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Control Concepts in Multinational Corporations (MNCs)

- The Case of Swiss MNCs with Foreign Subsidiaries in India -

DISSERTATION

of the University of St. Gallen,

Graduate School of Business Administration

Economics, Law and Social Sciences (HSG)

to obtain the title ofDoctor of Oeconomiae

submitted by

Sigu Muringaserilfrom

Germany and India

Approved on the application of

Prof. Dr. Li-Choy Chong

and

Prof. Dr. Narendra M. Agrawal

Dissertation no. 3398

Niedermann Druck, St.Gallen, 2007

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The University of St.Gallen, Graduate School of Business Administration,

Economics, Law and Social Sciences (HSG) hereby consents to the printing ofthe present dissertation, without hereby expressing any opinion on the views

herein expressed.

St.Gallen, October 15, 2007

The President

Prof. Ernst Mohr, PhD

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To my parents

Jacob Cherian Muringaseril

andKunjamma Muringaseril

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Acknowledgements

With this dissertation, another important milestone has been successfully

accomplished in my long journey of personal and professional development.

Therefore, I would like to take this occasion to thank my supervisor Prof. Dr. Li-

Choy Chong (University of St.Gallen) for providing me with this great

opportunity as well as the necessary discretion to develop my dissertation. I am

equally indebted to my co-supervisor Prof. Dr. Narendra M. Agrawal (IndianInstitute of Management, Bangalore) for the numerous inspiring discussions we

had in India as well as in Switzerland throughout the course of this research

project. Personally as well as professionally, I greatly cherish the time spent with

both the professors over the last couple of years.

Great endeavours always come with little sleep and lot of sacrifice. Hence,

finally, I would like to express my deepest gratitude to those dearest to my heart:my father, Jacob Cherian Muringaseril, my mother, Kunjamma Muringaseril, and

my wife, Bobby Jacob Muringaseril. Without their love and endless support this

and many other endeavours in my life would definitely have not been possible. I

owe them everything.

St.Gallen, October 2007

Sigu Muringaseril

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I

Table of Contents

Abstract .................................................................................................... IV

List of Exhibits...........................................................................................V

I. Introduction.......................................................................................1

A. Motivation.................................................................................................1

B. Structure of the Thesis .............................................................................2

II. Literature Review and Framework................................................3

A. International Management .......................................................................3

1. Contemporary Reflexion ..................................................................3

B. Multinational Corporation Characteristics................................................4

1. Overview ...........................................................................................4

2. Typology...........................................................................................4

C. Subsidiary Characteristics.........................................................................8

1. Subsidiary Role and Subsidiary Strategy .........................................9

2. Subsidiary Autonomy and Centralisation.......................................13

3. Subsidiary Involvement and Entry mode .......................................16

4. Subsidiary Age ...............................................................................19

C. Environmental Characteristics ...............................................................20

1. General Remarks ............................................................................20

2. Risk and Environmental Uncertainty .............................................20

3. Outcome Uncertainty and Outcome Measurability........................22

D. Control Modes .......................................................................................23

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II

1. Behaviour Control ..........................................................................24

2. Bureaucratic Control ......................................................................253. Culture Control ...............................................................................25

4. Output Control................................................................................28

5. Monetary Incentive Compensation..................................................29

E. Theories..................................................................................................31

1. Agency Characteristics ...................................................................31

2. Stewardship Characteristics............................................................33

III. Hypotheses.......................................................................................35

IV. Research Design .............................................................................40

A. Research Methodology ..........................................................................41

B. Research Process....................................................................................44

1. Population and Sampling................................................................44

2. Data Collection ...............................................................................47

3. Data Analysis..................................................................................50

3.1. Multiple Regression Analysis...............................................50

3.2. Binomial Logistic Regression Analysis................................54

3.3. Correlation Analysis .............................................................55

C. Variables and Measures .........................................................................56

1. Control Variables............................................................................57

2. Structural Variables ........................................................................58

3. Environmental Variables ................................................................60

V. Results ..............................................................................................61

VI. Discussion............................................................................................69

A. General Discussion of Results ...............................................................69

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III

B. Conclusion .............................................................................................74

1. Continuance of Formal and Structural Control ..............................742. From Unidimensional to Multidimensional Control......................75

3. Portfolio of Operative and Strategic Control ..................................76

4. Aptitude of Control Modes..............................................................76

VII. Reflexion and Implications for Future Research........................77

A. Critical reflexion and Limitations..........................................................77

B. Implications for future research .............................................................79

VIII. Closing Remarks .............................................................................80

References .................................................................................................83

Appendix .................................................................................................107

Questionnaire..........................................................................................111

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IV

Abstract

The purpose of this dissertation was to conduct an empirical examination of the

types and degrees of control exerted by Swiss Multinational Corporations

(MNCs) on their Foreign Subsidiary Companies located in India, in dependence

of certain structural and environmental properties.

Applying agency and stewardship theory, the author used the constructs of

culture control, bureaucratic control and monetary incentive compensation to

conceptualise and test the governance mechanisms imposed by Headquarters to

limit diverging activities at the Subsidiary Company level.

The present research is a logical outgrowth of extant research done in this field of

international management to the Indo-Swiss context. For this purpose, the author

generated primary data from more than 70 Business Units of Swiss Foreign

Subsidiaries operating in India.

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V

List of Exhibits

Exhibit 01: MNC Typologies................................................................................. 7

Exhibit 02: Schematic Comparison of Models of Subsidiary Strategy ............... 13

Exhibit 03: A Set of Control Predictors and Explanatory Variables ................... 35

Exhibit 04: Hypotheses Exemplarily Illustrated .................................................. 40

Exhibit 05: A Selected Set of Multivariate Data Analysis Techniques ............... 42

Exhibit 06: Relationship Between Paid-Up Capital and Culture Control............ 61

Exhibit 07: Relationship Between Paid-Up Capital, Bureaucratic Control as well

Monetary Incentive Compensation ................................................... 62

Exhibit 08: Influences of Subsidiary Company Strategy and Subsidiary

Autonomy on Culture control ........................................................... 63

Exhibit 09: Influence of Subsidiary Company Strategy and Autonomy on

Bureaucratic Control ......................................................................... 65

Exhibit 10: Influence of Subsidiary Company Strategy and Autonomy on

Incentive Compensation.................................................................... 66

Exhibit 11: Influence of Outcome Measurability on the Use of Monetary

Incentive Compensation.................................................................... 67

Exhibit 12: Relationship Between the Different Control Modes......................... 68

Exhibit 13: Summary of Hypotheses Tested........................................................ 69

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1

I. Introduction

A. Motivation

Advancement in technology, an increasing rate of globalisation, deregulation and

alleviation of restrictions has caused significant structural changes across the

globe and has increased the pressure of a highly selective market environment on

the various economic agents.

Particularly Multinational Corporations (MNCs), comprising of its headquarters

and its various foreign affiliated entities, which are geographically dispersed and

partly goal disparate (Ghoshal & Bartlett, 1990), are facing intensified multi-

point or hypercompetition since they expand across geographical and economic

borders not only to pecuniarily exploit arbitrages but also to explore and

strategically benefit from dynamic locational differences.

The purpose of this dissertation is to conduct an empirically based examination

of the types and degrees of control exerted by Swiss Multinational Companies on

their foreign subsidiaries located in India. Applying agency and stewardship

theory, we conceptualise and test the types and degrees of control imposed by

Headquarters (HQs), located in a relatively stable environment, on their affiliated

entities abroad, which are embedded in an uncertain and volatile habitat.

A thorough review of literature as well as previous analyses of similar conceptual

set-ups in different empirical contexts should not only help in developing an

adequate framework and subsequently deriving hypotheses, but also should help

us ultimately reveal through empirical testing whether and to what extent certain

structural as well as environmental properties moderate types and degrees of

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2

control that are exercised by focal organizations to align actions, interests and

goals with their affiliated entities abroad.

