The development of subsidiary-management research: review and theoretical analysis

International Business Review 11 (2002) 139–163 www.elsevier.com/locate/ibusrev

The development of subsidiary-management research: review and theoretical analysis S.L. Paterson a, D.M. Brock a,b,∗ a

University of Auckland, School of Business, 1 Short Street, Level 5, Private Bag 92019, Auckland, New Zealand b Bar-Ilan University, School of Business Administration, 52900 Ramat-Gan, Israel Received 18 April 2001; received in revised form 31 July 2001; accepted 7 September 2001

Abstract This article begins with a summary of the foundations of four streams of multinational management literature pertaining to the subsidiary. The most recent of these streams, namely Subsidiary Development, receives special attention. We look at the way in which the literature on subsidiary-management has evolved, and investigate how the streams have built upon each other. Autonomy is investigated as a growing theme in the literature and report word counts to validate our literature-based propositions. We also examine the literature in the light of national cultural differences, revealing considerable country bias. Finally, we look into the potential future directions of the field.  2002 Published by Elsevier Science Ltd.

1. What we have learned thus far Over the past few decades the management of multinational subsidiaries has gradually emerged as a distinct field of research from within the fields of International and Strategic Management. Lars Otterbeck (1981) was one of the earliest authors to try to define the field with the publication The Management of Headquarters-Subsidiary Relationships in Multinational Corporations. This edited collection focused on headquarters-subsidiary relationships, including articles by authors such as Prahalad and Doz. A subsequent collection by Etemand and Dulude (1986) contributed by bringing attention to Canada’s policies encouraging World Product ∗

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Mandates. More recently, Birkinshaw and Hood (1998a) have made a relatively systematic effort to not only define the field, but also to define three sub-streams and Birkinshaw (2001) built on this, with a four-part classification of the field’s base literature, as well as three other categories of more contemporary developments. We begin our review by identifying four overarching research streams, namely Strategy–Structure, Headquarters–Subsidiary relationships, Subsidiary Roles, and Subsidiary Development. While we examine each stream separately, this article is focused on understanding the accumulation of research and how each of these fields builds upon the work of the others, which provide the basis to challenge assumptions and look at issues from new perspectives, as illustrated in Fig. 1. The second half of the paper discusses two important contemporary issues in subsidiary-management that spring from the review of the literature, namely subsidiary autonomy and national culture. We conclude with some thoughts on the future directions of these research programs. 1.1. The Strategy–Structure stream The connection between strategy and structure in large corporations grew out of early work on organizational theory, with a key concern being more flexible structures as alternatives to traditional hierarchy. Bartlett and Ghoshal (1989) defined the ‘transnational organization’ which was presented as the preferred design for the multinational corporation (MNC) and this concept became one of the dominant schemes of the stream. Most contemporary authors have agreed that MNCs must now pursue integration and responsiveness simultaneously (Evans, Doz, & Laurent, 1989) with some functions coordinated at the global level while others remain local. This however was conceived on the assumption that structure was something that would change to fit strategy, at least in the long term. Strategy itself was under the

Fig. 1.

1

Development of the literature.1

These classifications except for the last one (the Internal Market Era) are from Harzing (1999).

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control of headquarters as emphasized in Fig. 2. Little consideration was given to the resistance that the headquarters might face. The arrows between HQ and the subsidiary labeled ‘SS’ depict the thrust of this research stream. 1.2. The Headquarters–Subsidiary relationship stream The Headquarters–Subsidiary Relationship Stream focused on centralization and formalization of decision-making (Gates & Egelhoff, 1986; Hedlund, 1981), as well as how to integrate a portfolio of subsidiaries to maximize their usefulness to headquarters (Picard, 1980). However, this stream was willing to accept that subsidiaries may have considerable autonomy and influence. Headquarters thus relied upon the quality of relations with subsidiaries to institute programs (Hulbert, Brandt, & Richers, 1980) and might need the involvement of subsidiary-management in the decision-making (Hedlund, 1994). The arrows between HQ and the subsidiary labeled ‘HS’ in Fig. 2 emphasize the reciprocal influence in this stream of research. Accordingly, this stream also began to emphasize heterogeneity within MNCs, with subsidiaries having different characteristics within the same organization.

Fig. 2. The Strategy–Structure and HQ–Subsidiary relationship streams.

