When are international managers a cost effective solution? The rationale of transaction cost economics applied to staffing decisions in MNCs

A common claim in the literature of expatriation is the one referring to the high costs of expatriation. In this paper, on the basis of transaction cost economics (TCE), we show how limited this approach is. In particular, we consider a set of costs that, although ignored in traditional expatriation literature, must be accounted for when a MNC is deciding on whether to recruit expatriates or local managers in its subsidiaries. These costs include selection, training, and performance evaluation costs. We also formulate a series of hypotheses around the situations in which the total costs of recruiting expatriates are lower than those generated by local managers. We then test these hypotheses in a sample of 96 Spanish MNCs. Findings may help explain the apparent paradox between the increasing pressures to reduce costs and the use of an apparently costly practice, such as expatriation.