A problem sea turtles can't solve

For robust economic growth to continue, Domestic middle-level talent needs to be nurtured

The towering skyscrapers of Shanghai, the bustling activity in Beijing's CBD, the nightly light shows in Hong Kong, and the hectic ports in Shenzhen highlight China's rise to power in the world economy.

These wealthy cities make it easy to forget about China's status as a developing country. However, when it comes to the acquisition of talent at an executive level China still falls short of the developing world. Some say China is short of some 30,000 executives.

Prior to the global financial crises, China suffered from the worst brain drain in the world, according to some reports. Of all the students who left China to study abroad since the country opened up in 1978 (more than 1 million), only 25 percent have returned to live and work in China. This is an all too familiar problem for developing countries: They need to send students abroad to learn necessary skills and technologies to lead the country toward an innovative economy, but too often the best and brightest leave and never return.

Today, that's changing. Unemployment and lack of opportunities in the West brought on by the global financial crises are motivating Chinese overseas graduates to return home where the opportunities are greater, the salaries comparable, and the cost of living lower. Many of these students, often called "sea turtles" in Chinese, return home to work in Western companies where they can use their English and knowledge of Western culture to function in a Western working environment, and can use their Chinese language and cultural knowledge to help the companies adapt their practices and business plans to China's local conditions.

This is, however, only a recent phenomenon and doesn't fix the short-term shortage companies in China have when looking for executive talent. The expatriate solution for many multinational companies seems the only way to solve this local executive shortage. But this still produces a minefield of problems both culturally and when trying to bridge the gap between the Western management techniques and China's middle management thirst to rise to the top. Many multinational companies are hemorrhaging their best talent purely because of the glass ceiling created by a Western management culture.

Now more than ever we are seeing a growing trend for companies in China, particularly foreign ones, to move away from hiring foreign expatriates for management positions toward tapping into the local talent pool. The advantages of local hires are clear: They have a better understanding of the Chinese market, demand lower salaries as competition is increasing and margins are shrinking, and it is easier for them to communicate with those working below them. This lets companies save money, avoid the high failure rate of foreign managers, and gives incentives to younger Chinese workers in the company who may have previously viewed high level management positions as "off-limits" if all of them were previously held by foreigners.

The downside for China's up and coming elite is the "musical chairs" effect of a handful of well-connected executives always being considered for the best jobs. This in turn has a damaging effect on the economy, even if it is great to see home grown (or even overseas cultivated) Chinese executives being considered for the top job. However, with too few of them and a limited talent pool, companies lack choices when it comes to hiring truly innovative leaders.

One solution to alleviate the executive shortage is for multinationals to take the risk and hire local middle management to take on the challenge of running the Chinese operations. The Chinese executives who speak English and have the international experience that multinationals so desire are still quite young in their careers, stuck in middle management and so don't necessarily possess the experience to hold high-level positions.

Therefore, many foreign companies ship over senior management and executives to run their offices in first-tier cities, and they can step in and be effective immediately because of the prevalence of English and the maturity of the market.

In second- and third-tier cities, however, foreign managers will have an extremely difficult time simply communicating with their employees, much less understanding the consumers they are catering to. In addition, it is difficult to convince a foreign executive, with family in tow, to relocate to a place with no international schools, few Western restaurants, and a small expatriate population. It is even more difficult for companies to convince Chinese employees from first-tier cities to pack up and move to these locations, seen as remote, underdeveloped, and poor.

So a solution to the problem could be to nurture that talent in the second- and third-tier cities while keeping control of the business from inside Beijing, Hong Kong or Shanghai.