CENTERS OF EXCELLENCE IN MULTINATIONAL...

Strategic Management JournalStrat. Mgmt. J., 23: 997–1018 (2002)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.273

CENTERS OF EXCELLENCE IN MULTINATIONALCORPORATIONS

TONY S. FROST,1* JULIAN M. BIRKINSHAW2 and PRESCOTT C. ENSIGN3

1 Richard Ivey School of Business, University of Western Ontario, London, Ontario,Canada2 London Business School, London, U.K.3 College of Business, San Jose State University, San Jose, California, U.S.A.

This paper seeks to understand the conditions under which ‘centers of excellence’ emerge inforeign subsidiaries of multinational firms. We define a center of excellence as an organiza-tional unit that embodies a set of capabilities that has been explicitly recognized by the firmas an important source of value creation, with the intention that these capabilities be lever-aged by and/or disseminated to other parts of the firm. Drawing on overlapping researchin international business and strategic management, we argue that the formation of centersof excellence is shaped by conditions in the subsidiary’s local environment as well as byvarious aspects of the subsidiary’s relationship with other parts of the multinational firm.Based on a survey of 99 foreign units in Canada, our results highlight the fundamentalrole played by parent firm investment as well as the role of internal and external organi-zations in the development of subsidiary capabilities. Performance implications of the cen-ter of excellence phenomenon are also explored. Copyright 2002 John Wiley & Sons,Ltd.

A fundamental challenge for large multinationalfirms is how to identify and leverage capabili-ties that develop within their global network ofsubsidiaries and affiliate companies. Regardlessof whether the MNE is conceptualized as a setof internalized cross-border transactions (Buckleyand Casson, 1976), a ‘differentiated network’ ofaffiliated companies (Ghoshal and Nohria, 1989;Nohria and Ghoshal, 1997), or a social communitythat crosses national boundaries (Kogut and Zan-der, 1992, 1993), the ability to manage dispersedcapabilities effectively is seen by most scholars asa key source of competitive advantage for multi-national firms.

In this paper we focus on the concept of a ‘centerof excellence’ as one mechanism that MNEs are

Key words: center of excellence; multinational corpora-tion; foreign subsidiary*Correspondence to: Tony S. Frost, Richard Ivey School ofBusiness, University of Western Ontario, London, Ontario,Canada N6G 2L1.

increasingly using as a means of identifying andleveraging pockets of expertise found within theircorporate networks. We define center of excellenceas an organizational unit that embodies a set ofcapabilities that has been explicitly recognized bythe firm as an important source of value creation,with the intention that these capabilities be lever-aged by and/or disseminated to other parts of thefirm. While the term could apply to any organi-zational subunit within the firm, in this paper wefocus on centers of excellence within foreign sub-sidiaries. Many, indeed most, headquarters unitswithin multinational firms are a key source ofthe kinds of advanced capabilities that are thebedrock of our definition of a center of excel-lence, and there exists a well-developed literatureon the strategic and organizational challenges asso-ciated with managing these capabilities abroad. Incontrast, the existence of centers of excellence inforeign subsidiaries appears to be both a rarer andmore recent phenomenon, notwithstanding the few

Copyright 2002 John Wiley & Sons, Ltd. Received 25 October 1999Final revision received 28 May 2002

998 T. S. Frost, J. M. Birkinshaw and P. C. Ensign

well-known examples that have been frequentlycited in the literature.1 As we will discuss shortly,the managerial challenges associated with devel-oping, identifying, and leveraging centers of excel-lence in foreign subsidiaries are many and varied.These challenges—and the evident difficulty thatmany companies have in coping with them—arethe underlying motivation for this paper.

The paper has three main goals: first, to reviewthe existing literature on the term ‘center of excel-lence’ and to explain how our definition remediesthe major shortcomings in current usage; second,to advance a conceptual model and specific set ofhypotheses regarding the factors contributing to theemergence of centers of excellence in foreign sub-sidiaries; and third, to test the explanatory powerof our model and hypotheses using recently col-lected survey data on 99 foreign-owned subsidiarycompanies in Canada.

The remainder of the paper is structured as fol-lows. We begin by discussing the center of excel-lence concept and providing examples of its usagein practice. This section concludes with our for-mal definition. We then develop our main theoret-ical argument, drawing on overlapping research ininternational business and strategic management.In this section we formulate a set of hypothesesabout the factors that are likely to give rise to cen-ters of excellence in multinational firms. The nextsection discusses research methods, including ourdata collection strategy and variable operational-izations. We then present the results of our hypoth-esis tests and, in a more exploratory vein, inves-tigate the performance consequences of the cen-ter of excellence phenomenon. Finally, the paperconcludes with a discussion of the contributionand limitations of the study and suggests severalavenues for future research.

CENTERS OF EXCELLENCE INMULTINATIONAL FIRMS

To ground our discussion and subsequent definitionof the center of excellence concept, we begin byoffering the following case examples culled from

1 Well-known examples include Fuji Xerox, Nestle’s headquar-ters for its confectionery business in England, GE’s power sys-tems business in Canada, and Volvo’s manufacturing operationin Belgium. Often such centers of excellence have arisen throughacquisitions of foreign firms rather than through active cultiva-tion by the parent firm.

an extensive search of the practitioner literature aswell as our own case research:

• Merck Frosst Canada, the Canadian subsidiaryof Merck & Co., is a center of excellencefor drug discovery in the area of leukotrienes.Although the subsidiary also has a broad set ofresponsibilities in terms of manufacturing, salesand distribution, it has gained primary respon-sibility within the company for leukotrieneresearch, and has developed several major prod-ucts that are now sold by Merck & Co.worldwide. Interestingly, the subsidiary’s mostrecently developed product in its area of spe-cialization is not manufactured in Canada, butrather at the company’s Irish subsidiary, itselfa center of excellence for the manufacture ofethical pharmaceuticals.

• Philips established a Center of Competence inLe Mans for its communications terminals busi-ness. This center became the business headquar-ters for cordless phones, smart cards, pagingand fax terminals. It drew on its own special-ized expertise in communication terminologyand also the expertise of the rest of the Philipsgroup worldwide (Bright, 1996).

• Hewlett Packard has a ‘center of manufacturingexpertise’ in Singapore that is responsible formanaging the migration of lower value-addedactivities out of Singapore into low-cost regionsin China and South East Asia. At the sametime, the Singapore subsidiary has been grantedthe worldwide mandate to develop, produce,and market all of HP’s handheld informationproducts, including mobile printers, calculators,and palmtop organizers (Leonard-Barton, 1995).

• ITT Fluid Technology Corp. created severalcenters of excellence in the Information Tech-nology area. Technical staff remained in theirlocal offices performing functions such as LANadministration, but in addition several becamecompany-wide experts in specific technologies.Staff anywhere can now call on these expertsfor assistance in their specific areas of expertise.This arrangement, according to the CIO, ‘is theideal balance between the efficiency of central-ized resources and the high-touch relationshipsthat are only possible when technical staffersstay in business units’ (Liebmann, 1996).

• IBM has established a number of centers ofexcellence in key technology areas. For exam-ple, the newly created Intelligent Agent center

Copyright 2002 John Wiley & Sons, Ltd. Strat. Mgmt. J., 23: 997–1018 (2002)

Centers of Excellence in Multinational Corporations 999

of excellence has a mandate to develop and mar-ket intelligent agent-based applications for useon the Internet. The center brings together thekey individuals throughout IBM with expertisein this area to ensure rapid development in thisfast-moving area (Cooney, 1997).

In terms of existing academic usage of the term,at least two distinct strands of thought can beidentified in the literature. The first approachis rooted in studies of subsidiary evolution andsubsidiary–headquarters coordination and control(e.g., Bartlett and Ghoshal, 1986; Jarillo andMartinez, 1990). This approach, also adopted byFratochii and Holm (1998), Surlemont (1998),and Holm and Pedersen (2000), views centersof excellence as a form of high value-addedsubsidiary—one that has a strategic role inthe corporation. Typically, these centers areresponsible for certain product areas or lines ofbusiness within the corporation as a whole, and, assuch, they have a geographic scope that transcendsthe local market. This approach has much incommon with the earlier concept of ‘productmandates’ used to describe subsidiaries that hadearned the responsibility for manufacturing aparticular product or product line for regionalor even global markets (Rugman, 1983; ScienceCouncil of Canada, 1980; Crookell, 1986;Birkinshaw, 1995).

The main shortcoming of this conceptualizationis its adoption of the subsidiary as a whole asthe main unit of analysis. Two problems standout. First, as the ITT example above illustrates,multiple centers of excellence may coexist withina particular subsidiary, meaning that a subsidiarymay not be synonymous with a particular centerof excellence. And second, a center of excellencemay be only one aspect of the overall capabil-ity profile and mandate of a particular subsidiary,as suggested by the Merck Frosst example. Espe-cially in an era where multinationals are moving toever more complex and sophisticated value chainconfigurations, the subsidiary level is simply tooaggregate a unit of analysis to be the basis for avalid definition of the term. For example, it is clearthat many firms are creating centers of excellencebased around particular functional specializationswithin subsidiaries, such as Merck Frosst’s special-ization in leukotriene research or the same com-pany’s center of excellence for drug manufacturingin Ireland.

