Headquarters-subsidiary relationship governance in ...

Wageningen Academic P u b l i s h e r s

Journal on Chain and Network Science 2011; 11(1): 49-68

http://www.wageningenacademic.com/doi/pdf/10.3920/JCNS2011.x189 - Friday, October 30, 2015 11:52:04 AM - IP Address:118.174.74.149

Headquarters-subsidiary relationship governance in Poland Joanna Gusc1 and S.W.F. (Onno) Omta2 1University of Groningen, Faculty of Economics and Business, Department of Accounting, P.O. Box 800, 9700 AV Groningen, the Netherlands; [email protected] 2Wageningen University, Department of Management Studies, P.O. Box 8130, 6700 EW Wageningen, the Netherlands; [email protected]

Abstract The study addresses the views of agency and stewardship theory on governance of the relationship between headquarters and subsidiaries. It explores the influence of strategy, task environment and cultural differences on this relationship. The conceptual model is explored based on a survey of 76 polish subsidiaries of multinational enterprises (MNEs) from 12 countries using partial least squares. The results show that the agency and stewardship mechanisms are used alongside each other, and are complementary. Agency mechanisms provide the platform on which stewardship mechanisms are built. Unexpectedly, the international strategy of the MNEs does not appear to influence the effectiveness and choice of the governance mechanisms. It is concluded that MNEs should recognise contextual and cultural differences in designing the headquarters-subsidiary governance. Keywords: multinational enterprises, international strategy, agency theory, stewardship theory, contingency theory

1. Introduction It seems that the limited scope of the research on multinational enterprises (MNEs), as mentioned by Porter (1986: 17) some 20 years ago, is still relevant, for we know more about how to become a multinational enterprise than about the strategies for managing an existing multinational. Although there is a significant body of research on the entry mode in the emerging economies of Central Eastern Europe, ownership level and institutional arrangement (Karhunen, 2005; Kirsch et al., 2000; Meyer and Peng, 2005), there is not much research that concerns the management of the operations after the entry. Operating as an MNE does not provide competitive advantages per se, instead locally leveraged global linkages create competitive advantages, both informational and economic, which eventually lead to an above-average performance of the whole MNE (Bartlett and Ghoshal, 1998). We argue in the present article that these locally leveraged global linkages are facilitated by the governance of the relationship between headquarters (HQ) and subsidiary (S). In the present study, the HQ-S relationship governance is analysed from two theoretical perspectives; agency and stewardship. The traditional agency view on HQ-S relationship governance seems to fail to accommodate the local-leverage linkages. Even though some authors differentiate the MNE governance depending on the subsidiary’s role in the network (Birkinshaw, 1997; Nohria and Ghoshal, 1994) or the headquarters’ strategy based on firm-specific advantages (Rugman and Verbeke, 2001), all

assume the dominant role of the HQ in the design and the nature of the HQ-S relationship governance, e.g. through intra-corporate isomorphism – subsidiaries operate in the manner carried through by the HQ (Van der Stede, 2003). The basic idea underlying this paper is that effective HQ-S relationship governance is a trade-off between governance mechanisms based on agency theory and governance mechanisms based on stewardship theory. This trade off, we believe, may accommodate the needs of locally leveraged global linkages in MNEs. The HQ-S relationship is analysed in the context of the rapidly changing economy of Poland. The pace of the transformation induces environmental dynamism while the transition from a planned to a market economy increases uncertainty of business operations, both of which may interfere with the creation of local linkages with the subsidiary. The institutional environment – weak (developing) regulatory regime, poorly protected property rights and relatively strong political interference in the economy (Slangen, 2000) – further adds to this uncertainty. It is caused not only by the past political and economic isolation but also by the current effects of joining the global market. Economic liberalisation may subject transition economies to negative effects such as disadvantages originating from becoming connected to other economies. The effects of the global economic crisis, for example, slowed down the transition process in Central and Eastern European countries (EBRD, 2008). This context of a transition economy characterised by rapid growth fuelled by a great pace of economic liberalisation

ISSN 1569-1829 print, ISSN 1875-0931 online, DOI 10.3920/JCNS2011.x189

49


Joanna Gusc and S.W.F. (Onno) Omta

(Hoskisson et al., 2000) inspired us to explore the HQ-S relationship governance from the Polish subsidiary’s perspective. Drawing on contingency theory, this study analyses the HQ-S relationship governance with elements from agency and stewardship theories and as a function of strategy, task environment and cultural distance. By examining these influences, we advance the research on MNEs on the management of the subsidiary after entry. The structure of this article is as follows: the next section describes the theoretical background, including the environmental and cultural aspects and their relationship with the governance mechanisms. The following section introduces the exploratory research design, and describes the survey among subsidiaries of MNEs in Poland. The results are then presented, starting with the peculiarities of the data collection process. This section also describes the general characteristics of the companies in the sample and presents the PLS procedure used in the model development process. The final section includes the discussion and the conclusions as well as suggestions for future research.

