The effect of cultural distence on strategy and structure of Dutch MNEs

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The effect of cultural distance on strategy and structure of

Dutch MNEs

Student name: Hans Ober Student number: 10246533 Thesis supervisor: E. Dirksen MSc Second supervisor: dr. J.P. Lindeque Date of submission: 12 May 2015

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Statement of originality

This document is written by Hans Ober (10246533), who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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1 Abstract

The IR-‐framework (Bartlett & Ghoshal, 1989) is clear; there are matching structures to strategies.

Harzing (2000) limited the amount of strategies to three, which enhanced the chance of a mismatch

between strategy and structure. Mismatches eventually always result in inefficiency (Hall & Saias,

1980), which makes this an important subject. Cultural differences are a broadly discussed subject in

the international management literature and are often linked to strategic and structural decisions

(Hofstede, 1980, Drogedijk & Slangen, 2006). This thesis checks if this is still valid today for modern

companies. The Dutch MNEs used in this thesis are all in the IT business and most of them exist less

than ten years. Only two companies do not have a global strategy and just three, two of which

already have a different strategy, MNEs have a structure different from an international division

structure. The SBUs of these MNEs are located in the least culturally distant countries of this

research. However, these MNEs are by accident also the oldest companies in this research. Therefore

we can only conclude that for young IT MNEs the most used strategy and structure are global

strategy and international division structure where cultural distance does not have any influence. We

discuss the findings and make recommendations for future researchers who want to follow up on

this qualitative research.

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2 Introduction

2.1 Motivation

This research focuses on the effect of country differences on strategy and structure of Dutch MNEs.

In particular how Dutch MNEs manage foreign subsidiaries. The reason this research should be

interesting is the rich history of the Netherlands and the unique current position. The Dutch were the

first with a multinational enterprise that issued shares, namely the VOC (Dutch East India Company).

The entrepreneurial drive of The Netherlands was big and the Dutch had a big influence on the world

economy. Nowadays the roles are different. The Netherlands is a relative rich country, but is has

relative small market (Van Iterson and Olie, 1992) and an open economy, which is to a great extent

interwoven with the world economy. Almost a third of the Dutch GDP is generated through

international trade in goods and services (CBS, 2012). The influences of the European Union and the

massive globalization cause isomorphism (Di Maggio and Powel, 1983) among firms and cause Dutch

MNEs to broaden their markets in foreign countries. This expansion of firms is driven by many

motives (Dunning and Lundan, 2008) to go abroad, and different motives require different strategies

and firm structure. There are many empirical studies (Harzing, 2000; Roth, 1992), as well as country

related studies (Grøgaard, 2011) about this topic, but there is not a lot of research about the specifics

for Dutch Multinational enterprises. It is also a very interesting subject because recent changes and

challenges (Brock and Birkinshaw, 2004) identify, such as increasing levels of global integration, e-‐

commerce and the internet and new network structures.

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2.2 Research questions

This thesis is titled: “The effect of country differences on strategy and structure of Dutch MNEs”. This

title consists of a few separate subjects; (i) Country differences, (ii) Strategy and structure, and the

(iii) effect they have on each other. The apparent question that follows would be: What is the effect

of country differences on strategy and structure of Dutch MNEs? Since this question does not answer some deeper questions that could be answered by a more specific research question. Therefore

these three topics result in the following research question:

RQ: To what extent does cultural differences have an impact on Strategy and Structure of Dutch MNEs?

In order to fully understand and properly answer the main research question the following sub-‐

questions are needed:

SQ1: What impact does cultural differences have on Strategy of Dutch MNEs?

SQ2: What impact does cultural differences have on Structure of Dutch MNEs?

(SQ3: Are the strategy and structure a match with the local responsiveness and global efficiency?)

2.3 Thesis structure

This thesis starts with a literature review. This part will reflect on the four main subjects that came

up in related studies. These subjects are internationalization, integration and responsiveness,

strategy and structure and cultural differences. Many theories and views will be reviewed and

discussed. The theories from the literature review lead us to the more narrowed down theoretical

framework, which starts with the conceptual visualized framework our research is based upon. The

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variables are discussed and the theories about these variables are narrowed down to the most

relevant ones. These theories are intensively analyzed in this section.

This section is followed by the methodology where we discuss how to conduct our research.

