Subsidiary Divestment: The Role of Multinational Flexibility

We take the multinational flexibility perspective and examine the conditions under which multinational corporations’ (MNCs’) foreign manufacturing subsidiaries in labor-intensive industries are not divested from their host country markets under the influence of their host country’s rising labor costs. We examine in this paper the effects of intra-firm product shifts within the same MNC network on foreign subsidiary divestment. We utilize a panel of data of Korean MNCs’ foreign subsidiaries in labor intensive industries and employ a Cox proportional hazard rate model as an event history analysis methodology on STATA 10. We find that intra-firm product shifts within the same MNC network reduce the probability of subsidiaries exposed to rising labor costs in their host countries being divested earlier. We also find that greater cross-country labor cost differentials and more country options in the same MNC network are helpful in facilitating intra-firm product shifts and lowering divestiture rates of the subsidiaries. Contrastingly, we find from control variables that weaker performing, smaller, and stand-alone subsidiaries, in riskier countries, facing currency appreciation, and increasing labor costs are more likely to divest. We conclude from our findings that MNCs are able to enhance multinational flexibility by using intra-firm trade connections among affiliated firms in flexible responses to cross-border cost and value differentials.     

Ownership Increase in International Joint Ventures: The Within- and Across-Country Flexibility Perspective

We employ the real options perspective to examine how multinational corporations (MNCs) increase ownership levels in their international joint ventures (IJVs) to exploit (or utilize) both within- and across-country flexibility. This paper utilize a rich dataset of South Korean firms’ foreign affiliates to test hypotheses derived from the real options theory. It examines the roles of growth options that require small equity stakes under uncertainty as well as switching options that require controlling equity stakes to coordinate switching implementation. Specifically, we examine how the ownership of jointly-owned foreign subsidiaries changes under the influence of changing labor cost uncertainty. We utilize a two-stage model to address the sample selection bias associated with a subsidiary’s choice of joint venture under the influence of high labor cost uncertainty. In the first stage, we run a probit model with a dummy variable for JVs and wholly-owned subsidiaries (WOSs) (1: JV, 0: WOS) as the dependent variable. In the second stage, we run a panel logistic regression model (STATA command, “xtlogit”). We found that MNCs engaged in greenfield IJVs increase their initial ownership when labor cost uncertainty within their host countries is favorably resolved. We also found that MNCs’ tendency to increase their IJV ownership intensifies when their subsidiary networks are exposed to negatively correlated labor cost growth rates across countries. Taking within and across country flexibility perspective, this study adds new insights on MNC ownership changes, especially in IJVs. Based upon our findings, we conclude that MNCs make flexible ownership adjustments for their foreign subsidiaries in response to different uncertainty conditions within and across countries.     

Collaboration in Innovation Between Foreign Subsidiaries and Local Universities: Evidence from Spain

Collaboration between foreign subsidiaries and universities is relevant for multinational companies (MNCs) that aim at absorbing knowledge from abroad, as well as for universities and policy-makers attempting to maximize the spillovers associated with foreign direct investment (FDI). In this paper, we explore how MNCs collaborate with universities in the foreign countries where they locate and provide new empirical evidence for Spain as a host country. Using a probit model with panel data comprising 9,614 firms for the period 2005–2011, we explore differences between the propensity to collaborate with universities of foreign subsidiaries and Spanish firms. Subsequently, building on a new survey to 89 foreign subsidiaries and on a more detailed analysis of five case studies, we discuss the variety of motivations that drive collaboration with universities and relate the scale and scope of such collaborations with the dynamic mandates of foreign subsidiaries in global innovation networks.     

Antecedents and Innovation Performance Implications of MNC Political Ties in the Chinese Automotive Supply Chain

The development of political ties represents a non-market strategy, which may substitute for formal contracts in safeguarding against transaction risks of innovation processes in emerging markets with weak institutions, such as China. Previous work has largely ignored the role political ties play in product innovation, and especially with respect to subsidiaries of foreign multinational corporations (MNCs). This study investigates the antecedents and role of political ties in relation to the innovation performance of foreign subsidiaries supplying automotive parts in China. Our analysis is based on survey data from 170 foreign MNC supplier firms in China. A partial least squares structural equation modelling (PLS-SEM) approach is employed to examine relationships through a ‘soft-modelling’ analysis, using SmartPLS 3. The results empirically confirm the positive impact of political ties, in terms of enhancing foreign MNCs’ product innovation performance in China. Furthermore, it is found that the extent to which foreign suppliers invest in and maintain political ties is driven by a mix of organizational and environmental factors, namely protection orientation, relationship-specific investment, technological dynamism and competitor opportunism. The paper contributes to the understanding of the antecedents and the implications of political ties with respect to the innovation performance of foreign MNC subsidiaries in emerging economies.     

