Corporate Competences in Subsidiaries of Brazilian Multinationals

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Corporate Competences in Subsidiariesof Brazilian MultinationalsFelipe Mendes Borini a , Maria Tereza Leme Fleury b c & AfonsoFleury da ESPM – Escola Superior de Propaganda e Marketing , São Paulo,Brazilb Escola de Administração de Empresas de São Paulo da FundaçãoGetulio Vargas , São Paulo, Brazilc Faculdade de Economia e Administração, University of São Paulo ,São Paulo, Brazild University of São Paulo , São Paulo, BrazilPublished online: 06 Nov 2009.

To cite this article: Felipe Mendes Borini , Maria Tereza Leme Fleury & Afonso Fleury (2009)Corporate Competences in Subsidiaries of Brazilian Multinationals, Latin American Business Review,10:2-3, 161-185

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Corporate Competences in Subsidiaries ofBrazilian Multinationals

FELIPE MENDES BORINIESPM – Escola Superior de Propaganda e Marketing, Sao Paulo, Brazil

MARIA TEREZA LEME FLEURYEscola de Administracao de Empresas de Sao Paulo da Fundacao Getulio Vargas,

Sao Paulo, Brazil

Faculdade de Economia e Administracao, University of Sao Paulo, Sao Paulo, Brazil

AFONSO FLEURYUniversity of Sao Paulo, Sao Paulo, Brazil

ABSTRACT. Emergingmultinationalsmust seek and develop compe-tences abroad and develop the skills to transfer such competencesfaster and more actively than traditional multinationals. This articleaims to further the understanding of the development, transfer, andrecognition processes of the competences of emerging multinationals’subsidiaries. Based on a review of the literature, a model was devel-oped focusing on the relationships between (i) the strategic guidelinesdesigned by corporate headquarters for subsidiaries (integration,entrepreneurial attitude), (ii) the management of subsidiaries(initiative), and (iii) the management of subsidiaries’ relationshipswith the external environment (competitive context and externalnetwork). The model was applied to a survey of Brazilian multina-tionals and their subsidiaries. The results showed that the variablescompetitive context and external network (in which the subsidiaryis embedded) are the most important for competence development,transfer to and recognition by the headquarters; the variable sub-sidiary initiative is important for recognition by headquarters only.

RESUMEN. Las multinacionales emergentes deben tratar deencontrar y desarrollar aptitudes para operar en el exterior, y

Received June 14, 2009; revised July 8, 2009; accepted September 10, 2009.Address correspondence to Felipe Mendes Borini, ESPM – Escola Superior de Propaganda

e Marketing, Rua Alvaro Alvim, 123, Sao Paulo, SP, CEP 04018-010, Brazil. E-mail: [email protected]

Latin American Business Review, 10:161–185, 2009Copyright # Taylor & Francis Group, LLCISSN: 1097-8526 print=1528-6932 onlineDOI: 10.1080/10978520903340952

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aumentar su habilidad de transferirlas m�aas r�aapida yactivamente, para superar a las multinacionales tradicionales.El objeto de este estudio es comprender c�oomo ocurre el desarrollo,transferencia y reconocimiento de los procesos de competenciasentre las subsidiarias de las multinacionales emergentes. Basadoen la revisi�oon de la literatura, el modelo se desarroll�oo analizandola relaci�oon que existe entre: (i) los lineamientos estrategicoselaborados por la matriz corporativa para sus subsidiarias(integraci�oon, actitud empresaria), (ii) la administraci�oon de lassubsidiarias (iniciativa) y (iii) la gesti�oon de la relaci�oon de lassubsidiarias con el entorno externo (contexto competitivoy red externa). El modelo se aplic�oo en una investigaci�oon de lasmultinacionales brasile~nnas y sus subsidiarias. Sus resultadosmuestran que: las variables contexto competitivo y red externa(donde se inserta la subsidiaria) son las m�aas importantes parael desarrollo, transferencia y reconocimiento de la competenciapor parte de la matriz, mientras que la variable iniciativa dela subsidiaria solo tiene importancia cuanto al reconocimientoque la misma recibir�aa de la matriz.

RESUMO. As multinacionais emergentes devem procurare desenvolver competencias no exterior e aprimorar a capacidadede transferi-las muito mais r�aapida e ativamente do que o fazemas multinacionais tradicionais. Este documento visa a compre-ender os processos de desenvolvimento, transferencia e recon-hecimento das competencias de subsidi�aarias de multinacionaisemergentes. Com base em uma revisao da literatura, desenvol-veu-se um modelo com enfoque nas relacoes entre: (i) as diretrizesestrategicas formuladas por matrizes de empresas para suassubsidi�aarias (integracao, postura empresarial); (ii) a gestaode subsidi�aarias (iniciativa), e (iii) a gestao das relacoes desubsidi�aarias com o ambiente externo (contexto competitivoe rede externa). O modelo foi aplicado em um levantamento demultinacionais brasileiras e suas subsidi�aarias. Os resultados mos-traram que o contexto competitivo e a rede externa vari�aaveis, emque a subsidi�aaria est�aa inserida, sao o fator mais importante parao desenvolvimento de competencia, a sua transferencia paraa matriz da empresa e o reconhecimento por parte desta; a inicia-tiva da subsidi�aaria vari�aavel reveste importancia tao-somente parao reconhecimento da matriz da empresa.

KEYWORDS. Brazilian multinationals, foreign subsidiaries,organizational competences

162 F. M. Borini et al.

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INTRODUCTION

Emerging multinationals have to compete in ways different from thetraditional multinationals (Mathews, 2006; Bonaglia and Goldstein, 2007).The market outlook and the position of the last emerging multinationalentrant (Bartlett and Ghoshal, 2000) dictate a diferentiated strategy todevelop and transfer competences that is more active than traditional multi-nationals’; in other words, emerging multinationals must seek and developcompetences abroad and develop skills to transfer these competences muchfaster and more actively than traditional multinationals.

