The relationship between subsidiaries’ initiatives and subsidiaries’ roles in emerging markets
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Transcript of The relationship between subsidiaries’ initiatives and subsidiaries’ roles in emerging markets
Espacios. Espacios. Vol. 31 (4) 2010. Pág. 9
The relationship between subsidiaries’ initiatives and
subsidiaries’ roles in emerging markets
La relación entre iniciativas subsidiarias y funciones subsidiarias en los
mercados emergentes
Felipe Mendes Borini* y Moacir de Miranda Oliveira Junior**
Recibido: 16-03-2010 - Aprobado: 15-06-2010
Contenido
Introduction
Theoretical background
Hypothesis
Traditional Subsidiaries (TS) in emerging economies
The Subsidiaries with Limited Relevance (SRL)
Strategically Relevant Subsidiaries (SRS)
Research methodology
Selecting Variables and Building
Results
Discussion
References
ABSTRACT:
The purpose of this paper is to analyze the
strategic relevance of the largest foreign
subsidiaries located in Brazil, under the
perspective of emerging economies, in order
to find out the most influencing factors in the
dynamics of the subsidiaries roles in the
multinational corporation. The exploratory
research was carried out in a sample of 118 of
the 1000 largest foreign subsidiaries in Brazil.
Statistical analysis presented three clusters of
subsidiaries in Brazil: the Traditional
Subsidiaries, the Subsidiaries with Limited
Relevance and the Strategically Relevant
Subsidiaries. Subsidiaries differ mostly in
terms of its international responsibility,
integrated innovation, and credibility of the
subsidiary.
Key-words: Subsidiaries‟ Roles; Initiatives;
RESUMEN:
El propósito de este trabajo es analizar la importancia
estratégica de las filiales extranjeras más grandes en
Brasil, bajo la perspectiva de las economías emergentes,
con el fin de encontrar la mayoría de los factores que
influyen en la dinámica de las funciones subsidiarias de
la corporación multinacional. El estudio exploratorio
fue realizado en una muestra de 118 de las 1000 filiales
extranjeras más grandes en Brasil. El análisis estadístico
presentado tres grupos de las filiales en Brasil: las
filiales tradicionales, las filiales con la limitada
relevancia y de las filiales de importancia estratégica. Filiales difieren principalmente en términos de su
responsabilidad internacional, integradas de innovación,
y la credibilidad de la filial.
Palabras clave: Importancia de las filiales; Iniciativas;
Mercados emergentes
Emerging markets
Introduction
Firms from large developing economies like China, India, Mexico and Brazil should
play a more important role in global competition in coming years. These firms include
subsidiaries of multinational corporations with investments in these large developing
economies. This paper deals with subsidiaries of multinationals corporations working in
Brazil. There is a growing interest in the area, and there are already some studies
analyzing aspects or sectors related specifically to foreign direct investment in Brazil
(Consoni and Quadros, 2003; Franco and Quadros, 2003; Quadros et.al.2001). The
purpose of this paper is to study the strategic relevance of the largest foreign
subsidiaries located in Brazil, under the emerging economies´ viewpoint, in order to
find out the most influencing factors in the dynamics of the subsidiaries roles in the
multinational corporation. By strategic relevance we understand the relative capacity of
the subsidiary to develop innovations that can be transferred and used by other
corporative units, so that they become a corporate competitive advantage. In this sense
Strategically Relevant Subsidiaries (SRS) are responsible for corporate value creation,
do own global competitiveness, when compared with other subsidiaries, and have her
competences recognized by the corporation. Based on the theory about subsidiaries
strategies, and the concept of strategic relevance, a typology of the multinational
corporation‟s subsidiaries in emerging economies was developed in order to:
1. Be able to classify the subsidiaries from the point of view of strategic relevance. The
fact is that, for emerging economies, attracting and keeping subsidiaries with strategic
relevance is a very important task. The use of advanced technologies and knowledge
tend to extend far beyond the borders of the firm, reaching suppliers, distribution
channels, research centers in the emerging economy, therefore improving the
international competitiveness of the country in the specific industry;
2. Be able to understand the factors that determine the dynamics of the subsidiaries‟
roles in emerging economies. Subsidiaries have roles in the global corporative network
that can change with time. The dynamics of these roles depends on internal factors of
the subsidiary, as well as factors related to external environment;
3. Be able to help in strategic decision-making regarding the subsidiaries‟ roles. A better
understanding of the different subsidiaries‟ roles in emerging economies, represent
executive support for multinationals corporations (in the headquarters and in the
subsidiaries), as well as for government‟s technicians in emerging economies.
Theoretical background
It‟s known that there are three main perspectives to explain the role performed by the
subsidiaries (Birkinshaw, 2001; Peterson and Brock, 2002): the perspective of
environmental determinism, the perspective of the headquarters policies regarding the
subsidiaries, and the perspective of the subsidiaries strategies. The first perspective of
environmental determinism is due to the fact that multinationals companies operate in
different strategic environments and, as the characteristics of location varies,
subsidiaries may have different strategic roles (Bartlett and Ghoshal, 1992). It is clear
that the more dynamic the local competition is, the more demanding the buyers and the
more qualified are the suppliers; therefore, higher the chances for the subsidiary to play
a role of strategic importance (Porter, 1990). Similarly, the higher is the global
competitiveness of the subsidiary, the higher are the chances of the subsidiary to
become strategically relevant for the corporation (Birkinshaw, 1996). The subsidiaries
are becoming more dependent and engaged with the productive chains located abroad,
also in activities of innovation and value creation (Frost and Zhou, 2000).