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It was noted that relationships between subsidiaries may vary as a result of the environment (Hedlund, 1981), and headquarters control methods should vary depending on these factors (Bartlett & Ghoshal, 1986; Ghoshal & Nohria, 1989). However as Bartlett and Ghoshal (1986) observed, many firms still suffered from the ‘United Nations Syndrome’ which resulted in their treating all subsidiaries alike. Formal control was often less effective than management systems or cultural control (Herbert, 1999; Prahalad & Doz, 1981) and Kim and Mauborgne (1993) went into some detail as to how, despite increasingly powerful control techniques, formal control mechanisms are getting harder to enforce. O’Donnell (2000) argued that monitoring and incentives are now insufficient to control the modern MNC. Some authors suggested the perception of due process as one of the main control methods which could replace formal control (Brandt & Hulbert, 1976; De Meyer, 1993; Herbert, 1999; Kashani, 1990; Kim & Mauborgne, 1993; O’Donnell, 2000; Quelch & Hoff, 1986). Authors also argued that shared managerial philosophy would increase success in pursuing a global strategy (Roth, Schweiger, & Morrison, 1991) and that communication quality was an aid to innovation (De Meyer, 1993; Ghoshal & Bartlett, 1988) and global marketing initiatives (Kashani, 1990). It was argued that the culture of organizations should be changed to allow for ‘friendly persuasion’ (Quelch & Hoff, 1986). Roth and Morrison (1992) concluded from this trend in the literature that the ‘us versus them’ mentality was giving way to a more co-operative stance. In recent years the more dynamic aspects of the relationship began to be exposed. Prahalad and Doz (1981) suggested headquarters’ power over the subsidiary gradually obsolesces and that the headquarters will eventually want to reassert their control. Forsgren, Holm and Johanson (1995) and Ghauri (1992) supported this theory of obsolescence by observing Swedish multinationals’ subsidiaries developing their independence by deploying networks and strategies in local markets. 1.3. The subsidiary role stream Issues raised by the previous field had clear counterparts at the subsidiary level of analysis. In particular the fact that subsidiaries had unique resources and were able to act with considerable autonomy implied that it might be necessary to allocate them different roles within the greater organization (Bartlett & Ghoshal, 1986). Authors such as White and Poynter (1984) took this further noting that these subsidiaries required different administrative practices and confronted different challenges. The shift in emphasis towards setting the multinational subsidiary as a unit of analysis and to some extent taking the headquarters as an external factor, allowed authors to take a detailed look at the various strategic roles of those subsidiaries. The literature considered differences in role within a single country (Jarillo & Martinez, 1990; Taggart, 1997) and across countries for a single MNC (Gupta & Govindarajan, 1991). The arrows around subsidiary SR in Fig. 3 emphasize the change in focus from headquarters to the subsidiary, as well as the direction of potential influences of the subsidiary.

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Fig. 3.

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Subsidiary Role and Subsidiary Development streams (including Regional Development)

1.3.1. World product mandates Canadian literature (D’Cruz, 1986; Etemand & Dulude, 1986; White & Poynter, 1984), in particular, began to look at public policy perspectives of subsidiary role, due to the Canadian government’s encouragement of World Product Mandates (WPM). Crookell (1987) was particularly concerned with this as an alternative to rationalization, which he associated with ‘deskilling’ of subsidiaries. WPM authors proposed strategies for government or subsidiaries (D’Cruz, 1986; White & Poynter, 1984) to achieve superior roles within the organization. In a study covering 445 Canadian subsidiaries, Feinberg found that these WPM, increased reinvestment and maximize decentralization and autonomy for the local subsidiary as well as reducing the risks of downsizing (Feinberg, 2000). Headquarters, however, were not always willing to accept this level of decentralization. This is further complicated by the fact that setting up a WPM is often expensive for, amongst other reasons, the costs of resource reallocation (Birkinshaw, 1998) and the risk of failure. In addition, Rugman and Bennett (1982) argued that the number of WPMs that can be developed, and thus the success of the policy overall, is likely to be limited particularly where the product is vital to the MNC. Birkinshaw (1995) suggested that in addition administrative as opposed to entrepreneurial focus lead to too much ‘going for the big hit’. The WPM push does not seem to have created the

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benefits it had promised; however more research is needed to ascertain whether the fault is in the theory or in the implementation. 1.3.2. Role typologies Researchers have created numerous tools with which we can help classify and sort the various roles that subsidiaries may take on within MNCs. Early work (D’Cruz, 1986; White & Poynter, 1984) focuses on grouping subsidiary roles into those with low globalization pressures (D’Cruz terms this a branch plant), and two different options for where globalization pressures were high. These two options were global rationalization and forming a global subsidiary mandate, and Birkinshaw and Morrison (1995) supported this three-type classification. In general however, later work has preferred the intuitiveness of a two by two matrix. The best known is the integration-responsiveness (IR) framework proposed by Prahalad and Doz (1987) that has some similarities to Bartlett and Ghoshal (1986) and Porter’s (1986) multinational strategies. Other authors such as Jarillo and Martinez (1990) have extended IR as a model of subsidiary strategy. They identified types of subsidiary in three of the four quadrants; and more recently, Taggart (1997) defined and redefined (Chap. 2, 1998b) options in all four quadrants. Solberg (2000) brought this approach to the relationship between subsidiary types and headquarters in respect to marketing policy. Similarly, Surlemont (1998) looked at domain and scope in determining a role through network influence and Beechler, Bird and Taylor (1998) looked at the dominant culture and aspects of adaptation and learning. While much of the literature had focused on product flows (e.g., Kobrin, 1991) others have looked at subsidiary role in terms of knowledge (Gupta & Govindarajan, 1991) and resource flows (Randoy & Li, 1998). Table 1 brings these frameworks together to compare their similarities. Almost all of the frameworks take into account the importance of the autonomy versus integration (coordination) aspect of a subsidiary’s role. This is included explicitly in many typologies. Other typologies include it implicitly, for example those typologies referring to resource flows. Although Gupta and Govindarajan (1991) suggest that lateral independence was higher with increasing inflows and outflows, autonomy is not just a simple opposite of lateral interdependence particularly in relation to knowledge flows. Most typologies then combine this with another factor associated with, for example, competencies (related to outflows), local responsiveness or headquarters strategy. 1.3.3. Centers of excellence One of the often-cited objectives has become the ‘Center of Excellence’ (COE). COEs are more difficult to define that it may at first seem. Moore and Birkinshaw (1998) went some way to clarifying this in service firms by dividing COEs into three different types: Focused, Virtual and Charismatic. The most common form is the Focused COEs, which are typically based around a single area of knowledge. In the Virtual form, the core individuals live and work in different cities while Charismatic COEs are simply individuals who are internationally recognized for their knowledge or expertise in a certain area.