2. Theoretical background HQ-S relationship governance: agency and stewardship perspective HQ-S relationship governance has been viewed from the agency theory (AT) perspective as a principal-agent relation, in which the HQ delegates decision-making authority and responsibility to its foreign subsidiaries, after having invested funds and resources in these subsidiaries (Chang and Taylor, 1999; O’Donnell, 2000). The subsidiaries, in turn, are expected to work for the benefit of the HQ. Although the agency costs incurred by MNEs have not been specifically defined, they might include any costs related to the subsidiary’s actions undertaken to promote its own interests at the expense of the HQ’s interests, so-called selfserving behaviour that is not in the interest of the principal. In order to reduce the risk of this behaviour, agency theory suggests monitoring of the results of the agent (S), providing incentives and increasing information exchange between the principal (HQ) and agent (S) (O’Donnell, 2000). In the MNE context, monitoring can be defined as an activity or a mechanism used by the headquarters to obtain information about the behaviour and the decisions of the subsidiary’s management. Traditionally, the most direct form of monitoring is personal supervision of managers (Eisenhardt, 1989; Ouchi, 1979). However, in the case of MNEs, the geographical distance makes direct supervision costly and difficult. The only way in which HQ may directly supervise the subsidiary managers’ behaviour is by sending expatriates to manage subsidiary operations.

50

However, this is very costly (Paik and Sohn, 2004; Schaffer and Jay Hyuk, 2005) and has many disadvantages, e.g. most expatriates are unable to quickly assimilate into foreign cultures (Adler, 2002) or misunderstand local employees’ expectations, which causes a backlash that may result in lower productivity, higher absenteeism or other labourrelated problems (Hiltrop, 2002). Therefore, sending expatriates is not preferred as a monitoring mechanism. The monitoring can be performed through other traditional mechanisms such as rules, programmes and procedures (Galbraith, 1976), serving as an information exchange system (Eisenhardt, 1989). Through monitoring devices, HQ increases the amount of information obtained about the actions of the subsidiary’s management, thereby limiting behaviour that is not congruent with its expectations. In response to different levels of agency problems, the specific governance of MNE is constructed (Kim et al., 2005). Besides increasing information exchange, HQ can set up specific goals for the subsidiary to achieve and tie incentives to these goals, so that the probability that S performs in the way HQ expects it to, will be higher. Although appealing at first sight, applying AT to governance of the relationship has received much criticism (Depelteau, 2008). AT is traditionally criticised for its inability to precisely define the peculiarities of delegating the decisionmaking process, clearly marking out the objectives as a result of incomplete contracts, for example (Hart, 1995). This effect becomes stronger in the international context, where the geographical (and cultural) distance between HQ and S makes setting objectives more difficult, and where S may be subject to other pressures. Inefficiencies in the HQ-S relationship may be caused, for example, if S is willing to respond to local requirements while HQ is operating with a global vision. When it is hard to set clear objectives, AT suggests an alternative by monitoring behaviour. As descried above, these possibilities are limited to creating standards and procedures, which are often ex post oriented and disable real-time action. Further, the more radical criticism of agency theory says that relying on agency mechanisms would doom the relationship and thus the MNE to extinction sooner or later (Perrow, 1986). In the case of the HQ-S relationship governance we argue that a pure agency-based relationship would exist for only a short time, more in joint venture cooperation than in the investment mode. Not surprisingly, some international management research recognised that different mechanisms are essential for keeping the MNE parts together, as suggested earlier by Martinez and Jarillo (1989) and Powell (1990), such as new cross-departmental, informal and subtle mechanisms between the MNE units aimed at building network relationships. To accommodate this specifics we use the insights from stewardship theory, which recognises an alignment of

