Decision-making in multinational corporations: key issues in international business strategy

Integration and differentiation

The choices about local adaptation and global integration apply to all elements of general business strategy. It can thus be argued that differentiation and integration represent the underlying strategic issue faced by the MNCs. ² Adaptation and integration are, in fact, typically experienced by MNCs as two simultaneous pressures. This is reflected in the popularity of the integration-responsiveness grid in international business studies (Prahalad and Doz, 1987; Bartlett and Ghoshal, 1989). The framework plots four strategic options faced by MNCs that are defined by different balances of integration and responsiveness. In the textbook understanding, the four strategic options – global standardization strategy, home replication strategy, transnational strategy and localization strategy – are then linked to four organizational models of the MNC network: global product division, international division, global matrix and geographical area structure. While a lack of fit between strategy and structure is generally assumed to have negative implications for company performance, the high degree of fine slicing of the value chain across borders has led some researchers to question the applicability of the four archetypal strategic options, with MNCs being characterized, rather, as ‘international coordinators’ organizing idiosyncratic sets of value-added activities (Verbeke, 2009).

In practice, strategy and structure are likely to co-evolve through experimentation, reaction to changing market conditions and the search for a workable structure. There are also likely to be differences in the degree to which individual functions are integrated. Accordingly, the key challenge for MNCs is to strike a balance between different degrees of integration and differentiation across products, divisions, functions and tasks (Bartlett and Ghoshal, 1989). It is thus important to distinguish between different levels, or orders, of strategic issues faced by an MNC, all of which involve the integration/differentiation choices (as in Boxall and Purcell, 2011; see T Edwards, Marginson et al., 2013).

The first order issues refer to the upstream strategy issues. This includes the strategic choices identified in the integration-responsiveness framework, such as the extent to which functions are similar in different countries, which business activities are interlinked across countries, and the degree of product standardization. The first order issues also include market positioning in terms of product diversification and the boundaries of the firm (the make-or-buy decisions). As far as the latter is concerned, the trend seems to be towards vertical disintegration, with firms becoming more focused (e.g. Meyer, 2006). Moreover, firms across sectors have been increasingly able to unbundle their corporate functions. Business support activities, such as HRM and accounting, could thus be segmented and centralized. Such segmentation signifies, in turn, that the make-or-buy decisions are made also in relation to the corporate functions, facilitating the outsourcing of the business support activities (see Gospel and Sako, 2010).

The second order issues involve the internal operating structures, including the structure and organization of the MNC network (for an overview, see Dunning and Lundan, 2008) and the forms of international management organization. Empirically, international structures of management and policy-making bodies, such as product divisions, regional structures, and global-function units, are common. At the same time, national subsidiaries remain widespread, Most MNCs thus in effect implement some forms of the matrix structure. However, the difficulties of running more complex matrix structures, and the transaction costs involved, would seem to place a question mark over the feasibility of the truly transnational strategies theorized by international business scholars (Devinney et al., 2000).

Finally, the third order – or downstream – issues include the organization, on the international level, of individual functions, such as HR and industrial relations (i.e. worker participation). While most MNCs seem to monitor HRM indicators, particularly employment numbers and labour costs (P Edwards et al., 2013), integration of HR and industrial relations policies would seem to be difficult because of the differences in cultural, institutional and legal contexts. Case study evidence shows that the unions, where present, have often been able to resist the diffusion of preferred HR practices – often in alliance with other actors in the affiliate. Union pressure would appear to be particularly effective when it comes to defending local collective bargaining and co-determination practices (Schmitt and Sadowski, 2003). MNCs have thus frequently found that the benefits to be potentially derived from integration of HRM policies do not outweigh the cost of overcoming local resistance to the introduction of practices from abroad (Cooke, 2007a). MNCs typically found it easier to integrate technological processes across affiliates than to implement common HRM and industrial relations policies. It has been argued, in this context, that the gains derived from technological integration – apparently less costly to implement and achieve – can substitute for limited integration at the level of HRM (Cooke, 2007b).

