Internationalization of Taiwanese manufacturing ... - (SSRN) Papers

Original Article

Internationalization of Taiwanese manufacturing firms: The evolution of subsidiary mandates and capabilities Received 2 March 2012; revised 29 June 2012; accepted 20 July 2012

Homin Chena,b,*, Chia-Wen Hsuc and D’Arcy Caskeyb a Commerce Development Research Institute, 4F, No. 303, Sec. 1, Fu-Xing South Road, Taipei 106, Taiwan. b Department of International Business, National Taiwan University, 85, Sec. 4, Roosevelt Road, Taipei 106, Taiwan. c Department of Business Administration, National Chung Cheng University, No. 168, University Road, Min-Hsiung Chia-Yi, Taiwan.

*Corresponding author.

Abstract We explore the internationalization of Taiwanese manufacturing firms by studying the evolutionary trajectories of their subsidiaries. Building upon the literature, we formulate and apply dimensions capability development and mandate expansion to explain the evolutionary paths of Taiwanese foreign direct investment. Subsidiaries are categorizable into groups from low to high performance: Pure Implementer, Capability Contributor, Mandate Extender and Global Innovator. Using data from Taiwanese firms’ foreign expansion, we find that subsidiaries with longer host-country experience and founded by parent firms with higher geographic dispersion are more likely to expand their mandates and/or develop new capabilities, which in turn lead to better subsidiary performance. Asian Business & Management (2013) 12, 37–60. doi:10.1057/abm.2012.29; published online 10 October 2012 Keywords: internationalization; subsidiary mandate; capability development

Introduction As one of the ‘newly industrialized economies’ (NIEs), Taiwan has seen rapid economic growth and a remarkable transformation into an important source of foreign direct investment (FDI). According to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2011, r 2013 Macmillan Publishers Ltd. 1472-4782 Asian Business & Management www.palgrave-journals.com/abm/

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Taiwan ranked 26th among 210 reporting countries in 2010 as a source of officially recorded outward FDI. The first Taiwanese FDI occurred in 1959, with an investment in Malaysia valued at only US$0.1 million. Outward FDI quickly rose thereafter; Table 1 illustrates this trend. In the period 1981–1985, officially approved FDI was US$115.3 million, quickly ballooning to US$66.26 billion in the period 2006–2010. An additional trend in outward investment flows from Taiwan is the shift in FDI recipients, illustrated in Table 2. In the 1970s and 1980s the Taiwanese government prioritized the development of domestic industries as well as their expansion into foreign markets, albeit with tight restrictions on China. Therefore, early FDI was primarily directed towards North America. Eventually, the focus shifted to Southeast Asia (SE Asia) (Thailand, Indonesia, Vietnam, the Philippines, Malaysia) from 1986 due to government policy, cheaper labor costs and geographical proximity. SE Asia’s proportion of received net outward FDI from Taiwan peaked in 1990–1992. In 1992, the Taiwanese government began relaxing restrictions on investments in Mainland China, resulting in FDI targets shifting once again. In 1993, Mainland China became the primary recipient of officially approved outward FDI. Even following the implementation of the short-lived ‘southward policy’ in 1994 (that is, government promotion of investing in SE Asia in order to reduce Taiwan’s economic dependence on Mainland China), China has remained the top beneficiary of Taiwanese FDI and continues to increase its overall share of outward flows. China’s lower production costs, relatively abundant resources, similar language and culture, and large domestic market are the main drivers of this trend. The remarkable growth of FDI originating from Taiwan presents an enticing topic for international business scholars. A number of previous studies have empirically examined different aspects of this subject, such as the determinants and motivations for FDI (for example, Lien et al, 2005; Lin, 2010), location choices (for example, Chen and Chen, 1998; Makino et al, 2002), entry modes (for example, Chen, 2006; Filatotchev et al, 2007), consequences of Taiwanese FDI (for example, Chen, 1999; Hsu and Chen, 2009) and the configuration of Taiwanese FDI (for example, McBeath, 1999; Chen, 2003; Chen et al, 2004). Although many studies have examined the effects of Taiwanese FDI, few have looked into subsidiary performance and their evolutionary trajectories (Chiao et al, 2008). Chiao et al indicated that subsidiaries of parent firms from developing countries might behave differently than subsidiaries of parent firms from developed countries. Hence, the purpose of this article is to explore this knowledge gap through the examination and testing of several hypotheses that should shed light on the evolutionary trajectories of Taiwanese manufacturing subsidiaries and their effects on subsidiary performance. Towards this goal, we approach the topic using a subsidiary evolutionary perspective that analyzes capability and mandate change (Birkinshaw and 38

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Asian Business & Management

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Year

Total amount China amount Asia amount (%) (%)


1981–1985 1986–1990 1991–1995 1996–2000 2001–2005 2006–2010

115.3 2864 10 796 24 925 41 745 66 266

NA NA 3616 8223 24 180 45 184

0 0 34 33 58 68

34 999 2991 3749 4115 7961

30 35 28 15 10 12

North America amount (%) 74 1221 1428 2758 3269 3856

64 43 13 11 8 5.8

Middle-South America Europe amount Oceania amount Africa amount amount (%) (%) (%) (%) 2 500 2196 9451 8899 7010

1.7 17 20 38 21 11

3 111 445 394 640 1170

2.3 3.8 4 1.5 1.5 1.7

0.3 9 50 244 547 894

0.3 0.4 0.4 1 1.3 1.3

2 24 70 106 95 191

Note: Asia includes Japan, South Korea, Hong Kong, Singapore, Indonesia, Malaysia, the Philippines, Thailand, Vietnam and India. North America includes the United States of America and Canada. Middle-South America includes Bermuda, British Overseas Territories in the Caribbean, Panama, Brazil, El Salvador and Nicaragua. Europe includes the United Kingdom, France, Germany, the Netherlands and the Czech Republic Oceania includes Australia, New Zealand and Samoa. Source: Investment Commission, Ministry of Economic Affairs, Taiwan (Republic of China).