Here is discussed how the variables are measured, what companies are used in this research, how

the interviews are conducted and how the data will be analyzed. In this section the companies that

are part of this research are also introduced and there is some general information about these

firms, to give an idea about what kind of business they are in.

The next section is the analysis of the data that is collected. The interviews are analyzed and

summaries about the different characteristics of the firms lead to a solid foundation on which the

strategy and structure can be determined. The analysis of the companies are followed by the cultural

distances between the Netherlands, which is the home country of every firm in this thesis, and the

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3 Literature review

3.1 Internationalization

The explanation of the existence of multinational enterprises (MNEs) is widely discussed by many

authors. The research of Hymer (1960) forms the foundation of later research that now forms the

basic understanding of internationalization of a firm. In his research Hymer (1960) distinguishes

foreign direct investments (FDI) and financial investments by the level of control by the investing

firm. The investing firm has with FDI a level of control in the invested firm. With a financial

investment, the investor does not have direct control of the firm invested in. Therefore only FDI is

relevant in an analysis of a MNE. There are two conditions for a firm to explain the existence of FDI;

(I) foreign firms must possess a countervailing advantage over the local firms to make such an

investment viable and (II) the market for selling this advantage must be imperfect. Hymer identifies

the risk of the various forms of distance (cultural, economic, institutional and geographic) as liability

of foreignness (LOF). This LOF explains why it is harder for MNEs to operate in foreign markets

compared to local foreign competitors that do not have to overcome these distances. This is why

Hymer argues that MNEs have to overcome the LOF by possessing monopolistic advantages that

outweigh the LOF to enter a new foreign market. These monopolistic advantages are firm specific

advantages (FSAs) which include product differentiation, superior marketing and distribution skills,

trademarks or brand names, access to raw materials, economies of scale, access to capital,

technology, patents, marketing, vertical and horizontal integration, etc. This theory is based on

overcoming LOF to leverage FSAs.

Sometimes leveraging FSAs is not what MNEs drive to invest abroad. When focusing on the

firm level instead of the country level, firms may invest abroad to internalize some valuable activities.

This internalization theory (Rugman, 1981) focusses on reducing transactions costs of MNEs. Due to

imperfect external markets and trade barriers MNEs can increase transaction costs, therefore

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acquiring or establishing foreign subsidiaries to take matters into their own hands. Firms aim at

maximizing profit by bypassing their intermediate markets across national borders by internalizing

them (Rugman, 1981). Interdependent activities are brought under common control and ownership.

This overcomes market imperfections like information asymmetries, trade barriers, import/export

quota, ineffective patents, etc. Internalizing activities enables MNEs to transfer, deploy and exploit

their FSAs abroad. The internal market of the MNE permits it to maximize its worldwide earnings

without incurring the risk of dissipating FSAs by external companies. With this internalization theory

the existence of an MNE is not explained by monopolistic advantages that result in exploiting

customers, but by an increasing efficiency caused by a firm that created and exploited a competitive

advantage. Increasing efficiency by cutting external factors and internalizing them eventually

increases customer welfare because efficiently coordinated transactions substitute for inefficient

ones.

Barney (1991) comes up with an additional view; the resource based view of the firm (RBV),

that is not exclusively interesting for MNEs or international management studies, but for all

management research and forms an important foundation of modern studies in this subject. The RBV

focusses on sustained competitive advantages created by leveraging firm’s resources. The firms

resources include all assets, capabilities, organizational processes, firm attributes, information,

knowledge, etc. that is controlled by a firm to conceive and implement strategies that improve its

efficiency and effectiveness (Daft, 1983). All these resources are divided in three categories; Physical

capital resources, Human capital resources and Organizational capital resources. These resources

need to be Valuable, Rare, Imperfectly imitable and Sustainable (VRIS). When a resource meets all

these requirements a firm can use this to gain a sustained competitive advantage (SCA). This

advantage is hard to duplicate by competitors, at least it will take time and cost a lot but is not

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of scholars use the core of the RBV as a base of their research, just as many international

management scholars that will follow later in this research.

Building on the RBV (Barney, 1991) Rugman and Verbeke (1992) argue that FSAs can be

created anywhere in the MNE network, as well in the Headquarters (HQ) as in the foreign subsidiary.

