Some Notes on Subsidiary Network Embeddedness and its Effects on

working paper 1999/3

Ulf Andersson

Some Notes on Subsidiary NetworkEmbeddedness and its Effects on the

Multinational Corporation

FÖRETAGSEKONOMISKA INSTITUTIONENUPPSALA UNIVERSITET

Department of Business StudiesUppsala University

1999

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Introduction

The notion that the multinational corporation can be considered to be a system of

interdependent units with flows of knowledge, products and capital between them in

different countries is not new (see, e.g. Bartlett and Ghoshal, 1989; Gupta and

Govindarajan, 1991). Although recognising that there are differences in the foreign

units' local conditions, only internal interdependence is discussed. Ghoshal and

Bartlett (1990) have explained different attributes of a multinational corporation in

terms of the characteristics of the networks within which the different subsidiaries are

embedded using a resource dependence perspective (Pfeffer and Salancik, 1978). The

subsidiaries are dependent on specific resources for their operations. In the literature

on resource dependence, the environment and its resources are defined as resource

areas rather than specific relationships (Larsson, 1985; Forsgren, 1989). In contrast,

network theory recognises that critical resources are linked to the subsidiaries' specific

exchange relationships with customers, suppliers and other counterparts (Tichy, et al.,

1979; Snehota, 1990; Axelsson and Easton, 1992; Håkansson and Johanson, 1993).

Thus, network theory offers a more precise description of the critical resources and

recognises that for each unit, the most important resource is the web of specific

relationships in which it is embedded. In this paper the perspective of the subsidiaries’

relevant network is widened to include external counterparts, such as suppliers,

customers and other counterparts who are outside the legal borders of the

multinational corporation, but are nevertheless interlinked with it through their

relationships with the subsidiaries.

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Defining the subsidiary's environment as identifiable direct exchange

relationships with business partners and indirect exchange relationships connected to

the direct ones has implications for our perception of control, integration,

performance and influence in the multinational corporation. When the subsidiaries are

embedded in such business network structures, we have reason to believe that the

ability of headquarters to make a correct evaluation of the behaviour and performance

of the subsidiaries diminishes because headquarters lacks knowledge of the

subsidiaries' specific operating environments (Holm, Johanson and Thilenius, 1995).

Furthermore, adaptation and interdependence result in exchange partners in business

networks being important to each other and enables them to exercise a certain amount

of control over one another. One consequence is that, when trying to control the

subsidiaries' behaviour, top management must compete with the subsidiaries'

exchange partners’ influence.

Embeddedness is an approach that avoids the atomisation of actors when

studying their behaviour.

”Embeddedness’ refers to the fact that economic action and outcomes,

like all social action and outcomes, are affected by actors’ dyadic

relations and by the structure of the overall network of relations.”

(Grabher, 1993, p. 4)

By using the resource dependence perspective, it has been recognised that different

attributes of an MNC can be explained by the characteristics of the networks within

which the different subsidiaries are embedded (Ghoshal & Bartlett, 1990 and 1993).

The embeddedness of individuals in ongoing social relationships has proved to have a

profound impact on behaviour (Granovetter, 1985). And even if his discussion of the

concept of embeddedness is on the level of individuals, there is reason to believe that

the behaviour of collectives, for instance companies, divisions and subsidiaries, is also

constrained by their embeddedness in ongoing relationships (see Cook, 1977;

Grabher, 1993).

Consequently, the concept of embeddedness is here used to describe how deeply

involved the subsidiaries are in their business networks, and thereby how strongly

influenced they are by them. An embedded firm is one that has recurrent exchange

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with its counterparts to which it has adapted its activities. In contrast to when the

relevant environment is viewed as a pure neo-classical market (Granovetter, 1985).

It is argued that one cannot rule out the impact from ongoing social relations

when the behaviour of social actors is being studied (Granovetter, 1985; Grabher,

1993). The fact that social and, above all, economic actions take place in an

environment consisting of relationships makes the embeddedness approach useful

when trying to understand the subsidiaries’ behaviour and development. The

influence from the surrounding system of business relationships, that is to say, from

the network, on the subsidiaries’ development and behaviour is likely to have

consequences for headquarters’ ability to control and integrate the subsidiaries.

