THE ROLE OF LOCAL CONTEXT IN HEADQUARTERS-SUBSIDIARIES RELATIONSHIPS: AN ANALYSIS OF THE LITERATURE

Abstract

This study reviews the literature on multinational firms’ headquarters-subsidiaries relationships, with a special focus on the role of the local context and the issues of control and coordination. We searched the literature using several terms directly related to these issues. The findings demonstrate that subsidiaries can only operate successfully in foreign locations by adjusting their policies to fit into the local environment, more importantly so as there are multiple contexts. Control and coordination are crucial elements that the multinational corporation can use to bring its policies in line with the subsidiary’s operating environment. A “headquarters -subsidiary relationships model” is proposed as a framework to understand these relationships. The framework proves that local context relationships problems are inclusively resolved by a focused and dedicated corporate leadership.

1. Introduction

The local context plays a central role in the affairs of Multinational Corporations (MNCs). It does so by providing a location in which Headquarters (HQ) and their Subsidiaries interact as much as possible. The relationships that subsist between the HQ and subsidiaries in the MNC network have also proved to be a thorny issue in international business debates. Birkinshaw (1996) relates that the dominant trend among large MNCs has been towards integrating their worldwide value-adding activities to achieve the best structural relations between stakeholders.

Similarly, Ferner et al. (2004) suggest that the problem of multinationals revolves around the process of balancing centralized policy making and giving maximum autonomy to the subsidiaries within an apparatus of control and coordination to achieve optimal goal.

No  doubt,  the  vital  issue  between  headquarters  and  subsidiaries  relationships  is  the achievement of MNC globalization goal, which is the responsibility of top leadership network.

The MNC leadership is known for ensuring a systematic permutation or combination of

fundamental elements revolving around control and coordination, in agreement with the local context or foreign location (Almeida & Phene, 2004; Grewal et al., 2008). This interplay inherent in the relations between HQ and subsidiaries is important to investigate, as it significantly influences the success of firms operating outside their home country.

For instance, the local context can cause friction in the subsidiary’s entrepreneurial ability or, even more importantly, its contribution to the parent firm (Birkinshaw, 1997; Birkinshaw et al., 1998). Because the local context greatly influences the control and coordination of subsidiaries, it could significantly affect their degree of autonomy. However, some researchers argue that highly independent subsidiaries harm global MNC integration (Edwards et al., 2002). The local context provides foreign subsidiaries with a variety of operational constraints (economic, legal, cultural, etc.) (Birkinshaw et al., 2002; Mu et al., 2007; Meyer et al., 2011). However, the local context also means that the subsidiary must constantly work to strike a balance between the strengths of the home and foreign countries forces (Devinneyet al., 2000; Tempel et al., 2006; Marin & Costa, 2013).

Regardless of the theories of ideal organization, headquarters often attempt to coordinate their organizations successfully by dictating subsidiaries’ terms of engagement. However, the subsidiaries are often made the scapegoat for failure, even when they clearly have little or no freedom (Meyer et al. 2011). Birkinshaw and Hood (1998) raise two important points with regard to this: (1) subsidiaries are established for a variety of motives; there are those with the mandate for resource seeking, market seeking, or efficiency; and (2) subsidiaries operate through a variety of modes (e.g., green-field, acquisition or joint venture). Depending on prevailing socio-economic conditions, a chosen motive or mode can make or mar a business mandate or relationship.

It is obvious that local context plays a complex role in the relationship between headquarters and their subsidiaries, and that this relationship is workable only with mutual understanding

between the stakeholders. Specifically, the problem here is that multinational firms are yet to find a solution to the challenges of operating in a foreign environment. This local context is a massive burden on headquarters and subsidiaries, as well as on other stakeholders in the relationships, such as host governments and host communities-the core site of subsidiaries). Generally, the key issue involves (but it is not limited to) different perceptions of what constitutes a local context, foreign environment or global business problem and how to resolve the problems, though this problem depends on the context.

In this project , we investigate the literature on HQ-subsidiary relationships with a focus on the local context. The specific research questions that we aim to answer are the following: 1) What role does the local context play in shaping HQ-subsidiaries relationships? 2) How do MNCs take account of the local context in their decisions relating to subsidiaries’ control and coordination? The next section reveals the method used in searching the literature and the format of this project.