Learning from Political Change and the Development of MNCs’ Political Capabilities: Evidence from the Global Mining Industry

Previous studies have suggested that (1) a type of organizational capabilities—namely, political capabilities—are required for multinational corporations (MNCs) to grow in global markets, (2) political capabilities are important for building productive relations with governments in politically risky host countries, and (3) MNCs can develop political capabilities by accumulating foreign experiences. However, empirical studies have found both positive and negative effects of such experiences on global market expansions. This study attributes such mixed findings to our lack of understanding about MNCs’ procurement processes of political capabilities and proposes types of experiences critical for such procurements by focusing on their reactions to political changes in host countries. Using data on the global mining industry and political changes in host countries, we find that MNCs develop political capabilities and thus make entries into politically risky host countries when they accumulate the experience of partially divesting some of their assets after political changes in host countries. We also find that MNCs are less likely to enter such countries if they have more experiences of exiting from host countries following political change.     

The Effect of Corporate Political Activity on MNC Subsidiary Legitimacy: An Institutional Perspective

MNC subsidiaries engage in a variety of corporate political activities to gain legitimacy in the host country. Based on institutional theory, our study examines five types of strategies that MNC subsidiaries pursue to gain legitimacy in foreign markets. Using data from Australian subsidiaries of MNCs operating in different industries, and whose parents originate from 28 different countries, we find that mimetic isomorphism strategy has the strongest effect whereas information strategy has no effect on subsidiary legitimacy. The other three strategies, namely, financial, constituency building and relational have strong to moderate effects on subsidiary legitimacy. In addition, we show that multiple CPA strategies are essential and work together synergistically to contribute to the legitimacy of MNC subsidiaries. Our paper provides empirical support to the widely recognized need for MNC subsidiaries to engage in different types of CPA to legitimize their operations in diverse institutional contexts across the globe.     

Headquarters’ Managerial Intentionality and Reverse Transfer of Practices

This paper addresses the reverse transfer (RT) of practices in multinational corporations (MNCs), a phenomenon which occurs when practices originating in their cross-border affiliates are transferred back to the parent MNCs. Based on an empirical investigation of the experience of 503 Hong Kong MNCs with subsidiaries in Mainland China, this study has successfully and more systematically tested and discussed the managerial intentionality (MI) related factors on RT than has been done before in the literature. The results suggest high headquarters intentional arrangements involving choosing wholly-ownership, International Human Resource Management control, active trust building, and frequent personal contact can improve explanatory power of achieving the objectives of reverse transfer of practices significantly.     

How Do the Normativity of Headquarters and the Knowledge Autonomy of Subsidiaries Co-Evolve? Capability-Upgrading Processes of Chinese Subsidiaries in Belgium

To successfully compete with advanced market multinationals (AMNEs), emerging market multinationals (EMNEs) have to access higher innovation capabilities from their autonomously operating advanced economy subsidiaries. There are two competing schools of thought on how EMNE subsidiaries obtain capability-upgrading autonomy from their headquarters. The first school of thought embraces a knowledge-based, boundedly rational perspective on headquarters’ delegation of capability-upgrading autonomy. The second argues that normative stakeholder priorities pervade headquarters’ capability-upgrading logic, with a “headquarters knows best logic” standing in the way of knowledge-based subsidiary autonomy. This paper adopts a process perspective to understand how EMNE headquarters’ logics and subsidiaries’ mandate for capability-upgrading co-evolve over time. Drawing on the case of Chinese multinational subsidiaries (CMNEs) in Belgium we find that subsidiary managers’ ability to challenge normative expectations is a condition to headquarters acting in a knowledge-based manner. We contribute to the literature on EMNE capability-upgrading by developing several propositions on how autonomy negotiation processes between headquarters and subsidiary evolve over time; depending on the historical imprinting of home success values, the socialisation in how to respond to failure and the emergence of constructive conflict.     

