Is the transnational organizational model appropriate for all?

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Is the transnational organizational

model appropriate for all?

An in-depth study of subsidiaries’ role in a single multinational

corporation

Pieter Noordhoorn S1258079

University of Groningen

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Foreword

This paper symbolizes the finalization of my doctoraal study International Economics and Business at the Faculty of Economics from the University of Groningen. Here, the identification of the transnational organizational model forms the research subject in a case-study concerning the subsidiaries from a multinational company.

In the period that I have worked on this paper, I have received valuable help from a couple of persons whom I would like to thank here. First of all I would like to thank my supervisor from the University of Groningen, Dr. Desislava Dikova. By giving me useful directions, literature advice and suggestions concerning the research questionnaire developed in this paper, Dr. Dikova has made a large contribution to the paper as it lies before you. Second, I like to thank Associate Professor Anne-Wil Harzing from the University of Melbourne for trusting me with the details of her work concerning the transnational organizational model. Her work has inspired and encouraged me during the writing of the paper. The third person I would like to mention is Eric Dumez, president of Henkel Benelux in Brussels, Belgium. Mr. Dumez has provided me the opportunity to do an internship of six months in Brussels and has additionally played an important part in the diffusion of the research questionnaire. Without his help, and the cooperation of the respondents of the questionnaire, this paper could not have been written. Last but not least I would like to thank my family, friends and others who have supported me whilst I was writing my thesis.

Pieter Noordhoorn

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Abstract

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1. Introduction

ver the past decennia, global markets have changed dramatically. Europe and the countries in the South-East Asian region have grown new economies out of the ashes of the Second World War and the United States developed itself as the most powerful political and economic entity of the second half of the twentieth century. The transformation that is going on in the world occurs not only in western civilization, but is converting the whole world into one community (Drucker, 1995). With the unification of markets and industries towards one common market, new economic incentives are given to companies that operate across the borders of their national market.

The economic, social and political movements in the world markets have opened up new opportunities for those who can organize themselves to conduct business in an efficient and responsive manner. One of the stakeholders that enhanced and stimulated the unification of the economical market place is the multinational company (MNC). According to the results of the World Investment Report 2005 undertaken by the United Nations Conference on Trade and Development (UNCTAD), MNCs have realized a growth in foreign affiliate assets from 2.1 billion dollar in 1982 to 36.0 billion dollar in 2004. Similar outcomes are found when looking at the growth of foreign direct investments (FDI) inflows, outflows and at the number of cross border mergers and acquisitions.1 From this results the substantial role of MNCs in the unification of the world and its markets.

An important reason behind the success of the MNC is its underlying organizational model. The MNC organizational model contains information about the configuration and coordination of the MNC activities and is linked to the strategy of the MNC. The changes in the world markets also have their effect on the MNC strategy and on the way it is organized. Together with the opening up of new foreign markets, MNCs have seen a growth in the competition of other MNCs in their home market. To face the competition, the MNC has to integrate multiple strategic goals into its operations, hereby demanding a flexible but efficient organizational model. As put by Bartlett & Ghoshal: “there is a great

1

These and other indicators of FDI and international production can be found in appendix A.

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deal of truth in the old maxim “nothing endures but change” to which they (managers) might be tempted to add, “and with every round of change the task becomes more complex”” (Bartlett and Ghoshal, 1989: 197). The need for a model that can simultaneously deal with multidimensional strategies has resulted in the transnational organizational model. This model, that was first identified by Bartlett and Ghoshal, can be described as the: “model (that), unlike traditional organizational forms, is designed and developed specifically to respond to complexity and change” (Bartlett and Ghoshal, 1989: 197).

With the introduction of this new organizational model, the question arises if the transnational organizational model provides a “universal solution” to the organizational challenged faced by MNCs? Is it an organizational form appropriate for all multination, corporations around the world? Indeed, the persistence of the transnational solution in practice received some albeit limited empirical support. Leong and Tan (1993) collected evidence on the presence of the transnational organizational model. In this study, chief executive officers of large MNCs were asked to indicate which out of four MNC organizational models (three traditional models and the transnational model)2 was at work in their MNC. Specifically, respondents were asked to indicate how their company achieved competitiveness in the global market on one of four forced choices: (a) by building a strong local presence through sensitivity and responsiveness to national differences among countries; (b) by building cost advantages through global-scaled operations; (c) by exploiting their parent company's knowledge and capabilities through worldwide implementation and adaptation; or (d) by building interdependent resources with specialized subsidiary roles while maintaining flexible and joint operations among countries. Little evidence was found on the transnational organizational model. However, the results of this research may be biased when the MNC managers classified their organization wrongly.

From Leong and Tan their work (1993) it becomes clear that a better understanding of the transnational model characteristics is necessary to extend the work of Bartlett and Ghoshal (1989). In an attempt to create a more detailed idea of the implications of the

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transnational organizational model, Harzing (2000) collected empirical results from 287 subsidiaries and headquarters of 104 different MNCs. The author aimed at measuring the corporate strategy, by creating own questions, based on the characteristics of the different types of firms as described in Bartlett and Ghoshal (1989). Four statements were constructed to measure whether competition was predominantly global or local and whether the corporate strategy was focused on achieving economies of scale or local differentiation. Harzing confirms the specific character of the transnational organizational model compared to the multi-domestic and global organizational models. Differences between the models concerning organizational design, local responsiveness and interdependencies are found.

One of the drawbacks in the works of Leong and Tang (1993) and Harzing (2000) is that they have focused only on broad differences across entire multinational corporations and not on variations across subsidiaries performing different strategic roles within the same multinational corporation (Gupta and Govindarajan, 1994). Thus, while extant empirical research provides some clues regarding how the transnational structure of a number of firms might differ from the global or multi-domestic structure of others, it sheds little light on how within those multinationals corporate control over one subsidiary and its unique strategic role might differ from another. This paper is a descriptive case-study of the MNC transnational organizational model. Starting from conceptual models of previous research in the field of MNC organizational models, it determines the specific roles subsidiaries have within the transnational organizational model in terms of coordination and control characteristics and patterns of intra MNC transactions between headquarters and the rest of the corporation (i.e. other subsidiaries) to arrive at a conclusion about the general applicability of the transnational organizational model for MNCs.