Journal on Chain and Network Science 11 (2011)


the interests of the equity holders and managers and the importance of social interaction and interdependence (Donaldson, 1990; Powell, 1990). It originates from psychology and sociology and was developed as a response to the agency deficiency in explaining multiple factors that affect managers’ decision making (Donaldson, 1990). In the principal–steward relationship, managers put the company’s interests first and their own second, striving at accomplishing their own goals by serving the interests of the organisation. Managers feel an intrinsic need to do a ‘good job’, and therefore the governance should be designed in such as way that it facilitates (and not necessarily supervises) efficient work of the managers. In the HQ-S relationship governance, the HQ’s function will then be counselling rather than monitoring and the decision-making authority will be evenly distributed between the headquarters and its subsidiaries. The goals for subsidiary operations do not have to be specified in advance or imposed but emerge during the interaction between HQ and S managers. The purpose of such governance is to share resources, knowledge and experience. It aims at creating trust and enhancing goal alignment between the headquarters and its subsidiaries. The relationship between units is more dependent on social contacts and mutual interests, and is less guided by formal structures of authority (Powell, 1990). Personal contacts contribute to a better knowledge transfer and enhance learning, which is similar to ‘coordination by socialisation and networks’ (Birkinshaw and Morrison 1995; Harzing 1999). These mechanisms keep MNE together and make the monitoring much less intensive and cheaper. We argue that stewardship mechanisms and agency mechanisms are both essential for keeping the MNE together and enhancing performance. In this paper we are going to search for the optimal trade-off between these mechanisms to arrive at enhanced performance in the context of a highly uncertain transition economy.

Headquarters-subsidiary relationship governance in Poland

Dynamic changes within a task environment can create a situation in which both the HQ’s and the subsidiary’s managers may lack sufficient information to accurately forecast customer demand, competitor reactions, and market response. In this type of environment, organisations find it difficult to pursue long-term strategies and build relationships with for example suppliers and customers (Luo and Peng, 1999). For a subsidiary, the HQ may play an important role and enable information by exchanging it with the other subsidiaries in the MNE and also forwarding information from HQ. Constraints in the resource market such as a limited or distorted access to key resources may restrain subsidiaries (and indirectly also MNEs) in creating resource back-ups, and potentially threaten their chances of survival during less favourable periods. Furthermore, resource market constraints may affect the strategic options available, bias competitive pressures, and threaten the relative harmony between the MNE competitors and their customers (Goll and Rasheed, 1997; Sutcliffe, 1994). In constraint environments, companies have to slow-down or even abandon their growth objectives. The interaction with the headquarters may contribute to solving shortage problems, while the MNE headquarters network may support the subsidiary in searching for and acquiring new resources. It seems that negative effects of the environment on the HQ-S relationship may be compensated by extended networking; and creating linkages with the HQ may provide useful feedback and facilitate knowledge exchange, thereby helping to the S cope with an uncertain environment (Lyles et al., 2004). We argue therefore that HQ-S governance mechanisms are aimed at supporting an intensive information exchange and promoting the subsidiary’s initiatives (stewardship mechanisms), while focussing less on the control and supervision of the S’s actions (agency mechanisms). HQ-S cultural distance

The subsidiary’s task environment The context of the HQ-S relationship governance is its environment, which is generally defined as all the elements that exist outside the boundary of an organisation, with the potential to affect this organisation or part of it (Daft, 1989). The task environment typically includes the industry, competitors, customers, production techniques, suppliers, stock market, raw materials, market sectors, and possibly human resources and international sectors (Thompson, 1967). The turbulence, dynamism and constraint of the task environment can either be a lapse or an opportunity which influences the organisation’s internal structures and processes (Lawrence and Lorsch, 1967: 187).


In managing their operations, MNEs generally face difficulties related to cultural barriers (Hennart, 2001). Therefore, using a single governance model across countries has proven to be an inefficient approach (Hofstede, 1999). In HQ-S governance, the members of at least two1 cultures cooperate with one another: those of the headquarters’ and those of the subsidiaries’ culture. The degree of difference in national norms, values and working methods between HQ and S, forms the cultural distance (Jobber, 2001). If the cultural distance is large, governance mechanisms 1 This

is the case in major or full ownership by a single investor. If there are more major international investors, the HQ-S governance will have to accommodate multiple cultural influences.

