This paper discusses the internal patterns of competence building in the multinational enterprise (MNE), with a focus on the creation of capabilities in its foreign subsidiaries. We present a new framework to synthesise ten types of MNE-subsidiary linkages leading to capability development. We find that several of the ten capability development processes are associated with subsidiary specific advantages (SSAs). We discuss the process of SSA development within the organizational structure of the MNE when it is a differentiated network of dispersed operations.
Key words: subsidiary specific advantage; subsidiary capability; location-bound firm-specific advantage.
INTRODUCTION
In this paper we reexamine the role of foreign subsidiaries in the multinational enterprise (MNE). As the firm is the unit of analysis, the creation and appropriation of rents depends upon effective resource deployments within the MNE, an issue discussed in this paper’s first section. The second section focuses on the generic resource deployment processes which have been documented in the recent academic literature on MNE growth. More specifically, we synthesise the ten possible patterns of MNE-subsidiary capability development processes that have been identified in the literature.
The third section explores three of these processes in more depth, namely those that rely entirely on subsidiaries as a source of firm specific advantages (FSAs). It is shown that these FSAs can be more usefully designated as subsidiary specific advantages (SSAs). The framework developed reconfirms the perspective of the MNE as a differentiated network of dispersed operations, with a configuration of competencies and capabilities that cannot be controlled fully through hierarchical decisions about foreign direct investment (FDI) taken by corporate headquarters. We explore how SSAs are linked to the more conventional FSAs of the overall MNE. Finally, the implications suggest the need to adapt current prevailing views on MNE development patterns.
The MNE is defined as a firm with value added activities in at least two countries. It is able to achieve a satisfactory economic performance only if it can build on some type of firm specific advantage (FSA) that, at the simplest level, is non-location bound (NLB), i.e. easily transferable across borders as an intermediate product. A NLB-FSA can take two main forms. First, it may reflect a functional, production-related proprietary asset, typically technological, manufacturing or marketing knowhow. Second, it may refer to an organisational capability to efficiently co-ordinate and control the MNE’s asset base, Rugman (1981), Dunning and Rugman (1985) and Dunning (1988). The FSA-concept thus covers a very broad set of unique company strengths (competencies and capabilities) which have been analysed and classified in much more detail by scholars espousing a resource based view (RBV) of the firm. Foss (1997) presents an overview of the RBV, albeit from a domestic perspective only. The unique perspective brought by researchers studying the MNE is, of course, their focus on the international, intra-firm FSA creation and diffusion issue.
The importance of FSA-transfer to explain MNE success has been widely researched for four decades, beginning with the seminal works of Dunning (1958), Hymer (1960, published 1976) and Vernon (1966). One of the most detailed descriptions of the significance of internal FSA-transfer in MNEs can be found in Rugman (1981). This work, as well as much of the earlier mainstream transaction cost based literature of the MNE, for example McManus (1972), Buckley and Casson (1976), Magee (1977), Caves (1982), and Hennart (1982) focused on the need to avoid FSA (and rent) dissipation, when penetrating foreign markets.
More specifically, this literature emphasised the need to internalise external markets in cases where contracts between the MNE and third parties in foreign markets (e.g. potential licencees of MNE knowhow, suppliers of inputs, distributors of outputs, foreign agents) would be inefficient in the sense that they would reduce the MNE’s performance (profits, market share, etc.) as compared to the situation whereby subsidiaries would be established to exploit the MNE’s FSAs. Hence, the internalisation perspective was useful in explaining the transformation of domestic firms into MNEs. The conventional internalisation view on MNE-functioning has a useful, but stylised, explanation of many FDI flows, especially those that are related to horizontal integration, although Dunning (1993), synthesising most of the relevant literature, also demonstrated its relevance for several other types of MNE-expansion.