Integration between levels (upstream and downstream)

Management theory suggests that integration policies on the three levels need to be well aligned if their potential net gains are to be optimized (Boxall and Purcell, 2011). Accordingly, a high level of upstream integration represents a significant constraint for downstream policies, such as HRM. In practice, however, higher order issues are more likely to be integrated than lower order ones (Rosenzweig, 2006). There seems to be a strong reciprocal link between first and second order issues, with evidence to support Chandler’s classic thesis (1962) that ‘structure follows strategy’ (Galan and Sanchez-Bueno, 2009). Some researchers have produced evidence that a high degree of upstream inter-dependence is associated with high degree of control by headquarters over downstream issues (Robinson, 1995; Young and Tavares, 2004), particularly as far as HRM is concerned (P Edwards et al., 2013); however, the thesis has been disputed with quantitative evidence showing a limited alignment (T Edwards, Tregaskis, et al., 2013).

There would thus appear to be no straightforward relationship between downstream and upstream strategies, with the downstream policies being apparently only partially nested within upstream strategies and structures (T Edwards, Marginson, et al., 2013). The impact is thus is more indirect and contextual and would seem to be conditioned by strategic and structural configurations. For instance, global HR policies may be less attractive for vertically integrated MNCs where individual affiliates have different roles in the value chain (e.g. Dedoussis, 1995), while the impetus to standardize is likely to be strongest in affiliates that replicate functions (e.g. Edwards and Zhang, 2008). There is also evidence to suggest that central control over downstream HRM issues is conditional upon implementation of an international structure of the HR function, which is independent of other upstream choices (Ferner et al., 2011; T Edwards, Tregaskis, et al., 2013).

The upstream context can thus represent an important constraint on downstream strategies, particularly if the choice is made to integrate HR functions. At the same time, there seems to be considerable room for local actors, including trade unions, in devising and negotiating policies that will have a direct impact on working conditions in affiliates.

Subsidiary strategy

Most MNCs constitute far from the coherent wholes, or monolithic firms, that are assumed in some international business strategy frameworks. They consist, rather, of sets of individual units, with different – and often competing – interests, that pursue independent strategies. Headquarters thus take their decisions in the context of information asymmetries (Birkinshaw, 1997; Kristensen and Zeitlin, 2005), a situation that has led to the subsidiary strategy being regarded as a specific field. Accordingly, the subsidiary strategy includes two elements: market positioning and resource development (Birkinshaw and Pedersen, 2010). Market positioning refers to positioning vis-à-vis competitors and customers, both within and outside the MNC. Resource development refers to resources and capabilities held by the subsidiary and deployed at the marketplace (both within and outside the MNC). In general, the most tangible resources (plant, equipment and people) are held at the subsidiary level, while the most intangible resources (financial, organizational, and reputational) are held at the firm level. Key intangible assets on the local level include the strategic position within the production network and the skills of the workforce. Most capabilities, such as manufacturing techniques and quality management systems, are held somewhere between the two levels, with some subsidiaries possibly playing key roles.

However, the degree of freedom enjoyed by the actors of subsidiaries in shaping their market position would seem to be narrowing (Birkinshaw and Pedersen, 2010: 376–378). Decision-making about market positioning is tending to become centralized on the MNC level. While most manufacturing subsidiaries serving domestic customers are part of integrated supply chains, many sales subsidiaries are now part of global sales organizations, with fairly limited freedom in choosing how they serve their local customers. By contrast, it seems to be the case that, in most contexts, key competences and techniques cannot be disentangled from the local context.

This asymmetrical situation has led to suggestions to involve subsidiary managers in decision-making about market positioning on the MNC level (Birkinshaw and Pedersen, 2010: 380–381). This would seem to provide also a good case for involvement of other subsidiary actors, most notably the employee representatives, who may be assumed to have the most direct access to information on resources and capabilities. From the worker representation perspective, the hollowing out of the subsidiary level makes the effective participation of representatives on the MNC level into a strategic priority. The strategic aspects of resource development on the subsidiary levels have been long recognized by trade unions in the affiliates. Resource development, in terms of securing investment in skills and tangible assets, has thus been one of the key union claims in concession bargaining, particularly in manufacturing. However, there is some evidence that the technological change in production techniques may undermine the strategic importance of the skill base on the subsidiary level in some sectors, such as the automotive industry (Benassi, 2013; Drahokoupil et al., 2014). Such developments then reinforce the significance of the MNC level as one at which decisions are made and strategic information can be accessed.

