Global Strategy Journal Global Strat. J., 1: 301–316 (2011) Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1111/j.2042-5805.2011.00025.x
A DYNAMIC PERSPECTIVE ON SUBSIDIARY AUTONOMY 25
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BJÖRN AMBOS,1* KAZUHIRO ASAKAWA,2 and TINA C. AMBOS3 1
WU Vienna, Institute for International Business, Vienna, Austria Keio University, Graduate School of Business Administration, Yokohama, Japan 3 Johannes Kepler University Linz, Department for International Management, Linz, Austria 2
Prior investigations treated subsidiary autonomy more or less as a static concept, but the headquarters-subsidiary relationship is likely to evolve and result in changing power positions over time. This article examines the static and dynamic impacts of external/internal embeddedness on the autonomy of overseas R&D subsidiaries. Based on data from 73 overseas R&D subsidiaries of German firms, we show that a dynamic perspective indeed produces counterintuitive results, namely that high internal embeddedness in the past may help laboratories gain higher levels of autonomy in the future, whereas high external embeddedness may lead to lower levels of autonomy in the future. Our results indicate that building trust and linking up with headquarters are important strategies for subsidiaries wishing to be granted autonomy in the future. Copyright © 2011 Strategic Management Society.
INTRODUCTION The coordination and control of geographically distributed subsidiaries has long been a central theme in global strategic management. In particular, the question how knowledge created by subsidiaries that are embedded in local networks can be integrated to the benefit of the whole organization remains a puzzle (Andersson and Forsgren, 1996; Nobel and Birkinshaw, 1998; Doz, Santos, and Williamson, 2001). The ambition to create value at the organizational periphery and at the center often leads to divergent behavior and goals for headquarters and subsidiary managers (Ghoshal and Nohria, 1989; Mudambi and
Keywords: external/internal embeddedness; subsidiary autonomy; social control; international R&D *Correspondence to: Björn Ambos, WU Vienna, Institute for International Business, Augasse 2-6, 1090 Vienna, Austria. E-mail:
[email protected]
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Navarra, 2004). While subsidiaries generally strive for more autonomy, headquarters will seek to maintain control in order to ensure efficiency and strategic alignment in the MNC. As power positions and the need for integration vary over time, the relationship between headquarters and subsidiaries needs to be conceptualized as an evolutionary process (Birkinshaw, Hood, and Jonsson, 1998; Cantwell and Mudambi, 2005; Ambos, Andersson, and Birkinshaw, 2010). During the last years, a vast body of literature has contributed to our understanding of headquarterssubsidiary relationships by identifying contingencies under which headquarters should grant more (or less) autonomy to a specific subsidiary, such as host market importance, the subsidiary’s assigned function, or the capabilities of the unit (cf. Doz and Prahalad 1981; Martinez and Jarillo, 1989; Gupta and Govindarajan, 1991; Nohria and Ghoshal, 1997). It has also been found that headquarters’
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ability to limit autonomy and ensure a certain level of control is often constrained by its lack of power vis-à-vis its subsidiaries (Doz and Prahalad, 1981; Tallman and Koza, 2010). Still, we do not know a great deal about dynamics of headquarterssubsidiary relationships that result in changing levels of subsidiary autonomy. We believe this is a serious limitation in our current understanding of the management of multinational corporations as, in reality, headquarters-subsidiary relationships evolve steadily and are characterized by a continuous bargaining process over power positions in the firm (Ghoshal and Nohria, 1989; Coff, 1999; Mudambi and Navarra, 2004). In this article, we set out to investigate the headquarters-subsidiary dynamics behind subsidiary autonomy, in particular the effects of external and internal embeddedness. The perspective we take is that of a subsidiary interested in maximizing its autonomy over time. While attaining a high level of autonomy may not be the ultimate goal of a subsidiary and while the strategic value of local autonomy may vary depending on the strategic mandate of each subsidiary, we maintain that pursuing high levels of autonomy remains an interest on the part of the subsidiary to preserve power and independence. We acknowledge that are also situations where subsidiaries compromise their autonomy to reap as many resources as possible (as in the case of Centers of Excellence), but the focus of our research is on the issue of subsidiary autonomy.1 Based on resource dependence theory and in line with prior literature (Andersson and Forsgren, 1996; Medcof, 2001; Ambos and Schlegelmilch, 2007), we first develop a theoretical argument that explains a subsidiary’s autonomy at a given time. In the second step, which builds on social exchange theory (Homans, 1961; Blau, 1964) and the logic of repeated games, we posit competing hypotheses about how the different strategies applied by a subsidiary in tn will influence its level of autonomy in the future (tn+1), taking headquarters’ intervention into account. We empirically test our propositions on a sample of international R&D units. R&D lends itself particularly well to this study, as it provides fruitful ground for autonomy/control debates (Asakawa
1 We thank Torben Pedersen for this comment. Theoretically, these two objectives may be related to each other, as seeking for resources and autonomy may not be mutually exclusive. Shedding more light on this issue may provide fruitful ground for further research.
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1996; Granstrand, Hakanson, and Sojlander, 1992, Pearce and Singh, 1992). R&D scientists in overseas subsidiaries need to bridge the ambiguity between science logic and business logic, and they need to be active in external professional networks as well as committed to the firm’s research agenda (Asakawa, 1996; Ambos et al., 2008; Mudambi and Swift, 2009). This duality of belonging makes it difficult for headquarters to grant ‘adequate’ levels of autonomy to the subsidiary. In the same vein, the strategic imperative for maintaining control is aggravated by the need to prevent costly double invention, the leakage of proprietary technology, or a drifting away from a strategic focus (Medcof, 2001; Ambos and Schlegelmilch, 2007). The analyses show that a dynamic perspective indeed produces counterintuitive results, namely that high internal embeddedness in the past may help subsidiaries gain higher levels of autonomy in the future, whereas high external embeddedness may lead to lower levels of autonomy in the future. Our results indicate that building trust and linking up with headquarters are important strategies for subsidiaries wishing to be granted autonomy in the future. This article is organized as follows: in the next section, a set of hypotheses is developed that focuses on the impact of external/internal embeddedness on current and future autonomy. The third section describes the research design, the data collection instrument, and the measurements employed in this study. The fourth section summarizes the results of the empirical tests. In the final section, we discuss our results and their implications for further studies.