However, in terms of parent-subsidiary relationships, conventional internalisation theory suffers from five main weaknesses. First, it was usually assumed that FSAs in the form of intangible, production related assets can relatively easily be transferred across borders internally without too much attention to adaptation or codification problems. A notable exception is Teece (1976, 1977). Second, in spite of the recognition of the importance of time associated with international knowhow diffusion processes, the approach lacked a dynamic component in terms of learning within the organisational structure. In this context, the emphasis was on predicting outcomes that would prevail in an equilibrium situation, with relatively little attention to the actual process of FSA generation. Third, little attention was devoted to managerial entrepreneurship, in terms of local subsidiary level initiatives that could contribute to new FSA development and exploitation. Fourth, the MNE’s internal functioning was described in a very stylised way, without much recognition of the impact of the credibility, experience and reputation of individuals and groups within the organisation. Fifth, given the elements above, perhaps too much emphasis was put on both the importance of cost optimisation and the danger of FSA dissipation, rather than capability creation.
In this context, the dominating FDI pattern was one whereby key NLB-FSAs needed to be transferred from the home country centre to host country subsidiaries, and where subsidiary roles were determined by the parent company. In contrast, the past decade has witnessed increased attention to several other FSA development and diffusion patterns associated with FDI, as described in the next section.
In parallel with the further development of the internalisation framework and its integration into what has now become the dominating, mainstream international business theory, namely the eclectic paradigm, Dunning, (1981, 1988, 1993), much insightful academic work was done on the MNE’s internal functioning during the 1970s and 1980s. Most of this work was mainly driven by empirical observations of the evolution of subsidiary roles. This research sometimes led to useful classifications of such roles, without, however, an attempt to develop an integrated conceptual basis for the analysis of knowledge creation and diffusion processes in MNEs, e.g., Bartlett (1986), Franko (1978), Hedlund (1981, 1986), Hood and Young (1983), Hulbert and Brandt (1980), Jarillo and Martinez, (1990) Rugman and Bennett (1982), Rugman and Douglas (1986), Stopford and Wells (1972), White and Poynter (1984) and others. Some of this work, such as White and Poynter (1984), was particularly interesting because of its departure from the three (often implicit) assumptions on which most of the prior mainstream MNE research had been built, Birkinshaw (1997). First, the evaluation of subsidiary roles and capabilities from a mere corporate ‘portfolio analysis’ perspective. Second, the ‘simple allocation’ of roles and capabilities to subsidiaries by corporate headquarters. Third, the enactment of coordination and control by corporate headquarters through the design of an appropriate ‘structural context’.
The 1990s were then characterised by a further elaboration of sophisticated subsidiary role classifications with a strong focus on subsidiary management. Birkinshaw and Hood (1998a) and Taggart (1998) are representative examples of this work. In the next section, we build upon this work, without assuming, however, that each subsidiary performs a single, well-defined role within the MNE. Instead, we attempt to identify patterns of competence building in MNEs, whereby a single subsidiary may be associated with several of these patterns simultaneously.
In Figure 1, ten patterns of FSA development and diffusion in the MNE are presented within a new synthetic framework. Each of these patterns has been amply documented in the academic literature, both conceptually and empirically. Two determinants are important for our framework. First, an FSA may be developed internally from three possible sources: a home country operation, a host country operation or an internal network whereby operations in various countries are involved. Second, the generic FSA type is critical, with a distinction being made between non location-bound (NLB) and location-bound (LB) FSAs. The former are defined as FSAs that can be exploited globally, and lead to benefits of scale, scope or exploitation of national differences. In the context of FDI, the NLB-FSAs can be transferred abroad at low marginal costs and used effectively in foreign operations without substantial adaptation. In contrast, location-bound FSAs can be defined as FSAs that benefit a company only in a particular location (or set of locations), and lead to benefits of national responsiveness. In the context of FDI, these LB-FSAs cannot easily be transferred and require significant adaptation in order to be used in other locations. This distinction between NLB-FSAs and LB-FSAs as a resource based interpretation of Bartlett and Ghoshal’s (1989) work was developed by Rugman and Verbeke (1992, 1993, 1998a, 1998b).
Pattern I: a NLB-FSA is created in the home base and is subsequently diffused across borders to the subsidiaries as an intermediate product or marketed internationally, embodied in final products. This is the conventional pattern, as described in the economics literature and most international business textbooks, e.g., Dunning (1993). It is consistent with Vernon’s (1966) product life cycle approach to FDI. It also reflects the dominating patterns of FSA-development found in so-called ‘international’ and ‘global’ firms, according to the Bartlett and Ghoshal (1989) classification of MNE managerial mentalities.