51



International strategy choices

that work well within one national culture may generate dysfunctional behaviour when transplanted thoughtlessly to a different cultural context (Chow et al., 1994; Filatotchev, 2004; Flamholtz et al., 1985). Taking one of the Hofstede’s (2001) dimensions – the acceptance of (un)equal power division within the organisation – as an example; if HQ and S both value or disvalue authority equally highly, no cultural distance exists. The problem arises when HQ and S represent different views on the power division and therefore large cultural distance exists between them. For example, if only the HQ highly values an unequal power division, it will attempt to impose centralisation and control on the subsidiary, to which the latter will reluctantly comply, or not, potentially threatening the survival of the MNE as a whole. Alternatively, if S highly values the unequal power division, it will expect the HQ to perform as a ‘commanderin-chief’, whereas HQ will perceive S as an equal partner, opting for decentralisation and consultation within the decision-making process. In this situation, S would perceive HQ as incompetent, and choose to operate autonomously. In both situations the effect will be disadvantageous for the performance of the MNE (Chow et al., 1999). Furthermore, if HQ and S approach the uncertainty differently, this will have consequences for the relationship governance. For example, if HQ has difficulty coping with uncertainty, it will be inclined to formalise and predetermine all interactions with S. The HQ’s managers will try to avoid uncertain situations and/or develop extended normative rules, with little tolerance for deviant behaviour (Hofstede, 1980). If this is combined with a high appreciation of authority, the HQ will focus on agency monitoring (imposed procedures, planning, budgeting, etc.) together with strong S output control (reporting, monitoring and performance evaluation). We argue that agency mechanisms may create transparency and culturally compromised (neutral) instruments for information exchange and the building of relationships to reduce uncertainty, and provide information to enable knowledge and learning about the two cultures.

S

(1) HQ

S S

Global strategy – tight HQ agency mechanisms

An international strategy is the way in which an MNE positions itself in the global business environment to create competitive advantage across national boundaries (Govindarajan and Gupta, 1985). According to Simons (1990), international strategy refers to corporate strategy, as it is concerned with determining the business (or buseinesses) an MNE chooses to compete in, and effectively allocating scarce resources among business units. MNEs have two basic strategic options to compete in the international market, (global optimisation or local responsiveness) and a third option (transnational strategy), which combines the strengths of the two basic options. Each strategy sets specific requirements for the design of the HQ-S governance. Figure 1 illustrates HQ and S interdependences in the three strategies: global, multidomestic and transnational. A global strategy gives primary importance to efficiency, while building on the global convergence of customers’ tastes as well as standardised production (Levitt, 1983). It is characterised by a high level of globalisation of competition and a focus on capturing economies of scale in interconnected national product markets. Because of the dominant requirement of efficiency in the production of standardised goods, HQ considers subsidiaries as pipelines which are not expected to respond to local market needs (Harzing, 1999). The competitive advantage of global companies lies in optimising the upstream value chain activities on a world-wide scale. Likewise it is in realising cost reductions and increasing their profitability resulting from experience-curve effects and location economies by performing value-creation activities in the optimal location, wherever in the world that might be (transportation costs and trade barriers taken into account). The automotive and electronic industries are clear examples of global strategy (Bartlett and Ghoshal, 1998). HQ usually finds it important to centralise decision-making, and considers a subsidiary as the implementer of its decision choices (Rugman and Verbeke, 1992). In these companies, many activities, such S

(2) HQ

S

S

(3) HQ

S Multidomestic strategy – moderate HQ agency mechanisms

S S

Transnational strategy – agency and stewardship mechanisms in network of interdependences

Figure 1. HQ-S relationships in a MNE with global, multidomestic or transnational strategy.