The main objective of the present work thereby, is to apply a theoretical set of

propositional arguments to a new empirical context in order to examine and

contrast its predictive ability and limitations and to ultimately not only contribute

to the process of theory development through theory testing but to increase our

understanding of control MNCs use to monitor their affiliated entities and the

circumstances that influence its usage.

The present study is a logical outgrowth of extant research done in this field of

international management (O'Donnell, 2000, Chang & Taylor, 1999, Ghoshal &

Nohria, 1989), to the Indo-Swiss context. The rationale for this investigation is

not only rooted in the magnifying role played by India as a rapidly emerging and

attracting market but also results from the circumstance that previous, large-scale

empirical studies have mainly captured Anglo-American, Japanese or Korean

HQs-perspectives.

Keywords: multinational corporations; subsidiary company; control modes;

agency theory;

B. Structure of the Thesis

In the initial section of the paper, the author briefly outlines the point of

departure. Section two follows the objective to review certain streams of

literature as well as empirical studies in order to not only portray relevant

characteristics of the subjects and units of analysis but to also lay the

informational and conceptual foundation of this research. Section three will thendescribe the various hypotheses derived in this study. The operationalization of

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3

the variables and constructs, the population and sampling procedures, the

methodologies applied for the data collection and hypotheses testing will bediscussed in section four. The results of the statistical analyses are subsequently

described and discussed in section five. The final section ultimately summarizes

the findings, highlights limitations and provides recommendations for future

research.

II. Literature Review and Framework

A. International Management

1. Contemporary Reflexion

On the basis of Werner's (2002) typology, research within the field of

International Management can be broadly divided into two major categories: (i)research on pure International Management, which is concerned with aspects of

management that do not exist in domestic firms (Ricks, 1991); and (ii) research

on cross-national or cross-cultural studies, which includes comparative studies on

management practices designed either cross-nationally or cross-culturally.

Most heavily researched, within the large body of International Management

literature, is the first category, comprising research on the description (Hendry,1996), measurement (Makhija, Kim and Williamson, 1997), antecedents (Autio,

Spienza and Almeida, 2000, Reuber and Fischer, 1997) and consequences

(Geringer, Tallman and Olsen, 2000, Palich and Gomez-Meija, 1999) of

transnational expansion of companies, research on market entry related aspects

(Madhok, 1997, Buckley and Casson, 1998, Erramilli, 1996, Pan, Li and Tse,

1999 & Pan and Tse, 2000), studies on expatriate management and repatriation

(Gregersen, Hite and Black, 1996, Egelhoff, 1984, Kobrin, 1988 &Borkowski,1999), multinational corporations (Bartlett, 1986, Bartlett and Ghoshal, 1989,

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4

Harzing, 2000) as well as headquarters and subsidiary relationships (Birkinshaw,

1997, Taggart, 1998, Gupta, Govindarajan and Malhotra, 1999 & Roth andO'Donnell, 1996).

B. Multinational Corporation Characteristics

1. Overview

Of the above mentioned areas and streams of International Management,

literature on Multinational Corporations (MNCs) has attracted substantial

attention among researchers. According to Ricks (1991) research on MNCs form

the core of international business research. This area includes, among other

aspects, reviews on the interactions between markets, governments and

Multinational companies (Dunning, 1992, Rugman and Verbeke, 1998), studies

on strategic processes within multinationals and models and descriptions, on

which the author will elaborate on in the subsequent section. Various aspects of

parent-subsidiary relationships in MNCs have been studied intensively for many

years (Martinez and Jarillo, 1989) as well.

2. Typology

Seizing Harzing's (2000) chain of argumentation, the author states that a

typology becomes useful in two ways: first, it significantly reduces complexitythrough the creation of classifications with a set of related characteristics and,

second, if conceptually meaningful typologies can be developed, they can then

serve descriptive and predictive purposes. This section, hence, follows the

objective to highlight relevant structural characteristics of Multinational

corporations for the present research through a discussion of some existing key

typologies.

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5

Various attempts have been made in literature to capture the true richness of

MNCs with definitions and concepts. Perlmutter (1969) for instance, used ataxonomy which was based on management styles namely geo-, poly- and

ethnocentric - to measure a firms degree of multinationality. Porter (1986)

distinguished between multidomestic and global firms based on the configuration

and coordination of the firms value chain. The framework developed by

Prahalad and Doz (1987) offers a rather context oriented classification based on

the nature of business, differentiating between global, multi-focal and local firms.

Probably Bartlett's and Ghoshal's (1989) four-fold typology of multinational,

international, global and transnational companies has been the most influential

and extensive one. The typology constructed, inter alia, included, environmental,

corporate, subsidiary, control and human resource characteristics. Many of the

studies on various aspects of MNCs that followed used either Bartlett and

Ghoshal's or a similar typology as a fertile base for their own research. Such

studies have been conducted by Sundaram and Black (1992), Leong and Tan

(1993), Ghoshal and Nohria (1993) and Roth, Schweiger and Morrison (1991), to

name a few. With the degree of centralisation being the predominant dimension

for differentiation, Martinez and Jarillo (1989) had distinguished between global

companies, i.e. companies labelled by a high degree of centralisation, and

multinational firms, who rather enjoy a laissez-faire doctrine and a great deal of

latitude.

Harzing (2000) has extensively reviewed and classified previous studies whichtried to conceptualise MNC typologies, concluding that, first, despite substantial

differences in details (e.g. number and types of variables included), most of the

studies show a considerable convergence in the basic characteristics (for example

with respect to the classification and characterization of companies, namely

multidomestic, global and transnational firms). Second, consistent with Weick's

(1995) posit of theory itself being a continuum, with guesses and speculations at

its beginning and explanations and models at its end, the first studies within thistheoretical stream were mainly descriptive and clinical in nature. Thereby

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6

employing small samples and rather qualitative research. While later studies

attempted to test variables in a more systematic manner on a large-scale andquantitative basis, thus being rather conclusive.

Empirically, especially in early premature stages of research, where little is

known about a phenomenon, when contemporary perspectives seem inadequate

because of little empirical substantiation, case study research is more appropriate

(Eisenhardt, 1989b). Therefore it is of no big surprise that most of the early

studies within the area of MNCs (Stopford and Wells, 1972, Doz, 1980, Bartlett,

1986, Prahalad and Doz, 1987, Bartlett and Ghoshal, 1989, White and Poynter,

1990) methodologically employed qualitative approaches, namely either

interviews or in-depth case studies.

Some researchers later on claimed that, hierarchy, as an approach of modelling

multinationals was being discussed by scholars without explicitly characterizing

the construct of hierarchy. As a consequence, and based on Simon's (1962) work,

Hedlund (1993) finally generated some general assumptions underlying the

modelling of MNCs as hierarchies. These assumptions are: (i) pre-specification

and stability of tasks and relationships, (ii) instrumentality and additivity of

individual elements of the organisation, (iii) unidirectionality and universality as

well as (iv) coincidence of knowledge, action and people hierarchies (Hedlund,

1993). Over time and especially in the nineteen eighties, it became increasingly

apparent to researchers that hierarchical models may not fully and adequately

reflect the complexity and reality of MNCs (Birkinshaw and Morrison, 1995).

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Authors Type of study

Perlmutter (1969) Conceptual polycentric ethnocentric geocentric

Doz (1980) Empirical National responsiveness World-wide integration -

Porter (1986) Conceptual Multidomestic industry Global industry -

Bartlett (1986) Conceptual/Empirical Multinational Global Transnational

Prahalad and Doz (1987) Empirical Locally responsive Integrated Multifocal

Bartlett and Ghoshal (1989) Empirical Multinational Global Transnational

White and Poynter (1990) Empirical Geographic area Global product Matrix

Roth, Schweiger and

Morrison (1991)Empirical Multidomestic Global -

Wolf (1996) Empirical Single market strategy Integration strategy Interaction strategy

Typologies

Exhibit 1: MNC Typologies

Source: amended and modified from Harzing (2000)

Hence, more recently, research culminated in newer conceptualisations of

Multinational Corporations. In contrast to the early more static considerations of

Multinationals, another quite interesting though poorly acknowledged impetus of

thought has been received to the body of MNC research by Allen and Pantzalis'

(1996) approach. Both researchers invited scholars to consider Multinational

Corporations on a continuum of multinationality with purely domestic firms on

the one end of the spectrum and perfectly global firms on the other end, with

each MNC having its own distinct degree of multinationality based on the

composition and concentration of its foreign subsidiary network. A further,

interesting model of a rather heterarchical MNC structure has been designed by

Hedlund (1986). A multi-centred approach that dissolves the hitherto existing

dyadic "Home Country / Headquarters" and "Host Country / Subsidiary"

perspective and considers subsidiary as a semi-autonomous entity within a

differentiated system with less of calculative and coercive control to more

appropriately reflect the increasingly critical strategic role played by subsidiaries

(Hedlund, 1986).