Pattern II: a LB-FSA is developed in the home base and is subsequently transformed into a NLB-FSA in the home country to again allow diffusion to foreign operations and markets. This approach builds upon the assumption that competencies and capabilities are usually developed first in a home based cluster for the domestic market and only later on become the source of competitive advantage abroad because of high productivity achieved in the domestic diamond as compared to foreign diamonds, Porter (1990).
Pattern III: a NLB-FSA is developed in the home base, but its diffusion to foreign subsidiaries is accompanied by the creation of LB-FSAs in the various host country operations. The FSA transferred could be viewed as a bundle of value creating elements, whereby the substitution of a few elements or the addition of new elements may increase the FSA’s rent generating potential. The necessity to adopt this pattern in many industries ("global thinking, local acting") has led to a large academic literature on the requirement for ethnocentric firms to become more nationally responsive, e.g., Bartlett (1986).
Pattern IV: LB-FSAs are developed in each host country operation and their exploitation is confined to the specific host country concerned. This pattern describes the dominant logic in a typical ‘polycentric’ MNE, (Perlmutter, 1969) or the ‘multi-national’ mindset (Bartlett and Ghoshal, 1989) whereby each subsidiary develops its own competencies and capabilities, usually confined to the host country in which they are created. Important managerial problems may arise when forces of globalisation impose the requirement to supplement these LB-FSAs with central co-ordination and control systems, i.e. NLB-FSAs in the organisational area, which may be rejected by the subsidiary managers, Prahalad and Doz (1981).
Pattern V: NLB-FSAs are generated autonomously in host country operations and then either diffused to the other MNE affiliates or directly embodied in internationally marketed products. This pattern reflects a subsidiary autonomously (without explicit ex ante parent approval) engaging in ‘global market initiatives’ that should typically lead to global scale efficiencies and higher local value added. Birkinshaw (1997) found that this pattern is facilitated by ‘high autonomy, a high level of proven resources and a low level of parent-subsidiary communication’. He also suggested that, ultimately, global market initiatives might lead to ‘the transfer of proprietary technology and other capabilities within the corporate network’. Within the ‘transnational solution’ context of Bartlett and Ghoshal (1989), this type of subsidiary would fit, from a corporate perspective, with the behaviour expected from the ‘strategic leaders’ inside the company.
Pattern VI: NLB-FSAs are generated in host country operations but closely linked to home base decisions or guidelines (e.g. subsidiary charter, granting of new subsidiary role as a result of parent driven restructuring, or an internal market opportunity) and subsequently diffused internationally to other MNE affiliates or directly embodied in internationally marketed products. This pattern is reflected in Birkinshaw’s (1997) ‘internal market initiatives’ (context of rationalisation of MNE activities) and ‘hybrid initiatives’ (context of site selection for new activities). With the latter, the subsidiary seeks to attract a global, internal investment which has received corporate support. In either case, substantial reflection must occur at the parent company level before explicitly approving the location of the relevant value creating activity in the subsidiary. Hence, in spite of relatively high proven resources at the subsidiary level, autonomy is low and substantial parent-subsidiary communication prevails.
Pattern VII: LB-FSAs are created in foreign subsidiary operations and transformed by the subsidiary itself into NLB-FSAs. The subsequent international diffusion or exploitation of these FSAs usually requires home base approval. This pattern has been called ‘local market initiative driven’ by Birkinshaw (1997) as it is first inspired by local, host country needs and subsequently exploited globally by the entire MNE. The intended, worldwide internal learning process typically requires parent company approval and support. It is important to observe, however, that the initial, entrepreneurial process at the subsidiary level is associated with high autonomy and low parent-subsidiary communication. One of the main differences with Pattern VI is the absence of a charter or explicit corporate fiat to engage subsidiary resources in these initiatives.
Pattern VIII: NLB-FSAs are created jointly by several MNE subsidiaries located in various countries and then typically exploited throughout the network. One example, increasingly found in global service firms is the formation of ‘virtual centres of excellence’, aimed to leverage the firm’s leading edge competencies which may be geographically dispersed but can relatively easily be codified and shared among various sub-units in the MNE, Moore and Birkinshaw (1998).