Emerging multinationals must view the world as a web of resources tobe acquired, aligned, learned about, and disseminated globally to the otherunits of the corporation as a source of competitive advantage (Mathews,2006). Emerging multinationals need to exploit the competences of theircorporate headquarters and build up competences the subsidiary level;however, competitiveness is achieved only when the company knows howto benefit globally from the competences subsidiaries develop, i.e., whetherit has the ability to transfer the competences from headquarters to subsidi-aries and vice-versa.

Therefore, for emerging multinationals, competence development,transfer, and learning are essential. Emerging multinationals need to ‘‘fetch’’these competences, developed abroad, and overcome the paradigm of‘‘having been born in the wrong place’’ (Mathews, 2006; Doz, Santos, andWilliamson, 2001). However, not all multinationals ‘‘are born in the rightplace’’ (Mathews, 2006). It is up to them, through their subsidiaries, toacquire and integrate resources found in other countries.

The body of research on the development of subsidiaries competitiveadvantages is already substantial. Four research streams appear to dominatein studies on the management of subsidiaries (Birkinshaw, 2001). The firstfocuses on the evolution of the role of subsidiaries (Birkinshaw and Hood,1998). The central idea is that the role of subsidiaries or, more recently, ofcertain functions thereof, results from decisions made by corporateheadquarters combined with the strategic effort of the subsidiary itself(Birkinshaw, 1997).

The second research stream focuses on managing the internal networkof multinationals (Bjorkman and Forsgren, 2000) and on linking this networkto the external network (Andersson, Forsgren, and Holm, 2002). It analyzeshow such linking determines the development of the different strategic func-tions within a subsidiary. On one hand, this line of research is concernedwith the influence of business networks (Andersson and Forsgren, 2000)and of the competitive context (Porter, 1990); on the other hand, it alsoanalyzes the importance of the internal network and the issues inherent inmanaging such a network (integration, control, entrepreneurial attitude) as

Corporate Competences 163

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tools for the transfer of knowledge=skills among subsidiaries (Gupta andGovindarajan, 2001; Bjorkman, Barner-Rasmussen, and Li, 2004) and thecreation of value fueled by internal competition (Monteiro, Arvidson, andBirkinshaw, 2008).

The third research stream focuses on the relationship between the cor-porate headquarters and subsidiaries. Specifically, it looks at the recognitionof the subsidiary, i.e., the gap between what the subsidiaries view as theirstrategic importance and corporate headquarters’ response (Taggart, 1997).This line also analyzes the extent to which corporate headquarters makesuse of the subsidiaries’ capacity to build up its own global competitiveadvantage.

Finally, the fourth research stream emphasizes the importance of centersof excellence (Frost, Birkinshaw, and Ensign, 2001; Moore, 2001), providinga more specific view of the role of subsidiaries. Instead of analyzing the roleof the subsidiary as a whole, it tries to understand the role of some of theirstrategic functions, such as research and development (R&D) (Birkinshawand Nobel, 1998) or production (Ferdows, 1997). Specifically, it seeks tounderstand how strategic functions are developed.

In short, the first research stream holds that the role of subsidiariesdepends on the capacities transferred from the corporate headquarters andon the initiatives that develop within the subsidiaries. The second tries tosee which management model is needed for such development to transpire.The third claims that in addition to understanding the initiatives that developwithin subsidiaries it is crucial to understand how their capabilities can beused by the corporation as a whole. Based on this assumption, the fourthresearch stream tries to understand how the subsidiaries’ strategic functionscan provide a competitive advantage for the multinational.

Thus, the discussion about the management of subsidiaries revolvesaround the transfer and development of the multinational’s competitiveadvantage. Given that the latter stems from core competences (Barney,1991) it stands to reason that the central issue for multinationals is thedevelopment and transfer of their core competences.

According to Birkinshaw (2001), the multinational’s core competenceresults from a set of various corporate competences spread throughout theworld, which, when coordinated and used jointly, provide the multinationalwith a sustainable competitive advantage. The analytical focus of this articleis to understand the development and transfer of corporate competences(in the areas of marketing, sales, production, research and development,and human resources), which, when jointly coordinated, can establish themultinational’s core competence.

Thus, this article is an attempt to understand how the development,transfer, and corporate recognition of subsidiaries’ strategic functions occur.To this end, based on recent studies on the management of subsidiaries, thisstudy addresses the following issues: how the development, transfer, and


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recognition of competences in overseas subsidiaries are influenced by (1) themodel for managing relations between corporate headquarters and subsidi-aries (integration and entrepreneurial attitude); (2) the model for managingthe subsidiary (own initiatives); and (3) the model for managing subsidiaries’insertion into competitive contexts and business networks abroad.

The originality of this article resides in the proposition of an analyticalframework for the study of emerging multinationals, a topic seldom the focusof studies on the subsidiaries of traditional multinational companies.1

The next section discusses competences at multinationals and proposesa hypothesis regarding the factors of the model for managing competencedevelopment, transfer, and recognition at multinationals. We then presentthe research methodology, followed by the test of hypotheses and discussionof the results. Finally, we state the conclusions and the limitations ofthe study.

THEORETICAL BACKGROUND

At multinationals, corporate competences can be classified according to thelikelihood of being transferred to the parent company’s subsidiaries. Thus,competences might be categorized as local, non-local, or specific (Rugmanand Verbeke, 2001; Moore, 2001).

Non-local competences stem from the company’s proprietary advan-tages (Dunning, 1993); in other words, they are created and developed atthe corporate headquarters and can be transferred to other subsidiariesaround the world. The opposite can also occur: A competence created anddeveloped at the subsidiary is transferred to the multinational’s other subsi-diaries or even its corporate headquarters. Therefore, a non-local compe-tence can be created not only at corporate headquarters but also atsubsidiaries; it can easily be transferred to other companies owned by themultinational parent company. The issue of transfer is essential for a discus-sion of non-local competence, because not all multinational competencescan be transferred (Rugman and Verbeke, 2001).