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1.1 Problem statement

In the field of MNC organizational model studies, this paper centers around the transnational organizational model. The transnational organizational model is identified as the fourth distinct type of organizational model that an MNC can implement. The MNC that is characterized by the transnational organizational model is referred to as the transnational company (TNC). To identify a TNC, the characteristics of its organizational model have to be known. However, as there is no broad consensus among the organizational model scholars concerning the characteristics of the transnational organizational model, a framework of these characteristics has to be made first.

The problem statement is a combination of the problem definition and the research question that is drawn from this definition. The problem definition of this paper is:

Determine the characteristics and the roles of the subsidiaries within the TNC network in order to establish the type of organizational model applied.

Deducted from the problem definition, the research question can be formulated as follows:

Is the transnational organizational form appropriate for all companies with worldwide operations?

To answer the research question, the following sub-question needs to be answered first:

In respect to subsidiaries’ strategic roles, what are the characteristics of the transnational organizational model?

1.2 Significance of the study for the field of MNC organizational models

From the 1980s onwards, the field of MNC organizational models can be divided into two distinct streams. First, there is the work of scholars who place the MNC as a whole central in their research.3 Here, different MNC strategic issues are identified and

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theorized to create a better insight of the ongoing processes and activities in the MNC. To map the characteristics of an MNC, this stream focuses on how an MNC integrates its activities, coordinates its corporate strategy and incorporates local responsiveness in the company’s operations. The benefit of taking the MNC as a whole as the subject of research is the ability to create an abstract view of the MNC operations. Although this facilitates the comparison between different MNCs and it also provides better insights in the different industries in which MNCs are active (Porter, 1986), the generalized outcomes have little practical relevance if one wants to understand the actual challenges an MNC has to face and the consequences for the characteristics of its organizational model.

Second, there is the group of scholars which focuses on the loose elements that together form the characteristics of the MNC.4 In the work of Bartlett and Ghoshal (1989), MNC subsidiaries are identified as one of the essential elements of the transnational organizational model. Building forward on their typology, important insights in the configuration of the transnational organizational model are revealed5. In this discussion attention is paid to the intra-corporate flows of knowledge, products and capital and the different coordination and control mechanism that are applied in the TNC.

In order to answer the research question, both of the above mentioned streams of theory need to be combined into and integrative framework of transnational characteristics. According to Birkinshaw and Morrison (1995), a definite framework of the transnational model has not been identified because there has hardly been any undertakings which attempts to integrate the results of the conceptual MNC organizational studies (Bartlett and Ghoshal, 1989; Hedlund, 1986; White and Poynter, 1990) with studies into the organizational elements of the transnational model (Gupta and Govindarajan, 1991a, 2000; Roth and Nigh, 1992). Findings from both streams of theory are used as theoretical underpinnings of the developed transnational framework.

4

Examples of scholars in this field are Birkinshaw and Morrison (1995), Gupta and Govindarajan (1991a, 1991b, 2000), Martinez and Jarillo (1989) and Roth and Nigh (1992).

5

In the detailed overview of researches concerning MNC subsidiary strategies and management,

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The uniqueness of the present contribution can be presented as:

- The transnational organizational model characteristics are identified in the different streams of MNC organizational model literature and are presented in one framework. - Different subsidiary roles, typical of the transnational organizational model, are found

to be held in a single MNC.

- An in-depth survey is carried out to collect relevant information from 79 subsidiaries located in 27 different countries.

- The primary information is obtained at subsidiary-level, directly from the subsidiary manager directors.

- The empirical findings can be used as an indicator of future direction in the field of MNC organizational models.

1.3 Overview of the methodology

The data is collected through the use of a research questionnaire. The existence of the transnational organizational model at the MNC is measured by the presence of the different subsidiary roles as they were developed by Bartlett and Ghoshal (1989). This questionnaire was used to obtain data concerning the variables that measure for the differences between the MNC subsidiaries, such as the intra-corporate flows of knowledge, products and capital and the different coordination and control mechanisms. The findings were processed and analyzed via different statistical tests (ANOVA analysis and LSD comparison tests).

1.4 Limitations of the study

The data collection for the study took place at a single MNC. Due to this detailed focus on a single MNC, limited general conclusions can be drawn from the empirical results. However, as the empirical study was intended to test the developed transnational framework, the data receiving process can be applied to other MNCs to broaden the understanding of the transnational organizational model.

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decisions that on their turn can influence the way and pace the transnational model is installed.6

1.5 Definitions

Because certain terms and definitions are sometimes used ambiguously in the literature or lack general currency, the most important concepts of the study are explained below.

Multinational company (MNC): incorporated or unincorporated enterprise comprising a parent enterprise and its subsidiaries (also referred to as affiliates). A parent enterprise is defined as an enterprise that controls assets of entities in countries other than its home country, usually by owning a certain equity capital stake (higher than 50%). A foreign subsidiary is an enterprise in which an investor, who is resident in another economy, owns a stake that permits a lasting interest in the management of that enterprise.7

Organizational model: the blue-print of how an MNC is organized. The organizational model reveals how the MNC business activities take place, which roles the different subsidiaries have, and how the strategic goals are pursued.

Transnational organizational model: the MNC organizational model (not the multi-domestic, global or international) whose set of characteristics belonging to the TNC are considered to be substantially different from other organizational models. The characteristics of this model are the differentiated subsidiary roles, the application of diversified coordination and control mechanisms and the reciprocal flows of knowledge, products and capital between the dispersed subsidiaries.

1.6 Paper outline

In the next chapter the literature review concerning the transnational organizational model is developed. First, a brief overview of the history of MNC organizational models is given (2.1). Second, the changes in the current MNC environment are discussed to create a basic understanding of the requirements that the transnational organizational

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Examples of external forces are the behavior of competitors and governmental regulations.

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model needs to fulfill (2.2). In the next section (2.3) the characteristics of the TNC are identified. The rest of Chapter 2 is used to explain these characteristics (2.4 and 2.5).

