Let’s assume a business headquartered in a European country. Following market internationalization the company expanded to the US, set up subsidiaries there and then began using expatriation to link the foreign units to the headquarters. In the following years, the US operations grow and the business focus increasingly shifts from Europe to the US, creating a bigger need for being close to major customers and stakeholders that now reside in the US. Given this scenario, what could be done?
A recent article by Dutch researchers suggests that despite a growing internationalization of markets and industries, a relocation of the entire corporate headquarters, though possibly addressing the issues in the above scenario, is quite rare. Naturally, headquarters relocation is a significant and very costly project. Alternatively, the relocation of elements of headquarters (e.g. core functions such as finance) may be more feasible and seems to happen more frequently. Thus, the scholars from Rotterdam School of Management addressed this trend by examining whether top management should relocate across national borders or not.
Based on a qualitative and quantitative study of 100 of the largest multinational companies in the Netherlands, the scholars argue that despite several advantages, the relocation of top management members is not always desirable. The study results indicated that only about half of the responding corporations reported that the relocation of top management team members led to higher performance. Thus, several barriers exist and the need for assessing both benefits and costs of relocation for taking the right decision becomes apparent.
The authors note that the main benefits of relocating top managers are strategic in nature. Specifically, relocation grants better access to global markets, stakeholders, and overall strategic knowledge. Although physical proximity to the key markets is beneficial, the physical remoteness from the headquarters implies several barriers. These include personal ties (e.g. an executive does not want to relocate), functional interdependencies (e.g. interdependencies within the top management team), and fiscal and legal constraints at the individual, organizational and country levels. Naturally, these barriers imply associated costs. Given the previous discussion, the authors argue that cost-benefit analysis, as well as an assessment of the interplay between relocation drivers and barriers is essential for making relocation decision, with the latter not always turning positive.
Fortunately, the physical relocation of top management team members’ office is just one of various solutions. For example, in case the costs outweigh the benefits firms can make better use of information technology and international travel, or manage so-called dual offices instead of relocating the whole headquarters. Extensive usage of communication technology and travel has its own costs and benefits of course, but generally speaking it can support the need of being closer to major customers and, at the same time, it overcomes the problems related to being too distant from headquarters. The dual offices option means that top management team members have two offices, one at headquarters and one in the host country. Such a structure might be easier to implement than relocating the whole executive office, and thus is another way of managing the trade-off between strategic benefits and physical relocation costs.
All in all, the authors conclude that the relocation of top management team members abroad is not an ‘all or nothing’ issue. There are always several benefits and costs included, and an assessment of their interplay is crucial for thinking about and deciding upon relocation. Fortunately, as the reviewed article suggests, issues related to an increasing internationalization of markets and industries have several possible solutions…