The resource-based perspective

The resource-based view of the firm dominates the mode of thinking in management and international business studies. According to the original formulation (Penrose, 1959), ‘resources drive the growth of the firm’. A firm’s unique bundle of resources and capabilities can generate a competitive advantage. The company strategy is driven by the attempt to deploy and develop the resources it commands with a view to earning the highest return. Key capabilities are dynamic, insofar as firms can learn to reconfigure their assets to respond to the changing environment (Teece, 2009). Standard strategy frameworks to inform managerial decision-making have been formulated from this perspective. Accordingly, management identifies strategic options in order to reach goals and objectives it sets itself by analysing whether and how resources and capabilities of the firm can be deployed in relation to the position of competitors in a market place so that they translate into competitive advantages and ultimately highest returns on the assets they deploy (Tallman and Yip, 2010).

Specific strategies of the firm can thus be related to the nature of its assets and their relative value. Companies that have a relative advantage in industry-specific assets, such as innovation capacity or production techniques, as distinct from country-specific assets, which would include links with local consumers, knowledge of national institutions or access to government officials, are thus likely to internationalize (Meyer, 2006). In turn, firms that are comparatively better endowed with location-bound assets are likely to maximize returns on their firm-specific assets by diversifying their local activities (Rugman, 1996). Diversification by internal growth through redeployment of resources to new, but related, activities will be pursued when the firm is endowed with bundled and indivisible resources that are not specific to a single industry (Kogut and Zander, 1993; Teece et al., 1997). Finally, the nature and separability of capabilities that are linked to individual activities in the value chain is likely to condition decisions concerning firm boundaries (the make-or-buy decisions). The key distinction in this context is that between lower-level operational capabilities to achieve technical fitness, and higher-level dynamic capabilities to sustain evolutionary fitness (Teece, 2009). Operational activities that are separable from activities involving dynamic capabilities are then subject to outsourcing, particularly if possible to centralize (Gospel and Sako, 2010).

The relative value of assets is dependent on the regulatory and business conditions and thus subject to continuous change. As such, environmental change may shift the relative value of industry- and country-specific resources and hence the optimal scope of the firm in terms of diversification and internationalization (Meyer, 2006). With globalization and formalization of institutions, country-specific capabilities are likely to reduce the value of country-specific advantages (Peng et al., 2005). Internationalization of the firm may be driven also by opportunities to develop new capacities, such as gaining access to local innovation systems, taking advantage of cost advantages at different locations, or realizing economies of scale in production (Meyer, 2006). Finally, technological innovations may make capabilities more easily separable and thus allow their concentration (e.g. in joint service centres) and even outsourcing (Gospel and Sako, 2010).

From the resource perspective, MNCs are unique since each subsidiary is defined not just by the internal resources it commands, but also by the external resources it can access (e.g. Hennart, 2009). From the headquarters’ perspective, company decisions seek to maximize efficiency by bundling external resources with internal competences. Restructuring is thus driven by changes in either of these respects (Rugman et al., 2011). Much of the international business strategy literature is thus devoted to discussing forms of organization that would maximize organizational learning across the MNC. By implication, the competence of local organization and strategic importance of local environment (location advantage) shapes the strategic importance and relative power of an affiliate within the MNC (Bartlett and Ghoshal, 1986; Rugman et al., 2011).

Transaction costs and the eclectic paradigm

The transaction cost perspective on MNCs draws on the transaction cost paradigm in economics and is concerned primarily with the optimal boundaries of the firm and, by implication, the dis-integration of value chains associated with the ‘make-or-buy’ decisions. The classic contribution by Coase posited firms and markets as alternative allocative mechanisms. The transaction cost paradigm then theorized the relative efficiency of vertical integration (‘hierarchy’) in preventing market failures, most notably in relation to opportunistic behaviour (Williamson, 1985). According to this rationale, firms are expected to expand to the point where additional advantages of ‘central’ planning are offset by the knowledge difficulties that stem from dispersed information. Recent empirical research conducted from this perspective has analysed the determinants of vertical integration, disintegration, and also hybrid forms (Shelanski and Klein, 1995; Parmigiani, 2007). Studies have also emphasized the importance of ‘mundane’ transaction costs, which are not predicated on opportunism, in providing incentives to standardize procedures and to consolidate activities (Gospel and Sako, 2010).

Cross-border expansion of a firm through direct, ‘hierarchical’ involvement was assumed to entail additional transaction costs due to the ‘liability of foreignness’ (cf. Zaheer, 1995), putting it at a disadvantage over local competitors with a better knowledge of the local market and regulatory environment. However, cross-border expansion through markets (exporting) also entails problems, given the imperfections and failures of the market mechanism. In particular, organization of cross-border inter-dependencies through the market is likely to be more costly than within MNCs if some types of know-how, raw materials and components, marketing and distribution services, and, in some cases, financial capital are involved (Hennart, 2010). ⁴ While the importance of the liability of foreignness has been often considered to be declining relative to the ‘liability of the industry outsider’ (Zaheer, 1995; Meyer, 2006), there is considerable evidence to support a ‘liability of regional foreignness’ thesis (Rugman and Verbeke, 2006). Accordingly, expansion beyond the triadic regions entails transaction costs that make most of the world’s largest MNCs pursue regional, rather than global, strategies (Rugman, 2005; Asmussen, 2012; Qian et al., 2013).