Specific subsidiary

Bartlett and Empirical Ghoshal (1986) Prahalad and Empirical Dox (1987) interviews

Bartlett and Ghoshal (1989) Jarillo and Martinez (1990) Gupta and Govindarajan (1991)

Whole corporation

Porter (1986) Conceptual

518 firms

Discussions with almost three dozen subsidiary managers

Sample

Specific subsidiary

Subsidiary relative to others in company

Empirical

Conceptual

50 Spanish subsidiaries

Whole 3 European, 3 corporation Japanese, 3 US

Empirical case studies

Whole Over 20 organization European, American and Japanese firms

Subsidiary

Conceptual

White and Poynter (1984)

Focus

Empirical/ conceptual

Authors

Table 1 Subsidiary role typologies

Marketing satellite

Value added scope and market scope

Miniature replica (innovator) Country centered strategy Local implementers

Miniature replica (innovator)

Knowledge outflows and Low inflow inflows low outflow local innovator

Integration/localization

Strategic independent

Transnational

Multifocal strategy, Multifocal/matrix organization

Strategic leader

Autonomous Active subsidiary subsidiary

Integrated product strategy, worldwide business management Global

Contributor

Purest global Complex global strategy strategy

Rationalized Strategic manufacturer independent

Product specialist

Generally high integration Low/High High/High

High inflow Low inflow High inflow low outflow high outflow high outflow Implementers Global Integrated player innovator (continued on next page)

Receptive subsidiary

Locally responsive strategy, autonomous national subsidiaries Adaptation, coordination, Multinational International use of competencies

Integration/responsiveness

Competence vs strategic Black hole importance

Coordination and configuration

Miniature replica (adopter)

Generally low integration Low/low High/low

Product scope and market scope

Variables

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Subsidiary relative to others in firm Subsidiary relative to others in firm Specific subsidiary Firm level

Specific subsidiary

Whole corporation

Solberg (2000) Conceptual

Conceptual

Empirical

Taggart (1999) Empirical

Taggart (1998b) King and Sethi (1999)

Randoy and Li Empirical (1998)

Empirical

Beechler et al. Empirical (1998)

Surlemont (1998)

Specific subsidiary

Subsidiary relative to others in firm Specific subsidiary Specific subsidiary

Empirical

Roth and Morrison (1992)

Focus

Birkinshaw Empirical and Morrison (1995) Taggart (1997) Empirical

Empirical/ conceptual

Authors

Table 1 (continued)

Resource inflows and outflows

Resource independent

Dormant centers

Similar to Taggart (1997) Autarchic subsidiary Market Integration, Parent–child Centralization, Alliances, configuration, coordination 265 manufacturing Autonomy/Procedural Militant subsidiaries in the justice UK Market knowledge and Civil war autonomy

US foreign affiliates in 25 industries 171 foreign firms in the UK

Power and competency

Quiescent subsidiaries Adaptive

Autonomous subsidiary Exportive

Exporting, high quality offerings strategy Specialized Contributor

Active subsidiary Closed hybrid

World mandate

Quasi-global, combination strategy

Generally high integration Low/High High/High

Local barony

Vassal

Federation

Partner

Confederation

Collaborator

Strategic Administrative Global Centers of centers headquarters Excellence Resource user Resource Resource provider networker Global Detached Confederate Strategic subsidiary strategy auxiliaries Portfolio firms ExportGlobal oriented

Receptive subsidiary Open hybrid

Coordination and configuration Dominant management perspective, Size of changes (learning)

50 Spanish subsidiaries 171 UK subsidiaries 90 USA, 4 Mexican, 38 SE Asia, 7 Spain, 8 UK. All Japanese MNC 662 relationships

Generally low integration Low/low High/low

Domestic, International product product specialization innovation strategy Autonomy, integration of Local activities implementers