Pattern IX: NLB-FSAs are again jointly created by the efforts of a network of MNE subsidiaries, but their exploitation is associated with some LB additions to maximise their earning potential in specific countries. This pattern is typical for firms adopting regional (e.g. triad based) strategies. They may want to create and diffuse ‘regional best practices’, resulting from a network process similar to Pattern VIII, but some adaptation may still be required in each county. Here, the different units operating in a region may then be instrumental in creating the required, complementary LB-FSAs, at a sub-regional level. One example of such a pattern was described by Malnight (1996) in a detailed analysis of Citibank’s evolution from a decentralised to a network-based MNE, especially after 1991.
Pattern X: LB-FSAs are created by a network of MNE operations, usually to serve a single, large national market but are subsequently transformed into NLB-FSAs to exploit their regional or global earning potential, typically under the guidance of the home base. This pattern would include the development of ‘focused centres of excellence’, formed by individuals or sub-units located in various countries but emphasising knowledge creation for a specific project, typically located in one country. At a ‘critical juncture’ the parent company then recognises the centre of excellence and provides resources for the knowledge dissemination to the global network and thus for the transformation of the LB-FSA into a NLB one, Moore and Birkinshaw (1998).
These ten patterns of subsidiary competence-building do not necessarily constitute an exhaustive set of FSA-creation and diffusion processes. Other, and perhaps more complex, combinations may possibly occur in practice. However, these ten well documented patterns confirm the need for a framework to handle the multidimensional and complex nature of FSA development and diffusion processes, especially if several patterns occur simultaneously within a single subsidiary, and change over time.
The next section will elaborate on the creation of FSAs in host country operations and the specific problems associated with their diffusion within the MNE network. We will focus on Patterns V, VI and VII as described by Birkinshaw (1997) to the extent that they are associated with individual subsidiaries creating and retaining a number of idiosyncratic resources and capabilities which are not diffused throughout the MNE, i.e., they are sticky and cannot be simply absorbed by other MNE operations. In contrast, the network approach, (Patterns VIII, IX and X) when successful, is usually associated with easier diffusion.
Ultimately, firms differ in their ability to accumulate competencies and capabilities which are rare, valuable, non-substitutable and difficult to imitate, Rumelt (1984), Wernerfelt (1984), Dierickx and Cool (1989), Barney (1991), Connor (1991). When valuable competencies and capabilities exist, one of the expected roles of top management is to make sure that this knowledge can be diffused throughout the company, so that economies of scope are gained across markets and products, Hamel and Prahalad (1994). In other words, given that the firm is the unit of analysis, the focus is largely on the creation of internal, firm-level competencies and capabilities, Teece, Pisano and Shuen (1997). However, a substantial literature now exists which demonstrates the role of idiosyncratic interfirm linkages, which may lead to systemic ‘relational rents’ and competitive advantages. Rugman and D’Cruz (1999) offer a synthesis and a description of one major type of interorganisational rent-generating process, namely the flagship-based multinational network. At the opposite side of the spectrum, an equally large and diverse literature observes an uneven internal distribution of knowledge among MNE affiliates, Birkinshaw (1996, 1997), Birkinshaw and Hood (1998a, 1998b), Birkinshaw, Hood and Jonsson (1998).
Birkinshaw and Hood (1998b) have attempted to model the ‘generic processes’ of subsidiary evolution. The three competence and capability development and diffusion patterns revolving around subsidiaries (as identified in this paper) are fully consistent with their work, although we confine ourselves here to capability enhancement and do not contemplate capability depletion issues. The authors identify three interacting drivers of subsidiary evolution and thereby capability creation: head office assignment, subsidiary choice and local environment determinism. However, in their analysis, no distinction is made between NLB-FSA development (as discussed in the previous section), whereby knowledge can ultimately be diffused throughout the company and the creation of subsidiary specific advantage (SSA). In the latter case, the competencies and capabilities developed can lead to value creation across borders, e.g., through world product mandates, but the knowledge base itself is characterised by mobility barriers, (i.e., isolating mechanisms), that make full absorption difficult throughout the MNE. In other words, the SSA, when embodied in products or services leads to international rent creation but, in the form of an intermediate product, such an SSA is not fully transferable internally.