The second perspective considers that subsidiaries roles are determined by headquarters.
Headquarters determines structure, control, communication and autonomy, thus
defining the relative importance of the subsidiary (Roth and Morrisson, 1992). The
larger the integration between headquarters and subsidiary, in terms of communication,
knowledge and socialization, the larger the strategic importance of the subsidiary
(Nohria and Ghoshal, 1997; Frost, Birkinshaw and Ensign, 2002).
In fact, the autonomy of the subsidiary, when it does not valorize the integration with
the other units of the corporative network (headquarters and subsidiaries), complicates
the alignment of the corporative strategies and may be considered a negative point. A
high autonomy, when unrelated to the non-local competences of the multinational, may
be harmful (Moore, 2001). The excessive power of the subsidiary may cause several
agency problems because a very autonomous subsidiary may tend to develop projects
that are not integrated to the goal of the multinational corporation (Birkinshaw and
Hood, 1998).
Finally, the third perspective proposes that the role is a consequence of the subsidiary‟s
active interest in improving it within the corporate network. Resources and capacities of
the subsidiary, aspirations of their executives, and their own initiative determine the
subsidiary role (Roth and Morrisson, 1992). This is not an easy task, because there are
several barriers that prevent subsidiary autonomy, such as the dependence of the
headquarters, the lack of resources and corporative recognition.
In any one of the three perspectives only non-local competences developed by the
subsidiary may be transferred to other units of the corporate network (Rugman and
Verbeke, 2001). This competence may be represented as specific knowledge,
managerial techniques or processes. The strategic relevance of the subsidiaries depends
essentially on the non-local competences development, mostly in R&D and manufacture
(Birkinshaw, 1996; Birkinshaw and Morrinson, 1995; Birkinshaw, Hood and Jonsson,
1998).
An entrepreneurial orientation of the subsidiary is in the base of the new business
opportunities creation that may be led by the subsidiary. Therefore, entrepreneurial
orientation is essential for the development of the non-local competences (Birkinshaw,
1997; Birkinshaw, Hood and Jonsson, 1998). Without proper initiative to make
decisions and take risks, the processes of developing strategic relevance can hardly be
started (Birkinshaw, 1996; Birkinshaw and Hood, 1998).
Again, creation and development of competences, as well as entrepreneurial orientation,
are strictly linked to the innovations in the subsidiaries (Bartlett and Ghoshal, 1992;
Birkinshaw, Hood and Jonsson, 1998). However, although the initiatives of the
subsidiaries can induce and increase strategic relevance, it will take an extra effort to
keep up with demands of new competences along the trajectory of the subsidiary; and
this means a continuous effort of the subsidiary in seeking, building and developing
new business opportunities and getting the necessary support from headquarters
(Birkinshaw, 1997). In other words, the subsidiary needs credibility and recognition
regarding its strategic relevance from the headquarters.
Therefore, the three perspectives point out a series of certain factors of the subsidiaries
roles, namely: a) the competences allocation; b) the communication and autonomy
regarding the head office; c) the subsidiary entrepreneurial orientation; d) the subsidiary
credibility; e) the global competitive context; f) the national and industry competitive
context; and g) key factors related to strategic relevance (value creation, global
competitiveness and recognition of the subsidiaries by the headquarters).
As the conditions of these factors change so do the different roles and degrees of
strategic relevance among subsidiaries, what configures the differentiated network
(Bartlett and Ghoshal, 1992; Nohria and Ghoshal, 1997), and as consequence these
subsidiaries may show different strategic behaviors and innovation processes (Nohria
and Ghoshal, 1997), as well as different situations regarding the evolution of their
strategies (Birkinshaw and Hood, 1998).
Innovation processes in multinationals, for example, differ according to the location of
the several competences of the company and of the nature of the interlinking among its
different units (Nohria and Ghoshal, 1997). In the center-to-global innovation process,
the center – the headquarters or a centralized structure as R&D laboratory – creates a
new product, processes or systems for global use, mostly technological; usually, local
subsidiaries were not involved except for routine tasks as marketing or support during
the implementation process.
In the local-to-local process innovations are mostly created and implemented entirely by
a national subsidiary for local level uses, and they don‟t involve technology; except for
small modifications to adapt a technology, product or already existing system. Later on
these local innovations, developed for a specific country, may be used in other units of
the corporation abroad that may get involved in implementation processes.
The local-to-global innovation process happens by seizing the different resources and
competences of the network, seeking to integrate local solutions and global
opportunities, representing an excellent example of the application of the combinative
capabilities concept in multinationals companies (Kogut and Zander, 1992); and
involves collaborative work from the corporate network in solving problems rather than
just sharing answers coming from a sole unit (Nohria and Ghoshal, 1997).