THEORETICAL BACKGROUND Toward a dynamic view on subsidiary autonomy The questions of how international units should be controlled and how much subsidiary autonomy is reconcilable with effective management of an MNC have long been central topics in the field of international management (Doz and Prahalad, 1981; Bartlett and Ghoshal, 1989; Gupta and Govindarajan, 1991). On the one hand, headquarters needs to control subsidiary behavior in order to ensure that the activities of subsidiaries are aligned with corporate strategy and to demonstrate to other stakeholders that headquarters’ policies are being enforced (Gates and Egelhoff, 1986; Roth et al., 1991; Global Strat. J., 1: 301–316 (2011) DOI: 10.1111/j.2042-5805.2011.00025.x
A Dynamic Perspective on Subsidiary Autonomy Harzing, 1999). On the other hand, subsidiaries provide access to knowledge and ideas through their linkages with the host country and can add great value to the MNC by engaging in autonomous entrepreneurial behavior (Birkinshaw, 1997; Galunic and Eisenhardt, 1996). While autonomy may be the result of the subsidiary’s structural position in the organization (i.e., granted by headquarters, or entrepreneurially acquired at a certain point in time), in a dynamic setting, headquarters are likely to react to the subsidiary’s efforts and intervene (Ambos et al., 2010). For example, headquarters may reward subsidiaries that are good ‘corporate citizens’ (Bouquet and Birkinshaw, 2008) or try to limit the rising power of ‘autonomous barons’ (Taggart, 1997). Static perspectives constrain our ability to conceptualize this process and account for the divergent views that the two partners often take: the subsidiary’s effort to increase its autonomy and the headquarters’ attempts to curb excess levels of subsidiary autonomy. In part, this neglect of a dynamic view is a result of the cross-sectional nature of most empirical studies. However, an inherent assumption in many studies is that once the proper contingencies are identified, a certain level of autonomy can be set, after which the situation can remain in an ‘equilibrium state.’ This assumption is also prevalent in studies that examine the power balance between headquarters and subsidiaries (Medcof, 2001; Andersson and Forsgren, 1996). As a result, extant literature on strategic autonomy tends to deal with these constructs in a rather static way. Only recently, a few studies have started to probe the evolution of autonomy over time (Asakawa, 2001; Siggelkow and Levinthal, 2003; Cardinal, Sitkin, and Long, 2004; Ambos et al., 2009). Cardinal et al.’s (2004) study on the evolution of control in a domestic moving company, for example, shows that autonomy changes as the firm matures. Similarly, Asakawa (2001) confirms that overseas R&D subsidiaries are often granted autonomy at the expense of information connectivity. Asakawa’s (2001) findings give rise to a theoretical puzzle when confronted with more static findings on the autonomy-control tension within MNCs. While the vast majority of (static) contingency models associate strong internal embeddedness with less autonomy (Ambos and Reitsperger, 2004; Ambos, 2005; Andersson and Forsgren, 1996) and strong external embeddedness with more autonomy (Ambos, 2005; Andersson and Forsgren, 1996), Asakawa’s (2001) findings show that a given state of Copyright © 2011 Strategic Management Society
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connectivity (i.e., internal embeddedness) in period tn may lead to different levels of autonomy in tn+1. The often-quoted case of Philips North America’s decision to source VHS technology from Japan instead of utilizing the technology developed by its Dutch parent and the subsequent buyback of majority shares by headquarters to limit the autonomous moves of its affiliate suggest that similar dynamics may be at work in terms of external relationships (and subsidiary power networks) (Bartlett and Ghoshal, 1990).2 However, so far studies have failed to empirically show dynamics of subsidiary autonomy in a systematic way. The autonomy debate in the context of international R&D In the context of international R&D, these conflicting interests are even more pronounced, as R&D subsidiaries are equipped with mandates for creativity and innovation that often require them to build strong ties with communities outside the MNC, such as scientific epistemic communities, or other stakeholders in the host country. Therefore, the question of how much autonomy a subsidiary should have has preoccupied scholars for more than three decades (DeMeyer and Mizushima, 1989; Medcof, 2001; Ambos and Schlegelmilch, 2007). While subsidiary autonomy has been widely studied by scholars of international management in general (Doz and Prahalad, 1981; Martinez and Jarillo, 1989), the topic has attracted the attention of scholars of international R&D management in an even more distinctive manner, due to the nature of R&D activities which involve conflict in two competing forces. Controlling R&D operations is challenging because this function is constantly affected by the tension between science logic and business logic (Asakawa, 1996; Mudambi and Swift, 2009). Basic research is particularly difficult to control from the center because of the ambiguity regarding the extent to which a particular research project can be leveraged for the use of company at a later point in time. Furthermore, scientists often maintain informal ties with their colleagues outside their firms, so they belong to dual epistemic communities: to the 2 The Philips case nicely illustrates that headquarters’ ability to regain power is not confined by resource dependencies alone (Philips North America controls the largest—by far—market within the organization), but that power and autonomy are also a matter of ownership rights (see Astley and Sachdeva, 1984; Mudambi and Pedersen, 2007).
