Expatriate Employment to Contain Risk: the Case of Japanese Subsidiary Firms in East Asia

This paper investigates whether firm, industry and/or host country characteristics explain the degree to which 1, 460 Japanese subsidiary manufacturing firms employ Japanese expatriates in China, Hong Kong and Taiwan, three countries with cultural similarities, but different levels of perceived country risk. The paper shows that basic firm-specific factors explain far more of the variation in the number of expatriates employed in subsidiary companies than risk-related factors specific to host countries and manufacturing industries. Total employment, capital intensity and the ownership share of parent firms are positively correlated with dependence on expatriates, which is moderated by the number of Japanese joint venture partners and the age of the ventures. The choice of capital-intensive production technology involves a transfer of key assets that requires expatriates to optimise productive use of tis technology, regardless of whether a subsidiary is small or large. Capital-intensive production technology also indicates a bias towards debt rather than equity or retained earnings in the financing of Japanese subsidiaries. This requires banks and parent firms to maximise control over their subsidiaries in order to service debt, and employment of expatriates is part of that strategy.