52



as strategic and operational decision-making, are either HQ based or centralised at the HQ. The aim of HQ-S governance is to enable resource sharing and ensure the required output; therefore we may expect a strong dependence of the subsidiary on the HQ, and a focus on agency mechanism with a tight control with respect to decisions, procedures and information (see scheme 1 in Figure 1). MNEs that pursue a multidomestic strategy compete on a domestic level by adapting their products and policies to each specific country market, and accommodating the diverse demands arising from national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions and government policies (Harzing, 1999). In each subsidiary’s country, the whole value chain of activities is built aimed at serving the local market optimally. The downstream activities of the value chain facilitate the creation of competitive advantage, as they are closely related to the local customer. The responsiveness to local markets requires decentralised decision-making and a relatively high autonomy of the subsidiaries (see scheme 2 in Figure 1). In a globalising world with rapidly developing information technology, concentrating solely on one of these strategies may lead to unsatisfactory performance, as both strategies have their shortcomings (Jackson et al., 1997). To capture the benefits of both global and multi-domestic strategies, a transnational strategy has been developed, which combines local responsiveness with global integration (Bartlett and Ghoshal, 1998). Competition is based on the ability to link subsidiaries’ activities across geographic locations (Bartlett and Ghoshal, 1998; Birkinshaw et al., 1995). According to the transnational strategy, the globalisation and localisation forces do not clash, as described by Prahalad and Doz (1987). These forces are orthogonal, requiring MNEs to judge the degree of strategic emphasis of both dimensions simultaneously, rather than treating them as separate alternatives. Bartlett and Ghoshal (1998) observed that in the modern MNE, distinctive competencies are not merely available in the home country but can also develop in any of the company’s world-wide subsidiaries. MNEs that adopt the transnational strategy recognise that they have to pay attention to global efficiency, national responsiveness and world-wide learning. The type of organisational structure that fits the transnational strategy is flexible. It is referred to as an integrated network structure, which connects the major sub-units of the company (Parkhe et al., 2003). It takes advantage of home- and host-country assets, as well as location-bound and non-location-bound firm resources. The subsidiary can serve as a strategic centre for a particular product-market combination. Thus, the flow of skills and product offerings is not just one-way from headquarters to subsidiary, as is the case with companies that pursue a global



strategy. Instead, the flow moves from HQ to its foreign subsidiaries and vice versa, and from a foreign subsidiary to another foreign subsidiary – a process referred to as global learning (Calori et al., 2000). The governance focus of MNEs that adopt a transnational strategy is not on agency mechanisms, but on activities that create transparency and a shared identity, as well as values and attitudes based on stewardship theory. These mechanisms include building lateral relations, informal communication and creating a strong organisational culture (Calori et al., 2000). Within the MNE network, a subsidiary is given a world mandate, so it can actively contribute to strategy development. In addition, it has an interdependent position with respect to the different units of the MNE (see scheme 3 in Figure 1). Here, the HQ-S governance mechanisms facilitate information sharing, learning and innovation, which will ultimately bring comparative advantages2 to the MNE (Todeva, 2005). The promotion of the interconnectedness (i.e. linking geographically dispersed parts of the organisation via intranets, extranets, etc.), best practice repositories, as well as centres of excellence, may enhance the companies’ performance (Calori et al., 2000; Yeniyurt et al., 2005). The transnational strategy combines elements of a global and a local strategy, which implies that a combination of tight and loose stewardship mechanisms is characteristic for that type of strategy. Figure 2 illustrates the proposed relationships of task environment, cultural distance and international strategy with HQ-S governance and performance.

3. Methodology We chose an explorative and quantitative research design for two reasons. First, no existing research explains the HQ-S relationship from the two-theory perspective, agency and stewardship; therefore we were not able to develop rigid hypotheses to be tested in the current research. Second, the quantitative research design allows for cross-sectional comparisons and the statistical modelling of the relationship between concepts, which may later become input for testing research. Furthermore quantitative designs are seldom performed in the Central Eeastern European region, which was a strong motivation for us to contribute to enlarging the research on this region (Yang et al., 2006). 2 In

economics, the theory of comparative advantage (sometimes known as ‘Ricardo’s Law’) explains why it can be beneficial for two parties (countries, regions, individuals and so on) to trade, even though one of them can produce items more cheaply than the other. What matters is not the absolute cost of production, but the ratio between the ease with which the two countries can produce different goods.

53


HQ-S governance Task environment


Transnational strategy

Stewardship mechanisms Performance

Cultural distance

Agency mechanisms

Global strategy Control variables Subsidiary age & size HQ age & size HQ capital share Relationship duration S’s international sales Figure 2. Conceptual model for environmental and cultural influences on HQ-S relationship governance.