A second approach is to see the center of excel-lence as a form of best practice that is then dissem-inated throughout the firm. Moore and Birkinshaw(1998: 1), for example, see centers of excellence as‘the focal points for knowledge development anddissemination’ in service multinationals. And Lyleand Zawacki (1997: 26) define them as ‘horizontalunits based on related skills or disciplines’ that areused to ‘foster competitive competencies.’ Viewedin this way, centers of excellence do not require afixed physical location. Rather, they represent theshared capabilities of a fairly small group of peo-ple. For example, Accenture (formerly AndersenConsulting) has ‘competence groups,’ which aresmall groups of 20–30 people with expertise in anemerging practice area. A competence group mayspan more than one office and may be drawn uponto solve problems, provide advice, etc. in any partof the firm’s multinational network.

This conceptualization of the center of excel-lence concept remedies the subsidiary-level focusof the earlier view, but at the same time suffersfrom problems of precision and generalizability.For example, it is unclear whether, in this view,a center can be defined as a single individualwhose expertise is valued by the firm or, the otherextreme, as a ‘virtual’ center, consisting of a groupof individuals based in multiple locations withinthe firm. In theory, a definition of the term couldbe broad enough to cover both of these cases. Inpractice, however, it appears that most firms donot equate centers to individuals for the obviousreason that the center would cease to exist if thekey individual left the firm. Similarly, the notion of‘virtual centers’ seems, in our view, to outstrip cur-rent practice by a considerable amount, althoughwe acknowledge that this approach may be gain-ing some currency among firms, at least as an idea.Finally, the conceptualization of the term found inMoore and Birkinshaw (1998) seems to us to focustoo narrowly on the dissemination of knowledgeas the primary way that centers of excellence cancontribute to the overall firm.

The above examples and discussion of currentacademic usage of the center of excellence conceptsuggests several dimensions that appear particu-larly salient. We focus on four.

First, centers of excellence tend to have a phys-ical presence, i.e., they are typically based ina particular organizational subunit. However, as



discussed above, it is a mistake to equate cen-ters of excellence with subsidiaries on a one-for-one basis, especially given the advanced globalconfigurations adopted by many of today’s lead-ing MNEs. Second, centers of excellence repre-sent a focus for a superior set of capabilitieswithin the firm, including tangible resources suchas equipment, licenses, and patents, and intangi-ble resources such as knowledge and experience.2

As such, a center of excellence is probably bestdefined in terms of its basis for creating valuerather than in terms of a specific product or lineof business, especially given that many centers ofexcellence possess fungible capabilities, i.e., capa-bilities that are able to create value for more thanone line of business (e.g., ITT’s information tech-nology centers). Third, a center of excellence isexplicitly recognized or declared as such by thecorporation. This is important if the term is tomean something other than a particular unit is‘excellent’ at a particular activity or practice. Andfinally, the pronouncement that a particular unit isa center of excellence in a particular activity ordomain implies the intention to derive value fromthat unit’s capabilities for the broader organization,through, for example, the development of productsand technologies that can be sold throughout thefirm’s global sales network, or through the diffu-sion of intangible assets (knowledge, learning) toother organizational units. These dimensions sug-gest the following definition:

A center of excellence is an organizational unitthat embodies a set of capabilities that has beenexplicitly recognized by the firm as an importantsource of value creation, with the intention that

2 The above discussion raises the question as to whether a partic-ular organizational subunit needs to have unique capabilities inorder for it to qualify as a center of excellence. In our opinion,uniqueness is not a requirement. Our fieldwork clearly indicatedthat there were many examples of companies that had estab-lished several centers of excellence within the company that werevery similar in terms of capabilities and mandate, in some casesidentical. Intel, for example, has several leading-edge fabrica-tion plants around the world at which the latest microprocessorsare being built. These are clearly centers of excellence by ourdefinition, but they also have to have the same key capabilitiesbecause of Intel’s ‘copy exactly’ manufacturing model. Merckis another example of a company that has several manufactur-ing centers of excellence spread throughout the world with verysimilar capabilities. For many companies, this apparent redun-dancy is purposive and strategic, as it allows the company toshift production in response to need and opportunity (e.g., e-ratefluctuations), and it engenders both learning and competitionwithin the network.

these capabilities be leveraged by and/or dissemi-nated to other parts of the firm.

DETERMINANTS OF CENTERS OFEXCELLENCE FORMATION

Having advanced our definition of the term centerof excellence, we are now in a position to explorethe conditions under which they are likely to becreated in multinational firms. This issue is con-cerned fundamentally with the development andrecognition of advanced capabilities that provide asource of value beyond the boundaries of the orig-inating unit, i.e., within the multinational’s globalnetwork of activities. Thus the research questionwe are concerned with is the following: Underwhat conditions do foreign subsidiaries develop aset of advanced capabilities that are recognized bythe parent as an important source of value creationfor the firm?

Our overarching argument is that the formationof centers of excellence is influenced by condi-tions in the subsidiary’s local environment as wellas by various aspects of the subsidiary’s relation-ship with other parts of the multinational firm.Figure 1 provides an overview of our concep-tual model. External factors concern the extent towhich the subsidiary is embedded in a dynamicmarket and institutional context and is connectedto key sources of competence within that con-text. Internal factors include, most fundamentally,capability-building investments made by the parentfirm, as well as organizational conditions such asthe autonomy of the subsidiary and its connectiv-ity to important sources of competence within thefirm. Performance in our model is endogenous: thesuperior capabilities and the greater-than-unit locusof exploitation for these capabilities drive posi-tive performance on several possible dimensions,including profitability, competitiveness, innova-tion, and learning. But performance, in turn, influ-ences the center of excellence formation process,most fundamentally by inducing greater levels ofparent firm investment in the unit. In the remain-der of this section we flesh out this frameworkby drawing on overlapping literature in inter-national business and strategic management. Wealso generate a set of hypotheses that are sub-sequently tested in the empirical portion of thepaper.



• Strength of local “diamond” (H1)

• Links to sources of competence (H2)

Inter-unit Relationships

• Links to sources of competence (H3)

• Subsidiary autonomy (H5)

Center of Excellence

• Strong capabilities

• Formal recognition

• Greater than unit level contribution

Parent FirmInvestment (H4)

Performance

• Profitability and competitiveness

• Innovation

• Learning and knowledge transfer

External Factors

Figure 1. Conceptual model of center of excellence formation in multinational firms

External factors

Scholars have long recognized that location (andall that term implies) is important to the devel-opment of firm-level capabilities and competitiveadvantage (Marshall, 1920; Kogut, 1991; Porter,1990). At a macro level, differences across coun-tries in terms of endowments and institutionalconditions play out in enduring patterns of interna-tional trade. At more micro levels, the dominanceof particular firms—and clusters of firms—in cer-tain industries can be attributed, in part, to theinstitutional conditions in which these firms areborn and evolve. Porter’s (1990) diamond modelis perhaps the most complete articulation of thisperspective to date and has led to a renaissance ofinterest in the relationship between geography andfirm-level competitive advantage.

Applied to a global strategy context, the mostbasic insight of this work is that the multina-tional enterprise is a firm-level manifestation ofhome country competitive advantage. In essence,this is the classical view of the multinationalfirm: the headquarters organization, responding tolocal stimuli (e.g., customers, competitors, sup-pliers) generates innovations, including organiza-tional capabilities, that then find application andsuccess in international markets. A more recentstream of research has extended this perspective to

include the possibility that the institutional diver-sity that is inherent in the border-crossing processof global strategy may actually provide opportuni-ties to create new sources of competitive advan-tage. As Frost (2001: 101) notes:

a potentially important source of competitive ad-vantage for multinational firms is the capacity oftheir foreign subsidiaries to generate innovationsbased on stimuli and resources resident in theheterogeneous host country environments in whichthey operate.

Although empirical work in this emergingresearch stream has been slow to develop dueprimarily to data limitations, a recent wave ofresearch has highlighted the importance of the hostcountry to the subsidiary development process. Forexample, Kogut and Chang (1991) and Anand andKogut (1997) provide evidence at an industry levelthat foreign investment may be motivated, in part,by the ‘pull’ of skills and capabilities resident inthe host country. Case study research bears thisargument out as well, especially in studies thathave focused on the motivation for and role offoreign R&D in multinational firms. Florida andKenney (1994), Kim (1997), Kummerle (1996),and Westney (1992) all provide examples thatsubsidiaries assimilate knowledge from their localenvironment. Frost’s (2001) larger sample workdrawing on patent citation analysis finds that



areas of technological specialization in foreignsubsidiaries are underpinned by ideas that originatein the subsidiary’s immediate geographic locale.

A closer look at this line of inquiry reveals twodistinct, albeit related arguments. The first, typi-cally cast at the country or regional level, looks atthe strength and dynamism of a particular locationas providing a ‘latent’ opportunity for multina-tional firms to derive a learning benefit from thatlocation. Fundamentally, this is an argument aboutlocational advantage—the strength of the industry‘diamond’ in a particular location, to use Porter’s(1990) terminology.