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The idea of heterarchy in discussing MNCs has been used before, to contrast

hierarchy, though, without giving any explicit definition or concept. The termheterarchy is being used by MNC researchers to capture that part of reality which

is increasingly being non-hierarchically organised. Within this school of thought

(Safarian, 1966, White and Poynter, 1984, 1990, Poynter and Rugman, 1982,

Crookell, 1986, D'Cruz, 1986), subsidiaries have a much greater element of

strategic choice, more precisely, subsidiary managers are equipped with

considerable latitude to formulate strategy. And the strategy itself is greatly

constrained to context only. According to Birkinshaw and Morrison (1995), there

are three characteristics that distinguish a heterarchical from a hierarchical model

(i) dispersion of managerial capabilities and decision-making authority

throughout the organisation, (ii) the lateral relationships existing between a

foreign subsidiary and its affiliated entities, and (iii) the multidimensionality of

coordination, e.g. product and geography. Some of these aspects will elaborated

further at a later stage.

C. Subsidiary Characteristics

For the purpose of this research, it will suffice to say that a Foreign Subsidiary is

defined as any operational unit of a Multinational organisation at company level,

which is situated outside the parent country. Therefore, the terms "ForeignSubsidiary", "Subsidiary Company (SC)", "Foreign Affiliated Entity",

"Subsidiary" and "Foreign Engagement" will be used interchangeably. The

relevant environment of a Foreign Subsidiary comprises not only of a multitude

of external linkages but also of a great deal of vertical and lateral linkages within

the MNC network (Ghoshal and Bartlett, 1990). However, it shall be noted, that

lateral linkages, i.e. relationships between the Foreign Subsidiary and its

affiliated entities, are conceptually excluded due to the direction and purpose of

this study.

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1. Subsidiary Role and Subsidiary Strategy

For the sake of conceptual clarity, it shall be further noted, that research on

subsidiary roles and subsidiary strategies are somewhat capturing two sides of

the same coin and subsequently, are heavily interrelated and even partly

competing. Technically, research on the first category greatly considers this

aspect of Headquarters-Subsidiary Company relationship from the angle of a

head office, with subsidiaries having a role, whereby its role is being derived and

assigned by the corporate headquarters out of a holistic perspective (Birkinshaw,

1997). Whereby, research on the second category directly ties in at the subsidiary

level, focusing on business strategy of the foreign entity from a subsidiary

perspective (Birkinshaw, 1997).

Looking at the chronicle of research, one can observe a significant shift in the

perception of the role over time, played by MNCs affiliated entities abroad, so

called Foreign Subsidiaries. From initially miniature replicas of the parent

company, with to some extent, single function operations to corporate entities

with responsibilities for high value activities (Birkinshaw, 1996). Or to state

more strikingly, from simple cost contributors to high value creators.

During the early phases of MNC research, there was wide acceptance on the

integrable aspects of MNCs while some corporate functions ought to becoordinated at the global level and others at the local level (Evans, Doz &

Laurent, 1989). Efforts were made to centralize and formalize the processes

within MNCs in order to benefit from scale economies and hence governance

mechanisms were rather, hierarchically and corporate processes rather, centrally

designed.

A Foreign Subsidiary's role was determined by the parent company and simply

assigned to the affiliated entity abroad (Birkinshaw, 1997). The process of target

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definition and strategy formulation was under the control of the Headquarters and

Foreign Affiliated Entities, mainly, did only the implementation and execution ofthe parental directive. In this phase of a rather functional operation, subsidiaries

assembled or marketed the parent's products and product lines in their respective

local markets (White & Poynter, 1984).

Researchers later on began to increasingly emphasize on external conditions and

started to gradually integrate more and more peripheral aspects into their models.

New contextual conditions such as differences in political, regulatory,

technological, cultural or societal environments, in which Foreign Entities

encounter distinct forces driving the competitive landscape in the local markets,

for instance. More and more dynamic and environmental aspects of the

relationship began to be exposed and as a consequence, decentralization was

postulated (Bartlett & Ghoshal, 1986). Internally, researchers also started to

focus on macro variations of control systems and processes across entire MNCs

(Gupta & Govindarajan, 1991). From a contingency theory perspective, Ghoshaland Nohria (1989) consequently postulated that overall organisational

adaptiveness has to be enhanced by matching the increasing heterogeneity in the

context with appropriate differentiation in structure.

In this rather recent phase of research, Foreign Affiliated Entities are not only

given considerable autonomy with variable scope of decision (Taggart, 1998).

But the shift towards the set-ups of subsidiaries allowed researchers to define

subsidiaries as value-creating entities and based on the notions of their own

business decisions (Peterson & Brock, 2002), allowed them to analyse the

multiple strategic roles played by those corporate units as well.Such a shift in

perspective envisions subsidiary managers with considerable latitude, who try to

rather utilize their own strategic discretion and capabilities than to respond to

parental decree.

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White and Poynter (1984) highlighted this natural progression of Foreign

Subsidiaries in a study, which was greatly acknowledged by scholars in this field.Based on subsidiary activities, White and Poynter (1984) differentiated among (i)

marketing satellites, who simply market products within their respective host

countries, but which are centrally produced, (ii) rationalized manufacturers, who

produce certain component parts of a product and deliver them internationally as

part of an international manufacturing system (iii) product specialists, who

develop, produce and market a particular, limited product or product line for

multi-country markets, as they have specialized competencies related to that

product as well as the required set of resources, and (iv) subsidiaries that employ

a strategically independent strategy and who has the necessary capabilities as

well as the required discretion to develop lines of business for either local, multi-

country or global markets (White & Poynter 1984).

Following studies stressed and acknowledged that without the diversity of

opportunities through the market initiatives at the Foreign Subsidiary' level,MNCs ability to adapt to changing environmental demands would be severely

constrained (Birkinshaw, 1997).

To some extent, the aforementioned change over time can be explained by the

interplay of two partially competing forces, namely, the pressure for global

integration and the pressure for local responsiveness (Prahalad & Doz, 1987).

Pressure for local responsiveness arises as MNCs have to respond to the

organizational environments in which they are embedded in and the extent can

differ significantly between the Affiliated Entities. This form of forces may be

ignited by the necessity for shorter time-to-market life-cycles, host country

regulations, highly demand oriented products and processes and subsequently the

need for product or process adaptations, to name a few. This is further supported

by environmental adaptation theories, such as the contingency approach, which

emphasizes the need for a strategic fit between external environment and internal

structure and point out that organizations have to continuously adapt to their

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extra-firm environment in order to succeed. Pressure for global integration is,

inter alia, caused by decreasing profit margin, the potential to cut costs andrealize transnational scale economies, capital and technology intensity of

products or endeavours to exploit commonalities across products and processes

(Prahalad & Doz, 1987).