The corporate headquarters itself might develop a competence that isuseless for subsidiaries, because it is specific to the place where certainactivities are conducted (Dunning, 1993). Therefore, a multinational has localcompetence when its corporate headquarters or subsidiaries develop compe-tences that are of strictly local interest rather than of global interest (Rugmanand Verbeke, 2001).

Finally, a subsidiary or corporate headquarters may develop compe-tences that could be useful for all the corporation’s units, but because ofthe specific characteristics of the competence, transfer is not feasible; in otherwords, the competences cannot be internalized (Dunning, 1993). These arereferred to as subsidiary-specific competences (Birkinshaw and Moore,


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1998; Rugman and Vebeke, 2001). The tangible and intangible resources andcapabilities involved in shaping the competence prevent it from being trans-ferred because such resources and capabilities are only available in a specificplace. A specific competence is based on tacit knowledge; it alos depends onthe operation’s specific context (Andersson and Forsgren, 2000) and on thecompany’s past history (Hakansson and Waluszewski, 2002), which makesit difficult for such a competence to be imitated and transferred. Specificcompetences created at subsidiaries or corporate headquarters have thepotential to be used globally, but they are difficult to transfer. Thus, a subsidi-ary’s specific competence can only be transferred to the network and sharedby the multinational corporation’s other companies when it is included in theend product or service (Rugman and Verbeke, 2001).

The transfer issue is essential for distinguishing between specific andnon-local competences: both have global potential, but only the latter istransferable. Moreover, the scope of the competence distinguishes betweenlocal, non-local, and specific competences. Figure 1 shows the three types ofcompetences.

Thus, there are two important aspects to be considered in the discussionof competences at multinationals: the scope of the competence (local or glo-bal) and its transfer (easy or difficult). These two aspects explain the contrast-ing dynamics in the creation of a multinational’s competitive advantage ascompared to a national company. Multinational corporations have more pos-sibilities for establishing competitive advantages because they can re-deploytheir corporate competences in different places if they have non-localcompetences.

However, maintaining a competitive advantage is not a static skill: it isdynamic and closely related to the development and transfer of competences(Augier and Teece, 2007). When competences developed at corporate head-quarters or subsidiaries have mobility (i.e., when they are transferable), theyare non-local competences. This closes a virtuous development cycle(Figure 2) of competences and enables the multinational to maintain itsglobal competitive advantage.

Having stressed the importance of competences for emerging multina-tionals and having understood the relevance of non-local competences forthe virtuous cycle of competitive advantages, this section discusses the

FIGURE 1 Types of multinational competences. Source: authors, based on Rugman andVerbeke (2001).


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corporate factors that influence the development, transfer, and recognition ofthe competences developed in overseas subsidiaries.

Figure 3 sums up how the structural elements for developingcompetences are emphasized in strategic models—multidomestic, global,transnational (Bartlett and Ghoshal, 1992), metanational (Doz, Santos, andWilliamson, 2001)—as being important for the creation of competences,or, in other words, for the hypotheses presented in this article.

FIGURE 2 Transfer of competences at multinationals.

FIGURE 3 Multinationals’ strategies and the structural elements emphasized in eachconfiguration.


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Integration

Integration involves the sharing of values among units, thereby allowingcorporate headquarters to understand its subsidiaries and vice-versa.Communication and socialization are the two corporate elements that arecrucial to integration (Nohria and Ghoshal, 1997).

The organization’s formal structure, reflected in the interdependencebetween subsidiaries and corporate headquarters, has a direct impact onthe level of communication (making it higher or lower) and on the sharingof experiences. The weaker the centralization, the stronger the positive effecton corporate headquarters=subsidiary communication (Nohria and Ghoshal,1997).

Corporate communication is essential to reduce uncertainty and dissemi-nate knowledge (Johanson and Vahlne, 1977). Communication can beimproved by increasing the information processing capacity, which results frominvestments in communications systems. However, as efficient as this mechan-ism may be for increasing information processing capacity, direct communica-tion is still more efficient, in addition to being a simpler way of exchangingknowledge (Nohria and Ghoshal, 1997). Examples of such communicationare the constant exchange of information between executives from the subsidi-ary and from corporate headquarters, or strong work ties among the units.

The structure of informal communication relations is also essential.Lateral work mechanisms are powerful means of shaping the flow ofinformation within a multinational. Activities conducted between the unitshelp to foster interpersonal relationships, e.g. the joint work of a task force;meetings between members of different corporate units, etc. (Gupta andGovindarajan, 2001; Birkinshaw and Moore, 1998). This yields a moredynamic network vis-a-vis managers of the corporation’s different units.

Socialization is another element of the corporate control structure thatenhances=improves integration. The higher the number of contacts anindividual has within the company’s personal relationships network andthe less redundant these contacts, the stronger the social capital (Nohriaand Ghoshal, 1997): close ties communicate subsidiary credibility to thecorporate headquarters (Birkinshaw, Hood, and Jonsson, 1998).

Therefore, strong integration drives the development of non-localcompetences: headquarters has greater confidence in the subsidiary and thusrealizes that non-local competences may be developed in places other thanthe corporation’s home country. As a result, more investments are channeledfor the development of the subsidiary’s competences, because it becomes areliable place for strategic corporate functions.

H1a: The stronger the integration between corporate headquarters andthe subsidiaries, the higher the possibility that distinct competenceswill be developed at the subsidiaries.


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Even as integration favors the development of competences, there is alsoa greater tendency to accept and learn the competences that resultfrom subsidiaries’ initiatives, given the trust developed through theintegration of corporate headquarters and subsidiaries.

Integration creates formal or informal communication ties and facilitatesthe understanding of the operations conducted by the different subsidiaries.This unity of values, as well as the established communication channels,makes it easier to transfer competences in both directions: headquarters tosubsidiaries and vice-versa.

H1b: The stronger the integration between corporate headquarters andsubsidiaries, the higher the possibility of transferring competencesfrom corporate headquarters to subsidiaries.

