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Weekly UpdatesEXECUTIVE SUMMARY
There has been a great deal of interest by researchers in understanding the issue of control of subsidiaries in a multinational network. The debate has been between using high control or centralization versus low control or decentralization when examining the relationship between head office and subsidiaries. The conceptual as wall as the empirical research has been contradictory. This is because the relationship between control and strategy is assumed to be a linear one. In this research, we reconceptualize the control-strategy relationship to be a curvilinear one. We find support for a curvilinear or quadratic relationship between control and strategy that helps to reconcile the contradictions in earlier research in this area. We also find support for two distinct and orthogonal components of control--an "overall" or strategic level of control and a second operational or "functional" level of control.
Keywords: international control, multinational network, head office, subsidiary, curvilinear relationship
INTRODUCTION
An important area of research is examining the relationship between control and strategy in the context of international business. This relationship, however, is quite complex as research findings have been contradictory. In the complex world of international business where there is a constant flow of technology, financial resources, creative ideas, and people, the nature of control between head office and subsidiary cannot be explained in simple centralization versus decentralization terms. In an insightful article, Heenan (1991) discussed the notion of diffused power and suggested that there are significant global changes in the direction of decentralization and demassing of power. According to Heenan (1991), conditions have been created which encourage companies to radiate power away from head offices to the operating companies, and to recast the traditional relationship of head office and subsidiaries in terms of a partnership. Understanding the nature of control, and its association with international strategy, is an area that has had numerous contributions (Anderson & Gatignon, 1986; Geringer & Hebert, 1989; Hill, Hwang & Kim, 1990; Laroche, Kirpalani, & Darmon, 1999; Zekos, 2003) but there is relatively limited empirical treatment of this important relationship. The work of scholars has been largely normative in suggesting what ought to be the relationship between control and strategy, but there is, as yet, limited empirical work regarding what is the relationship between these two constructs.
There have been calls for developing a new approach to understanding international management in theory and in practice (Moore, 2006). Nowhere is this more salient than in understanding the complex nature of the relationship between the multinational head office and its subsidiaries. As mentioned in different parts of the paper, there is the need to develop a complex mechanism of diffused power that is characterized by decentralization and demassing (Keenan, 1991). In such an environment, domination by the head office and resistance by the subsidiary is replaced by a system of dynamic negotiation between different groups with different strategies (Moore, 2006).
THE CONTEXT OF CONTROL AND STRATEGY
Beyond the reasons for the nodes of a multinational network to be compliant, is the need for the network to be purposive and cooperative. It is the need for an organizational network to move beyond perfunctory compliance to consummate cooperation (Ghoshal & Moran, 1996). A purposive and cooperative multinational is one where knowledge sharing can be viewed as an organizational innovation that has the potential to generate new ideas and develop new business opportunities (Lin, 2006). It is only through a head office-subsidiary relationship that is free of domination (by the head office) and resistance Coy the subsidiaries), and is instead characterized by collaboration, teamwork, and cooperation where trust can develop. A shared sense in jointly controlling subsidiaries and executing international strategies is likely to engender trust (Zaheer & Zabeer, 2006). Trust, in turn, is closely associated with perceptions of innovation and knowledge sharing (Lin, 2006).
In today's highly competitive environment, the ability to generate trust and various downstream factors (like shared control, innovation, knowledge sharing, cooperation, and collaboration) constitute important elements of competitive advantage. The international business literature has advocated the role learning and innovation play in determining multinational and subsidiary performance (Venaik, Midgley, & Devinney, 2005). There is some evidence that intense control hinders the development of trust (Li, Zhon, Lam, & Tse, 2006). It is through a process of sharing, networking, and inter-unit learning that improved performance can take place (Venaik et al., 2005).
In our examination of control and strategy, control refers to structural processes and arrangements that have been put in place by an organization to manage its international operations. Control or structural arrangements to manage operations typically include reporting relationships, locus of decision-making, appointments of key personnel, control over budgets and resources, and autonomy over operations. Control is part of organization structure and in the discussion that follows the terms control and structure are used interchangeably. Strategy, on the other hand, essentially covers product- market issues that include marketing decisions, cost control, standardization, market responsiveness, customer service, purchasing, manufacturing, and promotion.
We take a contingency-like approach in developing a framework that illustrates the interplay of control and strategy in international business. Contingency means that one thing depends upon other things, and for organizations to be effective there must be a "goodness of fit" (Daft, 1995, p. 24). In this respect, our approach follows Pennings' (1992) suggestion that there should be "fit" between a firm's strategies and structures, and with the conditions in the environment. Researchers who adopt a contingency perspective accept the organization status quo as given, and simply search and test for regularities in order to predict and control the organization toward greater efficiency and performance (Daft, 1995).
We argue that the relationship between head office and subsidiary in controlling international operations cannot be easily understood in terms of simple centralization and decentralization. The extant literature suggests a direct relationship between the following of a global strategy and exercising control over international operations (Doz & Prahalad, 1986; Hill et al., 1990; Porter, 1986). This means that those firms following a strategy of global integration would prefer to have high or centralized control over their subsidiaries. In addition, the literature also suggests that firms that follow a multidomestic or multifocal strategy are likely to prefer decentralized control between head office and subsidiaries (Anderson and Gatignon, 1986), indicating subsidiary autonomy in decision-making.
THEORY DEVELOPMENT AND HYPOTHESES
Dimensions of Control
As mentioned earlier, control cannot be easily understood in simple centralization/decentralization terms, and that the actual relationship is likely to be a lot more complex. International control between head office and subsidiary covers many areas including formation of the board of directors, formal agreements, key appointments, reporting relationships, and a variety of informal mechanisms (Geringer & Hebert, 1989; Schaan, 1983). International control is a complex process of coordinating different functions in a multinational network (Kim, Park, & Prescott, 2002). Further, control itself is unlikely to be a monolithic phenomenon but likely to have distinct dimensions. For example, Geringer and Hebert (1989) have identified different constituent dimensions of control. An essential aspect of control is to do with head office approval for certain actions undertaken by the subsidiary including approval for appointment of unit heads, plans and budgets, major projects and investments, and new products and new markets (Geringer and Hebert, 1989). Child (2002) has also suggested and empirically investigated the existence of two levels of control in joint ventures, namely strategic control and operational control. In Child's (2002) research, strategic control comprised of strategic priorities and investment policies, while operational control addressed issues of product pricing, sales and distribution, purchasing, production, and quality control.
It would be consistent and in line with Child's (2002) approach to argue that control is exercised at least along two dimensions--one that is a more strategic or "overall" or level of control, and the other is a more operational or "functional" level of control. In other words, the head office and its subsidiaries share control along different dimensions in managing the multinational network. Consequently, we hypothesize the following:
HI: Control of subsidiaries in a multinational network exists along two levels. The first level addresses control issues at an "overall" or strategic level. The second level addresses control issues at a more operational or "functional" level
Control and Strategy
Control. The next area of interest to us is the relationship between international control and strategy. The literature on control is still being developed and there is an absence of agreement among scholars in this area. While substantial agreement exists that the attainment of a firm's objectives over the long-terra is contingent on its ability to implement a strategy that exploits its distinctive competencies along one or several critical dimensions of corporate activity (Anderson & Gatignen, 1986; Stopford & Wells, 1972), there is less agreement about the form and nature of international control (Giglioni & Bedeian, 1974; Miner, 1982).
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