In chapter 3, the hypotheses and methodology of the paper are presented. Based on the transnational framework developed in the previous chapter, the hypotheses are developed (3.1). Furthermore, the methodology concerning the development of the research questionnaire is discussed (3.2 and 3.3). The research questionnaire is used to examine the existence of a transnational organizational model in an MNC.

Chapter 4 presents the results of the questionnaire. The obtained data is analyzed and processed into significant figures. After clustering the subsidiaries according to subsidiary typology (4.1), the different subsidiary roles are examined on their scores to answer the hypotheses concerning the transnational organizational model (4.2).

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2. The transnational organizational model

he transnational organizational model first appeared in the field of MNC organizational models. As such, this chapter starts with a brief overview of the general history of field of MNC organizational models (2.1). From this overview it becomes clear that the business environment plays an important part in the development of MNC organizational models. The changes in the business environment have been a great incentive for management practitioners and scholars to start developing the transnational organizational model. For this reason, four elements that characterize the current MNC business environment are discussed next: macro-economic changes, social developments, global competition, and technological progression (2.2).

From the 1980s onward, two distinct streams can be recognized in the field of MNC organizational models: one that focuses on the MNC as a whole, and one that place special attention to the individual characteristics of the MNC subsidiary. These two streams are discussed in the next three sections (2.3, 2.4 and 2.5). By aligning the results of the two streams in the field of MNC organizational models, a model of the TNC and its characteristics is developed.

2.1 General history of the field of MNC organizational models

The first studies in the field of MNC organizational models started out with the recognition of its value to both managers and governments (Perlmutter, 1969; Stopford and Wells, 1972). The value of being able to express the corporate operations in a model for MNC managers lies in the opportunities to determine the ability of the company to coordinate headquarters and subsidiaries, to overcome diseconomies of scale and to apply successfully a set of special skills in many different countries. For governments organizational models are useful to indicate to what level national governments can exert pressures on the MNC activities.

The MNC organizational model is considered to have close ties with the MNC strategy. 8 There are two variables that influence the development of the MNC

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The relationship between the MNC structure and strategy was pioneered in the work of Stopford and Wells (1972).

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organizational model via the strategy: the characteristics of the business environment and the managerial attitude. In different studies that were mainly conducted in the 1980s9, the relationship between the business environment and the MNC organizational model was tested. The results imply that the MNC organizational model should form a strategic fit with the MNC environment (Ghoshal and Nohria, 1993). As the environment is exposed to continuous changes in internal and external market forces, research shows that there is more than one MNC organizational model.10 The managerial attitude reflects the MNC position towards delegating responsibilities to its foreign managers and foreign subsidiaries (Perlmutter, 1969). In the organizational model, the managerial attitude is expressed in the coordination and control mechanisms and the internal linkages between the different multinational affiliates.

From the two variables that influence the MNC strategy and the development of MNC organizational models, multiple studies11 have recognized three prevailing organizational models: the multi-domestic model, the global model and the international model.12 Each model is characterized by a one-dimensional strategy. The multi-domestic organizational model is orientated towards a strategy of local responsiveness. The global organizational model is used to organize the multinational operations in an efficient way to achieve cost-efficiencies. The international organizational model specializes its operations towards the development and diffusion of knowledge in the MNC.13

2.2 Changes in the MNC business environment

In the previous section the importance of the MNC business environment was already mentioned. Now, four variables of the MNC business environment are presented to give an impression of the external forces and demands that an MNC has to face and respond to.

9

Among the studies are the work of Egelhoff (1988), Kogut, (1985a; 1985b) and Porter (1986).

10

Although the strategic management literature explains the different models as a rational mechanism or incremental process, the organizational literature believes that adaptation to the environment is the main reason behind the organizational models. See Malnight (1996) for more background on this discussion.

11

For a detailed overview of the different MNC organizational models, see: Harzing (2000), or: Westney and Zaheer (2001).

12

The multi-domestic, global and national organizational model are grouped under the name of traditional organizational models, to indicate that they have appeared before the transnational organizational model.

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The four variables are: macro-economic changes, social developments, global competition, and technological progress.14

Macro-economic changes – From the 1990 onward, different trade agreements have led to the acceleration and intensification of international trade among countries and regions.15 As a result, more countries start to open up their borders for international activities. To respond to the new opportunities, MNCs have increased their investments in expansion abroad via FDI.16 In the period from 1990 till 2000, the world FDI stocks has more then tripled in value.17 The FDI growth is expected to continue in the twenty-first century, as the average growth in world FDI over the period 2000-2004 has grown with 156 %.

Social developments - The growth in international trade is, besides in FDI growth, also reflected in the world gross domestic product (GDP).18 The GDP is often used to indicate the level of welfare. Made up by the different individual country GPD estimates of 2006, the world GDP has an estimated growth rate of 4,9% for 2006. Here, the advanced economies grow with an average of 3%, whereas emerging and developing countries like China, India and Russia grow at a rate of 7,2%.19 The high growth rate of the world GDP and especially the strong growth in the emerging countries GDP signals an increase in turnover opportunities for MNCs: new countries and areas are developing in a rapid pace what results in a larger platform for international trade.

14

As it is impossible to recognize and discuss all the elements that form the external business environment of the MNC, this part does not have the attention to create such an overview. The goal of this sub-section is to demonstrate how the MNC environment has changed over the last couple of years. From here on, the discussion concerning the need for the transnational organizational model is developed in sub-section 2.

15

Examples of such trade agreements are the North American Free Trade Agreement (1994), the formation and extension of the European Union (1993, 2004) and the Eurasia Economic Community (2001).

16

The FDI stocks are both inward and outward stock. FDI stock is the value of the stock of the share of capital and reserves (including retained profits) attributable to the headquarters, plus the net indebtedness of subsidiaries to headquarters (see: UNCTAD World Investment Report 2005: Transnational Corporations and the Internationalization of R&D).

17

See Appendix C.