Competencies and Interdependencies

Variables

115 business units

Sample

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COEs were profiled by authors such as Bartlett & Ghoshal (1986) as a way of capitalizing on unique resources for the corporation. COEs are usually portrayed as an attempt to utilize the efficiencies of certain locations and network integration (Andersson & Forsgren, 2000). Therefore, the focus is on Head office benefits (and secondarily on regional benefits) and the scope of excellence is often rather narrower than the subsidiary itself might have designed. While literature widely agrees about the existence of centers of excellence and their positive nature (e.g. Oliver, 1993; Lyle & Zawacki 1997; Liebmann 1996) it tells little about why and how they emerge. The costs are rarely considered in detail COE being a head office ‘euphemism’. The head office focus may be born from the fact that, usually, only the head office is in a position to do this sort of talent and resource relocation. Therefore, firms establish COEs only in areas that management feels to be of strategic importance (Moore & Birkinshaw, 1998). These centers have a dual and somewhat conflicting role of developing their skills and also dispersing them to the rest of the organization. (Moore & Birkinshaw, 1998). As a result, upon forming a COE most head offices see their primary role as dispersing it, for example taking the key individuals and using their skills around the world. Most literature on COEs is focused on the selling of the concept and observing the benefits of possessing one. However, the central debate as to the applicability of COEs should be whether the benefits associated with the ‘clustering of minds’ outweigh the costs of the resulting resource-reallocation and reduced concentration in other divisions. 1.4. The subsidiary development stream These authors attempted to balance headquarters control and global integration with the need for national sensitivity. The concept of a subsidiary developing on the basis of its own strategic business decisions was first considered in this context by Prahalad and Doz (1981). Later, WPM authors such as White and Poynter (1984) emphasized that a subsidiary’s primary objective was to justify its own existence as opposed to merely improving efficiency, in contrast to the headquarters perspective. The increasing focus on the local environment and the idea that the subsidiary can grow the organization itself even in the absence of headquarters support is shown in the arrows around subsidiary SD in Fig. 3. The model also shows how headquarters begins to lose its centrality in this more heterarchical view of the organization. 1.4.1. Investigating changes in subsidiary role To a limited degree changes in subsidiary role were looked into by empirical studies such as Jarillo and Martinez (1990) and Papanastassiou and Pearce (1994). However most of the investigation has taken the form of case studies where issues could be analyzed in more depth (e.g., Chang & Rosenzweig, 1998; Delany, 1998; Birkinshaw & Hood, 1997). Early literature (e.g. Crookell, 1987) viewed role changes as part of rationalization (deskilling) or COE formation. Later, the integrative aspects of role change were

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also investigated. Malgnight (1995) investigated role change as a slow process of integration into the operations of the firm. Delaney (1998) also presented subsidiary development as a series of stages of increasing integration and importance. Delaney, however, emphasized that it was more like a ‘snakes and ladders game’ than a progression. Network and market theories were often used to analyze development (Birkinshaw & Fey, 2000, Chap. 4). Emphasis was placed on championing new initiatives by proactive subsidiary–management, in some cases linked to a parent company management style and structure, which entail decentralization and autonomy. Birkinshaw (1998) defined subsidiary initiatives in a two-by-two matrix. This matrix includes four segments, defined by the extent of headquarters sponsorship and whether there is an internal or external orientation to the initiative. 1.4.2. Drivers of subsidiary development Birkinshaw and Hood (1998b) provided a model of subsidiary development emphasizing three main drivers. The first is the multinational itself, including changes in the global environment, resource availability, global restructuring, and competition from other subsidiaries. Factors more within the MNC’s sphere of control, include: changes in the charter assigned to the subsidiary, its perceived capabilities, the technological development that it is designed for, and headquarters’ tendency to prefer central control (Bartlett & Ghoshal, 1986). The second driver is subsidiary choice (Birkinshaw, Hood, & Jonsson, 1998), which includes subsidiary–management’s desire to increase autonomy, increase network importance and justify its own existence to headquarters and its country. The third is the local environment, which includes the subsidiary’s constraints and opportunities. This may include direct and indirect influences of the government and regional authorities. Birkinshaw and Hood (1998b) argued that these three basic mechanisms interact to determine the role of a subsidiary in a cyclical process of action and reaction to determine subsidiary development. Fig. 4 looks in detail at how a broad range of forces come together, with particular consideration of drivers in these domains and the results that can be expected for the regional subsidiary and headquarters. Not surprisingly, perspective has a huge impact on which factors are emphasized in an article. Brock (2000) points out that researchers from larger countries are more likely to see things from the corporate point of view, while those from smaller economies seem to be more interested in subsidiaries. Those studies written from the corporate managerial perspective assume that parent company managers are the most important drivers (Chang, 1995; Malnight, 1996). Those written from the subsidiary perspective emphasize subsidiary initiative (Birkinshaw, 1997). Meanwhile those from a regional development (RD) perspective (Hood & Young, 1994), emphasize the environmental effects, and the effect of government on that environment. The corporate perspective was the first to come to the attention of authors, in the rationalization programs of globalizing MNCs. However in the mid 1980s Canadian authors began to consider subsidiaries’ ability to resist this rationalization (Crookell, 1987; White & Poynter, 1984). Similarly, authors such as Neil Hood (Hood & Taggart, 1999; Hood & Young, 1994; Young, Hood, & Peters, 1994) and WPM authors

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Fig. 4. Subsidiary development: cause and effect.

such as Crookell (1987) greatly expanded our understanding of the local government’s impact as well as changes in the local economic environment (Jarillo & Martinez, 1990). Authors were particularly interested how government agencies can take an active role in encouraging subsidiary intrapreneurship. This is important, both from the point of view of helping existing subsidiaries to develop but also in facilitating the setting up of new subsidiaries with appropriate qualities as part of their developmental programs (Hood & Taggart, 1999; Hood & Young, 1994). This parallels the management literature’s encouragement of multinationals to encourage entrapreneurship (e.g., Pryor & Shays, 1993). This has important implications for aftercare policies (Hood & Taggart, 1999; Hood & Young, 1994) designed to capture a share of reinvestment, aftercare policies, which are very resource-intensive and time-consuming for the developmental agencies. The arrows and domains drawn around subsidiary RD in Fig. 3 illustrate this increasing focus on RD, public policy