In the context of the present study, the author specifically focuses on, and later

on will empirically test, a strategy construct which is, to a great extent, related to

the concepts and ideas of 'partial world product mandates, lateral centralisation &centres of excellence' (Roth and Morrison, 1992; Roth and O'Donnell, 1996, O'

Donnell, 2000, Poynter and Rugman, 1982 & Frost, Birkinshaw and Ensign,

2002), where the foreign entity has considerable competencies and

responsibilities for a set of value activities, associated with a particular product

for a multi-country market or geographic region respectively. Equipped in such a

manner, the author further assumes, that the foreign entity may also enjoy a great

deal of organisational flexibility in modelling its own processes. Scholars earlyclaimed, that organisational units require a certain level of latitude to

independently design a set of coherent organisational processes that support the

requirements of a new product (Abernathy & Clark, 1985). Conceptually, this

form of subsidiary role is also close to Frost, Birkinshaw and Ensign's (2002)

understanding of a centre of excellence as an organisational unit, which

embodies a set of capabilities and with the latter being leveraged by other parts

of the company group. However, a Foreign Subsidiary may not beorganisationally congruent with a centre of excellence. Multiple centres can

coincide or coexist within a single subsidiary or the competence profile of a

centre of excellence can also, alternatively, embody distinct functional areas of

various subsidiary companies.

To summarize, a basic comparison of strategies developed by Taggart (1997) is

illustrated in Exhibit 2.

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QuiescentConstrained

Independent

ReceptiveAutonomousTaggart

(1997)

World

Mandate

Specialised

Contributor

Local

Implementor

Birkinshaw &

Morrison

(1995)

ActiveReceptiveAutonomousJarillo &

Martinez

(1990)

Black HoleStrategic

Leader

ContributerImplementerBartlett &

Ghoshal

(1986)

OthersStrategic

Independent

Product

specialist

Rationalised

Manufacturer

Miniature

Replica

Marketing

Satellite

White &

Poynter

(1984)

QuiescentConstrained

Independent

ReceptiveAutonomousTaggart

(1997)

World

Mandate

Specialised

Contributor

Local

Implementor

Birkinshaw &

Morrison

(1995)

ActiveReceptiveAutonomousJarillo &

Martinez

(1990)

Black HoleStrategic

Leader

ContributerImplementerBartlett &

Ghoshal

(1986)

OthersStrategic

Independent

Product

specialist

Rationalised

Manufacturer

Miniature

Replica

Marketing

Satellite

White &

Poynter

(1984)

Exhibit 2: Schematic Comparison of Models of Subsidiary Strategy

Source: Taggart (1997)

This shift of locus is logically accompanied by a number of implications on the

various facets of mutual interactions between Headquarters and its Foreign

Subsidiaries.

2. Subsidiary Autonomy and Centralisation

Another important structural characteristic of subsidiaries, with relevance to this

study, is subsidiary autonomy. Autonomy within organisations is 'related to the

division of the decision making authority between a local unit and an outsideorganisation that controls it' (Garnier, 1982), or 'between centre and periphery in

an organisation' (Taggart, 1997), as in our case of multinational organisations,

between the Headquarters and its Foreign Subsidiary companies. It is worth

being noted at this point that theory (Roth and Morrison, 1992, Ghoshal, Korine

and Szulanski, 1994 & O'Donnell, 2000) frequently conceptualizes subsidiary

autonomy as the obverse of centralisation, whereby, centralisation is referred to

as 'the extent to which the locus of decision-making lies in the higher levels ofthe chain of command' (Martinez & Jarillo, 1991).

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According to Taggart (1997), within the body of early studies, some foundwidespread use of centralisation of decision making and control (Dunning, 1958,

Safarian, 1966, Deane 1970 & Brooke and Remmers, 1970), while others

suggested higher degrees of decentralisation (Johnstone, 1965, Roccour, 1966 &

Garnier et al. 1979). Not really surprising, in lieu of the aforementioned, two

diametrically opposed perspective within the parent-subsidiary relationship, a

researcher can basically take. Namely, that of either a head-office/role or a

subsidiary/strategy perspective. This causing a trade-off, with subsidiary role

research favouring centralisation as well as control and subsidiary strategy

research preferring autonomy (Birkinshaw, 1997). Having said this, we can

assume that higher degrees of centralisation at the Headquarters' level will

correspond to lower degrees of autonomy at the subsidiary level and vice versa.

It is probably these inconsistent results in early studies that led later work to

tackle and analyse autonomy related issues more specifically. The division of

discretion between Headquarters and its Foreign Affiliated Entities, thereby, is

very much a function of a set of complex factors. It is this structural delegation of

decision making that also serves as a framework for the identification of

responsibilities and functions (Welge, 1981). Factors which can influence the

degree of autonomy that a subsidiary enjoys can be broadly divided into two

categories, namely (a) differences in parent and host country's environmental

context, and (b) structural characteristics of MNCs such as the subsidiary's

relative importance, ownership, degree of interchange of products or the size of a

multinational organisation (Garnier, 1982). Complementarily, Hedlund's (1981)

study indicates that a high level of intra-network transfer of goods as well as

market share reduces, whereas the subsidiary size in relative and absolute terms

increases its autonomy. Yet, Gates and Egelhoff (1986) point out that

Headquarters' influence as a moderator of the level of autonomy is probably the

most crucial and pronounced factor of all.

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Subsidiary autonomy, which relates more to and is reflected in the formal

organisation structure (Ghoshal, Korine & Szulanski, 1994), discerniblyinfluences the latitude of subsidiary managers. Unlike pure influence, which can

also flow upward or horizontally, autonomy largely stems from structural

attributes and mainly flows downward (Bacharach and Lawler, 1980). Increasing

autonomy qualifies managers to perform corporate related strategic and operative

tasks far more independently. This is confirmed by many scholars (Rugman and

Bennett, 1982 & White and Poynter, 1984). Such strategic as well as operative

tasks include resource allocation, investment decisions, product or pricing

policies, target group selections, quality control decisions or development of

production plans and hence, most of the functions of the value chain (Martinez &

Jarillo, 1991).

Functionally, while autonomy is further advocated by Ghoshal and Bartlett

(1988) to facilitate the creation and diffusion of innovation at subsidiary level,

Ghoshal, Korine & Szulanski (1994) empirically found no perceptible influence

of autonomy on the intensity of inter-unit communication, namely, on both, the

level of information flow between Headquarters and subsidiary and between

lateral linkages of subsidiaries.

Interestingly, Prahalad and Doz (1981) illustrated that, at a much broader level

and as a consequence, the delegation of authority towards subsidiaries itself can

ignite a quasi-perpetual process with subsidiaries gaining further independence

from Headquarters with the implication for control and coordination being that,

as subsidiaries gain expertise, start performing excellently and mature with

respect to strategic resources, (i.e. technology, capital or access to markets) the

ability of Headquarters to control subsidiaries will be significantly reduced.

Scholars like Martinez and Jarillo (1991) support these findings by confirming

that autonomous subsidiaries, due to very little interdependencies, require the

least amount of coordination and control while subsidiaries who pursue higher

degrees of integration and centralisation, which correspond to lower degrees of

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autonomy, make intense use of practically almost all kinds of coordination and

control mechanisms.

However, this may not belie that Headquarters remain the strategic apex of the

Multinational organisation and the ultimate responsibility for coordination and

overall strategic direction lies with the focal organisation in the home country.

The locus of control shifts but yet the interdependence remains.

3. Subsidiary Involvement and Entry mode

A further important aspect to be highlighted refers to the alteration in the

institutional arrangements established to conduct cross-border transactions within

a firm, the so-called market entry modes. Entry decisions have been of strong

interest to researchers for a very long time. In the 1960's, the main focus of

studies was export vs. foreign-direct investments (FDIs). In the 1970's, further

strategic options such as licensing and franchising were included. And since the1990's, with the growing importance of emerging markets and equity regulations

as commonly practiced market entry barrier, international joint ventures (JVs)

have drawn the attention of scholars (Buckley & Casson, 1998).

Entry modes can be considered from a hierarchical perspective. Following the

conceptualisation made by Kumar and Subramaniam (1997), one can

differentiate between equity and non-equity modes of market entry on the firsthierarchical level, based on a probable equity involvement. At the second

hierarchical level, equity modes can be further subdivided into (equity) joint

ventures and wholly owned subsidiaries with both requiring a major resource

commitment in the host country. On the other hand, non-equity modes can be

further differentiated into contractual agreement and export (Pan & Tse, 2000)

with each institutional arrangement having its own merits and disadvantages.