The second argument is a subsidiary-level argu-ment and points to the connectivity of the unitto key actors and resources in the host country.In this view, competence development is facili-tated by active participation of the subsidiary inthe ‘community of practice’ that structures activ-ity and relationships in a particular area (Powell,Koput and Smith-Doerr, 1996). Local customersmay influence the path of subsidiary capabilitydevelopment through a stringent set of needs, aswas the case with the Canadian subsidiary ofBritain’s ICI, which became a center of excel-lence for explosives due, in part, to the demand-ing usage requirements of the Canadian miningindustry. Researchers have noted a similar rolefor suppliers, especially in facilitating the adop-tion of innovations by downstream organizations(Dosi, 1988). Competitors, too, may stimulatethe process of competence development throughdirect (e.g., alliances) or indirect (e.g., mimicry)means, as noted frequently by Porter (1990).From these arguments, we derive our first twohypotheses:

Hypothesis 1: The greater the strength anddynamism of the local industry ‘diamond,’ themore likely is the subsidiary to contain a centerof excellence.

Hypothesis 2: The greater the impact of externalorganizations on the development of a sub-sidiary’s competence, the more likely it is tocontain a center of excellence.

It is important to recognize that the above argu-ments are not in any sense deterministic. Thatis, we are not saying that a strong industry dia-mond in the host country guarantees the formationof a center of excellence in a subsidiary based

there. Rather, our point is that, all else equal, astrong industry diamond increases the likelihoodthat a subsidiary based there will form a center ofexcellence. These factors, then, need to be seen ascontributory, as empirical evidence suggests theymay not be necessary or sufficient. For example,many multinationals have ‘scanning units’ (Ver-non, 1979) in dynamic environments whose role isto pick up and transfer knowledge back to corpo-rate headquarters, rather than develop strong capa-bilities themselves. Equally, there are some casesof centers of excellence emerging in locations thatare not particularly dynamic and where externallinkages are weak, such as Monsanto’s manufac-turing center in Morden, Manitoba (Birkinshaw,1995). As in most of the issues studied by strat-egy researchers, outcomes are subject to manyand varied forces, as is suggested in our model,which we believe is the most parsimonious wayof explaining what is in practice a very complexphenomenon.

Internal factors

In addition to the external factors discussed above,our model also highlights the importance of fac-tors within the boundaries of the multinational firmthat play an important role in the formation ofcenters of excellence. Consider first the relation-ship of the foreign subsidiary to the parent firm.Nohria and Ghoshal (1997) suggest that the multi-national enterprise can be modeled as a ‘differen-tiated network,’ in which the foreign subsidiary isconnected not only to the headquarters of the par-ent firm but also to other subsidiary units aroundthe world. These network linkages make it eas-ier for foreign subsidiary units to coordinate theiractivities on a worldwide basis, but they also repre-sent an important source of intangible knowledgeflows. If, for example, the subsidiary is sellingto another business unit within the multinationalnetwork, the relationship with that customer canbe an important source of ideas about how toimprove its product offering. Equally, in work-ing with an R&D unit in another country, thatrelationship can also be the seeds of a new prod-uct that results in the development of the foreignsubsidiary. The argument, in other words, is thatinternal network linkages can work in a very sim-ilar way to relationships in the local market, i.e.,by stimulating the emergence of new ideas and



fostering the emergence of advanced capabilitiesin the subsidiary.3

Hypothesis 3: The greater the impact of otherunits within the multinational network on thedevelopment of a subsidiary’s competence, themore likely it is to contain a center of excellence.

The preceding discussion highlighted the role ofthe parent firm as a provider of important intangi-ble assets (skills, knowledge, expertise) that a sub-sidiary can draw upon to develop its own capabilitybase. But a more fundamental role of the parentfirm is typically as a provider of tangible resources,especially investment capital, needed by the sub-sidiary to develop the kind of advanced capabilitiesthat may give rise to its eventual recognition as acenter of excellence. Indeed, Birkinshaw and Hood(1998) identify parent-driven investment (PDI)as one of the classic processes through whichsubsidiaries develop capabilities that subsequentlyform the basis for an expanded role within thecompany. This claim is also supported by the moremainstream literature in strategic management onthe process of capability development and strate-gic decision making. Dierickx and Cool (1989) andBarney (1991), for example, note the importanceof sustained investment over time to the develop-ment of capabilities and positions that are likely tolead to competitive advantage. Similarly, Burgel-man (1996) and others (e.g., Galunic and Eisen-hardt, 1996; Noda and Bower, 1996) argue thatstrategic decision making, especially concerningthe capabilities needed to enter new businesses,can be understood as ‘as an iterated process ofresource allocation’ (Noda and Bower, 1996: 159).In this spirit we propose:

Hypothesis 4: The greater the investment madeby the parent firm in the subsidiary, the morelikely it is to contain a center of excellence.

Although investment may be a precondition for thedevelopment of advanced capabilities as suggested

3 Note that this is in some ways a mirror-image of the pro-cess by which the center of excellence leverages its capabilitiesthroughout the multinational corporation. However, the two pro-cesses are distinct, because in the first the center of excellenceis the receiver of knowledge and in the second it is the sender(Szulanski, 1996). Also, one will often see the center of excel-lence develop its expertise through one set of relationships (e.g.,a sister plant or HQ) and then apply that expertise in otherrelationships.

by our fourth hypothesis, it is also clear that thedecision by the parent firm to invest in a particularsubsidiary’s development is endogenous—i.e., it isat least partly determined by preexisting capabili-ties of the subsidiary, by preexisting commitmentsby the parent to the subsidiary’s position as a cen-ter of excellence within the firm (in the form ofpast investments and explicit recognition, perhaps),and by outcomes. Subsidiaries that perform wellin their role as a center of excellence can expectto be rewarded by the parent firm in the form ofadditional investment and, perhaps, an expansionof their charter. The HP Singapore case noted ear-lier is a classic example of the positive feedbackloops running from parent investment to capabilitydevelopment to subsidiary performance to char-ter extension to more parent investment (Leonard-Barton, 1995). In this sense the formation of cen-ters of excellence in multinational firms can beunderstood as a cumulative, evolutionary process.We return to this point later in the discussion.

The other classic subsidiary development pro-cess identified by Birkinshaw and Hood (1998),which they term subsidiary-driven charter exten-sion (SDE), also involves the parent firm. How-ever, in this case, the role of the parent is moreof a sanctioning body, granting a subsidiary witha preexisting set of advanced capabilities the rightto pursue a new or extended charter. In this sense,the SDE process actually requires the foreign sub-sidiary to have considerable autonomy in terms ofthe ability to identify and pursue interesting marketopportunities without explicit permission from theparent company. The link between autonomy andthe development of centers of excellence is sup-ported by early work in the Canadian context byCrookell (1986) as well as by more recent researchby Birkinshaw (1997). Hence our final hypothesis:

Hypothesis 5: The greater the autonomy of thesubsidiary, the more likely it is to contain acenter of excellence.

METHOD

Data collection

This paper is part of a larger project on centers ofexcellence in multinational firms conducted by ateam of researchers in eight countries, all of whomused a similar survey instrument. In the course of



developing the instrument, the research team meton four occasions. The first meeting defined theobjective of the questionnaire. Subsequent meet-ings were used to more carefully define the coreconstructs and then the wording of specific items.We also made use of existing scales from previousstudies. Finally, after the second iteration of thesurvey instrument we pilot tested it using a num-ber of executives from one multinational company.The net result was a carefully crafted instrumentthat had been subjected to three rounds of revision,pilot testing, and the opinions of eight researchersworking in the field.

This study focuses on Canada, which is in manyways an ideal context in which to explore thecenter of excellence concept. First, the Canadianeconomy is characterized by a high level of for-eign ownership of industry, a feature that has longdistinguished it from other advanced industrialnations. In addition to obvious advantages in termsof convenience, this feature of the Canadian econ-omy makes it likely that the center of excellencephenomenon is more evolved in Canada than inmany other countries. Findings from the Canadianexperience are thus likely to presage experiencein other countries where FDI has more recentlybecome a major part of the institutional landscape.Second, the 1989 Free Trade Agreement betweenCanada and the United States resulted in a consid-erable amount of restructuring of foreign-ownedactivities in Canada, with some being terminated ortransferred to other locations and others receivinggreater investment. We believe that this restructur-ing process has led many foreign firms operating inCanada to articulate explicitly their goals and ratio-nale for developing (or not developing) centersof excellence within their Canadian subsidiaries.Again, this suggests that the Canadian experienceis likely to be on the leading edge of develop-ments elsewhere. And finally, because Canada is adeveloped country with many advanced factors ofproduction, it provides a good location for explor-ing the linkage between the characteristics of thehost country and the development by foreign sub-sidiaries of the kind of value-creating capabilitiesthat are central to our understanding of the centerof excellence phenomenon.

We developed a list of 780 foreign-owned(greater than 50% of equity) companies in Canadawith annual sales of greater than $25 million.The mailing list was developed using well-established sources such as the Financial Post

1000, The Globe and Mail 500, and variousonline directories. Although some companiesdeliberately exclude themselves from such listings,our research suggests that this mailing list includesmore than 90 percent of the population.

