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The concepts of “de-risking” and “decoupling” are by now familiar to most, as the US and EU seek to diversify away from China in strategic industries.
Less well known is a more subtle form of decoupling that plagues Chinese companies, particularly international companies in China: the lack of expatriates.
Foreign companies with a presence in China report that the number of expatriates wanting to live and work in the world’s second-largest economy remains lower than before the pandemic, with few signs of a full recovery anytime soon.
Why should international companies care? After all, “localization” (appointing local staff instead of expatriates) is on the rise in China as geopolitical factors complicate the environment and more companies move parts of their supply chains to other countries.
Localization is also suitable for multinational companies that sell to the domestic Chinese market and need to better customize their products for local customers – a so-called “in China, for China” strategy.
But having too few foreign employees can also have unintended consequences for foreign companies based in China. Without employees travelling back and forth between headquarters and the company, communication gaps can lead to missed opportunities. One example of the latter is the rapid growth of Chinese electric car makers during the pandemic, which has put many foreign automakers in a bind.
For multinational corporations, ensuring that employees can move between their headquarters and their offices around the world is important in order to instill a global corporate culture.
“It’s very hard to maintain corporate culture in an environment where there isn’t a lot of exchange of talent between headquarters and China for long-term assignments,” says Sean Stein, president of the American Chamber of Commerce in China. “And when that culture starts to weaken, the gap between headquarters and China starts to widen.”
Executives also said having more headquarters talent with meaningful experience in China would reduce “friction” in communications with local units.
Accurate data on expats in China is scarce. Chinese authorities said the country issued 711,000 foreign residence permits last year, down from 846,000 in 2020, the most recent comparison available. A China-Europe Chamber of Commerce business confidence survey released in 2023 found that 16% of respondents did not employ any foreigners at the time, and for 78% of respondents, expats made up 10% or less of their workforce. This was somewhat grimmer than the survey released the previous year.
But both surveys reflect the worst of the pandemic’s effects: Executives report that while conditions have improved since then, there are no signs of a return to pre-COVID levels or even the heyday before U.S.-China trade tensions escalated in 2018.
In the past, big-name executives were happy to be based in China, but today the task seems trickier. Geopolitical concerns aside, there is fierce corporate competition in China. A recent business climate survey by the China Chamber of Commerce found that one-third of respondents said that profit margins in China, based on earnings before interest and taxes, were below the global average, and only 19 percent were above the global average.
Fixing the expatriate shortage will be complicated: Global headquarters will likely need to offer additional incentives to attract talent outside China to work here, and to encourage local staff in China to take on overseas assignments.
This is important not just because of the need to seize promising opportunities, but also because of compliance considerations. In China, as elsewhere, things can go way off the rails when global companies fail to closely monitor their subsidiaries. Expatriates alone cannot solve this problem, but they are one way of instilling global compliance standards. After all, Chinese corporate history is replete with foreign companies that got embroiled in disputes with local partners or caught up in local corruption scandals. That kind of separation is not something any company wants.
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