These last processes are the most common regarding strategic relevance of the
subsidiaries, but this does not mean that all the subsidiaries should perform processes of
local-to-global and global-to-global innovation, since in this case managing a
multinational would be too complex and strategic goals would hardly be accomplished.
Although the functions related to center-to-local and local-to-local innovations are of
smaller strategic relevance, and more susceptible to internal competition (Birkinshaw
and Hood, 1998), they also have some strategic implications in the sense that: a) means
application of technology and competences „overtaken‟ in other countries, thus
recreating and extending life cycle of the products and corporative profits; b) increases
economies of scale by mass production in countries where conditions may be more
advantageous; c) attends specific market needs exploring the volume of potential sales.
Table 1 shows the different degrees of strategic relevance of the subsidiaries as related
to innovation processes (Nohria and Ghoshal, 1997) helping to determine key factors
for relevance, as argued above. This panoramic view may help the reader in the
discussion that follows, trying to find out the key factors for each type of subsidiary. In
the table, SRS refers to Strategically Relevant Subsidiaries, while TS and SRL means
respectively, Traditional Subsidiaries in Emerging Economies and Subsidiaries of
Limited Relevance. SRS creates and transfer competences and innovations. TS just
implement and adapt innovations generally coming from the head office for the local
market or create innovations only for local purposes. SRL implement competences
coming from head quarters and help linking the net to increase corporative value; and
when they develop innovations, they are more specific recovering a product or
competence that is of no use anymore elsewhere. Next section will be dealing with these
categories.
Table 1: Strategically Relevance of Subsidiaries in Emerging Economies
Source: Authors
Hypothesis
Traditional Subsidiaries (TS) in Emerging Economies
According to their roles one may consider two types of Traditional Subsidiaries in
Emerging Economies: Implementator and Local Creator.
The Implementator has been those that need to control their resources without any
access to critical information. It is a subsidiary that practically neither creates nor
transfers innovations. It just acts as a great receptor of knowledge (Gupta and
Govindarajan, 1991). The responsibilities of these subsidiaries are limited to the
national borders, and do have very restrict autonomy. They are the most dependent of
the corporative headquarters (D‟Cruz, 1986) or of a Global Center.
In Brazil, the Japanese (Toyota and Honda) and French (Peugeot-Citroen and Renault)
assemblers are characterized by a larger centralization of the decisions and innovations
in the head office or regional centers; actually, the Brazilian branches just do small
adaptations for the local market, and there is a relation of strong subordination and
dependence of the subsidiaries from headquarters (Consoni and Quadros, 2003).
They are subsidiaries with little credibility, with low autonomy and interchange
communication and mostly controlled by the headquarters; and hence resulting in an
absence of competences for non-local creation, and a culture that does not stimulate
entrepreneurship.
Local Creators is the other category of Traditional Subsidiaries. Generally speaking they
are local market leaders and important revenue generators (Birkinshaw, 1996). They
stand out by their focus on the needs of local markets, like the case Unilever's powdered
soap in India (Bartlett and Ghoshal, 1998). Their role is strongly influenced by
industries that show great variations of consumer needs, coming mostly from cultural,
economic and social difference between markets (Herbig, 1998). It is an autonomous
kind of subsidiary (Jarillo and Martinez, 1990; D‟Cruz, 1986), which develops basically
all the activities of the value chain relatively independent from other subsidiaries or
headquarters, which may subsidize it due to certain credibility in their decisions, and in
facts that brings results for the corporation. However, as the innovation is locally
created it may hardly be transferred to other units of the corporative network (Gupta and
Govindarajan, 1991).
In Brazil, Unilever's Brilliant stone soap is a typical case. This soap is not in use in
developed countries. Its demand in Brazil is mostly due to the low purchasing power of
the population and because there is a belief, for cultural reasons, that dirt must be
manually removed. The soap eventually gained a new consumer-oriented name
“brilliant” and a blue color. Another case is Ala powdered soap; this product is oriented
to a very low purchasing power population, mostly located in the Northeast of Brazil
(Unilever Brazil, 2001).
Implementators and Local Creators subsidiaries are respectively characterized by
center-to-global innovation and local-to-local processes, typical of the Traditional
Subsidiaries of the Emerging Economies. In terms of competences creation, the role of
these subsidiaries is at most restricted to competences for local market. Hence, inside
the corporative network, they are the most susceptible to discontinuance of investments
by the headquarters (Birkinshaw and Hood, 1998)
The discontinuance of investments by the headquarters occurs when, for determination
of the headquarters, the strategic guidelines and the investments in the subsidiary
decrease, causing the loss of the responsibility about certain products, technologies or
markets and, in this way, taking the subsidiary to a state of gradual atrophy.
In these cases the strategy of the corporative headquarters is to give preference to more
active subsidiaries of its business portfolio. The business portfolio logic tends to prevail,
in search of the rationalization of the activities and administrative costs. The decision
for investments or discontinuance of investments in certain subsidiary may mean costs
reduction or focus on other subsidiary where there is a business opportunity that would
help to maximize the overall earnings of the corporation.