H1c: The stronger the integration between corporate headquarters andsubsidiaries, the higher the possibility of transferring competencesfrom subsidiaries to corporate headquarters.

Entrepreneurial Attitude

Entrepreneurial attitude concerns corporate headquarters’ positive viewof new business opportunities abroad (Birkinshaw, 1997). This iscrucial to create and develop initiatives and competences within subsi-diaries (Birkinshaw and Hood, 1998). However, it is much more thanthe creation of a new business activity=new production process, sinceit touches on issues such as credibility and the freedom to make riskydecisions. It also suggests a corporate willingness to embrace a proactivestance within a risky environment that entails decision-making(Birkinshaw, 1997).

An entrepreneurial attitude has the following characteristics: (1) Uppermanagement expertise and support for entrepreneurial activities to create astimulating corporate environment for new business practices and ideas(Birkinshaw, 1997). (2) Risk viewed as a positive attribute, provided itis an appropriately calculated one. Lack of success of entrepreneurialactivities is not synonymous with poor performance but rather of a corpo-rate process for the creation of new opportunities (Birkinshaw, 1997;Birkinshaw, Hood, and Jonsson, 1998).

The relationship between entrepreneurial attitude and the developmentof competences results from the company’s need to constantly re-invent itsbusiness activities and processes in an emerging and continuous mannerat corporate headquarters and overseas subsidiaries. Even if corporateheadquarters is entrepreneurially minded, its subsidiaries will be unsuccess-ful without the support of personnel responsible for carrying out theentrepreneurial activity.


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Therefore, it is expected that:

H2a: The stronger the entrepreneurial attitude, the higher the possibilitythat distinct competences will be developed at the subsidiaries.

Given that an entrepreneurial attitude encourages personnel andbusiness units to be open to calculated risks and to innovations in businessactivities and processes, it makes sense that such a company is more open tolearning new competences that can increase its business. The above assumesthat the competences created at corporate headquarters have higher recep-tivity when they are transferred to a subsidiary or vice-versa. Competencescreated at companies with a strong entrepreneurial attitude have a higherpossibility of being non-local, because of their usefulness in terms of innova-tion and the fact that subsidiaries are more willing to learn new competences.

H2b: The stronger the corporate entrepreneurial attitude, the higher thepossibility that competences will be transferred from corporateheadquarters to subsidiaries.

H2c: The stronger the corporate entrepreneurial attitude, the higher thepossibility that competences will be transferred from the subsidiaryto corporate headquarters.

Initiative

A subsidiary’s initiative is any innovative activity conducted with theresources and under the responsibility of the overseas subsidiary itself(Birkinshaw, 1997). This concept becomes clear when one considers thatthe multinational organizes itself in networks (Bartlett and Ghoshal, 1992;Nohria and Ghoshal, 1997). However, even if there is no instruction fromcorporate headquarters regarding a corporate network, the initiative mayderive from entrepreneurial behavior that senior management does notencourage actively, but that subordinates nevertheless do manifest, giventhe senior management’s inability to lead=guide=evaluate all of the actionsof its executive staff. Occasionally, corporate headquarters may even cometo recognize an initiative; initiatives can surface within multinationalsand the positive ones might be good enough to add to the corporation’scompetitive advantage (Birkinshaw, 1997; Birkinshaw and Hood, 1998).

One can understand how an initiative can appear with no strategicinstruction from the corporation where, from the point of view of the evolu-tion of the subsidiaries’ role, subsidiaries define their own strategies withinthe corporation (Birkinshaw, 2001; Birkinshaw, 1997). Burgelman (1983)suggested that initiatives can be coordinated by the corporation or generatedat the subsidiary. Other initiatives derive from opportunities that presentthemselves in the subsidiary’s host country. Therefore, initiatives may


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appear even in the absence of entrepreneurial guidelines for the subsidiaries,e.g., when subsidiaries decide to develop a given project without thecorporation’s pre-approval.

Given that initiatives are important at the subsidiaries of multinationalsand are the core elements for understanding the functions performed duringa specific period of time and for building up the subsidiaries’ competitiveadvantage, the emerging multinationals, in order to compete on an equalfooting with the global market’s most powerful players, need their subsidi-aries’ initiatives in order to create distinct corporate competences. Therefore,

H3a: The higher the intensity of corporate initiatives, the higher thepossibility that distinct competences will be developed at thesubsidiaries.

However, although initiatives favor the creation of competences, theyare, simultaneously, a barrier to the transfer of competences. An exceptionis the case of global initiatives, which are prepared in accordance with thewishes of corporate headquarters (Birkinshaw, 1997). Even in these cases,the resentment of the subsidiaries that lost out in the internal competition(Monteiro, Arvidisson, and Birkinshaw, 2008) can be a powerful barrier toreceptiveness to the transfer of the competences developed by the victorioussubsidiary (Gupta and Govindarajan, 2001).

In the case of in-company initiatives, a subsidiary’s rebelliousness mayeven create competences that will not be recognized by the corporation,resulting in the subsidiary’s isolation (Monteiro, Arvidisson, and Birkinshaw,2008). Market initiatives, in turn, can result in strictly local competences thatare deep-rooted in a given location and hard to transfer.

H3b: The lower the intensity of corporate initiatives, the higher thepossibility that competences will be transferred from corporateheadquarters to subsidiaries.

H3c: The lower the intensity of corporate initiatives, the higher the pos-sibility that competences will be transferred from the subsidiary tocorporate headquarters.

External Networks

Nordic research shows that the internationalization of companies, includingemerging multinationals, does not always follow a sequential and gradualpath (Johanson and Mattsson, 1988). In the case of emerging multinationals,this is explained by certain needs inherent to their position in the globalmarket. Emerging multinationals do not have the same amount of time thatthe traditional companies had to decide on the next international move.The opening up of markets and global competition have reduced both


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entry time and the number of internationalization stages (Bonaglia andGoldstein, 2007; Mathews, 2006).