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(or national) interests, as well as a subsidiary’s power to influence the company— even against the will of the headquarters. 1.4.3. Skepticism of subsidiary development In practice MNEs have tended to be concerned that granting significant autonomy may result in aspects of corporate interests being compromised or an escalation of personal commitment. This fear is reinforced by notorious cases such as that of Nick Leeson whose considerable autonomy led to the demise of Barings Bank (Leeson, 1996). Bartlett and Ghoshal (1989) suggest that strategic leader subsidiaries need high internal competencies even though this might raise the possibility of country managers building their own organization independent of the parent. There is thus a need to control aggressive localization policies and bring national subsidiaries within coordinated and interdependent networks. This approach has been explored by Buckley, Carter and Martin (1999) who viewed knowledge management in the multinational subsidiary relationship as a negotiation, where each faces the possibility of cheating by the other. Crookell and Morrison (1990) suggest that an inevitable outcome of globalization is that subsidiaries will end up competing with their parent firms and, if they cannot compete, will become redundant. In this environment it is not surprising that White and Poynter (1984) found some subsidiaries causing inefficiencies within multinationals by not importing significant parts, through a fear that foreign subsidiaries might displace local manufacturing. Similarly in the subsidiary evolution model itself, subsidiaries clearly have a vested interest in building up slack resources beyond the control of HQ, which allows them to develop and innovate (Young, et al., 1994). It has been found that granting strategic independence to subsidiaries may reduce the ability of headquarters to control their resources and thereby reduce the efficiency of the internal capital market, one of a MNC’s primary functions, reversing the localisation’ benefits of subsidiary strategic independence (Mudambi, 1999). Birkinshaw (1998) looks into this perspective highlighting the concerns of top management towards subsidiary initiative. He acknowledges the problem of empire building as well as considering the possibility that subsidiary initiative may result in reallocation costs as resources move around. Other disadvantages that Birkinshaw notes include administration costs associated with the more complex structure and a lack of strategic focus (as opposed to a more strategic focus in terms of the COE). Interestingly, Egelhoff, Gorman, and McCormick (1998) suggest that strong headquarters assignments are better than weak ones while at the same time suggesting that initiative should be encouraged. Overall, they found that subsidiaries with clear mandates achieved a greater level of development than those with unclear mandates. The mandate itself acted as a solid base from which to reach out as opposed to a restriction on development. This highlights the conflict between the importance of development and the policy objectives of headquarters. Schu¨ tte (1998) presents a model of how regional headquarters might grow to have greater allegiance from local subsidiaries than the head office. Ghauri (1992) also proposes that in multinationals with small home countries, subsidiaries will grow to dominate the network and become more important than headquarters. At headquarters

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this may cause distress amongst executives who may find themselves losing control and prestige as they are made less significant relative to the organization as a whole. Despite these reservations, recent research however has been very supportive of the use of regional headquarters. Often regional headquarters have been suggested as a response to a specific problem for example some sort of ‘overshooting-themark’ in European companies globalization of divisions in Asia (Schu¨ tte, 1997). Siddiqi (2000) details many of the advantages of regional structures in the context of developing core competencies. Interestingly Schlie and Yip (2000) suggested that regionalism may follow globalization as a strategy because it was necessary to globalize and acquire the economies of scale, before one could effectively realize the benefits of regionalizing. Rugman and Hodgetts (2001) were somewhat more aggressive in their opinion suggesting that in the current age successful multinationals pursue regional strategies; unsuccessful ones pursue global strategies. To what extent should the headquarters encourage the disregard for the charter that it set? A solution is to provide both strong (and appropriate) central direction and opportunity for autonomous initiatives so that managers have access to either path. We pick up this question in the following section on two of the most pressing sets of questions in subsidiary research, namely those around subsidiary autonomy and national culture.

2. Contemporary issues in subsidiary research Thus far we have seen how literature on subsidiary-management has developed in four streams over the last few decades. Birkinshaw (2001) observes two changes in perspective that underlie the emergence of the later streams: the change from a hierarchical to a heterarchical view of the firm, and the change in perspective from MNC level to the subsidiary level. Each of these represents a willingness to approach the problem of subsidiary-management in a complex but more realistic manner. Hedlund (1993) described hierarchy as the assumption of pre-specified and stable relationships, instrumentality and additivity of parts, unidirectionality and universality, and the coincidence of action. Heterarchy, on the other hand, serves as its antithesis—a new system to challenge hierarchy as the dominant design (Hedlund, 1986). Later authors such as Forsgren (1989) noted the presence of this sort of structure in modern multinationals; and Jarillo (1988) deepened our understanding of heterarchy by looking at how heterarchy influenced network structure. In the following two sections we will discuss critical decision areas that concern researchers and managers alike concerning today’s subsidiaries within these heterarchical forms. First we look at questions of subsidiary autonomy. Then issues of national culture are discussed. 2.1. Autonomy While attitudes towards autonomy differ greatly through the decades and between streams, a review of the literature reveals a connection between the increasingly