These subsidiaries are very exposed to internal competition for resources in the
corporate network (Birkinshaw and Lingblad, 2001), and hence depend on the strategic
responsibilities of the subsidiaries. A discontinuance of investment process will threaten
in a smaller scale those foreign subsidiaries dealing with competences at a larger level.
Both Implementators and Local Creators do not have practically any competitive
advantage, except in terms of, for example, better access to raw materials, cost of labor
work, and consumer market; therefore are the most susceptible to lose investments on
the corporate internal competition (Dunning, 1993). These considerations suggest that:
H1a: TS are subsidiaries without strategic relevance, so they do not create initiatives, or
when they created are strictly for the local market.
H1b: TS are subsidiaries without strategic relevance, therefore with lower performance
compared to other subsidiaries.
The Subsidiaries with Limited Relevance (SRL)
We have the Subsidiaries with Limited Relevance (SRL), which in emerging economies
may be subdivided into Global Platforms and Specific Creators.
Typical examples of Global Platforms are the subsidiaries of automobile multinationals
companies in Brazil, electro-electronic platforms in Asia and 'maquiladoras‟ in Mexico.
They are subsidiaries that implement innovations coming from headquarters, but they
act mostly integrated with global business, having better possibilities to play a strategic
role.
According to Roth and Morrison‟s typology (1992), they represent Globally
Rationalized Subsidiaries, which are embodied with some international responsibility,
but still show dependence regarding decision-making processes. In general, these
subsidiaries are responsible for one or more value adding activities of the corporate
network, they tend to be highly integrated dependant on the network in terms of
material and sales (Jarillo and Martinez, 1990), and are specialized in certain product or
process becoming part of the global business of the corporation (D‟Cruz, 1986).
Therefore one may observe an initial process of center-to-global, allocating resources
and capacities that in the course of time and development of the activities gains larger
importance in view of the interdependence relations with other activities of the
subsidiaries; this moves the corporation as a whole to become dependent of that
activity, rather than the opposite to be true.
As an example at Brazil, one may consider the case of an automobile assembler to
decide which of the subsidiaries to install a platform for Completely Knocked Down
Production and main components that will be exported for many countries (Consoni and
Quadros, 2003). All manufacturing process was developed in the head office, or in
some other subsidiary that acts as regional center, and the decision of installing the
productive park in the subsidiary X or Y results from factors associated to the
competitive context, as well as from the credibility of the subsidiary.
Therefore, Global Platforms result from an attribution of strategic responsibility for the
subsidiary conceded by the corporate headquarters. The subsidiary may have some
competences, but not enough to guarantee strategic relevance. These competences may
be transferred to the subsidiary, if the corporate headquarters finds that the subsidiary is
the one that may better shelter these competences. This will, in turn, increase the
competences of the subsidiaries, in a process always totally directed and coordinated by
the corporative headquarters. Although the subsidiary may have some influence in the
process, mostly in reason of its high performance, the development of the competences
only initiates after some delegation of strategic relevance made by the corporate
headquarters (Birkinshaw and Hood, 1998). The subsidiaries have credibility to gain
competences, but not to create them.
The other subgroup of SRL to be considered is the Specific Creators. Typical cases are
subsidiaries that accomplish innovations for the local market, which, may be used by
other subsidiaries after the product is ready. It is a typical local-to-global process, but
with some limitations.
One of the possible problems is the lack of integration, which may lead to duplicate
efforts along the network in terms of developing processes for the same purpose,
causing needless resources outlay, even though they may be trying to attend demands
against the external competition. One of the central issues in this case is that their
innovations can only be taken advantage as final products. They are typical cases of
subsidiaries‟ specific competences (Rugman and Verbeke, 2001; Moore, 2001).
Innovations are developed in the subsidiaries, which then could be taken advantage
globally, but there is a problem when implementing elsewhere because of lack in the
socialization and communication processes. Thus the innovation is only transferred as a
final product
Holm and Perdersen (2002) report the case of a director in the R&D area of a French
Multinational subsidiary in Denmark, showing how the competences developed in the
subsidiaries may be managed to be transferred. Many times a subsidiary has solutions
for the problems faced by other subsidiaries and then is called to supply such a solution.
Although the problem can be solved, the subsidiary checks only for the immediate
resolution of the problem. In the case other problems arise there or elsewhere, they will
need this support again. This happens because instead of transferring the competence to
solve the problems, the subsidiary transfers only the solution. One of the reasons may
be due to the corporate characteristics and the competitive context where the
competence was developed (Denmark).
Innovation process of the subsidiaries is developed exclusively by efforts built in the
subsidiary. It not necessarily involves the best practices transfer or external
benchmarking. For example, it may just consist in an improvement in terms of costs and
quality of the internal capacities. Important to notice that, although there is not direct
involvement of the head office, the process of reinforcing the competence of the
subsidiary allows a better performance with consequent improvement of their results,
raising the credibility and visibility of the subsidiary naturally, to the point of preserving
the recognition of the head office concerning its strategic relevance.
