Managing, Subsidiary Dynamics: Headquarters Role, Capability Development, and China Strategy: Volume 22

Joseph L. C. Cheng is Professor of International Business and Management and Director of the Illinois Global Business Initiative (IGBI) in the College of Business at the University of Illinois, Urbana-Champaign. During the 2008–2009 academic year, he was a visiting professor at the University of Hong Kong on leave from the University of Illinois.

At the time of this writing, the world was experiencing its worse recession and financial crisis since the Great Depression of the 1930s. After half a century of world growth and two decades of transformation to capitalism by much of Eastern Europe and Asia, world national product and trade will fall this year. For the first time since the postwar growth miracle, multinational enterprises (MNEs) are restructuring, cutting their foreign investments and subsidiary operations. Many senior expatriate managers, particularly those working in the global finance industry, have lost their jobs or been repatriated. All eyes are on the upcoming G20 meeting in April, where the new U.S President Barack Obama will be meeting his counterparts from China, the United Kingdom, Germany, Japan, and other member nations to discuss and formulate globally coordinated fiscal and monetary policies to help reverse the course of the current world economic turmoil.

Matrix structures are complex and conflict prone, so multinational enterprises (MNEs) would utilize them only if they conferred some advantage over less complex organizational structures. Based upon the information-processing view, a theory of matrix advantage is proposed. It is supported by a secondary analysis of data from a major study of German MNEs. Matrix structures are shown to have an advantage over the elementary structural types. Specifically, the matrix structures fit higher levels of transnational strategy than elementary structures. Transnational strategy is assessed by two concepts: firm internationalization (involvement in foreign sales, manufacturing, and research and development (R&D)) and corporate integration (intracompany transfers). Moreover, three-dimensional matrices are associated with higher levels of transnational strategy than are two-dimensional matrices, confirming the gains from having additional structural dimensions. Matrix structures arise because of the need to simultaneously fit high levels of both firm internationalization and corporate integration. Matrices fit the transnational strategy type of Bartlett and Ghoshal. Implications are drawn for the relationship between the head office and the subsidiary. The matrix often subjects the subsidiary to conflicting expectations from the head office, which it can attempt to manage. Similarly, the head office is challenged by the task of integrating the information that comes from different dimensions of the matrix.

We examine how internal markets channel the limited attention of corporate headquarters (HQ) executives inside the multinational enterprise. In doing so, we desire to understand three related set of issues: First, why do some HQ executives invest more time and effort than others in the international marketplace? Second, what factors explain the attention that specific subsidiaries attract within the multinational system? Third, how does such attention relate to subsidiary performance? Unlike fully independent local companies, subsidiaries have fundamental ties to a corporate network that can contribute to the realization of local objectives or, on the contrary, restrict their scope of actions and hinder performance. By securing the attention they need from HQ, subsidiaries can achieve benefits that justify their association to the multinational network, without compromising the pursuit of local objectives.

This chapter addresses an unresolved theoretical issue in international business: the impact of existing, committed assets in a host location on parent and subsidiary decisions regarding the configuration of future value-adding activities for the location. We develop a measure of investment committedness, or the degree of flexibility versus specificity of existing assets in a host location, to explore this issue. The measure assesses whether assets, such as brands, human capital, process technologies, and supplier relations, retain only scrap value outside their current application or they can be redeployed to alternative value-adding activities in the host location or shifted offshore, either within the multinational enterprise (MNE) or to another user. The measure is a key step in developing a model of strategic choice for the future configuration of value-adding activities by MNEs in host locations. Drawing on firm-specific data from 237 MNE subsidiaries operating in Australia, we first present a traditional integration-responsiveness classification of subsidiary activities. This static snapshot of the subsidiaries’ current profiles is then compared with the measure's preliminary findings on the levels of investment committedness and strategic flexibility available to the sample MNEs and how this may shape strategic allocation decisions, including divestment and withdrawal.

Taken together, these three chapters cover three important building blocks in the effective management of headquarters–subsidiary relations: corporate structure, executive attention, and resource allocation. A common theme across the three chapters is their focus on system flexibility and how this can be achieved for the MNE. Specifically, their research suggests that through the use of matrix structures coupled with conflict resolution training for managers, promoting subsidiary initiatives and profile building to capture headquarters attention, and allocating resources with limited committedness to foreign operations would enable the MNE to better scan and respond to a fast-changing external environment. This system flexibility is particularly important for MNEs that adopt the differentiated network model, which among other things, requires subsidiaries to share knowledge and resources in the formulation and implementation of company-wide response actions as demanded by the circumstance.