1.7 0.8 0.6 0.5 0.2 0.2

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Table 1: Government-approved outward investment by area (Unit: US$million)

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Table 2: Government-approved outward investment in North America, Southeast Asia and China (Unit: US$million) Year

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

North America

Southeast Asia

China

Cases

Amount

Cases

Amount

Cases

Amount

5 2 2 13 15 16 21 42 57 116 129 87 87 73 97 175 339 408 350 807 760 452 233 269 158 127 95 68 50 44

1.6 2.5 2.8 30.5 35.69 45.96 70.05 123.33 532.31 449.36 312.03 193.54 529.08 144.89 248.21 272.37 563.28 601.86 454.22 866.55 1341.73 582.01 467.4 559.85 317.97 487.79 1346.38 401.07 1114.38 506.62

0 1 3 2 1 4 13 30 62 109 100 72 72 84 87 79 84 80 45 50 51 41 45 59 74 54 48 43 26 25

2.03 8.96 5.01 6.31 3.61 7.66 14.78 52.73 276.87 519.76 707.24 300.34 364.17 297 294.45 422.29 410.93 319.32 197.66 169.92 145.04 185.1 271.70 144.1 166.44 258.93 900.37 681.99 364.62 1050.07

NA NA NA NA NA NA NA NA NA NA 237 264 1262 934 490 383 728 641 488 840 1186 1490 1837 2000 1287 897 779 482 249 518

NA NA NA NA NA NA NA NA NA NA 174.16 246.99 1140.37 962.21 1092.71 1229.24 1614.54 1519.21 1252.78 2607.14 2784.15 3858.76 4594.99 6939.91 6002.03 7375.20 9676.42 9843.36 6058.50 12230.15

Note: North America includes the United States of America and Canada. Southeast Asia includes Indonesia, Malaysia, the Philippines, Thailand and Vietnam. Source: Investment Commission, Ministry of Economic Affairs, Taiwan (Republic of China).

Hood, 1998). Several researchers have emphasized the importance of capability and mandate change in the process of subsidiary development. For example, foreign subsidiaries generate new capabilities through enhancing hostcountry experience that help offset the liability of foreignness (Delios and Beamish, 2001). In another study, Giroud et al (2012) used 423 foreign firms in the Korean manufacturing sector as empirical context and demonstrated that subsidiary innovation is primarily explained by its strategic role, which indicates 40



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that subsidiaries with competence-creating mandates have higher levels of innovation performance. We identify and operationalize two dimensions, mandate expansion and capability development, as primary trackers of subsidiary evolution. In line with these dimensions, we create a typology containing four subsidiary categories, with each category defined according to two binary measures of whether or not the subsidiary had its mandate expanded and whether or not it developed new capabilities. We label these categories Pure Implementer, Capability Contributor, Mandate Extender and Global Innovator. This typology can help to explain the basic rationales behind the evolutionary trajectories these subsidiaries follow. For instance, we posit that subsidiaries will have higher performance when they develop into Global Innovators, which are subsidiaries that have developed new capabilities and have had their mandates expanded. Furthermore, we identify two factors that drive the evolution of foreign subsidiaries towards Global Innovators: the parent firm’s geographic dispersion and the subsidiary’s degree of host-country experience.

Theory and Hypotheses Previous studies looking into changes in subsidiary roles and activities over time have generally approached the issue from a developmental perspective. Subsidiary development occurs when the subsidiary accumulates valuable resources and capabilities through its network of relationships over time, leading to an enhanced position and thus an expansion in the scope of its operations (Birkinshaw and Hood, 1997). Cavanagh and Freeman (2012) note that when subsidiary initiative is combined with subsidiary-driven resource development, subsidiaries are able to exert considerable influence on the contributory role they fulfill. Therefore, subsidiary development should result in either the enhancement or deterioration of subsidiary capabilities over time and the expansion or contraction of the subsidiary’s mandate (Galunic and Eisenhardt, 1996). Birkinshaw and Hood (1998) expanded on subsidiary development with the concept of subsidiary evolution, organizing a comprehensive framework to capture the change of a subsidiary’s mandate and the development of resources and capabilities. An evolutionary perspective has certain advantages over a purely developmental one. It is more dynamic, and suggests a flexibility and ongoing adaptability to market conditions and internal firm characteristics that the development perspective lacked. Since Birkinshaw and Hood’s (1998) study, the evolutionary perspective has been supported and refined by several empirical studies. These show subsidiary evolution is determined by the enhancement of the subsidiary’s capabilities, coupled with a change in the subsidiary’s mandate (for example, Sargent and r 2013 Macmillan Publishers Ltd. 1472-4782


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Matthews, 2006; Dorrenbacher and Gammelgaard, 2010). Therefore, any investigation into the process of subsidiary evolution should take into account both changes in mandate and the development of new capabilities.