Usually, the results of these processes are local innovations that reinforce other
innovations created in the subsidiaries that have global scope (Moore, 2001; Rugman
and Verbeke, 2001). However, it may happen that the whole effort in the developing
competences and seeking advantage of new opportunities does not achieve success or
helps strategic relevance, which may happen for example if the innovations are not
considered as value creators by the corporative head office, or if they are not
strategically aligned with the business of the corporation.
Hence, next propositions follow from that:
H2a: SRL are subsidiaries with some strategic relevance that create specific initiatives
that guarantee a global competitiveness, but that only may be taken advantage as final
products.
H2b: SRL are subsidiaries with some strategic relevance, therefore with performance
inferior to SRS, but superior to ST.
Strategically Relevant Subsidiaries (SRS)
Finally, we have the Strategically Relevant Subsidiaries (SRS). The innovation
processes for these subsidiaries may be local-to-global or global-to-global. These
subsidiaries have a high degree of strategic competences and acts in strategic markets
(Bartlett and Ghoshal, 1992). They may have global or regional responsibility for a
product line, business area or all the business of determined geographical area, and they
are responsible for the management of their own activities independently of the head
office (Birkinshaw and Morrinson, 1995).
Relevance may be the result of a local innovation; these are the so called Innovative
Subsidiaries. The Brazilian subsidiary of the British multinational FOSECO is a typical
example of local to global innovation. FOSECO, whose business is the foundry of
ferrous and not ferrous material, have more than 20 subsidiaries around the world. The
Brazilian subsidiary developed a foundry process with higher quality and smaller cost,
initially aimed to overcome the local competition. However, the excellence of the
innovation overcame the expectations of a local innovation, becoming global in the
sense of starting on the corporate network elsewhere. Today, the Brazilian subsidiary is
one of the four centers of excellence of the corporation, the other centers located in the
USA, Germany and Japan (Oliveira Jr et. al, 2008).
The Innovative Subsidiaries attain their roles in a process that demands building up the
competences along the time (Hakansson, Waluszewski, 2002). The process demands
initiative and entrepreneurship orientation by the subsidiary (Birkinshaw, 1997), and is
the result of a continuous effort of the subsidiary in seeking new business opportunities
to gain recognition and credibility by the head office, regarding the importance of the
competences and business been developed (Birkinshaw, 1997; Birkinshaw and Hood,
1998). This process involves three steps or stages running through the subsidiaries.
First, the execution of an initiative developed by the subsidiary in search of new
opportunities, in the local or global market, or even inside the multinational corporation
(Birkinshaw, 1997). Second, building up and sustaining the necessary significant
competences. And finally, the third step is to introduce to the corporative headquarters
the competence developed by means of the business opportunity (Birkinshaw, Hood and
Jonsson, 1998). Corporate headquarters needs then to agree in leaving the strategic
responsibility for the subsidiary, in case that the competence created really provides the
sustained value creation for the corporation and guarantees global competitiveness.
Another important group within the SRS is the Integrated Globally, in other words,
those that inside the multinational corporation act like the global center for some area of
the corporation in the manufacture, R&D, marketing or sales of some products. It does
not mean that certain activity needs to be performed only at the subsidiary. The
manufacturing activity, for example, may be developed in several subsidiaries, but the
strategic decision-making, global responsibility and coordination belongs only to those
that are SRS (D‟Cruz, 1986). However, differently from an isolated initiative and
property of the subsidiary, it‟s an integrated, typical initiative of a process of global-to-
global innovation.
The subsidiary may develop integrated initiatives that guarantee a larger strategic
importance. Such initiatives result not only by having an entrepreneurial orientation by
the subsidiaries (Birkinshaw, 1997), but mostly because of the organizational
competences development (Fleury and Fleury, 2000). In the case of the automobile
industry mentioned before, the recent projects of the GM´s Celtic, and VW´s Fox
(project Tupi), both in Brazil, have been developed by means of competences of several
subsidiaries having the coordination of the headquarters in the project (Consoni and
Quadros, 2003). In the case of the HP, Singapore‟s subsidiary was initially responsible
for the coordination of subcontracting the equipment production for low cost regions,
like China and Southeast Asia, it become globally responsible for the development,
production and commercialization of all the products for portable HP such as calculators
and palmtops (Frost, Birkinshaw, Ensign, 2002).
Finally, it may happen that an SRS Innovative and Integrated Globally with high
strategic relevance, may loose its role because of lack of essential effort to keep up its
strategic relevance. In this case, the subsidiary starts losing its competitive capacities
progressively (Birkinshaw and Hood, 1998). Many times the process happens without
the proper perception of the company. For example: a certain contract that guarantees
for earnings of the subsidiary for leading a productive process for a certain number of
years leads to conditions where the subsidiary doesn‟t need to make an effort to increase
that productive process in terms of innovation, quality, costs. Consequently, the
competences of the subsidiary tend to become obsolete due to the external competition
(other competitive companies) or even internal (subsidiary with the same functions, but
better enabled).