Further, the resources created in the subsidiaries’ networks may have implications for

subsidiary performance and the role that it play in the multinational corporations.

Extensive work on industrial firms and their market conditions reveals a picture of

the firm as having long-lasting and close relationships with a limited number of

counterparts (Håkansson, 1982; Håkansson and Snehota, 1995; Turnbull and Valla,

1986). Hence, relationships develop through interaction and exchange processes

between the firm under study and its counterparts. Gradually the exchange partners

learn from and adapt to each other until, with time, the relationship becomes stronger

and more difficult to substitute. Within the network perspective, relationships are

considered to form complex patterns of technical, economic and social

interdependence. The relationships are not isolated from each other, but, rather, are

interwoven in a complex web, connected to each other to different degrees and in

various ways. This means that exchange in one relationship is very often dependent

on or conditioned by exchange in others (Cook and Emerson, 1978). Business

networks can be defined as "sets of connected exchange relationships between actors

controlling business activities" (Forsgren and Johanson, 1992). The consequence of

this is that actors involved in a business network can exercise some control over each

other.

In this paper I will discuss how MNC headquarters possibilities to integrate and

control subunits is affected by subsidiary network embeddedness. I will also discuss

the connection between subsidiary network embeddedness and market performance

and subsidiary influence in the MNC.

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Subsidiary Network Embeddedness

A subsidiary’s environment is first of all its set of direct exchange relationships with

other counterparts and indirect exchange relationships that are connected to the direct

ones. One way of defining the degree of embeddedness in such a set is to estimate the

number of connections in relation to possible connections, often called density (see

e.g. Aldrich and Whetten, 1981; Ghoshal and Bartlett, 1990). Density measures to

what extent each actor is linked to every other actor in the set. Even if density reflects

the tightness of the set of relationships and therefore also to some extent an actor’s

degree of embeddedness in the network, there are two problems with this definition.

First, it does not cover the attributes of the exchanges in terms of activity

interdependence and adaptation between actors. The stronger the specific activity

interdependence between the subsidiary and other actors, the more they will be

inclined to develop close relationships rather than conducting business through arms-

length negotiations. Inversely, two actors who are engaged in a close relationship will

tend to strengthen their specific interdependence, with time, in order to increase the

joint productivity of their activities. We can assume that the closer a subsidiary’s

relationships, the higher the subsidiary’s degree of embeddedness because close

relationships are more difficult to substitute.

Secondly, the concept of density assumes that it would be possible to estimate

“from above” the number of actors and connections in a network. But networks in

terms of exchanges are most of all enacted. They can only be subjectively defined

from an actor’s point of view and the border of such a network is vague in terms of

number of relevant counterparts. Therefore, a subsidiary’s degree of embeddedness

should be defined by letting the subsidiary estimate its relevant direct and indirect

counterparts in terms of interdependence and adaptation.

It follows from the discussion above that the more transparent the counterparts

are to the subsidiary, the more its behaviour and activities are likely to be influenced

by these network actors. The more dependent the subsidiary is on its counterparts to

pursue its activities and the more adapted it is to its counterparts, the more embedded

it is. If these counterparts in their turn are dependent on and adapted to the subsidiary,

this is likely to strengthen the subsidiary's embeddedness because interdependence is

more prone to produce long term relationships. Therefore, the more pronounced the

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interdependence between the subsidiary and their counterpart, the more embedded the

subsidiary is in its network.

Interrelationships between actors and the actual interdependence and adaptation

can take different forms. Porter (1985), for instance, makes a distinction between

tangible interrelationships, intangible interrelationships and competitor

interrelationships. Tangible interrelationships arise from the opportunity to share

activities in the same value chain, while intangible interrelationships involve the

transfer of management know-how among separate value chains. Competitor

interrelationships link corporate units through common rivals, so called multipoint

competitiors. Although embeddedness, in a broad sense, can include intangible

elements and competitors' interrelationships, here the concept focus mainly on

tangible relationships. That is, on the exchange between units in terms of technology,

marketing, procurement activities, etc. (Porter, 1985, p. 327). In contrast to Porter,

though, embeddedness includes exchange between corporate units as well as non-

corporate ones.