Empirical studies have often drawn on a combination of transaction cost and resource-based theories (e.g. Parmigiani, 2007). On the theoretical level, the approaches have been combined into the influential OLI, or eclectic, paradigm for the study of FDI and MNCs (Dunning and Lundan, 2008). Accordingly, the extent and pattern of foreign value-adding activities can be explained by three sets of variables: ownership-specific advantages (O) of a firm, location-specific advantages (L) of a host country or region, and internationalization advantages (I) associated with the capacity to run cross-border networks. Accordingly, companies engaging in FDI enjoy some ownership advantage/s over competitors operating in other countries that they can exploit abroad. Decisions about where and how much to invest across alternative locations are a matter of comparative ‘location’ advantages, such as market size, proximity to customers, infrastructure, taxation and labour costs. I-specific advantages then allow companies to avoid transaction costs in exploiting O-advantages through the open market. The qualitatively different OLI configurations then characterize four types of investor with different motives for foreign involvement: natural resource seekers, market seekers, efficiency seekers, and strategic asset or capability seekers.

Institutionalism: the interplay of home and host country effects

Institutionalist approaches include a range of theories that focus on the role of social contexts, social embeddedness of economic actors (Granovetter, 1985) and diverse economic rationalities (Morgan, 2001). Studying the diffusion of organizational practices and structures, the neo-institutionalist school theorized pressures on actors to conform to dominant ideas and norms in pursuit of legitimacy (rather than economic efficiency) (e.g. Powell and DiMaggio, 1991). These ‘isomorphic pulls’ include the regulatory, normative, as well as the cognitive-cultural pressures. While some ideas, or ‘best practices’, may be seen as globally dominant, they are confronted within the MNC with competing isomorphic pressure of home country institutional environments (Kostova, 1999; Scott, 2008; Smith and Meiksins, 1995). It is this ‘institutional duality’ that makes MNCs specific (Kostova and Roth, 2002). It also allows greater room for actors within the MNCs who can take advantage of the conflicting isomorphic pulls in shaping strategic decisions.

‘Institutional duality’ also makes the transfer of practices, such as HRM strategies, across the MNCs conflict-prone, particularly where the ‘institutional distance’ between home and host countries is large. Practice adoption and implementation is conditioned not just by the host institutional environment, but also by the relational context within the MNC. As far as the MNC-level factors are concerned, the likelihood of transfer and adoption is highest where there is a high dependence of the subsidiary on headquarters and where there is a high degree of trust and identification between the subsidiary and headquarters (Kostova and Roth, 2002).

Comparative institutionalist research has placed emphasis on the importance of host country and home country institutions in shaping the strategies and structures of companies. The historically developed institutional complexes – means of financing, corporate governance, industrial relations, training and skills development and innovation systems – are interrelated with work and employment systems on the company level (Hall and Soskice, 2001), authority sharing and organizational career patterns within an MNC (Whitley, 2007), and firm internationalization strategies (Whitley, 2001; Geppert et al., 2013). A distinction is typically made between liberal and coordinated economies (following Hall and Soskice, 2001). With the USA and UK as model cases, the former are characterized by strong shareholder orientation, weak influence of other stakeholders and strong authority of top management. Given the low commitment to power sharing, MNCs from liberal economies have developed more standardized organizational practices that lend themselves to international transfer across their network (Almond and Ferner, 2006; Geppert, 2003). By contrast, in coordinated economies, of which the German case represents the model, national institutions such as sectoral collective bargaining and skills-development systems support and enforce social commitment to power-sharing with internal and external stakeholders, including trade unions. Work practices are thus negotiated with stakeholders through institutions such as works councils. These idiosyncratic practices, so it has been argued, are not easily transferable to other contexts that lack the requisite institutions to support them (so-called ‘complementarities’). Moreover, employers may prefer not to transfer home country practices, such as collective bargaining arrangements, for these may be perceived as constraining (e.g. Tempel, 2002).