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companies they work for and to the scientific communities in which they specialize (Westney, 1990). This dual belonging makes it even more difficult for firms to control them (Lam, 2000). The more ‘basic research’ that is included in their tasks, the stronger the scientists’ attachments to their professional communities (Larson, 1977). High levels of embeddedness in professional research communities often contradict the values of employers (Drews, 1989; Kreiner and Schultz, 1993). This gap between the norms and values of the external professional communities and the internal corporations renders the management of R&D units particularly challenging (Asakawa, 1996; Mudambi and Swift, 2009). The more a ‘development element’ becomes salient, the more confusion arises as to the extent to which scientific or commercial values prevail. This is largely because scientists and management belong to different ‘professional guilds’ that subscribe to different belief systems (Mudambi and Swift, 2009). In such unstable value systems, headquarters finds it very hard to identify an optimal level of autonomy to be granted to overseas R&D subsidiaries. As Behrman and Fischer (1980) once pointed out, R&D subsidiaries often feel a subtle tension between supervision and freedom (i.e., supervised freedom) or between participation and centralization (i.e., participative centralization). Subsidiaries tend to acquire valuable resources that augment their power and make them indispensible to the MNC. Therefore, striking an optimal autonomy-control balance is a particular challenge in R&D management, especially given the international context in which overseas R&D operations are physically closer to local external research communities than to distant headquarters, and in which values shared by overseas R&D subsidiaries and headquarters are often divergent (Nohria and Ghoshal, 1994). Success in managing such a tension depends on the effectiveness of management coordination mechanisms, such as boundary-spanning function (Mudambi and Swift, 2009). In order for management to identify appropriate levels of subsidiary autonomy, we need to understand a good deal more about the way the dual belonging influences the amount of subsidiary autonomy. Specifically, what are the effects of external and internal embeddedness on subsidiary autonomy, both in the short run and the long run? Based on this line of thought, we develop hypotheses about the relationship between the level of strategic autonomy granted to international R&D subsidiaries and (1) the external embeddedness of Copyright © 2011 Strategic Management Society
international R&D subsidiaries and (2) the internal embeddedness of international R&D subsidiaries within the global organization.
HYPOTHESES Autonomy and network embeddedness When it comes to the relationships between internal embeddedness, external embeddedness, and the degree of strategic autonomy granted to or obtained by the local subsidiary, most studies report a consistent pattern: external embeddedness enhances the local autonomy of R&D subsidiaries for various reasons. External embeddedness is likely to enable local subsidiaries to access valuable resources that are rare and available only locally. According to McEvily and Zaheer (1999), actors embedded in local networks are more likely to have access to local knowledge, which positively influences their learning and innovation performance (Saxenian, 1994). Embeddedness in local communities generates social capital (Nahapiet and Ghoshal, 1998) which, in turn, builds trust relationships that are indispensable if actors are to acquire core knowledge from local institutions (Inkpen and Tsang, 2005; Granovetter, 1974; Coleman, 1990; Podolny and Baron, 1997). Since accessing valuable knowledge involves social processes, fostering social capital in a community where such knowledge resides becomes critical (Kogut and Zander, 1992; Yli-Renko, Autio, and Sapienza, 2001). In addition, local embeddedness enables a firm to earn legitimacy as an insider, which is indispensable for gaining localized knowledge (Ghoshal and Bartlett, 1990). The social capital that is nurtured through social interactions and embeddedness ties tends to enhance the capability to access knowledge, which is indispensable for building competitive advantages not only for the subsidiary but for the MNC as a whole. This is especially true because such locally embedded resources often cannot be easily accessed from a distance.3 Therefore, high external embeddedness 3 A valuable resource held by a local lab cannot be obtained through alternative sources if the local subsidiary enjoys network centrality (Astley and Zajac, 1990; Ghoshal and Bartlett, 1990; Ambos and Schlegelmilch, 2007). If the local subsidiary acts as a bridge between the local community and headquarters, it enjoys the role of filling a structural hole (Burt, 1992). Other units cannot directly access valuable local
Global Strat. J., 1: 301–316 (2011) DOI: 10.1111/j.2042-5805.2011.00025.x
A Dynamic Perspective on Subsidiary Autonomy will help the unit utilize resource power and, therefore, increase its ability to resist headquarters control. The local subsidiary becomes the gateway to the local community for headquarters, which lacks external linkages with the local community. Often, R&D subsidiaries play the role of a broker, bridging the gap between headquarters and the local community—such a central position augments the subsidiary’s power and autonomy vis-à-vis headquarters. Under the premise of resource dependence theory (Thompson 1967; Pfeffer and Salancik 1978; Pfeffer, 1992; Medcof, 2001), actors ‘controlling strategically important resources with few options for alternative sourcing should command a high power with the network’ (Ambos and Schlegelmilch, 2007: 477). In this case, a local subsidiary holding important resources that are neither substitutable nor obtainable through a third party—such as headquarters—enjoys relative power over other units that are in need of that resource (Medcof, 2001; Ambos and Schlegelmilch, 2007). As Astley and Sachdeva (1984) point out, increases in power stemming from network centrality and resource control reduce headquarters’ ability to exercise control via hierarchical authority (Ambos and Schlegelmilch, 2007). In short, from a resource dependence perspective, we expect subsidiaries to look for ways of enhancing their bargaining power within the MNC (Mudambi and Navarra, 2004; Andersson, Forsgren, and Holm, 2007), such as increasing their control of strategic resources on which others rely. For this reason, we propose the following hypothesis: Hypothesis 1 (H1): A high level of external embeddedness is associated with higher autonomy.
Following similar reasoning, a unit tightly embedded in internal networks tends to be less autonomous, as internal embeddedness often provides a high level of information and knowledge flow, which eventually serves as a tool for informal behavioral and normative control. Excessive internal embeddedness may generate redundancies in knowledge and information shared among the intrafirm units (Burt, 1992). This may result in a situation in which a unit is so ingrained in the intrafirm networks that it would find it difficult to resources unless they go through the local subsidiary. Therefore, network centrality is positively related to the ability to exchange and combine resources (Tsai and Ghoshal, 1998). Copyright © 2011 Strategic Management Society
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generate valuable resources that would differentiate it from other units in the organization (Ghoshal and Bartlett, 1988). Although a high level of internal embeddedness nurtures social capital within a firm, social capital sometimes gives rise to negative aspects, described as the dark side of social capital (Gargiulo and Benassi, 2000). Such tight internal linkages typically generate a cognitive lock-in, which isolates the subsidiary from the external world (Uzzi, 1997; Grabher, 1993) and consequently deprives the unit of the flexibility necessary to maintain its unique resources and develop capabilities for the future (Gargiulo and Benassi, 2000). Internal embeddedness also tends to create a ‘groupthink’ situation (Janis, 1972). As such, cognitive lock-in reduces the opportunities actors have to autonomously unlearn in order to independently look for new opportunities (Bergman, 2008; Belussi and Samarra, 2009), and new knowledge and information that does not conform to the existing norms may be rejected. In the context of overseas R&D, Asakawa (2001) found that strong internal embeddedness constrained the autonomy of Japanese overseas subsidiaries. Typical examples of such negative aspects of social capital include the situation in which the headquarters sends so many expatriate managers and researchers to the overseas R&D subsidiaries that locally hired scientists cannot fully enjoy the freedom necessary for maximizing creativity. Ambos and Reitsperger (2004) also find that a high level of socialization within the MNC network lowers the chance for an overseas R&D subsidiary to autonomously develop technologies. Therefore, we propose that: Hypothesis 2 (H2): A high level of internal embeddedness is associated with lower autonomy.