Mandate Expansion The establishment, reformulation or loss of certain value-chain activities is usually referred to as mandate change (Birkinshaw and Hood, 1998; Dorrenbacher and Gammelgaard, 2010). A number of studies investigate the determinants of mandate change (Birkinshaw and Hood, 1998; Hood and Taggart, 1999). They find three critical factors: parent assignment (Prahalad and Doz, 1999), subsidiary choice (Birkinshaw, 1997) and local adaptation (Ghoshal and Nohria, 1989; Ghoshal and Bartlett, 1991). Taken as a whole, these studies show mandate change may occur through several different processes, from directives sent down by the parent firm to informal expansion undertaken by local managers, that the parent firm eventually decides to formalize. The impact of mandate changes on a firm can vary from fundamental shifts in strategy (White and Poynter, 1984; Hood and Taggart, 1999) to incremental removal of subsidiary activities (Malnight, 1995). Mainland China and the developing countries of SE Asia have long been primary targets for much FDI from Taiwanese manufacturers. The subsidiaries founded in these locations were usually mandated to act as manufactories utilizing low labor costs for export production, but may have later undergone mandate expansion. Examples of expanded mandates include penetrating the local market for developing domestic sales, becoming a global manufacturing center or taking on the role of a regional or global center (Chen and Chen, 1998; Chen et al, 2004). Since these subsidiaries usually began their existence with relatively restricted mandates, any reduction in their original mandate would translate into their closure. Therefore, we utilize mandate expansion as one of our two dimensions to measure the evolution of Taiwanese manufacturers’ foreign subsidiaries.

Capability Development Capabilities are often considered a special kind of intangible resource (Schmid and Schurig, 2003). The traditional view on capabilities maintains they are originally developed at corporate headquarters and then transferred to overseas subsidiaries as a way of overcoming the liability of foreignness (Vernon, 1966; Dunning, 1981). In contrast to this view, the constraints and opportunities specific to local markets can cause foreign subsidiaries to independently develop 42



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new capabilities to better match local conditions. Development of a subsidiary’s capabilities can be considered an evolutionary process initiated by the subsidiary in order to enhance its own resources and improve existing capabilities (Birkinshaw, 1997; Rugman and Verbeke, 2001). A more nuanced perspective regards capability development as the result of a triangular power struggle between the parent firm, the subsidiary and its local network (Chen et al, 2012). The parent firm may assist the subsidiary in the development of new capabilities, or it may impose or withhold certain key capabilities to maintain control over the subsidiary. Alternatively, subsidiary managers may choose to independently leverage their local knowledge to develop missing or new capabilities, effectively creating a situation where the parent firm provides indirect assistance (through its assignment of salaried expatriate managers) to the development of capabilities that are not necessarily aligned with its own interests. A subsidiary’s new capability might even surpass those of the parent firm, opening up the possibility of its transfer from subsidiary to headquarters or other sister subsidiaries (Hall, 1993; Schmid and Schurig, 2003; Kim et al, 2011). Evidence indicates that the evolution of a foreign subsidiary can be measured in terms of its capabilities development (Kim et al, 2011). Based on these theoretical foundations, we use capability development as our second measure of subsidiary evolution.

Subsidiary Evolutionary Trajectories According to these arguments, subsidiary evolution can be interpreted as expansion of the subsidiary’s mandate and the development of new capabilities. However, this says little about the pathways, or trajectories, that these subsidiaries follow, if any. Typologies can be a useful strategy to track trajectories over time, as the subsidiary moves through different categories within the typology, or perhaps remains stationary. Typologies have been used to highlight fundamental subsidiary characteristics (Bartlett and Ghoshal, 1986; Gupta and Govindarajan, 1991), including structure (Taggart, 1997; Birkinshaw et al, 2000), strategy (Frost et al, 2002) and, most relevantly, the evolution of subsidiaries (Birkinshaw, 1997; Birkinshaw and Hood, 1998; Alvarez and Cantwell, 2011). Typologies are relatively simple and easily understood, allowing researchers to test and verify the underlying rationales for different types of subsidiaries and their various roles within the parent MNC (Enright and Subramanian, 2007). Several existing studies appear to pinpoint subsidiary evolution as following trajectories guided by the interaction of capability development and mandate expansion (Cantwell and Mudambi, 2005; Alvarez and Cantwell, 2011; Kim et al, 2011). However, their focus has mainly been on subsidiaries founded by firms based in developed countries. r 2013 Macmillan Publishers Ltd. 1472-4782


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Few studies have elaborated specific typologies and theoretical foundations for foreign subsidiaries founded by firms originating from NIEs and emerging economies. Hence, we found it necessary to create a typology more appropriate for subsidiaries founded by Taiwanese manufacturing firms. Our typology contains four possible subsidiary types, illustrated in Figure 1. Each subsidiary can be assigned to one category, according to whether or not it has had its mandate expanded since founding and whether or not it has developed new capabilities since founding.

Mandate, Capabilities and Subsidiary Performance

Global Innovator

Pure Implementer

Capability Contributor

Yes

Mandate Extender

No

Mandate Expansion

An increasing amount of evidence connects development of capabilities and mandate expansion to subsidiary performance. Over the past two decades, investigations into how headquarters’ strategies affect subsidiary performance have found indirect evidence of this connection (for example, Birkinshaw and Morrison, 1995; Foss and Pedersen, 2002; Ambos and Birkinshaw, 2010). More recent empirical studies have found direct evidence for the link. For example, Alvarez and Cantwell (2011) found that developing R&D capabilities and internationalization experience has significant effects on subsidiary performance. Ambos et al (2010) show initiative-taking subsidiaries are able to enhance their performance in hostcountry operations. Subsidiaries that actively undertake mandate changes are more likely to improve their performance (Keupp et al, 2011; Giroud et al, 2012). Delios and Beamish (2001) found that subsidiary performance is enhanced when it uses host-country experience to develop new capabilities.

