Governance costs in foreign direct investments: A MNC headquarters challenge

Abstract

According to transaction cost and internalization theories of multinational enterprises, companies make foreign direct investments (FDI) when the combined costs of operations and governance are lower for FDI than for market or contract based options, such as exports andlicensing. Yet, ex post governance costs remain a conjectural construct, which has evaded empirical scrutiny, and the lack of focus on the implications of these costs constitutes a challenge for management in multinational companies (MNCs). What effects does the ensuing establishment of subsidiaries abroad have in terms of governance costs? What factors drive these costs? We hypothesize that such costs are driven by external contingencies as well as factors that characterize a particular company headquarters-subsidiary relationship. Using survey data from Norwegian MNCs, this study investigates 159 MNC-subsidiary relationships. Overall, our framework is corroborated by the data.

The Corporate Headquarters in the Contemporary Corporation: Advancing a Multimarket Firm Perspective

“…Early studies on the multinational firm suggested that the role of the CHQ depended on the maturity of the international subsidiaries (Rutenberg, 1969), and that a shift towards multinational operations led to changes in the firm's CHQ reporting and control systems (McInnes, 1971). Later research confirmed that several characteristics of a firm's international units affect the CHQ and the CHQ-subsidiary relationships (e.g., Ambos et al, 2010;Birkinshaw & Hood, 2001;Crilly, 2011;Foss et al, 2012;Law et al, 2009;Roth & Nigh, 1992;Takeuchi, Shay, & Li, 2008;Tomassen, Benito, & Lunnan, 2012;Vahlne, Schweizer, & Johanson, 2012), including the international subsidiaries' local networks (Vahlne et al, 2012), local stakeholders (Crilly, 2011), resource dependence, salience to the corporation, managers' nationalities (Martinez & Ricks, 1989), initiatives and autonomy (Ambos et al, 2010), internal and external embeddedness (Ciabuschi, Dellestrand, et al, 2011;Nell & Ambos, 2013), ownership arrangements and choices (Chan & Makino, 2007;Martinez & Ricks, 1989), and expatriate managers' decision-making autonomy (Takeuchi et al, 2008). For example, in a survey of Mexican affiliates of a US-based multinational firm, Martinez and Ricks (1989) find that the CHQ's influence is positively related to the affiliate's dependence on CHQ resources.…”

“…Such surveys have analyzed the multibusiness firm's CHQ performance as perceived by the CHQ executives (Collis et al, 2007); the bargaining, monitoring, information, and bonding costs of governing international subsidiaries as assessed by the senior managers (Tomassen et al, 2012); and the CHQ value added as evaluated by the subsidiary managers (Nell & Ambos, 2013). Nell and Ambos (2013), for example, find that the CHQ's external embeddedness, as perceived by manufacturing subsidiaries' general managers, is positively related to the CHQ value added, because that embeddedness may enhance the CHQ's knowledge and facilitate the building of domain expertise.…”

The Size and Composition of Corporate Headquarters in Multinational Companies: Empirical Evidence

“…In the MNC context, we should expect to see something similar as firms struggle to balance autonomy and local responsiveness with the need for oversight and standardization (Young and Tavares, 2004). Finally, the extent to which a headquarters function influences the activities of operating businesses has been seen as critical to understanding the relationship between MNC headquarters and country subsidiaries (Tomassen et al, 2012). Early approaches to this subject tended to conflate the location of an activity and the locus of decision-making authority, so that a subsidiary would either be allowed to have its own function, such as brand marketing, and be given authority to make decisions, or both would be located at headquarters.…”

What Do We Know About Corporate Headquarters? A Review, Integration, and Research Agenda

“…Common to most of the studies in this area is their focus on examining how distinct characteristics of a firm's international subsidiaries affect (processes in) CHQ-subsidiary relationships (Ambos et al, 2010;Birkinshaw & Hood, 2001;Crilly, 2011;Foss, Foss & Nell, 2012;Law et al, 2009;Roth & Nigh, 1992;Takeuchi et al, 2008;Tomassen, Benito & Lunnan, 2012;Vahlne et al, 2012). While the rich research has substantiated our knowledge on the effective design of CHQ-subsidiary relationship, it has been predominantly focused on questions of control and coordination from a CHQ perspective.…”

“…In addition to examining CHQ's effect on a firm's financial performance, several studies have also considered other performance outcomes, such as the costs and benefits of the CHQ (Collis & Montgomery, 1997;Pettifer, 1998;Rutenberg, 1969;Tomassen et al, 2012), perceived performance measures (Nell & Ambos, 2013), and survival/failure rates (Lange, Boivie & Henderson, 2009;Stubbart, 1982). For example, Collis and Montgomery (1997) summarize prior studies' findings and suggest that the costs of the CHQ range from 0.66 to 0.75 percent of the firm's assets, or about one percent of the revenues.…”