It is not only direct relationships that influence a subsidiary's degree of

embeddedness. Customers' customers, complementary suppliers, suppliers' suppliers

etc. that strongly influences the subsidiary's direct relationships will also increase its

embeddedness. The more prominent such indirect relationships are to the subsidiary,

the tighter the structure of the network and thereby the more embedded the subsidiary

is.

Recognising the multinational corporation as an interorganisational network,

(Ghoshal and Bartlett, 1990), where the subsidiaries' specific environments consist of

their important exchange counterparts (Håkansson, 1982; Thorelli, 1986; Turnbull

and Valla, 1986; Håkansson and Snehota, 1989; Forsgren and Johanson, 1992), gives

us reason to believe that integration of foreign subsidiaries is not primarily a question

of designing the organisation in such a way as to achieve adequate levels of co-

operation between the units. Rather, it is a matter of trying to promote flexibility and

economies of scope and scale among units embedded in different business networks,

which are not actually suited to integration.

Allowing the specific external exchange partners to affect the analysis of

subsidiaries’ and multinational corporations’ development by using the network

perspective also gives us reason to investigate what the implications are for

headquarters’ ability to exercise control and manage the subsidiaries. One reason for

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this is that, by definition, exchange partners have some influence over the subsidiaries

through adaptation and interdependence. We would expect that the more embedded

the subsidiaries are in their networks, the greater the chance there is that the

headquarters’ ability to control the subsidiaries' behaviour has been curtailed

(Ghoshal and Bartlett, 1990). Additionally, viewing the subsidiaries' relevant

environments as business networks enables us to study how resources created in these

networks impinge on the subsidiaries' ability to influence development and behaviour

in the multinational corporations. Resources controlled by one subsidiary and needed

by other subsidiaries in the multinational corporation may allow the subsidiary to

influence strategic behaviour if resource dependence so dictates (Kallinikos, 1984). In

summary, an analysis of the subsidiaries and their relationships in their business

networks, i.e., their embeddedness can help us to understand issues of integration,

control and subsidiary influence and performance in multinational corporations better.

Subsidiary network embeddedness and integration in the MNC

A major issue in the literature of the multinational corporation is managements need

to find the right balance between global integration and local adaptation. Local

capabilities in the different subsidiaries are seen as important resources that should be

employed on a global scale to achieve competitive advantage. Although different

scholars emphasise the importance of integration within the MNC, little attention is

paid to the problem of transforming capabilities developed at the subsidiary level into

competitive advantage for the whole MNC. Gupta and Govindarajan (1994), for

instance, recognise MNCs as networks of different flows, where subsidiaries play

different strategic roles. But this, and similar models, do not take the subsidiary’s

external network into account, nor the influence of important actors in the local

business context.

MNCs belong to multiple business networks. These networks are first of all sets of

exchange relationships in which the subsidiaries are embedded. The counterparts in

terms of customers, suppliers, competitors, governments, trade unions etc. exert

influence on the separate subsidiaries through these relationships. This influence can

or cannot be in accordance with integration and a coherent strategy at the

headquarters level. An analysis of both the needs and possibilities of integrating

different units in a multinational corporation must take networks of business

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relationships into account. The issue of integration in the MNC should therefore be

somewhat reformulated. It is not only a question of designing the organisation in such

a way that sufficient integration and co-operation between units is reached, but also of

obtaining flexibility and economy of scale and scope among a set of subsidiaries,

which are embedded in different networks. The question of integration should be

extended to a question of embeddedness in networks both inside and outside the

MNC. The degree of a subsidiary’s integration into a corporate system must be

evaluated against its embeddedness in the external network of specific relationships.

As can be seen in Figure 1, the focal subsidiary can be more embedded in some

relationships than in others. It is the total degree of interdependence in all involved

relationships that build up the focal company's embeddedness.