No

Yes New Capability Development

Figure 1: Typology of Taiwanese MNCs’ foreign subsidiaries. 44



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Expanding on these findings, we suggest that subsidiary performance is correlated with the evolutionary typology described earlier and measured in terms of mandate expansion and/or development of new capabilities. Therefore, we propose that expanded mandates and development of new capabilities reflect the subsidiary’s local knowledge, ability to maneuver within the bounds imposed by the parent firm and skill at acquiring further resources. These changes signify the evolutionary adaptations that the subsidiary experiences following the originally limited mandate assigned to it by the parent firm. Furthermore, these changes ought to cause the subsidiary to enjoy better performance compared with subsidiaries that are unable to evolve in either of these two dimensions. Thus, we construct the following hypothesis: Hypothesis 1:

Subsidiaries that have expanded mandates and developed new capabilities will have higher performance than subsidiaries that do not have extended mandates or developed new capabilities.

We now turn to identifying the drivers of capability development and mandate expansion. One well-known factor affecting subsidiary performance is its experience in the host country. Subsidiaries with greater experience in their host-country markets have an increased ability to learn and absorb new knowledge efficiently (Kor and Mahoney, 2005). In other words, the longer a subsidiary’s exposure to its host country, the more host country-specific knowledge it will have accumulated that it can then act on in beneficial ways, such as developing new market-specific capabilities. Types of knowledge gained include local market operations know-how, ability to discern and navigate cultural differences, and the characteristics of local institutions (Gao et al, 2008). As such, greater host-country experience allows the subsidiary to acquire meaningful knowledge of local cultural and institutional environments (Sohn, 1994; Luo, 1997). It also makes obtaining local legitimacy much easier (Zaheer and Mosakowski, 1997). The key point is that subsidiaries with greater host-country experience are more likely to be successful than those with less experience (Luo and Peng, 1999; Delios and Beamish, 2001). Therefore, the superior performance of subsidiaries with greater experience in the host country, found in previous research (for example, Makino and Delios, 1996; Luo and Peng, 1999; Gao et al, 2008), can be interpreted as resulting from the subsidiaries’ increased probability of developing new capabilities and having their mandates expanded. Greater host-country experience means subsidiaries are likely to have lower operating risks because of fewer environmental threats and reduced uncertainty, thus freeing them to discover profitable business opportunities, and enhance their capabilities (Chetty et al, 2006). We hypothesize that subsidiaries with greater host-country r 2013 Macmillan Publishers Ltd. 1472-4782


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experience will be more capable of acting on their assimilated local knowledge to develop new capabilities and acquire mandate enhancements. We can test this idea by forming our second hypothesis as follows. Hypothesis 2:

Subsidiaries with greater host-country experience are more likely to have expanded mandates and/or develop new capabilities compared with subsidiaries with less host-country experience.

The parent firm’s presence in more than one market is another strong factor in subsidiary performance. Exposure to diverse international markets offers the parent firm the opportunity to gain valuable knowledge-based resources, which are then potentially transferrable between itself and its subsidiaries and among sister subsidiaries. Expanding into more regions allows firms to enhance growth and profitability by leveraging existing capabilities, expand sales into a wider range of markets, spread risk across a number of foreign countries, and enhance their ability to exploit economies of scope (Kim et al, 1993). In a large sample of Japanese firms, Fang et al (2007) found that having a parent firm with greater international diversification affected subsidiary performance. Although knowledge-based capabilities are not always easily transferred (Kogut and Zander, 1993), diversified firms are likely to acquire some additional firm-specific capabilities from their diverse presence, which can then be used to help reduce environmental uncertainty for foreign subsidiaries (Chen et al, 2012). Related research also implies a higher degree of MNE geographic dispersion results in the evolution of subsidiaries towards competence-building mandates (Cantwell and Mudambi, 2005). These studies suggest a parent firm with a higher degree of international diversification is more capable of leveraging its firm-specific knowledge-based resources to improve subsidiary performance. Applying these concepts to Taiwanese manufacturing firms and their subsidiaries, we argue that those firms with more geographically dispersed FDIs (that is, investments in more than one region) are more likely to acquire and transfer knowledge-based resources that generate the dynamics required for the subsidiary to develop new capabilities and gain an expanded mandate. Knowledge may be directly transferred from the parent firm and sister subsidiaries, or indirectly developed as a result of internationally experienced managers being assigned to the subsidiary, who then stimulate these developments. In short, subsidiaries of geographically diverse firms will have a better chance of evolving towards the Global Innovators category. This idea is formalized in the following hypothesis: Hypothesis 3:

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The more regions in which the parent firm conducts FDI, the more likely its subsidiary will have an expanded mandate and/ or develop new capabilities.



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Data and Methodology Data collection, sample and methodology Testing these hypotheses requires longitudinal data enabling us to capture the development of a subsidiary over time. Preferably, these data should include information about the subsidiary at the time of its founding up to its recent status. We also require information about the subsidiary’s development of new capabilities and expansion of its mandate, or lack thereof, over the same time frame. Mandate and capability information is not readily available in most company accounting data, so this requires alternative sources. These specific requirements lead us to seek data from two surveys used in papers by Chen et al (2004, 2012). Their data are ideal for our current tests because it contains 106 complete sets of information collected from the same group of Taiwanese manufacturing firms founding a subsidiary in China or SE Asia between 1986 and 1998.1 The first survey, conducted in 2002, captured the subsidiaries’ early configuration. The second survey, 8 years later in 2010, recorded more recent developments. In effect, these data provide two snapshots of the focal subsidiary’s evolution, one near the time of founding and another more recently. These data also include information on whether the subsidiary had its mandate expanded or developed new capabilities beyond those already possessed by the parent company. The variables we derived from these data were then subjected to ANOVA and chi-squared tests. We then further tested the robustness of our results to control for the possible influence of firm size on subsidiary performance using the General Linear Model (GLM).