This last condition, of internal competition, deserves some highlight. It is crucial that
the subsidiary is alert regarding the maintenance of its competences, not only in view of
the menace of the competitors, but mostly of the other subsidiaries The atrophy of the
strategic relevance may happen even though the subsidiary has accomplished
increments in her competitive capacities, but that did not go so significantly to the point
of standing in a better position regarding competences of other subsidiaries. This
internal competition among subsidiaries is an essential characteristic of multinational
organizations that helps strengthen the subsidiary in the local arena. Actually, the
subsidiaries of the multinationals manage to build superior competitive advantages in
the market, even though the competitors do not demand such effort, since each one
needs to develop sustainable competences continuously to keep on its strategic
relevance. This discussion leads to the following propositions:
H3a: SRS are the subsidiaries with larger strategic relevance in the corporative network,
therefore are subsidiary‟s initiatives creators that aggregate value to the corporation.
H3b: SRS are the subsidiaries with larger strategic relevance in the corporative net, with
superior performance in relation to most of the others subsidiaries.
Research methodology
We selected the universe consisted on the 1000 largest, in terms of capital, multinational
subsidiaries located in Brazil. A questionnaire was mailed to the corresponding CEO´s
of each of these 1000 firms. Some of the addresses were repeated and some were not
available; so out of the 1000 we came to universe of 853, of which we had a return of
118 multinational subsidiaries (14 %). For this kind of survey this is quite expected.
Our sample shows 55% of business on the industrial sector, 32% on services, and the
rest on agribusiness and financial areas; which is representative of the universe of the
largest multinational subsidiaries in Brazil. They come from 21 different countries,
mostly from the US (32%), Italy (8.5 %), Germany (8.5%), Spain (7.5%), and UK (6%).
On the average 480 employees, although almost 30% have more than 1000 employees.
Selecting Variables and Building
Models Multiple choice questions using Lickert scales (1 to 7) were applied.
Four variables were selected as dependent variables to represent SRS (Birkinshaw,
Hood e Jonsson, 1998): the contribution of subsidiary for adding value to the
corporation; Whether the subsidiary is globally competitive in its own area of activity;
headquarters positioning in relation to the importance of the subsidiary as strategically
relevant; A mean strategic relevance variable formed by the average of these three
variables.
Competencies were analyzed in relation to the following areas: R&D, production, sales,
marketing, management of international activities, management of interface with
headquarters, innovation, and entrepreneurship.
Regarding to the SEO - Subsidiaries Entrepreneurial Orientation, five variables were
considered (Birkinshaw, 1996; Birkinshaw, 1997), asking for each one the degree to
which: they feel support from top management regarding entrepreneurial activities, top
management have experience on innovation activities, they feel support for individual
decisions involving risks, they feel support for calculated risk activities, and if the
subsidiaries consider assuming risks as a positive attribute.
In relation to communication and integration between subsidiaries and headquarters
(Nohria and Ghoshal, 1997) questions have been asked regarding the extent to which:
there is work relations between subsidiaries and headquarters, there is sharing of
information between managers at headquarters and subsidiaries, and there is good
understanding of the top management at headquarters about the subsidiaries´
competencies.
About autonomy of the subsidiary (Birkinshaw, 1996), eight variables have been
selected to check where the decisions were taking place, at headquarters, at a regional
subsidiary, or at the subsidiary itself regarding: change in design of products/services,
hiring top executives autonomy for outsourcing of activities, decision for entering new
markets, approving annual budget, introducing new products, organizational changes,
change in production processes.
Regarding credibility of the subsidiaries (Birkinshaw, 1996) and well as its past history,
the next variables were considered: the accomplishment of the goals of the subsidiary
along the operations of its business in the country; the development of essential
competences along time in the subsidiary; the experience in the activities regarding
international sales; and (4) if the international sales grew along the last years.
In relation to global competitiveness of industry, the question was focused in business
area and asking whether: needs of consumers/suppliers are worldwide standard; there
are competitors in all key markets; local competitiveness is intense International
competitiveness is intense; business activities are susceptive to global scale economies;
main product/service has world recognition ; production technology is standard and
worldwide available ; competitors are commercializing a worldwide standardized;
introduction of new products happens simultaneously on the main markets (Birkinshaw,
Hood e Jonsson, 1998).
To test some of the hypotheses, two more blocks of variables were formulated
representing the performance of the subsidiaries and its initiatives.
Regarding the performance of the subsidiary the variables considered were related to:
investments return; earnings; productivity; sales and market share.
Some initiatives of the subsidiaries were analyzed regarding international responsibility
(Birkinshaw, Hood and Jonsson, 1998; Birkinshaw, 1997), namely: the new products
development to Brazilian market and subsequently exported; results of successful
corporative investments in Brazil; activities of international business created in Brazil;
increment and adaptation in the products line already adopted internationally new
corporative investments in R&D or productive processes obtained by the subsidiary.