Toward a dynamic analysis of autonomy and network embeddedness Interesting questions arise when a dynamic component is introduced into the autonomy-embeddedness discussion. In this section, we first look at the relationship between external-embeddedness and autonomy over time and subsequently on the effects of internal embeddedness. One could assume that the association between external embeddedness and subsidiary autonomy stays the same over time. Resource dependence theory probably best illustrates the stability of the autonomy-control dilemma. In this view, subsidiaries Global Strat. J., 1: 301–316 (2011) DOI: 10.1111/j.2042-5805.2011.00025.x
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that are able to draw power from their external networks have more potential to maintain their autonomous position, as long as the underlying foundation of that power base (the external network) does not change. Furthermore, by being firmly embedded in the external network, subsidiaries accumulate not only resources that are useful today, but also resources that could be useful in the future, which allows subsidiaries to maintain autonomy in the long run. Similarly, centrality in the intrafirm network can be expected to provide power and autonomy not just for the short term, but also for the long term. Based on analogous reasoning, the impact of external embeddedness on the future amount of autonomy and control could be explained by the logic of inertia. Once external embeddedness leads headquarters to grant local autonomy, such a trend is likely to prevail and even accelerate in the long run (Stinchcombe, 1965). However, we argue that such a static assumption is not appropriate, since the R&D subsidiary’s ability to utilize its external network to exercise resource power and, thus, resist headquarters’ attempts to control its operations inevitably gives rise to a need for an adequate response from headquarters, given the threat to its authority. As maintaining strategic control over international innovative capacities is vital for the success of the firm (Ambos and Schlegelmilch, 2007), the most likely response from headquarters would be to regain control over the subsidiary and limit its autonomy. A subsidiary’s high external embeddedness contributes to its independence from headquarters and may also lead to empire building efforts by subsidiary managers who act like ‘autonomous barons’ (Taggart, 1997; Mudambi and Navarra, 2004). The suspicion that the subsidiary has ulterior motives leads headquarters to respond with increased monitoring and less autonomy to prevent clandestine or unexpected behavior (Eisenhardt, 1989; Ambos et al., 2010). From a theoretical standpoint, headquarters has two options if it wishes to regain control and limit subsidiary autonomy. First, the resource dependence arguments we’ve developed suggest that an obvious way of rebalancing the power relationship is to reduce the net dependence on the subsidiary’s external network by building up relationships with the same external network actors (Nell, Ambos, and Schlegelmilch, forthcoming) or by increasing reciprocal interdependencies. Second, Astley and Sachdeva (1984) show that a rebalancing of power is also possible without changing the resource dependence Copyright © 2011 Strategic Management Society
relationship, as headquarters usually has another prominent source of power—ownership.4 Ownership leads to what the authors call ‘formal authority,’ which puts headquarters in position to control the subsidiary and limit its autonomy. As none of these strategies are cost free, headquarters’ attempts to regain control will logically be contingent on the relative benefits gained from such initiatives. Yet, assuming that the benefits of strategic consistency (i.e., inhibiting local duplication of efforts, protecting technological assets, achieving scale) outweighs the costs of recentralizing decision making authority, it is reasonable to assume that headquarters will exercise these means. In sum, we suggest that even if headquarters acknowledges the strategic value of subsidiaries’ external embeddedness for the whole organization in terms of sourcing knowledge, developing new products, or spreading knowledge, it is likely to adopt an ambivalent approach to subsidiaries that attempt to gain additional resource power through embeddedness or those that deviate too much from the corporate norm. Therefore, irrespective of whether a rebalancing of power requires a change in the network structure or the exercise of formal authority, we propose that headquarters will try to react to high levels of subsidiary power (based on external embeddedness) by increasing control and limiting the autonomy of the subsidiary in future periods: Hypothesis 3 (H3): A high level of external embeddedness will lead to lower autonomy in the future.
The static view could be extended to argue that a certain level of internal embeddedness becomes a structural feature of the organization due to inertia. In this case, the (low) level of autonomy is unlikely to change, so that high levels of internal embeddedness are associated with low levels of autonomy in the future. However, we argue that there is a strong force against such inertia. Social exchange theory suggests that, given the principle of reciprocity, internal embeddedness fosters social exchange that builds 4 The case of Philips North America, which is referred to at the beginning of this article, illustrates the consequences if headquarters fails to rely on formal authority based on ownership or resource power. It also captures the argument made in this section, as Philips’ autonomy-limiting response was to buy back shares, thereby reestablishing formal authority over its U.S. subsidiary.