18

Data and statistics on country and region GDP growth are taken from the International Monetary Fund World Economic Outlook database, April 2006. See:

http://www.imf.org/external/pubs/ft/weo/2006/01/data/dbginim.cfm

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Global competition – With the unification of the world market, a sharp rise in cross-border merger and acquisition activities is taking place. In 2000 the number of mergers and acquisitions that took place in the world was more than three times higher compared to 1990 and the value of these transactions was more than 7,6 times higher.20 This increase in merger and acquisition activities can be qualified as a global phenomenon, as it occurred across all industries. The rise in the number of cross-border mergers and acquisitions indicates a movements towards a smaller amount of MNCs, but larger in size.

Technological progression – The dependence on technical assistance in multinational activities has probably never been as high as today. Thanks to all the technical progress that has been made over the last couple of years, global sourcing is now one of the opportunities to organize the MNC operating activities on a 24 hour basis. With the introduction of the internet, intranet and data processing software, MNCs have been given new opportunities to organize and coordinate their activities even in geographically dispersed subsidiaries.

From the changes in the business environment it becomes clear that MNCs can no longer rely on a strategy focused on only a single dimension (Ghoshal, 1987). As put by Bartlett and Ghoshal: “Earlier dominance of a single set of environmental forces was replaced by a much more complex set of environmental demands. Companies…must now respond simultaneously to diverse and often conflicting strategic needs. Today, no firm can succeed with relatively unidimensional strategic capability that emphasizes only efficiency, or responsiveness, or leveraging of parent company knowledge and competences. To win, a company must now achieve all three goals at the same time” (Bartlett and Ghoshal, 1989: 25). With such multidimensional strategic requirements, to remain competitive in the global marketplace the MNC has to find a way to effectively combine the strategic goals for local responsiveness, cost-efficiency and knowledge management in one organizational model.

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2.3 The development of the transnational organizational model

This section discusses the stream of research that focuses on the MNC as a whole. From the different studies that contributed to the development of the transnational organizational model, the work of Hedlund (1986) is a good starting point. In a descriptive study Hedlund outlines the characteristics of a new MNC form, which he refers to as the heterarchical MNC. Instead of searching for a strategic fit with the business environment (as is the case in the traditional organizational models), Hedlund advocates that the MNC should shape the organization of its activities according to its internal competences and capabilities. Here, the foundations of competitive advantage no longer reside in any one country, but in the dispersed specialized subsidiaries that have taken over the role historically held by MNC headquarters. The resulting network of subsidiaries stimulates the MNC to profit from the opportunities provided by the global reach of the organization.

The heterarchical MNC is mainly based on conceptual ideas. The lack of empirical evidence leaves space for speculation and raises doubt concerning the relevance of the heterarchical MNC. The ideas of the heterarchical MNC are appealing to managers and scholars, but it is questionable if this kind of MNC will ever exist. An important factor that Hedlund (1986) has not taken into account is the historical background of the MNC, in which embedded values and structures are hard to replace. Also, the replacement of headquarters by multiple, geographically dispersed specialized centers in the organizational framework will take a considerate amount of time to install. Given the global competition and the need to survive, it is questionable if an MNC has the time to complete such a drastic transformation.

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in-depth case studies, they discover the outlines of a new emerging organizational model: the transnational organizational model.

The transnational organizational model is presented as the answer to the MNC search for a model that can simultaneously achieve global efficiency, multinational flexibility, and also has the ability to develop and exploit knowledge on a worldwide basis. Here, the roles of headquarters and subsidiaries are specified towards their goals and opportunities for the overall organization. As a result, national subsidiaries have differentiated contributions to the worldwide operations of the MNC, shaping the organizational framework accordingly.

The transnational organizational model is depicted in Figure 1. Compared to the three traditional organizational models, the subsidiaries in the transnational organizational model fulfill a larger role in the MNC worldwide operations. Based on the importance of the subsidiary business environment and the position that the subsidiary holds in this environment, the role of the subsidiary is determined (Bartlett and Ghoshal, 1989). As a result, subsidiaries have different sizes and tasks in the MNC.21 Another difference with the traditional organizational models is the internal linkages between the subsidiaries, without interference of headquarters (shown in Figure 1 by the two-way arrows). This creates more flexibility in the corporate activities and stimulates intra-corporate flows of knowledge, products and capital.

Figure 1: the transnational organizational model

HQ

Source: adapted from Bartlett and Ghoshal (1989).

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The strength of the transnational model of Bartlett and Ghoshal (1989) lies in the recognition of the MNC’s current situation. By acknowledging that there is already an MNC organizational model in place,22 Bartlett and Ghoshal describe a new organizational model to which a MNC can transform in time. The characteristics of the transnational model are based on the results of their empirical work, what also contributes to the creditworthiness of the model.

2.4 Network of differentiated subsidiaries

The main distinction between the traditional organizational models and the transnational organizational model lies in the position held by the subsidiaries. This section is used to introduce the ideas behind the differentiation of subsidiary roles and to display the different roles that can be held by a TNC subsidiary.

In the TNC subsidiaries are seen as strategic units, each with its own task. Instead of predetermining the roles of the subsidiaries23, attention shifts to the capabilities and knowledge that is locked up in the individual subsidiary. By creating systematic differentiation of roles and responsibilities into different parts of the organization, smaller and more specialized facilities are located worldwide. These specialized subsidiaries are better able to deal with changes in the environment and provide the TNC with the opportunity to react to local demands (Bartlett and Ghoshal, 1989; Terpstra, 1977).

The resulting network of dispersed and specialized subsidiaries gives the TNC the opportunity to enhance its global competitiveness. By uniting the subsidiary’s strengths through linkages with the other subsidiaries, the TNC gains economies of scope via the sharing of investments and costs throughout the organization. The linkages between the subsidiaries also enables them to develop strong interdependencies among each other, resulting in a constant flow of products, resources, people, and knowledge (Levitt, 1983).

To identify the different subsidiary roles in the transnational organizational model, both strategic and organizational arguments are taken into account (Bartlett and Ghoshal, 1986;

22

Bartlett and Ghoshal refer to the historical background of the MNC as the company’s administrative heritage.

23

In this study, the Birkinshaw and Morrison (1995) definition of the subsidiary’s role is used: “a

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1989; Nohria and Ghoshal, 1994). The strategic argument is translated into the relative level of importance of the subsidiary’s business environment to the TNC strategy. The organizational argument refers to the value of the resources and capabilities of the subsidiary to the overall organization.