Variables and measurements Subsidiary typology Each subsidiary from the sample was sorted into one of the categories in our typology according to whether or not they had expanded their mandates and/or developed new capabilities between 2002 and 2010 (see Figure 1). This information was gathered from the 2010 survey, which asked respondent firms about subsidiary developments in yes-or-no formatted questions. Each subsidiary was classified into one of the following four groups: (1) Pure Implementer (no mandate expansion and no new capability development), (2) Capability Contributor (no mandate expansion, but new capability development), (3) Mandate Extender (mandate expansion, but no new capability development), and (4) Global Innovator (mandate expansion and new capability development). r 2013 Macmillan Publishers Ltd. 1472-4782


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Dependent variable Subsidiary performance Measuring the performance of Taiwanese subsidiaries is difficult, because profit data of Taiwanese subsidiaries are not publicly released. As with Dess and Robinson’s (1984) investigation, a subjective performance measure is acceptable if an objective measure is unavailable. Furthermore, subjective performance measures are considerably related to objective measures. Owing to the lack of alternative data, subsidiary performance was measured with the survey tool. We calculated subsidiary performance by dividing the amount of the subsidiary’s total sales in 2010 by the amount of its total sales in 2002, indicating the level of subsidiary sales growth. Independent variables Host-country experience To capture the subsidiary’s experience in its host-country market, we calculated the number of years since the subsidiary’s founding as of the 2010 survey. This variable was gathered from information included in the survey completed by the respondent firms. Geographic dispersion We coded this variable as zero if the parent firm only made investments in China, and one if the firm made investments in both China and other locations in SE Asia. We use this measure to test whether parent firms’ FDI in a single location versus multiple locations had an impact on the evolution of the focal subsidiary. This information was also collected from the survey forms. Control variable Firm size Firm size is known to affect firm performance (Ravenscraft, 1983; Contractor et al, 2007), and can be attributable to large firms’ greater number of resources, high-end capabilities and competencies, greater firm-specific advantages, and stronger commitment to the host country compared with smaller firms (Johnston and Menguc, 2007; Kaeppeli, 2009). Liability of smallness also means small firms are less likely to survive (Aldrich and Auster, 1986; Stuart, 2000) and may find it more difficult to hire internationally experienced managers, which will likely translate to poorer performance (Bloodgood et al, 1996). To control for the influence of parent firm size on our hypothesis tests, we utilize it as a control 48



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variable. This variable was coded as one for subsidiaries of firms with fewer than 300 employees and zero for firms with 300 or more employees.2

Empirical Findings As well as asking sample firms whether the focal foreign subsidiary had had its mandate expanded and if the subsidiary had developed new capabilities during this time, the 2010 survey also included additional questions meant to determine the nature of these changes. The results reveal some interesting descriptive trends and characteristics of the sample subsidiaries. We first briefly discuss these results before moving on to the results of our empirical hypotheses tests. By 2010, the sample of 106 subsidiaries had evolved into the following configuration, according to our typology: 45 (42 per cent) remained unchanged as Pure Implementers, 24 (23 per cent) were Capability Contributors, 13 (12 per cent) Mandate Expanders and 24 (23 per cent) Global Innovators. Subsidiaries matching the Global Innovator type include the Malaysian unit of Action Electronics Co., Namchow Group’s Thailand subsidiary and Da Yih Industrial Co.’s China unit. Additional descriptions of representative subsidiaries belonging to each of the four types, from both small and large firms, are shown in Table 3. Table 3: Exemplary parent firms and subsidiaries Mandate Extender

Global Innovator

Pou Chen Group|Indonesia Uni-President Enterprise Corp.|China a a 78% 59% Mandate extension: Global production, Capabilities developed: R&D, marketing marketing and R&D center Mandate extension: Global production center, regional headquarters, local market development Broad Bright Muffler (BBM)|Vietnam Chailease Resources Technology Co.|Malaysia a a 54% 56% Mandate extension: Global production Capabilities developed: R&D center, local market development Mandate extension: Regional headquarters, local market development Pure Implementer Shihlin Electric|Vietnam a 16% Yueli Machinery|China a 25%

Capability Contributor Cheng Shin Rubber Ind. Co., Ltd|China a 75% Capabilities developed: Production, marketing Tungaloy Taiwan Corporation|China a 50% Capabilities developed: Production

a Denotes percentage of total firm sales contributed by all foreign subsidiaries. Note: Upper row of each quadrant lists a large firm, the lower row an SME. Parent firm|country location of focal subsidiary.