To give the study additional focus, the780 foreign-owned companies were drawn fromCanada’s manufacturing sector. Service sectorfirms were thus excluded from the sampling frame.This choice was driven by both practical andmethodological considerations. On the practicalside, the focus on manufacturing firms reducedconsiderably the cost of administering the survey.Two methodological considerations influencedour decision to focus on the manufacturingsector. First, because the center of excellence‘phenomenon’ is still not well understood, webelieved that it was important to pay primaryattention to matters of internal validity rather thanexternal validity. Many researchers have notedimportant differences between manufacturing andservice sector multinationals—differences that webelieve are likely to impact the processes by whichcenters of excellence emerge and are subsequentlyleveraged by the firm. Combining both sectorsin the same study risked a marginal gain ingeneralizability for a potential serious cost in termsof internal validity. Second, because our definitionof a center of excellence is cast at the subunitlevel (i.e., at the level of a function or activity), webelieved it would be wise to focus initial researchattention on two primary activities—R&D andmanufacturing—where centers of excellenceappear particularly likely to emerge. For servicesector firms, it is much less clear (in termsof activities) where centers of excellence arelikely to develop.

The questionnaire was mailed to the CEOs of the780 foreign-owned firms in late 1997. In decid-ing upon the CEO as our target respondent, wefaced both theoretical and practical issues. Onthe one hand, our conceptualization of a cen-ter of excellence pushed us to consider respon-dents at lower levels in the subsidiary, ideallymore than one per organization. We ruled out thisapproach primarily for practical reasons relatingto the difficulty of obtaining the necessary contactinformation, and cost. Instead, we chose a singlerespondent—the CEO—but structured our instru-ment such that key questions were very explic-itly focused around functional areas, i.e., below



the overall organizational level. As discussed ear-lier, this functional level focus is consistent withour conceptual approach and with our observa-tions from the field about where and how cen-ters of excellence develop. The specific choice ofthe CEO as our target respondent follows tradi-tional practice and was intended to ensure that therespondent had a sufficient breadth of knowledgeabout all of the major facets of the organization,its activities, and environment.

Following the recommendations on survey pro-tocol contained in Dillman (1978), we followed upon our first mailing with a reminder letter. Afterthis follow-up, a total of 99 questionnaires werereturned in usable form, giving us a response rateof 13 percent. This is not as high a response rate aswe would have liked, but it is well within the nor-mal range for surveys of multinational subsidiaries(Harzing, 1997).

Data and measures

The data used in this study came primarily from thequestionnaire.4 Most items were measured using1–7 Likert-type scales. Some, such as the numberof employees and the percentage of foreign sales,were measured using actual values. In addition, weconducted field interviews in five subsidiary com-panies. The data collected during these interviewswere used to formulate the theoretical frameworkand, subsequently, to help make sense of the resultswhen they did not always correspond to our pre-dictions.

Centers of excellence

Recall that our definition of the term is composedof three main elements: strong capabilities, formalrecognition, and greater-than-unit level contribu-tion. Our survey contained questions designed tooperationalize all three elements. First, we askedrespondents to indicate their organization’s compe-tence level in (1) research, (2) development, and(3) manufacturing using a 7-point scale, where1 was defined as ‘weak competence’ and 7 wasdefined as ‘very strong competence.’5 We chose a

4 The complete questionnaire can be downloaded in PDF formatfrom the lead author’s home page: http://live1.ivey.uwo.ca/fa-culty/Tony Frost.html.5 Note that we chose to use an absolute scale, not a relative scale,in operationalizing strong capabilities. This was driven by our

score of 4 as our cut-off point for defining strongcompetence. This seemed to us a reasonable levelas a first approximation, and the distribution ofresponses bore this out. However, as discussedbelow, we experimented with alternative cut-pointsas a way of assessing the robustness of our results.Second, for each activity we asked respondents toindicate whether ‘Our competence is formally rec-ognized by the headquarters’ (1 = yes, 0 = no).Finally, we asked the respondents to provide anindication of the extent to which their capabilitiesimpact other units. Our fieldwork suggested thatthe impact on other units can take many potentialforms, and that there is not a uniform hierarchy ofimportance. Thus we chose to frame our questionon impact in purposively broad terms. For each ofthe three functional activities, we asked: ‘To whatextent are the subsidiary’s distinctive competencesin [Research, Development, Manufacturing] of usefor other units in the Corporation?’ As above, weused a 7-point scale, where 1 indicated ‘No use forother units at all’ and 7 indicated ‘Very useful forother units’.

In summary, we operationalized a center ofexcellence as a dichotomous variable based onrespondents’ answers to all three of the questionsnoted above. Only those units that met all threecriteria were classified as centers of excellencefor the purposes of our subsequent analysis. Thedichotomous nature of our variable seems to usto capture the essence of the center of excellenceconstruct as used in practice, although we recog-nize that it may also be valid to conceptualize themin terms of degree, i.e., as a continuous variable.With this in mind we explored several alternativeoperationalization strategies as a way of checkingthe robustness of our initial findings. We discussthese and other interventions in a separate sectionfollowing the main presentation of results.

qualitative work, which suggested that managers think simulta-neously about their unit’s capabilities in relative (to other unitswithin the firm and other firms) and absolute terms. Especiallyin manufacturing activities, it is apparent that many managerswould characterize their capabilities as being very strong in abso-lute terms, but essentially on a par with local competitors andmany other units within the firm. Merck’s Canadian subsidiaryhas world-class capabilities in the manufacture of ethical phar-maceuticals—but similar to several other units within Merckand, indeed, similar to the operations of many of the world’sleading pharmaceutical firms. Our concern was that if we focusedthe question around comparative or relative ability, we wouldmiss many centers of excellence that have this kind of profile,i.e., multiple centers with similar capabilities worldwide.



Table 1. Centers of excellence: activities, competence, recognition and use to others

Activity A B C D EUndertakes Strong Formal A + B + C D + Use

Activity Competence Recognition to Others

Research 45.3 35.8 20.0 18.9 17.9Development 68.4 63.2 33.7 33.7 26.3Manufacturing 93.7 91.6 70.5 70.5 51.6

Any of the above 100.0% 92.6% 74.7% 74.7% 58.9%

Because the center of excellence phenomenonis not yet well understood, it is worthwhile pro-viding some sense of the distribution of responsesto these questions—and thus the distribution ofcenters of excellence among Canadian subsidiariesin each of the three functional areas. Table 1 pro-vides an overview. Column A begins by show-ing the distribution of research, development, andmanufacturing activities across respondent units.Column A was derived from our questionnaire,which asked respondents to indicate which value-adding activities their unit engaged in. Whereasnearly all units reported undertaking some man-ufacturing activity, less than half reported under-taking research activities. Using a cut-off point of4 out of 7 to define ‘strong competence,’ Col-umn B shows that the distribution of such capa-bilities across functional activities is even moreskewed toward manufacturing. Fully 91.6 percentof all respondents rated themselves 4 or higher interms of manufacturing capabilities, whereas only35.8 percent of respondents rated their researchcapabilities at that level. Development was in themiddle, at 63.2 percent.

Column C shows the distribution of formalrecognition of the unit’s competence by head-quarters across the three functional activities. For-mal recognition turns out to be even rarer thanstrong competence, as evidenced by the consis-tently lower numbers in Column C than in Col-umn B. Somewhat surprisingly, three-quarters ofall of the units surveyed indicated that they hadat least one functional area where their compe-tence was formally recognized by headquarters.However, in Column E, this number drops con-siderably once we add the last criterion from ourdefinition, namely that to be considered a cen-ter of excellence a unit’s capabilities must cre-ate value beyond its own boundaries, i.e., in thebroader corporation. Thus, only 18.9 percent ofrespondents indicated that their unit (1) possessed

strong capabilities in research, (2) had those capa-bilities formally recognized by headquarters, and(3) considered their capabilities to be of significantuse to other units in the corporation.6 These unitsare centers of excellence (in research), accordingto our definition. The corresponding numbers fordevelopment and manufacturing were 26.3 per-cent and 51.6 percent respectively. Although themanufacturing percentage seems quite high, webelieve that this number is reasonable based onour understanding of the Canadian context and themajor role played by foreign companies in thatcountry. Especially in the post-NAFTA context,many multinationals have looked to their Cana-dian subsidiaries as platforms for regional produc-tion strategies—and have made correspondinglysignificant investments in manufacturing capabili-ties and capacity. We suspect that these numberswould be lower in most other contexts, althoughwe defer this and other questions of generalizabil-ity to future research.

External environment

Building on the main elements of Porter’s (1990)diamond model, and the scale developed by Birkin-shaw et al. (1998), respondents were asked toassess the business environment in which theycompete along four dimensions: availability ofsupply material; quality of suppliers; demandingcustomers; level of competition (1 = very low,7 = very high). Ideally, we would have been ableto use individual measures in our models. How-ever, the high intercorrelation between many ofthe items motivated us to construct a compositeindex. Diamond Strength is calculated as the sumof the scores across these four items.

6 We adopted a cut-off point of 4 out of 7 for establishing that aparticular unit contributed to the broader organization.