The gradual nature of entry modes is not necessarily a cut and dry rule(Rezende, 2003). Corporate headquarters’ perception is not the only factorexplaining a stronger or weaker commitment to the overseas operation.Relationship networks in overseas markets also play an important role(Johanson and Mattsson, 1988). The reference to relationship networks holdstrue for outside and in-company networks. The outside network is the resultof the subsidiary’s relationships with its business partners, including suppliers,research institutions, and advertising agencies (Andersson, Forsgren, and Holm,2002). The in-company relationship is the result of the subsidiary’s relationshipwith the other subsidiaries of the corporation (Bjorkman and Forsgren, 2000).

This explains why certain companies do not follow the sequential entrymode forms. Internationalization is a phenomenon that is not restricted interms of entry mode; rather, it involves the subsidiaries’ process of evolutionitself (Birkinshaw and Hood, 1998). The relationships established by subsidi-aries during their evolution in the international market may be gradual, yetthe sequence of the entry mode does not happen on a continuous basis(Rezende, 2003). This is the evolutionary process of the subsidiaries; theprocess depends on the contingencies of the competitive environment,the relationships between the subsidiaries, and on the company’s pastexperience with its overseas operations (Rezende, 2006).

To these researchers, the more embedded a company is in the businessnetworks and techniques abroad (Andersson, Forsgren, and Holm, 2002), thehigher the possibility that the subsidiary will gain access to new knowledgethat can assure the development of competences.

H4a: The stronger the involvement with the outside business network,the higher the possibility that distinct competences will be devel-oped at the subsidiaries.

However, as the company becomes more embedded in the local market,it becomes less integrated with the intra-corporate network, which implies asmaller possibility of competence transfer (Andersson and Forsgren, 2006;Minbaeva, 2007). On one hand, the fact that a subsidiary is deeply embeddedin the network of the foreign host country provides access to complex andimplied knowledge, which would not otherwise have been acquired; onthe other hand, such access prevents the transfer to other units of the corpo-rate network due to the weak ties with co-subsidiaries and corporate head-quarters (Andersson and Forsgren, 2006).

H4b: The weaker the involvement with the outside business network,the higher the possibility that competences will be transferred fromcorporate headquarters to subsidiaries.


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H4c: The weaker the involvement with the outside business network,the higher the possibility that competences will be transferred fromthe subsidiary to corporate headquarters.

Competitive Context

A national competitive context that brings together the attributes of thenations’ best competitive practices provides the basic conditions for innova-tion (Porter, 1990). When one analyzes the relationship of multinationals’subsidiaries with national environments, the participation rationale mustbe guided by the fact that once they are part of the environment thesubsidiaries can gain access to innovative ideas, talents, and specificknowledge (Bartlett and Ghoshal, 1992; Porter, 1990). The multinationaland its overseas subsidiaries can have access to competitive advantagesources of other prime national sources. These innovation sources can becopied and further developed at corporate headquarters (Frost, Birkinshaw,and Ensign, 2002).

The innovations of competence-creating subsidiaries are more closelyrelated to innovation factors coming from the foreign host country than fromcorporate headquarters (Frost, 2001). This is the case at more independentsubsidiaries with a higher level of resources and special skills. Thus, thesesubsidiaries’ scientists and engineers are able to develop their own initiatives,depending on their level of education, training, expertise, and knowledge-sharing with the players of the local outside network (Frost, 2001; Frost,Birkinshaw, and Ensign, 2002). The hypothesis is that external factors playan important role in the development of strategically important subsidiaries.

Therefore, the environmental determinism perspective (Bartlett andGhoshal, 1992; Porter, 1990) becomes all the more important for understand-ing the role of subsidiaries. This point of view emphasizes the importanceof external factors and of institutions to create knowledge and developinnovations outside the multinational’s native country (Frost, 2001); inaddition, it shows that innovation factors exist not only within the company’sinternal borders but also among consumers and suppliers (Birkinshaw andFry, 1998).

H5a: The more dynamic the competitive context, the higher the possibi-lity that distinct competences will be developed at the overseassubsidiaries of emerging multinationals.

Unlike insertion into business networks, the competitive context ele-ments do not provide the intrinsic and long-lasting relationship that charac-terizes subsidiaries’ non-alignment with corporate headquarters’ strategies.The subsidiary will be influenced by context elements for the developmentof competences, but once the competence is created, it can be transferred,


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because the factors inherent to the development of a competence wereabsorbed from the external environment and can be reproduced internallyor artificially in other countries. Things happen differently in a businessnetwork, where often the competence’s elements depend strongly on othercompanies’ activities. Therefore, a subsidiary can transfer a competence,although this can occasionally be difficult.

H5b: The more dynamic the competitive context, the higher the possibi-lity that competences will be transferred from corporate headquar-ters to subsidiaries.

H5c: The more dynamic the competitive context, the higher the possibi-lity that competences will be transferred from subsidiaries tocorporate headquarters.

METHODOLOGY

The research into the subsidiaries of Brazilian late-movers was structured intwo parts. Initially, a survey was prepared focusing on ‘‘Strategies andCompetences of Brazilian Multinationals’’ in three periods: before internatio-nalization, during entry into international markets, and during expansion.The questionnaire was designed to be answered by the CEO or the personin charge of international operations. It was pre-tested in two firms.

In our survey, the research population consisted of Brazilian multina-tionals that engage in manufacturing or that supply technological services,with operations abroad. In December 2006, 42 Brazilian enterprises withoverseas operations were identified, thus qualifying as multinationals. Thisfigure comprised a diverse range of firms, from those based on naturalresources to others based on services such as Engineering and IT. Weidentified multinationals with data from the 2006 issue of Analise Editorial.They publish a ranking of Brazilian enterprises abroad (exportation, foreignoffices, and foreign enterprises).

The questionnaire pre-testing was done in three multinationals: oneapplication was face-to-face and two via e-mail and telephone. The resultsof pre testing led to minor changes in the questionnaire.