Important business environments are defined in terms of its current and future contribution to the TNC overall activities. There are multiple reasons why the foreign business market is attractive for the TNC, for example when important production factors are available, it is the home country of an important competitor, it is highly sophisticated or technically advanced, it is very large and therefore offers interesting sales opportunities, and so on (Bartlett and Ghoshal, 1989). For all these reasons and more, the TNC can decide to remain present in a region or to invest in the local operations.

The importance of the subsidiary business environment might not be as significant as it was in the past. The growing number of permanent global customers, the importance of integrating the TNC supply chain activities to enhance efficiency and the increased competition of global competitors has increased the need for corporate coordination of activities (Birkinshaw, 2001). Together with the greater accessibility of technologies for more and more countries, the importance of the subsidiary’s environment to the corporate strategy has been reduced.

Perhaps more important than the environment in which the subsidiary is located, are the resources it has accumulated over time and the capabilities that it possesses. The resources that the TNC subsidiary possesses are twofold: tangible and intangible. The tangible, or physical, resources are the plants, machineries and raw materials that are available at the subsidiaries abroad. The local workforce is another example of the subsidiary’s tangible resources. The tangible resources are the tools with which the local subsidiary has to create added value for the TNC. The intangible resources are less straightforward to recognize. They can take on the form of financial resources, subsidiary reputation with local customers and suppliers or technical resources. In general it is presumed that the TNC’s most valuable intangible resources are held by headquarters and therefore play a minor part in defining the subsidiary’s role (Birkinshaw, 2001).

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on the initiatives taken by the subsidiary itself (Birkinshaw and Hood, 1998; Ghoshal and Bartlett, 1990). Even though there remains a requirement to operate within certain product, market and/or resource constraints, the subsidiary can influence its own role in the organizational network by developing specialized capabilities that are valuable to the whole organization (Birkinshaw, 2001; Rugman and Verbeke, 2001). The subsidiary capabilities that are most valuable to the TNC are the development of knowledge, the creation and maintenance of an effective distribution network and the ability to identify new market opportunities.

From the two dimensions that determine the subsidiary’s role, four different types of generic roles are identified in the TNC (Bartlett and Ghoshal, 1989). The four (oversimplified) functions that a subsidiary can fulfill in a company’s strategy are: strategic leader, implementer, contributor and black hole (see Figure 2).24

Figure 2: the differentiated subsidiary roles in the transnational organizational model Low High Contributor Implementer Strategic leader Black hole High Low Strategic importance of business environment Level of local resources and capabilities

Source: adapted from Bartlett and Ghoshal (1989).

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Strategic leader: a subsidiary with a high level of local resources and capabilities, located in an important business environment. A strategic leader is included in the decision-making process and together with headquarters influences the course of the operations. The strategic leader has also an important innovative and entrepreneurial role.25

Contributor: a subsidiary with strong internal capabilities, often highly specialized and active in a small or strategically less important market. Examples are subsidiaries that have learned to reach a high level of cost efficiency in manufacturing practices or subsidiaries that developed advanced knowledge concerning the technological aspects of the production cycle. The knowledge that is developed by contributors play an important element in the MNC production process and is applied in projects of corporate importance.

Implementer: a subsidiary that operates in a region of little strategic importance and which does not hold any strategically key assets or responsibilities. However, its role in the transnational organizational model is of critical importance. The task of implementers is to keep the company’s business going by generating funds for global activities and by exploiting company’s competitive advantages. Or, as Bartlett and Ghoshal state it: “The implementers produce the opportunity to capture economies of scale and scope that are crucial to most companies’ strategies.” (1986; p.91).

Black hole: a subsidiary located in a critical market in which the MNC is underrepresented. These markets hold important business information, like market trends, competitor moves and technological novelties. The black hole subsidiary is often small in size with the limited task to monitor the competitive environment.

2.5 Subsidiary typology features

The following analysis of subsidiaries’ specific role in a multinational corporation is based on the link between subsidiaries’ strategic context and corporate control

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mechanisms. The founding arguments of this dichotomy are borrowed form Gupta and Govindarajan’s work: “First, different subsidiary strategic context imply different task environments for subsidiary managers in terms of degrees of lateral interdependence, levels of global responsibility and authority, and need for local initiative. Second, different task environments require different behaviors on the part of subsidiary managers. Third, different control mechanisms induce and support different kinds of managerial behaviors. Therefore, fourth, assuming norms of administrative rationality as well as the selective survivability of experiments in organization design, it is expected that there will be systematic associations between subsidiary strategic contexts and the emergence of specific corporate control mechanisms” (Gupta and Govindarajan, 1991: 775).

For this section, considerate use has been made of the model that was developed by Harzing and Noorderhaven (2006). In 2006, Harzing and Noorderhaven published an article in which they present a model to test and extent the findings of Gupta and Govindarajan’s typology of subsidiary roles (1991). To do so, they have defined a set of structural characteristics for the different subsidiary types and accordingly tested different MNC subsidiaries for their presence. From their findings it becomes clear that the factors that are of influence to the subsidiary typology can be grouped into two categories: coordination and control mechanisms and intra MNC transactions.

In the rest of this section the different structural characteristics are discussed that are used to cluster the subsidiaries into the different MNC subsidiaries types. Here, the model of Harzing and Noorderhaven (2006) is used and extended where necessary to make it applicable to the Bartlett and Ghoshal subsidiary typology (1989).

2.5.1 Coordination and control mechanisms

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In the transnational organizational model, there are two processes that stimulate the development of the integrative network: coordination and control (Roth and Nigh, 1992). While the former process of integration can be characterized by multilateral and collaborative actions based on the dialogue between the different units in the organizational model, control processes are more rigid and structural with the purpose of directing activities to specific outcomes.