External sources of competence

This construct was measured by asking respon-dents to assess the impact of various organizationsoutside the boundaries of the firm on the devel-opment of the subsidiary’s competencies, where1 = no impact at all, 7 = very decisive impact. Wechose to focus the questions specifically aroundthe issue of competence development rather thana more general ‘strength of ties’ conceptualiza-tion in order to avoid ambiguity in the inter-pretation of the results. Our fieldwork suggestedthat many subsidiaries would characterize them-selves as having strong ties (depth and breadth)to, say, a particular customer or supplier—withoutthose ties necessarily impacting the developmentof the subsidiary’s capabilities. In other words,many—probably most—interorganizational rela-tionships appear to be geared toward the exploita-tion of existing capabilities rather than the devel-opment of new ones. We identified four exter-nal organizations that the existing literature andour own fieldwork suggest were potentially impor-tant sources of competence development in foreignsubsidiaries: customers, suppliers, competitors, andexternal research institutions. In the models usedto test our hypotheses we use a composite mea-sure, External Influence, based on the sum of theresponses across the four actors.

Internal sources of competence

The measurement of this construct mirrored theone above. Four specific organizations wereidentified (foreign corporate headquarters, specificinternal corporate customer, specific internalcorporate supplier, specific corporate R&D unit)and respondents assessed their impact on thedevelopment of the subsidiary’s competence,where 1 = no impact at all, 7 = very decisiveimpact. Our measure, Internal Influence, is the sumof the individual scores.

Parent firm investment

For each of research, development, and manufac-turing, respondents were asked to ‘describe thelevel of investment in the Canadian Subsidiaryfor the past 3 years’ (1 = very limited, 7 = verylarge). We chose a 3-year time frame to eliminatesingle-year fluctuations and anomalies. Unfortu-nately, many surveys were returned with missing

values on this question, potentially underminingits use in our statistical analysis. However, sub-sequent analysis of the data indicated that thecause of the missing values was the absence ofa zero anchor, i.e., a ‘no investment’ category.This was confirmed by cross-tabulations, whichrevealed that surveys with missing values for thelevel of investment question were overwhelminglythose in which the respondent also checked ‘NA’for any activity in that area. Hence, we interpreteda missing value as indicating little or no investmentin that activity and recoded these values as 1. Ourresulting measure, Investment Level, is therefore anactivity-specific measure of parent firm investmentin the subunit, ranging from 1 to 7.

Autonomy

Based on the scale developed by Roth and Mor-rison (1992), respondents were asked to identifythe level at which certain decisions were made,where 1 = subsidiary level, 2 = subcorporate, 3 =foreign corporate HQ). Decisions were as fol-lows: hiring top subsidiary management; enter-ing new markets within the country; entering for-eign markets; changes to subsidiary organization;introduction of new products/services; approval ofquarterly plans/schedules. Our measure, DecisionMaking Autonomy, is based on the average of thesesix items (alpha = 0.63).

Controls

The multinational literature suggests several fac-tors that might be correlated with the formation ofcenters of excellence, but which are not causallyrelated to or even essential to the subsidiary devel-opment process. In particular, we expect that largerand more established (i.e., older) subsidiaries willbe more likely to contain centers of excellence.Both variables find some evidence in the previousempirical research on the evolution of foreign sub-sidiaries in multinational firms (e.g., Birkinshaw,1997; Frost, 2001; Ronstadt, 1977). To control forsize, we used the unit’s sales revenue in 1997,which was one of the items on our questionnaire.The age of the unit was similarly obtained fromthe questionnaire.

A final factor that we considered important tocontrol for was the entry mode of the foreignunit. For example, research by Eun, Kolodny, andScheraga (1996), Harris and Ravenscraft (1991),



and Capron, Dussauge, and Mitchell (1998) hashighlighted the role of technological assets ofacquiring and target firms. Acquisitions may beparticularly favored when the capabilities of thetarget firm would be difficult to develop internally(for example, where intangibles are key) and whenthe acquiring firm has few technological capabili-ties of their own (Granstrand and Sjolander, 1990).Based on field interviews and our general knowl-edge of the Canadian context, we do not havea strong prediction about the role of entry modein the development of centers of excellence. Wehave seen centers of excellence in units estab-lished through greenfield investment and acquisi-tion. However, to ensure that entry mode is notdriving our results, we controlled for it by creat-ing a dummy variable that takes on the value of1 if the unit was established through greenfieldinvestment, and 0 otherwise.

RESULTS

We begin by presenting descriptive statistics oncenters of excellence in each of the three functionalareas. These are presented in Table 2. In addition,we provide a set of comparison points with thoseunits that do not meet our three element defini-tion of a center (‘non-centers’ in Table 2). Thesestatistics reveal interesting differences across thethree types of centers of excellence as well as sub-stantial differences between centers (of any kind)and non-centers. In terms of size, manufactur-ing centers are the largest, with average sales in1997 of over C $300 million compared to lessthan C $100 million for both research and devel-opment centers. Non-centers are in the middle at

C $179.2 million. A similar pattern is reflected inthe number of employees, with manufacturing cen-ters averaging 774 employees compared to 436 and404 for research and development centers, respec-tively. Non-centers were again in the middle at 558employees, on average. Research and developmentcenters are also younger (19 years and 27 yearsold, on average, respectively) and more likely to beformed within an acquired subsidiary than a green-field subsidiary. This finding accords with recentwork in strategic management on internationalacquisitions that has highlighted the importanceof technology-seeking motivations for cross-borderM&A (Capron et al., 1998; Inkpen, Sundaram andRockwood, 2000; Teece, 1992). Manufacturingcenters average about 35 years old, the same asnon-centers, with a closer split between greenfieldand acquisition (55% acquisition).

Centers of excellence in all three areas aremore export oriented than non-centers. This isnot surprising in light of our earlier discussionon the evolution of multinational firms frommultidomestic-type strategies and structures tomore global and transnational-type structures(Bartlett and Ghoshal, 1989). As noted earlier,centers of excellence are seen by many scholarsas an important manifestation of the transitionto more globally rationalized structures forinnovation, production, and distribution. Furtherevidence of this trend comes from the statisticson internal sales and purchases. Developmentand manufacturing centers sell significantly moreof their output internally (i.e., to other unitsof the multinational firm) than do non-centers:19 percent of total sales for manufacturing centers(14% for development centers) vs. an average

Table 2. Descriptive statistics: centers of excellence vs. non-centers∗

Activity Research Development Manufacturing AllCenter Center Center Non-Centers

Sales revenue ($C million) 78.6 85.5 300.8 179.2Employees (#) 436 404 774 558Age (years) 19 27 34 35Acquisition (%) 65 64 55 56Exports (%) 34.8 36.7 38.6 25.4Internal purchases (%) 9 15 26 30Internal sales (%) 10 14 19 7Autonomy† 1.87 2.00 2.01 2.02

∗ All statistics shown are means, except where noted.† Average response to five questions (lower numbers indicate more autonomy).



for non-centers of only 7 percent. Interestingly,however, non-centers have the highest averagelevel of internal purchases, averaging 30 percent oftotal purchases. The asymmetry between internalsales and purchases for non-centers is suggestiveof a dependent relationship between headquartersand subsidiary, consistent with the classicalview of the multinational firm as a mechanismfor exploiting headquarters-created advantages inforeign markets. However, manufacturing centersappear to be especially well integrated into theglobal operations of the parent firm, as evidencedby the combination of high exports and highlevels of both internal sales and purchases. Overall,there do not appear to be major differences inthe autonomy levels experienced by any of thedifferent types of unit: only research centers appearto have a slightly higher level of autonomy(reflected in the lower average autonomy score).

Table 3 contains the correlation matrix. For allthree centers, there is a moderately high correla-tion with external sources of competence develop-ment; the correlations with internal influences aremore modest, although still significant, with theexception of manufacturing centers where internalinfluences appear especially important (r = 0.296,p < 0.01). Investment by the parent firm standsout for its high correlation with all three types ofcenters, but particularly research and developmentcenters. Finally, the strength of the local businessenvironment (Diamond Strength) and the auton-omy of the unit are not significantly correlatedwith any of the centers. Autonomy, in particu-lar, appears to bear little relationship to center ofexcellence formation in our data. Further investi-gation revealed that none of the individual itemsused in our composite measure of autonomy wassignificantly correlated with any of the dependentvariables. Given our modest sample size, we there-fore chose to drop Autonomy from our regressionmodels to preserve degrees of freedom. We pick upthe issue of unit autonomy again later in the paper.

Hypothesis tests

We turn now to the multivariate tests of ourhypotheses. Because our dependent variables aredichotomous (center/not center), we used logis-tic regression techniques. Results are reported inTable 4. The table is divided into three sectionsby functional area in order to explore differencesin the factors contributing to the development of

centers of excellence in research, development,and manufacturing activities. Numbers in paren-theses represent standard errors. Interpretation ofthe logistic regression coefficients follows the nor-mal pattern: positive, significant values indicatethat an increase in that variable (or a movementfrom 0 to 1 for indicator variables) increases theodds that a particular unit will meet our definitionof a center of excellence, ceteris paribus. Nega-tive values indicate the reverse. For each activity,we begin with a baseline model including just ourcontrol variables. Comparisons in the model fitbetween this baseline model and the fully spec-ified model provides an indication of the overallexplanatory power of our hypotheses. In additionto these two models, we also present models inwhich External Influence is included but InternalInfluence is not, and vice versa. This decision wasmotivated by the correlation matrix (which showsthat the two variables are correlated more highlywith each other than with the dependent variables)and by the results we obtained in our fully specifiedmodels (Models 2, 6 and 10). Our intervention fol-lows a classic approach for dealing with problemsof multicollinearity (Kennedy, 1998).