Results
As shown in table 2 a factor analysis using the variables of global competitiveness,
autonomy, communication and integration, competences, entrepreneurial orientation
and credibility; gives significant results (p<0.000) with KMO showing 0.644. There is
internal consistency of the factors and those with eigenvalues greater than 1 already
explain 70% of the variance of the sample. The first one that may be called
Entrepreneurship refers to aspects dealing with the entrepreneurial orientation
(Birkinshaw, 1997). The second factor that may be called International Responsibility is
the result of the experience in international sales and competences in the manufacture,
R&D and management of international activities. The third one Credibility is related to
the development of the competences in the subsidiary along the time and the capacity of
making these competences be comprehended by the headquarters. The next one Global
Competitiveness depends on how much the activities of the sector are internationalized,
while the factor Global Standard is related to standardization of the products and
activities world-wide. The Domestic Competitiveness is associated with competitors in
the market to motivate subsidiaries to develop marketing and sales competences. The
Autonomy means larger autonomy for local decisions and it‟s related to better
receptivity of the head office for the decisions of the subsidiaries, while the related
factor Integrated Work corresponds to a working information and intense relationship
between head office and subsidiary. Finally the Integrated Innovation factor
corresponds to the competence of the subsidiary in creating innovation aligned to the
world corporative goals, by means of the management competence of the interface with
the head office.
Table 2: Factors
Source: authors
Considering these factors each one represented by index obtained as an average of the
Likert values of the variables, a clusters analysis has been executed using the Varimax
method. Table 3 shows the centers of the factors for each of the three clusters selected
with it‟s between distances,. One may naturally refer clusters 1, 2 and 3 to TS, SRS and
SRL, respectively.
Table 3. Final Clusters
Source: authors
Now starting from these previous results a discriminant analysis has been executed to
find out the relative importance of the factors regarding differences among TS, SRS and
SRL.
From this analyzes (Table 4) it follows that the three types of subsidiaries (ST, SRL and
SRS) differ mostly in terms of its international responsibility, integrated innovation, and
credibility of the subsidiary. Other factors such as global competitiveness and
standardization and autonomy are significant, but at a much lesser degree.
Table 4 Discriminant Function
Source: Authors
Once the differences regarding conditions for the strategic relevance of the subsidiaries
are detected, one may seek to find out to what extent differences in strategic relevance
are related to performance and initiative of the subsidiaries.
The ANOVA of table 5 shows that the performance difference of the subsidiaries
regarding the several subsidiaries of the corporation in world scope happens related to
the market share regarding the corporation, to the return on the investment (both with p
< 0,01) and regarding the productivity and to the profit (both with p < 0,05).
Table 5. Subsidiaries Performance
Source: authors
Table 6 shows that, regarding performance, the SRS are the ones that have the best
results comparatively to the other subsidiaries of the corporation, supporting H3b.
Actually about 55% of SRS have a larger market share in comparison to the others
subsidiary of the corporation. Moreover, 50% of them have higher earnings, 45% better
productivity and 40% higher return on investments. On the other hand, it‟s interesting to
observe that at least in terms of earnings and return on investments TS behave better
than the SRL, contradicting H1b and H2b. However in terms of productivity and market
share SRL overcome TS, hence supporting H1b and H2b.
Table 6. Subsidiaries‟ Roles and Performance
Source: Authors
Finally table 7 shows that, regarding the initiatives, the strategic relevance does
distinction related to the new products developed in Brazil and sold internationally, new
investments in R&D and processes (both with p < 0,01) and larger responsibility due to
successful previous investments
Table 7. Subsidiaries Initiatives
Source: Authors
Actually, about 75% of SRS obtained larger responsibility due to their previous results,
against 45% of SRL and barely 33% of TS. From the SRS, 60% developed new
products that are sold internationally, against 20% of SRL and 33% of TS. Finally, only
SRS, and practically 40% of them, received or accomplished new investments in R&D
and productive processes. It‟s interesting to observe that while SRL do not introduce
investments in productive processes or R&D, some TS (15%) do introduce investments
in this direction.
These support H3c, but rejects H3a and H3b, except for the biggest responsibility due to
previous investments accomplished by the subsidiary.
Discussion
This paper deals with a different empirical approach to the study of typologies of
multinational subsidiaries‟ roles, in the sense of focusing exclusively the subsidiaries in
the emerging markets, considering the critical aspects related to the evolution of the
subsidiaries‟ roles (Birkinshaw and Hood, 1998) and the multinationals innovation
processes (Nohria and Ghoshal, 1997). For this purpose, previous research suggests
considering three types of subsidiaries: SRS, TS, and SRL. SRS meaning Strategically
Relevant Subsidiaries, while TS and SRL means respectively, Traditional Subsidiaries
in Emerging Economies and Subsidiaries of Limited Relevance. This taxonomy is based
on recent research of subsidiaries' roles (Birkinshaw, 2001; Frost, Birkinshaw and
Ensign, 2002; Paterson and Brock, 2002), from which the concept of Strategically
Relevant Subsidiaries was developed, going beyond the idea of subsidiaries with
International Responsibility, or World Mandate subsidiaries. SRS actually means
competences creation and transfer of innovations along the corporate network, while the
subsidiaries with World Mandate based mainly on the idea of international
responsibility, doesn‟t necessarily transfer capacity of the innovation as a practice or
final product, and hence doesn‟t consider the recognition and utilization of that
innovation by other corporate units. The concept of Strategic Relevance allows a better
differentiation of the subsidiaries' roles, mostly when aligned with the innovation
processes of the multinationals corporations and with the evolution of the subsidiaries
roles. Following these ideas we may consider further divisions of subsidiaries roles.