This characteristic of SSAs implies that the MNE’s knowledge base consists of more than just NLB-FSAs (easily diffused internally and with the benefits of integration) and LB-FSAs (difficult to diffuse internally and with the benefits of national responsiveness). SSAs do not allow a subsidiary’s competences and capabilities to be nationally responsive (the conventional LB-FSAs associated with pattern IV, which have been widely documented in the international business literature). Instead, SSAs reflect the competencies and capabilities that lead to benefits of integration (patterns V, VI and VIII) without, however, the bundle of knowledge itself being easily diffused internally.
Building upon the joint impact of the three drivers mentioned above, Birkinshaw and Hood’s (1998b) work implicitly suggests that the SSA development process is contingent upon four determinants:
First, the relevant subsidiary competencies and capabilities must incorporate knowledge that is tacit (difficult to codify), fundamentally context specific (locally embedded and (path) dependent on the subsidiary’s earlier technological and organisational trajectories), and dispersed across several individuals within the subsidiary (embedded in teams). Then they are difficult to diffuse internally, due to mobility barriers, Nonaka and Takeuchi (1995), Nelson and Winter (1982), Weick and Roberts (1993).
Second, sustainable SSAs must reflect the existence of a capability gap with the other MNE affiliates. In this context, Birkinshaw, Hood and Jonsson (1998) have coined the term ‘specialised resources’, defined as superior to those elsewhere in the MNE. Here, the contestability of this ‘gap’ and the associated potential competition from other MNE affiliates may fulfil a role similar to competition by external parties at the firm level. It is instrumental to SSA regeneration efforts by subsidiary management.
Third, SSAs can only be sustained in the long run, and will only be supported by the parent company subject to the perceived absence of negative externalities on other MNE operations. One of these externalities is obviously the danger of subsidiary imprisoned resources, the benefit of which would be withheld from the other affiliates.
Fourth, synergies must exist between the rent creation potential of MNE level NLB-FSAs and the SSAs at the affiliate level, i.e. there must be ‘interest interdependence’.
The third and fourth elements are strongly related to the concept of ‘recognition’ by parent company management. Birkinshaw, Hood and Jonsson (1998) argue that ‘recognition refers to the widespread understanding and acceptance of the subsidiary’s specialised resources in other parts of the MNE’. This implies that the potential for ‘reciprocal leveraging’ must exist for SSAs to be nurtured and sustained in the MNE. MNE level FSAs and subsidiary level SSAs must reflect specialised competencies and capabilities, the bundling of which leads to greater performance potential than if they were exploited separately. In other words, bundling increases the distinctiveness, perceived value, non-substitutability, and non-imitability of the firm and subsidiary level competencies and capabilities. The higher the ‘synergy intensity’ the more likely it is that the creation of new SSAs will be stimulated.
The four distinctive characteristics of SSAs are depicted in Figure 2. Pockets of competencies and capabilities within the subsidiary will only become, and be allowed to remain, SSAs, as compared to conventional MNE-wide NLB-FSAs, if the four conditions described above are met simultaneously.
The above perspective does not challenge Birkinshaw and Hood’s (1998b) description of subsidiary evolution patterns. Rather it suggests that their so called ‘generic processes’ (of subsidiary evolution as a function of parent company assigned charter changes and capability changes in the subsidiary) fundamentally reflect, respectively, the parent company’s and the subsidiary’s management appreciation of the four contingent factors described in Figure 2. The ‘parent driven investment’, ‘subsidiary-driven charter extension’ and ‘subsidiary-driven charter reinforcement’ processes largely describe behavioural patterns that result from conducting the fourfold test. Conflict may obviously arise between both views if the subsidiary management focuses exclusively on the first two determinants and parent company management on the last two.
Further work in this area may find the procedural justice concept to be a fruitful avenue for application, Kim and Mauborgne (1991). In this context, procedural justice would mean the "fairness" governing the subsidiary-parent relationship. This can be used to assess how diverging perspectives on the creative tension between NLB-FSAs and SSAs may be reconciled.