These FSAs can be location bound (LB) or non-‐location bound (NLB). Location bound FSAs are only

exploitable in the subsidiary where this FSA is created or in a certain geographic area and are not

transferrable to the other subsidiaries or HQ. These LB FSAs include local reputation, positioning, and

relationships with economic actors, etc. On the other hand, NLB FSAs are easily transferable across

different subsidiaries at low cost and easy to implement and exploit in other countries. The most

common examples of NLB FSAs are patents and brand names. Later Rugman and Verbeke (2009)

suggested that MNEs could sometimes leverage the country specific advantages (CSA) and use them

both in the host country and the rest of the MNE network. This creates new FSAs and may

eventually become a sustained competitive advantage. Figure 1 shows how these CSAs and FSAs

relate in the home and host country.

Figure 1: International strategy

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The eclectic paradigm of Dunning (1977) integrates theories like the Trade-‐based theory, the

Industrial Organization theory and the Internalization theory (Rugman, 1981) and therefore is a more

comprehensive model to determine investment motives. This eclectic paradigm is also known as the

OLI framework, because this paradigm explains the Ownership (O) -‐, Location (L) -‐, and

Internalization (I) advantages for firms that go abroad.

Ownership advantages are divided in two different categories: Asset advantages (Oa) and

Transactional advantages (Ot). Asset advantages are gained from tangible and intangible assets, such

as patented technologies, brand names, etc. By owning subsidiaries with these advantages, MNEs do

not have to pay unnecessary high prices. Transactional advantages arise from taking advantage with

operating and coordinating a network of geographically widespread foreign affiliates where the MNE

can profit by reducing transaction costs as result of multinational coordination and control of assets.

Localization advantages occur when the host country has certain CSAs or the recombination of

CSAs from the home and host country creates new FSAs. These advantages can arise from structural

market imperfections, such as government regulations and the potential to reduce transaction costs

by reducing risks and to benefit from local opportunities.

Internalization benefits are in this OLI framework related to the entry mode of the MNE in the

host country. The different entry modes are ways to overcome market imperfections or market

failures. These market imperfections can be related to both natural market imperfections and

government imposed market imperfections.

Firms go to a certain country for natural resource seeking, market seeking, efficiency seeking

and strategic asset seeking (SAS) motives. These are the main causes of internationalization. The SAS

motive can be divided in catch-‐up, diversification and R&D springboard as motives to go abroad.

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as potential localization advantages. But the advantages may differ per type of industry.

Internalization advantages are benefits gained when a FDI is made to start or acquire a foreign

affiliate to get benefits from creating, transferring, deploying, recombining and exploiting FSAs

internally opposed to outsourcing. This means firms trade internally to lower costs, avoid trade

regulations and create efficiency by common governance. This framework allows identifying key

location advantages by the four internationalization motives; strategic asset seeking, market seeking,

natural resource seeking and efficiency seeking. The OLI framework struggles to integrate country

and firm level interactions. From the firm’s viewpoint, ownership advantages and internalization

advantages are interrelated parameters in the motives of firms to go abroad, both need to be

considered jointly. But despite discussions, the eclectic paradigm represents for sure the most

comprehensive framework to explain foreign entry mode choices and the economic implications of

that (Rugman et al., 2011).

3.2 Integration and Responsiveness

International strategies are known to be crucial decisions because they drive performance and are

difficult to change once they are chosen. Hence, international strategies are intensively analyzed.

Effectively implementing international strategies to create sustained competitive advantages in

MNEs is a critical strategic management issue. To effectively do so, literature emphasizes that the fit

between organizational capabilities and foreign subsidiary roles is important for the effective

implementation of international strategies (Lin and Hsieh, 2010). There are many factors to consider

for firms to go abroad and it is not easy to manage foreign subsidiaries in such a manner that the

subsidiary is satisfied and has all the required characteristics of the firm. These factors are mostly

related to the foreign subsidiaries pressure to be locally responsive and the pressure of the MNE to

fit into the organization most efficiently. Rosenzweig and Singh (1991, p. 340) make a related

observation, namely: “subsidiaries of MNEs face dual pressures: They are pulled to achieve

isomorphism with the local institutional environment, and they also face an imperative for

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isomorphism towards the local environment and there is pressure for internal consistency within the

MNE. Figure 3 adds a number of countries where subsidiaries are located of one MNE. These figures

show that there has to be a lot of thought in the decision where to go and how to manage a

subsidiary. Westney (1993) also recognizes that there are contradictory forces working on MNEs and

their subsidiaries: The regional diversity of subsidiaries, their contexts, markets and environments,

making for persistent organizational divergence (isomorphic pull exerted by regional or national

environments); International or global terms of competition in markets, and of regulation, making for

institutional convergence (isomorphic pull exerted by an international environment); Consistency

and integration, notably in the transnational enterprise, exerting an isomorphic pull towards an

enterprise model that may lie between national models and represent a sort of international

practice.