Below, we shortly describe the concepts exhibited in Figure 2 and present their operationalisation. The detailed measures and the questionnaire can be obtained on request from the corresponding author. Further in this section, we describe the survey research and the methods of data analysis. Agency mechanisms Agency mechanisms in the HQ-S governance model are based on HQ comparing the S’s actual with its planned output. Egelhoff (1984) emphasises the measurement of output, providing operationalisations of control mechanisms for three areas: marketing, manufacturing and finance. Harzing (1999) applies Egelhoff’s framework to MNEs, and estimates the subsidiary’s output at the headquarters’ level by means of written reports. As written reports frequency measures have proven their external validity in the abovementioned studies, a similar operationalisation is used in the present study: the frequency of reporting on two levels: strategic and operational. Strategic control is less concerned with the comparison of achieved with planned output, and more directed towards the implementation and adjustment of the MNE’s strategy. It includes written reports on the fulfilment of long-term strategic objectives, such as market share change, R&D and human resource management. Operational control addresses the general question of whether a subsidiary is operating appropriately. This means that it reports on operational aspects, such as output control and the realisation of short-term goals by

54

the subsidiary (Merchant and Van der Stede, 2003). The questions used the interval scale that reflects 8 frequencies: 1 less than once a year, 2 yearly, 3 semi-yearly, 4 quarterly, 5 monthly, 6 bi-weekly, 7 weekly, 8 daily. Submitting a report, however, does not guarantee reading its content; it may well only be stored in an HQ’s database. To learn whether the information from the subsidiary’s reports is actually being used or not, we added an item reflecting the HQ’s sensitivity to the information in these reports. This new item serves as an important indicator of the HQ’s eagerness to use the information provided by the subsidiary, by indirectly measuring its feedback. This item was measured on a 7-point Likert scale, using the scale anchors strongly disagree – strongly agree. Stewardship mechanisms Stewardship mechanisms focus on mutual cooperation. They represent personal interaction, joint actions and the application of liaison devices. Moreover, through personal contacts, the employees of HQ and the subsidiary get to know each other, which creates a basis for performing a task jointly. In the present study, we included the mode and frequency of personal contacts between the managers of the HQ and those of the subsidiary departments, as well as the frequency of joint task and group activities. Linking the different parts of an MNE occurs by informal attuning, usually short ad-hoc e-mail or telephone contacts, which enable the subsidiary to alter and adjust its actions




in real-time without any possible delays by procedural requirements (Merchant and Van der Stede, 2003). This flexibility is, in turn, essential in order to anticipate and react to changes in the environment at low or no additional costs. The stewardship mechanisms of attunement, personal communication and joint task groups were measured on an interval scale that reflects 8 frequencies: 1 less than once a year, 2 yearly, 3 semi-yearly, 4 quarterly, 5 monthly, 6 biweekly, 7 weekly, 8 daily. Task environment Previous research suggests that the subjective measures of environmental uncertainty, such as managers’ perceptions, are more relevant than archival measures (Miller and Friesen, 1983). We have used the subsidiaries CEO’s perception for the evaluation of the environment. Task environment includes three dimensions: political uncertainty, environmental dynamism and environmental constraints. Political uncertainty concerns the predictability of law change and the reliability of governmental agencies (Luo and Peng, 1999). Environmental dynamism reflects the intensity of competitiveness and the variety of the customers’ needs and taste (Luo and Peng, 1999). Environmental constraints refer to the difficulties in acquiring resources from the market in general, the scarcity of the workforce and, in particular, the difficulties in assuring cooperation with a suppliers’ network (Dess and Beard, 1984). The three dimensions were measured on a 7-point Likert scale, using the scale anchors strongly disagree-strongly agree. Cultural distance To measure the cultural distance among the subsidiaries and their headquarters, the formula developed by Kogut and Singh (1988) was applied. The differences between HQ and S countries’ proxies were measured on two dimensions developed by Hofstede (1980): power distance and uncertainty avoidance. These dimensions were summed up after dividing the difference of the i-th HQ and S country