Clusters and Regional Management Structures by Western MNCs in Asia: Overcoming the Distance Challenge

Recent literature suggests that multinational companies pursue regional rather than global strategies. Therefore, this study investigates regional management structures, using French multinational companies (MNCs) in the Asia–Pacific region as an empirical context, to address two research questions: first, do MNCs split Asia into subregions and, if so, what are the resulting clusters of countries and clustering criteria? Second, what kind of regional management structures do MNCs establish in Asia, and what are their roles and functions? Factors, such as MNC size, the size of host markets, or the nature of their activities, might explain some differences. The authors conducted 77 face-to-face interviews with expatriated managers in charge of the subsidiaries or regional management structures of 47 French MNCs located in 11 countries in Asia, then crossed these data with secondary sources of information. Nearly half the MNCs subdivide the Asia–Pacific region into clusters of countries, where they locate regional management centres (regional headquarters, regional offices, distribution centres, local offices) with substantial functions and roles. The main drivers of a regional Asian strategy and organisation are the overall size of the MNC and its sales in Asia; the presence of manufacturing activities does not exert any influence. This research identifies ten clusters of countries in Asia, determined by the French MNCs in our sample, on the basis of four main criteria: market orientation/economic logic, geographical and institutional proximity, cultural differences, and the MNC’s own characteristics. Smaller MNCs do not slice Asia into clusters but rather centralise regional decisions and control procedures, implementing few regional management centres in Asia and giving them limited roles and functions.     

Subsidiary Initiatives in the Institutional Environment

We study subsidiaries of a MNC and research why they implement initiatives that deviate from organizational values of headquarters. Initially we relied only on the concept of institutional duality and expected that pressures in the institutional environment and values of headquarters explain the agency of the subsidiaries. But the results of our extensive participatory observation showed that the organizational values of subsidiaries (rather than those of headquarters) helped explain the subsidiaries’ actions. In conclusion, we find that there are limits to the predictive power of the concept of institutional duality. Our study shows that a distinction between values of headquarters and values of subsidiaries is necessary in order to understand the agency of subsidiaries. We suggest a concept of ‘institutional trinity’ that distinguishes between these two values as well as pressures in the institutional environment. Our research demonstrates that an MNC can benefit from a subsidiary that develops its own organizational values. If headquarters is subsequently ready to adopt some of these subsidiary values, it may be able to adapt more easily to a changing institutional environment.     

Foreign Subsidiaries and Technology Sourcing in Spain

Firms acquire external technological knowledge via different channels. In this paper, we compare the technology sourcing of foreign subsidiaries and domestic firms looking at domestic R&D outsourcing, international R&D outsourcing, domestic cooperation for innovation and international cooperation for innovation. We use data from the Spanish Technological Innovation Panel for the years 2005–2009 for 10,206 innovative firms operating in Spain. We apply a multivariate probit specification which allows for systematic correlations among the different choices. The results show that the different technology sourcing choices are interdependent and that foreign subsidiaries show a different pattern of external technology sourcing. Compared to affiliated domestic companies, foreign subsidiaries show a smaller propensity for external technology sourcing via R&D outsourcing from independent firms in the host country, for international R&D outsourcing and for international cooperation for innovation. In contrast, foreign subsidiaries show a greater propensity for domestic cooperation for innovation. However, foreign subsidiaries are not a homogenous group in this respect.     

Global Mindset and Entry Mode Decisions: Moderating Roles of Managers’ Decision-Making Style and Managerial Experience

From the managerial cognition perspective, we develop a contingency framework that empirically examines the effect of senior managers’ global mindset on their decisions regarding the choice of entry mode for foreign subsidiaries and how their cognitive decision-making style and managerial experience interact with their global mindset and thereby affect their decisions. Data were collected from both headquarters and subsidiary senior managers of 345 Chinese multinational enterprises. The results show that senior managers who exhibit a stronger global mindset tend to choose a lower-level ownership entry mode for their foreign subsidiaries. This tendency is stronger when senior managers possess a ‘thinking’ decision-making style as opposed to a ‘feeling’ decision-making style but weaker when senior managers have more experience in their managerial positions.     

Dual-Option Subsidiaries and Exit Decisions During Times of Economic Crisis

• This study examines the dual implications of dual-option subsidiaries on exit decisions during times of economic crisis. Retaining dual-option subsidiaries in crisis-stricken countries means leaving a shadow option open for future growth once a crisis ends. However, MNCs may encounter problems pursuing either option due to challenges in managing dual-option subsidiaries with clashing strategic mandates.
• The equivocal nature of dual-option subsidiaries points to the possibility of another factor playing an important moderating role in exit decisions—subsidiary performance—which has been rarely considered in the MNC real options literature. Our primary argument is that lower subsidiary performance increases the influence of shadow option value embedded in dual-option subsidiaries.
• Analyzing a sample of 703 Korean overseas manufacturing subsidiaries in Asian countries, we find that when profitability falls, subsidiaries with dual options are less likely to be exited than those with single options.