As Roth and Nigh (1992) make clear in their work, the sort of coordination and control mechanisms used in the MNC depend on the potential benefits gained from the balance between independent and interdependent means of subsidiary behavior. Due to the different roles a subsidiary can hold, the TNC has to define its set of coordination and control mechanisms per subsidiary role. Two main coordination and control mechanisms are identified: subsidiary autonomy and socialization (Harzing and Noorderhaven, 2006).26

Subsidiary autonomy

Taken from the work of O’Donnel, subsidiary autonomy is defined as: “the degree to which the foreign subsidiary of the MNC has strategic and operational decision-making authority” (O’Donnel ,2000: 528). The need to differentiate in the degree of decision-making authority between the MNC subsidiaries results from the business environment of each subsidiary and the unique set of assets and capabilities it possess.

In order to establish and manage relationships with partners in the business environment (for example distributors, customers, suppliers, and governmental institutions) the subsidiary needs to have a minimum amount of operating autonomy. As subsidiaries are embedded in different national business environments to different degrees, the dependency of the subsidiaries on their environment differ as well. The more the subsidiary is dependent on its external business environment, the greater the subsidiary need for autonomy (Andersson and Forsgren, 1996; Forsgren and Pahlberg, 1992). In addition, the more important the national business environment is for the MNC,

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and hence the tasks of the subsidiary, the greater is the autonomy of the national subsidiary (Birkinshaw and Hood, 2000; Birkinshaw and Morrison, 1995).

The strong embeddedness of a subsidiary in its external business environment also influences the degree of subsidiary autonomy via the subsidiary’s capabilities (Young and Tavares, 2004). External partners in the business environment play an important role as sources of innovation and practices. The greater the interaction with its business environment, the more the development of local subsidiary capabilities is stimulated (Schmid and Schurig, 2003). Assuming that the subsidiary’s ability to identify and develop capabilities is positively related to the amount of subsidiary capabilities already in place, a positive relationship between the height of the subsidiary’s capabilities and the degree of subsidiary autonomy is expected.

Socialization

Due to the different demands and pressures faced by headquarters and subsidiaries, autonomy mechanisms can fall short when headquarters and subsidiaries have diverging interests and preferences. One effective solution for this governance problem is installing socialization mechanisms throughout the organization (Nohria and Ghoshal, 1994).

Socialization mechanisms are subtle and informal forms of coordination and control within the MNC. This includes informal communication, the establishment of lateral or cross-subsidiary relationships (through meetings, trainings and task forces) and the dissemination of corporate values and beliefs throughout the organization (Martinez and Jarillo, 1989; Ouchi, 1979).27 Through actively communicating the transnational’s corporate vision, values and objectives, the TNC creates an internal environment where headquarters and subsidiaries have shared management perspectives (Doz and Prahalad, 1984).

Socialization mechanisms also plays an important role in coordinating the international subsidiary interdependency.28 The effective transfer of internal transaction flows has proven to result in greater overall MNC results (O’Donnell, 2000). To reach a

27

This definition of socialization is broader than the one used by Martinez and Jarillo (1989).

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high degree of effectiveness and to benefit from and strengthen intersubsidiary linkages a social organizational network is a prerequisite. Thus, the more a subsidiary is actively involved with the international operating activities, the more effective social mechanisms are for the subsidiary performance and the overall TNC performance.

2.5.2 Intra MNC transactions

In addition to the coordination and control mechanisms to identify the distinct characteristics of MNC subsidiaries, Gupta and Govindarajan (1991a, 1991b) have deepened the understanding of MNC intersubsidiary differentiation by focusing on the intra MNC transaction flows. In their work, Gupta and Govindarajan describe the TNC as a network in which internal multidirectional flows of product, capital and knowledge29 take place among the different subsidiaries.30

The differences of the transactions that occur within the transnational organizational model can be expressed in the magnitude and direction of each transaction. According to Gupta and Govindarajan (1991a), substantial differences can be expected between the TNC subsidiaries due to the unique characteristics of the transaction flows (knowledge, product or capital) in which the subsidiary is engaged. Findings that confirm that the subsidiary role is related to the amount and direction in which subsidiaries are engaged in intra-corporate transactions will enhance the understanding of the TNC and can have important implications for structure and strategy.

Knowledge flows

From the three different transaction flows, the recent literature has paid most attention to the relationship between knowledge flows and the subsidiary role (Björkman, Barner-Rasmussen and Li, 2004; Gupta and Govindarajan, 1991a, 1991b, 2000; Harzing and Noorderhaven, 2006). In the work of Harzing and Noorderhaven (2006) a clear correlation is found between the level of the subsidiary’s capabilities and the amount of knowledge transactions. When a subsidiary has little opportunities to develop knowledge

29

Gupta and Govindarajan (1991a) define intra-corporate knowledge flows as: “the transfer of either

expertise (e.g. skills and capabilities) or external market data of strategic value, (…) but not the transfer of internal administrative information (such as the exchange of monthly financial data)” (p.773). In the rest of the paper, this definition of knowledge flows is used.

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the amount of knowledge inflow is high. In addition, the amount of knowledge flows into the subsidiary is higher when a subsidiary is more dependent on other subsidiaries in order to operate its activities. For the amount of subsidiary knowledge outflow the opposite is true. When a subsidiary holds a high level of assets and capabilities, it is likely that the subsidiary engages in knowledge development processes, what results in a high level of knowledge outflows.

Product flows

The amount of product flow transactions in which a subsidiary is engaged is expected to depend on the capabilities it holds and the importance of the tasks of the subsidiary in the worldwide activities. Birkinshaw and Morrison (1995) found that strategic leaders have a much lower level of product inflows compared to contributors or implementers. 31 This corresponds with its relatively self-supporting character that is related to this subsidiary type, caused by the high level of capabilities held by a strategic leader. A similar outcome is found by Harzing and Noorderhaven (2006), who have made a distinction between the flow of products between a subsidiary and other subsidiaries and between the subsidiary and headquarters.32 Again, subsidiaries with a higher level of capabilities have less product inflows compared to subsidiaries with less capabilities.33 Both studies have not found significant differences in the internal outflow between the different subsidiary roles.

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Capital flows

In a study into the determinants of the capital structure of foreign subsidiaries in MNCs, Aggarwal and Kyaw (2004) find out that differences exist in the level to which

31

Even though Birkinshaw and Morrison (1995) use slightly different terms to differentiate between subsidiary roles, they show a high resemblance in characteristics with the Bartlett and Ghoshal subsidiary typology (1989) used in this paper.

