To exploit overseas opportunities, multinational corporations must usually transfer executives into them I Yet these expatriates--a scarce and very dear resource--often fail, and many leave their employers even after they succeed overseas I What can multinationals do to protect their investment?
A shortage of leadership talent is the greatest obstacle Fortune 500 companies face as they seek to operate on a global scale. McKinsey research shows that most companies have identified rich opportunities created by the globalization of markets, the opening of formerly closed economies, the ability to arbitrage differences in skill and productivity from one region to another, and ready access to a vast pool of capital. But companies also recognize that so long as they do not have enough talent, their reach will continue to exceed their grasp of these opportunities (Exhibit 1, on the next page). In a world of intensifying competition for human capital, a strong global talent pool has become a strategic asset and one of the few sources of sustainable competitive advantage. As John S. Reed, Citicorp's chairman, once commented, "Our global human capital may be as important a resource as, if not more important than, our financial capital."
For most companies, expatriate managers are the cornerstone on which international ventures are built. Once the deals have been signed, the last toast has been drunk, and the corporate jet has left for the return flight to North America or Europe, it is the expatriate managers who stay behind to get the new business up and running.
These expatriates are among the scarcest and most expensive resources of multinational companies; salaries and benefits can easily run to more than $500,000 a year. They also play the critical role in the process of transforming opportunities into thriving businesses by transferring (typically from the company's home base) the required institutional resources, technologies, and know-how; by building country-specific knowledge and relationships; and by developing the local talent that is the key to long-term success and profitability.
Clearly, however, companies have not given enough thought to the problem of helping this critical resource to succeed. Failure rates for overseas postings can run as high as 70 percent and typically range between 15 and 25 percent; furthermore, companies often see their successful expatriate managers leave for other opportunities. As a result, costs rise and international growth slows.
In this article, we focus on approaches to establishing a first-class cadre of expatriates and on the problems that arise when companies attempt to do so.
Building local operations and transferring skills
Although most companies agree on the need to develop local talent for running international operations, expatriate managers will long be with us. Even leading global companies that have substantial local management resources use expatriates extensively. Shell, a truly global company, has as many as 5,600 of them, in more than 120 countries.
Expatriates are important for sustaining international growth because the development of new businesses requires companies to transfer their skills, and expatriates continue to be the most effective means to...