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heterarchical and subsidiary focused perspectives (Birkinshaw, 2001) and the perception of autonomy. Analysis from the point of view of the MNC clearly has a tendency to consider issues of efficiency and centralization (e.g., Fayerweather, 1969). On the other hand, looking at the issues from the subsidiary point of view is likely to reveal longer-term development aims, regional impacts and a desire for autonomy (Birkinshaw et al., 1998; Hood & Taggart, 1999). Thus subsidiaries generally seem to be autonomy-seeking, while overall MNC push for more centralization. The following sections examine this literature and its implications. 2.1.1. Development of autonomy The traditional structure for multinationals had been a confederation of country firms (Murtha, Lenway, & Bagozzi, 1998), with the home country planning new products, and initially manufacturing them (Vernon, 1966). From this starting point, which involved relatively high autonomy within a narrow range of activities, the literature focused on opportunities for formal control, centralization, and unified strategies for cost saving (Fayerweather, 1969). Chandler’s (1962) model of strategy and structure implied that structure (including levels of autonomy and centralization) was something that may be designed to fit the strategy of the corporation. While some authors argued that only those closest to the market should make policy decisions (Lee, 1965; Pryor, 1965) others suggested that control could be moved to the regional (Williams, 1967), if not global, level (Buzzell, 1968). Dichter (1962) suggested global standardization of product and image was becoming more appropriate, and Clee and Sachtjen (1964) observed decision-making being moved to higher levels in practice. In the late 1970s and early 1980s globalization literature gained in momentum and came to be regarded as the strategy of the future (Levitt, 1983). Harzing (1999) termed this period from 1960 to the early 1980s the ‘Global Era’. In this period the literature tended to view the issue of globalization from the perspective of headquarters with the prime reason for the globalization of operations being the efficient location of production, economies of scale and minimizing the duplication of activities. Regional integration, such as the European Union (Jarillo and Martinez, 1990) and NAFTA (Krajewski, Blank, & Yu, 1994), has also influenced perspectives, often resulting in many previously autonomous subsidiaries being brought under head office or regional headquarters’ direct control. In response to authors such as Levitt, a large amount of culturally based criticism emerged in the literature in the middle of the 1980s (Brott, 1984). Autonomy was seen as important where the size of foreign operations had made strategy formation excessively complex. By the late 1980s, responsiveness emerged as a strong theme and the literature began to incorporate these arguments by considering the possibility of an integrated and responsive ‘Transnational’ subsidiary (Bartlett & Ghoshal, 1989). The transnational structure was more heterarchical than previous structures with COEs forming in foreign subsidiaries (Bartlett & Ghoshal, 1986). Harzing (1999) termed this period the ‘Transnational Era’. The Headquarters-Subsidiary Relationship Stream was also primarily concerned with the control of subsidiaries and maximizing their potential for headquarters

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(Picard, 1980). However, as the field developed it began to move away from formal restrictions of autonomy toward more flexible cultural controls (Herbert, 1999; Kim & Mauborgne, 1993; O’Donnell, 2000; Prahalad & Doz, 1981). This still did not amount to support for autonomy and authors such as Brandt and Hulbert (1976) suggested the surrendering of only ‘perceived’ power. Although it was targeted in a more indirect manner, the primary goal was still control and integration. The subsidiary role stream represented a significant departure from this line of thinking. While one of the aims was efficient coordination with the rest of the multinational, another became the interest of the local management, and its significance to the network as a whole. Ghoshal and Bartlett (1988) found relationships between autonomy and ability to diffuse innovations through networks. WPM research focused on autonomy, the building up of stores of knowledge and the resulting impact on capability formation (D’Cruz, 1986; Rugman & Bennett, 1982; White & Poynter, 1984). Later subsidiary role typologies (Jarillo & Martinez, 1990, Taggart, 1997; Solberg, 2000) gave somewhat more attention to the interests of headquarters. These typologies considered roles with varying levels of autonomy, most specifically in Solberg’s (2000) analysis of the interaction between headquarters and subsidiaries in the formation of marketing policy. As with the WPM literature, the subsidiary development stream continued this trend with a predominantly subsidiary-centered viewpoint with some consideration of local development agencies. Subsidiary development literature looked into how autonomy and active development allow subsidiaries to increase their influence within a MNC (Forsgren, Holm, & Johanson, 1992) and facilitated the formation of global mandates (Birkinshaw & Morrison, 1995). Hood and Taggart (1999) extended this finding that embeddedness, autonomy, and research and development are all related and Taggart (1999) reaffirmed the importance of autonomy and procedural justice for performance. Autonomy was suggested not only as a way to improve local responsiveness but also in internal activities to create an internal market (Birkinshaw & Fey, 2000). Autonomy was assumed to be both a prerequisite and a desirable result of subsidiary development (Birkinshaw & Morrison, 1995; Forsgren, et al., 1992; Hood &Taggart, 1999). In addition, Birkinshaw and Hood (1997) argued that autonomy was beneficial not just to the subsidiary but to headquarters as well. 2.1.2. Clarifying and testing the trends in autonomy Harzing (1999) provides a framework for better understanding the trend towards heterarchy and autonomy. The period in which subsidiary-management literature emerged she termed the ‘International Era’. In this era, firms were usually dominated by their headquarters, which provided the competitive advantages for the firm. The move from this to the global and finally Transnational Era implicitly includes increasing heterogeneity and flexibility in determining a subsidiary’s role. While Harzing’s (1999) model was based on business practice, this article is centered on literature; and since literature has historically lagged behind practice (or at least, best practice), our literary eras are slightly later than her practical eras (see Fig. 1). Fig. 5 illustrates what we have identified as an increasing respect for autonomy

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Fig. 5. Attitudes towards autonomy over time.