Overall, the models shown in Table 4 workwell, although, interestingly, the baseline models(Models 1, 5, and 9) do not. For research anddevelopment centers, the baseline models (Models1 and 5) barely reach significance; in Model 9,the baseline model for manufacturing centers, itdoes not. This is in contrast to the fully specifiedmodels (2, 6 and 10), which in all cases aresignificant at a minimum of p < 0.05. This resultsuggests that structural characteristics alone (size,age, entry mode) do not provide a solid basis onwhich to understand and predict patterns of centerof excellence formation.

Hypothesis 1 posited a relationship between con-ditions in the local business environment and thedevelopment of centers of excellence in foreignsubsidiaries. This hypothesis is not supported. Inall cases the coefficient on Diamond Strength isnot significantly different from zero. Subsequentinvestigation revealed that this result does not indi-cate that respondents perceive the local businessenvironment to be weak. Rather the reason for thelack of significance of this variable is that virtuallyall of the respondents rated the four attributes ofthe local context that compose our measure quitehighly. As such, perceptions of the strength of thelocal industry diamond do not distinguish centers



Tabl

e3.

Cor

rela

tion

mat

rix

12

34

56

78

910

1112

1.C

OE

(Res

earc

h)2.

CO

E(D

evel

opm

ent)

0.65

6∗∗∗

3.C

OE

(Man

ufac

turi

ng)

0.28

7∗∗∗

0.29

2∗∗∗

4.G

reen

field

−0.0

74−0

.086

−0.0

495.

Log

(Sal

es)

−0.1

61−0

.156

0.06

2−0

.107

6.L

og(A

ge)

−0.2

35∗∗

−0.2

91∗∗

∗−0

.038

0.43

6∗∗∗

0.12

67.

Dia

mon

dSt

reng

th0.

147

0.09

50.

124

−0.1

020.

064

−0.0

828.

Ext

erna

lIn

fluen

ce0.

393∗∗

∗0.

306∗∗

∗0.

330∗∗

∗−0

.280

∗∗0.

148

0.07

80.

148

9.In

tern

alIn

fluen

ce0.

213∗

0.24

4∗∗0.

296∗∗

∗−0

.000

0.01

7−0

.014

0.07

30.

464∗∗

∗

10.

Inve

stm

ent

Lev

el(R

esea

rch)

0.60

6∗∗∗

0.45

1∗∗∗

0.21

0∗∗−0

.163

0.03

7−0

.096

0.06

20.

458∗∗

∗0.

206∗

11.

Inve

stm

ent

Lev

el(D

ev.)

0.35

9∗∗∗

0.44

5∗∗∗

0.10

4−0

.174

0.03

3−0

.128

0.15

70.

394∗∗

∗0.

180

0.61

9∗∗∗

12.

Inve

stm

ent

Lev

el(M

anuf

.)0.

052

0.01

30.

230∗∗

−0.1

860.

214∗∗

−0.0

410.

244∗∗

0.29

7∗∗∗

0.07

80.

166

0.40

9∗∗∗

13.

Aut

onom

y−0

.126

0.00

70.

027

0.12

40.

020

−0.0

140.

090

−0.1

520.

129

−0.1

89∗

−0.2

27∗∗

−0.1

97∗

∗∗∗ p

<0.

01;

∗∗p

<0.

05;

∗ p<

0.10



Tabl

e4.

Fact

ors

affe

ctin

gth

elik

elih

ood

ofce

nter

ofex

celle

nce

form

atio

n

Res

earc

hC

ente

rsD

evel

opm

ent

Cen

ters

Man

ufac

turi

ngC

ente

rs

12

34

56

78

910

1112

Gre

enfie

ld−0

.214

−2.2

58−0

.894

−2.0

88−0

.314

−0.8

18−0

.060

−0.9

010.

188

0.07

20.

308

−0.1

55(0

.688

)(1

.671

)(1

.175

)(1

.573

)(0

.595

)(0

.888

)(0

.756

)(0

.895

)(0

.478

)(0

.626

)(0

.571

)(0

.604

)L

og(S

ales

)−0

.289

−0.9

74∗∗

−0.7

69∗∗

−0.9

23∗∗

−0.2

36−0

.464

∗−0

.382

∗∗−0

.454

∗0.

081

0.03

2−0

.017

0.03

5(0

.190

)(0

.496

)(0

.374

)(0

.453

)(0

.168

)(0

.244

)(0

.222

)(0

.247

)(0

.139

)(0

.164

)(0

.160

)(0

.158

)L

og(A

ge)

−0.4

76∗

−1.0

44∗

−0.5

37−0

.988

∗−0

.559

∗∗−0

.748

∗∗−0

.466

∗∗−0

.754

∗∗−0

.042

0.05

60.

054

−0.0

34(0

.246

)(0

.532

)(0

.386

)(0

.507

)(0

.231

)(0

.321

)(0

.277

)(0

.317

)(0

.193

)(0

.233

)(0

.215

)(0

.227

)D

iam

ond

Stre

ngth

0.26

00.

256

0.24

0−0

.055

−0.0

25−0

.049

0.04

40.

016

0.03

0(0

.234

)(0

.195

)(0

.229

)(0

.107

)(0

.092

)(0

.110

)(0

.082

)(0

.076

)(0

.081

)E

xter

nal

Influ

ence

0.35

8∗∗0.

331∗∗

0.21

8∗∗0.

242∗∗

0.07

00.

127∗∗

(0.1

70)

(0.1

60)

(0.1

04)

(0.1

00)

(0.0

67)

(0.0

61)

Inte

rnal

Influ

ence

−0.0

460.

057

0.05

80.

116∗

0.09

9∗0.

151∗∗

(0.0

96)

(0.0

95)

(0.0

69)

(0.0

64)

(0.0

56)

(0.0

46)

Inve

stm

ent

Lev

el1.

166∗∗

∗1.

277∗∗

∗1.

117∗∗

∗0.

638∗∗

∗0.

663∗∗

∗0.

609∗∗

∗0.

328∗

0.36

6∗∗0.

320∗

(0.4

03)

(0.3

47)

(0.3

70)

(0.2

16)

(0.1

99)

(0.2

09)

(0.1

81)

(0.1

78)

(0.1

79)

Con

stan

t1.

155

−7.6

84−6

.967

−7.7

691.

782

−1.7

38−1

.783

−1.2

30−0

.290

−5.1

83∗

−3.9

82∗∗

−3.8

68∗

(1.1

95)

(5.8

06)

(5.0

35)

(5.8

52)

(1.0

93)

(2.8

65)

(2.5

14)

(2.8

73)

(0.8

89)

(2.2

83)

(2.0

27)

(2.1

34)

Mod

elC

hi-S

quar

e7.

251∗

46.8

7∗∗∗

43.2

5∗∗∗

46.6

5∗∗∗

9.92

∗31

.59∗∗

∗28

.67∗∗

∗30

.86∗∗

∗0.

716

14.9

6∗∗13

.08∗∗

11.6

8∗

%C

orre

ctly

Pred

icte

d81

.589

.590

.089

.576

.178

.977

.580

.357

.663

.267

.564

.5N

9276

8076

9276

8076

9276

8076

∗p

<0.

10;

∗∗p

<0.

05;

∗∗∗ p

<0.

01



from non-centers: lack of variation, not low rat-ings, drove this result.

Hypothesis 2 was concerned with the role ofexternal actors in the capability development pro-cess, which is at the root our conceptualizationof centers of excellence. We posited a positiverelationship between external actor influence andcenter of excellence formation. This hypothesis isgenerally supported in our models. The strongestresults are obtained in the research and develop-ment models, where External Influence is posi-tive and significant in all cases at p < 0.05. Inthe manufacturing centers models, External Influ-ence does not reach significance in the fullyspecified model (Model 10). However, when theeffects of multicollinearity are treated by drop-ping Internal Influence from the model (Model12), External Influence is positive and significantas hypothesized.

Turning to Hypothesis 3, we argued that otherparts of the multinational firm (headquarters, aswell as internal suppliers, customers, and researchunits) were likely to play an important role inthe formation of centers of excellence, especiallyin terms of the capability development process.This hypothesis receives modest support acrossthe three groups of models, although support isquite strong in the manufacturing center models.Internal Influence is positive and significant in allthree manufacturing models (Models 10, 11, and12). In the development center models (Models6 and 7), it is only significant when ExternalInfluence is dropped. In the research center models(Models 2 and 3), Internal Influence does not reachsignificance at any point.