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One stand-out finding is that subsidiaries of parent firms deriving a substantial portion of their total sales (50 per cent or more) from overseas subsidiaries were more likely to have an expanded mandate and/or develop new capabilities. Breaking these numbers down according to region, 46 subsidiaries were founded in China and 60 in SE Asia. Of those in SE Asia, 34 (57 per cent) remained Pure Implementers, 10 moved into a Capability Contributors configuration, six became Mandate Expanders and 10 developed fully into Global Innovators. Of the subsidiaries in China, 11 (24 per cent) remained Pure Implementers, 14 were Capability Contributors, seven Mandate Expanders and 14 Global Innovators. These results clearly show that China-based subsidiaries more readily evolved away from Pure Implementers relative to those in SE Asia, pointing to the influence of specific China market characteristics and forces. Constraints in the data meant we were unable to identify the exact forces, but we do speculate on some of these in the discussion section. If we look more closely at the 48 subsidiaries that developed one or more new capabilities, 33 claimed to have gained new manufacturing capabilities, 28 developed marketing capabilities and 17 research and development capabilities. Although new production capabilities were most commonly developed, the development of R&D and marketing capabilities was also relatively high. This points to the selective pressures facing these firms in their respective markets. Moreover, since most of the subsidiaries that developed capabilities were based in China, this hints that the China market motivates these subsidiaries to fill important gaps in their array of capabilities beyond the original manufacturing ones assigned by the parent firm at founding. This might be a sign of export-oriented original equipment manufacturing (OEM) and original design manufacturing (ODM) firms evolving towards own brand manufacturing (OBM) to better fit the Chinese domestic market. As we mentioned in the theory section, capability development can be complex, expensive and influenced by intra-organization power struggles. In many cases, development often requires direct support from the parent firm, sister subsidiaries, clients or sometimes from more than one source. Alternatively, the subsidiary may independently or with help from its local network develop capabilities beyond those supplied by the parent firm. The survey results were indicative of these differing motivations for new capability development. Twenty-nine of the subsidiaries that developed capabilities received direct support from the parent firm; 17 developed their new capabilities independently without help from the parent firm; seven collaborated with clients and five cooperated with one or more sister subsidiaries. In regard to mandate expansion, 37 (38 per cent) of the subsidiaries gained an expanded mandate. The surveys show that several main tasks were prioritized for inclusion during mandate expansion, as follows: 28 subsidiaries helped their parent firm to penetrate the local market, 18 became global 50



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Table 4: Performance comparisons among subsidiaries Dimension

Performance

Variable

n

Pure Implementer (1) Capability Contributor (2) Mandate Extender (3) Global Innovator (4) F-value P-value Comparison

45 24 13 24

Means

SD

3.16 4.77 6.71 8.09 3.35 0.023 (4)4(1), (4)4(2),

3.71 3.97 5.39 10.03

(3)4(1)

Estimated marginal means 2.92 4.78 6.89 8.38 3.03 0.022 R2=0.12

SD 1.02 1.30 1.84 1.29

manufacturing centers, 17 took on the task of a regional headquarters, 12 accessed global marketing channels, eight developed into a global R&D center and four became global strategic investment centers. These results show the majority of mandate expansion was centered on penetrating the local market and/or acting as a regional/global center. We now move on to the results of our hypothesis tests, presented in Tables 4–6. These tables include results from the additional GLM tests using firm size as a control variable, which were performed to test the robustness of the initial results.3 In Hypothesis 1, we proposed that Global Innovators have the highest performance among the four types of subsidiaries. The results of the analysis (see Table 4) support this hypothesis. Pair-wise comparisons of Pure Implementers with Mandate Expanders are also significant, while comparisons of Pure Implementers and Capability Contributors are not. GLM test results are found on the right-hand side of Table 4 and show our results remain significant. This demonstrates the strong influence that mandate expansion and capability development have on subsidiary performance. Subsidiaries with both expanded mandates and new capabilities are significantly correlated with better performance than subsidiaries that have not evolved in these two dimensions. According to our typology, these results suggest that change in both dimensions is the most desirable choice for managers when considering the future development of their subsidiary. In cases where just one dimension has changed, mandate expansion has more influence on performance than just developing new capabilities. The results of tests on our other two hypotheses are also supportive. Hypothesis 2 claims that subsidiaries with greater host-country experience are more likely to expand their mandate and/or develop new capabilities. In other words, they are more likely to evolve towards Global Innovators. The empirical results of the analysis (see Table 5) show that this is indeed the case. Pair-wise r 2013 Macmillan Publishers Ltd. 1472-4782


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Table 5: Subsidiary experience comparisons among subsidiaries Dimension

Subsidiary experience

Variable

n

Pure Implementer (1) Capability Contributor (2) Mandate Extender (3) Global Innovator (4) F-value P-value Comparison

45 24 13 24

Means

SD

15.40 16.17 17.23 18.54 4.02 0.009 (4)4(1), (4)4(2),

3.61 3.21 4.66 3.69

(3)4(1)

Estimated marginal means 15.42 16.17 17.23 18.51 3.00 0.022 R2=0.12

SD 0.56 0.76 1.03 0.77

Table 6: Geographic dispersion comparisons among subsidiaries Dimension

Geographic dispersion

Variable

n

Single

Multiple

Pure Implementer (1) Capability Contributor (2) Mandate Extender (3) Global Innovator (4) Pearson X2 P-value

