Stewart Johnston

Control and Coordination

To continue the investigation of the HQ-subsidiary relationship, the next undertaking is to analyze the association between subsidiary task and control and coordination in the MNC. The types of control and coordination mechanisms imposed on the various subsidiaries are a central aspect of the HQ-subsidiary relationship. More specifically, this chapter investigates the use of the devices implemented by HQ to control and coordinate activities in the MNC’s network of subsidiaries.

The Strategies of the Modern MNC

This chapter shifts the analysis to the modern MNC and strategies based upon innovation and knowledge management. First, the central place of these issues in the transnational strategy and the organizational form of heterarchy are explained. Then, because the subsidiary’s task, autonomy, control and contribution are intertwined with all aspects of knowledge, the remainder of this chapter examines the issues of organizational knowledge, learning and memory and the resource-based view of the firm to provide the conceptual base for understanding knowledge in the HQ-subsidiary relationship.

Knowledge Management and Innovation

Theories of the firm have usually emerged to explain why firms differ in their performance (Chandler, 1962; Donaldson, 1995; Coase, 1937; Williamson, 1975; Wernerfelt, 1984; Barney, 1991) and these performance differentials emerge essentially as a result of a firms ability to create a sustained competitive advantage that generates, sustains and appropriates rents (Coff, 2003b: 245). Today, knowledge, learning and innovation are at the heart of our understanding of competitive advantage and firm performance. For the purposes of this chapter the two most important theoretical perspectives to have been applied to understand these issues are organizational learning and the RBV. Building upon Kogut and Zander (1992) and Tsai and Ghoshal (1998), Tsai (2001: 996) stated that ‘inside a multiunit organization … knowledge transfer among organizational units provide opportunities for mutual learning and interunit cooperation that stimulate the creation of new knowledge and, at the same time, contributes to the organizational units’ ability to innovate’. The intricate web of relationships that links these themes is currently the dominant paradigm in the strategy and international business academic literatures.

A New Model of the Headquarters- subsidiary Relationship

The several literatures presented in the Chapters 2 and 3 above have not made much progress in extending their analysis to include HQ- subsidiary relations. This is because the picture has become more complex in recent times. As international competition grew, so did proliferation of strategies. The extant research was generally based upon detailed examination of relatively small numbers of firms. For example, few if any large-scale studies in this literature linked strategy with particular industries or product markets in the manner of Porter. The classifications that have emerged were therefore simply descriptive, providing labels for the outcomes of a given context. The hierarchical form and its various local and global subsidiary tasks remained unexplained and the new dimensions introduced by the arrival of the transnational/heterachy have not yet been convincingly assimilated into the previous work.

The Strategies of the Developing MNC

The next two chapters examine the strategies and theoretical underpinnings of the developing and modern MNC. They provide the conceptual base of the study in that these strategies are the prime determinants of the subsidiary task and the characteristics of the HQ- subsidiary relationship.

Subsidiary Task and Subsidiary Autonomy

It was argued in Chapter 1 that the relationship between headquarters and subsidiaries is central to the understanding of the functioning of multinational corporations and, as several authors have pointed out (Birkinshaw, Hood and Jonsson, 1998; Enright, 2000; Edwards, Ahmad and Moss, 2002), the subsidiary is playing an increasingly important role in generating competitive advantage for the overall MNC. The sometimes conflicting and sometimes cooperative nature of this connection has become a significant concern in international management. The ambivalence in the relationship frequently arises because the subsidiary requires or desires a degree of autonomy of decision-making that the HQ is not always disposed to concede. Over the last two decades, subsidiary autonomy has been the subject of considerable academic research. An important outcome of the nature of the task that the subsidiary performs on behalf of the overall corporation is its connection with the subsidiary’s level of autonomy. The first contribution of this chapter is to investigate the relationship between level of subsidiary autonomy and subsidiary task in the context of the range of strategies available to the MNC. The second results from subsidiary autonomy being a phenomenon independent of the factors used to derive the subsidiary task clusters in Chapter 6. Hence, by testing hypotheses regarding the task-autonomy relationship the investigation also adds important external validation to the clusters derived in Chapter 6.

Conclusions, Limitations and Future Directions

In the development of the HQ-subsidiary model, this research further clarified the nature of the HQ-subsidiary relationship in the MNC by providing a detailed theoretical underpinning for a series of HQ-subsidiary connections. Based upon Chandler’s development of strategic contingency theory, the transaction cost approach and the knowledge- oriented variant of the resource-based view, a new model was presented. This model posited that the choice of advantage generating strategy employed by the MNC, the knowledge asymmetries that this strategy engendered, the subsidiary tasks, subsidiary autonomy, how the subsidiaries were controlled by HQ and the place of the subsidiaries in the knowledge management and innovation networks of the MNC were intimately and reciprocally interrelated features of the HQ-subsidiary relationship. While some of the links in this interplay had been addressed previously in the literature, this model was an important step forward because, for the first time, it synthesized, integrated and extended, often disparate, conceptual and empirical knowledge, to produce a new model of an important organizational phenomenon.

MNC Strategies and Subsidiary Tasks

In Chapter 5 a model was developed that hypothesized the existence of six distinct subsidiary tasks each of which was derived from the advantage-generating strategy embraced by the MNC parent. Each subsidiary task was proposed to be manifest as a group of firms. The relevant section of the basic model is shown in Figure 6.1 below.

Subsidiary Size and Subsidiary Autonomy

As was demonstrated in the previous chapter, over the last two decades, subsidiary autonomy has been the subject of considerable academic research but the specific relationship between the subsidiary’s size and its decision-making autonomy has not been the primary subject of research since a preliminary investigation more than two decades ago (Hedlund, 1981).