Taggart (1997) has developed an insightful framework linking autonomy and procedural justice to evaluate subsidiary strategy. He has argued that, from the perspective of subsidiary management, the ideal situation, at least in a context of strong SSAs, is obviously one of both high autonomy and high procedural justice. This situation is difficult to achieve as it requires the continued investment of scarce resources in ‘social lubrication’ and ‘a wide array of well developed leadership and management skills being deployed at headquarters and affiliate levels’. Furthermore, the danger exists that specific good subsidiary-headquarters relationships may be resented by other subsidiaries, hence reducing the potential of internal network formation. It is interesting to observe that Taggart does not discuss the issue of mobility barriers associated with SSAs, although these may complicate headquarters-subsidiary relationships. He thinks, on the contrary, that headquarters’ induced changes will be easy to manage and that corporate headquarters may simply draw upon this ‘source of well-trained and highly motivated executives for deployment in other parts of the network’.
If, however, high mobility barriers are assumed as a characteristic of SSAs, then procedural justice in decision making becomes a concept that should not only be measured at the subsidiary level (being subject to headquarters’ decisions) but also at the headquarters level (being subject to subsidiary decisions itself). In other words, in the case of SSAs, the identification of truly good working relationships between subsidiary and corporate headquarters can only be assessed on the basis of perceptions by both sets of actors. High procedural justice, as perceived by subsidiary managers alone, may in fact mainly refer to the existence of immobile SSAs forcing the corporate headquarters to systematically give in to any subsidiary demands.
The distinction between a conventional NLB-FSA developed in a subsidiary and a SSA is a subtle but important one for five reasons.
First, an MNE parent company and one of its subsidiaries cannot just decide upon a simple, optimal structural context that would determine all their interactions, because a single subsidiary may be involved in several value creating activities, each of which is associated with a particular bundle of LB FSAs, NLB-FSAs transferred from the parent (or the MNE network), NLB-FSAs created by the subsidiary itself and diffused throughout the MNE and finally SSAs. In other words, SSAs may themselves be differentiated across various value creating activities. This implies that the recent empirical studies on global knowledge creation in MNEs, e.g. Nobel and Birkinshaw (1998), Pearce (1997) and Taggart (1998), which have observed substantial differentiation in subsidiary roles and have attempted to identify generic subsidiary roles in this area, need to be complemented with detailed empirical analysis of FSA and SSA bundles in subsidiaries. These bundles may largely influence which co-ordination processes in the MNE may be most conducive to rent creation.
Second, SSAs result at least partly from interactions with external networks specific to the subsidiary. The question that arises is whether the parent company should stimulate isomorphic flexibility by subsidiaries, Rugman and Verbeke (1995). On the one hand this will facilitate the SSA development process, but on the other it will increase the local embeddedness of the competencies and capabilities created. An alternative is the institutionalisation approach. While the subsidiary may act as the key agent in NLB knowledge creation, attempts are made to reduce the local embeddedness of the knowledge creation process. This is done by focusing on organisation routines that increase the MNE’s overall absorptive capacity to properly assimilate the knowledge created at the subsidiary level. The problem with ‘institutionalisation’ is that a knowledge creation process aimed at reducing local embeddedness may actually reduce the subsidiary’s capability to assimilate and exploit externally available information, Cohen and Levinthal (1989).
Third, the creation of SSAs leads to new challenges regarding the evaluation and rewarding of subsidiary managers. Should the existence of intra-company mobility barriers to knowledge transfers be sanctioned, given the problems created, as compared to the situation whereby subsidiary managers would have attempted to increase the internal knowledge diffusion potential? Or should subsidiary managers be rewarded for creating a ‘specialised’ knowledge base which is unique, thereby making the MNE less vulnerable if competitive pressure would erode its key NLB-FSAs that are diffused throughout the company. Paradoxically, bounded rationality problems in the area of subsidiary performance evaluation by the parent company, and the multinational network as a whole, may become so important when the scope and volume of SSAs in an MNE increase, that the firm may revert to the use of "second best", simple, market based incentives (i.e., financial controls, and non-monetary rewards such as access to additional corporate technology or human resources), Hennart (1993). Here, it is the external market which is ultimately viewed as the best appraiser of the value creating capacity of SSAs and the synergies realised by combining them with FSAs.