Export is mainly characterized by domestic value creation, administrative control

and physical transfer of products and goods either directly through the company

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itself or indirectly through intermediaries. The basis for a contractual agreement

is a binding contract between the company and an agent to produce and marketthe product in the host country, in return for an economic rent (Kumar &

Subramaniam, 1997). Joint ventures, as institutionalized and equity based

arrangements, are realised through the pooling of tangible and intangible assets

between the company and its JV-partner and additionally through sharing or joint

ownership. The concept of wholly owned subsidiaries, with full ownership over

foreign operations as an integral characteristic, can be implemented either

through brownfield (acquisition) or greenfield investments.

Empirically, the preferential use of the aforementioned modalities to transfer a

product or service assimilated over time, as contextual conditions, started to

increasingly influence the choice of foreign market entry modes, a possible

epiphenomenon of increasing pressure for local responsiveness. The choice for

an entry mode, thereby, very much depends on a set of different factors.

According to Pan and Tse (2000) & Kumar and Subramaniam (1997), these so-

called predictors can be broadly categorized into firm-specific, product-specific,

(Erramilli & Rao, 1993, Kim & Hwang, 1992, Kumar & Subramaniam, 1997 and

Madhok, 1997), industry-specific and country-specific factors (Anderson &

Gatignon, 1986, Kogut & Singh, 1988 and Tse, Pan & Au, 1997).

From a theoretical perspective, the question of whether and to what extent

organizations should adapt and hence structurally respond to their environment,

has been central to a large number of environmental adaptation theories such as

institutional theories or contingency approaches.

From a transaction cost perspective, the preference for a particular market entry

mode and hence a firms degree of engagement or foreign involvement, will to a

great extent reflect a firm's desire to minimize transaction costs. The question of

how a firm should organize its boundaries in order to minimize transaction costs

becomes central. Transaction costs, inter alia, include costs of monitoring, costs

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of establishing supplier relations, costs regarding the after sales market

(Dunning, 1989).

Market entry modes have been investigated using the theoretical lenses of

cultural and national factor frameworks as well. Kogut and Singh (1988)

hypothesized that increased cultural distance between home and host country,

increases the level of risk in post-acquisition integration and hence firms may

prefer less risky arrangements as modes of transaction. Their findings illustrated

that greater cultural distance predominantly resulted in joint-ventures and

greenfield investments rather than acquisitions. Similarly, Gatignon and

Anderson (1988) found evidence that cultural distance, rather leads to partial

than full ownership.

Agarwal and Ramaswami (1992) have examined in one of their studies, the

independent and joint influences of some of these factors on the choice of an

entry mode by applying multinomial logistic regression analysis. They concluded

that though firms want to increase their market presence through foreign direct

investments, their ability however is constrained to market knowledge

(Anderson, 1997), size and multinational experiences (Agarwal & Ramaswami,

1992). Kogut and Singh (1998) directly related cultural aspects to different

international operation modes, inter alia, stating that in contrast to wholly owned

subsidiaries, joint ventures may be troubled not only by the cultural distance of

the partner but also due to the concerns of sharing proprietary assets.

Further conceptual frameworks with explanatory power to some extent are the

eclectic model, also frequently referred to as the OLI-model, developed by

Dunning (1980) based on ownership specific, location specific and

internalisation specific advantages and the Swedish Uppsala model (Johanson &

Vahlne, 1977). Based on these distinct schools, literature, by and large,

distinguishes between two ways of modelling the process of alteration in

institutional arrangements. While the former is a static approach with entry

modes emanating from single stage decisions, the latter posits a dynamic

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contemplation. In the second school, entry modes are considered to be a

continuum of gradually increasing levels of resource commitment (Chu &Anderson, 1992) as a result of increasing market knowledge. Calof and Beamish

(1995), who epically investigated in one of their studies the general causes and

patterns of change in entry modes, consistently and concludingly, portray a

firms process of internationalisation itself as an ongoing sequence of adaptations

to a continuously changing international environment (Calof & Beamish, 1995).

4. Subsidiary Age

Conceptually, the construct of firm or subsidiary age is not new. Numerous

studies have examined the concept of firm age and its relations to various aspects

of internationalisation. Some have investigated why firms internationalize at an

early age (Oesterle 1997, McDougall, Shane and Oviatt, 1994 & Oviatt and

McDougall, 1997), others like Autio, Sapienza and Almeida (2000) have

examined the effects of firm age on international sales, its knowledge intensityand the imitability of its core technology; Evans' (1987) study examined the

influence of firm age on company growth, the variability of its growth and the

probability of firm dissolution, suggesting that the latter will decrease with firm

age.

In the context of this study, the author assumes that the age of the Subsidiary

Company has an influence on the strength of relationship between the structuralvariables under observation and control that is imposed by focal organizations on

their Foreign Affiliated Entities. This rationale is grounded in the presumption (i)

that increasing time of operation leads to a more solid embedding of the

Subsidiary Company into its corporate environment and (ii) organisational

learning at various levels within the Subsidiary Company increases with the

period of the Subsidiary Company's operations. Such as, an increase in

managerial and technical proficiency, higher host-country environmental

competencies and experiences or more profound market knowledge possessed by

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local managers, which in turn leads to greater attempts to circumvent

Headquarters' governance mechanisms.

C. Environmental Characteristics

1. General Remarks

The centrality of the concept of environment with its components and dimensionshas been recognised by literature for a very long time (Lawrence and Lorsch,

1967; Perrow, 1967; Duncan, 1972). According to Werner (2002), this area of

research among others includes studies on global economy (Aram, 1997,

Czinkota and Ronkainen, 1997 & Denison et al. 1996), on domestic and global

market structures (Arora and Gambardella, 1997, Mascarenhas, 1996), on

political and regulatory environments in the home and host countries (Guilln,

2000, Nehrt, 1998, Rugman and Verbeke, 1998, Moon & Lado, 2000) and

research on the measurement and management of environmental risks (Shrader,

Oviatt and McDougall, 2000, Werner, Brouthers and Brouthers, 1996).

2. Risk and Environmental Uncertainty

Generally, the term risk is used to denote the probability of the occurrence of a

likely event. And if the probability of occurrence is unknown, we refer to it as

uncertainty. The term "risk" thereby actually does not state anything as to

whether a possible deviation from the expected values is positive or negative.

However, many management scientists and organisational theorists commonly

assign the label "risk" not only with strictly negative deviations and outcomes but

also use "risk" and "uncertainty" interchangeably. Despite these misconceptions

in theory, which are more than simply semantic, the author, for the sake of

usability of previous concepts and constructs in this study, will follow the

commonly established practice in the usage of the terms and ideas of risk and

uncertainty. Further, Jauch and Kraft (1986) accent, that a significant amount of

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the theoretical and empirical work on environmental risks is based on the implicit

assumption that uncertainty is dysfunctional to outcomes and performances butthis may not be applicable as illustrated in their proposed model.

Environmental uncertainty or perceived environmental uncertainty is being

viewed as one of the key issues top managements and organizational

administrators have to cope with. Milliken (1987) noted that the construct has

often been inadequately understood. These problems and a lack of consistency in

prior conceptualizations made her develop not only a general definition but also

suggest three types of uncertainties about environments, namely state uncertainty

or perceived environmental uncertainty, effect uncertainty and response

uncertainty (Milliken 1987). Effect uncertainty refers to the inability to predict

the nature of the effect of a future state of the environment on the organization

and response uncertainty denotes the inability to predict the consequences of a

response choice (Buchko, 1994). State uncertainty or perceived environmental

uncertainty occurs when management perceives the organization's environment

to be unpredictable or perceives the prediction to be less accurate (Buchko,

1994). According to Milliken (1987) it is this type of uncertainty which is

conceptually closest to what is subject to general usage. Uncertainty about

environmental variables that impact corporate outcomes, as a consequence,

reduces the predictability of corporate performance and subsequently increases

risk (Miller, 1992).