It is worthwhile elaborating on the results ofthe tests on Hypotheses 2 and 3, since an interest-ing pattern is revealed. For manufacturing centers,internal actors—i.e., other parts of the multina-tional firm—appear to play a more important rolein the development of strong capabilities than doactors outside the boundaries of the firm. Thepattern is reversed for research and developmentcenters, where external customers, suppliers, andcompetitors are given more credit as importantsources of competence development. This patternseems to us to be quite consistent with the gen-eral thrust of much of the literature on innovationand capability development, which tends to viewmanufacturing competence as developing throughincremental improvements and the internal transferof superior practices. Research and development,

on the other hand, are generally thought to involvea greater amount of boundary spanning activityand participation in the technological communitythat exists in the ‘interstices between firms, uni-versities, research laboratories, suppliers, and cus-tomers’ (Powell et al., 1996: 118).

Hypothesis 4 posited a positive relationshipbetween parent firm investment and the formationof centers of excellence. This hypothesis is sup-ported for all three types of centers. The impactof parent firm investment appears to be especiallyimportant for research and development centers, asindicated by the size of the coefficients on Invest-ment Level in Models 2–4 and 6–8. In all cases,this variable is significant at p < 0.01. For themanufacturing models, Investment Level is alsopositive and significant as hypothesized, but thereis a notable reduction in the effect size and sig-nificance level of this variable compared to theresearch and development models. One explana-tion for this result is that research and developmenttend to be very high fixed-cost activities, ofteninvolving large investments in specialized equip-ment, personnel, and other resources. As such,we would expect parent firm investment to bea more important driver of center of excellenceformation in these activities than in manufactur-ing, though manufacturing can also involve veryhigh fixed costs.

Perhaps a more persuasive argument comes froman understanding of the context for this study,namely Canada in the post-free trade era.7 After thepassage of the 1989 Free Trade Agreement, manyforeign multinationals operating in Canada tookthe opportunity to reevaluate their North Americanoperations with an eye to building more efficientregional innovation and production platforms. Atthat time, many firms discovered that their Cana-dian manufacturing operations were actually quitecompetitive as a result of the historical accumula-tion of capabilities as well as a favorable macroe-conomic context. These units often became centersof excellence within the company with only a mod-est amount of additional investment, typically incapacity to enable the unit to scale up to regionally

7 Recall that Canada was a signatory to two major trade agree-ments in the last decade, the 1989 Canada–United States freetrade agreement and NAFTA. Both agreements had a significantimpact on the structure of foreign investment (and disinvest-ment) in Canada, especially the 1989 bilateral agreement withthe United States.



efficient levels. In R&D, on the other hand, Cana-dian operations had by and large remained smalland underdeveloped—a subject of much publicdebate in Canada (Rugman, 1983). Many of thoseoperations were, in fact, closed down in the post-1989 restructuring. This shows up in the data inthe much smaller number of research and devel-opment centers compared to manufacturing cen-ters. Those R&D operations that were maintainedoften required substantial investment in equipmentand personnel, a fact that seems a likely expla-nation for the result with respect to InvestmentLevel in Table 4.

As noted earlier, we dropped Autonomy fromthe models based on the absence of a relation-ship between it and any of the dependent vari-ables, as revealed in the descriptive statistics.Hence Hypothesis 5 is not supported. One wayto reconcile this result with prior research (e.g.,Birkinshaw, 1997; Crookell, 1986) is through adynamic argument. It may indeed be the case,as suggested by this earlier body of work, thathigh levels of autonomy are associated with theaccumulation of subsidiary capabilities throughthe process of ‘subsidiary-driven charter exten-sion’ described by Birkinshaw and Hood (1998).However, it also seems likely that, once formallyrecognized as a center of value creation for thecorporation as a whole, the subsidiary may beforced to give up some of its autonomy as thefirm seeks to integrate the unit into its global net-work of innovation, production, and distribution.In Bartlett and Ghoshal’s (1989) terms, this maydescribe the rationalization process associated withmoving away from ‘multidomestic’ configurationscharacterized by substantial independence at theunit level to ‘transnational’ configurations charac-terized by substantial interdependence. In short,achieving recognition as a center of excellencemay involve a kind of Faustian bargain for thesubsidiary: more investment, more responsibility,but less autonomy to act independently in key deci-sion areas.

Robustness checks and extensions

We assessed the robustness of our findings inseveral ways, most importantly by exploringwhether and how alternative operationalizations ofthe dependent variable might impact the resultsobtained. These results are contained in Table 5.First, we experimented with the cut-points we

adopted in defining ‘strong capabilities’ as partof our definition of a center of excellence.Whereas our original models used 4 out of 7as the minimum threshold for defining strongcapabilities, in subsequent analyses we tried morestringent cut-points: 5 out of 7, and 6 out 7. The5-point cut-off had no bearing on the results. A6-point cut-off had only minor impact, as can beseen in Models 12, 15, and 18 in Table 5. Noneof the earlier results was contradicted and, indeed,some of the results were strengthened.

Second, we experimented with alternatives toour stipulation that centers must receive formalrecognition of their distinctive competence byheadquarters. Drawing on another item from oursurvey, we first considered whether shifting therecognition requirement to either formal or infor-mal recognition would impact our results. Thisintervention had little impact on the research anddevelopment center models, but it caused a gen-eral attenuation in the significance of the individualcoefficients in the manufacturing models. This canbe seen in Models 13, 16, and 19 in Table 5. Thisresult appears to be caused by the greater inclusive-ness of the modified dependent variable: adoptingthe criterion that the capabilities could be formallyor informally recognized boosted the number ofunits falling into our definition of a manufactur-ing center to 60 percent, thus reducing the amountof variation in the dependent variable. Finally, wetried dropping the recognition requirement alto-gether, in effect creating a continuous variable asour center of excellence measure: strength of capa-bilities multiplied by use to others. Models 14,17 and 19 represent OLS regression results onthis measure. Although these models proved moresensitive to the problems of multicollinearity dis-cussed above, when we entered Internal Influenceand External Influence separately into the mod-els, the results obtained were very similar to thoseobtained in Table 4.

Finally, we turn to the question of performance.Although the central focus of this paper is on theemergence of centers of excellence as an importantphenomenon to be understood, ultimately strategyscholars and managers are interested in whethernew organizational strategies and structures con-tribute to the performance of the enterprise. Butperformance is also of particular interest in thispaper because of its dual role in our conceptualmodel: as outcome of the center of excellence pro-cess and as driver of subsequent investment by the



Tabl

e5.

Rob

ustn

ess

chec

ks

Res

earc

hC

ente

rsD

evel

opm

ent

Cen

ters

Man

ufac

turi

ngC

ente

rs

12a

13b

14c

15a

16b

17c

18a

19b

20c

Gre

enfie

ld−0

.441

−1.6

831.

395

0.38

0−1

.977

0.00

30.

072

−0.5

532.

060

(1.6

79)

(1.1

74)

(2.5

55)

(1.1

44)

(0.8

81)

(0.9

20)

(0.6

26)

(0.6

59)

(3.0

63)

Log

(Sal

es)

−1.7

81∗

0.04

20.

525

−0.9

92∗∗

−0.1

09−0

.266

0.03

2−0

.003

0.45

5(0

.946

)(0

.252

)(0

.758

)(0

.398

)(0

.194

)(0

.239

)(0

.164

)(0

.175

)(0

.916

)L

og(A

ge)

0.12

0−0

.933

∗∗−0

.684

∗∗−0

.068

−0.8

97∗∗

−0.6

72∗

0.05

6−0

.284

−0.2

97∗∗

(0.7

71)

(0.3

82)

(0.2

95)

(0.4

26)

(0.3

50)

(0.3

58)

(0.2

33)

(0.2

64)

(0.3

50)

Dia

mon

dSt

reng

th1.

069∗

−0.0

09−0

.031

−0.0

110.

020

−0.2

64∗∗

0.04

40.

140

0.00

8(0

.608

)(0

.127

)(0

.093

)(0

.168

)(0

.107

)(0

.113

)(0

.082

)(0

.086

)(0

.119

)E

xter

nal

Influ

ence

0.50

5∗0.

203

0.00

90.

361∗∗

0.39

0∗∗∗

0.49

1∗∗∗

0.07

00.

051

0.13

7(0

.305

)(0

.119

)(0

.089

)(0

.144

)(0

.124

)(0

.105

)(0

.067

)(0

.070

)(0

.098

)In

tern

alIn

fluen

ce−0

.037

−0.0

12−0

.002

−0.0

93−0

.089

−0.1

57∗

0.09

9∗0.

086

0.00

7(0

.152

)(0

.085

)(0

.065

)(0

.087

)(0

.069

)(0

.078

)(0

.056

)(0

.057

)(0

.078

)In

vest

men

tL

evel

2.30

6∗∗1.

087∗∗

∗2.

346∗∗

∗0.

955∗∗

∗0.

511∗∗

∗1.

423∗∗

∗0.

328∗

0.28

11.

125∗∗

∗

(0.9

27)

(0.3

02)

(0.2

03)

(0.3

41)

(0.1

82)

(0.2

11)

(0.1

81)

(0.1

83)

(0.2

58)

Con

stan

t−3

6.28

7∗−1

.392

1.39

5−5

.976

−2.2

886.