Figure 1. The embeddedness of a focal subsidiary in its network

= Focal Subsidiary = Headquarters

= Counterpart = Connected Partner

= Functional Relationship (thickness indicates strength)

= Control Relationship

As is indicated in Figure 1, it is not just the focal subsidiary’s dependence on

and adaptation to its counterparts that constitutes embeddedness, but also the

counterparts' dependence on and adaptation to the focal company. In other words, it is

the strength of the interdependence that exists in the focal company's enacted network

that constitutes the focal subsidiary’s embeddedness.

Even if both its dependence on business partners and the business partners’

dependence on the subsidiary constitute a subsidiary’s embeddedness, these two

dependencies are not unrelated. Based on network theory we would expect that if one

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actor over time adapts its resources and activities to some other actor a corresponding

adaptation will also be carried out by the latter (see e.g. Hallén, Johanson and Seyed-

Mohamed 1991).

Corporate and External Embeddedness

Different scholars have treated integration in different ways: direct contacts, planning

procedures, liaison roles, teams and matrix structures are administrative devices that

can be related to integration (Galbraith and Nathanson 1978). These integrative

devices are supposed to enhance information exchange and co-operation in the

company. The more of these devices, the stronger the integration. The degree of

integration can also be estimated more directly by mapping the closeness of the

headquarters and the subunits (Egelhoff 1988). A more tangible way of estimating

integration is to measure the actual flows of goods and services between the

subsidiary and the rest of the company (Gupta and Govindarajan 1991). Even if

administrative devices can be implemented to enhance such integration, it is the actual

outcome of integrative efforts that is reflected in the flows between the subsidiary and

the rest of the multinational corporation (ibid.).

If we define integration as a subsidiary's realised integration in terms of the

flows of goods and services between the subsidiary and other corporate units, we can

call this corporate embeddedness. Corporate embeddedness shows how deeply a

subsidiary is involved in its business relationships with other internal units. But we

also have to consider that the subsidiary is embedded in specific business

relationships with counterparts outside the multinational corporation. We call this

external embeddedness. It is the configuration of the subsidiary's network and

strength of its corporate and external embeddedness respectively, that determines the

management's possibilities to enhance the integration of the subsidiary's activities

with the rest of the multinational corporation.

Managing Subsidiaries Embedded in Networks

It has been pointed out by several scholars within the field of international business

that implementing global strategies will give headquarters a pivotal role in controlling

subsidiary behaviour. (see e.g., Doz & Prahalad, 1981; Cray, 1984; Kogut, 1985;

Bartlett & Ghoshal, 1989; Doz, et al., 1990; Hedlund & Rolander, 1990;

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Chakravarthy & Doz, 1992) There has also been extensive discussion about the

mechanisms that can be used by headquarters to accomplish the required control (see,

e.g., Edström & Galbraith, 1977; Doz & Prahalad, op.cit; Baliga & Jaeger, 1984;

Egelhoff, 1984 and 1988; Martinez & Jarillo, 1989; Bartlett & Ghoshal, 1995).

Headquarters' control becomes more difficult because, rather than being a single

entity facing a homogeneous environment, the MNC is, as said above, composed of a

set of differentiated structures and processes, each of which existing in one of the

subunits of the organisation (Rosenzweig & Singh, 1991; Ghoshal & Westney, 1993).

For instance, it has been argued that the control mechanisms, formal as well as more

informal and subtler ones, used by the headquarters must be adapted to environmental

and resource contingencies faced by the different subsidiaries (Bartlett & Ghoshal

1989; Ghoshal & Nohria, 1989).

But headquarters' subsidiary control is not only a question of designing the

control mechanisms in accordance with the subsidiaries' different characteristics.

Many scholars have pointed out that dependence is an important source of control,

(Yuchtman & Seashore, 1967; Jacobs, 1974; Pfeffer & Salancik, 1978; Aldrich, 1979;

Pfeffer, 1981; Astley & Sachdewa, 1984) and in particular that the resource

dependence theory also provides a useful analytical tool for studying the management

of the MNC (Forsgren, 1989; Doz & Prahalad, 1993). Different subsidiaries can

obtain resources that are difficult for other actors, including headquarters, to secure.

These affect the control possibilities within the MNC and, as said above, sometimes

circumscribe the possibility of incorporating subsidiary behaviour into an integrated

corporate strategy.