Several studies have tried to develop appropriate measures of risk. According to

Miller (1992), literature on risk conceptualisation and measurement in the field

of international management can be broadly divided into two categories, namely

(i) the "particularist" view, which investigates uncertainties individually (e.g.

political risks or exchange rate risks), and (ii) the multidimensional and

integrated approach, which avoids exclusion of other interrelated risk variables

and hence investigates specific uncertainties jointly, with multidimensional and

integrated approaches forming the majority of risk measurement techniques.

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A brief overview on measurement research shall follow. Lawrence and Lorsch

(1967) examined uncertainty associated with a specific job or function and henceMilliken (1987) suggested that this scale may not be adequate to measure an

organizations general environment. Duncan (1972) conceptualized uncertainty

based on two dimensions, namely complexity and dynamism, and three

operational indicators that had been derived from these two categories. Downey,

Hellriegel and Slocum (1975) and Tosi, Aldag and Storey (1973) have

empirically assessed measurement properties of both concluding that both scales

have significant weaknesses. A more comprehensive and sophisticated scale was

developed by Miles and Snow (1978). The so-called "perceived environmental

uncertainty scale" developed by Miles and Snow comprises six subscales and 25

items where each of those six subscales correspond to six key sectors of external

environment namely supplier, competitor, financial market, government,

regulatory environment as well as unions. The respondents are asked to rate the

degree of predictability applying a seven-point Likert scale. Euromoney's proxy

for uncertainty, the "Euromoney country risk rating" uses nine categories that

more or less fall into three broad groups: analytical indicators, credit indicators,

and market indicators and ultimately calculates a weighted score for each

country.

3. Outcome Uncertainty and Outcome Measurability

Following the afore-mentioned chain of argumentation, environmental

uncertainty becomes, inter alia, manifest in outcome uncertainty caused through

host country or industry volatility. Outcome uncertainty denotes the probability

that the action undertaken by an agent (for example a Foreign Subsidiary

manager) will ultimately result in the intended outcome (O'Donnell, 2000). With

increasing uncertainty, the manager will have less influence on the outcome as

outcomes are only partly a function of the agent's efforts (Jensen & Meckling,

1976). Under these premises, outcomes will be increasingly affected by

undetermined and unsystematic disturbances from the environment. Hence when

outcome uncertainty is high, outcome based control modes as well as

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performance related incentive compensations become less attractive to (i) the

principal, since the cost of shifting risk to the agents is much higher (Eisenhardt,1989a), particularly when agents are risk avers, and (ii) to the agent, where the

lack of attractiveness to the agent is caused by his inability to diversify risk to the

same extent as the principal can generally do. Empirically, the outcome

uncertainty is frequently conceptualised and assessed by the outcome

measurability. The author, more specifically, will revert to this point later.

D. Control Modes

Generally, control can be defined as the sum of activities or mechanisms used to

obtain information about behaviours and decisions. It is to utilize the former to

regulate the conduct of activities so that the results are in accordance with the

plans, goals and expectations of the controller (Child, 1973).

Top managers at the Headquarters, who increasingly derive a considerable share

of sales and profit from overseas subsidiaries, or top executives who have a

significant part of their assets attributable to overseas operations, would not only

like to be assured that subsidiaries continue to contribute to the overall success of

the group but also have an increased desire to exercise control over these

affiliated entities abroad (Prahalad and Doz, 1981). Management researchers,

likewise, have been greatly concerned with issues and aspects of control inorganisations (Lawrence and Lorsch, 1967; Child, 1973; Edstrm and Galbraith,

1977; Mintzberg, 1979).

As businesses and companies became increasingly global, studies started to more

heavily focus on coordination and control mechanisms used by Multinational

Corporations as well as subsidiary companies (Nobel and Birkinshaw, 1998;

Borkowski, 1999; Chang and Taylor, 1999; Taylor, 1999; Gupta, Govindarajanand Malhotra, 1999;Ferner, 2000; O' Donnel, 2000). Control mechanisms were

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mainly used to integrate the activities within MNCs. However, it is generally

accepted that mechanisms used by multinationals to coordinate and control theirforeign affiliated entities are neither original nor exclusive to MNCs (Martinez

and Jarillo, 1989). Yet, the complexity and idiosyncrasies of MNCs make it an

interesting subject of study.

1. Behaviour Control

Behaviour control denotes control obtained by observing and monitoring thebehaviour of subordinates (Egelhoff, 1984). However, personal surveillance

requires a clear understanding of mean-end relationships because only then are

appropriate instructions possible. This form of monitoring is considered to be the

most direct one. Taken to its logical extreme, behaviour control would lead to

behaviour formalisation (Egelhoff, 1984). Ouchi and Maguire (1975), in one of

the early studies on organisational control examined the conditions that govern,

inter alia, behaviour control suggesting that especially in small organisations andeven more importantly when mean-end relations are completely understood,

behaviour control is exerted. Their research further indicated a decrease in

behaviour control as the hierarchical level increased.

On the very practical end, time-intensity, high control costs entailed with this

form of regulation and the frequent lack of proximity between controller and

his/her object of control make this form of control less attractive. Also, it is

considerably more restrictive than the other forms. Thus, it is quite likely that

MNCs use techniques other than behaviour control to monitor Foreign

Subsidiary management.

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2. Bureaucratic Control

Bureaucratic control denotes integrating mechanisms such as rules, policies,procedures and objective or target performance setting, to manage subsidiary

activities (Roth and Nigh, 1992). Plans and schedules are pre-established, rules,

policies and procedures are formalised and information and communication

systems are standardised, with all former elements being specified impersonally

(Van de Ven, Delbecq and Koenig, 1976). Bureaucratic control strategies reduce

Headquarters' direct involvement in Foreign Subsidiaries by replacing active

control (Roth, Schweiger and Morrison, 1991) through impersonal methods(Edstrm and Galbraith, 1977) and explicit delineation of objectives. It utilizes

the extensive set of rules, regulations and procedures to restrict and limit

subsidiary management's activities and authorities (Baliga & Jaeger, 1984).

However, this requires that organisational members accept the legitimacy of an

organisation's authority. This mode of control is considered to be a relatively

simple form of controlling subunit activities, resulting in a greater degree of

decentralization (Galbraith, 1973). Object of control is organisational executionand the output of activities rather than managerial behaviour. Hence it may limit

operational flexibility and organisational adaptiveness to a greater extent but at

the same time reduces the required verbal communication between headquarters

and subsidiary company to a minimum.

3. Culture Control

Corporate culture is considered to be a pattern of values, norms, beliefs and

expectations shared by the organizations members (Schwartz & Davis, 1981).

These patterns serve as adaptive and regulatory mechanisms and are an important

guide to behaviour in addition to the explicit rules which exist. Especially in

instances where it is difficult to specify, monitor and control behaviour or output,

organisations may indoctrinate these values and norms to their organisational

members and hope that their acts are in accordance with the company's intents.(Baliga & Jaeger, 1984). This form of control is rather implicit and informal and

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coordination here is based on a broad and commonly accepted corporate culture.

Corporate culture finds its explicit organisational articulation in its symbols,languages, perceived atmosphere, practices and in its corporate identity. Certain

corporate and human resource related practices facilitate the evolution and

diffusion of corporate culture within an organisation like a careful selection and

integration of new organisational members or training and socialisation. Further

facilitators are long-term employment, consensual decision-making or repeated

interactions among corporate members.