Global Strat. J., 1: 301–316 (2011) DOI: 10.1111/j.2042-5805.2011.00025.x
A Dynamic Perspective on Subsidiary Autonomy
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Same time period
External embeddedness
H1 Autonomy
Internal embeddedness
H2
Different time period
External embeddedness
H3 Autonomy
Figure 1. Relationships between external embeddedness, internal embeddedness, and autonomy
Internal embeddedness
trust and prompts headquarters to grant higher levels of autonomy in the future (Homans, 1961; Blau, 1964). Subsidiaries may sacrifice autonomy to headquarters (through internal embeddedness) with the expectation that the favor will be returned in the long run. While headquarters and subsidiaries are not entirely equal partners, a reciprocal exchange relationship is anticipated. Such logic also has an intellectual foundation in gift theory. Based on the moral obligation of reciprocal exchanges of gifts, gift recipients are obliged to offer a gift, with a certain delay, if they wish to maintain the relationship (Mauss, 1954). Waiting and delaying are indicators of power and ways of exercising power (Schwartz, 1974; Pfeffer, 1997). According to Schwartz (1974), waiting is a form of investment. It increases the value of a particular thing that is being sought (Pfeffer, 1997). By waiting to grant autonomy to a local subsidiary, headquarters can exercise power. The local subsidiary, in turn, would strive to recover the sunk cost of waiting for autonomy. Subsidiaries can create their environment settings, on the basis of which headquarters can eventually grant a higher level of local autonomy. A subsidiary’s willingness to concede autonomy to headquarters in the short term can assure headquarters that the subsidiary is not striving for power. Once the lack of trust is alleviated, headquarters is likely to take a more open-minded approach to the subsidiary’s activities. Such open-mindedness, in Copyright © 2011 Strategic Management Society
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turn, can lead to a greater amount of local autonomy. Moreover, given the higher level of internal embeddedness, the subsidiary can obtain better information from headquarters, while it can also provide headquarters with more relevant information and knowledge, which headquarters is more likely to appreciate. As internal embeddedness increases, local activities are more likely to show up on headquarters’ radar. This may create grounds for providing the local subsidiary with more autonomy in the future. Birkinshaw, Bouquet, and Ambos (2007) emphasize the significance of local subsidiaries receiving sufficient ‘attention’ from headquarters in relation to securing autonomy. Asakawa (1996) finds that managers use internal linkages as a precondition for the granting of local autonomy, as a high degree of internal linkages tends to decrease the difficulties of internal control and even allows for a potential increase in local autonomy. Therefore, we assume that if headquarters is reasonably satisfied with the current level of internal embeddedness, it will be ready to grant more autonomy in the future. Hypothesis 4 (H4): A high level of internal embeddedness will lead to higher autonomy in the future.
Figure 1 summarizes our model and hypothesized relationships. Global Strat. J., 1: 301–316 (2011) DOI: 10.1111/j.2042-5805.2011.00025.x
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METHODOLOGY
budget (scale anchors: 1 = your subsidiary decides, 5 = the parent decides, Cronbach’s alpha = 0.77).
Sample and data collection We use a dataset covering German overseas R&D subsidiaries to test our hypotheses. The German top 500 listing (Die Welt, 2001) was used to determine the number of German firms with overseas R&D investments. Telephone precontacts with all 500 enterprises revealed a total of 106 firms that operated R&D sites overseas. Collectively, these firms operated a total of 531 R&D laboratories abroad. These laboratories form the population under investigation. Data collection took place in the second quarter of 2004. In all cases, respondents were senior R&D managers in the respective R&D subsidiaries, who were generally believed to be most knowledgeable about the topics under investigation. Using a standardized mail survey, detailed responses were gathered on the type of R&D investment, integration, and links to the local research community. To capture the dynamics, the questionnaire contained two sections: one regarding embeddedness/ autonomy today and one regarding embeddedness/ autonomy three years ago. All managers were contacted by phone before the questionnaire was mailed to them. Two telephone reminders, an offer of an executive summary, and an invitation to participate in a workshop on the topic were used to help ensure a high response rate. These efforts led to a final dataset covering a total of 73 (i.e., 13.7%) overseas R&D units. In three cases, responding subsidaries belonged to the same firm, violating the assumption of independent error terms in OLS regression. Excluding these cases from our analysis did not alter the results in any significant way. Given the small nature of the sample, we decided to abstain from excluding them or running HLM to control for this potential bias. Measures Autonomy
Autonomy was measured on a nine-item scale originally developed by Asakawa (1996). Scale items included: selection of key projects, the issue of whom to recruit, performance appraisals of local scientists, promotion decisions related to local scientists, approval for conference presentations, approval for publication, acceptance of trainees from outside the company, acceptance of trainees from other units within the company, and spending the assigned Copyright © 2011 Strategic Management Society
External embeddedness (tn/tn+1)
Following Ambos and colleagues (Ambos and Reitsperger, 2004; Ambos and Schlegelmilch, 2007), we used a graphical scale and employed a two-step procedure to assess the external embeddedness of an R&D unit. Managers were first asked to identify collaborators from a range of possible partners (e.g., competitors, suppliers, customers, other firms, private research institutions, universities, local governments, or other institutions). They were then asked to rate the importance of existing cooperative arrangements. By multiplying network ties with tie strength, we calculated the network density of the given R&D unit. Following Ghoshal and Bartlett (1990), we derived the final measure by dividing the actual network density by the total possible network density. Internal embeddedness (tn/tn+1)
As with external embeddedness, internal embeddedness was measured using the instrument developed by Ambos and Reitsperger (2004). Managers were asked to identify collaborators from a range of possible internal partners (e.g., headquarters’ R&D, other R&D facilities, local manufacturing/sales, other manufacturing/sales within the company). They were then asked to rate the importance of the existing linkages. By multiplying network ties with tie strength, we calculated the network density of the given R&D unit. Following Ghoshal and Bartlett (1990), we derived the final measure by dividing the actual network density by the total possible network density. Control variables
Five control variables were added to our model: size of the R&D subsidiary, age, subsidiary mandate, subsidiary performance, and R&D intensity. Size of the R&D subsidiary was used to control for the effects of subsidiary size on subsidiary autonomy (Schmaul, 1995; Picard, 1979; Garnier, 1982; Gates and Egelhoff, 1986). In accordance with the literature, we assume that R&D unit size is positively related to autonomy. Size was measured as the number of R&D employees in the respective Global Strat. J., 1: 301–316 (2011) DOI: 10.1111/j.2042-5805.2011.00025.x
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1 -0.147 0.033 -0.043 0.134 0.097 0.165 0.049
1 0.091 -0.240 0.093 -0.235 -0.094 0.110
1 0.416 0.642 0.170 0.170 0.009
1 0.011 0.334 0.008 -0.126
1 0.428 0.156 0.023
1 0.092 -0.149
1 0.087
1
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Correlations at or above 0.20 are significant at the 0.05 level.