32

Although Harzing and Noorderhaven (2006) have used another subsidiary typology to test the

relationship between product flows and the role of the subsidiary, their findings can be generalized so that they are still hold here.

33

Harzing and Noorderhaven (2006) have tested for the relationship between subsidiary product flows and knowledge flows. By applying their results concerning the relationship between knowledge flows and subsidiary capabilities, their findings concerning product flows and the role of the subsidiary can be extended and used in the context of this study.

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subsidiaries make use of the internal capital market. Subsidiaries that operate in environments with poor institutional features (resulting in weak capital market development and high political risks) make more use of internal capital compared to subsidiaries in environments with better institutional abilities. Another finding of their work is that financial funds run primarily from headquarters to foreign affiliates, something that is confirmed by Desai, Foley and Hines Jr. (2004). Other capital flows besides financial funds are business assets and human capital.

In the event of increasing global competition (see section 2.2), it is interesting to find out how subsidiaries are engaged in intra-corporate capital flows. Intra-corporate capital flows can be used by the TNC to answer to the global competition, for example through cross-subsidization35. To create a more complete overview of the intra MNC transactions in which a subsidiary is engaged, the model of Harzing and Noorderhaven (2006) is extended by including capital flows in the research.

2.6 Chapter summary

The development from the traditional organizational models, based on one-dimensional strategies, towards the more adaptive, multi-dimensional transnational organizational model is explained in the field of MNC organizational models. Due to political, economic and social changes that haven taken place in the world, MNCs now face more demanding and challenging business environments than ever before. Based on the recognition that a MNC needs to simultaneously operate efficient, flexible and orientated towards knowledge development and diffusion, the transnational organizational model is developed.

By identifying the uniqueness of the subsidiary’s business environment and the assets and capabilities it has accumulated over time, the role of the subsidiary in the TNC is determined. The four roles that have been developed are: strategic leader, contributor, implementer and black hole. Each role is distinguished by a couple of characteristics, with are divided into two groups: coordination and control mechanisms (subsidiary

35

Here the definition for cross-subsidization is taken from the work of Hamel and Prahalad (1985), who define the strategy for cross-subsidization as “when a global company uses financial resources

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autonomy and socialization) and intra MNC transaction (knowledge, product and capital flows). This is also depicted in Figure 3.

Figure 3: an overview of the TNC subsidiary roles and the characteristics

• Implementer • Black hole • Strategic leader

• Contributor

Subsidiary typology

Determined by the business environment and the assets and capabilities

Intra MNC transactions:

• Knowledge flows • Product flows • Capital flows

Coordination and control mechanisms:

• Subsidiary autonomy • Socialization

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3. Hypotheses and methodology

n order to determine the general applicability of the transnational solution to all corporations with worldwide activities, I perform an in-depth analysis of the subsidiary network of Henkel KGaG (Henkel), based on the transnational organizational characteristics identified in Chapter 2. With headquarters located in Germany and additional operating units in more than 125 countries, Henkel is active in four different industries36 with over 50.000 employees. With a net sales of 11.9 million euro in 2005, Henkel is one of the largest producers in each of the industries in which it is active.37 The information is collected by the means of a recently-executed survey of Henkel’s subsidiary managers. After an investigation of subsidiaries’ characteristics and roles within the multinational organizational structure, a conclusion is presented whether Henkel’s organizational model matches the characteristics of the TNC.

3.1 Hypotheses

Based on Bartlett and Ghoshal subsidiary typology (1989), each subsidiary role is expected to have specific characteristics to contribute in the best possible way to the success of the MNC. If an MNC can be described as a TNC, each of the identified subsidiary roles have to be detected in its organizational model and have to demonstrate the corresponding characteristics.38 Therefore, I first present the hypothesis that directly addresses the research question, followed by relevant hypotheses focused on the different subsidiary roles.

Hypothesis 1a: At least three types of subsidiaries are extant in the organizational structure of Henkel (Strategic leader, Contributor, Implementer). Hypothesis 1b: The organizational model of Henkel matches the characteristics of a transnational corporation (TNC).

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Henkel is active in the following four industries: laundry and home care, cosmetics/toiletries, consumer and craftsmen adhesives, and technologies.

37

This information was taken from the Henkel Annual Report 2005.

38

From the four identified subsidiary roles the black hole position is not taken into account in the empirical research. The reason is that black holes are limited in number in the transnational organization (Birkinshaw and Morrison, 1995) and that it is not very likely that a subsidiary managing director identifies itself with this subsidiary role.

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To identify the characteristics of the different subsidiary roles in an MNC, the model of Harzing and Noorderhaven (2006) is applied and extended. Coordination and control through the delegation of autonomy power by headquarters plays an important role in the TNC. The level of autonomy granted by headquarters to the subsidiary is expected to depend on the role that the subsidiary fulfills in the transnational organizational model. The more important the national business environment is to the overall TNC performance and the higher the level of assets and capabilities needed and held by a subsidiary, the larger the need for high subsidiary autonomy. Hence, as strategic leaders are active in important business environments and are expected to develop new innovations for the future, it follows that they need a high level of autonomy over their operations. To a lesser degree this is true for contributors. Implementers require the lowest level of autonomy. Hence:

Hypothesis 2a: The level of autonomy differs across subsidiary types.

Hypothesis 2b: The level of autonomy will be highest for strategic leaders, medium for contributors and low for implementers.

Socialization is used to stimulate managerial interaction between different subsidiaries and to coordinate and control for the corporate values of the TNC throughout the organization. The mechanisms of socialization prevail at subsidiaries that have the highest interdependency on other subsidiaries and headquarters. From the identified subsidiary roles, the contributor fulfills this description. On the contrary, implementers often operate only end of the line value-chain activities like marketing and sales and therefore require less socialization and network mechanisms.