Figure 2: Conflicting pressures on a subsidiary of a multinational enterprise

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Figure 3: Variations in structure or process across subsidiaries of a multinational enterprise

Source: Rosenzweig and Singh (1991)

To analyze international strategies the Integration Responsiveness (I-‐R) framework (Barlett

and Ghoshal, 1989) has persisted as the dominant and commonly accepted framework for examining

international strategies and this framework is very well documented (Haugland, 2010). Bartlett and

Ghoshal (1989) argue that the typology of the MNE is two-‐dimensional. This framework classifies

international strategies into a matrix which axes represent “global integration” and “local

responsiveness”. Global efficiency is the level of need for a centralized management of an

geographical widespread organization and the level of cost efficiency on a global scale. That is to

realize the level of return on investment the firm tries to achieve. Local responsiveness is defined as

the extent to which subsidiaries respond to local differences in customer preferences (Harzing,

2000). This affects the products and services that can be adapted to local needs and standards. The

adaption of products and services can be done to maximize the local market, but can also be a result

of cultural pressures or local legislation. Brock & Birkinshaw (2004) argue that the ultimate

responsiveness in an organizational structure would be a true bottom-‐up flow of ideas, information,

and ultimately managerial decision-‐making. So when there are more policies and protocols, there is

less local responsiveness. It is even possible that there is reverse diffusion; managerial practices

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distinct categories and types of international strategy that can be clearly separated from each other

(Haugland, 2010). This model can also be used within countries with large internal differences.

Table 1: The integration responsive framework

High

Global efficiency

Global strategy

Global product division

Transnational strategy Global matrix International strategy International division Multidomestic strategy Geographic area Low Pressures for local responsiveness High

Note: italic font is the matching structure of the firm Source: Bartlett and Ghoshal, 1989

The international strategies in the I-‐R framework (table 1) are the Global strategy,

transnational strategy, international strategy and multidomestic strategy. The most widely used and

known are the global and multidomestic strategies (Harzing, 2002). Many authors do not use the

International strategy in their research (Harzing, 2000), including the original authors Bartlett and

Ghoshal (1987). The international quadrant has many overlays with other types of firms. Also authors

struggled to empirically test this international strategy type (Harzing, 2000). Many authors (Harzing,

2000) use different terms and measures for the IR framework.

Here an explanation of the four strategies in the I-‐R framework:

Global strategy: Firms that operate with a global strategy achieve cost efficiency by globally implementing economies of scale. These firms realize that by standardizing products and services,

and geographically concentrating their most important assets, responsibilities and resources.

Information flows mostly from the headquarters to the subsidiaries. R&D and manufacturing are

centralized and the firm sees the world as one giant market place. The task of the manager is to

implement the strategy that the headquarters dictates.

Transnational strategy: The firm wants to achieve efficiency and also adapt to the host country. The firm adapts where it is appropriate and standardizes where feasible. The

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responsibilities, knowledge and resources are allocated across all foreign subsidiaries. Headquarters

and subsidiaries are reciprocal interdependent, knowledge can be created and transferred from both

the headquarters to the subsidiary and the other way around.

International strategy: This firm is oriented to its home market; therefore many authors refer to this strategy as the home replication strategy. The international oriented firms adapt little to the

host countries in which they have subsidiaries. The foreign subsidiaries are mostly copies of the firm

in the home market and offer the same products and services to the local market. International firms

use the skills and knowledge from their home markets, there is little knowledge flow from the

foreign subsidiary back to the home country. The reason for firms to go abroad with an international

strategy is to replicate home market successes and extend the product life cycle. The foreign

affiliates of the international firm are also very dependent on the home market.