In its operations the subsidiary is dependent on specific resources. Headquarters

can offer some of these resources, for instance capital. But in theories of business

networks, it is recognised that, to a large extent, critical resources are linked to the

subsidiary's specific relationships with customers, suppliers and other counterparts,

(Tichy, et. al., 1979; Snehota, 1990; Axelsson & Easton, 1992; Håkansson &

Johanson, 1993). Thus, network theory offers a more precise description of critical

resources than is usually the case in the resource-dependence literature, and a unit's

most important resource is the web of specific relationships in which the subsidiary is

embedded (see discussion on p. 1). Thus any study of headquarters’ control, to which

a subsidiary objected, has to consider this web of relationships.

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In this paper it is argued that subsidiary behaviour is shaped by two different

factors. On one hand, headquarters use different control mechanisms in order to

integrate their subsidiaries according to the overall strategy of the company. On the

other hand, subsidiaries are embedded in business networks that include other actors

inside and outside the MNC (Ghoshal & Westney, 1993). The subsidiary's role in the

network is shaped and developed in interaction with these actors rather than through

any specific decision by headquarters (Forsgren, 1990). The subsidiary's strategic role

assigned by headquarters does not have to correspond with its role in the network. On

the contrary, there is a fundamental difference. Its strategic identity in the network is

assumed to be based on business relationships developed over a long time. Its role in

the corporate strategy designed by headquarters can be changed quite quickly (even if

this role can allow for the business relationships). The tension between the corporate

role and the resource control related to the business network can be considerable and

may also be interpreted differently by subsidiary and headquarters. The latter's role is

supposed to be the implementation of a common strategy, in which every unit has its

own special position within the MNC. The subsidiary's own view is likely to be much

more influenced by its business relationships. Against headquarters' search for co-

ordination in the group, we may posit the subsidiaries' involvement in business

activities based on successive and reciprocal adaptations to business counterparts

within the network.

An exemple may clarify this: In one of the largest Swedish multinationals, the

cost for R&D is enormous. It is therefore of the utmost importance to co-ordinate the

different subsidiaries’ R&D activities to avoid the duplication of investments and to

reach large-scale economy in production and development. The ability to integrate

R&D is assumed to be one of the most critical competitive forces among the main

competitors in the industry. But the driving forces behind product development are, to

a large extent, local. Specific customers demand special product adaptations which

sometimes result in more or less customized R&D activity at the subsidiary level.

From the subsidiary’s point of view there can be a good reason to commence such

activity, especially for a large customer. From the perspective of the headquarters,

though, it is important whether or not the results anticipated from such investments

have a wider application to the group as a whole.

One of the largest subsidiaries of this group is located in Italy. Italy is one of the

firm's biggest markets and this subsidiary has always been very profitable. The

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subsidiary has an important role in the group's R&D function, both as the developer of

so called standard applications, that is applications suitable for several markets, and

market applications, meaning those applications suited to the Italian market only. But

market applications have always been dominant in the Italian subsidiary. Changes in

the organization of R&D within the group, initated by the headquarters to increase the

proportion of standard applications, have not led to any profound change in this

situation. One important reason for this is that almost every request from one very

dominant Italian customer is defined and handled by the subsidiary as a request for a

market application. This is due to the old and strong commercial and social link

between the subsidiary and the customer, an important and profitable relationship for

both parties. From the subsidiary’s point of view, it is more important to maintain and

develop this relationship by servicing the customer’s special needs than to initiate the

development of products which are applicable to customers in other countries, even

though that would be more beneficial for its sister companies in the group (Andersson

& Forsgren, 1995).

This case illustrates that different contexts produce conflicting interests

resulting in different behaviour at different places within the multinational and hence

that the subsidiary’s own business network plays an important role in these contexts.

This view of the multinational is in accordance with what has sometimes been

called the political view of the firm (Forsgren, 1989; Forsgren & Johanson, 1992;

Forsgren, et. al., 1995). It is based on the idea of power as a relational concept that has

been derived from social exchange theory, and on the assumption that the control of

critical resources is an important basis of power. Power based on the control of

critical resources is multidirectional and can flow upwards, downwords or

horizontally, i.e., from subsidiaries to headquarters as well as the other way. Within

this perspective it is claimed that relationships with the actors that surround the

subsidiary are sources of power that affect the subsidiary and can be used by it to

exert influence on other actors.