Two types of SRS: The Innovators and the Global Integrated; two types of TS in
emerging economies: The Implementators and the Local Creators; and two types of
SRL: Global Platforms and Specific Creators.
This subdivision respects the previous typologies, refining their roles considering
important aspects regarding the relationships with the innovation and evolution
processes of the subsidiaries, which one may consider another contribution of this paper
to the literature on the area. The typologies always appear lightened of the innovation
processes, described and searched by Bartlett and Ghoshal, (1992) and Nohria and
Ghoshal, (1997). Actually, the attempt to better understand the relationship of SRS, TS
and SRL with innovation lead to the more specific classification of subsidiaries roles
presented for the first time on this paper.
TS are mostly characterized by its autonomy and enterprising orientation. Surprisingly
it seems that in emerging economies like Brazil, TS credibility appears just next to SRS
and much superior to SRL. This may be due to their positive results in the development
of their activities, providing a significant contribution to the total corporate sales. These
subsidiaries need to keep on permanently creating innovations, generally local
innovations, to stay competitive in the market. Hence, we may consider, within the
sample considered in this survey, the TS of the largest foreign subsidiaries in Brazil, as
Local Creators Subsidiaries. Local Creators focus on market innovations and the short
term results provide better earnings and returns on the investment than the SRL, as
indicated also by the results of Birkinshaw's study (1995). Moreover it‟s interesting to
observe that these Local Creators developed more initiatives than the SRL in terms of
developing products for international sales. This represent an interesting case of local-
to-global innovations processes without necessarily the subsidiary receiving the role of
a SRL; actually, as explained later on, at least in Brazil, most of the SRL belong to the
kind of Global Platform and not Creator Specific. This may be explained by the fact that
although the Local Creator Subsidiary reaches a given competence for developing an
international product it may not continue on the process of evolution of its role. This
may be happening because an innovation may have been developed for local purposes,
but later expanded, just by chance, to the international market; and the subsidiary is not
yet mature enough to be able to invest own resources and efforts to develop new global
initiatives and to win the recognition of the corporate headquarters. Actually, the head
office decision in how much to invest in a subsidiary and to assign higher relevance role
may come from the lack of trust in the ability of the subsidiary to develop this new role,
due to the subsidiary limitations in terms of technical resources and management, and
local business network for innovations, which may be the case in particular in emerging
economies.
SRL, on the other hand, seem to be characterized by the lowest levels in terms of
entrepreneurial orientation and integrated innovation; and very low autonomy, which
configure a condition more likely to innovation receptor than to innovation creator, even
when considering the subsidiaries specific competences. However, their strong points
are related to high global standardization and responsibility that guarantees their place
in the global corporative network, characterizing a condition of predominance of center-
to-local innovation processes. Hence, in Brazil, SRL are typically Global Platforms.
According to Birkinshaw (1995) these subsidiaries have a lower performance in terms
of earnings and returns on the investments as compared to other subsidiaries. On the
other hand, due to scale production and global distribution of parts or final products, in
terms of market share and productivity, this paper shows that in Brazil they perform
better than the TS reinforcing previous results by Fleury and Fleury (2000). However,
hardly ever these subsidiaries create products or processes, since they are the less
responsible for developing global products, at least until head office transforms them
into a SRS.
Finally, SRS appear characterized basically by its high degree of International
Responsibility, Integrated Innovation and Credibility. Clearly the role of the innovation
inside SRS in the development of competences (mostly in terms of R&D and productive
processes) and in the management of competences with the headquarters, guarantees
innovations to become global. Naturally, autonomy is actually an exclusive aspect of
SRS, since once subsidiaries start developing local-to-global or global-to-global
innovation processes they loose autonomy, due to the need to strengthen interface
management coordination; so, seeking excessive autonomy may be even harmful for the
development of subsidiaries. Surely enough in terms of initiatives and financial results,
SRS are highly superior to the other subsidiaries; moreover they are the solely
responsible for R&D, in particular when related to new productive processes. Therefore,
if emerging economies want to have top innovations they need to attract SRS that need
to guarantee an appropriate business environment for innovation development.
A question remains as how to distinguish SRS from being Innovators or Globally
Integrated subsidiaries. Perhaps a case study may help to find out which factor makes
the difference, in either case, or how they become one or the other along the time
analyzing their evolution process. By now, it seems that the process of evolution of
subsidiaries roles may follow two ways: to be headquarters oriented or to be
autonomous development. The SRS Integrated Globally may come from Global
Platforms, which in turn come from a fast evolution of Implementators, as in the case
mentioned before of automobile assemblers. In case a corporation has no interest in
keeping an Implementator subsidiary, it will close it because results are inferior to Local
Creators, or else it will transform it into a Global Platform. On the other hand, SRS
Innovators seem to come from Specific Creators that in turn come from Local Creators.
As a matter of fact, the role of Specific Creators is very brief and many times not even
formally recognized; the example of FOSECO, considered along the text, supports this
idea. The study of the evolution process of subsidiaries of multinational corporations in
emerging markets is an open-ended, very interesting, and important problem for
defining appropriate policies, both for the multinational corporation (headquarters and
subsidiaries) and for the Government of these countries.
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