007
Japanese
Non-Japanese
728 (65.9%)
106 (9.6%)
84 (7.6%)
186 (16.8%)

2003
Japanese
Non-JapaneseEuropean MNCs
2003
Japanese
Non-Japanese

2007
Non-Japanese.13.69Japanese
.82
.22

2007
Non-Japanese.18.78European MNCs
2007
Japanese
Non-Japanese
488 (51.0%)
105 (11.0%)80 (8.4%)
284 (29.7%)

2003
Japanese
Non-JapaneseAsian MNCs

Asian MNCs
2007

2003
Japanese
Non-JapaneseJapanese.87.31Japanese49 (24.9%)9 (4.6%)

Non-Japanese
9 (4.6%)130 (66.0%)

2003
Japanese
Non-Japanese

33

2007
Japanese
Non-Japanese
.84
.16
.06
.94

Table 4. Results of Logistic Regression Analysis (Complete Sample)
Variable
Step 1
Industry dummies
Years of operation
Capital
Number of employees in 2003
Ownership ratio in 2003
North American MNCs
European MNCs
Asian MNCs

Non-Japanese executive in 2003
Model 1Model 2
.003
.000
.000
.003
-1.330
-.705
-.779

.004
.000
.000
.004
-1.364-.730.783

Step 2
Change in number of employees
Change in ownership ratio
Model Chi square
Cox & Snell R2
R2

Japanese Executive in 2003
Model 3Model 4-.005
.000.000 *.019 **
.590
1.125
.896

.111
.008
52.076 **
.085
.130

54.133 **
.089
.135

.000
.043 **
55.293 **
.042
.076

N = 583 for Models 1 and 2. N = 1,283 for Models 3 and 4; *p < .05; ** p < .01
Due to space considerations, coefficients for industry dummy variables are not reported but are available from the authors.

34

-.006
.000
.000 *.028 **
.573
1.110
1.002

81.498 **
.062
.111

Table 5. Results of Logistic Regression Analysis (North American Sample)

Variable
Step 1
Industry dummies
Years of operation
Capital
Number of employees in 2003
Ownership ratio in 2003

Non-Japanese executive in 2003
Model 1Model 2
.006
.000
-.001
-.006

.008
.000
-.001
-.017

Step 2
Change in number of employees
Change in ownership ratio
Model Chi square
Cox & Snell R2
R2

Japanese Executive in 2003
Model 3Model 4
.001
.000
.000
.020 **.081-.027
23.265 **
.114
.157

25.638 +
.124
.172

-.003
.030 *
28.895 *.041.080

N = 193 for Models 1 and 2. N = 691 for Models 3 and 4; *p < .05; ** p < .01
Due to space considerations, coefficients for industry dummy variables are not reported but are available from the authors.

35

.002
.000
.000
.025 **

34.465 **
.049
.096

Table 6. Results of Logistic Regression Analysis (European Sample)

Variable
Step 1
Industry dummies
Years of operation
Capital
Number of employees in 2003
Ownership ratio in 2003

Non-Japanese executive in 2003
Model 1Model 2
.001
.000
.000
.013

.003
.000
.000
.019 +

Step 2
Change in number of employees
Change in ownership ratio
Model Chi square
Cox & Snell R2
R2

Japanese Executive in 2003
Model 3Model 4-.010
.000.001 **.017 **.329.075 *
18.029.060.094

27.716 *
.091
.142

.065
.053 **
23.648 +.044.073

N = 289 for Models 1 and 2. N = 521 for Models 3 and 4; *p < .05; ** p < .01
Due to space considerations, coefficients for industry dummy variables are not reported but are available from the authors.

36

-.010
.000
.001 *.030 **

45.557 **
.084
.138

Table 7. Results of Logistic Regression Analysis (Asian Sample)

Variable
Step 1
Industry dummies
Years of operation
Capital
Number of employees in 2003
Ownership ratio in 2003

Non-Japanese executive in 2003
Model 1Model 2
.029
.001
.012
.019

.041
.001
.017
.023

Step 2
Change in number of employees
Change in ownership ratio
Model Chi square
Cox & Snell R2
R2

Japanese Executive in 2003
Model 3Model 4
-.151
.001
.046
1.653

.761
-.003
6.816
.071
.207

7.75
.081
.235

7.656 +
-2.90921.174 *.363.679

N = 92 for Models 1 and 2. N = 47 for Models 3 and 4; *p < .05; ** p < .01; † p < .10.
Due to space considerations, coefficients for industry dummy variables are not reported but are available from the authors.

37

-.699
.007
.376
6.317

27.708 *.457.856