This chapter provides an empirical investigation into the process by which subsidiaries in multinational firms add capabilities in a given line of business. We describe the process of subsidiary capability development as a non-recursive relationship between the parent's transfer of decision-making power and capability development, which then affects subsidiary performance. The empirical results from survey data confirm such mutually reinforcing mechanisms and highlight the importance of both external and internal forces that facilitate or impede the developmental process.

This empirical study explores knowledge outflows from MNE subsidiaries and its impact on subsidiary performance. We develop hypotheses derived from literature on MNE knowledge flows integrated with an organizational economics perspective on knowledge-creating MNE subsidiaries. The hypotheses are tested using a simultaneous equation model applied to a unique data set encompassing a German MNE, HeidelbergCement. Enablers and impediments of knowledge outflows are assessed to explain why subsidiary managers share their knowledge with other MNE units. Our findings suggest that knowledge outflows increase a subsidiary's performance only up to a certain point and that too much knowledge sharing is detrimental to the contributing subsidiary's performance.

One of the major conceptual dilemmas of international management has been issue of the liability of foreignness. The multinational enterprise (MNE), as it expands internationally, faces two fundamental problems: does it continue to do abroad what it does well at home, or does it change its approach to adapt to the differing conditions in its new markets? Additionally, the option of changing its approach confronts a major constraint: how to cover the costs of organizational complexity brought on by multinationality. Together, these problems and this constraint imply that multinationals face complexity and strategic-fit costs that quickly overwhelm the gains from economies of scale and scope that are derived from moving abroad into what are, for them, new markets. We know by the fact that multinationals exist and thrive that they are able to overcome these concerns. However, the question of why and how remains something of a mystery, although one we can conceptually work around this with a bit of theoretical and semantic legerdemain.

Drawing upon new institutional economics and contracting theory, this chapter extends the concept of headquarter (HQ)–subsidiary relationships to capture unconventional types of subsidiary organizations in transition economies. A conceptual framework is first developed to examine how the interplay between institutions and subsidiaries shapes HQ–subsidiary relations in rapidly changing institutional environments. It is then applied to study contractual joint ventures in China, an important, yet often misunderstood, form of multinational subsidiary operation. The research sheds new light on how parent firms design contract provisions, credible commitments, and contract renegotiation mechanisms for the effective management of joint venture subsidiaries. These findings have important implications for future inquiry into the interplay between institutions and organizations in safeguarding subsidiary operations in transition economies.

Many studies of control and international joint venture (IJV) performance have focused on ownership and management control. We develop a conceptual framework to explain how strategies affect the relationship between management control and joint venture performance. Specifically, we focus on serving the host-country customer and extending the life cycle of the foreign partner's products. Using a sample of Sino–U.S. and Sino–Japanese joint ventures, we found that serving the host-country customer strengthens the positive relationship between management control by the foreign partner and IJV performance. However, extending the product life cycle of the foreign partner's products weakens the positive relationship between management control by the foreign partner and IJV performance. We discuss the performance implications of dealing with both strategies and reveal a complex relationship between equity ownership, management control, and IJV performance.

Drawing on organization theory perspectives, this chapter investigates how multinational enterprises (MNEs) based in different home countries influence each other's foreign entry decisions. The proposition that the subsidiaries of multinationals from different countries constitute a reference environment and that this environment provides important information for potential new entrants was tested with panel data on foreign entries from 55 home countries into China from 1979 to 1995. The rate of new entries from a focal home country was found to correlate with the number of foreign subsidiaries already established by firms from other home countries with cultures similar to that of the focal home country. This was interpreted as reflecting transnational learning and competition. Uncertainty derived from home-host-country trade ties and cultural differences was shown to moderate this transnational mimetic learning.

While these three studies investigated different aspects of MNE operations in China, they all seem to converge on one important research topic: the multifaceted role of learning in the choice of a firm's international expansion strategy (e.g., timing of entry into the Chinese market) or the choice of an organizational form as the vehicle for expansion (e.g., mode and extent of managerial control). The results show that learning occurs not only between foreign and local Chinese partners but also between existing and potential entrants from the same or culturally similar countries. In addition, they also suggest that learning affects not only the initial entry decision and mode choice but also the evolution of the relationship between the MNE entrant and its local partner over time. Furthermore, the study by Wang and Nicholas demonstrates that a MNE entrant into the highly dynamic Chinese market can expect to acquire new information about the country's evolving institutional environment and may find it advantageous to modify its strategic or organizational choices as the country's institutional reform progresses.