Subsidiary roles

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Subsidiary roles
Torben Pedersen Professor Center for Strategic
Management and Globalisation Copenhagen Business
School tp.smg_at_cbs.dk
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A topic of relevance

• By the beginning of the 21st century, there
  were over 64,000 firms operating internationally,
  controlling at least 870,000 foreign affiliates
• UNCTAD (2003)

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In the beginning.

• Subsidiaries the long arm of the headquarters
  (HQ)
• everything designed from HQ
• .but not all subsidiaries are equal!

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Degree of Strategic responsibility /
activityWhite Poynter (1984)
Degree of strategic responsibility
Strategic Independent Unit
Product Specialist
Miniature replica
Marketing Satellite/ Rationalised Manufacturer
Scope of Activity
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Change of subsidiary roles(Birkinshaw Hood)
Subsidiary resources
Host country factors
MNC Organisational and structural factors
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The network context of a subsidiary
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The Differentiated MNC

• A shift towards competence creation in the
  internationally dispersed networks of MNCs
• Knowledge have become the key resource
• Subsidiary roles have shifted from being
  home-base exploiting to being home-base
  augmenting
• Subsidiaries differ in terms of resources,
  competencies and cognitive frames

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Subsidary Power

• the subsidiaries ability to influence
  decision-making and the allocation of firm
  resources
• is the ability to get others to do something
  that they would not otherwise do (Dahl 1957)

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Subsidiary power

• How can a subsidiary have bargaining power when
  it has no legally defensible property rights?
• The key resources are intangible assets like
  knowledge which reside in the heads of the
  employees
• Ownership rights over the human and relational
  resources of knowledge are difficult if not
  impossible to enforce

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Interests of subsidiaries

• Subsidiaries pursue their own interests and or
  not a mechanical instrument of HQs will. They may
  have two sets of objectives
• External objective serve the firm by increasing
  firm sales and profits (Creating the cake)
  profit-seeking
• Internal objective pursue its own interests in
  order to increase its share of the value created
  by the firm (Dividing the cake) rent-seeking

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The network context of a subsidiary
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Decision making in organizations Two views I

• AGENCY THEORY (Theories of the Firm)
• Decisions are designed by the principal (HQ) to
  enhance efficiency, promote innovation and
  generally to maximize shareholder value.
• Decision rights are loaned, not owned
• Headquarter retains the power of veto i.e. the
  ability to overule any subsidiary decision
• Applicable to the hierarchical model of the MNC
  where subsidiaries mainly exploit home-based
  advantages

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Decision making in organizations Two views II

• RESOURCE-DEPENDENCY THEORY
• Power is based on the control of ressources that
  are considered strategic within the organization
  those ressources that cope with critical
  problems arising from the environment
• Subsidiaries with strong bargaining power have a
  degree of ownership over their decision rights
  rather than holding them at the pleasure of HQs
• Applicable to competence-creating subsidiaries

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Theoretical conclusion
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Empirical test of Resource Dependency theory
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Resource-Dependency Theory

• power is a property of a relationship and not
  attribute of a unit (Emerson 1962)
• Power is held by divisions that are the most
  important for coping with and solving the
  critical problems of the organization (Pfeffer
  and Salancik 1977)
• Power stems from the dependency of one unit on
  another generated by the control of critical
  resources
• Dependency emerges from subsidiaries ability to
  provide critical and non-substitutable resources
  that enable MNC-units to improve performance and
  adapt to its environment

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Functional vs. strategic power

• Power is not a unitary concept
• Subsidiary responsibilities vary in terms of
  functional specialization and mandates
• We distinguish between power within particular
  functions and strategic power
• Functional power stems from functional competency
• Strategic power relates to controlling the
  direction of the firm as whole

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Functional competencies
Subsidiary RD competencies
Subsidiary marketing logistics competencies
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The Full Model
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The data

• Survey data drawn from the Centers of Excellence
  project, launched in May 1996.
• Foreign MNE subsidiaries located in seven
  Northern European countries
• Response rate varied from 20 (UK) to 55
  (Sweden)

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1 - Measuring the MNCs dependency on RD-related
competencies

• To what extent are the subsidiarys distinctive
  competences in the following activities of use
  for other units in the Corporation (1no use for
  other units at all, 7very useful for other
  units)
• Research Development Production technology
• What impact has the subsidiary on the development
  of competence of other units within the parent
  MNE (1no impact at all, 7very high impact)
• Research Development Production technology

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2 - Measuring subsidiary RD-related power

• To what extent has the subsidiary influenced the
  parent MNE when it concerns
• Corporate investments in production technology
• Corporate investments in RD
• Corporate investments in new products
• (1no influence at all, 7very high influence)

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4 - Measuring subsidiary output-related power

• To what extent has the subsidiary influenced the
  parent MNE when it concerns
• Corporate business volume
• Corporate market competitiveness
• Corporate margins

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5 - Measuring subsidiary strategic power

• To what extent has the subsidiary influenced the
  parent MNE when it concerns
• Establishment of new units in host country
• Establishment of new units outside host country
• Acquisitions in host country
• Acquisitions outside host country
• (1no influence at all, 7very high influence)

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Estimation

• Five equation model
• Estimating methodology
• Iterated 3SLS

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(No Transcript)
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Results
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Concluding remarks

• Power is a multidimensional concept rather than a
  unitary concept
• Dependency is a very important determinant of
  subsidiary power
• Power is exercised at different levels and power
  at lower levels is a prerequisite to power at a
  higher level
• Strategic power within MNEs is driven by RD-line
  considerations

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3 - Measuring the MNEs use of subsidiary
marketing competence

• To what extent are the subsidiarys distinctive
  competences in the following activities of use
  for other units in the Corporation (1no use for
  other units at all, 7very useful for other
  units)
• Marketing/Sales Logistics/distribution
  Purchasing
• What impact has the subsidiary on the development
  of competence of other units within the parent
  MNE (1no impact at all, 7very high impact)
• Marketing/Sales Logistics/distribution
  Purchasing
• (1no influence at all, 7very high influence)