Multidomestic strategy: Multi-‐domestic firms are characterized by their sensitivity to the local customer and market needs. The products and services that the foreign subsidiary provides to

the local markets are adapted to ensure that the firm is highly locally responsive. The headquarters

delegates autonomy and the local manager is responsible for the operation abroad. The country

manager is most likely a local and is highly autonomous; therefore foreign subsidiaries are relatively

independent of one another and of the headquarters.

Table 2 gives an overview of the most important advantages and disadvantages.

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Table 2: Pros and cons of the strategic choices

Strategy Advantages Disadvantages

Global • Leverages low-‐cost

advantages • Lack of local responsiveness • Too much centralized control Transnational • Cost-‐efficient while being

locally responsive

• Engages in global learning and diffusion of innovations

• Organizationally complex • Difficult to implement

International • Leverages home country-‐ based advantages

• Relatively easy to implement

• Lack of local responsiveness • May result in foreign customer

alienation Multidomestic • Maximizes local

responsiveness • High costs due to duplication of efforts in multiple countries Source: Adapted from Peng, 2013

A widely discussed problem for the IR framework is the lack of commonly accepted variables

to empirically test this IR framework. Harzing (2000) identified a set of variables that most authors

use to identify the type of MNE. These variables are: environment/industry, corporate level strategy,

Corporate level organizational design, Subsidiary strategy/role, Subsidiary structure, Control

mechanisms and Human resource practices. In this research the combination of these variables

determine the level of need for global integration and the level of need for local responsiveness.

Eventually this determines the organizational type of the MNE.

Local responsiveness of MNEs is characterized by: The flexibility to tailor the product and service

offerings to the local environment, the incentive package, the inventory control policies, the planning

policies and the cash management protocols (Brock & Birkinshaw, 2004).

Global efficiency of MNEs is characterized by: Global integration mechanisms, global account

management, global purchasing, corporate political activity and perceived individual career benefits

(Brock and Birkenshaw, 2004).

The types of Firm Specific Advantages (FSAs) and organizational characteristics necessary to

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Specifically, global efficiency requires the development and exploitation of transferable (non-‐

location-‐bound) FSAs while firms pursuing local responsiveness rely on non-‐transferable (location-‐

bound) to succeed (Harzing, 2000; Rugman & Verbeke, 1992

3.3 Strategy and Structure of FDI

In the book of Chandler (1964), Structure follows strategy; the relationship between strategy and

structure has been the subject of a number of empirical and conceptual studies. Hall and Saias (1980)

argue with a literature review, that the relationship between strategy and structure is, despite the

title of the paper, reciprocal. Therefore it is reasonable that Chandler states that unless structure

matches strategy, inefficiency will be a result. Hall and Saias agree and find that a mismatch of

strategy and structure eventually always results in inefficiency; a less than optimal input/output

ratio. Therefore managers should take structure into account when planning strategies, something

that by far not all managers currently do.

In the above-‐discussed book Chandler also identifies the M-‐form structure of a firm. The M-‐

form, or the Multidivisional form, refers to the organizational structure where the firm is separated

into different autonomous units. Financial targets from the HQ control these units. The M-‐form is

widely acknowledged as the most successful organizational form of the twentieth century

(Williamson, 1985).

Porter (1980) identifies three strategies; Differentiation, Focus and Cost leadership.

Differentiation aims to create unique and attractive products or services, marketing is a large part of

the value creation of this strategy. Focus is the strategy where a firm operates in a niche market.

Within the focus strategy a cost leadership or differentiation can be identified. Cost leadership

focuses on reducing costs and high volumes. Cost leaders do not innovate. These strategies are not

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(1980) therefore fails to identify related structures. Miller (1986) tries to find related structures to

Porters strategies, but he fails to successfully match these strategies to a structure.

The earlier discussed IR framework emphasizes the importance of global and local forces on

the MNE (Haugland, 2010). In the book of Bartlett and Ghoshal (1989) strategy is linked to structure.

The IR framework assumes that the strategy and structure of the firm need to be in alignment in

order to increase firm performance. Many authors believe this statement is true (e.g. Wang and Suh,

2009).

3.4 Cultural differences

Hofstede (1980) defines culture as "the collective programming of the mind distinguishing the

members of one group or category of people from another". The "category" can refer to nations,

regions within or across nations, ethnicities, religions, occupations, organizations, or the genders.

The world today has over 200 countries. Every country and region has unique cultural features.