1 0.139 -0.262 -0.055 0.168 -0.065 0.159 0.089 0.048 1 0.175 0.031 0.242 0.086 -0.201 -0.071 -0.136 -0.002 0.074 5.54 29.12 125.07 0.49 4.07 4.09 5.25 4.94 4.55 0.50 17.07 25.98 85.53 0.41 4.12 7.36 5.68 9.94 15.02 0.12 1. Autonomy 2. Age 3. Size 4. R&D intensity 5. Int. embed. (tn) 6. Int. embed. (tn+1) 7. Ext. embed. (tn) 8. Ext. embed. (tn+1) 9. Goal achievement 10. Exploration mandate
9 8 7 6 5 4 3 2 1 S.D. Mean
Table 1 presents a summary of the descriptive statistics and correlations for all variables in this study. No variable exhibits distribution or correlation problems. We analyzed non-response bias and lateresponse bias and found no significant differences. To counter common method bias, we protected respondent anonymity to avoid consistency motif and social desirability, we used improved scale items after extensive pretesting, and we based most of the constructs on well-established scales in the literature (Podsakoff et al. 2003). While independent and dependent variables were collected through the same survey instrument, constructs were well distributed over the questionnaire, making it harder for individuals to ‘theorize’ about potential relationships among the constucts. In addition, a Harman’s one-factor test
Mean, standard deviations, and correlations among study variables
RESULTS
Table 1.
subsidiary. For similar reasons, we deemed it necessary to control for subsidiaries’ age. Subsidiary age was measured in years since establishment. Literature suggests that competence-creating laboratories or those devoting the majority of their work into exploring new technologies (as opposed to exploiting exiting capabilities) receive higher levels of autonomy (Asakawa, 1996; Ambos, 2005; Cantwell and Mudambi, 2005). Consequently, we ran our models after controlling for a laboratory’s dominant mandate. Subsidiary mandate was operationalized as a continuous variable measuring the percentage of work devoted to exploratory, as opposed to exploitative, projects (see Ambos, 2005; Kuemmerle, 1999). Higher performing units are likely to be granted more autonomy as they show a good track record and take a contributory role within the organization (Bouquet and Birkinshaw, 2008; Birkinshaw et al., 1998). We measured unit performance as relative goal achievement (i.e., time, project, and budgetary goals) adopting an eight-item scale originally developed by Schmaul (1995). Finally, we ran all of our models after controlling for the industries’ R&D intensity. A dummy variable, high tech, was created and coded ‘1’ for subsidiaries operating in high-tech industries (e.g., those with an R&D to sales ratio of more than 8.5%—see the OECD’s definition). While it would have been preferable to include separate dummies for all industries, as well as separate controls for all years, the small number of observations made such an approach unfeasible.
10
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310 Table 2.
B. Ambos et al. Linear regression models; dependent variable: subsidiary autonomy 1
2
Age 0.060 (.024)** 0.061 (.024)** Size -0.002 (.006) -0.002 (.006) R&D intensity 1.836 (1.478) 1.860 (1.469) Unit performance 0.264 (.185) 0.278 (.184) Mandate -1.572 (1.935) -2.087 (1.963) Int. embed. -0.240 (.186) Ext. embed. Int. embed. (lagged) Ext. embed. (lagged) Model statistics 0.151 0.179 R2 0.066 0.078 Adj. R2 F-Score 1.779 1.780 Sign. 0.134 0.123
3
4
0.062 (.024)** -0.002 (.006) 1.851 (1.483) 0.275 (.186) -2.146 (1.997) -0.229 (.193) -0.37 (.149)
0.068 -0.003 1.366 0.213 -2.352 -0.459 -0.075 0.398
0.180 0.060 1.506 0.188
5
0.248 0.120 1.933 0.077
(.023)*** 0.061 (.023)*** (.006) -0.001 (.005) (1.455) 1.369 (1.399) (.182) 0.127 (.180) (1.935) -1.674 (1.885) (.218)** -0.697 (.236)*** (.146) 0.175 (.180) (.194)** 0.851 (.277)*** -0.495 (.224)** 0.320 0.187 2.402 0.025
* p < 0.1, ** p < 0.05, *** p < 0.01; standard error in parentheses.
did not produce a single emerging factor (Podsakoff and Organ, 1986). Hierarchical multiple regression analysis was used to test our propositions. The data was examined to ensure that it complied with the requirements of regression analysis, i.e., linearity, equality of variance, and normality. The plotting of standardized residuals against standardized predicted values showed no major violations. We examined the variance inflation factors (VIF) and all of the scores were below 3.2. A coefficient variance decomposition analysis with condition indices (cf. Hair et al., 1998) confirmed that multicollinearity was not a serious problem. Finally, a Cook-Weisberg test using fitted values for our dependent measures confirmed that heteroskedasticity was not an issue. Collectively, these results ensured us that multiple regression was appropriate. Consequently, hierarchical OLS regression was used to analyze the impact of the independent variables on subsidiary autonomy. The results of the regression analysis are summarized in Table 2. Model 1 reports on the base model, including the control variables only. Models 2–5 introduce the four independent variables sequentially. The full model is displayed in Model 5. Our first model provides information on the impact of the five controls: subsidiary size, subsidiary age, subsidiary mandate, subsidiary performance, and R&D intensity. Of the three, only age has a significant, positive effect on autonomy (p = Copyright © 2011 Strategic Management Society
0.014), which supports the well-established argument that older subsidiaries are able to demand more autonomy from headquarters. Model 3 presents the analysis of our first two hypotheses. Hypothesis 1 suggests that high external embeddedness will help the unit utilize resource power and, therefore, increase its ability to resist headquarters control. Following this hypothesis, we expected the coefficient to be significant and positive. While the coefficient has the suggested sign, it is not significant (p = 0.804). Therefore, we find no support for the argument that high external embeddedness is associated with high autonomy. Hypothesis 2 argues that high internal embeddedness is associated with low levels of autonomy. As with H1, our results do not support such a relationship (p = 0.242). With regard to the dynamics, we propose two hypotheses (H3, H4). Introducing our lagged variables improves the predictive validity of our model significantly. The adjusted R-square increases from 0.06 (in Model 3) to 0.120 and 1.87 in Models 4 and 5, respectively. Similarly the results in Model 5 confirm a negative, significant path for external embeddedness (H3) (p = 0.032), which suggests external embeddedness in the past will lead to less autonomy in the future. Furthermore, our results confirm the view that internal embeddedness in the past will lead to more autonomy in the future (p = 0.004), suggesting that headquarters gradually grants autonomy on the basis of increased trust and better understanding (H4). Global Strat. J., 1: 301–316 (2011) DOI: 10.1111/j.2042-5805.2011.00025.x
