Human capital, cultural distance and staffing localization

Abstract

PurposeThis study aims to explore how a change in the staffing configuration of foreign subsidiaries affects subsidiary performance by focusing on staffing localization.Design/methodology/approachThe relationship between localization and subsidiary performance is analyzed from the perspective of human capital. Hypotheses are tested using a panel data set of foreign direct investment by Japanese multinational enterprises.FindingsThe analysis demonstrates that localization has a positive effect on subsidiary performance when subsidiaries can access a pool of competent local managers in the host country. It also shows that when competent local managers are highly available, localization has a positive effect on subsidiary performance under high cultural distance. In comparison, when the availability of competent local managers is limited and cultural distance is high, localization has a negative effect on subsidiary performance.Originality/valueUsing human capital theory, this study theorizes how localization, which is a change in the configuration of human capital toward a reliance on local-specific human capital, enhances subsidiary-specific advantages. It introduces the effects of changes in the configuration of human capital over time, into studies on subsidiary staffing. In addition, from a different viewpoint than previous studies, this study proposes one possible path where human capital leads to organizational performance. Specifically, it shows that a change in the configuration of human capital affects subsidiary-specific advantages, which eventually impacts subsidiary performance.