The questionnaire was e-mailed to 42 CEOs of multinationals; follow-uptelephone calls were made to reinforce to the message. Thirty of the 42firms responded to the questionnaire; of those 30, 11 are included in the14 Brazilian New Global Challengers (Boston Consulting Group, 2009). Fromthe 12 non-respondent firms, 2 important ones were unable to respondbecause they were on the brink of important acquisitions and thus unableto disclose information to the general public. Four other firms refused toanswer because their international incursions were small and experimentaland they were unsure whether they would keep up their internationalizationprocess. Finally, the remaining six simply did not respond.


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The second stage consisted of having the firms’ corporate headquarterssend a custom-designed questionnaire to all their subsidiaries. The 30headquarters of Brazilian multinationals sent this questionnaire to a total of93 overseas subsidiaries. All questionnaires were equal. In other words, eachcorporate headquarters involved an average of three subsidiaries; someinvolved as many as eight, whereas others involved only one. Sixty-six outof the 93 subsidiaries involved provided a response by letter or via theelectronic questionnaire found on the project’s website. The response ratefor the subsidiaries was 70%.

Construction of the Study’s Variables

The questionnaire used 5-point scales. Many of the questions are basedon Birkinshaw’s studies (Birkinshaw, Hood, and Jonsson, 1998; Frost,Birkinshaw, and Ensign, 2002; Birkinshaw, 1997). Only the ‘‘recognition’’and ‘‘external network’’ variables were derived from other authors.

The first dependent variable of the model, the development ofcompetences from corporate headquarters to subsidiaries, is comprisedof the following variables (Frost, Birkinshaw, and Ensign, 2002):development of R&D, production, sales, marketing, and human resour-ces competences (Cronbach’s alpha¼ 0.812). The second dependentvariable of the model, the transfer of competences (Birkinshaw, Hoodand Jonsson, 1998), is comprised of the same variables as developmentof competences (Cronbach’s alpha¼ 0.643). The third dependent variableof the model, recognition of the subsidiary’s competences by corporateheadquarters (Li, Barner-Rasmussen, Bjorkman, 2007), is comprisedof the same variables as development of competences (Cronbach’salpha¼ 0.883).

The ‘‘entrepreneurial attitude’’ independent variable was comprised ofthe following variables (Birkinshaw, Hood, and Jonsson, 1998): seniormanagement’s support to entrepreneurial activities; senior management’sexperience in innovation-related activities; support to individual decisionsinvolving risk; whether decision-making in relation to calculated risks isencouraged; and whether ‘‘undertaking risks’’ is considered a positiveattribute (Cronbach’s alpha¼ 0.879).

The ‘‘integration’’ independent variable was comprised of the followingvariables (Birkinshaw, Hood, and Jonsson, 1998): strong work relationship;trust delegated to the subsidiary; exchange of information; understanding,by corporate headquarters, of the subsidiary’s competences; and strongcredibility of senior management (Cronbach’s alpha¼ 0.893).

The ‘‘initiative’’ independent variable was comprised of the followingvariables (Birkinshaw, 1997): new products developed in Brazil and soldoverseas; acquisition of national companies conducted by the subsidiary;new international business activities created in the country; increases in


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internationally adopted production lines; and new investments in R&D or inproduction processes (Cronbach’s alpha¼ 0.808).

The ‘‘competitive context’’ independent variable was comprised of thefollowing variables (Birkinshaw, Hood, and Jonsson, 1998): whether thecompetition in the country is fierce; whether suppliers are highly qualifiedand capable; whether clients and suppliers have a strong relationship;whether the country has major research centers; whether competitorsinnovate products rapidly; whether local consumers demand high standards;whether there are strong business support institutions; whether marketdemand is growing fast; and whether labor is skilled and specialized(Cronbach’s alpha¼ 0.859).

The ‘‘business network’’ independent variable focused on the relation-ship with strategic partners and was comprised of the following variables(Andersson and Forsgren, 2002): relationship level with the corporation’sother overseas subsidiaries; with the R&D units of other companies; withengineering firms of other companies; with universities or specific researchinstitutes; with preferred corporate suppliers in the country; with specificmarket suppliers; with corporate clients; with local market clients; and withgovernment institutions (Cronbach’s alpha¼ 0.803).

Three control variables were used. The first variable, the age of thesubsidiary, is a dummy variable (0 for younger and 1 for older). (The averageage is seven years.) The second variable, the entry mode, is also a dummyvariable (0¼ acquisition and joint venture; 1¼ greenfield investments). Thisvariable is important because it acknowledges that emerging multinationalsgo abroad not only to explore their own competences (Dunning, 1993),but also to ‘‘seek’’ new competences, especially through acquisitions, accord-ing to the resource-based view. The third variable, the stage of developmentof the country where the subsidiary is located, is also a dummy variable(0¼ subsidiary located in an underdeveloped country; 1¼ subsidiary locatedin a developed country). The classification of the development stage wasconducted based on the OECD parameters, according to the theory ofgeographic location (Li, 2004).

RESULTS

The results of the regression models appear in Table 1 for the threedependent variables in the study: the development of competences, thetransfer of competences from corporate headquarters to subsidiaries, andthe recognition of competences (i.e., the transfer of competences fromsubsidiaries to corporate headquarters).

The model was checked regarding the basic assumptions: normality,homoscedasticity, linearity, and multicollinearity. The violations werenegligible.


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Development of Competences

The development of competences at subsidiaries of Brazilian multinationalsdepends on the integration between corporate headquarters and subsidi-aries, on the company’s insertion into the business network abroad, andon the dynamism of the competitive context. The results give support toH1a and H4a, but not to H2a and H3a. Although the results were significantfor H5a, the sign of the coefficient was contrary to the hypothesizeddirection. Note, however, that the explanatory power of the model is quitelimited; the adjusted R square was only 15%.