In large countries, such as Brazil, China, India, the US and many others, there are many local-‐ or sub

cultures that are unique. The most defining differences of culture are norms, values and beliefs.

Next to national cultures, corporate culture within companies or MNEs is very important for

organizations and their employees. These corporate cultures are a huge factor in the satisfaction

levels of employees and customers. Big MNEs spent millions of dollars to create and maintain a

corporate culture. Superior organizational cultures are sometimes even the key factor of success, for

example Zappos. Zappos’ organizational culture based on 10 core values that should be represented

by every employee and decision taken, which made Zappos the most desirable company to work for.

Hofstede’s (1980) cultural distance index (CDI) is probably the most widely used measurement of

national culture. Hofstede surveyed almost 120,000 IBM employees in over 40 countries about

national culture. He found four bipolar dimensions that were responsible for the differences in the

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uncertainty avoidance. Even today the findings, and updates of this extensive research are publicly

available at www.geert-‐hofstede.com.

Kogut and Singh (1988) developed the Cultural Distance formula. This formula uses Hofstede’s

CDI to measure cultural distance between countries. This formula enables scholars to compare the

combined cultural distances between countries.

Despite the wide usage of Hofstede’s Cultural Distance Index and the pioneering work Hofstede

did to understand national cultures, critiques also appeared. Schwartz (1994) criticizes Hofstede’s

CDI with 5 main critiques. The first critique is that Hofstede’s cultural dimensions do not cover all the

dimensions of a national culture. Second Schwartz argues that the countries Hofstede did use in his

research were not representative for all the cultural differences there are. Adding different countries

would have resulted in more cultural dimensions. Third, he argues that employees of IBM are not

necessarily representative for a countries culture. IBM employees are normally well educated and

exposed to modernizing forces. Hofstede defends his sample by arguing that by consequently using

IBM employees, country differences are still clear and complete. As a fourth critique, Schwartz

argues that due to major worldwide cultural changes the different cultural dimensions are possibly

outdated. The final critique of Schwartz is that the different cultural dimensions can be interpreted

differently in the different countries. Understanding the different dimensions the same way in every

country is necessary to compare the differences between countries (Schwartz, 1994).

To overcome the main critiques, Schwartz (1994) comes up with his Value Survey. In different

researches Schwartz (1992) found 56 individual values recognized across different countries. He

reduced this amount to 45 when he checked for double values. Afterwards he interviewed students

and teachers from 67 different countries. Finally Schwartz found seven dimensions which he labeled

Conservatism, Intellectual autonomy, Affective autonomy, Hierarchy, Egalitarian commitment,

Mastery and Harmony. Schwartz uses importance scores for each dimension. Conservatism is the

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autonomy is the level of autonomy people within a culture have to pursue their intellectual ideas and

affective desires. Hierarchy identifies the acceptance of distributing power, roles and resources

unequally, while egalitarian commitment refers to the extent to which people are inclined to

voluntary put their selfish interests aside to increase the importance of others. Mastery is the

importance of getting ahead by yourself, while harmony is the importance of fitting in harmoniously.

Both Hofstede and Schwartz primarily focus on culture only and they are both extensively

criticized (Drogendijk and Slangen, 2006), but national cultural distance is extensively used in

international business research (Shenkar, 2001).

House et al. published another answer to Hofstede’s cultural distance index, namely the GLOBE

project (2004). GLOBE, short for Global Leadership and Organizational Behavior Effectiveness, used

nine cultural dimensions, each of the dimensions is presented in two variants: society as it is, and

society as it should be. Hence the authors argue that there are (9x2) 18 dimensions.

As you would expect Hofstede (2006) came with a response in the form of an analysis that

suggests that there are only five dimensions. A broader overview of differences between countries is

the CAGE distance framework (Ghemawat, 2001). The CAGE distance framework includes Cultural,

Administrative, Geographical and Economical distances. This framework covers other important

differences than culture alone and therefore it gives a complete overview of differences and barriers

with other countries than some alternatives.