Hypothesis 3a: The use of socialization mechanisms differs across subsidiary types. Hypothesis 3b: The use of socialization mechanisms will be highest for contributors,

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Subsidiaries with a high level of capabilities have a higher level of knowledge outflow and a lower level of knowledge inflow compared to subsidiaries with a lower level of capabilities (Harzing and Noorderhaven, 2006). Also, when a subsidiary is highly interdependent on other parts of the organization, it can be expected that the subsidiary has a high level of knowledge flow transactions. For the subsidiary typology used in this paper it is therefore expected that contributors have the highest level of knowledge inflow, followed by implementers and that strategic leaders have the lowest level of knowledge inflow due to their high level of capabilities. Strategic leader will have the highest level of knowledge outflow, followed by contributors and implementers will have the lowest level of knowledge outflow. This results in the following two hypotheses:

Hypothesis 4a: The inflow and outflow of internal knowledge differs across subsidiary types.

Hypothesis 4b: The inflow of internal knowledge will be highest for contributors, medium for implementers and low for strategic leaders.

Hypothesis 4c: The outflow of internal knowledge will be highest for strategic leaders, medium for contributors and low for implementers.

Subsidiaries that operate in important business environments and hold a high level of capabilities are expected to be more self-sufficient compared to subsidiaries with lower capabilities in less important environments. As such, strategic leaders are expected to be less dependent on the inflow of products from other parts of the organization. Implementers are expected to have the highest level of product inflows. For the outflow of products, strategic leaders and contributors are expected to have a higher level of transactions compared to implementers. This is because production is expected to take place at the level of the strategic leaders and contributors.

Hypothesis 5a: The inflow and outflow of internal products differs across subsidiary types.

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Hypothesis 5c: The outflow of internal products will be highest for strategic leaders and contributors and low for implementers.

Based on the environment of a subsidiary the amount of capital flows in which the subsidiary is involved is predicted. When a subsidiary is operating in an environment with poor institutional features (often in countries with political, economic or social instability) it demands for more capital inflows compared to subsidiaries in relatively stable environments. In the event of cross-subsidization, this direction of capital flows is also expected. For the amount of capital outflows the opposite is expected: subsidiaries in relatively stable markets have a higher outflow of capital compared to subsidiaries in unstable environments. Hence:

Hypothesis 6a: The inflow and outflow of internal capital differs across subsidiary types. Hypothesis 6b: The inflow of internal capital will be highest for implementers and

contributors and low for strategic leaders.

Hypothesis 6c: The outflow of internal capital will be highest for strategic leaders and low for contributors and implementers.

3.2 Data collection and sample

The data for this study were collected through a questionnaire survey. The questionnaire was sent out by e-mail due to time and cost restraints and the wide geographical dispersion of the respondents (Frazer and Lawley, 2000). To locate measures that appropriately capture the characteristics under study, the questionnaire is based on the review of previous research. After consultation with an experienced scholar in questionnaire design, the first draft of the questionnaire was tested on one of the target subsidiary managers. In the final questionnaire some modifications have been made on the questionnaire content and design, based on the manager’s feedback.39

The choice for a research design that focuses on the differences among subsidiaries within the same MNC controls for contextual factors that can complicate the interpretation of results in multi-company samples (Tsai and Ghoshal, 1998; Mahnke,

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Pedersen and Venzin, 2006). Examples of these contextual factors are company specific factors and industry differentiations.

The benefit of focusing on a single MNC is that the data reveals the presence of the different organizational characteristics within one MNC. In previous studies that identified the transnational elements by focusing on subsidiaries from multiple MNCs (such as Jarillo and Martinez, 1990), it remained unclear if these different subsidiary roles also appear together in a single MNC.

Although the use of a single company sample reduces the opportunity to generalize the results among industries, the work of Bartlett and Ghoshal (1989) and Ghoshal and Nohria (1993) demonstrate that MNCs in the same industry display different organizational model characteristics. This implies that even though the developed transnational framework is only used on a single MNC in this study, the obtained results could still hold valuable information for other MNCs, even if they are active in different industries. In addition, previous researches have successfully used single firm sampling to measure the effect of knowledge flows on the subsidiary performance (Mahnke et al., 2006) and to test the effect of internal linkages on the exchange of resources among subsidiaries (Tsai and Ghoshal, 1998).

Questionnaires were e-mailed to 79 subsidiary managers, located in 27 different countries. A subsidiary manager is defined as the manager in charge of a physical operating unit.40 If a manager was in charge of multiple regionally dispersed physical operating units, the respondent was asked to fill out the questionnaire for only one of the operating units that he or she manages. Each subsidiary manager received a questionnaire written in English, a letter to explain the purpose of the study and to provide assurances regarding the confidentiality of the collected data, and additional guidelines to assure that the respondent would fill out the questionnaire in the proper way. In addition, to ensure that the subsidiary manager was knowledgeable enough to provide meaningful answers, the respondents were asked how long they have been in charge of the subsidiary operations (to be included in the research a minimum of six months was applied).

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After a week of first receipt, a second e-mail went out to the managers that had not reacted, with a second request for filling out the questionnaire. Both e-mails were sent from the corporate e-mail-address from the person of contact, the president of the Belgium subsidiary of Henkel, to gain the confidence of the receiving managers. The sample was drawn from the information available on the MNC website and in cooperation with MNC management.

After four weeks the response rate was 29.1 % (23 reactions), with reactions from managers in 15 different countries. All respondents met the requirement of being in charge of the local operations for at least 6 months. However, the final sample used in the research was 20 (25.3 %), as three of the reactions were not received on time. Data were collected in 2006.

Given the constraints of time and funding and given the need to obtain access, it was not possible to use a random sample from either subsidiaries in multiple MNCs or from the total amount of subsidiaries in Henkel. As a result, the findings might be biased.

3.3 Variables and measures

To measure the transnational elements there has been made use of categorical scales (yes or no), five-point Likert scales, seven-point Likert scales and actual values. The collected data was processed to be used for multiple statistical regression tests (this will be discussed in more detail in Chapter 4).

3.3.1 Subsidiary role

To make a distinction in the role a subsidiary has in the transnational model, two dimensions, taken from the work of Bartlett and Ghoshal (1989), have been used: the strategic importance of the subsidiary business environment and capabilities possessed by the subsidiary.

Is the transnational organizational model appropriate for all?