Article

Subsidiary Embeddedness and Control in the Multinational Corporation

Department of Business Studies, Uppsala University, Box 513, S-751 20 Uppsala, Sweden
International Business Review (Impact Factor: 1.51). 10/1996; 5(5):487-508. DOI: 10.1016/0969-5931(96)00023-6

ABSTRACT

A subsidiary of a multinational corporation (MNC) is embedded in a network of specific business relationships. It is argued that the degree of subsidiary embeddedness is a function of the adaptation between the subsidiary and direct and indirect counterparts of these relationships. The paper hypothesizes that the higher the degree of embeddedness, the greater the likelihood of counterparts influencing the subsidiary's behaviour. This influence competes with headquarter's desire to exercise control to integrate the subsidiary into the overall corporate strategy.The empirical data presented, collected from 78 subsidiaries of major Swedish MNCs, indicate that embeddedness has an impact on how headquarter's control is perceived by the subsidiary, if embeddedness is separated into external and corporate embeddedness. The test provides support for the opinion that the higher the degree of embeddedness vis-à-vis external customers, suppliers and other counterparts, the lower the degree of headquarters' control, as perceived by the subsidiary. But it also lends support for the view that embeddedness vis-à-vis corporate counterparts works in the opposite direction; it rather tends to increase the control perceived at the subsidiary level. These results indicate that competition for influence over the subsidiaries' behaviour, as seen from the headquarter's point of view, arises primarily from external actors who have business specific relationships with the subsidiary.

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    • "Moreover, relationships with other business factors have been pointed out as a crucial ingredient of every organisation's business life (Granovetter, 1985; Uzzi, 1996 Uzzi, , 1997). In recent years, a new line of research has focused on the impact of firms' reliance on networks over entrepreneurial actions and different aspects of business performance, such as sales growth (Lee et al., 2001), innovation (Ahuja, 2000); or different issues of corporative multinational performance (Andersson and Forsgren, 1996; Forsgen et al., 2000; Andersson et al., 2002), among others. Network reliance can be looked upon as a strategic resource influencing the firm's future capabilities (Andersson et al., 2002). "

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    • "Yet, it is known that the relationships between firms are principally based on trust (Andrews and Delahay, 2000) and mutual adaptation (Andersson and Forsgren, 1996). If one of these two terms is violated, cooperation and knowledge sharing between firms can be harmed. "
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    • "For this reason, Chinese MNE subsidiaries suffer less unfamiliarity and discrimination hazards, making it relatively easier for them to access local resources. This also implies that subsidiaries could be more embedded in the host country business network with customers, suppliers and other counterparts than in their corporate network within the MNEs (Andersson & Forsgren, 1996). Hence, the Chinese MNE subsidiaries will be relatively less dependent on their headquarters for resources, which may result in lower levels of interaction and collaboration with their headquarters. "
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    ABSTRACT: Through the lens of the institutional theory, we developed and empirically tested a contingency theoretical framework that examines the effects of formal and informal institutional distances on the quality of the headquarters–subsidiary relationship, and how such effects are contextualized by internal institutionalization of headquarters’ practices in subsidiaries of Chinese multinational enterprises (MNEs). Data were collected from both the headquarters of 297 Chinese MNEs and their respective subsidiaries. The results show that regulative and cultural distances are positively associated with the quality of the headquarters–subsidiary relationship, and that these positive relationships are stronger when subsidiaries institutionalize headquarters’ practices to a higher degree. Theoretical and practical implications are highlighted in the paper.
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