A Dynamic Perspective on Subsidiary Autonomy Robustness checks and extensions To further investigate the robustness of our results, we performed a number of tests. With only two time periods and in light of the moderate correlation between internal and external embeddedness over time, part of our findings may be attributed to a general change of embeddedness over time rather than a response (in tn+1) to a certain level of embeddedness in tn. To account for this possibility, we divided the data in four cells: (1) no change in external and internal embeddedness; (2) change in internal embeddedness/no change in external embeddedness; (3) change in external embeddedness/no change in internal embeddedness; and (4) change in both internal and external embeddedness. Applying this procedure and including dummies for the four cells in our regression model, we were able to control for a potential time effect.5 The dummies turn out to be insignificant, and furthermore, leave our results unaffected. Similarly, deleting all cases with a significant change in embeddedness over time and rerunning the model with the resulting subset of cases did not impact any of our findings. We conclude from this analysis that a change in embeddedness over time is not driving our results. Thus, we have more confidence in stating that it is the headquarters’ reaction to the level of embeddedness in tn that influences the levels of current autonomy granted in tn+1. The multiple embeddedness perspective proposes that external embeddedness may be difficult to be disentangled from internal embeddedness (Asakawa, 1996). In other words, the effect of external embeddedness on autonomy in the next period may depend on, among other things, the extent to which a subsidiary is internally embedded. By the same token, the effect of internal embeddedness on autonomy in the next period may depend on the extent of the subsidiary’s external embeddedness.6 Thus, in order to investigate these joint effects, we created interaction terms for our embeddedness measures. Rerunning our regressions with the respective interaction terms did not, however, alter our results in any significant way. As our first two hypotheses (embeddedness on autonomy in the same time period) did not reach significance, we were also interested in investigating whether the operationalization of our autonomy
5 We thank Timothy Devinney for providing this helpful suggestion. 6 We thank Ram Mudambi for pointing us toward this idea.
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measure was the reason behind these nonfindings.7 While the autonomy measure we utilized in this study is well established in the strategic management literature, it is somewhat biased toward strategic autonomy and autonomy with regard to decision making. Thus, in a further extension of our study, we rerun our models using the percentage of expat managers in the local unit as a more direct, albeit simpler, proxy of headquarters’ influence in local operations (and, thus, limited autonomy). The results of this modification produce significant and positive coefficients for internal embeddedness (0.97, p = 0.024) and a significant and negative coefficient for external embeddedess (-0.066, p = 0.054). In other words, the more internal imbedded the local laboratory the more expatriates are used, the more external embedded the local laboratory, the less expats are used in the local laboratory—providing support for both H1 and H2. Alternative approaches would include: (1) qualitative fieldwork with particular attention to the way the HQ-subsidiary relations evolve over time; (2) a longitudinal study collecting and analyzing panel data related to subsidiary autonomy; and (3) experimental designs controlling for changing conditions over time. While these methods are highly relevant for investigating the dynamic aspect of subsidiary autonomy, the huge amount of time and excessive resources required to implement them would not allow us to do so. Given such constraints, we believe that our method based on time-lag data is appropriate and relevant for investigating the dynamic nature of subsidiary evolution.
DISCUSSION AND CONCLUSION Building on data from 73 overseas R&D subsidiaries of German firms, our study sets out to break new ground with regard to a long-standing, pertinent issue in international management (cf. Johnston and Menguc, 2007): the level of strategic autonomy granted to, or obtained by, overseas affiliates. With much of the previous literature taking a static perspective on subsidiary control, we advance the debate by conceptualizing the observed level of strategic autonomy as an outcome of a dynamic bargaining process between subsidiaries and headquarters, a 7 The authors thank Bill Newburry for pointing out this possibility.
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process that is likely to change over time. The dynamic interactions spelled out in the theoretical section of this article are largely supported by the empirical analysis. Collectively, these findings suggest that we need to revisit the often normative implications of prior studies that make recommendations for subsidiaries desiring higher levels of strategic autonomy. Our study illustrates that, in contrast to common belief, high internal embeddedness is not necessarily bad for subsidiary autonomy. In fact, our findings show that building trust and investing in internal linkages with headquarters is an effective strategy for subsidiaries wishing to be granted autonomy in the future. This argument is consistent with social exchange theory. Headquarters that attain a sufficient amount of control vis-à-vis a subsidiary are inclined to grant autonomy to that subsidiary in the future in exchange for control now. This finding has important implications for theory, as it goes against the commonly held assumption that internal embeddedness is detrimental to a subsidiary’s efforts to achieve strategic autonomy. Managers at headquarters may use social control as a condition for the granting of local autonomy. In terms of the impact of external embeddedness on subsidiary autonomy, our results hint that the utilization of power to obtain autonomy at a certain point in time is not a sustainable strategy. Headquarters can find ways to limit autonomy in future exchanges if it feels external embeddedness leads to excessive levels of power and autonomy in the subsidiary. Therefore, our findings suggest there is a potential discrepancy between a subsidiary’s structural power position in the organization (Astley and Sachdeva, 1984) and its actual ability to use its power. Our results also suggest that utilizing resource power based on proprietary network ties (that result from external embeddedness) may be a difficult strategy for subsidiaries to pursue in the first place. In fact, within the context of our study, the statistical significance of such a relationship could not be established per se, but only when looking at the much narrower concept of expatriate infiltration. One explanation for the weak leverage of resource power may be the sequential nature of the impact of external embeddedness on subsidiary autonomy. In other words, external embeddedness enhances social capital held by the subsidiary vis-à-vis the external community which, in turn, contributes to the accumulation of knowledge (Nahapiet and Ghoshal, Copyright © 2011 Strategic Management Society