Another option would be to classify a countries’ business system type (Whitely, 2000) and

compare the home country with the host country of the chosen subsidiary. There are seven different

Business Systems categorized, which are formed by differences in characteristics of ownership,

institutional features and characteristics of firms. The seven Business System types are: Fragmented

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business system, highly coordinated business system and state organized business system. These

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4 Theoretical Framework

4.1 Conceptual framework

The conceptual framework of this thesis is graphically displayed in figure 4. To determine strategy

the integration responsiveness framework is used. The IR-‐framework consists on its turn of two

variables, the global efficiency and local responsiveness, here summarized as Integration

responsiveness. The integration responsiveness determines the Strategy, which according to the IR-‐

framework (Bartlett and Ghoshal, 1989) is related to the structure. However, because we use existing

companies, the structure can be determined separately and can now be compared to what it

theoretically should be. To explain matches or mismatches between strategy and structure, we will

be looking at cultural distance of the host-‐ and home country of the MNE.

4.2 Integration responsiveness

The Bartlett and Ghoshal Integration responsiveness (IR) framework (1989) is broadly used (Harzing,

2000) to identify international strategies of MNEs. This two-‐dimensional framework uses the level of

local responsiveness and the level of need for global efficiency to identify three or four strategies.

Many authors used a different typology, but Harzing (2000) managed to reduce those to three

Cultural Distance

Integration

responsiveness

Strategy

+

Structure

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strategies, as originally identified and poorly described by Bartlett and Ghoshal (1987). Bartlett and

Ghoshal (1989) found matching structures to these strategies. In the following part the different

definitions are described according to the literature mentioned.

4.2.1 Local responsiveness

Local responsiveness is defined as the extent to which subsidiaries respond to local differences in

customer preferences and is, therefore, an important element of subsidiary strategy/role (Harzing,

2000). There are three strategic choices for a MNE to establish local responsiveness (Harzing, 2000).

First, adapted products that are specially adapted or modified for the local market and local needs.

Adapting products to local markets is done on a large scale by the food industry, but it is a lot harder

for hardware manufacturers. Hardware or computer companies prefer locally adapted marketing,

which is the second way of a MNE showing local responsiveness. Adapting marketing to local markets

is relatively cheap and the need for those products to be adapted is low. This can make products

developed for the global market more appealing to the local market.

The third apparent way to be locally responsive is local presence of the MNE with one, or

more, subsidiaries with preferably production and R&D close to the end market. This makes it easier

to adapt the product and successfully sell the product locally (Harzing, 2000).

MNEs face several pressures to be locally responsive. The unique resources and capabilities

available to the firm, diversity of local customer needs, differences in distribution channels, local

competition, cultural differences and the host governments’ requirements and regulations are

important drivers for MNEs to adapt to local markets. MNEs express local responsiveness with the

flexibility to tailor the product and service offerings to the local environment, an adapted incentive

package, inventory control policies, planning policies and with the cash management protocols

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4.2.2 Global efficiency (GE)

Global efficiency is defined as the level of need for a centralized management of a geographical

widespread organization and the level of cost efficiency on a global scale. That is to realize the level

of return on investment the firm tries to achieve (Bartlett and Ghoshal, 1989). This efficiency is

mainly achieved by integrating business mechanisms. This way MNEs realize synergies among their

subsidiaries to lower costs and reduce the costs of doing business abroad by the exchange of

resources within the different countries the subsidiaries are located in.

4.3 Strategy

Bartlett and Ghoshal (1989) identified different strategy types, but did not describe the

characteristics of these types in a detailed and systematic way, which led to other researchers come

up with other strategy types. Types that were used in different studies where Polycentric,

international, multidomestic, global, ethnocentric, geocentric and transnational. Researchers used all

kind of different typologies for the strategies in the IR-‐framework. A lot of international management

related studies assume the existence of different types of MNEs. This literature uses many terms to

describe those types. Harzing (2000) decided that is was time to structure and measure these types

to clarify the abundance of types and settle with a few clear described and measurable types. The

author first focused on the existing literature to test and derive comprehensive typologies. Bartlett

and Ghoshal (1989) were the most influential and had the most extensive typologies, however the

research of these authors was limited. Harzing (2000) found three different typologies that had

several variables that significantly differed among the different each other; Multidomestic, Global

and Transnational. There are twelve different characteristics that determine the type a MNE is, these

are shown in table 3. The international type had too much overlap with the other types. Therefore

we do not use the international type in this paper.

The effect of cultural distence on strategy and structure of Dutch MNEs

The effect of cultural distance on strategy and structure of

Dutch MNEs

Statement of originality

1 Abstract

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