Consequently, the control of subsidiaries in an MNC can be exercised in

different ways and by different interest groups. Stakeholders who try to shape its

behaviour in accordance with their own interests surround the individual subsidiary.

Headquarters uses different combinations of control mechanisms depending on the

conditions under which the subsidiaries operate (Merchant, 1985; Ghoshal & Nohria,

1989; Goupta & Govindarajan, 1994). The efficiency of this control will increase if

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headquarters are in control of resources, for instance financial resources or

technology, needed by the subsidiary. Other actors than headquarters can exert control

over the subsidiary to the extent that they have business relationships with it. The

efficiency of other actors' control depends on the importance the subsidiary attaches

to these relationships.

Such a control concept is in accordance with the notion that one need not

differentiate between control and influence (see, e.g., Etzioni, 1961; Tannenbaum,

1968) and this viewpoint considers control to be something which emanates from

social relations within and between organisations (Pfeffer & Salancik, 1978; Astley &

Sachdewa, 1984). In the literature about management control systems, control

mechanisms used by management are sometimes referred to collectively as the "core

control system", while that influence exerted by others is called a "control context

factor" (see, e.g., Flamholtz et al, 1985). One such context factor is the external

environment.

If we assume that the subsidiary business network and the headquarters are two

separate, and sometimes contradictory, forces affecting the subsidiary’s behaviour,

one interesting question will be to what extent the degree of subsidiary embeddedness

circumscribes headquarters’ control of its subsidiaries.

We can hypothesise that the degree of embeddedness has a direct impact on top-

management's possibilities of controlling the subsidiaries. By definition, a high degree

of embeddedness means that there are other specific actors than headquarters in the

subsidiary's enacted environment that the subsidiary considers important.

Headquarters has to compete with these actors when trying to influence the

subsidiary's behaviour. Such a competition is less likely in a situation with a low

degree of embeddedness when other network actors are more anonymous. The more

visible and tangible a subsidiary's relationships are, compared to a "market-like"

relationships, the greater the likelihood that the business network will influence

subsidiary activities and therefore compete with headquarters’ control. This is similar

to Ghoshal & Bartlett's conclusion that remote control loses efficacy when

"localness", by itself, is the key requirement for maintaining relationships in the

subsidiary network (Ghoshal & Bartlett, 1990 and 1993).

Based on the discussion above about the link between embeddedness and

control the following proposition can be formulated: The higher the degree of

subsidiary embeddedness, the lower the degree of perceived control.

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By perceived control is meant the extent to which the subsidiary considers

headquarters to exert influence on its behaviour.

The link between the degree of embeddedness and control may be somewhat

different if we consider that some exchange relationships are corporate and some

external. By corporate embeddedness is meant exchange relationships between sister

units and the focal subsidiary, that is, relationships that go beyond administrative links

because of adherence to a common organisational entity. By external embeddedness is

meant the subsidiary's exchanges with actors outside the organisational entity. On the

one hand, if we assume that headquarters task is above all planning, co-ordinating and

controlling, this can always be challenged by the influence of actors in the network,

irrespective of whether these actors are corporate or external. It is the degree of

embeddedness that counts not the organisational border. As headquarters often has a

better knowledge of corporate units than they have of other actors in the network, we

can expect the challenge to the headquarters' control to be greater the more external

the subsidiary's network is.

Even though this discussion is limited to a resource dependence perspective,

other factors than the actual configuration of the subsidiary business network have to

be considered. For instance, headquarters’ knowledge of the subsidiary network

(Krackhardt, 1990; Holm, et al, 1995), the existence of personal relationships and

"shared values" between headquarters and subsidiary management (Bartlett &

Ghoshal, 1995) are crucial factors for headquarters to be able to exert control.

In the light of subsidiaries differing in terms of their organisational context

(Ghoshal & Nohria, 1989; Rosenzweig & Singh, 1991; Gupta & Govindarajan, 1994),

we can also expect that the type of control exercised by headquarters would differ

between the subsidiaries. For instance, there is reason to assume that headquarters will

control operationally interdependent subsidiaries through different integrative

mechanisms while operationally independent subsidiaries will experience a higher

degree of autonomy.