scores, by the standard deviation of the i-th dimension (see calculations in Appendix 1). International strategy Most studies measuring a company’s international strategy use measures based on the work of Bartlett and Goshal (1987). This work has been updated and validated by a number of researchers, such as Harzing (2000), Zou and Cavusgil (2002), and Yeniyurt et al. (2005; 2000). In the literature, global strategy measures often use different contexts and a higher level of abstraction (Kogut, 1984; Roth and Morrison, 1992). Roth et al. (1991), for example, measured the global subsidiary mandate on the basis of a 4-item statement, after which they used the summed score for classifying the subsidiary as a carrier of a global mandate. In the present study, Harzing’s (1999) typology and Roth et al.’s (1991) measures were incorporated in four statements (concerning focus on local market or global market and the subsidiary initiative in providing innovative ideas as well as developing export channels for the whole MNE), on which the respondents were asked to give their opinions. All items were measured on a 7-point Likert scale, using the scale anchors strongly disagree-strongly agree. The expected scores for the three strategies are presented in Table 1. Performance In the present study, performance measures focus on the effect of the managerial influence of the HQ on the subsidiary’s operations. To estimate this influence, several existing measures (Choi and Czechowicz, 1983; Luo and Peng, 1999; Nohria and Ghoshal, 1994; Robinson and McDougall, 2001; Roth et al., 1991) were combined, which predominantly focus on subjective performance indicators of the perceived satisfaction of the subsidiary’s CEO. Nonfinancial performance evaluation, based on managers’ perceptions of four factors concerning the company’s competitive position, as well as their satisfaction with the company’s operations, was successfully applied earlier by

Table 1. Operationalisation of international strategy concept. Variable

Focus on local market Focus on world-wide market Subsidiary’s ideas for international products Subsidiary’s control over export


Expected score for: Global strategy

Multidomestic strategy

Transnational strategy

Low High Low Medium

High Low Low Low

High High High High

55



Luo and Peng (1999). Moreover. subjective (non-financial) performance measures correlate with objective measures with a high degree of reliability (Gonzalez-Benito and Gonzalez-Benito, 2005; Luo and Peng, 1999). Performance measures included six dimensions: general, short-term, market, network, customer and learning performance, all measured on a 7-point Likert scale, using the scale anchors strongly disagree-strongly agree. Control variables The size of HQ and S, the duration of the HQ-S relationship, and the relative international sales of S were included in the study as control variables. Size was measured by the number of employees working in full-time equivalents (fte) in the headquarters and in the subsidiary. Following earlier studies, we used the natural logarithm of the number of employees in the analyses (Gonzalez-Benito and GonzalezBenito, 2005; Roth and Morrison, 1992). As stated by Miller and Droge (1986), this logarithmic scale normalises the variable, which might otherwise be skewed. The duration of the relationship with the headquarters is in some studies equal to the subsidiary’s age, e.g. Egelhoff (1984) and Chang and Taylor (1999). However, this only applies to subsidiaries set up recently. When an investment is made in an existing subsidiary, the age and the relationship duration are not equal, because the foundation of the subsidiary already took place earlier. Harzing (1999) used a two-item measure, which includes the foundation year of the subsidiary and the date at which the majority of the capital was provided by the MNE. Harzing, however, did not register when the company actually became a subsidiary. To avoid this shortcoming, we included two variables for measuring the relationship duration: the investment date (becoming a subsidiary) and the foundation year of the subsidiary. We calculated the duration of the HQ-S relationship by subtracting the year in which the largest capital stake was acquired from the year of the data collection. The subsidiary’s sales were measured by the percentages of its sales in the international and domestic markets. These percentages had to add up to 100% in total. In addition, the intra-company sales transfers were measured (percentage of the production sold directly to the market and to the headquarters), thereby identifying the S’s dependence on the HQ in the international market. A similar measure was used bay Kobrin (1991), who applied intra-firm international sales to measure the transnationality of a subsidiary.

4. Questionnaire and analyses We collected the data by means of mailed questionnaires sent to Polish manufacturing companies with a majority