The result of the integration between the counterparties suggeststhe stronger possibility that distinct competences will develop, becauseexecutives have stronger support to adapt the competences transferred fromcorporate headquarters. Concomitantly, the strong relationship with thecounterparty seems to allow for a better exchange of experiences, improvingunderstanding and the further development of the competence.

On the other hand, the credibility of and trust in executives, granted bycorporate headquarters to the executives of the subsidiaries, can reduce theperception of uncertainty and lack of control in relation to the developmentof competences. The constant exchange of information and group workseems to allow for the development of competences more closely alignedwith the core business.

The results also suggest that the stronger the insertion within thenetwork in which the subsidiary operates, the higher the possibility thatsubsidiaries will develop distinct competences. Once the subsidiary startsworking in an integrated way with the production chains of the overseaspartners, the non-local competences transferred from corporate headquartersmust be transformed to align with the contingencies of the foreign marketand thus driving the development of competences.

TABLE 1 Regression Models

Regression models

Dependent Development Transfer Recognition

Constant 2.545 1.571 �1.230Independent Integration 0.213(�) �0.142 0.077

Entrepren. �0.011 0.001 0.244(�)Initiative 0.102 �0.084 0.375(��)Networks 0.211(�) �0.256(�) 0.117Context �0.205(0 0) 0.305(�) 0.396(�)

Control Age �0.083 0.149 0.223Place 0.045 �0.175 0.025Entry �0.198 0.356 �0.173

R Square�Adjusted 0.154 0.151 0.419

�p< 0.05; 00p< 0.10; ��p< 0.01.


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This insertion into the foreign network seems to allow the subsidiary togain access to new knowledge, which can be applied to the existing compe-tences or drive the development of new competences. This kind of acquiredknowledge is only possible by insertion, which distinguishes the subsidiaryfrom the network’s other subsidiaries because the subsidiary is unique to thatplace, to that structural configuration of the network’s arrangement abroad.

The data also show that the context is associated with the developmentof distinct competences; however, these results go in the direction oppositeto that hypothesized and were only marginally significant (p< .10).

Brazilian multinationals tend to transfer their competences to subsidi-aries in dynamic competitive contexts; and the subsidiaries tend to changethe competences very little. Subsidiaries in less dynamic contexts receivecompetences on a smaller scale, although transfer of competences doesoccur. Moreover, subsidiaries must transform competences more highly; theymust also develop new ones as a survival strategy, in a context that is againstthe expansion of the company, which imbues competences with distinctcharacteristics.

Transfer of Competences

The two management model variables that explain the transfer of compe-tences are the competitive context and the insertion into business networks.The results give support to H4b and H5b, but not to H1b, H2b, and H3b. Inaddition, it should be noted that the explanatory power of the model islimited (adjusted R square of 15%).

The results suggest that the stronger insertion of subsidiaries intothe business networks abroad has an inverse correlation with the use ofcompetences that are identical to those of the corporate headquarters.The opposite also seems to be true: the weaker the insertion into theforeign network, the stronger the probability that subsidiaries will usetheir headquarters’ competences without changing them or with slightadaptations only.

Once subsidiaries become part of the business network, the competitiveconfigurations of the site overlay the other competences; this means thatcorporate headquarters’ non-local competences must undergo major changes.In other words, it is unfeasible to use non-local competences transferred bycorporate headquarters without changing them in some way.

The results also seem to support H5b. The transfer of competences fromcorporate headquarters to subsidiaries in the case of Brazilian multinationalstakes into account the dynamism and the excellence of the competitive con-text of which the subsidiary is a part, and this evaluation does not seem todepend on whether the country is classified as underdeveloped or devel-oped. The perceived context in the subsidiary’s field of business appearsto be the predominant factor.


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Operating in a prime location in terms of competitive advantage seemsto provide corporate headquarters with more confidence to transfer its com-petences and to try to exploit them abroad. It is likely that the absence ofcompetitive dynamism makes them slightly fearful of transferring compe-tences. In other words, the existence of a dynamic competitive contextentices Brazilian multinationals to transfer their competences to their subsidi-ary, a characteristic of the multinational’s stronger commitment to the foreigncountry. The absence of dynamism, in turn, appears to weaken the multina-tional’s foreign commitment, causing the firm, perhaps, to delegate to thesubsidiary the role of market explorer, without establishing stronger ties withthe region in which it is located.

Recognition of Competences

The results of the regression model in relation to the recognition of compe-tences showed a better fit than the other models, with an explanatory powerof approximately 42%. The results do not support H1c and H4c. However,recognizing competences depends on the entrepreneurial attitude (H2c),on initiative (H3c), and on the competitive context (H5c). The modelincludes three dimensions: corporate headquarters=subsidiaries relationship;management of subsidiaries; and prospects of the competitive environment.Therefore, H2c and H5c are supported but H3c (initiative) is not (results wereopposite to those expected).

The model shows that an entrepreneurial attitude is important when itcomes to recognizing competences. Consistent with the theory of emergingmultinationals in search of resources abroad and with the need for develop-ment=fundraising in other countries, Brazilian multinationals pursue innova-tion abroad. This is confirmed by their recognition of the competences foundin those subsidiaries that were given stronger support for their entrepreneur-ial initiatives and that took advantage of this to develop their own initiatives.

Thus, the stronger the intensity of corporate initiatives, the higher thepossibility of transferring the subsidiary’s competences to corporate head-quarters. This shows that contrary to the hypothesis the development ofinitiatives does not mean that the subsidiary will become isolated as a resultof a lack of alignment with the competences of corporate headquarters; aswe have pointed out, the development of competences correlates stronglywith the integration between corporate headquarters and its subsidiary.The development of initiatives is not associated only with market compe-tences and local competences unaligned with the corporation’s competencesmodel.

In-company competition and the subsidiary’s fear of losing power whenits initiatives are implemented by the other subsidiaries do not occur at thispoint in the development of emerging multinationals’ subsidiaries, some-thing which is not the case with the subsidiaries of traditional multinationals.