The connection between subsidiary network embeddedness and

performance

Here I argue that subsidiaries seek to perform well in both the local market place and

in the corporate network, the latter being where the political process for making

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strategic decisions within the MNC is based. Along with Forsgren et al. (1998) the

terms: market performance and organizational performance is used for these two

different, but related, types of subsidiary performance. The market performance is the

performance in the market place where the subsidiary competes with all other

companies, while the organizational performance is the performance in the political

process inside the MNC, where the subsidiary aims to influence strategic decisions of

relevance to the subsidiary.

Many researchers have pointed out that a unit’s performance is contingent on its

ability to obtain valuable resources from the environment. For instance, resource

dependence theory stresses the ability to cope with strategic interdependencies in the

environment as a crucial factor for its performance in the market place (Yuchtman

and Seashore, 1967; Jacobs, 1974; Pfeffer and Salancik, 1978). In contingency theory,

survival and success is dependent on the unit’s responses to diverse environments

(Lawrence and Lorch, 1967; Stopford and Wells, 1972; Galbraith, 1973; Egelhoff,

1988). The importance of the ability to obtain resources from the environment is also

apparent in theories which deal with factors behind a unit’s power within an

organization (Crozier, 1964; Hickson et al., 1971; Provan et al., 1980; Pfeffer, 1981;

Krackhardt, 1990). Theories focusing on geography in an organizational context also

emphasise the importance of the firms’ ability to selectively tap the environment of

knowledge (Piore and Sabel, 1984; Amin and Thrift, 1994; Porter, 1990; Sölvell and

Zander, 1995).

Later writings about organizational learning explicitly focus on the firm’s

ability at all levels to acquire new knowledge from the environment (see e.g. Levitt

and March, 1987; Cohen and Levinthal, 1990; Kogut and Zander, 1996; Lane and

Lubatkin, 1998; Nahapiet and Ghoshal, 1998). Cohen and Levinthal (1990) coined the

term absorptive capacity of a firm. By absorptive capacity what is meant is the firm’s

ability to recognize the value of new, external information, and its ability to assimilate

it and apply it to a commercial end. This ability is assumed to be crucial for the firm’s

competitive advantage. Firms learn from each other and the efficiency of such a

learning process is dependent on the characteristics of the relationships the focal

organization has with other organizations. For instance, in the literature about

strategic alliances, the focus has shifted from traditional resource or risk-sharing

alliances to alliances where the primary benefits is learning (Hamel, 1991; Dunning,

1996; Kumar and Nti, 1998). Through learning in the alliance the firms can acquire

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and exploit knowledge developed by others, which often allows the firms to respond

more quickly to market changes than their rivals.

The acquisition of external knowledge through interorganizational learning can

be carried out in different ways. However, a basic distinction can be made between

passive and active learning. Passive learning means acquiring objective and

observable facts of the other firm’s capability. This learning occurs at arms-length and

only the most visible parts of another firm’s knowledge can be acquired. Active

learning, on the other hand, means also acquiring tacit knowledge embedded in a

firm’s social context which is, therefore, more difficult for others to imitate (Lane and

Lubatkin, 1998). It is difficult to acquire such knowledge without having an

interactive relationship with the other firm, built on trust, personal ties, relation

specific investments and path dependence (Håkansson, 1989; De Laat, 1997; Uzzi,

1997; Nahapiet and Ghoshal, 1998). If we assume that the acquisition of tacit, non

imitable, knowledge is crucial for a firm’s competitive advantage, we can state that

the quality of the relationships with other firms is of decisive importance.

The concept of active learning is intellectually related to the term social capital,

as it has been used in studies of different social phenomena (for an overview see

Nahapiet and Ghoshal, 1998). The central proposition of social capital theory is that

networks of relationships, characterized by mutual acquaintance and recognition,

constitute a valuable resource in them selves. The social capital influences the actors’

possibilities of combining and exchanging knowledge and therefore their ability to

develop their capabilities. The process of active learning is therefore contingent on the

social capital of the network.