in the literature by graphing the approximate position of four articles vis-a`-vis autonomy and integration. The articles were chosen to represent each of the four literature streams. Growing discontent with the theory of globalization has been apparent in recent years, particularly in protests such as those at the 2000 World Trade Organization meeting in Seattle. Morrison, Ricks and Roth (1991) studied the perceived advantages of globalization focusing on issues such as industry standards diversity and regional differentiation. They found that the majority of managers viewed the advantages of globalization as being more theoretical than real, suggesting that regional strategies are increasingly the primary determinant of competitive advantage. Table 2 summarizes some of the advantages and disadvantages related to the rationalized centralized structures associated with globalized strategies, as well as the more autonomous/decentralized alternatives. Thus far we have seen more theoretical argument than empirical testing of these issues. The articles that have directly addressed the centralization and standardization of globalization seem to have found that even more globalization is desirable. Birkinshaw, Toulan, and Arnold’s (2000) paper, investigates the use of global account managers, finding that the ‘globalization’ of accounts was associated with high performance. Similarly, Birkinshaw, Morrison and Hulland (1995) found that most of the firms in their study seemed under-globalized; that is that the firms that showed more globalized attributes tended to have superior performance. Those that have addressed autonomy specifically have suggested that autonomy may be good or bad depending on task (White, 1986) and cultural contingencies (Newman & Nollen, 1996) as well as initiative (entrepreneurial culture) and specialized resources (Birkinshaw, et al., 1998). To test the validity of the preceding arguments on autonomy, we prepared a simple experiment taking a sample of seven articles. We chose the seven articles, both for

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Table 2 Advantages of autonomy versus advantages of centralized structures in the literature Autonomous and decentralized structures

Centralized structures

Diverse industry standards. Consumer demand for locally differentiated products (Morrison et al., 1991). Difficulties in managing a global organization (Morrision et al., 1991). Global strategies wasting subsidiary competencies. Significant benefits of being an ‘insider’ (Morrison et al., 1991). Prevent loss of skills through rationalization (Crookell, 1987). Reduce likelihood of downsizing (Feinberg, 2000). Allows rapid response to local opportunities or threats (Birkinshaw & Hood, 1997). Prevent reduction of local embeddedness and encourage responsiveness. Local development agencies may provide incentives (Hood & Taggart, 1999).

Having a single image. Minimized confusion for customers who travel (Papanassiliou & Stathakopoulous, 1997). Cost savings. Central control may facilitate global change strategy. Closer coordination of strategy (Papanassiliou & Stathakopoulous, 1997). Headquarters has more network power. Relatively stable subsidiary roles, for example avoiding resource reallocation costs (as mentioned in Birkinshaw, 1995). Limited control may allow headquarters to prevent excessive initiatives and empire building (Birkinshaw, 1998).

their significance to the field and the fact that they belonged, as clearly as possible, to a particular research stream. We counted the number of times certain words appeared in the text and then the approximate number of each of these words per page was calculated. Each word includes all of its derivatives as long as they were used in the same context. Summary results appear in Table 3. These results generally support our theory concerning the increasing emphasis on certain concepts within the subsidiary-management field. Of particular interest in this table is the increasing emphasis on autonomy found in the articles from the strategy– structure stream to the subsidiary development stream. At the same time there is a reduction in the references to globalization, which carries associations of centralization and standardization, and a reduction of the emphasis on control. The usage of words such as entrepreneurship and initiative has also increased. The fact that these trends are more closely related to the stream than the date implies is largely because of the change in perspectives as argued throughout this essay. A more thorough study of these trends is encouraged. 2.2. National culture The literature on subsidiary-management repeatedly considers how culture challenges the ability of managers to generalize strategies (Brott, 1984; Herbert, 1999). Differences in culture not only bring into question the generalizability of conclusions, but also create bias in the formation of the tools of analysis (Adler, 1983). It is thus not sufficient to take theories developed in the USA, for example, and just apply

0.41 0 8.59 0.18

0.08 0.50 0.67 0

1 6 8 0

Jarillo and Martinez, 1990 12 pages

Subsidiary role

⫺8 14 3 21 ⫺0.35 0.61 0.13 0.91

⫺3 14 12 88 ⫺0.14b 0.67 0.57 4.19

21 pages

Birkinshaw and Hood, 1998b 23 pages

Subsidiary development

Birkinshaw, Hood and Jonsson, 1998

Subsidiary development

b

All derivatives of words were counted, so that control includes controlled and controlling as long as it is used in the context of organizational control. Numbers have negative signs where references were usually in a negative context. It is noted that in these articles, each word was used in a similar context throughout the article and thus complex calculations were not necessary.

a

0.38 0.13 0.13 0

0.95 0.10 2.75 0

0.38 0.14 1.48 0.14

7 0 146 3

3 1 1 0

19 2 55 0

8 3 31 3

Length (pages) Word count Controla Autonomy Global Entrepreneurship/initiative Words per page Control Autonomy Global Entrepreneurship/initiative