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However, it is important to draw attention to the small number ofsubsidiaries that take initiatives. The evidence indicates that if subsidiarieswant their competences to be recognized, they must improve their manage-ment of their own initiatives in order to attract the preference of corporateheadquarters. Otherwise, they run the risk of having their competencessimply transferred to corporate headquarters.

Finally, the model shows the importance of the competitive context forcompetences to be recognized. Like the transfer of competences fromcorporate headquarters to subsidiaries, the reverse transfer also depends onthe competitive context. The institutionalization and credibility of places withdynamic competitive contexts are important factors when it comes to corporateheadquarters transferring resources or seeking the resources of subsidiaries.

CONCLUSION

The aim of this study was to understand key dimensions of the approachadopted by multinational companies from an emerging country in regardsto subsidiaries management. More specifically, the dimensions ‘‘transfer,’’‘‘development,’’ and ‘‘competence recognition’’ were analyzed as variablesinfluenced by (i) the strategic guidelines that corporate headquarters setfor subsidiaries (integration, entrepreneurial attitude), (ii) the managementof each subsidiary (own initiative), and (iii) the management of each subsidi-ary’s relationship with the external environment (competitive context andexternal network), as shown in Figure 4.

FIGURE 4 Management model for the transfer, development, and recognition of compe-tences at Brazilian multinationals.


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Concerning the transfer of competences from corporate headquarters tosubsidiaries, the managerial approach adopted by Brazilian multinationalsemphasizes aspects related to the external environment. The less the subsidi-ary is inserted in the business network abroad (Andersson, Forsgren, andHolm, 2002), the stronger the probability that the subsidiary will adopt, withvery few changes, the competences transferred from corporate headquarters.The corporate headquarters, in turn, emphasize the transfer of their compe-tences to subsidiaries that are part of more dynamic competitive contexts andthe reapplication of the competences (Porter, 1990).

The result is consistent with other studies on emerging multina-tionals, which have also identified resource-seeking as being a high prior-ity (Mathews, 2006). The corporate headquarters seek to re-apply theircompetences at subsidiaries located in competitive environments thatwere more positively evaluated than average, because they plan to learnhow the competences perform in situations more competitive than thoseof the domestic market. As corporate headquarters use subsidiaries ascentral units to test new competence configurations, they can learnhow to re-invent their business back home and in other countries thatdo not benefit from a competitive environment with similar features.This ability to learn from subsidiaries may ensure a corporation’s compe-titive advantage in several markets, because it enables the corporateheadquarters to anticipate market trends and to lead competitionstandards both domestically and abroad (Mathews, 2006; Bonaglia andGoldstein, 2007).

The development of distinct competences is explained not only bythe strong integration between corporate headquarters and subsidiaries,but, more importantly, by the company’s relationship with the externalenvironment.

Brazilian multinationals try to develop distinct competences abroadas a means of increasing their resources, and to this end, they resort toan association with companies from the external business network, whileadding complementary competences. This indicates the importance ofsubsidiaries in creating a global competitive advantage (Rugman andVerbeke, 2001) and is in line with previous studies on emerging multina-tionals and the meta-national strategy, i.e., the external environmentgains importance in the strategic architecture of the development ofcompetences.

This also means that when the competitive context is dynamic, thesubsidiaries of emerging multinationals re-apply and re-configure the com-petences of corporate headquarters to improve and energize the retainedknowledge. When the context is unfavorable, the subsidiaries insert them-selves into the business networks abroad to learn how to work in a muchmore troubled context, thereby gaining a new source of competitive advan-tage (Andersson and Forsgren, 2000). It is clear that in one way or another,


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emerging multinationals do seek competitive advantages by means of newcompetences in their overseas subsidiaries.

The results on recognizing competences confirm the above andshow just how important it is for Brazilian multinationals to pursueinnovation in their subsidiaries. Brazilian multinationals are eager forinnovative competences developed abroad and again, this is consistentwith the research on emerging multinationals, whose sources of competi-tive advantages are found not only at corporate headquarters but also attheir innovative subsidiaries (Mathews, 2006). Moreover, this strategicconfiguration supports models with a transnational and a meta-nationalstrategy, which emphasize the dispersion of resources at subsidiariesand the innovation sourced at the fringes as a source of knowledge forcorporate headquarters.

In sum, Brazilian multinationals depend not only on the competencestransferred from corporate headquarters in order to develop their compe-tences, but also on the competences developed by their subsidiaries inorder to maintain their competitive advantage. The cycle of competencesmentioned as being essential for the competitiveness of multinationals issupported by the results, which point to the constant dynamics of compe-tences at multinational corporations as one way for them to safeguard andmaintain their competitive advantage.

LIMITATIONS OF THE RESEARCH

The limitations of this study are with respect to research method used, typeof respondent, selection of model variables, and sample size.

Stratification of subsidiaries in the study shows a static picture thatallows some inferences to be made regarding the processes of development,transfer, and recognition of competences. However, other researchmethodologies, such as case studies, although less comprehensive than asurvey, have the advantage of a longitudinal perspective regarding the pro-cess of development, transfer and recognition of competences in Brazilianmultinationals.

Another limitation of the study concerns the type of respondents.Information obtained at the corporate management level allows a broadview of the variables studied, but may fail to yield an accurate picture ofthe processes under study from the perspective of other management levels.

Another limitation concerns the choice of variables used in the model.While the variables chosen have followed the general dimensions ofcorporate strategy and are those most commonly discussed in similar studies,other potential variables of equal importance were ignored.

Finally, the small number of Brazilian multinationals in our sample mayhave had an impact on the study’s results.


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NOTE

1. In this paper, traditional multinationals are the older multinationals, typically from developed

countries in North America and Europe, and from Japan. Emerging multinationals are those that have

recently globalized, especially those from Southeast Asia and the BRICs (Brazil, Russia, India and China).

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Corporate Competences in Subsidiaries of Brazilian Multinationals

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