1998). Although such knowledge accumulation should theoretically enable the subsidiary to occupy a central position within the MNC network and result in power and autonomy, it typically takes some time for headquarters to recognize and appreciate such resources. Due to the lag between the actual acquisition of key knowledge by the subsidiary and the recognition of the value of such knowledge by headquarters, the high external embeddedness of overseas subsidiaries does not immediately lead to more strategic autonomy in the same time period. This may explain our nonfindings for Hypothesis 1. Implications for research These results also provide interesting insights into theory development and research on the topic. First, our study extends the existing literature by complementing the structural power and resource dependence perspectives with social exchange theory to predict more dynamic patterns of autonomy and control in international R&D operations. Extant research has investigated various factors that influence the level of autonomy in overseas R&D subsidiaries (Behrman and Fischer, 1980; DeMeyer and Mizushima, 1989; Medcof, 2001). Our results indicate that the structural power perspective and resource dependence perspective do not explain the impact of embeddedness on strategic autonomy—at least not when applying a dynamic perspective. These perspectives predict that high internal embeddedness is associated with low autonomy. Our empirical findings concerning the dynamic impact of a subsidiary’s embeddedness in tn on its autonomy in tn+1 shows that the structural power and resource dependence perspectives lack explanatory power when adopting a more dynamic perspective. Instead, our result confirms the explanatory power of relational, social exchange theory in capturing the logic of a subsidiary accepting headquarters control today in exchange for future autonomy. In particular, our finding that subsidiaries fare much better at achieving a high level of autonomy in the future if they initially link up with other actors in the firm—rather than use their power to resist such integration—provides evidence that social exchange theory may be better suited to the dynamics in the autonomy-control relationship than to structural power and resource dependency theories. Such mechanisms for dynamic linkage strategies deserve further investigation, precisely because a Global Strat. J., 1: 301–316 (2011) DOI: 10.1111/j.2042-5805.2011.00025.x
A Dynamic Perspective on Subsidiary Autonomy subsidiary’s willingness to concede autonomy to headquarters does not automatically lead to subsidiary autonomy in the long run. In other words, a subsidiary’s intention to tolerate headquarters’ control in the short run may be a necessary condition, but it may not be a sufficient condition. By elaborating on the mechanisms through which today’s control can be converted into increased autonomy tomorrow, we can advance our understanding of social exchange theory and the relational perspective. One interesting avenue that may pave the way toward a more complete understanding of the dynamic effects at work may come from bridging recent findings on the dynamics of control with our findings on autonomy over time. The focus of our study has been a subsidiary’s ability to obtain strategic autonomy or, if argued from a headquarters perspective, the conditions under which headquarters are willing and able to grant autonomy in the future. Recently, Cardinal, Sitkin, and others have started to look at the dynamics and workings of headquarters control (i.e., the means by which headquarters successfully limits subsidiary autonomy and ensures coordination within the group) (Cardinal, 2001; Cardinal et al 2004). While the two streams of research do answer relevant questions in their own right, they highlight the role of social control, which may also have interesting implications for our findings. Social control has been commonly defined as the degree to which members of the organizations share the same values and beliefs. Thus, to the extent that such a normative integration also takes place in strongly internally embedded units, the construct of social control and internal embeddedness are somewhat related. Our results hint that headquarters attempting to maintain control by relying on social control may end up in a paradox situation. The very control mechanisms used to keep subsidiaries close may eventually prove to be the stepping stone for reducing the level of control altogether. If this holds true in further testing, we may need to revisit our theory on control altogether. Second, although our framework is based on the dyadic headquarters-subsidiary relations, the external and internal embeddednesses relationships, in practice, are likely to be much more complicated. External embeddedness could go beyond the local relationship and include the impact of various forms of external collaborations, such as joint venture, alliances, etc. Newburry and Zeira (1999), for example, found that autonomy increased international joint Copyright © 2011 Strategic Management Society
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venture effectiveness for activities that need strong ‘local embeddedness.’ Similarly, there may be a trade-off between headquarters attention and subsidiary autonomy—not only for intraorganizational (Birkinshaw et al. 2007), but also for interorganizational relationships (Chen, Park, and Newburry, 2009). Thus, future research may also include other types of external collaborations. Third, research may also benefit from moving beyond the interesting, yet refined, context of global innovation units. While we contend that the basic postulates in this article should also hold for other subsidiary populations, research suggests that Japanese parents, for example, apply somewhat different control strategies than German firms (Ambos, 2005; Asakawa, 2001). Therefore, further research on this topic should be conducted before generalizing beyond the context of this study. Finally, it is important to highlight that local autonomy may not be the ultimate and only goal for the subsidiaries. We posit that subsidiaries can pursue autonomy, regardless of their mandates, and our data supports this point. But we may speculate that subsidiaries with competence-creating mandates are more likely to pursue local autonomy than those with competence-exploiting mandates (Cantwell and Mudambi, 2005). Future studies may gain further insights into the rationale behind pursuing subsidiary autonomy and a set of particular mechanisms for gaining autonomy, so that much broader managerial implications can be developed. Managerial implications
Our study also gives rise to a series of managerial implications for local and headquarters managers. It is crucial that local managers understand that today’s (limited) amount of autonomy will not last forever and that the local subsidiary’s willingness to accept a certain level of control will pay off in the future in the form of additional autonomy gains. More importantly, managers should create an ongoing trust relationship with headquarters in order to be able to exchange control for autonomy whenever necessary. Our findings suggest that subsidiaries fare much better when they cultivate a relationship of high quality and trust with other actors in the firm than when they use their power to resist such integration, if the goal is to achieve a high level of autonomy in the future. Headquarters managers in charge of controlling overseas R&D subsidiaries should continually assess Global Strat. J., 1: 301–316 (2011) DOI: 10.1111/j.2042-5805.2011.00025.x
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the relevant level of local autonomy on the basis of various factors. For example, managers might eventually, if not immediately, want to consider tightening control over a local subsidiary that has increased its collaborations with local research partners. In contrast, it may eventually, if not immediately, be worth loosening control on a local subsidiary if subsidiary managers feel confident about the current level of control, especially as tight social control through internal embeddedness tends to negatively influence the innovative performance of an overseas subsidiary (Ambos and Reitsperger, 2004). This point may be especially relevant as the role of an overseas subsidiary evolves over time (Asakawa, 2001). Therefore, managers should be attentive to the timing aspect as it relates to shifts in the mode of control.
ACKNOWLEDGEMENTS We thank GSJ Editors Torben Pedersen and Stephen Tallman for their comments and guidance throughout the review process. We also thank Bill Newburry, Ram Mudambi, and all the participants of the GSJ launch conference for their constructive feedback on this manuscript.
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