56

foreign capital share, i.e. foreign headquarters. The questionnaire was developed in English and translated and sent out in Polish with a cover letter. It was retranslated into English by an independent translator to minimise translation bias. Before collecting the data, we conducted a pilot study among 24 Dutch subsidiaries in Poland in 2002. Both the comments of the respondents (directors) and the acquired research experience during the pilot data collection in Poland were taken into account in the design of the final questionnaire. The cover page of the questionnaire included a statement on the confidentiality of the data, guaranteeing the anonymity of the respondents and of the subsidiaries engaged in the project. Further, the questionnaire included the name and address of the researcher and the cooperating universities as well as space for additional comments and an email-address, in case the respondent was interested in receiving the results of the study. To identify the research population, we used company data from the database of the Centre for Economic Information (unit of the Polish Ministry of Economics). This database provided us with a population of potential respondents (all general or financial directors), based on the criteria that the company had a significant share of foreign capital (more than 10%), and employed more than 10 employees. We were informed by the database provider that the database was not up-to-date: many companies that had terminated their activities had not yet been removed from the database. For that reason we decided to send the questionnaire to all address entries, the entire population. In total 2,872 survey questionnaires were sent in May 2004. Soon after the mailing it appeared that many companies no longer existed and many data such as the address and the name of the director were outdated. We had to therefore adjust the data collection strategy. This revised strategy is described below in the results section. Given the objective and the characteristics of the study, we chose a single respondent – General Director – as the best-informed and the only competent person. In this study it was not possible to survey several people and groups simultaneously, for that approach would have jeopardised the return rate to the point of threatening the entire investigation. Since using a single respondent may cause common method variance bias, we applied both procedural and statistical precautions to reduce the likelihood of the possible bias (Podsakoff et al., 2003). With respect to procedural steps, we methodologically separated the measurement by using different types of scales (5-point and 7-point Likert scales as well as frequencies), assured anonymity of the respondents, counterbalanced the measurement order of the predictor and criterion variables and kept the expected relationships between constructs hidden from the respondents (Hult et al., 2006; Podsakoff



et al., 2003). Statistical steps included the most commonly used Harman’s single factor test (McFarlin and Sweeney, 1992). If a substantial amount of common method variance was present, either single factor would have emerged or one general factor would account for the majority of the covariance among measures. If common method bias posed a serious problem within a data set, a single latent factor would account for a large portion of the variance across observations (Podsakoff and Organ, 1986). This was not the case in our data, and a substantially worse fit for the one-factor model suggested that common method bias did not pose a serious threat (Krause, 2006). For developing the model, PLS-Graph software was used, under license of W. Chin. In PLS, the analysis of loadings of the manifest variables on their latent constructs confirmed that no common method variance existed (Table 3). This analysis is described in the next section of this document. All other analyses were performed using SPSS and Excel software.

5. Results From the first mailing 61 questionnaires were returned, of which seven had to be excluded, as the companies either did not possess foreign capital, or their capital was brought in by a Polish private individual with a foreign nationality. These companies returned empty questionnaire forms, so no additional information was available. Another six companies returned the questionnaire and declined participation in the research. To increase the response rate, we were forced to adjust the research strategy. In preparation of the second mailing of the questionnaire, telephone calls were made from a local university to randomly select companies listed in the database. From these calls we learned that some of the CEOs required an authorisation from the HQ to provide external parties with any information, such as filling out the questionnaire. In some cases, we received mailings with multiple authorisation signatures from the headquarters’ offices. The telephone conversations revealed additional information about the organisational structure of the companies in Poland. For example, Danone has a number of production plants spread all over Poland, which in the database were all registered as separate companies with a foreign capital share. These production plants were, however, subsidiaries of Polish headquarters seated in Warsaw, which in turn was a subsidiary of the French headquarters. In view of the objective of the study – the analysis of the cross-border HQ-S relationship governance – the Polish subsidiaries of the headquarters seated in Poland were excluded from the analysis. The phone calls led to another 28 completed questionnaires, and revealed the reasons for the non-response of 123 other respondents. The noneligible respondents were removed from the population. The



first and second mailings together provided us with a total of 89 completed questionnaires, which makes a response rate of about 7%. This is relatively low, but still within the range generally found in international management studies (Chin and Newsted, 1999; Harzing, 1997). An important reason for the relatively low response rate was the timing of the mailing; at that particular moment Poland was about to enter the European Union (EU). At this zero-measurement moment many directors and managers expressed a strong uncertainty about the future developments of their companies within the new EU legislation framework. Of the 89 questionnaires, 76 were useable for analysis. A comparison of early and late respondents did not show any significant differences, indicating that non-response bias might be limited. Baseline description of the companies Most of the subsidiaries had a private foreign ownership and were established after the market liberalisation process in Poland had started in 1990, whereas only a few (15%) had a longer tradition. Although the subsidiaries had a relatively large mean size (223 employees), the majority was small; 76% employed fewer than 250 workers. The subsidiaries sold their products mostly to B2B markets, and showed a strong international activity; a large group of companies (75%) exported at least the majority of their production to the international market. As the strong positive correlation between international sales and sales to the HQ (r=0.8, P