475∗∗

∗−5

.183

∗∗−4

.576

∗2.

060

(18.

912)

(3.3

94)

(2.5

55)

(4.8

90)

(2.8

41)

(3.0

89)

(2.2

83)

(2.3

37)

(3.0

63)

Mod

elsi

gnifi

canc

e∗∗

∗∗∗

∗∗∗

∗∗∗

∗∗∗

∗∗∗

∗∗∗

∗∗∗∗

∗

N76

7675

7676

7576

7675

∗p

<0.

10;

∗∗p

<0.

05;

∗∗∗ p

<0.

01a

Dep

ende

ntva

riab

leop

erat

iona

lized

as:

min

imum

6ou

tof

7fo

rle

vel

ofco

mpe

tenc

e;fo

rmal

reco

gniti

on;

min

imum

4/7

for

use

toot

hers

.b

Dep

ende

ntva

riab

leop

erat

iona

lized

as:

min

imum

4ou

tof

7fo

rle

vel

ofco

mpe

tenc

e;fo

rmal

reco

gniti

onor

info

rmal

reco

gniti

on;

min

imum

4/7

for

use

toot

hers

.c

Dep

ende

ntva

riab

leop

erat

iona

lized

as:

leve

lof

com

pete

nce

×us

eto

othe

rs.



Table 6. The performance impact of centers of excellence

Individual Itema Research Centers Development Centers Manufacturing Centers

COE Not COE COE Not COE COE Not COE

Corporate Business Volume 4.18∗∗∗ 2.96 3.42 3.10 3.77∗∗∗ 2.55Corporate Profitability 5.18∗∗∗ 3.82 4.68∗∗ 3.84 4.42∗∗ 3.64Corporate New Product

Introduction4.53∗∗∗ 2.76 4.04∗∗∗ 2.74 3.50∗∗ 2.64

Corporate Competitiveness 4.82∗∗∗ 3.15 3.92∗ 3.29 3.94∗∗∗ 2.90

Other Units’ CompetenceDevelopment: Research

3.94∗∗∗ 1.81 2.96∗∗ 1.95 2.62∗∗ 1.89

Other Units’ CompetenceDevelopment: Development

4.06∗∗∗ 2.33 3.44∗∗ 2.35 3.16∗∗∗ 2.18

Other Units’ CompetenceDevelopment: Manufacturing

3.94∗∗ 3.01 3.76∗ 2.97 4.04∗∗∗ 2.31

Numbers represent means on a 7-point scale. ∗p < 0.10; ∗∗p < 0.05; ∗∗∗p < 0.01a For each performance outcome item (top half of table), respondents were asked: ‘To what extent has the subsidiary influencedthe foreign corporation when it concerns .’ For each competence development item (bottom half of table), respondents wereasked: ‘What impact has the subsidiary had on the development of competence of other units within the foreign corporation in thefollowing activities?’

parent firm. In the spirit of exploratory research,we briefly consider both issues.

To assess performance, we asked several ques-tions on our survey that were designed to illumi-nate the various mechanisms through which cen-ters of excellence might conceivably impact thefirm. These are listed in Table 6, the top half ofwhich is concerned with traditional ‘outcome’ vari-ables pertaining to performance: business volume,profitability, new product introduction, and over-all competitiveness of the firm. For each of thesevariables, we asked respondents to assess the influ-ence of their unit on the company on a 1–7 scale.Figures are mean response scores. The bottom halfof Table 6 is concerned with the subsidiary’s rolein the development of competence in other units,i.e., a learning and knowledge transfer outcome.

The results are striking. Compared to non-centers, centers in all three functional areas appearto contribute at a much higher level in most areas.For research and manufacturing centers, respon-dent ratings indicate superior performance (com-pared to non-centers) on all of the outcome vari-ables in the top half of Table 6. For developmentcenters, the unit’s impact on profitability and newproduct introductions was rated at a significantlyhigher level than non-centers. Similarly, in termsof competence development, centers of excellencewere consistently rated more highly than non-centers. These results were further corroboratedin subsequent regression analysis (not shown),

in which these measures of performance wereregressed on a center of excellence dummy vari-able along with a set of controls. Finally, althoughit is impossible to untangle cause and effect givenour cross-sectional data, some sense of the rela-tionship between performance and parent firminvestment (as indicated in our conceptual model)can be obtained by examining the correlationbetween the two. Using a composite measure ofperformance, the correlation between performanceand parent firm investment in (a) research was0.399 (p < 0.001); (b) development was 0.252(p < 0.05); and (c) manufacturing was 0.321 (p <

0.01). Although purposively exploratory, thesefindings serve to at least suggest the plausibilityof these paths in our conceptual model and, moreimportantly, to motivate the importance of the cen-ter of excellence phenomenon as an issue worthyof future research.

CONCLUSION

A central question in current debates about thenature and evolution of the multinational firmconcerns the ability of multinationals to identify,develop, and leverage capabilities within their dis-persed network of foreign subsidiaries. This paperhas sought to provide some initial insight into onesuch mechanism that multinationals have turned



to in dealing with this issue, namely the cre-ation of ‘centers of excellence’ within foreignsubsidiaries. A growing body of mostly anecdo-tal evidence suggests that the center of excel-lence phenomenon is increasing among the world’smajor multinationals, at the same time that thisevidence also suggests that many firms are strug-gling with the managerial issues involved. Assuch, we believe there is significant value instudying this phenomenon, both for academicsand managers.

Perhaps the most basic contribution of this paperis to advance a formal definition of the term‘center of excellence’ that we believe is both robustenough to capture the diversity of its usage inpractice and precise enough to guide subsequentacademic research.

A second contribution of the paper is the devel-opment and testing of a basic conceptual frame-work for understanding the development of centersof excellence in multinational firms.

We argued that centers of excellence can beviewed as the outcome of a combination of exter-nal and internal factors, the most important ofwhich (based on our results) appear to be parentfirm investment and linkages to sources of com-petence both within and outside the boundaries ofthe firm. Our results also showed that the relativeimportance of these factors varies across differenttypes of centers (e.g., manufacturing vs. researchand development).

At a higher level of abstraction, we believeour results are consistent with a view of capa-bility development that is inherently evolutionaryin nature. That is, the development and recog-nition of subsidiary capabilities can be under-stood as a cumulative, path-dependent processthat is shaped by both external and internal fac-tors. This view has deep roots in strategic man-agement, of course, but is also widely sharedamong international business scholars as a wayof understanding the role of foreign subsidiarieswithin the broader multinational network (Birkin-shaw, 1997; Frost, 2001; Kogut, 1983). Our field-work also bears this out. We identified a numberof examples of subsidiaries that had incremen-tally increased their competence over an extendedperiod of time, underpinned by multiple ‘tranches’of parent firm investment. These observations areconsistent with an overarching evolutionary pro-cess that is captured in the double-headed arrows

in our model: investment to capabilities to perfor-mance to investment.8

This paper contributes to the ongoing dialogue instrategic management on the organizational deter-minants of competitive advantage. Our exploratoryinvestigation of the relationship between centersof excellence and corporate performance showedthat, along several standard measures of perfor-mance, centers of excellence scored significantlyhigher than non-centers. The results held across allthree types of centers, although the data also sug-gested that different kinds of centers have differentkinds of impact.

Finally, it is worth noting several limitations ofour study as well as avenues for future research.In addition to the obvious limits on generaliz-ability inherent in a study set in a single coun-try and time period, our results must be consid-ered preliminary due to the combination of smallsample size and inherently complex phenomena.Anecdotal evidence concerning centers of excel-lence in multinational firms abounds. Arguablywhat the literature needs at this point is moredetailed qualitative work (through, for example,longitudinal and/or comparative case studies ofparticular subsidiaries) as well as large sampleresearch, perhaps using surveys or even patentdata as a way of adding rigor to the analy-sis of both the antecedents and consequences ofthe phenomenon.

Observations from the field tell us that the inci-dence of multinationals adopting center of excel-lence structures is very likely to increase, both inbreadth and scope going forward. More broadly,it is our belief that the twin motors of globaliza-tion and technological change will push a grow-ing number of multinational firms to adopt evermore complex global configurations and ever morefinely grained divisions of competence and author-ity. The creation of centers of excellence appearsto be one important manifestation of, and responseto, this trend. Clearly more work needs to be done

8 The evolutionary logic that we are advancing here probablyapplies most closely to the process experienced by greenfieldsubsidiaries. It is interesting to note, though, that a large num-ber of the centers of excellence in our sample—over half ofthe research and development centers—were acquired. Althoughthe capabilities of the acquired organization probably also devel-oped along the evolutionary lines we are referring to, from theperspective of the acquiring multinational this is much less anincremental, cumulative process than it is a direct and purposivemove that in some sense bypasses the need to engage in thiskind of protracted internal upgrading of capabilities.



in this area to understand both the nature and scopeof the contribution made by various kinds of cen-ters, as well as the specific organizational mech-anisms through which companies have been ableto ‘extract’ corporate-wide value from such dis-tributed capabilities. Given the still limited under-standing of the phenomenon by researchers and theapparent ascendance of the concept in the practiceof multinational management, it is clear that fur-ther research on centers of excellence is warranted.

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