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This paper aims to investigate how the gap between a multinational enterprise’s (MNE) productivity and that of its competitor determines the utilization of expatriate managers in its foreign subsidiaries.

The authors first develop a formal analytical model where expatriate managers are relatively more reliable and expensive while local managers are prone to job-hopping. The authors then test the predictions of the analytical model using subsidiary-level data of Korean MNEs.

The findings show a positive relationship between the productivity gap and the share of expatriate managers in a foreign subsidiary. The empirical findings also show that the job position (middle versus top managers) is another key determinant of the utilization of expatriate managers.

The results of this paper are consistent with the literature that finds that MNEs choose a governance structure that minimizes the hazard of opportunism in their subsidiaries, yet the paper reveals a novel aspect of the determinants of expatriate utilization.