     

The international geography of general purpose technologies (GPTs) and internationalisation of corporate technological innovation

This study is inspired by a discussion that there is a shift towards more internationalised innovation networks in multinational corporations. In this study, we introduce the concept of general purpose technologies (GPTs) and examine the role of GPTs in the internationalisation of innovation activities. Based on an U.S. Patent and Trademark Office database covering patents granted in the U.S. to large MNCs between 1969 and 1995, our empirical findings suggest that the development of GPTs is closely linked to the internationalisation of corporate innovations. Moreover, the internationalisation of GPTs is significantly associated with the level of centrality of GPTs within an industry. GPTs are more likely to be generated in an innovating firm’s foreign countries when they serve as the non-primary technologies in an industry. More importantly, a shift in the creations of GPTs to foreign countries is accompanied with increasingly more innovations in an industry’s primary technology areas being moved to host countries.     

A Dynamic Comparative Analysis of International Innovation Networks in Emerging Market MNCs

This paper compares the international innovation strategies of emerging market MNCs (EMNCs) with those of developed country MNCs (DMNCs). More specifically, we analyze the patent outcomes related to the use of international innovation networks (IINs) of EMNCs in developed markets compared with those of DMNCs in emerging markets. We explore the convergence and volatility patterns in patent generation within these IINs, considering the use of overseas R&D affiliates and the outcomes of interactions between foreign R&D affiliates and home headquarters for generating patents over a 20-year period. Our findings are broadly supportive of the idea that the trends in the volume and volatility of patents generated from the underlying IINs used by EMNCs are converging with those of DMNCs. This is in line with the predictions of a number of current international business theories regarding EMNC international expansion.     

FDI Experience Location and Subsidiary Mortality

Purpose: This study examines the relationship between an MNE’s experience with foreign direct investments (FDI) and subsidiary mortality when considering learning limitations that an MNE are susceptible to under the influence of national cultural differences. Methods: We apply event history analysis on a sample of subsidiaries of Korean MNEs during 1990–2006. Results: We find that subsidiary mortality has a negative relationship with FDI experience from countries culturally similar to both the MNE’s home country and the focal host country; an inverse U-shaped relationship with both experience from countries culturally similar to the home country but different from the focal host country, and experience from countries culturally different from the home country but similar to the focal host country. Experience from countries culturally dissimilar to both the focal host country and the home country has a negative effect when a subsidiary is located in countries dissimilar to the home country, and an insignificant effect when a subsidiary is located in countries similar to the home country. Conclusions: Our findings show that prior experience has different effects depending on where it is accumulated and that MNEs are susceptible to limitations both when drawing inferences from their FDI experiences and when applying these experiences toward subsequent FDIs.     

Capital Structure of Foreign Direct Investments: A Transaction Cost Analysis

Transaction cost theory (TCT) plays a major role in theorizing about the boundaries of the multinational enterprise (MNE), and is increasingly being applied to intra-MNE governance. We apply TCT to capital structure decisions for MNE subsidiaries. According to TCT, equity and debt are not just financial instruments, but alternative governance structures. Equity is useful for projects involving specific assets that do not serve well as collateral, and for knowledge intensive activities where information asymmetry and public good issues make external financing more costly. We study under what conditions MNE headquarters may wish to partially re-introduce market mechanisms inside the MNE through the use of external or internal debt to finance subsidiaries. This can allow economizing on governance costs and strengthen subsidiary manager incentives, but may be inappropriate if subsidiary assets are MNE-specific or subsidiary-specific. Empirically testable propositions are developed.     

Subsidiary Interdependencies and International Human Resource Management Practices in German MNCs

• Using the resource-based view, this paper links the degree of interdependence that exists between subsidiaries of multinational corporations (MNCs) to the use of various International Human Resource Management (IHRM) practices.
• We assume that in many MNCs this interdependence has increased the need for cross-border coordination.
• We analyze to what extent MNCs use IHRM practices in order to enhance their coordination capability across national borders.
• We present a framework that addresses these effects and empirically test it using data from a questionnaire survey among 142 majority-owned overseas subsidiaries of German MNCs.
• The findings show that the degree of interdependence is related to the level of international experience of staff employed in subsidiaries, the use of third-country nationals, the provision of training, the use of cross-cultural management teams, and the choice of employee evaluation and reward methods.
• We conclude by discussing the implications of our findings for IHRM practitioners and scholars as well as the limitations of our study.