One, very practical way of exerting culture control in a MNC context is through

recruiting parent country nationals for international subsidiary positions (Ouchi,

1979) and consequently this mode of control may be adopted in culturally high

distant subsidiaries. Edstrm and Galbraith (1977) refer to this as control by

socialisation, characterized by (i) a significant number or proportion of

expatriates in top and middle management position in Foreign Subsidiaries, (ii)

de-emphasis of formalisation and (iii) an increased exchange of informationbetween Headquarters and its Foreign Affiliated Entities. These expatriates use

commonly shared assumptions as well as indoctrinated values and implement

social and corporate standards within the subsidiary companies, which are

derived from the Headquarters. In this context, Perrow (1971) observed an

interesting phenomenon associated with culture control denoted as the paradox of

decentralisation which states that the degree of control exerted in a decentralized

organisation can be even higher than in a centralized one. Again the assumptionis that, once organisational members have internalized firm's values, we can

expect them to make similar decisions under similar circumstances. Clegg and

Gray (2002) underpin these findings by arguing that most of the expatriates are

sent abroad on the basis of an ethnocentric staffing policy. Ethnocentric view

suggests that key positions in foreign subsidiaries should be staffed with parent

country nationals while the geocentric view, for instance, advises staffing

selections based on competencies and not on nationality (Perlmutter & Heenan,1974). This kind of implicit cultural control over subsidiaries may not only

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reduce agency costs due to shared values and goals but also makes rigid

bureaucratic control less necessary (Markus and Pfeffer, 1983).Complementarily, Gong (2003) found empirical support for one of his

propositional arguments which state that with greater cultural distance, the

impact of parent countrys expatriate staffing policy on subsidiary performance

will be increasingly positive.

Since environmental characteristics surrounding a Multinational Corporation are

quite different or partly even unique, the extent to which companies use

expatriates or foreign assignments even within a single MNC can differ. Based

on a set of environmental (e.g. political risk, cultural distance and competition) as

well as organisational (e.g. level of complexity and interdependence) variables,

Boyacigiller (1990) has designed a model to account for the differential

utilization of expatriates in U.S. multinationals. However, in the past few years,

managers and academics (Zeira and Banai, 1983, Tung, 1987 & Harvey, 1989)

likewise have noted a marked reduction in the assignment of expatriates abroad.This trend of replacement through host country nationals is inter alia fuelled by

lower costs, increasing managerial and technical proficiency in many countries,

indigenous operations, higher host-country environmental competencies and

more profound market knowledge possessed by local managers (Kobrin, 1988).

While recognizing the increased use of host country nationals, Kobrin (1988)

however maintains that (American) Multinationals may potentially face

difficulties in exercising control and in creating informal organisational links

across subunits. Underpinning Bartlett's (1982) argument that MNCs need to be

simultaneously, globally integrated and locally responsive, Boyacigiller (1990)

and Kobrin (1988) advocate from a control perspective that the phase-out of

expatriates has probably gone too far. However, in accordance with Gong (2003),

one may counter argue that parent companies, through a process of cultural

learning, may socialize host country nationals into their corporate culture and

hence, in such a manner, may still be able to exercise culture control.

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4. Output Control

Output control is largely exerted through performance reporting systems whichevaluate the subsidiarys output (Chang & Taylor, 1999) and implies that data

such as sales figures, return or profit are considered suitable and can be used to

monitor operations. In contrast to behaviour or bureaucratic control, companies

enjoy substantial organisational flexibility to choose the means and deliver

jointly predefined results. But the risk will be more or less transferred completely

to the agent as outcomes are only partly a function of behaviour (Jensen &

Meckling, 1976). Hence, particularly in culturally distant environments, whereuncertainty may possibly be higher, this mode of control can be less attractive to

the principal as well as the agent.

The process of managing and controlling individual corporate units through the

medium of measurable and prioritized results is not really new. Substantial

importance has been given to this particular domain of management techniques

approximately two decades before. Management by Objectives (MbO) refers to a

closed loop process, where managerial attention is clearly focused on results

rather than on activities and comprises co-determination of objectives, schedules,

measurement variables and control means (Duffy, 1989). Dirsmith, Jablonsky &

Luzi (1980) have epically assessed MbO as a management technique based on a

number of variables such as organizational perspectives, planning and control

orientation, flow of information, finally concluding that MbO serves as a control

mechanism by providing for feedback and measurement of objective attainment.

Not only in agency theory is information considered to be a commodity which

brings about costs but at the same time, it can be purchased as well (Eisenhardt,

1989a) thus giving information systems increased importance as a mechanism to

impose control. Such a consideration implicitly assumes that the principal can

limit the diverging and aberrant activities of the agent by investing money in

corresponding information systems such as MbO i.e. in output based control

modes.

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5. Monetary Incentive Compensation

Given that subsidiaries are not only increasing in size and scope but also

maturing in terms of technology, capital and management resources scholars

have been greatly concerned about more subtler and newer forms of control

types. Another way of aligning headquarters' and subsidiary company's goals is

through the use of financial incentives, in which a portion of subsidiary

management's compensation is outcome-based (O'Donnell, 2000).

Conceptually, the total compensation for the management comprises fixed as

well as variable components. Fixed components mainly include a fixed salary

and fringe benefits such as cars, housing, school etc., while variable components

include short-term and long-term incentives and individual or group elements for

instance. According to the company's pay strategy or pay policy, the pay mix will

vary in terms of relative allocation. Balkin and Gomez-Mejia (1987) have

examined the effectiveness (which denotes the extent to which the compensation

strategy contributes to the achievement of organisational objectives) of different

pay strategies, arguing that effectiveness significantly depends on the match

between compensation strategy on the one hand and organisational as well as

environmental characteristics on the other (e.g. high-tech vs. traditional firms,

stage in product life cycle, scale or profitability etc.). Further conditions of

relevance for designing such a system include the decision horizon (a balance

between short-term and long-term objectives) (Rappaport, 1978), the executives

attitude and behaviour towards risk (Salter, 1973), his preference for direct pay,

deferred income and benefits (Lewellen and Lanser, 1973) or its link to

meaningful financial measures (Murthy and Salter, 1975).

Hierarchically, most of the early studies focused on the effects of compensation

strategies upon corporate level. Hence more recent studies (Galbraith andMerrill, 1991, Gupta and Govindarajan, 1986) have started to concentrate on

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business-unit level indicating possible trade-offs between different functional

strategies (e.g. R&D / Innovation - oriented vs. marketing - oriented strategies).Interestingly, Gupta and Govindarajan (1986) further posit that the determination

of reward should be specified by some combination of a strict formula and

subjective assessment by the superior. A strict formula ensures reliance on rather

an objective formula with the merits of great precision and no exercise of bias in

assessing. Whereas a subjective assessment, allows for managers to pay attention

to tasks and objectives which are less operational and quantifiable, but at the

same time, of great importance (Gupta and Govindarajan 1986).

Martinez and Jarillo (1989) have thoroughly studied control mechanisms through

an exhaustive literature review finding that those mechanisms used by

Multinationals have evolved over time from focusing on the more formal and

structural tools initially to an appreciation of the subtler and informal forms of

coordination. They have argued that, in the early years, practically all studies

centred on the formal mechanisms of coordination such as departmentalization orgrouping of organizational units, centralization, formalization, standardization as

well as output and behaviour control. Then, from the 1980s onwards research

increasingly started dealing with informal, subtler mechanisms such as

socialization, acculturation and informal communications. From a contingency

perspective both authors argue that changes in the internationally competitive

environments forced strategic adaptations and adequate internal differentiation

by Multinational Corporations and hence the described evolution in theory wasdriven by an occurred evolution in practice Martinez and Jarillo (1989). Werner

(2002) points out that type and degree of control is, inter alia, related to and

moderated by the role played by subsidiary, the level of interdependence, degree

of ownership or MNC nationality for instance.

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E. Theories

Before directing particular attention to the theoretical perspectives applied in the

present study, a brief operationalization of the term theory is given below. A

theory is 'an ordered set of assertions about a generic behaviour or structure

assumed to hold throughout a significantly broad range of specific instances'

(Sutherland, 1975). According to Whetten (1989), and tied to its necessary

components, a theory must contain the following elements (i) a set of factors (i.e.

variables, constructs and concepts; relevant question: what?), (ii) a set ofinternally consistent relationships of variables (i.e. introduction of causality;

relevant question: how?), and (iii) dynamics that justify the selection of factors

and proposed causal relationships (i.e. constitution of theory's assumptions:

why?). He further comments that, while these three elements together form the

essential ingredients of a simple theory, namely description and explanation, the

rather temporal and contextual questions of who? where? when? constitute the

range of a theory (Whetten, 1989). While data describes which empirical patterns

are observed, theory explains why these empirical patterns are observed (Sutton

and Staw, 1995).