45 24 13 24

0.578 0.667 0.385 0.208 12.581 0.006

0.422 0.333 0.615 0.792

Estimated marginal means 0.46 0.33 0.60 0.72 F-value 7.02 P-value 0.001 R2 0.22

SD 0.07 0.09 0.13 0.09

comparisons with Pure Implementers and Mandate Expanders are also significant. GLM test results are not significantly different, further supporting our second hypothesis. This shows that subsidiaries with greater experience in the host country have an increased probability of evolving towards the Global Innovator category, thus bringing about greater performance. The second driver behind evolutionary change is geographical dispersion. Our third hypothesis states that firms with greater geographic dispersion will have subsidiaries that are more likely to have expanded mandates and/or develop new capabilities. The results of our analysis presented in Table 6 indicate that overall differences among the four types of subsidiaries are statistically significant in terms of Pearson X2 (12.581). Further GLM testing with firm size as a control variable (see Table 6, right-hand side) also supports our hypothesis. This shows that subsidiaries of more geographically dispersed firms are more likely to evolve away from Pure Implementers towards higherperforming typologies. A presence in more than one location may allow the parent firm to acquire greater knowledge of operating overseas subsidiaries. 52



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This knowledge may then be directly transferred to the focal subsidiary, including having internationally experienced managers assigned to it, who may then lobby for further parent firm resources or possibly endeavor to create new subsidiary capabilities independently. The results of the GLM show the control variable, firm size, has an insignificant influence on firm performance (b ¼ 1.82, F ¼ 1.95, P ¼ 0.17) and subsidiary host-country experience (b ¼ 0.14, F ¼ 0.03, P ¼ 0.86). However, it is positively related to the degree of geographic dispersion (b ¼ 0.33, F ¼ 12.77, P ¼ 0.001). This suggests that large parent firms tend to possess more resources and capabilities and hence tend to make investments in multiple locations. This result implies that firm size may be a precondition to the evolution of subsidiaries. Finally, we conducted a robustness test. We were especially concerned with possible reverse causality in Hypothesis 1. To check for this potentiality, we tested whether high-performing subsidiaries in 2002, measured by sales, were more likely to have developed new capabilities and expanded mandates by 2010. The results of our GLM test were not significant (P ¼ 0.17), which means reverse causality is unlikely and supports our hypothesized directionality of expanded mandates and new capabilities influencing subsidiary performance.

Discussion and Conclusion The results of this study bring up several interesting implications. First, since subsidiaries occupying the Global Innovator position are correlated with higher performance, this suggests that parent firms and subsidiary managers ought to push subsidiaries in this direction in order to maximize subsidiary performance. Subsidiaries currently in intermediate positions (Mandate Expander and Capability Contributor) may indicate their current transition towards the Global Innovator locus, which means the parent firm should support further evolution of the subsidiary by helping it obtain the relevant missing enhancement. Subsidiaries remaining as Pure Implementers could indicate underperformance, and point to a need to remedy the lack of change. A second implication is identification of two and possibly three subsidiary evolutionary trajectories. Historically, many Taiwanese firms’ subsidiaries were founded with the intention of replicating existing capabilities while capturing lower labor costs and obtaining valuable resources available in overseas markets, especially China (Chen and Chen, 1998). This means that parent firms initially intended their subsidiaries to be no more than equivalents to Pure Implementers. The results of this study show that over the intervening years since their establishment, many subsidiaries evolved both expanded mandates and new capabilities, turning themselves into Global Innovators, r 2013 Macmillan Publishers Ltd. 1472-4782


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while others either changed their mandate (Mandate Expander) or developed new and improved capabilities (Capability Contributor). These results indicate that subsidiaries follow one of two or three routes during their potential evolution into Global Innovators. The first route is to initially enhance subsidiary mandate, then develop the necessary capabilities to achieve this goal. The second is to first develop new capabilities, then later expand its mandate in recognition of these new advanced capabilities. Finally, a third possible route may be to jump directly from Pure Implementer to Global Innovator. The third pathway may open when a subsidiary acquires additional facilities/human resources concurrently with having its mandate extended. Since the results show that Mandate Expanders have significantly better performance than Pure Implementers, while Capability Contributors’ performance is not statistically improved compared with Pure Implementers, pursuing the first route may be preferable to the second for subsidiaries currently in the Pure Implementer category. The third possible route was not captured in the data. The results point to some important market-specific evolutionary pressures affecting manufacturing firm strategies and intentions. Subsidiaries in China are more likely to evolve into Capability Contributors and Global Innovators than their counterparts in SE Asia. We suspect the main factor behind the increased probability of subsidiaries in China developing new capabilities is China’s immense domestic market. China is transitioning from a global factory to a global market, and since the results show many Taiwanese subsidiaries have developed marketing and R&D capabilities, these changes are likely invoked to capture these market-specific opportunities. In all, 65 per cent of subsidiaries developing new capabilities did not transfer them back to the parent firm. Over half of these were in the China market, suggesting these new capabilities are likely to be specific to the local market and of less value to the firm as a whole. Furthermore, this may be a sign the subsidiary is building itself into an OBM for China’s domestic market. This is a significant development for Taiwanese firms, because most began as OEMs and moved into ODM, but largely failed (at least until now) to make the step into global OBMs and gain the associated higher profit margins (Hsu et al, 2008). If this is the case, China is presenting an opportunity for Taiwanese firms to develop into OBMs, but through subsidiary developments rather than headquarters transferring this ability to the subsidiary. The data also show subsidiaries in SE Asia are more likely to remain Pure Implementers compared with those in China. This is likely due to Taiwanese firms’ desire to exploit low labor costs and capture resources from relatively resource-rich SE Asian countries (Taiwan has a paucity of resources and thus must source almost all its requirements from overseas). Additionally, Taiwan’s cultural affinity and closer psychological distance is favorable to deeper exploration of China’s market compared with SE Asia (Chen and Chen, 1998). 54