Actor-centred approaches: politics in MNCs

In international business literature, the study of headquarter-subsidiary relations challenged the understanding of the MNC as a monolith. Accordingly, MNCs are viewed as internal market systems with subsidiaries competing with each other in the effort to influence headquarters’ decisions on key aspects of MNC strategy (Birkinshaw, 2000). The subsidiaries’ power is dependent on their position in the MNC network and on the resources they control, but the decisions are conditioned also by their strategies, including market and capabilities development as well as more political strategies vis-à-vis headquarters (feedback and attention seeking, issue framing/selling) (Ling et al., 2005; Bouquet and Birkinshaw, 2008).

The rationalist ontology associated with the subsidiary entrepreneurship literature (but see Bouquet and Birkinshaw, 2008) has been rejected by the sociologically oriented approaches to the study of MNCs. These approaches emphasize the importance of actors other than management in shaping decision-making in MNCs. These actor-centred institutional approaches attribute outcomes in MNC affiliates to micro-political processes in which the company strategy and employment relations are continually renegotiated between employees, management, and possibly also other actors beyond the company. Viewed from this perspective, the strategy process can be regarded as a conflict among actors with diverging interests over company goals, resources, policies and procedures (Edwards and Bélanger, 2001). The interplay of home country and host country effects can thus be understood as constituting a set of capabilities and resources, such as industrial relations and skills-development systems, that are available to individual actors operating in the MNC (Geppert and Williams, 2006).

In this sense, an MNC can be seen as a multi-level social field, or a ‘contested terrain’ (Edwards and Bélanger, 2009) in which actors renegotiate the ‘contextual rationality’ of MNC strategy (Morgan, 2001). MNCs are thus fragmented organizations that bring together divergent collective and individual actors with different histories and experiences (Geppert and Dörrenbächer, 2013). These experiences, gained in contexts of diverse regional and business systems, take on a major role in defining the interests and preferences of individual actors and constitute the ‘administrative heritage’ that characterizes an MNC (Kristensen and Zeitlin, 2001).

The structure and strategy of the MNC is thus continually renegotiated by actors, and actor coalitions, within the MNC that mobilize resources on local, national and MNC levels in order to pursue their interests. Accordingly, for instance, diffusion of policies across the MNC will be conditioned by how the practices transferred by the company affect existing interests of actors in the affiliate and by the capabilities and resources of these actors; these resources are then conditioned by sets of institutions on the company, regional and global levels (Ferner et al., 2012). The congruence of interest could thus lead to implementation of a work practice even when it does not match host country regulations (which could be changed through lobbying or reinterpreted in the affiliate). In the event of opposition, outcomes are conditioned by the resources individual actors are able to mobilize in the negotiation, with the power resources available to labour here playing a key role.

The network-based approach

The network-based perspective combines transaction cost economics, network theory and organizational learning to analyse the integration of firms across national boundaries in cross-border production and service networks (Gereffi, 1995; Henderson et al., 2002). This configurational approach thus focuses on relationships between firms and governance structures used to coordinate them. The global value chain theory (GVC) identifies five major types of network configurations based on their mode of governance: market, modular, relational, captive and hierarchy (Gereffi et al., 2005). These configurations vary in the degree of explicit coordination and power asymmetry between ‘lead firms’ and suppliers. The modes of governance, and lead firm strategies, are related to three key variables: the complexity of task requirements; the codifiability of those requirements; and the capabilities of actual and potential suppliers.

The key configurational variables, i.e. inter-firm relationships and governance structures used to coordinate them, are used also as explanatory factors. For instance, they condition opportunities for suppliers to upgrade or move up the value chain. Moreover, they also condition skill levels and organizational outcomes within the supplier firms (Lakhani et al., 2013). The framework thus posits a reciprocal link between lead firm and supplier firm strategies. Accordingly, supplier firm strategies will influence the strategic posture adopted by the lead firm, particularly its make/buy decisions. In turn, lead firm strategies will also have a direct effect on the strategies employed by the supplier firms concerning what lines of business to pursue (market positioning) and what forms of employee development to adopt in order to meet strategic goals (Coe et al., 2008).

A recent application of the framework to the analysis of employment relations combined the GVC perspective with actor-centred and institutional approaches, showing how value-chain configurations interact with national institutional influences and actor strategies. Accordingly, strong states and a strong labour movement can be highly effective in influencing lead firm strategies and, in turn, their GVC configurational choices (Lakhani et al., 2013).