Concordantly with Weick (1995) the author emphasizes that a good theory is the

result of socially constructed and cooperative development process.

1. Agency Characteristics

Agency theory provides theoretical underpinnings for various research efforts.

Whenever the completion of a task within a hierarchical relationship necessitates

the delegation of authority, which is actually central to the structure of any

multiperson business organization, agency analyses become useful (Jacobides &

Croson, 2001). In such a situation, the principal engages one or more agents to

perform some services on his behalf and hence delegates some decision-making

authority towards the agents. Agency problems occur due to an incongruence of

goals, an asymmetry of information and a diverging attitude towards risk.

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However, this has to be accompanied by a particular model of man, which has

been neoclassically derived. The idea of homo economicus who isopportunistic, individualistic and mainly self-serving (Donaldson & Davis,

1991). Such an economic view of utility maximization and own expenditure

minimization causes agency problems such as moral hazards (attempt to exert

less effort) and adverse selection (refers to the mispresentation of an agent's

abilities).

According to agency theory, the principal will generally attempt to control agents

in order to minimize the costs of the agency relationship. Agency costs refer to

the expenditures by the principal to monitor the agent, the bonding expenditures

by the agent and the residual loss, defined as the experienced reduction in

welfare of the principal (Jensen & Meckling, 1976). Within this domain,

contracts are considered to be the prime governing mechanisms to limit the

agents self-serving behaviour. Agency theory, in particular the principal-agent

research, is about determining the most efficient contract alternative, givencertain assumptions about people, organization and information in a particular

situation (Eisenhardt, 1989a).

Applied to the particular context of Multinational organisations, the

Headquarters-Subsidiary relationship by all means, has a principal - agent (Roth

& ODonnell, 1996) or principal - multi agents structure. In this given context,

agency theory highlights the principal-agent relationship between the parent

company acting as a principal and the subsidiary acting as an agent. The design

of control now plays an important role while organizations expand and

internationalise, particularly, as it serves as an essential integration function in

MNCs. Increasing complexity and differentiation of structures, as side effects of

increasing degrees of internationalisation of Multinationals, generate a crucial

need to monitor and coordinate activities (Geringer & Hebert, 1988), as

Headquarters do have to ensure that the various activities originating and

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executed in its foreign subunits are compatibly coordinated and support the

commonly shared objectives of the overall organisation (Egelhoff, 1984).

While operating the strategic objectives and interests (especially in culturally

distant and different contexts), management practices or types of control may

diverge and might not be salient for the principal at the Headquarters (Yan, Zhu

& Hall, 2002). According to Holmstrom, the more autonomy the agent enjoys,

the greater the information the agent possesses, the greater the specialized

knowledge required to perform the task and subsequently the greater the chances

for the occurrence of moral hazard and hidden information (Holmstrom, 1979).

This will possibly result in higher risks and uncertainties and therewith in higher

agency costs (Davis, Schoorman & Donaldson, 1997). In such cases, agency

theory traditionally suggests governing contracts like behaviour control, culture

control or output control for monitoring agents (Ekanayake, 2004).

2. Stewardship Characteristics

Assumptions made in agency theory, particularly about individualistic and self-

serving utility maximizers might not hold for all managers. Hence, newer, critical

writings posit that an additional theory might be needed to explain principal -

manager or Headquarters - Subsidiary relationships.

Stewardship theory, which is more a psychological and sociological approach to

governance, takes up an alternative perspective. In contrast to the economic

approach of agency theory, stewardship theory argues that managers are not

opportunistic, self-serving agents but rather good stewards of a company, who

work pro-organizationally and diligently, as well as behave in a collective

manner (Donaldson, 1990). Therefore, firstly, as can be seen from the

aforementioned behavioural premises, stewardship theory applies a distinct

model of man. Secondly, when a principal engages a manager to perform certain

tasks on his behalf, the situational assumption underlying the delegation of

authority is one that is characterized by aligned interests between steward and

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principal, rather than by diverging goals and asymmetric information (Davis,

Schoorman and Donaldson, 1997). Stewards place a higher value to or have ahigher utility respectively on cooperative and pro-organisational behaviour.

Proponents of stewardship theory argue that in trade-off situations, stewards are

believed to work towards the overall organisations interest, and by doing so they

will simultaneously meet personal needs. Further, if performance variations arise,

then these are mainly caused by structural or situational differences in which the

steward is located rather than by the steward himself. It is these structural or

corporate characteristics that determine the facilitation of effective actions

(Donaldson and Davis, 1991).

Analogue to agency theory, stewardship theory is grounded in control as well.

However, in contrast to agency approaches, it posits empowering governance

structures and recommends control to be rather centralised with managers

(Dalton et. al., 1999). It exceedingly considers structures that facilitate and

empower stewards (Davis, Schoorman and Donaldson, 1997) to be far more

appropriate, further arguing that stewards' autonomy should be deliberately

increased. Specifically, with respect to Top Management level executives such as

the CEOs, for instance, stewardship theorists argue that they should be given

highest authority and discretion that will ultimately help to attain superior

performance. The rationale behind such kind of 'involvement oriented' (Lawler

1986) approaches is that challenges and responsibility will develop self-

regulatory behaviour and make stewards control their own behaviour. Too much

control imposed on stewards may not only lower their motivation but also - if a

manager rather prefers a stewardship over an agency relationship - can possibly

become counterproductive.

Both theories seem to be partially competing, but moreover it seems possible that

each of these theoretical approaches has validity in its own domain. Donaldson

(1990) somewhat argues, that stewardship theory may possibly prove appropriate

when coalition between principals and stewards persists, but if the same coalition

is called into question, agency theory might prove better. Interestingly, through

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his form of argumentation for conditional appropriateness, he adds a dynamic

component into the organisational economics and management theory -discussion.

III. Hypotheses

For recapitulation, Figure 3 exemplarily shows a set of structural, environmental

and control variables derived from theory to graphically add order to the

underlying conceptualisation of this research. The relevant set of factors for the

present dissertation, which have been extensively highlighted in the preceding

sections and repeatedly included in Figure 3, are based on an array of causal

assumptions between the variables, now transformed into propositional

arguments. The same will be further operationalised and empirically tested

hereinafter.

Environment

Control

Degree

Type

Multinational Corporation

HQ - level:

- Nationality

- Firm Size- Degree of Involvement

- Degree of Internationalisation

- Level of Interdependence

etc.

SC - level:

- Subsidiary Role

- Subsidiray Age

- Tenure of Subsidiary President

- Subsidiary Relative Importance

- Subsidiary Autonomy

- Entry Mode

- Task / Decision Characteristics

etc.

PC & HC - level:

- Environmental Uncertainty

- Outcome Uncertainty

- Geographical & Cultural Distance

etc.

Behaviour, Bureaucratic,

Output, Culture Control

Incentive Compensation etc.

Low, Moderate, High

etc.

Environment

Control

Degree

Type

Multinational Corporation

HQ - level:

- Nationality

- Firm Size- Degree of Involvement

- Degree of Internationalisation

- Level of Interdependence

etc.

SC - level:

- Subsidiary Role

- Subsidiray Age

- Tenure of Subsidiary President

- Subsidiary Relative Importance

- Subsidiary Autonomy

- Entry Mode

- Task / Decision Characteristics

etc.

PC & HC - level:

- Environmental Uncertainty

- Outcome Uncertainty

- Geographical & Cultural Distance

etc.

Behaviour, Bureaucratic,

Output, Culture Control

Incentive Compensation etc.

Low, Moderate, High

etc.

Environment

Control

Degree

Type

Multinational Corporation

HQ - level:

- Nationality

- Firm Size- Degree of Involvement