That the embeddedness aspect is very much in line with the discussion of a

firm’s absorptive capacity is apparent in Cohen and Levinthal’s (1990) notion that

such a capacity is something that develops over time, is path dependent and therefore

builds on prior knowledge of an other organization’s capacity.

By combining the notion of embeddedness in business network theory with the

discussion of organizational learning and the capacity to absorb new technology, we

can conclude that the latter capacity is dependent on the degree of embeddedness in

specific relationships of the firm’s business network. The more a certain relationship

with a customer, supplier or some other counterpart has developed into a close

relationship, the higher the possibility for a firm to acquire new knowledge through

exchange with this counterpart.

- 16 -

This conclusion is also relevant for subsidiaries in a multinational corporation.

The embeddedness of the subsidiary network is decisive for its ability to acquire

external, tacit knowledge about new technology. Further, if we assume that

technological development is a key resource of economic growth and competitive

advantage (Mansfield, 1968; Bartlett and Ghoshal, 1990; Chesnais, 1986; Dosi et al.,

1988; De Meyer, 1992) we can conclude that technological embeddedness is

positively related to the subsidiary’s market performance and organizational

performance. Technology embeddedness reflects the importance of the network

relationships for the continual improvement of how work is done in the subsidiary

(Scott, 1981. A more precise definition of technology is provided in the empirical

section).

We would also expect that the subsidiary’s market performance have a positive

impact on its organizational performance. A profitable subsidiary, or a subsidiary with

good market prospects, will be more influential within the MNC than a non-profitable

subsidiary, ceteris paribus (Larsson, 1985). The reason for this is twofold. First,

market performance reflects the subsidiary’s ability to obtain financial resources from

the environment. Second, market performance is itself considered by other members

of the MNC to be the ultimate sign of the subsidiary’s ability to contribute to the

MNC’s economic well being. Both these factors will improve the subsidiary’s

possibility to be influential within the MNC.

On the basis of the discussion above of technological embeddedness and

absorptive capacity we would also expect that subsidiary environments differ in terms

of their perceived strategic importance for the rest of the MNC, irrespective of their

market performance. A subsidiary that has a high capacity to identify and assimilate

knowledge about new technology, because of its technology embeddedness, will be

considered important by the corporate headquarters. Such a subsidiary will be in a

favourable position to affect the MNC’s strategic decisions.

But if we base our reasoning on the assumption that intraorganizational power

has to do with resource dependence, we would argue that the relationship between a

subsidiary’s technological embeddedness and its organizational performance is

contingent on the MNC’s dependence on the subsidiary. In resource dependence

theory power is based on resource exchange between parties. That is, the more A is

dependent on resource exchange with B, the higher B’s power is - enacted or potential

- over A (Emerson, 1962; Blau, 1964, Cook & Emerson 1984; Pfeffer, 1981;

- 17 -

Krackhardt, 1990). Applied to the MNC, this would mean that the more the rest of the

MNC is dependent on exchange of resources with a subsidiary, the greater the

possibility that the latter can affect the MNC’s strategic decisions.

Concluding remarks

In this paper it has been shown that avoiding the atomisation of studied actors by

using the concept of subsidiary network embeddedness can help us to better

understand the problems associated with controlling and integrating subsidiaries in the

international corporation. Further, it has been argued that the embeddedness of

subsidiaries in networks of suppliers, customers and others has a strong impact on the

development of subsidiaries in terms of market performance and influence on

strategic decisions within the international corporation.

By recognising that subsidiaries are embedded in business relationships that takes

the form of a business network, and assessing their degree of embeddedness in these

networks, we can further extend our knowledge of the management of the

international corporation. In addition, it help us to better understand that the

development of the international corporation is an interdependent process of strategic

decisions and influence from external actors participating in the subsidiaries business

activities.

As always, the key question of managing the international corporation boils down

to finding the right trade of between local adaptation and integration of subsidiaries.

By perceiving the embeddedness of subsidiaries the complexity, but also the

accurateness, of knowledge needed for taking strategic action increase. A difficult but

necessary task for management of the international corporation is to gather knowledge

about the subsidiaries’ contexts.

- 18 -

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