This constitutes a sobering thought in an era when influential academic work (Nohria and Ghoshal, 1997) suggests the need to establish an MNE-wide global corporate culture, based primarily on socialisation mechanisms such as interpersonal communication, lateral networking, the creation of shared values, etc. The perhaps unpleasant reality of multinational business is that in a complex, differentiated network, trust results primarily from consistent and coherent, and therefore predictable managerial decision making, on the basis of facts and data which can easily be codified and understood by all in the organisation. The extensive use of socialisation mechanisms may be essential to make people feel good in an MNE, but an MNE characterised by strong SSAs may need to be managed by a few simple, price based co-ordination and control tools which ultimately should measure the customer’s willingness to pay for the MNE’s products and services. In a comparative institutional analysis, the relative costs and benefits of increased socialisation must therefore be carefully weighted against the costs and benefits of alternative co-ordination and control systems.
Fourth, if the relative importance of SSAs in an MNE increases, as compared to NLB-FSAs and LB-FSAs, a situation which appears especially relevant in an era of mega-takeovers (e.g., the takeover of the Belgian Tractebel energy group by the Suez-Lyonnaise des Eaux utility group) and mega-mergers (e.g., the formation of the Daimler-Chrysler group), it may become increasingly difficult to take charters away from particular ‘subsidiaries’ in the MNE. It could be argued that this situation has already been widely documented in the past, e.g. in the seminal Prahalad and Doz (1981) work, but the difference is that here subsidiaries are involved which serve the global market and possess competencies and capabilities which cannot be altered just by changing the subsidiary managers’ ‘cognitive’, ‘strategic’, ‘administrative’ and ‘power’ orientations through a well-designed change process.
Fifth, and this is related to the two previous implications, a substantial body of knowledge now exists, which identifies the so called ‘regional solution’ rather than the ‘transnational solution’ as an organisational form that many MNEs are, or will be, adopting in the near future. The regional solution implies that, within the MNE, both bounded rationality constraints and value creation objectives require dispersing competencies and capabilities among internal, region-based networks, typically in each leg of the triad (E.U., NAFTA countries, Asia). If this perspective is correct – one author has even coined the phrase ‘end of globalization’ (Rugman 1999), to illustrate the tendency toward region-based networks - it implies that a much greater attention will need to be devoted to the relative impact of SSAs associated with high inter-regional mobility barriers.
We have developed the foundations of a new framework to assess patterns of competence building in MNEs. In this framework non location-bound firm-specific advantages (NLB-FSAs) have two key characteristics: (i) they lead to benefits of integration, and (ii) they are relatively easy to diffuse internally. In contrast, location-bound firm-specific advantages (LB-FSAs) have the opposite characteristics: (iii) they lead to the benefits of national responsiveness, and (iv) they are difficult to diffuse internally. The concept of subsidiary-specific advantages (SSAs) developed here leads to a new mixture of characteristics, namely (i) and (iv). In other words, SSAs combine the benefits of integration with difficulty in dispersion of them internally. This SSA case has not been discussed previously in the rapidly growing literature on the management of multinational subsidiaries.
One of the two key elements in the new framework is the implication that perhaps too much attention has been devoted to identify either specific subsidiary roles in an MNE or specific patterns of mandate gains or losses that would lead to such roles. If, in a single subsidiary, several patterns of competence building can be identified, this implies a multidimensional nature of the subsidiary function in the MNE. We identified ten types of possible FSA development and discussed their patterns of competence building within the dispersed network of the MNE. Our synthesis of these ten patterns reflects the contributions of recent literature in the area of parent-subsidiary relationships and the rapid development of this literature.
A second key element is the explicit introduction of the SSA-concept itself. The SSA is distinct from both NLB-FSAs and LB-FSAs. Managers and researchers need to recognize the existence of SSAs. This will lead to a focus on internal knowledge mobility barriers, which may appear to be at odds with the large recent literature on improving internal know-how absorption and diffusion processes, Galunic and Rodan (1998). However, if one starts from the assumption that internal mobility barriers will continue to exist and that, from a normative perspective, this may even increase a firm’s performance, then more research attention should be devoted to the functioning of, e.g., regional networks within MNEs. The increasing importance of SSAs may also reflect an urgent need to recognise the limits of globalization, even from the perspective of the MNEs themselves.
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