Brandt and Kim and Hulbert, 1976 Mauborgne, 1993 8 pages 17 pages

Headquarters subsidiary relationship

Bartlett and Harzing, Ghoshal, 2000 1988 21 pages 20 pages

Headquarters subsidiary relationship

Article

Strategy structure

Strategy structure

Stream of literature

Table 3 Usage of words in articles

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them to foreign countries. On the other hand, we should not simply ignore their applicability on foreign turf. 2.2.1. Country bias It is well established that academic literature is prone to certain country biases (Adler, 1983). In the strategy–structure stream, Harzing (2000) notes that Japanese firms are absent from empirical studies, with American firms dominating the samples. Authors on subsidiary development, however, display a different regional bias. While they come from quite a wide range of countries (relative to many other fields) there is a tendency for researchers and data to come from peripheral economies (Brock, 2000), usually those that are industrialized and are neighbors to larger, even more industrialized countries. Common examples in this group include2 Scotland (Birkinshaw & Hood, 1997; Taggart, 1998a), Canada (Birkinshaw & Hood, 1997, White & Poynter, 1984), Sweden (Hedlund, 1980; Birkinshaw, et al., 1998), Ireland (Delaney, 1998), and Spain (Jarillo & Martinez, 1990). While this bias may not be as great as the American-centric bias found in other business/management fields it should still be considered before generalizing to other countries. Noticeably these countries are also predominantly Western cultures. This is underlined by the fact that research into the development of Japanese subsidiaries has shown a rather less autonomous, headquarters-centered process (Chang, 1995; Chang & Rosenzweig, 1998). Of particular interest is Newman and Nollen’s (1996) study, which used Hofstede’s national culture dimensions and the Rokeach Value Survey to determine that more employee participation (analogous with subsidiary participation) may actually hinder performance levels in high power distance countries such as those in Latin Europe and East Asia. Comparative studies, like Welge’s (1994) comparison of German subsidiaries of managerial structures in three different host countries are helpful. Similarly Erramilli (1996) has shown how subsidiary ownership patterns differ within American and European MNCs. It is also a significant error to assume that a country has a homogenous culture and ignore within-country cultural variation. This may be significant for subsidiaries located in geographically diverse countries such as the USA—consider Alaska versus California. In addition to the obvious socio-economic differences, Olson and Currie (1992) studied managers and their company’s values using the Miles and Snow typology and found that there were also significant gender differences in attitudes and values. Unfortunately, culture has failed to emerge in subsidiary models as a clear contingency variable. To move the literature forward in this area there is a need for more consensus on definitions and theoretical models. These would help in molding consensus, building a foundation so that culture can be included systematically in the wider literature (Howard, 1998). For example, Bartlett and Ghoshal’s (1989) strategy-structure typologies, Jarillo and Martinez’s (1990) roles, and Birkinshaw and

2

Country is identified by the source of data collected.

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Hood’s (1998b) drivers of subsidiary initiative have helped to serve this role in the literature streams we identified earlier in this paper. In the area of cultural research, it is particularly hard to convince authors to use a standard framework, because of the long tradition of challenging standard theories. However some attempts have been made, including Quinn and Rohrbaugh’s (1983) ‘competing values’ framework, which is a three-dimensional framework incorporating control versus flexibility, internal versus external focus, and means versus ends orientation. Howard (1998) tested this and provided qualified support for the model while questioning the bipoliarity of the competing values. Thus there are grounds for optimism that further research will bring us closer to resolution in these areas.

3. From yesterday to tomorrow in subsidiary research The policy implications of subsidiary development should be of considerable interest to future researchers (Hood & Taggart, 1999). This area is becoming increasingly significant as countries become more pragmatic about the development of industry clusters and the impact of subsidiary development on local economy. This literature also brings up issues of after-care policies (Hood & Young, 1994), cluster formation, and growth (Birkinshaw, 2000; Birkinshaw & Hood, 2000). Research in this area is especially valuable as it reminds the MNC manager of countries’ concerns with the nature of subsidiaries that they establish and their consequential impact on economic development. Thus, greater understanding will make it possible to raise the issue in the bargaining process with governments to gain special concessions where appropriate, especially in major projects (Hood & Taggart, 1999). MNCs should also be keen to understand their importance to economic development as members of clusters (Birkinshaw, 2000; Birkinshaw & Hood, 2000) or other networks of subsidiaries within the jurisdiction of a particular government. Further, a realization that some regional, subsidiary and headquarters interests do not coincide (Birkinshaw, 1998) may also lead to interesting ways to solve the problem or for each party to gain influence. The increasingly positive attitude towards autonomy is likely to continue as strategy becomes even more complex to the point where comprehensive MNC-wide strategy formation is beyond the capacity of the top management team. Literature on internal markets such as Birkinshaw and Fey (2000) may help to build a model to clarify the extent to which internal markets should be encouraged. Researchers have begun to make progress studying some issues of subsidiarymanagement within various functional areas. Brock and Thomas (1998) and Brock, Barry, and Thomas (2000) have proposed theoretical frames for understanding issues of planning in the MNC–subsidiary context. Papanastassiou and Pearce (1998) have studied the R&D function, while Burg, Siscovick and Brock (2000) work within the HR area. Structuring of subsidiaries under regional HQs is a common organizational issue on which research has commenced (Schu¨ tte, 1998). However there is still tremendous scope for work within the functional areas of multinational subsidiaries. Finally, one of the most productive areas would be the creation of a model of

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culture in the context of subsidiary-management. A good start would be the testing of the underlying assumptions of subsidiary development in various cultures. This may be based on older theories as attempted by Howard (1998), or on completely novel ones. Progress in this area would provide a potential paradigmatic base within which the many areas of subsidiary research could be situated.

Acknowledgements The authors are grateful to Julian Birkinshaw for his advice and comments on early drafts of this paper.

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