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The current configuration is extremely interesting, because it is a powerful reversal of conditions in the 1990s, when Taiwanese subsidiaries entered the China market primarily for export-oriented activities that sought to take advantage of the low labor costs (Chen and Chen, 1998). The rapidly developing domestic market in China has presented many new opportunities to subsidiaries of Taiwanese firms, many of which have evolved new capabilities that surpass those of the parent firms. SE Asia, meanwhile, remains attractive to firms intent on replicating successful manufacturing models, but with lower costs. Finally, this study sheds light on the performance consequences of subsidiary evolutionary trajectories. Prior research on subsidiary evolution has mainly focused on antecedents (Birkinshaw and Hood, 1998), but has so far largely failed to explore the consequences. To the best of our knowledge, this study is the first to use the dimensions of capability development and mandate expansion to empirically examine the relationship between subsidiary evolution and subsidiary performance. We believe the most interesting finding is that a subsidiary that has expanded its mandate and developed new capabilities has higher performance than those subsidiaries that did not extend their mandate or develop innovative capabilities. This result points to the critical role of mandate expansion and capabilities development in future theoretical consideration of subsidiary evolutionary processes. In sum, this study introduces a typology of subsidiary evolutionary forms which we have then used to make several predictions about performance. Subsidiaries with enhanced mandates and new capabilities were higherperforming than those that did not change. We also identified two drivers behind changes to mandates and the development of capabilities: a subsidiary’s previous experience in the host country and its parent firm’s geographic dispersion. Both drivers create an increased likelihood that the subsidiary will evolve into the role of Global Innovator.

Limitations and Future Research As mentioned in the discussion section, subsidiaries seem to follow one of two or three trajectories. However, data constraints only allowed an analysis of subsidiary trajectories using two points in time. It is possible that subsidiaries might have evolved then devolved, or vice versa, between these two snapshots, which our data would not have captured. Despite this gap in time, our study provides a convenient starting point for future studies wishing to more closely track the dynamics of these trajectories, using more fine-grained tools such as interval scales and case studies of representative companies. There are three other tests that could be done in the future to further explore and verify our main conclusions, with the provision that additional relevant r 2013 Macmillan Publishers Ltd. 1472-4782


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data are available. First, our dependent variable of performance was subsidiary sales growth, which may or may not be inferior to other measures. Future research should capture alternative measures of performance and test the robustness of our results. Second, future tests should examine additional factors that might lead to the increased performance of Global Innovators. Since 58 per cent of Global Innovators were found in China, is there a so-called ‘China factor’ at work? Third, tests should determine what, if any, interaction effects exist between mandate and capability change. Future research can also apply the concepts proposed in this article to firms from other NIEs and emerging economies, which face different pressures, circumstances and motivations that are bound to influence the evolutionary trajectories of their subsidiaries in ways divergent from those of developedcountry firms. Studies could contrast and compare the evolutionary trajectories we identified with those followed by subsidiaries of firms from other NIEs, such as the Korean firms discussed in Lee et al (2013). A related option is to empirically test whether there are any significant differences in expanded mandate tasks and new capabilities of subsidiaries of NIE and developing-economy firms with subsidiaries from developed-country firms. For instance, some Taiwanese firms (for example, Delta Electronics) conduct additional FDI through their foreign subsidiaries rather than making investments directly originating from the parent firm (Pananond, 2013). Is this particular mandate expansion task more or less common for subsidiaries of firms from developing or developed countries, and at what stage of the subsidiary’s evolution is this most likely to occur? In conclusion, the extant studies cited within this article, in addition to our contribution and any future research along the lines suggested here, can form a stream of highly topical research for IB scholars. Not only does this research expand our knowledge of subsidiary evolution and performance, it also deepens our understanding of FDI originating from NIEs and developingeconomy firms, which are likely to grow in importance as sources of FDI well into the future.

Acknowledgements We are grateful for the helpful comments from an anonymous reviewer. A prior version of the article was presented at the International Workshop on Internationalization of East Asian Firms at Kyoto University on 17 March 2012. We would like to thank Profs. Asli Colpan and Takashi Hikino for organizing the workshop. We also thank two commentators, Prof. Akira Takeishi and Prof. Xiyou He, and the other participants for their insightful comments and suggestions. This research was partially supported by a grant from the National Science Council of Taiwan (NSC 99-2410-H-002-005-MY3). 56



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About the Authors Homin Chen is President of the Commerce Development Research Institute and Professor in the Department of International Business, National Taiwan University. His research interests include international business and international marketing strategy. He has published in journals such as Industrial Marketing Management, Management International Review, Journal of World Business, Journal of Business Research, Long Range Planning and Journal of International Business Studies. Chia-Wen Hsu is an Associate Professor at the Department of Business Administration, National Chung Cheng University, Taiwan. His research interests include strategy management and international business. He has published in journals such as Industrial Marketing Management, Management Decision, Management International Review and Journal of World Business. D’Arcy Caskey is a PhD candidate at the Department of International Business, National Taiwan University. His research interests include international business and marketing.

Notes 1 Sample firms came from the following industries: electrical and electronic products (20), machinery (14), basic and fabricated metals (11), chemicals (10), plastics (10), transportation equipment (8), rubber products (7), clothing (6), others (6), shoes (5), textiles (5), food and beverage (4). 2 The choice of 300 employees as the boundary for determining firm size was made to align with the official Taiwanese governmental standard definition, which classifies firms with fewer than 300 employees as SMEs and those with 300 or more employees as large firms. 3 We checked for correlation of the variables in our GLM test. All variables were not highly correlated, implying that there is no multicollinearity problem.

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